Indian Economy
Money and Banking
GS Paper III
Money and Banking — Quick Revision
One-page UPSC revision of money and banking: money supply measures, the multiplier, RBI facts, bank types, reform milestones, NPAs and deposit insurance.
SyllabusGS III · Indian economy and issues relating to mobilisation of resources; money, banking and the financial system
A last-week sheet for money and banking. Most Prelims questions here are definitions and dates; get them exact.
Money Supply Measures
| Measure | Composition | Remember |
|---|---|---|
| M0 | Currency in circulation + bankers’ deposits with RBI + other deposits with RBI | Reserve / high-powered money |
| M1 | Currency with public + demand deposits with banks + other deposits with RBI | Narrow money |
| M2 | M1 + savings deposits with post office savings banks | |
| M3 | M1 + time deposits with banks | Broad money |
| M4 | M3 + all post office savings deposits (excluding NSCs) | Least liquid |
Money multiplier = M3 ÷ M0. It falls when CRR rises or when the public holds more cash.
The Reserve Bank of India
| Item | Fact |
|---|---|
| Recommended by | Hilton Young Commission (1926) |
| Act | RBI Act, 1934 |
| Operations began | 1 April 1935 |
| Nationalised | 1 January 1949 |
| Note issue | Section 22 (sole right); denominations under Section 24 |
| Reserve backing | Minimum Reserve System: ₹200 crore, of which ₹115 crore gold |
| Coins and ₹1 notes | Government of India |
Types of Banks
| Bank | Key feature |
|---|---|
| Scheduled bank | Listed in the Second Schedule of the RBI Act |
| Regional Rural Bank | RRB Act 1976; shares Centre 50%, sponsor bank 35%, State 15% |
| Small finance bank | Lends to underserved; 75% of ANBC to priority sector |
| Payments bank | Deposits with a per-customer cap; no lending; no credit cards |
| Cooperative bank | Dual control historically; RBI oversight strengthened by the Banking Regulation (Amendment) Act, 2020 |
Reform Milestones
| Year | Event |
|---|---|
| 1949 | Banking Regulation Act |
| 1955 | State Bank of India formed from the Imperial Bank |
| 1969 | 14 banks nationalised |
| 1975-76 | Regional Rural Banks |
| 1980 | 6 banks nationalised |
| 1982 | NABARD |
| 1991 / 1998 | Narasimham Committees I / II |
| 2002 | SARFAESI Act |
| 2015 | Payments and small finance bank licences; Asset Quality Review |
| 2016 | Insolvency and Bankruptcy Code |
| 2020 | 10 PSBs merged into 4; DICGC cover ₹5 lakh |
| 2022 | Digital rupee pilots (wholesale November, retail December) |
High-yield facts
- NPA: interest or principal overdue more than 90 days; sub-standard → doubtful → loss.
- RBI minimum CRAR 9% (Basel III minimum 8%) + 2.5% capital conservation buffer.
- DICGC (wholly owned by the RBI) insures ₹5 lakh per depositor per bank since 4 February 2020.
- “Twin balance sheet” problem: Economic Survey 2016-17.
- Payments banks were licensed after the Nachiket Mor Committee report on comprehensive financial services.
Traps
- Time deposits are in M3, not M1.
- Coins are issued by the Government, not the RBI.
- Higher CRR reduces money supply.
- Payments banks cannot lend, even small amounts.
Related Topics
- Money Supply and the Banking System
- Money and Banking: practice questions
- Monetary Policy and Inflation
- All quick revision sheets
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