Introduction to Banking and Financial Services
This domain tests whether you can define a bank, separate its primary from its secondary functions, and place NBFCs and other intermediaries correctly within India's financial system.
Core functions
A bank accepts demand deposits (repayable on demand - savings and current accounts) and time deposits (fixed and recurring), then lends and invests those funds. Accepting deposits for the purpose of lending is the defining activity: only entities licensed under Section 22 of the Banking Regulation Act, 1949 may use the word "bank". Primary functions are accepting deposits and advancing loans. Secondary functions are agency work (collecting cheques, paying bills, standing instructions) and general utility services (lockers, drafts, forex).
The wider landscape
Financial services cover banking, insurance, mutual funds, pension funds, NBFCs and payment operators. An NBFC may lend and invest but cannot accept demand deposits, is not part of the payment system and cannot issue cheques drawn on itself. Regulation is split: RBI for banks and NBFCs, IRDAI for insurers, SEBI for securities markets, PFRDA for pensions.
Worked example
A saver deposits ₹20,000 at 4% p.a.; the bank lends ₹16,000 of it at 9% p.a. for a year. Gross margin = (16,000 × 9%) − (20,000 × 4%) = 1,440 − 800 = ₹640. Reasoning: deposit interest is a cost, loan interest is income, and the spread must cover operating cost and profit. The bank earns on only part of the deposit because CRR and SLR keep a slice aside.
Traps
Calling an NBFC a bank; saying banks print currency (only RBI issues notes); mixing RBI's central-banking role with commercial banking; and ignoring that savings-account interest is a cost, not income, to the bank.