Introduction to Banking
What the domain covers
Introduction to Banking tests whether you can explain why banks exist, classify banks, describe basic functions and understand credit creation. Expect definitions, matching and short application questions.
Core rules and concepts
- A bank accepts deposits, lends and provides payments. It earns mainly from the spread between interest paid to depositors and interest charged to borrowers, plus fees and investments.
- The Reserve Bank of India is the central bank. It regulates banks, issues notes, manages monetary policy and acts as banker to government and banks. It is not an ordinary commercial bank for the public.
- Types include public-sector and private commercial banks, cooperative banks, regional rural banks and specialised institutions. Ownership, reach and regulation differ.
- Credit creation: a new deposit adds reserves. With a cash reserve ratio, only a fraction must be kept as cash, so the banking system can create deposits up to a multiple. The simple multiplier is 1 divided by CRR.
- KYC identifies customers; nomination helps settlement; deposit insurance protects eligible deposits up to the prescribed limit.
Worked example
A bank receives a fresh deposit of ₹10,000. CRR is 4%. Required cash reserve = 4% of ₹10,000 = ₹400. Lendable excess = ₹10,000 minus ₹400 = ₹9,600. Simple deposit multiplier = 1 divided by 0.04 = 25. Theoretical maximum deposit creation from the initial deposit = ₹10,000 × 25 = ₹2,50,000. Real banks hold extra reserves and customers withdraw cash, so actual creation is lower.
Traps that cost marks
Do not call RBI a commercial bank; it does not run ordinary savings accounts for the public. Do not treat CRR as interest paid to depositors. Do not say banks lend every rupee deposited. In multiplier questions, convert the percentage to a decimal and distinguish the initial deposit from total deposits. Do not confuse cooperative banks with ordinary cooperative societies.