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Quick recap: Money and banking on one page
Both parts of Money and banking condensed for quick revision: money and note issue, M0 to M4, credit creation and the multiplier, CRR and SLR, kinds of banks and nationalisation, deposit insurance, NPAs and recovery laws, and priority sector lending, with a one-table overview and eight mixed questions.
Money is whatever is generally accepted in payment; it ends barter's need for a double coincidence of wants and serves as a medium of exchange, unit of account, store of value and standard of deferred payment. Notes are fiat money and legal tender: under section 22 of the RBI Act, 1934 only the RBI issues bank notes, while coins and the ₹1 note are issued by the Government under the Coinage Act, 2011. Bank deposits are money too, but not legal tender.
reserve money (M0) is currency in circulation plus bankers' deposits and other deposits with the RBI; it is the monetary base the RBI controls most directly. The 1977 measures add the public's money in steps: M1 (currency with the public, demand deposits, other deposits with the RBI) is narrow money; M2 adds post office savings deposits; M3, M1 plus banks' time deposits, is broad money and the headline measure; M4 adds all post office deposits. Liquidity falls from M1 to M4. The 1998 Working Group under Y.V. Reddy added NM1–NM3 and liquidity aggregates L1–L3.
Banks create money through credit creation: they keep a fraction of each deposit as reserves and lend the rest, which returns as new deposits. The theoretical limit is the deposit divided by the reserve ratio. The money multiplier, M3 divided by M0, falls when the reserve ratio rises or when the public holds more cash. The cash reserve ratio (RBI Act s.42) is a cash balance with the RBI that earns no interest and has had no floor or ceiling since 2006; it was cut to 3 per cent of NDTL by November 2025. The statutory liquidity ratio (Banking Regulation Act s.24) is held by the bank itself in cash, gold and approved securities, has a 40 per cent ceiling and no floor since 2007, and has been 18 per cent since April 2020.
| Item | Key fact | Legal or official basis |
|---|---|---|
| Bank notes | Issued only by the RBI; coins and ₹1 note by the Government | RBI Act s.22; Coinage Act, 2011 |
| M0 / M1 / M3 | Reserve money / narrow money / broad money | RBI working groups, 1977 and 1998 |
| CRR | Cash with the RBI, no interest; 3% of NDTL | RBI Act s.42 |
| SLR | Cash, gold, approved securities with the bank; 18%, ceiling 40% | Banking Regulation Act s.24 |
| NPA | Overdue more than 90 days | RBI prudential norms |
| Deposit insurance | ₹5 lakh per depositor per bank | DICGC Act, 1961 |
| Priority sector | 40% of ANBC or CEOBE for domestic banks | RBI Master Directions, 2025 |
The RBI regulates banks under the Banking Regulation Act, 1949; a scheduled bank is one in the Second Schedule to the RBI Act. Commercial banks are public, private, foreign, regional rural, small finance and payments banks; cooperative banks are member-owned. The RBI was nationalised in 1949, the SBI formed in 1955, 14 banks nationalised in 1969 and six in 1980; mergers left 12 public sector banks from 1 April 2020. Regional rural banks date from 1975 and the 1976 Act, owned 50:35:15 by the Centre, a sponsor bank and the state. Payments banks take deposits up to ₹2 lakh per customer but cannot lend; small finance banks lend mainly to small borrowers. The DICGC insures deposits up to ₹5 lakh per depositor per bank since 2020.
A loan becomes a non-performing asset when interest or principal is overdue for more than 90 days; before that it passes through SMA-0, SMA-1 and SMA-2, and afterwards it is graded substandard, doubtful and loss. Net NPAs are gross NPAs minus provisions. In the 2010s stalled projects produced the twin balance sheet problem (Economic Survey 2016-17); after the 2015 Asset Quality Review the gross NPA ratio rose above 11 per cent by March 2018. Debts Recovery Tribunals (1993), the SARFAESI Act (2002) with asset reconstruction companies, and the Insolvency and Bankruptcy Code (2016) are the recovery tools; the ratio was 2.1 per cent in September 2025 (RBI Financial Stability Report, December 2025).
priority sector lending steers a share of bank credit to eight categories, from agriculture and MSMEs to education, housing and renewable energy. Under the RBI's 2025 Master Directions, domestic banks and foreign banks with 20 or more branches must lend 40 per cent of ANBC or CEOBE, whichever is higher, including 18 per cent to agriculture, 7.5 per cent to micro enterprises and 12 per cent to weaker sections; regional rural banks have 75 per cent, and small finance and urban cooperative banks 60 per cent. Shortfalls go into low-yield funds such as the RIDF, and since 2016 banks can trade priority sector lending certificates without transferring loans.
Exam traps
- CRR (RBI Act s.42) is cash with the RBI and earns no interest; SLR (BR Act s.24) is held by the bank and earns interest.
- M3 = M1 + banks' time deposits; M2 adds post office savings deposits instead.
- Coins and the ₹1 note are issued by the Government, not the RBI.
- A higher CRR or more cash with the public lowers the money multiplier.
- Payments banks cannot lend; small finance banks can.
- An NPA is a loan overdue for more than 90 days.
- DICGC cover is ₹5 lakh per depositor per bank, with the premium paid by banks.
Recap
- Money: medium of exchange, unit of account, store of value, standard of deferred payment.
- RBI alone issues bank notes (s.22); M0 is reserve money, M1 narrow and M3 broad money.
- Credit creation limit = deposit ÷ reserve ratio; money multiplier = M3/M0.
- CRR: s.42 RBI Act, 3%, no interest; SLR: s.24 BR Act, 18%, ceiling 40%.
- Nationalisation: RBI 1949, SBI 1955, 14 banks 1969, 6 banks 1980; 12 PSBs from 2020.
- RRBs 1975/1976 (50:35:15); payments banks cannot lend; small finance banks lend to small borrowers.
- NPA after 90 days; SARFAESI 2002, IBC 2016; gross NPA ratio 2.1% in September 2025.
- PSL: 40% of ANBC or CEOBE (18% agriculture, 7.5% micro, 12% weaker sections); RRBs 75%; SFBs and UCBs 60%.
Practice questions
Q1. In India, the ₹1 currency note is put into circulation under the authority of which one of the following?
- The Reserve Bank of India
- The Government of India
- The State Bank of India
- The Security Printing and Minting Corporation on its own authority
Show answer
Answer: B. The Government of India
The ₹1 note, like coins, is issued by the Government of India. The RBI issues all other bank notes under s.22, the SBI is a commercial bank with no issuing power, and the printing corporation only manufactures notes and coins for the issuing authorities.
Q2. Consider the following statements:
1. Time deposits held with banks form part of M1.
2. M4 is a less liquid measure of money than M1.
Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: B. 2 only
Statement 1 is wrong: time deposits are added in M3, not M1, which has currency with the public, demand deposits and other deposits with the RBI. Statement 2 is right. So '1 only', 'both' and 'neither' are wrong.
Q3. If the reserve ratio is 25 per cent and there are no other leakages, the maximum deposits that can be created from a fresh deposit of ₹2,000 are
- ₹2,500
- ₹4,000
- ₹6,000
- ₹8,000
Show answer
Answer: D. ₹8,000
Maximum deposits = 2,000 ÷ 0.25 = ₹8,000. ₹2,500 adds only a quarter, ₹4,000 simply doubles, and ₹6,000 counts only the new loans and leaves out the first deposit.
Q4. Consider the following statements:
1. The cash reserve ratio is kept by banks as a balance with the RBI.
2. The Reserve Bank of India Act, 1934 is the law that lays down the statutory liquidity ratio.
Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: A. 1 only
Statement 1 is right: CRR is a cash balance with the RBI under s.42 of the RBI Act. Statement 2 is wrong: the SLR comes from s.24 of the Banking Regulation Act, 1949. So '2 only', 'both' and 'neither' are wrong.
Q5. In which year were six more commercial banks, each with deposits of ₹200 crore or more, nationalised?
- 1955
- 1969
- 1980
- 1991
Show answer
Answer: C. 1980
Six banks were nationalised on 15 April 1980. 1955 is when the SBI was formed, 1969 when 14 banks with deposits of ₹50 crore or more were nationalised, and 1991 is the year of the Narasimham Committee, which pointed towards reform rather than nationalisation.
Q6. Consider the following pairs:
1. Payments bank — Cannot lend
2. Regional rural bank — Share capital of the Centre, a sponsor bank and the state in the ratio 50:35:15
3. DICGC — Deposit cover of ₹1 lakh per depositor per bank
How many of the pairs given above are correctly matched?
- Only one
- Only two
- All three
- None
Show answer
Answer: B. Only two
Pairs 1 and 2 are correct. Pair 3 is wrong because the cover has been ₹5 lakh since 4 February 2020; ₹1 lakh was the earlier limit. So 'only one', 'all three' and 'none' are wrong.
Q7. The Economic Survey 2016-17 described India's bad-loan crisis as a 'twin balance sheet problem'. Which two sets of balance sheets did the phrase point to?
- The RBI and the Central Government
- Banks and corporate borrowers
- Households and banks
- The Centre and the states
Show answer
Answer: B. Banks and corporate borrowers
The Economic Survey 2016-17 used the phrase for over-leveraged companies and the banks that had lent to them. It is not about the RBI and the Centre, households, or Centre-state finances.
Q8. Under the RBI's priority sector lending directions effective from 1 April 2025, what is the overall target for small finance banks?
- 40 per cent
- 60 per cent
- 75 per cent
- 18 per cent
Show answer
Answer: B. 60 per cent
Small finance banks now have a 60 per cent target. 40 per cent applies to domestic commercial banks, 75 per cent to regional rural banks (and to small finance banks before the revision), and 18 per cent is the agriculture sub-target.
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- Reserve Bank of India Act, 1934 (ss.22 and 42, Second Schedule) — https://www.indiacode.nic.in
- Banking Regulation Act, 1949 (s.24) — https://www.indiacode.nic.in
- Reserve Bank of India: Working Group on Money Supply (1998); Master Directions on Priority Sector Lending (2025); bank licensing guidelines (2014); Financial Stability Report (December 2025) — https://www.rbi.org.in
- Coinage Act, 2011 — https://www.indiacode.nic.in
- State Bank of India Act, 1955; Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980; Regional Rural Banks Act, 1976 — https://www.indiacode.nic.in
- DICGC Act, 1961; SARFAESI Act, 2002; Insolvency and Bankruptcy Code, 2016 — https://www.indiacode.nic.in
- Economic Survey 2016-17, Ministry of Finance (chapter on the twin balance sheet problem) — https://www.indiabudget.gov.in/economicsurvey/