By : Akash Srivastava you tube : Infinite study

1) Functions of Commercial Banks

A. Primary Functions (TRAD)

a) Accepting Deposits

• Demand Deposits: Can be withdrawn anytime (e.g., savings/current

account).

• Time Deposits: Fixed time period (e.g., fixed/recurring deposit).

b) Providing Loans and Advances

• Banks lend money to individuals and businesses and earn interest.

• Includes overdrafts, cash credit, personal loans, etc.

2) Money Creation – LRR

LRR = Legal Reserve Ratio (OR) Reserve Ratio

B. Secondary Functions (AGUS) It is the percentage of deposits commercial banks must keep with RBI or with
themselves before giving loans.
a) Agency Functions (Done on behalf of customers)
LRR = CRR + SLR
• Collecting cheques, dividends, etc.
• CRR (Cash Reserve Ratio) = % of deposits kept with RBI
• Paying bills, rent, insurance premiums.
• SLR (Statutory Liquidity Ratio) = % of deposits kept in form of liquid assets
• Buying/selling securities.
(cash, gold, govt securities)
• Acting as trustee or executor.
Banks can't use LRR part for lending, but the remaining part is used to create
b) General Utility Services credit → Money Creation.
• Locker facility for valuables.

• Issue of drafts, cheques, travelers’ cheques. Money Creation – Step-by-step Logic:

• Credit/debit card services. Let’s say:
• Online banking, mobile apps. • Initial deposit = ₹1,000

• LRR = 20%

"Success is the best revenge"- "Akash Sir"

By : Akash Srivastava you tube : Infinite study

• So, bank keeps ₹200 as reserve and lends ₹800

Step-by-step Credit Creation:

Round Deposit (₹) Reserve (20%) Loan Given

1 1000 200 800

2 800 160 640

3 640 128 512

… … … …

∞ Total Deposit = ₹5,000

• What is Money Multiplier?
This process continues, and total credit created becomes
• Money Multiplier (MM):
Total Deposits = Initial Deposit × (1 / LRR)
It shows how much total money (deposits) can be created by the banking
= ₹1,000 × (1 / 0.20) = ₹5,000
system from a given amount of initial deposits.
Logic ko Samjho:

• Bank har baar 80% paisa loan deta hai (kyunki 20% reserve rakhna hota
hai).

• Loan wala paisa fir kisi aur ke bank account me chala jaata hai. Importance of Money Multiplier

• Wo paisa fir se naya deposit ban jata hai, jispe fir se bank reserve rakhkar 1. M – More Credit Creation
loan deta hai.
• Jab MM zyada hota hai, banks zyada loans de sakte hain.
• Ye process tab tak chalta hai jab tak loan amount bahut chhoti value na ho • Isse economy mein credit (udhaar) badhta hai → investment aur
jaye. spending badhti hai.
• Example: ₹1,000 se ₹5,000 tak ka credit ban sakta hai agar MM = 5
4) Formula for Money Multiplier 2. O – Overall Money Supply Increases

• MM directly impact karta hai total money supply ko.

"Success is the best revenge"- "Akash Sir"

By : Akash Srivastava you tube : Infinite study

• RBI agar LRR kam karta hai → MM badhta hai → paisa market mein • In India, RBI issues all notes except ₹1, which is issued by the Government
zyada hota hai. of India.

3. N – New Employment Opportunities

• Zyada paisa hone se industries aur businesses loan le kar expand B. Custodian of Foreign Exchange (Forex Reserves)
karte hain.
• Ye foreign currency ka stock rakhta hai jaise USD, Euro.
• Isse naye jobs create hote hain.
• Foreign exchange rate ko stable banaye rakhna iska kaam hai.
Definition of Central Bank:

The Central Bank is the apex financial institution in a country that manages the
monetary system and regulates the supply of money and credit. In India, the C. Banker to the Government
central bank is the Reserve Bank of India (RBI).
• Government ka account rakhta hai.
Current governor - Sanjay Malhotra
• Government ko loan deta hai aur uske bonds bechta hai.

D. Banker's Bank

• Sabhi commercial banks ka bank hota hai.

• Unke CRR/SLR deposits rakhta hai, aur unko loan bhi deta hai (Repo rate
ke through).

E. Credit Control Function (Monetary Policy)

• Central bank money supply control karta hai through:

o Repo Rate
Functions of Central Bank: o Reverse Repo Rate
A. Currency Issuer (Note Issue Authority) o CRR
• Central bank ke paas currency note print karne ka adhikar hota hai. o SLR

"Success is the best revenge"- "Akash Sir"

By : Akash Srivastava you tube : Infinite study

o Open Market Operations

F. Maintaining Price Stability and Economic Growth

• Central bank inflation control karta hai aur stable economy maintain karta
hai.

Lender of the Last Resort – अंतिम सहारा दे ने वाला

Hinglish Explanation:

Jab koi bank bilkul majboor ho jaye aur usko kahin se bhi paisa na mile, tab RBI A. Quantitative Instruments (General Tools)
uski madad karta hai by giving loan. Isliye RBI ko “last resort” kaha jata hai — These affect the overall volume of credit in the economy.
matlab aakhri ummeed.
Tool Meaning Effect

Long-term interest rate at which RBI

Main Points: ⬆ Bank Rate → ⬇ Credit
Bank Rate lends to commercial banks (no
availability
1. RBI provides emergency loans to banks facing liquidity crisis. collateral)

2. This helps prevent the collapse of the banking system. Short-term rate at which banks
⬆ Repo Rate → loans
3. It maintains public confidence in the banking system. Repo Rate borrow from RBI by selling securities
costlier → ⬇ credit
with an agreement to repurchase
Example:
⬆ Reverse Repo Rate →
Suppose Punjab & Sind Bank is unable to pay its customers because it has no cash Rate at which RBI borrows from
Reverse Repo Rate banks keep more with RBI
and other banks are refusing to lend. Then, RBI gives it emergency funds. This is banks (to absorb excess liquidity)
→ ⬇ liquidity
called Lender of the Last Resort.
CRR (Cash Reserve
Instruments to Control Money Supply and Credit % of NDTL to be kept as cash with RBI ⬆ CRR → ⬇ lendable money
Ratio)

SLR (Statutory % of NDTL to be kept in liquid form

⬆ SLR → ⬇ credit
Liquidity Ratio) (gold/govt. securities)

"Success is the best revenge"- "Akash Sir"

By : Akash Srivastava you tube : Infinite study

Tool Meaning Effect Result: Market me paisa kam ho jata hai → Control on inflation

RBI sells → ⬇ money Summary Table (Quick Revision)

OMO (Open
RBI buys/sells govt. securities in open supply
Market Tool ⬆ Rate ⬇ Rate
market RBI buys → ⬆ money
Operations)
supply Repo Rate Loans costly → ⬇ Credit Loans cheap → ⬆ Credit

Reverse Banks deposit more with RBI → ⬇ Banks deposit less → ⬆

Repo Liquidity Liquidity
B. Qualitative Instruments (Selective Tools)

These control specific uses or directions of credit. CRR / SLR ⬇ Lending capacity ⬆ Lending capacity

Tool Meaning Bank Rate ⬇ Credit flow ⬆ Credit flow

Margin Increasing difference between loan amount and security Difference Between Central Bank and Commercial Bank
Requirement value
Basis Central Bank Commercial Bank
Credit Rationing Limiting loans to sectors
1. Ownership & It is owned and controlled by the It may be public, private, or
Moral Suasion RBI politely persuades banks to follow policies Control government (e.g., RBI in India). foreign-owned.

Direct Action Punishing banks not following credit norms 2. Main Controls money supply, credit, Accepts deposits and provides
Function and acts as banker's bank. loans to the public.

3. Issue of Has the sole authority to issue Cannot issue currency; only
Hinglish Example: Currency currency notes (except ₹1). deals in money supplied by RBI.
Jab market me zyada paise ki supply hoti hai (inflation), to RBI kya karta hai?

• Repo Rate bada deta hai (loan lena mehenga) PYQ’s MCQs – Banking & Central Bank Functions
• Reverse Repo Rate bhi bada deta hai (banks apna paisa RBI me rakh dete 1. Which of the following is NOT a primary function of commercial banks?
hain) A) Accepting deposits
• CRR/SLR bada deta hai (bank ke paas kam paisa bacha) B) Granting loans and advances
C) Regulating the country’s money supply
• OMO se securities bechta hai (paise absorb karta hai) D) Agency services like payment of rent and dividends

"Success is the best revenge"- "Akash Sir"

By : Akash Srivastava you tube : Infinite study

2. When the Reserve Bank of India wants to control inflation, which of the 7. The central bank uses moral suasion mainly to:
following actions is LEAST likely to be taken? A) Legally enforce credit control measures
A) Increasing the repo rate B) Persuade commercial banks to follow its policies voluntarily
B) Raising the cash reserve ratio (CRR) C) Increase the statutory liquidity ratio
C) Buying government securities through open market operations D) Reduce the cash reserve ratio
D) Increasing statutory liquidity ratio (SLR)
8. Money creation by commercial banks depends directly on all the
3. What is the effect on the money supply when the central bank sells following EXCEPT:
government securities in the open market? A) Cash reserve ratio (CRR)
A) Money supply increases B) Statutory liquidity ratio (SLR)
B) Money supply decreases C) Marginal propensity to consume
C) No effect on money supply D) Excess reserves held by banks
D) Money supply stabilizes temporarily
9. When the central bank acts as a lender of last resort, it:
4. The “Banker’s Bank” function of the central bank includes all EXCEPT: A) Provides loans to the government in case of deficit
A) Acting as a lender of last resort to commercial banks B) Provides funds to commercial banks facing short-term liquidity
B) Providing loans to general public problems
C) Maintaining cash reserves of banks C) Provides loans to large industries for expansion
D) Regulating and supervising commercial banks D) Regulates foreign exchange reserves

5. If the Reserve Bank of India wants to encourage more lending by 10. Which of the following is an example of selective credit control by the
commercial banks, which of the following should it do? central bank?
A) Increase the reverse repo rate A) Changing the bank rate
B) Decrease the repo rate B) Increasing cash reserve ratio
C) Increase the bank rate C) Fixing margin requirements for loans against securities
D) Increase CRR D) Conducting open market operations

6. Which of the following statements about the cash reserve ratio (CRR) is
TRUE?
A) CRR is the percentage of deposits banks must keep as cash with the
central bank
B) Increasing CRR increases the amount of funds available for banks to
lend
C) CRR is maintained in the form of government securities 1. C) Regulating the country’s money supply
D) CRR changes do not affect money creation by banks
2. C) Buying government securities through open market operations

"Success is the best revenge"- "Akash Sir"

By : Akash Srivastava you tube : Infinite study

3. B) Money supply decreases

4. B) Providing loans to general public

5. B) Decrease the repo rate

6. A) CRR is the percentage of deposits banks must keep as cash with the
central bank

7. B) Persuade commercial banks to follow its policies voluntarily

8. C) Marginal propensity to consume

9. B) Provides funds to commercial banks facing short-term liquidity problems

10. C) Fixing margin requirements for loans against securities

"Success is the best revenge"- "Akash Sir"