Introduction to Banking and Financial Services
Introduction to Banking and Financial Services tests whether you can classify financial institutions, name their regulators, and explain how deposits, credit and payment services fit together in the Indian system.
Core rules and concepts
- A bank accepts demand deposits repayable on demand and uses those funds for lending; an NBFC may lend but cannot accept demand deposits and is not a full member of the payment system.
- The RBI Act, 1934 established the Reserve Bank of India; the Banking Regulation Act, 1949 governs banking business, licensing, capital and supervision.
- Scheduled banks are included in the Second Schedule of the RBI Act and must meet prescribed conditions; co-operative banks and regional rural banks serve specific constituencies.
- Financial services include deposits, loans, insurance, mutual funds, pension products, remittances and advisory services. Each has a different regulator: RBI for banking and payment systems, SEBI for securities, IRDAI for insurance, PFRDA for pensions.
- Deposits are protected by DICGC up to Rs 5 lakh per depositor per bank, not by the RBI itself.
Worked example
A customer deposits Rs 20,000 in a savings account at 6% per annum for 9 months. Simple interest = 20,000 x 6/100 x 9/12 = Rs 900. Maturity value = Rs 20,900. Reasoning: the rate is annual, so the time must be expressed in years; 9 months is 0.75 year. This is simple interest, not compounding.
Traps that cost marks
Do not say the RBI insures deposits; DICGC does. Do not treat an NBFC as a bank that can issue cheques or accept demand deposits. Do not confuse the regulator of insurance with the regulator of banking. Do not describe every financial product as a bank deposit; mutual funds are market-linked and not guaranteed.