Banking, RBI and Monetary Policy — TNPSC Group II/IIA Economy
Overview
Banking and monetary policy are critical areas for TNPSC Group 2/2A. The RBI is the apex monetary authority. Understanding RBI functions, key monetary policy tools (CRR, SLR, Repo Rate), types of banks, and financial inclusion schemes is essential.
Reserve Bank of India (RBI)
Key Facts
| Aspect | Details |
|---|---|
| Established | April 1, 1935 |
| Act | Reserve Bank of India Act, 1934 |
| Nationalised | January 1, 1949 |
| Headquarters | Mumbai (Fort, Mint Road) |
| Governor | Sanjay Malhotra (2024–) |
| Subsidiaries | NABARD, NHB, DICGC, BBPS |
Functions of RBI
1. Note Issuing Authority: Issues all currency notes (except 1 rupee coins/notes — issued by Finance Ministry)
- All currency backed by minimum gold reserve (Minimum Reserve System since 1957)
2. Banker to Government: Manages accounts of Central and State governments; collects and pays funds
3. Banker to Banks: Provides loans to commercial banks; keeper of cash reserves (CRR)
4. Controller of Credit (Monetary Policy): Regulates money supply and credit through interest rates
5. Custodian of Foreign Exchange: Manages India's foreign exchange reserves; implements FEMA
6. Developmental Functions: Promotes agriculture, industry, and overall development
7. Regulatory Functions: Licenses banks; inspects bank accounts; protects depositors
Monetary Policy Tools
Key Quantitative Tools
| Tool | Full Form | Description | Current Rate (approx.) |
|---|---|---|---|
| Repo Rate | Repurchase Rate | Rate at which RBI lends to banks (short-term) | 6.5% |
| Reverse Repo Rate | — | Rate at which RBI borrows from banks | 3.35% |
| CRR | Cash Reserve Ratio | % of deposits banks keep as cash with RBI | 4% |
| SLR | Statutory Liquidity Ratio | % of deposits kept in liquid assets (gold/govt securities) | 18% |
| Bank Rate | — | Rate for long-term loans from RBI to banks | 6.75% |
| MSF | Marginal Standing Facility | Emergency overnight borrowing by banks from RBI | 6.75% |
How Monetary Policy Works
Inflation control:
- RBI increases Repo Rate → banks pay more for loans → they charge customers more → borrowing falls → money supply reduces → inflation reduces
Stimulating growth:
- RBI decreases Repo Rate → cheaper loans for banks → cheaper for customers → borrowing increases → investment and spending increase → economic growth
Monetary Policy Committee (MPC)
- Established under RBI Act (2016)
- 6 members: 3 from RBI (including Governor) + 3 external experts appointed by government
- Meets every 2 months; decides Repo Rate by majority vote
- RBI Governor chairs; has casting vote in case of tie
Types of Banks in India
Commercial Banks
| Type | Examples | Ownership |
|---|---|---|
| Public Sector Banks | SBI, Punjab National Bank, Bank of Baroda, Canara Bank | Government |
| Private Sector Banks | HDFC, ICICI, Axis, Kotak Mahindra | Private shareholders |
| Foreign Banks | Citibank, HSBC, Standard Chartered | Foreign ownership |
Bank Nationalisation
- 1969: 14 banks nationalised by Indira Gandhi (under PM Mrs Gandhi's 20-Point Programme)
- Banks with deposits over Rs 50 crore
- 1980: 6 more banks nationalised (deposits over Rs 200 crore)
- Recent mergers: Several PSBs merged — now 12 nationalised banks
- Example: Dena Bank, Vijaya Bank merged into Bank of Baroda
State Bank of India (SBI)
- Formerly Imperial Bank of India
- Nationalised as SBI under State Bank of India Act, 1955
- Largest commercial bank in India by assets
- Headquarters: Mumbai
Regional Rural Banks (RRBs)
- Established: October 2, 1975 (Prathama Bank — first RRB)
- Ownership: Centre (50%), State (15%), Sponsor Bank (35%)
- Focus: Rural credit for agriculture and small businesses
- Currently merged into fewer, larger RRBs across states
Cooperative Banks
- Urban Cooperative Banks: City-based; regulated by both RBI and state
- Rural Cooperative Banks: NABARD oversight; three tiers
- Example: National Cooperative Bank
Payment Banks (New Category)
- Cannot give loans; only deposits and payments
- Maximum deposit: Rs 2 lakh per customer
- Examples: Airtel Payments Bank, Paytm Payments Bank (license cancelled), India Post Payments Bank
- Established to promote financial inclusion
Small Finance Banks
- Focus on underserved sections (small farmers, micro industries, small businesses)
- Examples: AU Small Finance Bank, Equitas, ESAF
- Can give loans (unlike payment banks)
Financial Inclusion
Key Schemes
| Scheme | Launch | Key Feature |
|---|---|---|
| Jan Dhan Yojana (PMJDY) | August 28, 2014 | Basic savings account; RuPay card; Rs 10,000 overdraft |
| Direct Benefit Transfer (DBT) | 2013 | Government subsidy directly to bank account; no middlemen |
| PM Jeevan Jyoti Bima Yojana | 2015 | Rs 2 lakh life insurance at Rs 436/year |
| PM Suraksha Bima Yojana | 2015 | Rs 2 lakh accident insurance at Rs 20/year |
| Atal Pension Yojana (APY) | 2015 | Pension for unorganised sector workers |
| Mudra Yojana | 2015 | Small business loans under Rs 10 lakh |
| Stand Up India | 2016 | Loans for SC/ST and women entrepreneurs |
Pradhan Mantri Jan Dhan Yojana (PMJDY)
- Launched: August 28, 2014 (National Financial Inclusion Mission)
- Account: Zero balance savings account
- Benefits: RuPay Debit Card, Rs 1 lakh accident insurance (Rs 2 lakh for new), Rs 30,000 life insurance, Rs 10,000 overdraft
- Accounts: Over 50 crore accounts opened (2024)
- Principle: "Har ghar, ek bank account" — every household with bank account
NABARD (National Bank for Agriculture and Rural Development)
- Established: July 12, 1982 (based on B. Sivaraman Committee report)
- Headquarters: Mumbai
- Ownership: RBI (100% — initially joint with government)
- Functions: Refinancing agricultural loans; rural development; oversight of RRBs and cooperative banks
- NABARD Refinance: Provides cheap credit to banks that lend to farmers
Priority Sector Lending (PSL)
| Sector | PSL Target (% of ANBC) |
|---|---|
| Agriculture | 18% |
| MSMEs | 7.5% |
| Weaker sections | 12% |
| Total priority sector | 40% (domestic banks) |
ANBC: Adjusted Net Bank Credit
Key Facts for TNPSC Group II/IIA
- RBI established: April 1, 1935; nationalised January 1, 1949; HQ: Mumbai
- RBI Governor: Appointed by Central Government; currently Sanjay Malhotra
- 1 Rupee notes/coins: Issued by Government (Finance Ministry) — NOT by RBI
- Bank Nationalisation: 14 banks in 1969 (Indira Gandhi); 6 more in 1980
- CRR: % of deposits kept as cash with RBI — earning no interest
- SLR: % kept in liquid assets (government securities, gold) — earns some interest
- Repo Rate: Rate banks borrow from RBI — key inflation control tool
- PMJDY launched: August 28, 2014 — financial inclusion; zero balance accounts; 50+ crore accounts
- RRBs: Established October 2, 1975; Centre 50%, State 15%, Sponsor Bank 35%
- NABARD: Apex bank for agriculture; established July 12, 1982
Previous Year MCQ Patterns
Q: The Reserve Bank of India was established in the year: a) 1947 b) 1935 c) 1949 d) 1950
Q: Which of the following is kept by commercial banks with the RBI without earning any interest? a) SLR b) CRR c) Repo Rate d) Bank Rate
Q: Pradhan Mantri Jan Dhan Yojana was launched in the year: a) 2013 b) 2014 c) 2015 d) 2016
Frequently Asked Questions
The Reserve Bank of India (RBI) is India's central bank, established on April 1, 1935, under the Reserve Bank of India Act, 1934. It was nationalised in 1949. The RBI is the banker to the government, issues currency, regulates banking sector, manages monetary policy, and manages foreign exchange. Its headquarters is in Mumbai (Mint Street).