Banking and Financial Awareness
Banking and Financial Awareness focuses on the structure and working of banks and financial institutions: RBI functions, monetary policy tools, deposit types, negotiable instruments, NPAs, financial inclusion, deposit insurance and cooperative banking.
Core rules
- RBI conducts monetary policy. Repo rate is the rate at which banks borrow from RBI against securities; reverse repo absorbs liquidity. A repo cut generally makes credit cheaper but can reduce deposit returns.
- CRR is the share of net demand and time liabilities kept as cash with RBI; SLR is held in approved securities. Both reduce lendable funds when raised.
- DICGC insures deposits up to ₹5 lakh per depositor per bank, covering principal and interest.
- A cheque is a negotiable instrument drawn on a bank. Crossing restricts payment to the payee's account; a bearer cheque is payable to the holder.
- NPA classification is based on overdue status: substandard, doubtful and loss assets reflect worsening recovery prospects.
Worked example
A bank has net demand and time liabilities of ₹500 crore and must maintain CRR at 4%. Required CRR balance = 4% of ₹500 crore = ₹20 crore. If CRR rises, the bank must keep more cash with RBI and has less to lend.
Traps
Confusing CRR with SLR; treating repo and reverse repo as the same direction; forgetting DICGC's per-bank limit; assuming all overdue loans are immediately loss assets; mixing cooperative bank regulation with securities regulation.