- Small Finance Banks: Give loans and basic banking to small businesses, small/marginal farmers and the unorganised sector; promote financial inclusion.
- Payments Banks: Take small deposits (up to ₹1 lakh) and do remittances/digital payments; cannot give loans or credit cards.
- Universal Banks: Large “one‑stop” banks offering commercial banking, investment banking and insurance under one roof.
- Local Area Banks: Small private banks working in a few districts; mobilise rural savings and lend locally.
Definitions [2]
Definitions: Reserve Bank of India (RBI)
- Dr. M. H. de Kock: “Central bank is one which constitutes the apex of the monetary and banking structure of the country.”
- Prof. W. A. Shaw: “Central bank is a bank which controls credit.”
Definitions: Commercial Banks
- “A bank collects money from those who have it to spare or who are saving it out of their incomes and it lends this money to those who require it.” — Crowther
- “Bank means accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise.” — According to Indian Companies Act, 1949
- Banking Regulation Act of 1949: “Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, demand draft, order or otherwise.”
- Prof. Cairncross: “A bank is a financial intermediary, a dealer in loans and debts.”
Key Points
Key Points: Concept of Financial Market
- Finance is managed as personal, corporate and public finance.
- Financial markets are a key part of the Indian financial system.
- Financial market deals in assets like bonds, stocks and government securities.
- It links surplus investors with deficit business enterprises.
- Main functions: channelising savings, price determination, liquidity and low transaction cost.
- Financial markets are divided into money market and capital market based on maturity.
Key Points: Money Market
- Money market is for short-term funds and near money instruments.
- All money market instruments have maturity of one year or less.
- Instruments are highly liquid, less risky and easily tradable.
- Key participants include RBI, banks, NBFCs, governments, big companies and mutual funds.
- Main instruments: Treasury bills, call/notice money, commercial papers, commercial bills and certificates of deposit.
- Call rate affects demand for other money market instruments through an inverse relationship.
Key Points: Structure of Money Market in India
- The Indian money market has two sectors: organised and unorganised.
- Organised sector: RBI, commercial banks, co‑operative banks, development financial institutions, investment institutions and DFHI.
- Unorganised sector: Indigenous bankers, moneylenders and other unregulated financial intermediaries.
- Main centres: Mumbai (most active), Delhi and Kolkata.
Key Points: Structure of Money Market in India
- The Indian money market has two sectors: organised and unorganised.
- Organised sector: RBI, commercial banks, co‑operative banks, development financial institutions, investment institutions and DFHI.
- Unorganised sector: Indigenous bankers, moneylenders and other unregulated financial intermediaries.
- Main centres: Mumbai (most active), Delhi and Kolkata.
Key Points: Commercial Banks
- Commercial banks are profit-seeking intermediaries connecting savers and borrowers.
- Their primary functions are accepting deposits and granting loans.
- India has 89 scheduled commercial banks divided into PSBs, RRBs, Private Banks, and Foreign Banks.
- Nationalisation in 1969 and 1980 expanded banking access to rural and priority sectors.
- SBI is India's largest bank — 25% market share, 45 crore customers, top 5 globally.
- RRBs serve rural India at lower interest rates and are the backbone of rural credit.
- Private and foreign banks drive technology, innovation, and competition in banking.
- Commercial banks are regulated by the Reserve Bank of India (RBI) and governed by the Banking Regulation Act, 1949.
Key Points: Co-operative Banks
- Co-operative banks give loans to local people, mainly small and middle‑income groups.
- They have a three‑tier structure:
Primary Co‑operative Credit Societies (village level).
District Central Co‑operative Banks (district level).
State Co‑operative Banks / Apex Banks (state level).
Key Points: Development Financial Institutions (DFIs)
- Development Financial Institutions (DFIs) give medium and long‑term loans to industry, agriculture and other key sectors.
- IFCI (1948) was the first DFI in India.
- After liberalisation, many DFIs expanded into services like commercial banking and infrastructure finance and some, like ICICI, became universal banks.
Key Points: Discount and Finance House of India (DFHI)
- Discount and Finance House of India (DFHI) is a money market institution started in 1988.
- It was set up on Vaghul Committee’s recommendation.
- It is jointly owned by the central bank, public sector banks and financial institutions.
- Main role: provide liquidity to money market instruments.
Key Points: Unorganized Sector
- The unorganised money market mainly operates in rural areas and includes indigenous bankers, moneylenders and some informal finance companies.
- Indigenous bankers: Work like small local banks, giving short‑term loans (e.g. via hundis) to farmers, traders and small businesses.
- Moneylenders: Village lenders who charge very high interest and give loans for any purpose to poor farmers, labourers and artisans.
- Unregulated intermediaries: Chit funds, Nidhis and loan companies that collect money from members and lend it, often at high interest.
Key Points: Money Market
- Money market is for short-term funds and near money instruments.
- All money market instruments have maturity of one year or less.
- Instruments are highly liquid, less risky and easily tradable.
- Key participants include RBI, banks, NBFCs, governments, big companies and mutual funds.
- Main instruments: Treasury bills, call/notice money, commercial papers, commercial bills and certificates of deposit.
- Call rate affects demand for other money market instruments through an inverse relationship.
Key Points: Role of Money Market in India
- Money market gives short‑term funds to borrowers at reasonable rates.
- Helps the central bank manage liquidity and interest rates, supporting economic stability.
- Offers safe instruments for investors to manage portfolios and earn returns.
- Provides short‑term finance to the government (e.g. via Treasury Bills).
- Reduces the need to hold cash by using near‑money instruments.
- Supports trade, industry, agriculture and small businesses through short‑term credit.
Key Points: Problems of the Indian Money Market
- Indian money market is small and less liquid compared to advanced countries.
- Dual structure (organised + unorganised) causes poor integration and weak control.
- Different lenders charge different interest rates; no uniform rate.
- Shortage of funds due to low savings, low income and weak rural banking habits.
- Strong seasonal demand for funds creates fluctuations.
- Many poor/weak sections still lack access to banking (low financial inclusion).
- Slow technology adoption reduces efficiency of the market.
Key Points: Reforms introduced in the Money Market
- New short‑term instruments: T‑bills (various maturities), CPs, CDs, MMMFs.
- Repo and Reverse Repo under LAF to manage liquidity.
- Interest rates mostly set by market forces.
- NEFT and RTGS introduced for fast electronic payments.
- Electronic dealing systems adopted to modernise trading.
Key Points: Recent Developments in Banking Sector
Key Points: Capital Market
- Capital market is for long‑term funds (debt and equity).
- Supports investment and economic growth.
- Demand: agriculture, trade, industry.
- Supply: individual savers, corporates, banks, insurance companies, special institutions.
- Institutions and instruments: development banks, commercial banks, stock exchanges, shares, debentures, bonds, mutual funds, public deposits.
Key Points: Structure of Capital Market in India
- India’s capital market has four main parts.
- Government Securities Market: Deals in government and semi‑government bonds with fixed interest.
- Industrial Securities Market: Deals in company shares and debentures via primary market (new issues) and secondary market (stock exchanges like BSE, NSE).
- Development Financial Institutions: Give medium/long‑term loans to industry (e.g. IFCI, IIBI, EXIM Bank).
- Financial Intermediaries: Link investors and borrowers (merchant banks, mutual funds, leasing firms, venture capital companies).
Key Points: Role of Capital Market in India
- The capital market mobilises long‑term savings from the public for industry and government.
- It provides equity capital to businesses for assets and operations.
- It improves efficiency by reducing costs and speeding up settlements.
- It enables quick, fair valuation of shares and bonds.
- It promotes integration of real and financial sectors, equity and debt, public and private, domestic and foreign funds.
Key Points: Problems of the Capital Market
- The Indian capital market suffers from financial scams, causing investor distrust and loss.
- Insider trading and price rigging distort fair prices and hurt smooth functioning.
- The debt market is weak with low trading in bonds and debentures.
- Regional exchanges see low trading as investors prefer BSE and NSE.
- The market has low informational efficiency, so prices do not fully reflect all available information.
Key Points: Reforms introduced in the Capital Market
- SEBI was made a statutory regulator in 1992 to protect investors and develop the securities market.
- NSE was set up in 1992 with a modern, screen-based trading system.
- Demat accounts were introduced in 1996 for electronic share holding and trading.
- Firms can raise global funds via ADRs and GDRs.
- The IEPF was started in 2001 to educate and protect investors.
Important Questions [22]
- Find the odd word out: Financial Assets: Bonds, Land, Govt. Securities, Derivatives
- Explain the functions of RBI.
- Give an economic term: Deposits that are withdrawable on demand.
- Complete the correlation: ______ : Central bank :: SBI : Commercial Bank
- Assertion (A): Foreign exchange management and control is undertaken by commercial banks. Reasoning (R): RBI has to maintain the official rate of exchange of the rupee and ensure its stability.
- Find the odd word out: Quantitative Tools of credit control:
- Identify and explain the concept from the given illustration: Tina deposited a lumpsum amount of ₹ 50,000 in the bank for a period of one year.
- Distinguish between: Demand deposit and Time deposit
- Identify and explain the following concept. Lucy deposited a Lump sum amount of ₹1,00,000/- in the Bonk of India for the period of one year.
- Study the following table, figure, and passage, and answer the questions Commercial banks act as intermediaries in the country's financial system to bring savers and investors together.
- Distinguish between: Recurring deposits and Fixed deposits
- Development financial institutions were established to ______.
- Factors which are working in unorganized money market. Money lenders Commercial bank Hundi Chit funds
- Assertion and reasoning question: Assertion (A): The money market economises the use of cash. Reasoning (R): The money market does not deal with financial instruments that are close substitutes
- State with reasons whether you agree or disagree with the following statement: Money market plays an important role in India.
- The money market faces a shortage of funds due to ______.
- Explain the problems faced by the money market in India.
- Differentiate between the money market and the capital market.
- Identify and explain the following concept: Raju’s father invests his money in a market for long term funds both equity and debt raised within and outside the country.
- Complete the correlation: Money market : Short-term funds : : ______ : Long-term funds.
- State with reasons whether you agree or disagree with the following statement. The capital market plays an important role in India.
- Explain the problems of the capital market in India.
Concepts [22]
- Concept of Financial Market
- Money Market
- Structure of Money Market in India > Organized Sector
- Structure of Money Market in India > Organized Sector
- Reserve Bank of India (RBI)
- Commercial Banks
- Co-operative Banks
- Development Financial Institutions (DFIs)
- Discount and Finance House of India (DFHI)
- Structure of Money Market in India > Unorganized Sector
- Money Market
- Role of Money Market in India
- Problems of the Indian Money Market
- Reforms Introduced in the Money Market
- Recent Developments in Banking Sector
- Capital Market
- Structure of Capital Market in India
- Role of Capital Market in India
- Problems of the Capital Market
- Regional Stock Exchanges in India
- Reforms Introduced in the Capital Market
- Economic Policy in an Economy
