Money, Banking and Payments — How the System Actually Works

The General Awareness section is 20 of CMAT's 100 questions, and the business-and-economy half of it is where a management entrance separates itself from a general knowledge quiz. It does not ask what the repo rate is this month; it asks what raising it does, who runs UPI, and what a loan is called on its sixty-first overdue day. This chapter is built around those mechanisms. Four sections: the Reserve Bank's jobs and how one rate decision reaches a home loan; the map of India's banks and what defines each kind; the life of a loan from late payment to recovery; and the payment rails, with the one distinction candidates most often get wrong — which ones the RBI runs and which ones NPCI does. Nothing here depends on a current number.

The Reserve Bank's Jobs, and How a Rate Reaches You

The Reserve Bank of India was set up under the RBI Act, 1934, began operations on 1 April 1935, and was nationalised on 1 January 1949. It wears five hats, and questions usually test whether you can tell which hat a given action belongs to.

Five jobs, and the one thing that is not the RBI’s
JobWhat it means in practice
Issuer of currencyThe RBI issues every banknote from ₹2 upward. Coins and the ₹1 note are issued by the Government of India (the Ministry of Finance) — the RBI only distributes them. This is the classic trap question.
Banker to banks and to governmentBanks keep their reserve balances with the RBI; the Centre and the states bank with it and borrow through it. It is also the lender of last resort — the one place a solvent bank can borrow when no one else will lend.
Monetary authoritySets the policy rate and the reserve ratios to steer inflation and credit — the mechanism is the next table.
Regulator and supervisor of banksLicenses banks, inspects them, sets capital and provisioning rules, and can put a stressed bank under restrictions or a moratorium.
Manager of foreign exchangeHolds the country’s foreign-exchange reserves and administers the Foreign Exchange Management Act (FEMA, 1999). It intervenes in the currency market but does not fix the rupee’s value.

The monetary instruments are best learnt as levers with a direction, not as definitions. Each one changes either the price of money or the quantity banks can lend, and a question that says "the RBI raises X — what happens?" is asking you for the direction.

The levers, and which way each one pushes
LeverWhat it isIf it is RAISED
Repo rateThe rate at which banks borrow overnight from the RBI against government securities. The policy rate.Bank funding costs rise → lending rates rise → borrowing slows → demand and inflation cool. Tightening.
Reverse repo / SDFThe rate the RBI pays banks for parking surplus funds with it (the Standing Deposit Facility does this without collateral).Parking with the RBI becomes more attractive than lending → less credit in the system.
CRR — Cash Reserve RatioThe share of a bank’s deposits it must keep as cash with the RBI, earning nothing.Money is physically removed from what the bank can lend. The bluntest quantity tool.
SLR — Statutory Liquidity RatioThe share of deposits a bank must hold in liquid assets it keeps itself — chiefly government securities, which earn interest.Less is available to lend to businesses; more is channelled into government paper.
MSF — Marginal Standing FacilityEmergency overnight borrowing from the RBI above what the repo window allows, at a penal rate above the repo.Sets the ceiling of the interest-rate corridor; the SDF/reverse repo sets the floor and the repo sits between.
Open market operationsThe RBI buying or selling government securities in the market.Buying injects rupees; selling absorbs them. A quantity tool that works without changing any announced rate.
🧠 CRR versus SLR in one line
CRR is cash, with the RBI, earning nothing. SLR is securities, with the bank itself, earning interest. Every question that confuses the two is asking which of those three words differs.

The Map of Indian Banks — What Defines Each Kind

The paper does not ask you to name banks; it asks what kind a described bank is, or what a kind is allowed to do. The history has three dates worth knowing cold: 1955, when the Imperial Bank of India (formed 1921) became the State Bank of India; 19 July 1969, when fourteen major private banks were nationalised; and 1980, when six more followed. A round of mergers completed in April 2020 left twelve public sector banks.

Kinds of bank, and the one fact that defines each
KindDefining feature
Public sector banksThe Government of India holds a majority of the shares. Twelve after the 2020 consolidation, SBI the largest.
Private sector banksMajority privately owned; "new generation" private banks were licensed from 1993–94 onward after liberalisation.
Regional Rural BanksCreated in 1975 to lend in rural areas; owned jointly by the Centre (50%), a sponsor bank (35%) and the state (15%). Supervised by NABARD.
Small finance banksLicensed from 2015 to serve small businesses and the unbanked. A full bank — it lends — but with a heavier priority-sector obligation (75% of its lending).
Payments banksAlso from 2015. Can take deposits only up to a cap per customer and provide payments and remittances, but cannot lend. Their income is fees and interest on government paper.
Co-operative banksOwned by their members. Under dual regulation — the RBI for banking functions and the Registrar of Co-operative Societies for management — which is why they feature in so many failure headlines.
NBFCs — not banksNon-Banking Financial Companies lend but cannot accept demand deposits (no current or savings accounts) and are not part of the payment system. Regulated by the RBI, but they are not banks.

Two obligations sit on every commercial bank. Priority sector lending requires a share of lending — 40% of adjusted net bank credit for domestic banks, with an agriculture sub-target — to go to agriculture, small enterprises, education, housing and other named sectors. And deposit insurance: the DICGC, set up in 1978, insures each depositor up to ₹5 lakh per bank (the limit set in February 2020, raised from ₹1 lakh), covering principal and interest together.

The Life of a Loan — Late, Stressed, Bad, Recovered

A loan does not become bad on the day a payment is missed. The RBI’s classification runs on a calendar of overdue days, and questions test the calendar. Payment missed: the account is a Special Mention Account — SMA-0 for 1–30 days overdue, SMA-1 for 31–60, SMA-2 for 61–90. On the 91st day it becomes a Non-Performing Asset, and the bank must set aside capital against it (provisioning) instead of counting the interest as income.

Four ways to get the money back
RouteWhat it is for
Lok AdalatSettlement of small-value disputes by compromise, cheaply and fast.
Debt Recovery Tribunal (Act of 1993)A dedicated tribunal for banks to recover dues above a threshold, faster than a civil court.
SARFAESI Act, 2002Lets a secured lender take possession of and sell the collateral without first going to court, after notice. Applies to secured loans only.
Insolvency and Bankruptcy Code, 2016A time-bound process before the NCLT in which creditors take control of a defaulting company and either find a buyer (resolution) or wind it up (liquidation). The Insolvency and Bankruptcy Board of India regulates the process.
🎯 Why the calendar matters more than the definition
The one-line definition — "an NPA is a loan overdue more than 90 days" — is asked once. The calendar is asked repeatedly, because it can be dressed as arithmetic: a payment due on the 1st is unpaid on the 15th of the following month — what is the account? Forty-five days overdue, so SMA-1. Learn the three boundaries (30, 60, 90) and every version of the question is the same question.

The Payment Rails — Who Runs Which

India has two operators of payment systems, and the single most common error in this topic is to attribute everything to the RBI. The RBI itself runs two: RTGS and NEFT. Everything a phone does — UPI, IMPS, RuPay, BBPS, FASTag — is run by the National Payments Corporation of India (NPCI), a not-for-profit company set up in 2008 by the RBI and the Indian Banks’ Association under the Payment and Settlement Systems Act, 2007. NPCI is an operator, not a regulator; the regulator is still the RBI.

The rails, their operators, and what tells them apart
RailRun byDistinguishing fact
RTGS — Real Time Gross SettlementRBIEach transfer settles individually and immediately ("gross"). Minimum ₹2 lakh, no maximum. Available 24×7 since December 2020. For large payments.
NEFT — National Electronic Funds TransferRBISettles in half-hourly batches, not individually. No minimum. Available 24×7 since December 2019.
IMPS — Immediate Payment ServiceNPCILaunched 2010; instant, round the clock, using account number and IFSC or a mobile number. UPI runs on this rail.
UPI — Unified Payments InterfaceNPCILaunched April 2016. A layer over IMPS that lets a Virtual Payment Address stand in for account details, and lets one app hold several bank accounts. Not a bank, not a wallet.
RuPayNPCIIndia’s domestic card network (2012), the counterpart of Visa and Mastercard. A card scheme, not a bank.
BBPS, NETC (FASTag), AePSNPCIBill payments; toll collection by RFID tag; Aadhaar-authenticated cash-out through a business correspondent.

Financial inclusion has its own anchor date: the Pradhan Mantri Jan Dhan Yojana was launched on 28 August 2014 to give every household a zero-balance bank account with a RuPay debit card. It is the reason the payments rails above had somewhere to land.

Key takeaways

  • The RBI issues banknotes from ₹2 up; coins and the ₹1 note are issued by the Government of India. This is the trap in the "functions of the RBI" question.
  • Learn every monetary lever with its direction. Raising the repo, CRR or SLR all tighten; the difference is whether they change the price of money or the quantity a bank can lend.
  • CRR is cash with the RBI earning nothing; SLR is securities with the bank earning interest. Same purpose, different place, different yield.
  • 1955 SBI, 1969 fourteen banks, 1980 six banks, 2020 twelve public sector banks. Four numbers carry the whole nationalisation story.
  • A payments bank takes capped deposits and cannot lend; an NBFC lends and cannot take demand deposits. Each is defined by the thing it is forbidden to do.
  • SMA-0, SMA-1, SMA-2 at 30, 60 and 90 days; NPA on day 91. SARFAESI lets a secured lender seize collateral without a court; the IBC puts creditors in charge of the company before the NCLT.
  • The RBI runs RTGS and NEFT. NPCI runs UPI, IMPS, RuPay and the rest — as an operator, not a regulator. Attributing UPI to the RBI is the commonest wrong answer in this topic.

Practice questions (8)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

  1. Which of the following is NOT done by the Reserve Bank of India?

    1. Issuing ₹500 banknotes
    2. Minting and issuing coins
    3. Acting as lender of last resort to banks
    4. Managing the foreign-exchange reserves
    Show answer

    Answer: B — Minting and issuing coins

    Coins (and the ₹1 note) are issued by the Government of India under the Coinage Act; the RBI only distributes them. Banknotes from ₹2 upward, the lender-of-last-resort role and the management of reserves are all the RBI’s. The question is set precisely because the RBI handles coins every day, so "issues" and "distributes" are easy to blur.

  2. If the RBI raises the Cash Reserve Ratio, the immediate effect on commercial banks is that:

    1. They can lend more, because their reserves have grown
    2. They must hold more cash with the RBI, so less is available to lend
    3. They earn more interest on the reserves they keep with the RBI
    4. They must buy more government securities
    Show answer

    Answer: B — They must hold more cash with the RBI, so less is available to lend

    CRR is the share of deposits a bank must park as cash with the RBI, and that cash earns nothing. Raising it pulls lendable money out of the bank — a tightening move. Option C is wrong because CRR balances earn no interest, and option D describes the SLR, which is held in government securities by the bank itself. The two ratios are separated exactly on these points.

  3. A payments bank in India is permitted to:

    1. Lend to small businesses but not accept deposits
    2. Accept deposits up to a per-customer cap but not lend
    3. Accept unlimited deposits and lend like any commercial bank
    4. Issue credit cards but not debit cards
    Show answer

    Answer: B — Accept deposits up to a per-customer cap but not lend

    The payments-bank licence (from 2015) is defined by what it forbids: no lending, and deposits only up to a cap per customer. Its business is payments, remittances and debit cards, with income from fees and from investing deposits in government paper. Option A inverts the model — that is closer to an NBFC, which lends but cannot take demand deposits. Option C describes a small finance bank or a full commercial bank.

  4. A loan instalment has been overdue for 45 days. Under the RBI’s classification the account is:

    1. SMA-0
    2. SMA-1
    3. SMA-2
    4. A non-performing asset
    Show answer

    Answer: B — SMA-1

    The calendar: SMA-0 is 1–30 days overdue, SMA-1 is 31–60, SMA-2 is 61–90, and the account becomes an NPA on the 91st day. Forty-five days falls in the second band. The commonest error is to jump straight to "NPA" because the loan is late; the whole point of the Special Mention categories is that a bank must flag stress well before the 90-day line.

  5. Which law allows a bank to take possession of and sell a defaulting borrower’s mortgaged property without first obtaining a court order?

    1. The Recovery of Debts Due to Banks Act, 1993
    2. The SARFAESI Act, 2002
    3. The Insolvency and Bankruptcy Code, 2016
    4. The Banking Regulation Act, 1949
    Show answer

    Answer: B — The SARFAESI Act, 2002

    SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) lets a secured creditor enforce its security after notice, without a court, which is exactly what makes it fast. The 1993 Act created the Debt Recovery Tribunals — a tribunal, so still an adjudication. The IBC is a collective process before the NCLT for a whole company, not a single mortgaged asset. The Banking Regulation Act governs how banks are run, not how they recover.

  6. Which statement about RTGS and NEFT is correct?

    1. Both are operated by NPCI
    2. RTGS settles each transfer individually in real time and has a minimum of ₹2 lakh; NEFT settles in batches with no minimum
    3. NEFT is for large payments and RTGS for small ones
    4. RTGS is available only on working days
    Show answer

    Answer: B — RTGS settles each transfer individually in real time and has a minimum of ₹2 lakh; NEFT settles in batches with no minimum

    RTGS is Real Time Gross Settlement — each payment settles on its own, at once — and it is meant for large values, hence the ₹2 lakh floor. NEFT clears in half-hourly batches and has no minimum. Both are run by the RBI, not NPCI (option A), and both have been available round the clock — NEFT since December 2019, RTGS since December 2020 — so option D is out of date.

  7. The Unified Payments Interface (UPI) is owned and operated by:

    1. The Reserve Bank of India
    2. The National Payments Corporation of India
    3. The State Bank of India
    4. The Ministry of Finance
    Show answer

    Answer: B — The National Payments Corporation of India

    UPI (launched April 2016) is an NPCI product, as are IMPS, RuPay, BBPS and FASTag. NPCI is a not-for-profit company set up in 2008 by the RBI and the Indian Banks’ Association; it operates the rails, while the RBI regulates them and itself runs only RTGS and NEFT. "The RBI" is the most-chosen wrong answer because the RBI regulates everything in payments — but regulating a rail and running it are different things, and the paper knows the difference.

  8. How many major commercial banks were nationalised in India in July 1969?

    1. Six
    2. Twelve
    3. Fourteen
    4. Twenty
    Show answer

    Answer: C — Fourteen

    Fourteen banks were nationalised on 19 July 1969, and six more in 1980 — twenty in the two rounds together, which is why "twenty" appears as a distractor. Twelve is the number of public sector banks left after the mergers completed in April 2020. Each of the four options is a real number from the story; the question is which one belongs to 1969.