Money and Banking

Why we need money

• Exchange: money lets people buy without matching two separate wants.
• Saving: people can keep value for later.
• Measurement: prices let us compare different things.
• Barter works only when both people want what the other offers.
• Money removes that difficulty.

Legal tender

• Legal tender is money that a creditor must accept to settle a debt.
• RBI banknotes are legal tender for their face value.
• The ₹1 note is issued by the Government of India. It is also legal tender.
• ₹1 and larger coins must be accepted only up to ₹1,000 in one payment.
• 50-paise coins must be accepted only up to ₹10.
• These limits govern debt settlement. A shop can still refuse a new sale.
• Say you owe a shopkeeper ₹1,500 and try to pay it all in ₹1 coins. The shopkeeper must take only ₹1,000 of it in coins. The rest needs another form of payment.
• (Source: RBI, explaining the rules.)
• Read more: Money and Monetary Concepts.

What the RBI does

• India’s central bank began working in 1935.
• It manages money and interest-rate conditions. This is monetary policy.
• It supervises banks and can give emergency support.
• Read more: Reserve Bank of India (RBI).

The toolkit

• Repo rate: banks borrow from the RBI against approved securities.
• A higher repo rate can make some bank loans costlier. Spending may slow, and inflation may ease over time.
• SDF: banks park spare funds with the RBI without giving collateral.
• Since 2022 the SDF has formed the lower edge of the policy corridor.
• Reverse repo: banks lend funds to the RBI against securities. Reverse-repo auctions remain a separate tool.
• CRR: banks keep a required share of their net demand and time liabilities as cash with the RBI.
• SLR: banks hold a required share in liquid assets.
• Open-market operations: the RBI buys or sells government securities to change liquidity.

Who decides, and what for?

• A six-member Monetary Policy Committee (MPC) votes on the repo rate by majority.
• The Governor does not decide alone.
• CPI measures changes in consumer prices.
• India targets 4% CPI inflation, within a band of 2% to 6%.
• (Source: RBI, on the SDF change; RBI, on monetary tools.)
• Read more: Monetary Policy and RBI Tools.

One decision, ripples everywhere

• The MPC votes on the repo rate.
• The repo rate is what the RBI charges banks, not the public.
• Banks pass the change on as loan and deposit rates.
• Higher rates cool borrowing and spending. Lower rates do the opposite.

Who owns them?

• Public and private banks differ mainly by ownership.
• Both follow the same banking rules.
• A public sector bank has majority government ownership. The State Bank of India is one.
• Government policy can give such banks public goals, like wider access to banking.
• Private banks, like HDFC and ICICI, are privately owned. They must follow RBI rules too.
• Read more: State Bank of India (SBI) and Banking History and Structure.

Nationalisation and mergers

• In 1969 and again in 1980, the government nationalised major private banks.
• The goal was to push credit toward farmers and small industries.
• Since 2017, India has merged public banks into fewer, stronger ones.
• Many small public banks were financially weak.
• SBI absorbed its associate banks in 2017.
• On 1 April 2020, ten banks merged into four: PNB, Canara, Union Bank and Indian Bank.
• India had 12 public sector banks after this, down from 27.

What is an NPA?

• A loan generally becomes non-performing when payment stays overdue for more than 90 days.
• NPA status warns that repayment is seriously delayed.
• The bank must set aside money for possible loss. This is provisioning.
• Some money may still be recovered later.
• Capital is the bank’s safety cushion for absorbing losses.
• An NPA weakens a bank. It does not prove the whole loan is lost forever.

A picture of it

• A steel company borrows ₹500 crore to build a plant.
• Steel prices crash and it stops repaying.
• After 90 days of missed payments, the loan becomes an NPA.
• The bank sets money aside against loss.
• It might still recover part by selling the company’s assets.

The mid-2010s crisis

• India’s banks hit a major NPA crisis in the mid-2010s.
• It mostly hurt public sector banks.
• They had lent heavily to infrastructure and steel projects that later defaulted.
• The crisis led to large bank recapitalisation.
• It also fed directly into the mergers above.

8 November 2016

• The decision was announced at 8:15 pm on 8 November 2016.
• The existing ₹500 and ₹1,000 series lost legal-tender status after midnight, with limited exceptions.
• Cash-dependent workers and businesses faced serious short-term disruption.
• India did not become cashless.
• But digital payments grew rapidly afterwards.
• Economists still debate how much demonetisation caused that growth.

Financial inclusion: JAM

• Financial inclusion means helping more people use safe, formal financial services.
• J — Jan Dhan: low-cost bank accounts widened access.
• A — Aadhaar: digital identity helped verify customers.
• M — Mobile: phones and cheap data widened digital payments.
• UPI then made small digital payments easier for homes and local shops.
• Read more: Financial Inclusion in India: PMJDY and the JAM Trinity.

Lending adds deposits

• Banks do not just store your money. They multiply it through lending.
• When a bank makes a loan, it usually credits the borrower’s deposit account.
• The borrower spends it, and the payment may become another person’s deposit.
• So bank lending can add deposits to the system.
• There is no fixed ten-times rule for actual lending.
• Borrower demand, bank capital, risk and RBI rules all matter.

The Quantity Theory

• The older Quantity Theory of Money links total spending to how much money exists and how fast it moves.
• If money supply grows faster than goods, prices tend to rise.

Monetary tools versus fiscal tools

• Monetary tools belong to the RBI: bank rate, repo rate and open-market operations.
• Fiscal tools belong to the government: public debt and public revenue.
• “NOT correct” questions on the repo rate often hinge on one detail.
• It is charged to banks, never to the public directly.
• Legal-tender and money-supply definitions are tested word for word.

A new evidence law

• The Bankers’ Books Evidence Act, 2026 got Presidential assent on 13 August 2026.
• It replaces the 1891 law of the same name.
• It takes effect on 1 October 2026.
• It is technology-neutral. It recognises banking records in physical, electronic, digital, virtual and cloud forms.
• From 1 October 2026, a court needs a written “special cause” to summon bank officials when the bank is not a party.
• (Source: Ministry of Finance, PIB.)

MPC holds the repo rate

• The MPC kept the repo rate at 5.25% at its 3-5 August 2026 meeting.
• All six members voted to keep it unchanged.
• It raised its FY27 GDP growth forecast to 6.7%.
• It lowered its CPI inflation forecast to 5.0%.
• It cited global geopolitical uncertainty, even as domestic demand and manufacturing stayed strong.
• (Source: RBI, Monetary Policy Statement, August 2026.)

RBI’s Financial Inclusion Index

• The index has three parts.
• Access carries 35%: can people reach services?
• Usage carries 45%: do people actively use them?
• Quality carries 20%: are the services suitable and reliable?
• The index rose from 67.0 in March 2025 to 70.0 in March 2026.
• Higher Usage drove most of the rise.
• (Sources: RBI; PIB.)