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.

Analogy — Think of RBI's monetary policy tools like a thermostat controlling how much money is circulating in the economy, not a single on/off switch. Raising the repo rate (the rate RBI lends to banks) is like turning the thermostat down — borrowing gets costlier, banks lend less, money supply cools. Open Market Operations (buying/selling government securities) work the same direction but through a different mechanism — selling securities pulls money OUT of circulation the same way raising rates discourages new borrowing. Multiple tools, same underlying goal: adjusting how much money is actually moving through the economy.

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

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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.

Revision Notes

BANK TYPES:
Public Sector: SBI, PNB, Canara, Bank of Baroda, Union Bank
Private: HDFC, ICICI, Axis, Kotak, Yes Bank
Small Finance Banks: AU, Jana, Equitas
Payments Banks: deposits + payments only (no loans)
NABARD: rural/agri | NHB: housing | SIDBI: small industries

RBI MONETARY TOOLS:
Repo: RBI lends to banks (↑ = expensive → less credit = anti-inflation)
Reverse Repo: RBI borrows from banks (always < Repo)
CRR: cash kept with RBI (↑ = less lendable money)
SLR: liquid assets kept by banks (↑ = less lendable money)
OMO: buy/sell govt securities to control money supply

KEY TERMS:
NPA: loan unpaid 90+ days
CAR/CRAR: Capital Adequacy Ratio (min 9% for India)
PSL: 40% loans to priority sectors
KYC: mandatory identity verification
SARFAESI: recover bad loans without court

Try It (2 Minutes)

RBI raises the repo rate by 0.5%. Before reading further, predict the chain reaction in your own words: banks' own borrowing cost from RBI goes up → banks raise the interest rates they charge customers → loans (home, car, business) become costlier → people and businesses borrow and spend less → money supply in the economy cools down. This is exactly why a repo rate hike is RBI's go-to tool when inflation is too high (too much money chasing goods) — it's a deliberate brake on spending, not just an isolated number change.