- Banks are financial intermediaries — they connect savers and borrowers, fuelling the economy.
- RBI is the apex bank of India — it regulates all other banks, issues currency, and manages monetary policy.
- Commercial banks (such as SBI and HDFC) are the most common — they serve the general public for everyday banking needs.
- Cooperative and RRBs serve rural India and weaker sections, providing affordable credit.
- EXIM Bank (est. 1982) exclusively supports India's international trade through long-term finance.
- Development Banks like SIDBI and NABARD drive industrial and agricultural growth by providing long-term capital.
- Modern additions — Small Finance Banks and Payments Banks — ensure financial inclusion for India's last-mile population.
Definitions [8]
Define the following concept.
Open Market Operation
Open market operations refer to the sale and purchase of government and other approved securities by central bank in the money and capital markets.
Open Market Operations (OMOs) are employed by Central Banks, such as the RBI, to control the money supply. Buying and selling government bonds on the open market changes liquidity, interest rates, and the economy. Central Bank purchases of securities increase market liquidity and lower interest rates. Selling assets reduces market liquidity and raises interest rates.
Definitions: Central Bank
- "A bank which constitutes the apex of the monetary and banking structure of the country." — De Kock
- "A central bank is "The bank in any country is one which has been entrusted the duty of regulating the volume of currency and credit in that country." — Bank for International Settlements
Definition: Banking
“Ordinary banking business consists of changing cash for bank deposit and bank deposit for cash, transferring bank deposit from one person to another, giving bank deposit in exchange for government bonds, the recurring promises of businessmen to repay and so forth.” — Prof. Sayer’s
Definition : Bouncing of Cheque
A cheque is said to be bounced or dishonoured when the bank refuses to pay the amount written on the cheque.
Definition : Cheque
A cheque is a written order from an account holder to their bank to pay a specified amount to another person or the bearer (anyone physically holding or presenting it). It is mostly valid for 3 months from the date of issue.
Definition : Chequebook
A chequebook contains several blank cheques, which can be used when payments or money transfers are needed. Banks give a chequebook to their account holders if they keep a certain minimum balance.
Definition: Endorsement of Cheque
Endorsement involves writing the name of the new payee (the person who will get the cheque) and signing it on the back of the cheque.
This allows the original payee to transfer the right to receive the payment to another party.
Definition : Cheque Truncation System (CTS)
The Cheque Truncation System (CTS) is a modern method used in India for faster and safer cheque clearing. Instead of physically moving the paper cheque from one bank to another, the bank scans the cheque, and an electronic image is sent for clearing and payment.
Key Points
Key Points: Types of Bank
Key Points: Central Bank
- The central bank is the highest authority in the banking system. It controls, regulates and supervises all banks and manages the country’s monetary system.
- It formulates and implements monetary policy to control inflation, deflation, and overall credit in the economy.
- It acts as a banker, adviser and agent to the government, and also works as a “banker’s bank” by guiding and supporting commercial banks.
- The central bank has the sole authority to issue currency (except small coins/notes in some cases), ensuring a uniform and reliable money supply.
- It supports economic growth by promoting banking, developing financial institutions, managing foreign exchange, and helping priority sectors.
Key Points: Central Bank as a Controller of Credit
- The Central Bank controls currency and credit to maintain monetary stability.
- It regulates money supply through quantitative and qualitative credit control measures.
- Credit control helps in achieving price stability, economic stability, and exchange rate stability.
- The ultimate aim is high employment and economic growth (in India, done by the RBI).
Key Points: Banking > Functions of Commercial Bank
- Accept Deposits – Main source of funds: Demand Deposits (Current/Savings Accounts) & Time Deposits (Fixed/Recurring Deposits)
- Grant Loans & Advances – Cash Credit, Overdraft, Term Loans, Bill Discounting (banks profit from interest spread)
- Cheque System – Safe payment method using cheques (principal business payment tool)
- Transfer of Funds – Fast/safe money transfer via drafts, pay orders, mail/telegraphic transfers (essential for commerce)
- Credit Creation – Banks multiply money: loans create new deposits (Initial Deposit × 1/CRR formula)
- Financing Trade – Bill discounting + short-term trade loans (facilitates internal/external trade)
- Foreign Exchange & Utility Services – Currency exchange + lockers, travel cheques, mobile banking, agency functions
Important Questions [3]
Concepts [16]
- Banking
- Types of Bank
- Meaning of Central Bank
- Central Bank
- Central Bank as a Controller of Credit
- Banking > Functions of Commercial Bank
- Types of Bank Deposit Accounts
- Procedure of Opening a Bank Account
- Operating a Bank Account
- Types of Bank Accounts
- Advantages of Bank Account
- Cheque
- Types of Cheques
- Crossing of Cheques
- Bank Draft
- Travellers' Cheque
