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Sem 5 Prep
← Money & BankingThe structure of Indian banking

Formulas for this chapter

RRB capital split

Central government 50% · State government 15% · Sponsoring public sector bank 35%

Any question on regional rural banks. The three shares must sum to the whole capital, which is the check to run before writing the answer.

sponsoring bank
The public sector bank that sponsors the RRB and contributes 35% of its capital

Credit creation

Total deposits = fresh deposit / reserve ratio Total credit created = total deposits - fresh deposit Deposit multiplier = 1 / reserve ratio After n rounds: first loan x (1 - (1-r)^n) / r

Whenever a fresh deposit and a reserve ratio are given. Read whether the question asks for total deposits or total credit, because they differ by the original deposit.

reserve ratio
Fraction of every deposit not lent on; in India CRR plus SLR
n
Number of lending rounds, when the cascade is cut short

Lendable funds at one bank

Lendable = deposits x (1 - CRR% - SLR% - vault cash%) Maximum credit-deposit ratio = lendable / deposits

When a question asks what a single bank can lend, as opposed to what the system can create. Add every reserve percentage before multiplying once.

vault cash%
Cash held at branches for operations, over and above the CRR
Step 1 of 31
The ideaTheory

A shop that lends other people's money

You give a bank ₹1,000 to keep safe. It lends ₹800 of it to your neighbour, who buys cement with it. The cement dealer banks the ₹800.

You still believe you have ₹1,000. The dealer has ₹800. The bank has done nothing wrong, and ₹1,800 of deposits now exist where ₹1,000 did.

That trick is called credit creation, and it is the third of the six functions in this chapter. Everything else here is a map of which institutions in India are allowed to do it.

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