Chapter 6: Money and Banking System

1. Introduction

Money and Banking are essential components of a modern economy. Money facilitates exchange, while banks mobilize savings, provide credit, and support economic development. The banking system plays a crucial role in maintaining financial stability and economic growth.

2. Meaning of Money

Money is anything that is generally accepted as a medium of exchange for goods and services and for the settlement of debts.

Features of Good Money

• General Acceptability
• Durability
• Portability
• Divisibility
• Uniformity
• Recognizability
• Stability in Value

3. Functions of Money

Primary Functions

• Medium of Exchange
• Measure of Value (Unit of Account)

Secondary Functions

• Store of Value
• Standard of Deferred Payments
• Transfer of Value

4. Types of Money

5. Banking System

A banking system is a network of financial institutions that accepts deposits, provides loans, and facilitates financial transactions.

Structure of Banking System in India

• Reserve Bank of India (RBI)
• Commercial Banks
• Regional Rural Banks (RRBs)
• Co-operative Banks
• Development Banks
• Small Finance Banks and Payment Banks

6. Reserve Bank of India (RBI)

The Reserve Bank of India is the Central Bank of India. It was established under the RBI Act, 1934 and commenced operations on 1 April 1935. It was nationalized in 1949. :contentReference[oaicite:0]{index=0}

Main Functions of RBI

• Issuer of Currency
• Banker to the Government
• Banker's Bank
• Lender of Last Resort
• Controller of Credit
• Custodian of Foreign Exchange Reserves
• Regulator and Supervisor of the Banking System
• Monetary Authority of India

RBI formulates and implements monetary policy, regulates banks, manages foreign exchange reserves, acts as banker to governments and banks, and functions as the lender of last resort. :contentReference[oaicite:1]{index=1}

7. Commercial Banks

Commercial banks accept deposits from the public and provide loans for trade, commerce, agriculture, industry, and personal purposes.

Functions of Commercial Banks

• Accepting Deposits
• Providing Loans and Advances
• Credit Creation
• Agency Services
• Utility Services

8. Credit Creation by Banks

Credit Creation refers to the process by which banks create additional money in the economy through lending activities based on deposits received.

Banks keep a fraction of deposits as reserves and lend the remaining amount, leading to multiple expansion of credit.

9. Monetary Policy

Monetary Policy refers to the policy formulated by the RBI to regulate the supply of money, availability of credit, and interest rates in the economy. Its primary objective is price stability while keeping growth in mind. :contentReference[oaicite:2]{index=2}

Objectives of Monetary Policy

• Price Stability
• Economic Growth
• Control of Inflation
• Financial Stability
• Employment Generation

10. Instruments of Monetary Policy

Repo Rate, CRR, SLR, Bank Rate and Open Market Operations are major tools used by RBI to manage liquidity and inflation in the economy. :contentReference[oaicite:3]{index=3}

11. Financial Inclusion

Financial Inclusion means providing affordable banking and financial services to all sections of society, especially weaker and rural sections.

Objectives

• Universal Access to Banking
• Reduction of Poverty
• Promotion of Savings
• Inclusive Economic Growth

12. Digital Banking

• Internet Banking
• Mobile Banking
• UPI (Unified Payments Interface)
• NEFT
• RTGS
• IMPS

13. Important BPSC Facts

• RBI was established in 1935 and nationalized in 1949. :contentReference[oaicite:4]{index=4}
• RBI is the Central Bank of India. :contentReference[oaicite:5]{index=5}
• RBI acts as the Banker's Bank and Lender of Last Resort. :contentReference[oaicite:6]{index=6}
• Monetary Policy aims at maintaining price stability while supporting growth. :contentReference[oaicite:7]{index=7}
• Repo Rate, CRR and SLR are frequently asked in BPSC examinations. :contentReference[oaicite:8]{index=8}

14. Quick Revision

1. Money acts as a medium of exchange and store of value.
2. RBI is the Central Bank of India.
3. Commercial banks accept deposits and provide loans.
4. Credit creation is an important function of banks.
5. Monetary Policy is formulated by RBI.
6. Repo Rate, CRR, SLR and OMO are key monetary tools.
7. Financial Inclusion and Digital Banking are modern banking objectives.