📑 Topics on this page (Jump to Topic):
📌 1. Money: Meaning & Functions
- The main drawback of barter: it needs a double coincidence of wants.
- Primary functions: medium of exchange, measure of value. Secondary: store of value, standard of deferred payments.
- Fiat money is valid by government order; legal tender cannot be refused in payment.
- Gresham's law: "Bad money drives good money out of circulation."
📌 2. Measures of Money Supply
| Measure | Components | Nature |
|---|---|---|
| M0 | Reserve money: currency in circulation + bankers' deposits with RBI + other deposits with RBI | High-powered money |
| M1 | Currency with the public + demand deposits with banks + other deposits with RBI | Narrow money, most liquid |
| M2 | M1 + post office savings bank deposits | — |
| M3 | M1 + time deposits with banks | Broad money |
| M4 | M3 + total post office deposits (excluding NSCs) | Least liquid |
- Order of liquidity: M1 > M2 > M3 > M4.
- The ₹1 note and all coins are issued by the Government of India (Finance Ministry) — the ₹1 note carries the Finance Secretary's signature; other notes are issued by RBI (Governor's signature).
- Note issue follows the Minimum Reserve System (1957): reserves of ₹200 crore, including ₹115 crore of gold.
📌 3. Banking: History & Types
| Year | Event |
|---|---|
| 1770 | Bank of Hindustan — India's first bank |
| 1894 | Punjab National Bank — first bank with wholly Indian capital |
| 1921 | Imperial Bank of India formed from three Presidency Banks |
| 1955 | Imperial Bank became State Bank of India (SBI), 1 July 1955 |
| 1969 | 19 July: 14 banks with deposits above ₹50 crore nationalised |
| 1975 | Regional Rural Banks (RRBs), 2 October 1975 |
| 1980 | 6 more banks nationalised (deposits above ₹200 crore) |
| 1982 | NABARD (12 July) and EXIM Bank |
| 2019-20 | Big mergers; 12 public sector banks from 1 April 2020 |
- Payments banks: deposit limit ₹2 lakh per customer, cannot lend. Small finance banks: lend to small businesses and farmers. (Recommended by the Nachiket Mor Committee)
- Priority sector lending (PSL): domestic banks must lend 40% of adjusted net bank credit to agriculture, MSMEs, education, housing etc.
- Narasimham Committee (1991 and 1998) — banking reforms.
📌 4. NPAs, Deposit Insurance & Digital Payments
- NPA: a loan becomes a non-performing asset when principal or interest is overdue for more than 90 days.
- Recovery tools: SARFAESI Act 2002, Insolvency and Bankruptcy Code (IBC) 2016, Debt Recovery Tribunals (DRT).
- DICGC (an RBI subsidiary) insures deposits up to ₹5 lakh per depositor per bank (since 2020; earlier ₹1 lakh).
- NPCI (2008) runs UPI (2016), RuPay, IMPS and AePS. RTGS is for large sums (minimum ₹2 lakh); NEFT has no minimum; both run 24×7.
- Basel norms (Basel, Switzerland) are international rules on bank capital adequacy.
⚠️ Exam Traps:
- M1 is the most liquid and M3 is broad money — "M4 is most liquid" is wrong.
- The ₹1 note is issued by the Government of India, not RBI.
- Payments banks can take deposits but cannot lend.
- The NPA limit is 90 days, not 180.
💡 Memory Tip: 1969-14-50, 1980-6-200 — year, number of banks and deposit cut-off (₹ crore) of nationalisation.
📌 5. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. What is the main drawback of the barter system? Practice
Correct answer: (D)
In barter both sides must want each other's goods, which is not always possible.
In barter both sides must want each other's goods, which is not always possible.
Q2. Which of these is a primary function of money? Practice
Correct answer: (A)
Medium of exchange and measure of value are primary functions; the rest are secondary.
Medium of exchange and measure of value are primary functions; the rest are secondary.
Q3. "Bad money drives out good money" is whose law? Practice
Correct answer: (B)
This is Gresham's law; people hoard good money and spend bad money.
This is Gresham's law; people hoard good money and spend bad money.
Q4. Narrow money is: Practice
Correct answer: (C)
M1 = currency with the public + demand deposits + other deposits with RBI; it is the most liquid.
M1 = currency with the public + demand deposits + other deposits with RBI; it is the most liquid.
Q5. Broad money is: Practice
Correct answer: (C)
M3 = M1 + time deposits with banks; RBI calls it broad money.
M3 = M1 + time deposits with banks; RBI calls it broad money.
Q6. M3 = M1 + ? Practice
Correct answer: (D)
Adding time deposits to M1 gives M3; adding post office savings gives M2.
Adding time deposits to M1 gives M3; adding post office savings gives M2.
Q7. What is "high-powered money"? Practice
Correct answer: (A)
M0 is the base for banks' credit creation, so it is called high-powered money.
M0 is the base for banks' credit creation, so it is called high-powered money.
Q8. Who issues the ₹1 note in India? Practice
Correct answer: (B)
The ₹1 note and coins are issued by the Government of India; the note carries the Finance Secretary's signature.
The ₹1 note and coins are issued by the Government of India; the note carries the Finance Secretary's signature.
Q9. Which system does RBI follow for issuing notes? Practice
Correct answer: (A)
Since 1957 the Minimum Reserve System: ₹200 crore reserves including ₹115 crore gold.
Since 1957 the Minimum Reserve System: ₹200 crore reserves including ₹115 crore gold.
Q10. When was State Bank of India established? Practice
Correct answer: (C)
The Imperial Bank of India became SBI on 1 July 1955.
The Imperial Bank of India became SBI on 1 July 1955.
Q11. How many banks were nationalised in 1969? Practice
Correct answer: (D)
On 19 July 1969, 14 banks with deposits over ₹50 crore were nationalised; 6 more in 1980.
On 19 July 1969, 14 banks with deposits over ₹50 crore were nationalised; 6 more in 1980.
Q12. When were Regional Rural Banks (RRBs) set up? Practice
Correct answer: (B)
RRBs began on 2 October 1975 to provide credit in rural areas.
RRBs began on 2 October 1975 to provide credit in rural areas.
Q13. Which statement about payments banks is correct? Practice
Correct answer: (B)
Payments banks can take up to ₹2 lakh per customer and issue debit cards, but cannot give loans or credit cards.
Payments banks can take up to ₹2 lakh per customer and issue debit cards, but cannot give loans or credit cards.
Q14. When does a loan become an NPA? Practice
Correct answer: (C)
RBI norm: an account is treated as an NPA when payment is overdue for more than 90 days.
RBI norm: an account is treated as an NPA when payment is overdue for more than 90 days.
Q15. In which year was the Insolvency and Bankruptcy Code (IBC) enacted? Practice
Correct answer: (D)
The IBC was enacted in 2016; the SARFAESI Act is from 2002.
The IBC was enacted in 2016; the SARFAESI Act is from 2002.
Q16. DICGC insures deposits up to how much per depositor per bank? Practice
Correct answer: (A)
Since 2020 the limit was raised from ₹1 lakh to ₹5 lakh.
Since 2020 the limit was raised from ₹1 lakh to ₹5 lakh.
Q17. Which body operates UPI? Practice
Correct answer: (D)
The National Payments Corporation of India (NPCI, 2008) runs UPI, RuPay and IMPS.
The National Payments Corporation of India (NPCI, 2008) runs UPI, RuPay and IMPS.
Q18. What is the minimum amount for an RTGS transfer? Practice
Correct answer: (A)
RTGS is for large sums — minimum ₹2 lakh; NEFT has no minimum.
RTGS is for large sums — minimum ₹2 lakh; NEFT has no minimum.
Q19. What is the overall priority sector lending target for domestic banks? Practice
Correct answer: (B)
The PSL target for domestic commercial banks is 40%, with a sub-target of 18% for agriculture.
The PSL target for domestic commercial banks is 40%, with a sub-target of 18% for agriculture.
Q20. How many public sector banks has India had since the 1 April 2020 mergers? Practice
Correct answer: (C)
There were 27 public sector banks in 2017; after the mergers there have been 12 since 1 April 2020.
There were 27 public sector banks in 2017; after the mergers there have been 12 since 1 April 2020.