Banking Basics
Why This Chapter Matters
Banking Awareness carries 40-50 marks in IBPS SO (Specialist Officer) and 10-15 marks in all other banking exams. Understanding how banks work, RBI's role, and monetary policy tools are the most tested topics.
Core Concepts
1. Types of Banks in India
Central Bank: Reserve Bank of India (RBI) — apex bank.
Established: 1 April 1935. Nationalised: 1949.
Governor: RBI Governor is appointed by the Government of India.
Functions: Issue currency, regulate banks, monetary policy, FOREX management, banker to government.
Commercial Banks:
Public Sector Banks (PSBs): government-owned majority stake. Example: SBI, PNB, Bank of Baroda, Canara Bank, Union Bank.
Private Sector Banks: privately owned. Example: HDFC, ICICI, Axis, Kotak Mahindra.
Foreign Banks: foreign-headquartered, operating in India. Example: Citibank, Standard Chartered, HSBC.
Small Finance Banks: focus on small borrowers, microfinance. Example: AU Small Finance Bank, Jana Small Finance Bank.
Payments Banks: limited services (deposits and payments only, no loans). Example: Airtel Payments Bank, India Post Payments Bank.
Cooperative Banks: Owned by members. Serve rural and agricultural sector. Example: National Cooperative Bank.
Development Finance Institutions:
NABARD: Agriculture and rural development.
NHB (National Housing Bank): Housing finance.
SIDBI: Small Industries Development Bank of India.
EXIM Bank: Export-Import Bank of India.
2. RBI's Monetary Policy Tools
Repo Rate: Rate at which RBI lends to commercial banks. ↑ Repo Rate → banks borrow less → credit contracts → inflation falls. (Key anti-inflation tool)
Reverse Repo Rate: Rate at which RBI borrows from commercial banks. Always lower than repo rate.
CRR (Cash Reserve Ratio): Percentage of deposits banks must keep as cash with RBI. ↑ CRR → less money banks can lend → credit contracts.
SLR (Statutory Liquidity Ratio): Percentage of deposits banks must maintain in approved liquid assets (govt securities, cash, gold). SLR is usually higher than CRR.
Bank Rate: Long-term lending rate of RBI to banks (rarely used now; MSF is more relevant).
MSF (Marginal Standing Facility): Emergency overnight borrowing by banks from RBI at rate above repo rate.
OMO (Open Market Operations): RBI buys/sells government securities to control money supply.
RBI buys securities → money enters banking system (expansionary)
RBI sells securities → money exits banking system (contractionary)
3. Banking Regulatory Terms
BASEL Norms: International banking regulations. BASEL III requires banks to maintain minimum capital adequacy ratios to absorb losses.
CAR (Capital Adequacy Ratio): Capital / Risk-weighted assets. Must be above minimum (currently 9% for India). Ensures banks can absorb losses.
NPA (Non-Performing Asset): Loan where borrower has stopped paying for 90+ days. Bad debts.
Gross NPA: Total NPAs. Net NPA: After deducting provisions.
Priority Sector Lending (PSL): Banks must lend 40% of Adjusted Net Bank Credit to priority sectors (agriculture, MSME, housing, education, weaker sections).
SARFAESI Act (2002): Banks can recover bad loans by seizing and selling collateral WITHOUT going to court.
4. Important Banking Acronyms
| Acronym | Full Form |
|---|
|---|---|
| RBI | Reserve Bank of India |
|---|---|
| NABARD | National Bank for Agriculture and Rural Development |
| SIDBI | Small Industries Development Bank of India |
| NHB | National Housing Bank |
| EXIM | Export-Import Bank |
| NEFT | National Electronic Funds Transfer |
| RTGS | Real Time Gross Settlement |
| IMPS | Immediate Payment Service |
| UPI | Unified Payments Interface |
| NPCI | National Payments Corporation of India |
| KYC | Know Your Customer |
| AML | Anti-Money Laundering |
| CIBIL | Credit Information Bureau India Limited |
PYQs
IBPS PO 2023: What is the minimum CRAR (Capital to Risk-weighted Assets Ratio) for Indian banks?
9% (as per RBI norms following BASEL III)
SBI PO 2023: Which organisation regulates Payments Banks in India?
RBI (Reserve Bank of India) regulates ALL types of banks in India including Payments Banks.
IBPS Clerk 2022: MSF rate is generally __ basis points above repo rate.
25 basis points (0.25%) above repo rate.