Mrunal Sir's Economy 2020 Batch - Handout PDF

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11🤑 MONEY: DEMAND, SUPPLY & CREATION
11.1 🤲 DEMAND OF MONEY: LIQUIDITY PREFERENCE THEORY (तरलता अधिमान)

John Maynard Keynes (Book: The General Theory of Employment, Interest and Money)
noted that people prefer to keep a part of assets in liquid form (cash money) with 3
motives:
1. 🌽 Transaction motive (संव्यवहार उद्दे श्य): For using money as a medium of
exchange e.g. for buying daily milk, vegetables and fruits.
2. 💊 Precautionary motive (एहततयाती): To protect against sudden / unforeseen
expenditure e.g. medical emergency or impulsive purchase during a holiday trip.
3. 📉 Speculative motive (सट्टा-उद्दे श्य): Investors hold cash to make the best use of
any investment opportunity that arises later e.g. waiting for gold / land prices to
fall, then “I will use my cash to buy it”. Also known as "Asset Demand of Money".
The amount of money held in cash form vary inversely with interest rates. If higher
interest available in Bank Deposits, Bonds etc., people would invest money there instead
of keeping money in liquid form (cash).
11.2 📥SUPPLY OF MONEY (मद्र

ु ा की पतू ति)
🗓 Time Liabilities of a Bank (FDRD) 💪 Demand Liabilities of a Bank (CASA)
समय / मीयादी दे यताएँ माांग दे यताएां
- Fixed deposits, Cumulative/ recurring - Current Account, Savings Account,
deposits, Staff security deposit etc. Demand Draft
- Bank legally not required to pay - Overdue balance in Fixed Deposits
customer before maturity but may pay - Unclaimed deposits.
after deducting penalty/ interest.
Public parks more money here, because ____
better returns / higher interest rates.
____ More liquid because easily convertible
into cash on demand.
(Pre18-SetA) Q64. Which of the following is not included in the assets of a commercial
bank in India? (a) Advances (b) Deposits(c) Investments(d) Money at call and short notice
*CU: Coins & Currency with Public

Commercial Banks Post Office Savings Bank
Measure Demand Time Demand
Liquidity
*CU Time Qty
सांकुचित, व्यापक Deposits Deposits Deposits
Deposits
तरलता
(CASA) (FDRD) (SA)
Narrow M1 ✓ ✓ ✗ ☆☆☆☆ ☆
Money M2 ✓
____ M3 ✓
Money M4 ✓ ☆ ☆☆☆☆
- Self-Extrapolate e.g. M3 = M1 + Time deposits with commercial banks.
Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 16
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- M3 is the most commonly used for measuring money supply, aka “Aggregate Monetary
Resources” (समस्त मौद्रिक सांसाधन).
- In above formulas for money supply, we are only counting the “NET Demand / NET
Time deposits” i.e. only public deposits in bank. The interbank deposits, which a
commercial bank holds in other commercial banks- is not counted.
- Liquidity refers to the ease of converting an asset into cash. Cash is the most liquid
asset. Highly liquid assets: Gold, Demand deposits, G-Sec/T-Bill, shares/bonds of
reputed companies. Relatively illiquid assets: Home/Real estate, Paintings/Sculptures
etc. Because difficult to find buyers at right price instantly.
- Liquidity injection / infusion refers to phenomenon when RBI buys Bank/NBFCs’ G-
Sec/T-bill/financial assets to provide them with cash.
11.3 🖨 CREATION OF MONEY (मि
ु ा का ननमााण)
M0 / Reserve Money / Government Money / High Powered Money (उच्ि शक्तत मि
ु ा) is
issued under RBI Act, by RBI’s ISSUE DEPARTMENT, with condition that ISSUE
DEPARTMENT’s assets must match its liabilities.
Assets of Issue Department (पररसांपत्तियाँ) Liabilities of Issue Department [M0]
1. Rupee coins [RBI ‘buys’ coins & ₹1 notes from Total Currency notes (& coins & ₹1
Govt and circulates it as the ‘Agent of govt’] notes) in circulation, which consists
2. Gold coins [Min. ₹ 200 crores] of:
3. Gold bullion [Min. ₹ 115 crores] 1. Held by Public
4. Foreign Securities, incl. IMF [Earlier Min. ₹ 400 2. Held by other Banks in “Vault
crores but Post-1995 no such requirement.] cash” (i.e. amount for day to
5. (Indian) Govt. Securities [through which Govt day Ops.)
borrows money from RBI & returns Principal + 3. Other Deposits in RBI (of
Interest at later date] Public*, Banks & Governments)
* such as PM Garib Kalyan Yojana (2016) under which Blackmoney holder was required to
deposit 25% of his blackmoney in RBI for a lock-in period of 4 years. More in Pillar#2
11.3.1 💸 Velocity of Money Circulation (मि ु ा सांिालन का वेग)

It is the average number of times money passes from one hand to another, during given
time period. e.g. you bought pen worth Rs.10 from shopkeeper, he uses same 10 rupee
note to buy tea from another shop, then same currency note performed function of 20
Rupees. This “Velocity of money circulation” is affected by following factors:
- Income distribution. Money in the hands of poor people has higher velocity than the
rich.
- If more people borrow money for purchase=> higher velocity. Hence developed
countries => higher velocity, because people save less and spend more because of
lifestyle and confidence in Government’s social-security e.g. USA.
- Boom period in economy = more raw material purchase & hiring = higher velocity.
- Other 500-jaat-ke permutation-combination-PHD = poor cost:benefit for exam
11.4 ⚡️MONEY MULTIPLIER (मि

ु ा गण
ु क)
RBI’s Cash Reserve Ratio (CRR) leads to Fractional Reserve Banking & Credit Creation by
the commercial banks, which creates money multiplier effect as following:

High Powered money (M0) = 100 Asset Side Loaning 10% Reserve (‘R’)
Bank#1 100 90 10
Bank#2 90 81 9
Bank#3 81 72.9 8.1
Bank#.. .. .. ..
Total Money (here M3) 1000 = 900 + 100
𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝑇𝑜𝑡𝑎𝑙 𝑀𝑜𝑛𝑒𝑦 1000
𝑴𝒐𝒏𝒆𝒚 𝑴𝒖𝒍𝒕𝒊𝒑𝒍𝒊𝒆𝒓 = = =_
𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝐻𝑖𝑔ℎ 𝑃𝑜𝑤𝑒𝑟𝑒𝑑 𝑚𝑜𝑛𝑒𝑦 100
- Every “R” reserve generates “1/R” new money. Here, 10% reserve (R) generated 1/R =
10x times the high-powered money. 4% reserve ratio will generate 25x times (in
theory), however in reality the multiplier may be lower due to poor banking
penetration.
- In a functional economy, money multiplier is always _ _ _ _ _.
o & It directly improves with cut in CRR.
o & It indirectly improves as economy develops, consumption / loan demand
increases, banking penetration improves etc. In 1960s = less than 2x, 90s =
more than 3x, At present = more than 6x.
(Pre18-SetA) Q90. The money multiplier in an economy increases with which one of
the following?
A. Increase in the cash reserve ratio
B. Increase in the banking habit of the population
C. Increase in the statutory liquidity ratio
D. Increase in the population of the country
11.5 FACTORS AFFECTING MONEY SUPPLY [M1, M3]

M1, M3 Money Supply will increase when:
- When Money multiplier and / or Velocity of money increases.
- When RBI’s asset side increases e.g. Government borrowing more from RBI using G-sec
or increase in RBI’s foreign securities.
- With the increase in banking penetration, financial inclusion, formalization of
economy, Boom period, whenever loan demand increases.
- When RBI adopts Cheap / Easy / Dovish / Expansionary monetary policy to combat
deflation.
12 📢 MONETARY POLICY (मौद्रिक नीनत)

- [Definition] Monetary Policy is a _ _ _ _ _ _ _ _ _ policy (समक्टि आचथाक नीनत), designed
by the central bank of a country, to manage money supply & interest rates. It helps
shaping variables such as inflation, consumption, savings, investment, and capital
formation (मि ु ास्फीनत, खपत, बित, ननवेश और पज ां ी ननमााण).
- [Significance] Monetary policy plays an important role in price stability [inflation
control], economic growth, job creation and social justice in any economy.
- Philip Curve: Inflation ↑ = unemployment _ (and vice versa).
- Therefore, stable & moderate inflation is good for the economy. So, RBI tries to keep
inflation with 2-6% CPI (All India) using its bi-monthly monetary policy made by its 6-
member statutory Monetary Policy Committee.

12.1 📢 📐 MONETARY POLICY: QUANTITATIVE TOOLS (पररमाणात्मक सािन)

Also known as (aka) General or Indirect Tools as they affect the entire economy, and not
just a particular sector.
12.1.1 Statutory Reserve Requirements: CRR, SLR (Fight inflation: ↑, deflation: ↓)

CRR SLR
Full form: Full form:
(नकद कोष अनप
ु ात) (वैधाननक तरलता अनप
ु ात)
Banks must keep this much deposits with Banks must keep this much deposits in
RBI. RBI doesn’t pay interest on it, except liquid assets such as cash, gold, G-Sec, T-
in extraordinary circumstances like 1999’s Bills, State Development Loan Bonds and
Banking slowdown. other securities notified by RBI.
Bank earns no profit / interest* Some profit*
Mandated under RBI Act, 1934 _________________________________,
1949
RBI can fix any amount of CRR, legally Legally, SLR can’t be more than 40%.
there is no minimum floor or maximum Presently it’s 19.00% of NDTL and will be
ceiling. Presently it’s 4% of total DTL reduced to 18% in 2019-20 in a phased
manner.
Counted on Total Demand and Time On Net Demand & Time Liabilities (NDTL)
Liabilities (DTL) of a Bank. of a bank (ननवल माांग और समय दे यताएँ)
During demonetization, RBI temporarily Associated topics: Liquidity Coverage Ratio
prescribed Incremental CRR of 100% to (LCR) and High Quality Liquid Assets
drain excess liquidity in banks & prevent (HQLA): we’ll study in BASEL-III lecture.
crashing of loan interest rates.
All Scheduled Commercial Banks (SCB) Similar to left cell.
must keep CRR however, RBI may prescribe
separate norms/ slabs for RRBs and
Cooperative Banks
- CRR-SLR are counted on fortnightly basis. If not maintained, bank will have to pay
penalty interest rate to RBI which is linked with Bank Rate.
- CRR-SLR ensure monetary stability of India through two primary functions:
1) CRR assists in money multiplier effect,
2) CRR-SLR provide buffer/protection during a Bank Run i.e. an emergency when
every depositor wants to pull out money from his bank account at once, mainly
due to fake news / rumors.
- While in theory CRR/SLR can be used for inflation control but RBI primarily relies on
REPO Rate (=its Policy Rate) to combat inflation, and not CRR/SLR.
Asked in UPSC-CDS-2011-II Asked in UPSC-Pre-2015

Q. Find correct statements about Statutory Q. When the Reserve Bank of India reduces
Liquidity Ratio (SLR) the Statutory Liquidity Ratio by 50 basis
1. To meet SLR, Commercial banks must points which of the following is likely to
keep cash only. happen?
2. SLR is maintained by the banks with (a) India's GDP growth rate increases
themselves. drastically.
(b) Foreign Institutional Investors may
bring more capital into our country.

3. SLR restricts the banks leverage in (c) Scheduled Commercial Banks may cut
pumping more money into the their lending rates.
economy. (d) It may drastically reduce the liquidity
Answer codes: to the banking system.
(a) 1, 2 and 3 (b) 1 and 3
(c) 2 and 3 (d) only 2
12.1.2 ®️ Key Rates (Inflation → _ _ _ Rates, Deflation → _ _ _ Rates)

- Bank Rate (बेंक दर): Interest rate at which banks borrow long term loans from RBI
without pledging any securities/collaterals. Nowadays RBI uses repo rate the policy
rate to combat inflation/deflation. Bank rate is used in computation of penalty
rates. Usually, Bank Rate % = MSF %
- Marginal Standing Facility (MSF, 2011 - सीमांत स्थायी सवु विा): The Interest rate at
which RBI lends short-term loans to Scheduled Commercial Banks (SCB) with their _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ as collaterals. MSF _ _ _ _ _ _ _ _ than Repo Rate.
- Liquidity Adjustment Facility (LAF, 2000- तरलता समायोजन सवु विा): consists of
two mechanisms:
I. ®️ LAF-Repo Rate (पन
ु : क्रय-अनब
ु ि
ं ): The Interest rate at which RBI lends
short-term loans to its clients with their G-Sec as collaterals. Clients enter
into an agreement with RBI to repurchase their G-sec at a future date at a
(higher) pre-determined price. SCB _ _ _ _ _ _ pledge their SLR-quota-G-
Secs. Repo is also called ‘Ready Forward Transaction’. Repo Rate is our
Policy Rate to control inflation. MSF% & Reverse Repo% are tied with
Repo%.
II. ®️ ®️ LAF-Reverse Repo Rate (उलट पन ु : क्रय-अनब
ु ि
ं ): It’s the interest rate
that clients earn when parking their surplus funds with the RBI for short
periods. Mechanism similar to Repo, RBI gives its G-Sec as a collateral.
Reverse Repo is _ _ _ _ _ than Repo Rate.

12.1.3 ®️ Key Rates- associated terms

- ↔️ Policy Corridor: It’s the width among MSF-Repo-ReverseRepo. Presently, 25
basis points (0.25%). Previously it had been 1%, 0.50% but narrowed to 0.25% for
better alignment with call money market, thus ensuring better transmission of
monetary policy.
- Window Operations: LAF-MSF “windows” are operated through RBI’s _ _ _ _ _ _
Core Banking Solution (CBS) platform.
- (Uncollateralized) Standing Deposit Facility (SDF, स्थायी जमा सवु विा): Banks parks
funds in RBI for short-term to earn interest. No G-sec / collateral, unlike Reverse
Repo. This helps RBI absorb excess liquidity for short term in situations like
demonetization when RBI may not have enough G-Secs to pledge as collaterals.
Urjit Patel Committee on Monetary policy (2013) proposed this, Budget-2018
agreed to amend RBI Act for this.
- Tri-Party Repo (त्रि-पक्षीय पन
ु : क्रय-अनब
ु ि
ं ): In ordinary repo, there are two parties-
borrower vs. lender (RBI). In Tri-party Repo, there are 3 parties 1) borrowers 2)
lenders 3) Tri-Party Agent (e.g. NSE) who, acts as an intermediary between the two
parties to facilitate collateral custody, payment and guaranteed settlement. 2017:
RBI issued guidelines → 2018: National Stock Exchange (NSE) started. This is not a
tool of Monetary Policy. It helps deepening Corporate Bond market.
- BPLR, MCLR, External Benchmarks, Teaser Loans etc: Terms related to how
individual banks decide their lending rates. More in NPA-handout in future.
- Liquidity Trap: will learn in Microeconomics lecture.
12.1.4 📁 Market Operations (OMO, MSS): (Inflation → Sell G-Sec, Deflation → Buy)
I. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (खुले बाजार की क्रियाए): RBI buys and sells
Union & State Govts’ securities to control money supply. RBI buying= Money supply
increased/liquidity injected in the market. RBI selling = Money supply
decreased/liquidity absorbed from the market.
II. Market Stabilization Scheme (बाजार क्स्थरीकरण योजना): RBI sells G-sec, T-Bill &
Cash Management Bills (CMB) to suck excess liquidity. While the money thus
collected is not part of Govt.’s borrowing, but Govt. pays interest on it. This
mechanism was enhanced during Demonetization to counter excess liquidity and
crashing of lending rates.
III. Sterilization / Forex Swap: Their primary objective is to control the currency
exchange rate volatility. <More in Pillar#3 >
Q. Which of the following measures would result in an increase in the money supply in
the economy? (Asked in UPSC-Pre-2012)
1. Purchase of G-Sec from the public by the Central Bank.
2. Deposit of currency in commercial banks by the public.
3. Borrowing by the government from the Central Bank.
4. Sale of government securities to the public by the Central Bank.
Answer Codes: (a) 1 only (b) 2 and 4 only (c) 1 and 3 (d) 2, 3 and 4
12.2 📢🌽 MONETARY POLICY: QUALITATIVE TOOLS (गुणात्मक साधन)
While quantitative tools (SLR, CRR, Repo etc.) control the ‘volume’ of loans, these
qualitative tools (PSL,LTV etc.) control the “distribution” of loans to a particular sector of

economy (e.g. agriculture) or particular segment of society (e.g. farmers, women, SC/ST).
Hence, also known as SELECTIVE (ियनात्मक) or DIRECT (प्रत्यक्ष) Tools.
12.2.1 🙇🏼 Moral Suasion (नैततक दबाव / सलाह)

- “Persuasion” without applying punitive measures. RBI governor tries this tactic via
conferences, informal meetings, letters, seminars, convocation, panel discussion,
memorial lectures.
- Example, RBI-Governor asking banks to transmit repo-rate cuts, open new branches
in rural areas, spread financial literacy, give loans to farmers beyond PSL quota
etc. Similarly, Governor requesting Chief Ministers or Finance Minister to control
fiscal deficit & subsidy leakage to enhance the efficacy of RBI’s monetary policy.
12.2.2 🚯 Direct Action (सीिी कायिवाही)

- RBI can punish banks (and even non-banks) for not complying with its directives
under RBI Act, Banking Regulation Act, Payment and Settlement Systems Act,
Prevention of Money Laundering Act, Foreign Exchange Management Act (FEMA).
12.2.3 💍 Margin Requirements / Loan to Value (LTV) (सीमा अतनवायिता)

- RBI can mandate Loan to Value (LTV) for a gold-loan, home loan, auto loan or
business loan etc. so a Bank/NBFC can’t lend more than x% of the value of the
collaterals. RBI can change this x% to boost / curb demand.
12.2.4 Selective Credit Control (चयनात्मक ऋण तनयंिण)

In a negative / restrictive direction In a positive direction
- In erstwhile-USSR: Credit Rationing - 🚗 Consumer credit control e.g.
System where an individual can’t get During deflation / recession, RBI can
more than prescribed amount of loans relax the down payment / EMI
for each category (housing, education, installment norms for durables like
business). Vehicles, TV, Fridge etc. to boost
- 1960s: Credit Authorization Scheme consumption and demand.
(CAS) in India: all commercial banks - Priority Sector Lending <see below>
had to obtain prior approval of the RBI
before loaning ₹ 1 crore/> to a single
borrower.
- 1970s: RBI imposed quantitative
ceiling on non-food loans to boost
green revolution, food inflation.
But such measures failed due to lax
monitoring and loopholes.
12.3 🌽 PRIORITY SECTOR LENDING (प्राथममकता क्षेत्र के मलए ऋण मानक)

- 1968: First time RBI used the word “priority sector”: Banks must give 40% of their
loans to 3 priority sectors 1) agriculture 2) small industries 3) exporters by 1985.
- Later, Deposit Insurance and Credit Guarantee Corporation of India (DICGCI) was setup
to facilitate bank lending to the priority sectors. [Will study more about Credit
Guarantee with future handout on Pillar#1D: Financial Inclusion.]

Priority Sector Loans norms updated in 2015 Min.Quota

👩🏻 Weaker Sections: SC, ST, Women, PH, Minorities, Manual scavengers, __%
Artisans, NRLM/NULM beneficiaries, PMJDY Overdrafts upto Rs.10k.
🌽 Agriculture: (all farmers small and big) 10%
🌽 Agriculture: *Marginal Farmer (upto 1ht); *Small farmer (>1 upto 2ht) _%
🧵 Micro Enterprises, Khadi-Village industries 7.50%
Above parties, as well as Small & Medium Enterprises, Affordable housing 4.50%
loans to beneficiaries under Pradhan Mantri Awas Yojana, food processing
companies, Vermi compost, biofertilizer, seed production, Exporters,
Student-Education loans (upto Rs.10l), Social Infrastructure (schools,
health care, drinking water, sanitation facilities); Renewable Energy
Projects (wind mills, biomass generators, solar street light, micro-hydel
plants etc.)
Total PSL for SCB and (Foreign Banks with 20/> branches). ___
- If Regional Rural Bank (RRB) or Small Finance Bank, then above 40% quota + extra 35%
quota (in any PSL-sectors as per given bank’s wish) = _ _ PSL loan-quota.
- PSL applies on Urban Cooperative Banks with certain caveats but its #PHD-NOT-IMP.
- If foreign bank has less than 20 branches, they’ll also have to give 40% PSL-Quota loans
WEF 31/3/2020, but no internal loan-quotas for weaker section, small farmers, khadi
enterprise etc. for such banks (Afterall, how can they find all such people!)
- Loans given to Microfinance Agencies for above categories, are also counted in quota.
- PSL quotas are ‘minimum’ and not maximum. So, if bank wishes it can give even 30% of
its loans to weaker section instead of just RBI mandated 10%.
- Bank + NBFC’s joint lending / co-origination loans to PSL categories are also eligible,
with conditions. [Handout: Pillar#1D: Financial Inclusion].
- Micro, Small, Medium Enterprise definition= [Handout: Bank Classification → Mudra]
12.3.1 📜 Priority Sector Lending Certificates (PSLC) from 2016 onwards

- In this arrangement, the overachieving Banks can sell their excess PSL in form of
‘certificates’ to underachieving banks without transferring the loan assets or its risk.
- Four kinds of PSLCs traded through RBI’s _ _ _ _ Portal, viz., Agriculture (PSLC-A);
Small and Marginal Farmers (PSLC-SM); Micro Enterprises (PSLC-ME); and General
(PSLC-G).
- If an underachiever bank can’t fulfil its PSL-quota through PSL-certificates purchase
then ultimately, it’ll have to deposit PSL-shortfall money to NABARD's Rural
Infrastructure Development Fund (RIDF), SIDBI, or National Housing Bank, MUDRA Ltd.
etc as per the norms decided by RBI from time to time. Under-achiever bank will earn
interest from such deposited money, but it’ll be (usually) linked with Bank-Rate &
their money will be locked-in a long term project.

Asked in UPSC-Pre-1995 Asked in UPSC-Pre-2013

Q. Which of the following is not an Q. An increase in the Bank Rate generally
instrument of Selective Credit Control? indicates that _ _ _
a) Regulation of consumer credit a) Market rate of interest is likely to fall.
b) Rationing of credit b) Central Bank is no longer making loans
c) Margin requirements to commercial banks.
d) Cash reserve ratio c) Central Bank is following an easy
money policy.
d) Central Bank is following a tight money
policy.
Q. Consider the following: Q. 'Open Market Operations' refers to:
1) Bank rate 2) Open market operations (a) borrowing by banks from the RBI
3) Public debt 4) Public Revenue (b) lending by commercial banks to
Which of them is/are part of Monetary industry and trade
Policy? (c) purchase and sale of government
(a) 1 only (b) 2, 3 and 4 securities by the RBI
(c) 1 and 2 (d) 1, 3 and 4 (d) None of the above
Q. Priority Sector Lending by banks in India constitutes _ _ _ (Asked in UPSC-Pre-2013)
a) Agriculture b) Micro and Small Enterprises c) Weaker Sections d) All of the above
12.4 📢 👁‍🗨 MONETARY POLICY TOOLS: A READY RECKONER TABLE

Tools & Strategy? <2%CPI= Fight deflation >6%CPI= Fight Inflation
- Deflation: ↑ money (अपस्फीतत) (मुद्रास्फीतत)
supply, inject liquidity=>
Easy, Cheap, Dovish, Tight, Dear, Hawkish,
make loans cheaper, ↑
Expansionary policy. Contractionary
consumption
- Inflation: Do reverse आसान-सस्ता व्याजदरे , त्तवस्तारवादी तांग- मँहगी व्याजदरे , सांकुिनवादी
Reserves: CRR, SLR _____ ↑ (increase)
Quantitative
Key Rates (Repo, ↓ (decrease) _______

MSF, Bank Rate)
OMO: RBI _ _ _ _ _ G-Sec from OMO: RBI _ _ _ _ G-Sec
Market Ops
market. MSS: same as OMO
(OMO, MSS)
MSS: not its objective.
Moral Suasion / Nudge / Force the banks to To enforce the Hawkish

Direct Action enforce Dovish Policy policy
Increase e.g. inverse
Margin Req. / LTV
Gold-LTV: 60% → 90%
Qualitative Tools
↑ loan-flow to sectors that - ↓the loan-flow to

can generate employment sectors where
e.g. textile →workers buying speculative investment
more →demand /consumption is leading to demand-
Selective Credit
increased →deflation fought. side inflation e.g. real
Control / PSL
estate & housing.
- ↑loan-flow to sectors
where loans can ↑supply
e.g. onion farmers.

** MCQs are usually confined to how can CRR,SLR,Repo & OMO be used
for inflation / deflation control. For rest of the tools you need not
waste time thinking 500-jaat-ke-permutation-combination & PhD.
12.5 📢 MONETARY POLICY IN PRESENT-DAY INDIA
There are 3 strategies / ways of making a monetary policy:

1. Exchange rate stability: Singapore & other export-oriented economies use this.
2. Multiple Indicators: Central Bank tries to focus on Growth, Employment, Inflation
Control and Exchange rate stabilization. India's RBI had this before 2016.
3. Inflation targeting: Central Bank only aims to keep inflation controlled, THEN other
indicators (growth, employment, exchange rate) will automatically fall in line. It was
successful in Western nations, adopted in India WEF 2016-Oct, based on Urjit Patel
Committee Report (2013-14), by amending RBI Act Section 45 →
12.5.1 📢 Monetary Policy Making under RBI Act since 2016

Monetary Policy to be made by a statutory Monetary Policy Committee (MPC):
RBI side (3 members) Govt. Side (3 members)
1. RBI Governor, as the Ex-officio Chairman. 1. Dr. Chetan Ghate, Indian
2. Dy.Governor responsible for Monetary Policy. Statistical Institute
3. One person nominated by RBI Central Board: 2. Dr. Pami Dua, Delhi School of
Michael Patra (Executive Director, RBI) Economics
3. Dr. Ravindra H. Dholakia, IIM-A
Their tenure (कायाकाल) tied with their ex-officio Tenure: 4 years, no re-
appointment. They’re selected by a
job tenure E.g. Shaktikanta’s shakti (powers) will
Committee headed by cabinet
be gone after his 3-years tenure as RBI-Governor
Secretary (IAS)
expires, unless he is reappointed.
RBI Governor & Dy.Gov are selected by Financial They’re selected by Search-cum-
Sector Regulatory Appointment Search Committee Selection Committee headed by
(FSRASC) is headed by Cabinet Secretary (IAS) Cabinet Secretary (IAS)
- Meeting quorum 4 members, incl. Governor. Legally minimum four meetings a year. In
practice, they meet every two months to decide bi-monthly monetary policy updates.

- Repo rate (=Policy rate) decided by Majority vote. If tie, then Governor has second _ _
_ _ vote.
- To ensure transparency / accountability: Govt can send message only in writing.
Committee must publish its minutes of the meeting on the 14th day, and “Monetary
policy report” at every 6 months.
- Inflation target decided by Union Government after consulting with RBI Governor.
o Present target: Keep Consumer Price Index (CPI:All India) within 2-6% for _ _ _
_ _ _ (ending at 31/03/2021). [alt. way of saying: 4% +/- spread of 2%]
o Target fail: if inflation not kept in this 2-6% zone for 3 consecutive quarters (=9
months) then Committee must send report to Govt with reasons and remedies.

Q. With reference to inflation in India, Q. Consider following statements about
find correct statement: Monetary Policy Committee:
a) Controlling the inflation in India is the 1. It decides RBI’s benchmark interest
responsibility of the Government of rates.
India only 2. It is a 12-member body including the
b) The Reserve Bank of India has no role Governor of RBI and is reconstituted
in controlling the inflation every year.
c) Decreased money circulation helps in 3. It functions under the chairmanship of
controlling the inflation the Union Finance Minister.
d) Increased money circulation helps in Find Correct Statements:
controlling the inflation (a) 1 only (b) 1 and 2 only
(c) 3 only (d) 2 and 3 only
12.6 📢 REVIEW OF MONETARY POLICIES
📢 Policy Decisions & Regulatory Announcements

[we will study in appropriate pillars/sections]
Feb- - No change in Repo@6%; Neutral Stance (meaning next time, we may
2018 raise repo, cut repo or keep it unchanged)
- Share market volatility, Advanced Economies recovery= foreign investors'
outflow → weakening of rupee + OPEC-Russia OIL production CUT = crude
oil led inflation.
- Base rates-MCLR Reforms.
- ATM-Cash recycler machine subsidy removed.
- Ombudsman for NBFCs
April- - No change in Repo @6%; Neutral Stance
2018

- Wait and Watch mode because Budget’s pro-farmer-MSP, pro-rural

approach; 7th Pay Commission’s HRA hikes could generate demand-side
inflation.
- IndAS accounting norms for Indian Banks deferred till 1/4/2019
- BASEL-III CCCB not necessary for this Financial Year.
- Payment System data must be stored in India within next 6 months.
- Reiterated that cryptocurrencies / VC are dangerous WRT consumer
protection, market integrity and money laundering. No entity regulated by
RBI shall deal with VC companies, else be ready to “Face Direct Action”.
- RBI’s inter-departmental group to check desirability and feasibility to
introduce a central bank digital currency.
- Financial literacy: new booklets for five target groups: Farmers, Small
entrepreneurs, School children, Self Help Groups and Senior Citizens. Will
review Lead-Bank Scheme.
- RBI data science lab for big-data analytics will be setup by 2018-Dec.
- Regulatory norms for Cash-in-Transit (CIT) companies and Cash
Replenishment Agencies (CRAs)
June- - Repo hike 25 bps= @6.25%; Neutral Stance
2018 - There has been a 12% increase in the crude oil price since the April policy.
Crude Oil price rise are 'passed through' because Governments not reducing
custom / excise /state VAT. So, had to fight inflation by raising Repo.
- Will implement Yeshwant Deosthalee report on Public Credit Registry.
- Will allow Voluntary Transition of Urban Cooperative Banks into Small
Finance Banks.
- PSL home-loan guidelines revised to sync with Pradhan Mantri Awas Yojana.
- Will develop a suitable rechargeable device or offline-software/app
mechanism for visually challenged to identify Indian banknotes.
Aug- - Rate hike 25 bps= @6.50%; Neutral Stance (meaning next time, either
2018 hold, hike or cut).
- Rupee weakening against dollar, Government’s MSP-hike = more inflation
likely. Had to fight inflation by raising Repo.
- Norms for Co-origination of loans for Bank-NBFC. <More in Pillar#1D>
- Banks’ Internal Ombudsman trial successful. Now applicable to all SCB.
- Extension of MSF-LAF facilities to certain cooperative banks.
Oct- - No change in Repo but Stance changed to: Calibrated Tightening
2018 (meaning next time either rate hold or rate hike but no chance of rate
cut)
- RBI still apprehensive of oil prices, rupee strength and inflation, but did not
increase Repo, just wait and watch for now.
Dec- - Urjit’s last policy: No change in Repo; Stance: Calibrated Tightening.
2018 - While Crude oil prices have declined by ~30% since October, so higher
inflation is unlikely. But RBI wants to keep inflation @4 per cent on a
durable basis. So, “calibrated tightening” stance continued.
- Loan rate external benchmarks WEF 1/1/2019.
- RBI to reduce SLR, from 19.5% to 18% at the rate of 25 basis points in each
quarter for BASEL-LCR-HQLA compliance. (More in Pill#1:BASEL)
- India and Japan have agreed to enter into a bilateral swap arrangement of
$75 billion (will learn in Pill#3)

- Told Banks to keep special facilities for the senior citizen customers since
2017, if not done then be ready for “DIRECT ACTION” via Banking
Ombudsman.
- RBI's own Ombudsman for digital transactions- he'll look into not just banks
but all payment service providers. (Covered in first handout)
- Framework for Limiting Customer Liability in Unauthorized E-Transactions in
Prepaid Payment Instruments.
- RBI to setup Ex-SEBI Chairman U K Sinha’s Committee on long-term solutions
for the economic and financial sustainability of MSME.
- Urban Cooperative Banks to have board of management under RBI.
Feb- - Shakti’s 1st Policy: CPI falling towards 2%, so to prevent deflation, Repo cut
2019 by 25 basis points BPS (6.50% → 6.25%), stance changed to “neutral”.
- Collateral free loans to farmers : ₹1l-> ₹1.6l
- 3 NBFC categories (Asset Finance Co.,Loan Co., Investment Co.) merged into
single category ‘Investment and Credit Company’ (NBFC-ICC).
Apr- - Repo cut 25bps (6.25% → 6.00%), stance kept at Neutral.
2019 - Decision not unanimous. Dy. Gov. Viral Acharya fears inflation due to Oil &
El Nino. But, Gov.Shaktikanta Das feels the declined sale of vehicles, air &
sea traffic is pointing to deflationary trend ahead so rate cut necessary.
- Loan interest rates: External Benchmark mechanism was to be implement
from 1/4/2019 but decision deferred after bankers’ feedback.
- BASEL-III Countercyclical Capital Buffer (CCCB) not yet required in India.
- To help the international / non-resident investors to participate in G-Sec,
RBI will allow them via International Central Securities Depositories (ICSDs).
Jun- - Repo Cut 25bps (6.00% → 5.75%), Consequently, the reverse repo rate
2019 @5.50%. MSF and Bank Rate @6%
- Stance: changed from Neutral to _ _ _ _ _ _ _ _ = next time Committee
may decrease the repo rate or keep it unchanged, but, no chances of rate
hike.
- Committee voted unanimously for rate cut because, IMD has predicted 96%
normal monsoon, so high level of food inflation seems unlikely. Fuel prices
rose but overall inflation is offset by falling of other commodities prices.
Thus, CPI inflation remained unchanged at around 3%. Slowdown in trade
and manufacturing due to US-China trade war, and other geopolitical issues.
So cheaper loans required to boost demand and mfg.
- RBI waives NEFT & RTGS charges. Banks will be required, in turn, to pass
these benefits to their customers.
- RBI to give ‘On-Tap’ license in Small Finance Bank category soon.
Other technical announcements (Not Exam worthy)
- Guidelines for Foreign Exchange Trading Platform for Retail Participants
developed by Clearing Corporation of India.
- Will setup new committees to review 1) ATM charges 2) regulatory
guidelines for systemically important Core Investment Companies (CICs).
- Technical guidelines for retail investors to participate in State G-Sec
auctions.
- Basel-III standards- Leverage Ratio guidelines: 4% for Domestic Systemically
Important Banks (DSIBs) and 3.5% for other banks.
Aug- <empty page kept for updating monetary bi-policies upto April 2020>
2019

Oct-
2018
Dec-
2018
Feb-
2019

Apr- <April policy usually has more update for it opens with the new Financial Year,
2019 therefore, more writing space>

12.7 🔇 LIMITATIONS OF MONETARY POLICY IN INDIA

Even though the monetary policy is updated every 2 months, its efficacy in controlling
inflation or boosting growth is restricted by following factors:
1) Repo is not major source of funds for banks, unlike the Advanced Economies, where
households don’t save that much in Banks. So those banks borrow more from US Feds.
2) Indian Banks don’t immediately pass on the RBI rate cuts to customers, citing NPA/Bad
loans / profitability problem.
3) Supply Side Issues: El-Nino/Poor monsoon hurting crop production, geopolitical issues
increasing global crude oil & raw material prices. RBI can’t control them. While cheap
loans can boost consumption, investment and growth but because of monsoon-fear and
oil-price fear, RBI is usually apprehensive of inflation and more inclined to keep repo
rate high. Then RBI gets criticized for not facilitating cheap loans & economic growth.
4) Government Side Issues: Fiscal repression, Fiscal slippage, Fiscal deficit, Subsidy
leakage, Populist Loan-waivers etc. [More in Pill#2: Budget]
5) Structural Issues in Economy: lack of electricity-road infrastructure / Ease of Doing
Biz = production /supply affecting inflation trends. Presence of Informal moneylenders
in rural areas who circulate black money at exorbitant interest rates. Poor penetration
of banking sector and financial inclusion etc.
12.7.1 ⁉️ Mock Questions for UPSC Mains/GSM3 (150-250 words)

1. "Monetary policy is both a catalyst and an impediment to India's growth story." Examine
critically. “भारत की विकास-गाथा में मौद्रिक नीवत एक उद्दीपक भी है और एक अिरोधक भी है।" गंभीररूप
से विश्लेष्ण करे .
2. “Monetary policy is a useful medicine, but NOT panacea for economic growth”. Comment
in context of India. “आर्थिक विकास के विए, मौद्रिक नीवत एक उपयोगी दिा है, िेद्रकन रामबाण नहीं”.
टिप्पणी करे .
3. Discuss the significance of Monetary policy in India's economic growth and human
development. भारत की आर्थिक िृवि और मानि विकास में मौद्रिक नीवत के महत्ि पर चचाि करें .

13 🏛 BANKS & NBFCS CLASSIFICATION
- A Financial
Intermediary (FI:
त्तविीय मध्यस्थ) is an
entity that acts as
the middleman
between two parties
in a financial
transaction- between
lenders vs.
borrowers, investors
vs. entrepreneurs,
households vs
business firms.
- Such FI can be
subdivided into (1)
Formal (2) Informal.
13.1 🏦 ₹ 🖨 BANKS → RESERVE BANK OF INDIA (RBI): भारतीय ररजवा बैंक

1913 Commercial banks were required to register under the Companies Act, but
monitoring was lax. No CRR, SLR, BASEL Norms.
1926 Royal Commission on Indian Currency (_ _ _ _ _ _ _ _ _ Commission)
recommends setting up a central bank named 'Reserve Bank of India'.
1929 Great Depression in USA leads to collapse of 450+ banks in India. So British
Government becomes serious about setting up RBI.
1934 Reserve Bank of India Act was enacted.
1935, April RBI becomes operational from 1st April, with 1st Governor Sir _ _ _ _ _ _
Government ownership was ~4.4% only.
1935, July Commercial Banks fulfilling certain conditions were listed in the 2nd
Schedule of RBI Act, & such “Scheduled Banks” were required to keep
CRR with RBI.
1943-49 _ _ _ _ _ _ _ _ _ _ _ _ becomes the first INDIAN Governor of RBI. He had
also participated in the Bretton Woods Conference, USA (1944).
1948-49 All private investors’ shares transferred to GoI under the RBI transfer of
ownership act 1948. Therefore, RBI governor answerable to Parliament,
has to pay dividend to Government from its profits.
19__ Banking Regulation Act (बैंककं ग विवनयमन अवधवनयम) empowered the RBI to
 Give license to companies to open banks, give permission banks to
open new branches.
 Prescribe auditing and liquidity norms for Banks such as SLR.
 Protect interest of depositors. Force elimination / merger of weak
banks.
Mrunal’s Economy Pillar#1B: Classification Bank-NBFC → Page 32

MCQ. In context of independent India's economy, which one of the following was the
earlier event to take place? (Asked in UPSC Prelims-2009)
A) Nationalization of insurance companies B) Nationalization of State Bank of India
C) Enactment of Banking Regulation Act D) Introduction of first Five year plan
Table 1: RBI Central Board Composition

(Non-Official Directors) (Official Directors)
- 2 Government officials - RBI Governor
- 10 directors nominated by Government. - 4 Dy. Governors
- 4 directors from RBI’s local boards @West, East, North, South
13.1.1 🏦 ₹ 🖨 RBI Governor & Dy Governor

- 25th Governor: Shaktikanta Das (Retd. IAS, Former finance secretary, G20 Sherpa,
Member of 15th Finance Commission). He replaced Urjit Patel (2018-Dec).
- RBI Act (Section 8) provides for “NOT MORE than 4” Dy. Governors viz.
1. B.P. Kanungo: from RBI officer cadre.
2. N. S. Vishwanathan: from RBI officer cadre.
3. Mahesh Kumar Jain: Outsider
4. Dr. Viral V. Acharya: Outsider, resigned in 2019-June. _ _ _ _ _ _ _ _ _ _ _ _
<update new name when appointed>
Their tenure usually 3 years. Re-appointment Possible. They’re selected by Financial
sector regulatory appointment search committee (FSRASC) headed by the Cabinet
Secretary (IAS) → successful candidates’ names sent to Appointments Committee of the
Cabinet headed by the Prime Minister for final approval.
Related Topic: RBI Autonomy, Dividend Controversy, Section 7, PCA/BASEL: [Future

Handout → Burning Issues in Banking Sector → NPA]
13.1.2 🏦 ₹ 🖨 RBI Offices & Departments

- RBI 4 regions: Northern: Delhi, Eastern: Kolkata, Southern: Chennai, Western: Mumbai
- RBI has various departments looking after Banks, NBFCs, Payment Systems, Foreign
Exchange Management etc.
- Previously individual departments directly acted against violators. WEF 1/4/2017: A
New Enforcement Dept was setup in RBI for centralized action against violators.
- This is different from FinMin’s Enforcement Directorate (प्रितिन वनदेशािय) that looks
after Foreign Exchange Management Act, 1999 (FEMA) and Prevention of Money
Laundering Act, 2002 (PMLA)- विदेशी मुिा प्रबंधन अवधवनयम, और धनशोधन वनिारण अवधवनयम.
13.1.3 🏦 ₹ 🖨 RBI: Functions of

1) Controller of Money Supply: Issues M0 under RBI Act, Makes Monetary Policy.
2) Controller of Foreign Exchange: through FEMA Act. (more in Pillar#3)
3) Banker to Governments & Public Debt Manager.
4) Banker’s _ _ _ _ _ : Lender of Last resort, Advises in monetary matters.
5) Regulator of all “BANKS”: through BR Act’49, Payment Systems’07
6) Regulator of AIFI, NBFC-D & others.
7) Promotional Roles: Customer protection through Ombudsman, Financial Inclusion
through PSL norms, 25% rural branch requirements.


13.3.1 Nationalization of Banks After Independence: Reasons

 NEXUS between Banks and Industrialists: From 1950s to 1960, only 188 elite people
controlled the economy by being in board of top 20 banks, 1452 companies, and
numerous insurances, finance companies. This led to reckless lending to directors and
their firms. So, Banks failed frequently, RBI had to close unviable banks.
 Private Banks unwilling to open in rural areas- this did not help in financial inclusion
of poor, farmers, MSME or achievement of FYP targets or reducing regional imbalance.
Table 3: Nationalization & Merger of Banks after Independence

1948 RBI Transfer of Ownership Act.
1955 Imperial Bank nationalized and became SBI.
1955-56 LIC Act took over private life insurance cos.
1963 State Bank of Jaipur and Bikaner merged together.
1969 'Banking Companies (Acquisition and Transfer of Undertakings) Ordinance,
1969: 14 Private banks with ₹ 50 cr/> deposits were nationalized e.g. Bank of
Baroda, PNB, Dena, Canara etc.
- Catholic Syrian Bank (1920, Kerala), Ratnakar Bank, Dhanlaxmi Bank etc.,
did not have such large deposits, so they were left out & called “_ _ _ _
Private Banks”.
1972-73 GIC Act- took over private Non-Life (=General) insurance cos. Later GIC was
re-organized with 4 subsidiaries: National Insurance, New India Assurance,
Oriental Insurance and United India Insurance.
1980 6 banks with ₹ 200 cr/> deposits were nationalized e.g. Corporation Bank,
Vijaya Bank, Oriental bank of Commerce etc.
2008-10 State Bank of Saurashtra and State Bank of Indore merged into SBI.
2013 - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ was setup as PSB, HQ Delhi, 100%
ownership by Union Government.
- BMB’s Board of Directors:_ _ _ _ _ _ _ _ _ _ _ . Staff & Deposit Holders:
both men and women, Loans given predominantly to women- and that too
without collaterals upto Rs.1 crore.
2017, BMB & 5 Associated Banks of SBI viz. State Bank of Bikaner and Jaipur (SBBJ),
1st April State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of
Patiala (SBP) and State Bank of Travancore (SBT), merged with SBI from 1st
April by swapping of shares.
2017, - Alternative Mechanism Panel setup under the FM Jaitley’s chairmanship
Nov (other members: Piyush Goyal, Nirmala Sitharaman).
- They examine the proposals for merger/consolidation of the Public Sector
Banks (PSBs) and forward to Cabinet for approval.
- Department of Financial Services coordinates the filework.
2019, ___________________________________ to be merged into Bank of Baroda,
1st April by swapping of shares.
- Among these three oldest: BoB (1908) > Vijaya (1931)> Dena (1938)
- BoB & Dena nationalized in ’69, HQ: Mumbai
- Vijaya: nationalized in ‘80, HQ. Bengaluru
13.4 🏦 👨‍⚖️ 🔂CONSOLIDATION OF PSBS [एकिीकरण]

Consists of two types of reforms: 1) Merger 2) Privatization

- Merger (ववलीनीकरण): Such as BMB & 5 Associated Banks → SBI; Vijaya & Dena →BoB.
Benefit? Geographical & technological synergies (in ATM, Branches, Servers etc.)
resulting into reduced cost of business → better lending & deposit rates.
- Privatization (तनजीकरण): such as UTI Bank → Axis Bank, IDBI’s ownership transferred
to LIC. Benefit? Govt. need not waste tax-payers’ money in running such loss banks.
Govt. need not recapitalize them for BASEL-III norms. (More in next handout on ‘Burning
Issues in Banking Sector → BASEL)
- Anti-Arguments: Employees worried seniority, promotion, increments; financial
burden of Voluntary Retirement Scheme (VRS). Banks may lose regional identities &
customer intelligence with transfer of employees. Big customers may shift to other
banks for faster service and personalized privileges.
13.4.1 UTI Bank → ‘Privatization’ into Axis Bank (2007)

 Setup in 60s as a Sarkaari Mutual Fund Company through Unit Trust of India Act 1963
 1993: Obtained License to open UTI Bank.
 2001: Ketan Parekh Sharemarket Scam, Govt has to bailout UTI → further
restructuring 2007 → Became Axis Bank: 77% private shareholding + 23% by Public
sector bodies like LIC, New India Assurance, SUUTI etc. (as of 2019, Jan).
13.4.2 IDBI Bank → Purchased by LIC (2018)

 Setup in 60s as a Development Financial Institution (DFI) through the Industrial
Development Bank of India Act, (1964).
 2004: Transformed into a Public Sector Bank, after Narasimham-II suggested DFI
abolition.
 IDBI Bank shareholding: 81% Government + ~11% LIC + remaining by other investors
 2014: RBI’s P.J. Nayak Committee that suggest Govt should exit shareholding in smaller
PSBs, to enhance their efficiency.
 Budget 2016: Govt agreed to reduce shareholding to <50% in IDBI Bank.
 2018: IDBI has the highest NPA (28%) among PSB, so no mentally-fit investor willing to
buy Govt’s shares. Govt. (forces) LIC to buy its 40% for ~9k crores. Thus, LIC will own
51% in IDBI. Deal was approved by the respective financial regulators (RBI and IRDAI) by
2018-July. Though LIC itself is public sector entity but RBI has declared IDBI as ‘private
sector’ bank.
 Positive: Govt. no longer worry about BASEL-recapitalization of IDBI. LIC can market
its insurance policies to IDBI consumers (bancassurance).
 Negative: LIC policy holders’ money is going into a loss-making Bank. They’ll be
deprived of better insurance-investment products (opposite to had LIC invested in a
profitable company) = this amounts to “Financial Repression of Households” (त्तविीय
दमन).
13.5 🏦 👨‍⚖️COMMERCIAL BANKS  PVT. SECTOR BANKS (PVB) ननजी-क्षेत्र के बैंक

While the nationalization of banks was done with the lofty objectives, but politicization in
Public Sector Banks (PSBs) created new set of problems:
- Government administered loan interest rates for populism= Low profitability for PSBs.
- Low recovery from NPA due to political interference, and legal loopholes.
- Employees unions hampering any innovation or customer responsiveness.

- 1991: Balance of Payment (BoP) crisis finally forced Govt. to set up a committee for
Banking Sector Reforms under The former RBI Governor_ _ _ _ _ _ _ _ _ _ . He said:
o Government should ↓ its shareholding in Public Sector Banks.
o RBI should ↓ CRR and SLR, Govt should not dictate interest rates to Banks,
Liberalize the branch expansion policy
o Allow entry of New Private Banks and New Foreign Banks.
Table 4: Three rounds of private bank licensing in India

Round-1 (1993-95) Round-2 (2001-04) Round 3 (2013-16)
1) ICICI 1) Kotak Mahindra Rajan invited applications,
2) HDFC 2) _ _ _ _ _ _ _ (Founder Bimal Jalan Committee
3) IndusInd Rana Kapoor) made selections:
4) DCB 1. _ _ _ _ _ _ _ (A
5) UTI-> later Axis bank Microfinance company
6) IDBI->now owned by LIC based in W.Bengal)
7) Global Trust Bank-> 2. _ _ _ _ (An infra finance
Merged with Oriental NBFC based in
Bank Maharashtra). Later on,
#8-9-10: Bank of Punjab, another NBFC “Capital
Centurian Bank, Times Bank First” merged so
were merged into HDFC renamed into IDFC-First
Above banks are also known as new-generation private banks in India.
13.5.1 🏦 👨‍⚖️ 🚗📜 On-Tap License to open Private Sector Banks

A private entity can open Bank only after getting license from RBI under Banking
Regulation Act, 1949. Previously, one had to wait till RBI invited applications. But in the
On-Tap system (WEF 2016), one can apply to RBI whenever he wishes (like a driving
license), provided that:
1. It’s a Resident Indian individual, NBFC, or private company with min._ _ years of
experience in Banking-Finance Sector, and Min. 500 crore capital, and total assets not
more than Rs. 5000 crores. [Amount / B.com/CA-interpretations not imp. for UPSC]
2. Proposed Bank will be controlled by Indians & willing to open 25% branches in
unbanked rural areas.
13.6 🏦 👨‍⚖️ 🈶 COMMERCIAL BANKS  FOREIGN BANKS (ववदे शी बैंक)

In Nehruvian Socialist Economy there was disdain & apprehensions about Foreign Banks.
Only a handful of them were allowed to open branches. But, Post-Narasimham-Reform:
foreign banks approval policy was liberalized.
Foreign Bank - They’re Incorporated abroad (i.e. registered under the Companies
in India Act of a foreign nation) & opening branch / subsidiary in India e.g.
Citibank, Bank of America, HSBC.
- While CRR, SLR & other norms applicable, but PSL norms vary
depending on number of branches. [Ref: Prev. Handout: PSL]
Indian Public - Foreigners can invest max. 20% in its shareholding. E.g. BoB (15%),
Sector Bank SBI (14%), PNB (13%)
- Although Government thinking of raising it to 49% to help capital
mobilization for BASEL-III norms. [More in Next NPA handout]
India Private - Foreigners can invest upto 49% (automatic) and upto 74% by
Sector Bank approval of Government.

- e.g. HDFC (73%), ICICI (59%) Axis Bank (52%).

- Although Government thinking of raising it to 100% to help capital
mobilization for BASEL-III norms
13.7 🏦 👨‍⚖️ 🌎🚫COMMERCIAL BANKS  DIFFERENTIAL BANKS

Difference 🌎Universal Bank (सावित्रिक) 🌎🚫Differential Bank (भेदकर)
Anywhere: example SBI, ICICI Geographical Restrictions on branch
Open
[*After opening 25% of branches opening for Local Area Bank (LAB),
Branches
in unbanked rural areas] Regional Rural Banks (RRB)
Both Time & Demand Deposits Payment Bank – Accept Max. _ _ _ _
Accept
of any amount. only.
Give Anyone [After 40% PSL] - SFB, RRB: _ _ _ to PSL
Loans to - Payment Bank can’t give loans;
Chronology of differential banks: RRB(1976) → Local Area Bank (1996) → Small Finance
Bank & Payments bank(2015) → Wholesale banks (proposed)
13.7.1 🏦 👨‍⚖️ 🌎🚫 Commercial Banks  Differential Banks RRB and LAB

Regional Rural Banks (क्षेिीय ग्रामीण बैंक) Local Area Bank (स्थानीय क्षेि बैंक)
- Based on M.Narasimham’s Committee - Based on Budget-1996 by Finance
on Financial Inclusion in 1970s Minister Manmohan Singh
- Setup under the provisions of RRB act - Unlike RRBs, they're not setup by Union
1976 & its amendment in 2015. Voting or State govts or by any special act or
power: (Union + State + Sponsor bank) parliament. But by pvt entities simply
= 51% applying to RBI under Banking
- e.g. Uttar Bihar Gramin Bank (Sponsor Regulation Act.
bank- Central Bank of India) - Present in Max. 3 geographically
- Subjected to CRR, SLR norms but RBI contiguous districts. only 1 urban
could prescribe separate norms. centre per district.
- PSL: 75%. - They’re Non-Sch. Banks so while CRR,
- Their loan interest rates can’t be more SLR, PSL etc very apply but every norm
than prevailing lending rates of with caveats.
Cooperative Banks in the area. - Initially 4: (1) Coastal Bank Andhra
- Restricted to few districts. E.g. Baroda Pradesh (first to setup in 99), (2)
Gramin Bank branches confined to Subhadhra Local Area Bank, Kolhapur;
Gujarat’s southern districts. (3) Krishna Bhima Samruddhi (Andhra &
- Ultimate regulator: RBI but immediate Karnataka) and (4) Capital Local Area
regulator NABARD. Bank: Punjab (Largest). But later
Capital LAB converted into Small
Finance Bank (2016), so now only 3
left.
- Only RBI regulates them.
13.7.2 🏦 👨‍⚖️ 🌎🚫Commercial Banks  Differential Banks  SFB & PB

On Nachiket Mor Committee’s recommendations (2013-14), Governor Raghuram Rajan
approved these new types of banks for (1) financial inclusion (2) competition & innovation
among players.

Parameters Small Finance Banks लघु ववत्त बैंक Payment banks भग

ु तान बैंक
Capital Small Finance Bank
7 at present: Airtel, India Post,
(Punjab), Ujjivan (Karnataka),
Examples FINO, Paytm, Aditya Birla Idea,
Utkarsh (UP): Total 10 list at
Jio, NSDL. (Total 11 were selected)
rbi.org.in/scripts/banklinks.aspx
Min.100cr. capital-walla resident
Min.100cr. capital-walla Resident Indians, NBFCs, PPI-wallets (pre-paid
Indian, Local Area Bank, NBFC, payment instrument), mobile telephone
Eligibility
Micro-finance, with 10 years exp. companies, super-market chains,
in banking / finance cooperatives & companies controlled by
resident Indians
RBI Committee gave selection
preference North East & Central India
📌Area Anywhere
clusters where Universal Banks’
penetration is poor
Selected by? Usha Throat (Former RBI Dy.Gov) Nachiket Mor(Ex-RBI Board Member)
CRR, SLR, Same as Indian Private Banks, but
Same as Indian private banks
Repo, FDI? caveats in SLR.
No need but 25% access points must
Rural Must have 25% branches in
be in rural areas like Business
Penetration unbanked rural areas
correspondence (BC), Kiraana Stores
Promoting Small savings
🛒Target Unserved, Underserved Remittance of migrant labors, low
Consumers Farmers, Micro, Small industries income households, unorganized sector,
small business.
- No NRI deposits, Fixed deposit,
Recurring Deposit.**
💰Accept
Yes, without any restrictions - Can accept only Demand
Deposits
Deposits and max. balance Rs. _
_ _ per year per customer.
Debit cards 💳 YES (but EMV-Chip-walla) YES (EMV-Chip-walla)
Credit cards 💳 YES (but EMV-Chip-walla) No (because can’t “loan”)
- Can’t loan, So no PSL.
- Yes, but _ _ _ _ in PSL,
- They’re required to invest all
Loans - 50% of loan portfolio of Rs. 25
deposits in G-sec, T-Bill and in
lakhs/< loans.
other SCBs. How much% notimp.
Yes, after 5 years can become
Evolve? Not mentioned.
Universal Commercial Bank.
- ** While Paytm Payment Bank accepts fixed deposit but it’s acting simply as an ‘Agent’
to open your fixed deposit IndusInd Bank, a private sector Commercial Bank.
- BASEL-III norms applicable on both of SFB & PB, and they are tighter than a (universal)
commercial scheduled bank. (How, What % = NotIMP)
- Both can sell Mutual Fund (MF), Pension, Insurance policies with approvals of
respective regulators.
13.7.3 🏦 👨‍⚖️ 🌎🚫🚗📜 On-Tap Licenses for SFB

- 8 out of 10 Small Finance Banks (SFB) became Scheduled Banks. RBI reviewed & found
they have achieved their priority sector targets and helped in financial inclusion. More
competition and new players will help so 2019-June, RBI announced it’ll allow ‘On-

Tap’ license for SFB soon. (i.e. no need to wait for notification unlike IAS exam, apply
whenever you wish like a driving license)
- However, RBI not yet permitted ‘On-Tap’ license in Payment Banks category because
RBI is still reviewing the performance and problems of existing Payment Banks.
Payment Bank Challenges? Low profitability due to lending restrictions. 2018: RBI barred
Vijay Shekhar Sharma’s PayTM Payment Bank from opening new accounts as it could not
keep Min.100 crore capital, but the ban lifted in 2018-Dec.

Q. Find correct Statement(s) about Q. What is the purpose of setting up of
Payment Banks? Small Finance Banks (SFBs) in India?
1) Mobile telephone companies and 1. To supply credit to small business units
supermarket chains that are owned and 2. To supply credit to small and marginal
controlled by residents are eligible to farmers
be promoters of Payment Banks. 3. To encourage young entrepreneurs to
2) Payment Banks can issue both credit set up business particularly in rural
cards and debit cards. areas.
3) Payment Banks cannot undertake Codes:
lending activities. (a) 1 and 2 only (b) 2 and 3 only
Codes: (c) 1 and 3 only (d) 1, 2 and 3
(a) 1 and 2 only (b) 1 and 3 only
(c) 2 only (d) 1, 2 and 3
13.7.4 📬India Post Payment Bank (IPPB)

- Registered as a Public Limited Company under Companies Act, 100% owned by
Department of Posts (Ministry of Communication and Information Technology.) →
Obtained RBI’s License under Banking Regulation Act to start working as a Payment
Bank.
- Airtel Payments Bank was first to launch operations in 2017- Jan. Later, IPPB launched
pilot branches at Raipur (Chhattisgarh) and Ranchi (Jharkhand). Then IPPB launched
full-fledged operations in 2018. In between, Paytm, Fino, Birla Idea and Jio launched
their Ops. In short IPPB not the first to launch full fledged Ops.
- Motto: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . Largest customer reach with 1.55 lakh Post
offices across India. Doorstep banking through Postmen (but fees applicable).
- IntraBank transfer: no fees. IMPS: fees applicable.
- Bank Account Types: Safal, Sugam, Saral (internal differences about ATM withdrawal
limits etc. not important for UPSC).
- Account can be opened with zero balance, no minimum balance requirement. Max.
Balance _ _ _ _ per person per year. Minimum Customer Age: 10 years / >
- Also partnered with Bajaj Alliance Life Insurance (BALIC) to sell insurance policies.
MCQ. Which of the following statements about the India Post Payments Bank (IPPB)
is/are correct? [Asked in UPSC-CDS-2018-1]
1) It has been incorporated as a Public Limited Company.
2) It started its operation by establishing two pilot branches at Hyderabad and Varanasi.
Answer codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

13.7.5 🚐 ⏳ (Proposed) Wholesale & Long Term Finance Banks (WLTF)

2017: RBI proposed. Entry capital 1000 crores, can’t accept deposits less than 10 crores,
can give loans only to large corporates & infrastructure projects. Other banks may use it
for PSLC-certificate trading.
13.8 🏦 👨‍🌾FI  BANKS  COOPERATIVE BANKS (सहकारी बैंक)
Type 🏦 👨‍⚖️Commercial Banks 🏦 👨‍🌾Cooperative Banks
Banking Reg. Applicable since 1949 Applicable since 1966.
Act
Regulator RBI _ _ _ _ _ _ _ , State Registrar of
Cooperative Societies
CRR, SLR, Yes Yes, but, RBI could keep different
BASEL-III slabs/ norms.
Repo, MSF Eligible Yes, but only selected category of
borrow Cooperative Banks
PSL Lending Yes 40-75% ___
Who can Anyone First preference to members
borrow
Vote power Based on Shareholding, like a According to Cooperative Society
Commercial Company norms, members will have vote power
Profit Motive Yes, purely profit motive, so lending Desire to help community. So, lending
rates may be higher than Coop. rates little lower than
Presence All India & overseas Mainly in Guj,MH,Andhra,TN
Table 5: Classification of Cooperative Banks

Urban Cooperative Banks (शहरी) Rural Cooperative Banks (ग्रामीण)
Further subcategories depending on 1) Long term: Land Banks, Cooperative
- Scheduled / Non-Scheduled; Agriculture & Rural Development Banks
- Single State / Multi State. 2) Short term: State Cooperative Bank →
From 2018, RBI allowed them to District Central Cooperative Bank (_ _ _
voluntarily upgrade to Small Finance _ _ ) → Primary Agricultural Credit
Banks, with certain conditions. Societies (_ _ _ _)
- Challenges: Politicization, casteism, poor recovery of loans, scams, money laundering.
- They were prevented from exchanging banned 500-1000 notes due to malpractices.
- Budget-2017: provided funds to NABARD for implementing Core Banking Solution (CBS)
within PACS & DCCB- this will help in targeted delivery of farm loans and subsidies &
prevent malpractices and siphoning of funds.
Related topics: Jan Dhan Yojana, Lead Bank Scheme etc. later in Pillar#1D: Financial
Inclusion
13.9 🚫🏦👨‍⚖️ FORMAL FI  NON-BANKING FINANCIAL INSTITUTIONS

गैर-बैंक त्तविीय सांस्थान
13.9.1 (Extinct) Development Finance Institutions (DFI)

विकास वित्त संस्थान were meant for Medium to long term loans to industries, including also
support services like arranging foreign currency, underwriting, technical / management
consultancy, Bank guarantee etc. They did not accept DEPOSITs from ordinary people.

Industrial Finance Corporation of India ltd. (IFCI) Act. Later became a Non-
1948
Deposit-Taking-Systematically-Important (NBFC-ND-SI).
State Finance Corporation (SFI) Act, because IFCI alone couldn’t cater industrial
1951
loan demand.
1955 National Small Industries Corporation (NSIC) by Government of India (GoI)
ICICI: Industrial credit and Investment Corporation of India Ltd was setup by GoI,
1955
World Bank, and other FI. Later became a Private Sector Bank.
- Industrial Development Bank Of India (IDBI) Act. For a while, it was also given
regulatory powers over Industrial finance but then overtaken by SIDBI, EXIM
1964
Banks. 2004: Transformed into a Public Sector Bank. 2018: Government sold its
majority shareholding to LIC.
Narasimham-II (‘98): only two categories: Bank or non-bank. DFI should join either one.
13.9.2 🚫🏦👨‍⚖️Non Bank  All India Financial Institutions (AIFI):

अखखल भारतीय त्तविीय सांस्थान were setup by respective acts of Parliament
EXIM (Jan 1982) NABARD (Jul 1982) NHB (1988) SIDBI (1990)
Export-Import ____ National Housing _____
Bank of India Bank
Boss: Government Previously RBI had Original boss: RBI BOSS: SBI, LIC, IDBI
of India (100%) minority-stakes in (100%). But, 2019- other public sector
NABARD but 2018: Apr: RBI sold 100% banks, insurance
100% Govt owned. to Govt. companies etc.
Promotes cross - Regulatory - Finance to - Operates Credit
border trade and authority: Coop banks and Guarantee fund,
investment, helps + RRB NBFCs for Small Enterprises
importers-exports - + Indirect housing Development Fund
with loans and refinance to projects. (SEDF).
foreign currency. farmers, artisans - Regulator of - Operates _ _ _ _ _ _
- Operates Rural Housing for loans to small
Infra. Finance Cos entrepreneurs &
Development (NBFC) SME via schemes
fund (RIDF) from - _ _ _ _ _ index like Mudra, Stand-
PSL shortfalls to monitor up-India.
from SCBs. residential real
estate prices.
th
- 5 AIFI = Industrial Investment Bank of India (IIBI) closed in 2012.
- NABARD Amendment Act 2017: 1) increased capital 2) facilitated transfer of RBI shares
to Govt 3) MSME definitions updated.
- AIFIs are not ‘banks’ because can’t accept direct deposits from the public at large.
- RBI is the regulator over AIFI, BASEL norms applicable but RBI can prescribe different /
slabs norms / deadlines.
Asked in UPSC-Pre-2013 Asked in UPSC-Prelims-2004
Q. Which of the following grants/grant Find Correct Statement(s)
direct credit assistance to rural A. NHB, the apex institution of housing
households? finance in India, was setup as a wholly
1) Regional Rural Banks owned subsidiary of RBI
2) National Bank for Agriculture and B. Small industries development bank of
Rural Development India was established as a wholly

3) Land Development Banks owned subsidiary of the Industrial

Answer Codes: development bank of India
(a) 1 and 2 only (b) 2 only C. Both A and B
(b) 1 and 3 only (d) 1, 2 and 3 D. Neither A nor B
13.9.3 🚫🏦👨‍⚖️FI  Non-Bank  Primary Dealers (PD)- (प्राथममक ववक्रेता)

- They deal in "primary" market, directly buy G-sec from RBI’s E-Kuber platform and sell
it in the secondary market. Total 21 PD licensed by RBI: 14 of them are Banks. E.g.
Standard Chartered Bank, HSBC (HongKong), SBI, Kotak etc.
13.9.4 🚫🏦👨‍⚖️FI  NBFCs (गेर-बैंककं ग ववत्तीय कंपतनया)

Parameter Commercial Banks Non-Banking Financial Companies (NBFCs)
Registration Banking Regulation Act Companies Act
Supervision RBI Varies: Mutual funds-SEBI, Insurance
Company: IRDAI etc.
Entry 500 Cr. 5cr for MicroFin, 2 cr for others; 200 cr. For
Capital reinsurer etc. [figures not imp]
Numbers 19 Public Sector (incl. Post Total 10,190. Out of them 108 deposit
Payment Bank), 56 RRBs, 39 Taking, remaining are non-deposit-taking
private sectors (including SFC, (ND).
PB), 44 Foreign Banks.
Can accept - Can accept Time & - Only NBFC-Deposit-Taking (NBFC-D) &
Deposits? Demand [chequable even they can accept only Time Deposits.
deposit]** E.g. Bajaj Finance.
- Their deposits are insured - Can’t issue their own chequebook,
under DICGCI Act. debit/credit card. Deposits are not
insured under DICGCI Act.
Prudential CRR, SLR, applicable NBFC-D: SLR required but RBI can prescribe
Norms different slabs / norms. CRR not applicable
on any NBFC.
BASEL Applicable - Applicable on 108 NBFC-D and
Norms - Applicable on 276 NBFCs – ND – SI (non-deposit
taking Systematically Important with assets
over ₹ 500 crores) e.g. L&T Finance,
Cholamandalam etc.
But RBI can prescribe different slabs / norms
/deadlines.
Investment They can keep depositor’s Can invest clients’ money in share market.
money in RBI approved E.g. Mutual Funds, Insurance Companies.
securities. But can’t invest in
share market per se, directly.
Loan Rate Decided as per RBI’s Varies & depends on nature of biz.
methodology from time to
time (BPLR, MCLR, External
Benchmark etc.)
Recovery Loan recovery powers under - Only Housing Finance Companies have
SARFAESI Act. SARFAESI powers.
- Gold Loan company can auction gold.

Parameter Commercial Banks Non-Banking Financial Companies (NBFCs)

- Mutual Fund /Insurance Company may
have to wait till liquidation of bankrupt
company where they invested clients’ ₹.
Consumer RBI’s Ombudsman, Bank’s RBI’s separate Ombudsman for NBFCs
Complaints Internal Ombudsman ** starting the NBFC-D since 2018**.
**More about these ombudsman in Pillar#1: Insurance handout
MCQ: Find correct Statement(s) about NBFCs in India [Asked in UPSC-Prelims-2010]

A. They cannot engage in the acquisition of securities issued by government.
B. They cannot accept demand deposits like savings account.
C. Both A and B
D. Neither A nor B
MCQ: The main functioning of the banking system is to [Asked in UPSC-CDS-2013-II]

(a) accept deposits and provide credit (b) accept deposits and subsidies
(c) provide credit and subsidies (d) accept deposits, give credit and subsidies
13.9.5 🚫🏦👨‍⚖️ NBFCs Regulated by RBI

Investment and Credit New category in 2019: by merging previous NBFC categories
Company viz. Asset Finance Companies, Loan Companies, Investment
Companies. E.g. SREI Equipment Finance
Core Investment - They do long term investment in Companies. E.g. Tata /
Company (CIC) Birla / Reliance Capital & Infrastructure Leasing &
Financial Services Limited (IL&FS)
- IL&FS is owned by SBI, LIC and Corporates from Japan
and Abu Dhabi. 2018: In controversy because couldn’t
repay interest to lenders. More in next NPA handout.
Infrastructure Finance Internal difference notimp for UPSC. Basically, they give
Company (IFC) loan for infra. projects.
Infrastructure Debt - E.g. Rural Electrification Company ltd. (REC): PSU under
Fund (IDF) Power Ministry
- L&T IDF, Kotak IDF, IDFC IDF (“IDFC First” has separate
license for Bank).
Asset Reconstruction They buy bad loans / NPA from Banks & other NBFCs, and
Companies (ARC) try to salvage value from the underlying assets. E.g Anil
Ambani’s Reliance ARC.
Factoring Companies They lend short term money to client against his invoices /
accounts receivable. E.g. IFCI Factors, Siemens Factoring.
Gold Loan Companies e.g. Muthoot gold loan, Mannapuram Gold. RBI decides their
Loan to Value ratio.
Micro Finance RBI + Ministry of Corporate Affairs (given on next page)
Institutions (MFI)
Fintech cos: P2P Similar to Olx-Quickr connecting sellers of second hand
Lenders goods with buyers, the P2P lending websites connect
borrowers and lenders. E.g. Faircent.com, Cashkumar.com
Fintech cos: Account - They manage information of a customer’s financial
Aggregators (AA) assets & display it to him or to third party (like loan
giver, credit rating company, App like Google pay etc.)

- 2018-Nov: RBI said it’ll give license to 5 companies. List

awaited.
_ _ _ _ _ _ (अवमशटि) Any NBFC that is not regulated by any other regulator- falls
under RBI’s purview.
13.9.6 🚫🏦👨‍⚖️ NBFCs Regulated by SEBI

They help clients buy-sell shares/bonds (=debentures)
Stock Broker depending on his instructions E.g. Motilal Oswal,
Indiabulls, Sherkhan etc.
- They pool clients’ money and MF-manager invests it in
shares/bonds using his own discretion & expertise.
Mutual Funds (MF) - E.g. SBI's Shariah Equity Mutual Fund: clients' money
invested in Sharia compliant Cos. That don’t deal
with alcohol, pork, debt, tobacco or weapons.
- Pool & invest money in real estate / infra projects
REITs / InvITs
e.g. IRB. <More in SEBI Handout>
Underwriting, Merger & Acquisition, Wealth Management
Investment Banks: (US
of rich people: E.g. Kotak Mahindra, Citigroup, Bank of
term) & Merchant Banking
America, DSP Merrill Lynch, Morgan Stanley, SBI capital
Companies: (UK term)
(separate license)
Venture Capital Fund VCF Help startup companies via equity finance e.g. IFCI, IDG.
13.9.7 🚫🏦👨‍⚖️ NBFCs Regulated by Others

Regulator Example NBFC Companies
- Life Insurance companies e.g. LIC, HDFC Standard Life Insurance
______ - Non-Life (=General) insurance companies e.g. IFFCO-Tokyo General
Insurance
____ All Pension Funds, except EPFO & other statutory funds.
Housing Finance Companies such as DHFL, Muthoot Housing finance
____
etc. (have SARFAESI Powers)
1. NIDHI Companies: Mutual benefit club, only members can borrow.
e.g. South Madras Benefit Fund ltd, Maben Nidhi Ltd (of
Ministry of Mannapuram group)
Corporate 2. Microfinance Companies: They give loan to poor without
Affairs collateral, flexible EMI, But no loans above ₹ 50k. e.g. Bandhan
(WB- got PvB license), Disha (A'Bad: got SFB license), SKS (Andhra),
Cashpor (UP), Ujjivan (Karnataka).
Chit fund is a type of collective investment scheme with monthly
State Registrar
contributions & borrowing by contributing members e.g. Shriram Chits.
of Chit Funds
(More in Pillar#1: Financial Inclusion)
13.9.8 🚫🏦👨‍⚖️🚫👨‍🌾 NBFC → Mudra (2015, 100% SIDBI subsidiary)

- _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . (सूक्ष्म इकाई विकास एिं पून: वित्तपोषण एजेंसी)
- Objective? provides indirect lending via SCB, RRB, Cooperatives, MFI & other NBFCs
through refinancing.
- Ownership? It’s wholly owned by _ _ _ _ _ , and also receives the funding from PSL-
shortfalls via RBI and budgetary support via Department of Financial Services.
- Beneficiary? Non-Farm-Non-Corporate type Micro Enterprises.

Table 6: Definitions in Micro, Small and Medium Enterprises Development Act / Bill
Micro, Small and Medium Enterprises Devlp Act, 2006 Bill 2018:
Category Mfg: Investment in Plant Services: Investment in Only annual
and Machinery Equipment turnover
Upto 25 lakh Upto 10 lakh Upto 5cr
>25 lakh upto 5 crore >10 lakh upto 2 crore >5cr upto 75 cr
>5cr upto 10 crore >2cr upto 5 crore >75cr to 250cr
Table 7: Mudra-Products:
Pradhan Mantri MUDRA Yojana (PMMY) MUDRA Rupay Card

1) Shishu : loans upto _ _ _ _ _ - ATM cum Debit Card issued against
2) Kishor : >50,000/- upto 5 lakh MUDRA loan account.
3) Tarun : > 5 lakh and upto _ _ _ _ - For working capital component.
- Can be accessed in all modes like a
routine debit card (ATM, MicroATM,
PoS, Online)
- Mudra loans are collateral-free. If borrower defaults on loan, then lender’s losses are
covered through Credit Guarantee Fund for Micro Units [CGFMU] operated by National
Credit Guarantee Trustee Company Ltd. [NCGTC]- a private ltd company by Dept of
Financial Services (setup in 2016).
- MUDRA Challenges? (1) Loan Interests are high (2) Rising NPA/Bad loans.
MCQ. Pradhan Mantri MUDRA Yojana is aimed at (Asked in UPSC-Pre-2016)

a) bringing the small entrepreneurs into formal financial system
b) providing loans to poor farmers for cultivating particular crops.
c) providing pensions to old and destitute persons.
d) funding the voluntary organizations involved in the promotion of skill development
and employment generation.
13.9.9 🙋‍♀️Stand Up India Scheme, 2016 (उवत्तष्ठ भारत)

- Boss? FinMin’s Dept of Financial Services (त्तविीय सेवा त्तवभाग)
- Objective? Each SCB bank branch to give Greenfield Loans between 10 lakh and 1
Crore to at least 1 _ _ _ _ and atleast 1 _ _ _ _ entrepreneur with tenure upto 7 years.
- Collateral? Bank can ask collaterals. If loan without collaterals, then Credit Guarantee
Fund for Standup India (CGFSI) operated by NCGTC.
13.9.10 psbloansin59minutes.com (2018)

portal by SIDBI & 5 PSBs. GST-registered MSME get loans 10L to 1 cr. Without collaterals.
₹1000 fees if loan approved.
13.9.11 🧕NBFC: Islamic Banking

- Interest (Riba) is prohibited (Haram) in Islam. So, Islamic Banking operates through
Ijara, Murbaha, Musharaka mechanisms- in which depositors’ money is invested in
borrower’s property / business and returns are shared in form of rent / profit but not
in the form of _ _ _ _ _ .
- While previous committees said give permission to Islamic Banks in India, but _ _ _ is
opposed (2017).
- Pro-Arguments? Financial inclusion of Muslims. Mobilization of deposits from Islamic
countries for Indian Economy.


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11🤑 MONEY: DEMAND, SUPPLY & CREATION

11.1 🤲 DEMAND OF MONEY: LIQUIDITY PREFERENCE THEORY (तरलता अधिमान)

11.2 📥SUPPLY OF MONEY (मद्र

*CU: Coins & Currency with Public

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 16

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11.3.1 💸 Velocity of Money Circulation (मि ु ा सांिालन का वेग)

11.4 ⚡️MONEY MULTIPLIER (मि

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 17

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11.5 FACTORS AFFECTING MONEY SUPPLY [M1, M3]

12 📢 MONETARY POLICY (मौद्रिक नीनत)

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 18

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12.1 📢 📐 MONETARY POLICY: QUANTITATIVE TOOLS (पररमाणात्मक सािन)

12.1.1 Statutory Reserve Requirements: CRR, SLR (Fight inflation: ↑, deflation: ↓)

Asked in UPSC-CDS-2011-II Asked in UPSC-Pre-2015

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 19

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12.1.2 ®️ Key Rates (Inflation → _ _ _ Rates, Deflation → _ _ _ Rates)

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 20

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12.1.3 ®️ Key Rates- associated terms

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12.2.1 🙇🏼 Moral Suasion (नैततक दबाव / सलाह)

12.2.2 🚯 Direct Action (सीिी कायिवाही)

12.2.3 💍 Margin Requirements / Loan to Value (LTV) (सीमा अतनवायिता)

12.2.4 Selective Credit Control (चयनात्मक ऋण तनयंिण)

12.3 🌽 PRIORITY SECTOR LENDING (प्राथममकता क्षेत्र के मलए ऋण मानक)

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 22

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Priority Sector Loans norms updated in 2015 Min.Quota

12.3.1 📜 Priority Sector Lending Certificates (PSLC) from 2016 onwards

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Asked in UPSC-Pre-1995 Asked in UPSC-Pre-2013

12.4 📢 👁‍🗨 MONETARY POLICY TOOLS: A READY RECKONER TABLE

Key Rates (Repo, ↓ (decrease) _______

Moral Suasion / Nudge / Force the banks to To enforce the Hawkish

↑ loan-flow to sectors that - ↓the loan-flow to

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 24

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12.5 📢 MONETARY POLICY IN PRESENT-DAY INDIA

There are 3 strategies / ways of making a monetary policy:

12.5.1 📢 Monetary Policy Making under RBI Act since 2016

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 25

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Asked in UPSC-Pre-2015 Asked in UPSC-Pre-2017

12.6 📢 REVIEW OF MONETARY POLICIES

📢 Policy Decisions & Regulatory Announcements

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 26

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- Wait and Watch mode because Budget’s pro-farmer-MSP, pro-rural

Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 27

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Mrunal’s Economy Pillar#1B: Monetary Policy →: Page 28

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