Financial infrastructure and what banks do
Navdeep keeps his savings in a bank instead of a cupboard, and the bank lends part of it to Rima for her bamboo business — one bank, two needs met.
Financial infrastructure is the network of banks, payment systems, stock markets and other institutions that help people, businesses and the government move and manage money. A bank collects deposits from people and lends money as loans.
In the figure : Banks take deposits, give loans and keep records.
Rule 1: Three kinds of bank accounts — A savings account is for individuals who save regularly and earn interest. A current account is for businesses and traders who deposit and withdraw often; it does not earn interest. A fixed deposit is a one-time deposit for a fixed period like 3 or 5 years that gives higher interest than savings.
- Easy : A trader with many daily payments opens a current account.
- Medium : Money kept for 5 years earns higher interest as a fixed deposit.
- Exam-type : Which account does not earn interest? Answer: the current account.
Rule 2: Banks earn from the interest gap — Banks pay a lower rate to depositors and charge a higher rate on loans. If Anand deposits Rs 200 at 2%, the bank pays him Rs 4; it lends Rs 200 to Shreya at 5% and gets Rs 10 interest, so it earns Rs 6. Banks keep reserve money and do not lend out all deposits.
- Easy : Deposit rate 2%, loan rate 5%: the 3% gap gives the bank income.
- Medium : A student loan funds education.
- Exam-type : Why do banks charge more on loans than they pay on deposits? Answer: the difference is their income.
Bank = deposits in, loans out; earns on the interest gap.
Thinking banks lend out all deposits. Banks keep reserve money.
Savings (interest), Current (no interest), Fixed (higher interest). Memory clue: S-C-F.
Spot the difference
| Term | Meaning | Example |
|---|---|---|
| Deposit | Money placed in a bank account that can be withdrawn as per bank terms and often earns interest | Navdeep's Rs 3000 monthly saving |
| Loan | An amount borrowed from a bank that must be repaid later with interest | Rima's loan for her business |
| Interest | The amount charged for borrowing money or gained by lending it, usually a percentage | 6% on Rs 1000 is Rs 60 |
| Passbook | A diary-like record of all receipts and payments in a bank account | Shows debit and credit entries |
Practice questions
- 1What is financial infrastructure?
- 2Which account does not earn interest?
- 3Which account gives higher interest for a fixed period?
- 4What does a passbook record?
- 5Why did Navdeep prefer a bank to a cupboard?
- 6How does a bank earn income from deposits and loans?
- 7Why is a current account suited to traders?
- 8Why do banks not lend out all the deposits?
Show answers (try them yourself first)
- 1A network of banks, payment systems, stock markets and other institutions that help money move.
- 2The current account.
- 3The fixed deposit.
- 4All receipts and payments, shown as debit and credit.
- 5Cash at home may not be safe, and the bank keeps it safe and pays interest.
- 6It pays a lower rate to depositors and charges a higher rate on loans, and keeps the difference.
- 7Traders deposit and withdraw often, and this account has no limit on the number of transactions.
- 8Banks keep reserve money to be safe and able to meet withdrawals.
Compound interest, Jan Dhan and other institutions
Rs 1000 earns Rs 60 in the first year but Rs 63.60 in the second, because interest is also earned on the earlier interest.
Compounding means earning interest on previously earned interest, so money grows faster over time. The Pradhan Mantri Jan Dhan Yojana (2014) opened bank accounts for everyone with no minimum balance. Post offices, NABARD and the RBI are other key institutions.
In the figure : Interest on interest makes savings grow faster each year.
Rule 1: How compounding works — At 6% a year, Rs 1000 becomes Rs 1060 after year one (Rs 60 interest). In year two, interest is on Rs 1060, which is Rs 63.60, giving Rs 1123.60. After 12 years the amount is about Rs 2012.20. Starting early and staying long makes compounding powerful.
- Easy : Year one interest Rs 60 grows to Rs 63.60 in year two.
- Medium : In the chessboard story, grains double on each square, showing exponential growth.
- Exam-type : What is compounding? Answer: earning interest on previous interest.
Rule 2: Jan Dhan, post offices and special institutions — Before 2014 only about 15 crore Indians had bank accounts; Jan Dhan has since opened over 50 crore accounts, mainly for women, and wages and scholarships now go directly to accounts. Post offices offer NSC, Kisan Vikas Patra and Sukanya Samriddhi accounts even in remote places. NABARD funds banks that lend for farming, village industries and rural infrastructure.
- Easy : Direct transfers reduce middlemen and speed up payment.
- Medium : In ancient India, temples lent money to artisans and merchants, with contracts on copper plates.
- Exam-type : Which institution funds banks that lend for farming? Answer: NABARD.
Compounding = interest on interest. Jan Dhan 2014. NABARD for rural finance.
Thinking compounding gives the same interest every year. Interest rises each year because the base grows.
1000 -> 1060 -> 1123.60 at 6%. Memory clue: "Interest on interest".
Spot the difference
| Term | Meaning | Example |
|---|---|---|
| Compounding | Earning interest on previously earned interest as well as on the original amount | Rs 1000 becomes Rs 1123.60 in two years at 6% |
| Jan Dhan Yojana | A 2014 scheme giving everyone a bank account without minimum balance or fees | Over 50 crore accounts opened |
| NABARD | National Bank for Agriculture and Rural Development, which funds banks lending for farming and village industries | Supports rural roads and irrigation |
| Direct transfer | Money sent straight into a person's bank account without middlemen | Wages and scholarships |
Practice questions
- 1What is compounding?
- 2When was the Jan Dhan Yojana launched?
- 3Which institution funds banks that lend for farming?
- 4Name two post office savings schemes.
- 5Why does interest increase from Rs 60 to Rs 63.60 in year two?
- 6How did Jan Dhan change banking in India?
- 7Why are post offices a popular savings option?
- 8What lesson does the chessboard story give?
Show answers (try them yourself first)
- 1Earning interest on previously earned interest.
- 22014.
- 3NABARD.
- 4National Savings Certificates and Sukanya Samriddhi accounts (also Kisan Vikas Patra).
- 5In year two interest is earned on Rs 1060, which includes year one's interest.
- 6Over 50 crore accounts opened, mainly by women, with no minimum balance, and wages and scholarships go directly to accounts.
- 7Their wide network reaches even remote locations.
- 8Small amounts can grow very large through repeated doubling or compounding over time.
The Reserve Bank of India and payment modes
A school has a principal who sets rules for all teachers — the RBI is like that for banks, and UPI is like paying by scanning a code.
The Reserve Bank of India (RBI), India's central bank, is the banker to banks. It prints and distributes currency and fixes the benchmark interest rate. Payment modes include cash, cheque, debit card, internet banking and UPI, launched by NPCI in 2016.
In the figure : From cheque to UPI, payments became faster and recorded.
Rule 1: The RBI regulates and supports banks — The RBI was established in 1935 and has worked as the central bank, the banker of banks, since 1949 when it came under the Government of India. It keeps accounts of other banks, helps funds move between them and lends to banks and the government. It sets rules on printing currency and fixes the benchmark interest rate.
- Easy : The RBI prints and distributes banknotes.
- Medium : The yaksha and yakshini statues at the RBI office in Delhi compare it to the guardians of Kubera's treasure.
- Exam-type : What is the benchmark interest rate? Answer: the base rate at which the RBI lends to commercial banks.
Rule 2: From cash and cheques to UPI — Cash is withdrawn using a withdrawal slip or an ATM with a debit card and PIN. A cheque moves money by debiting one account and crediting another but needs a bank visit. Debit cards and POS machines, internet banking and apps like BHIM work instantly. UPI, launched by NPCI in 2016, uses a QR code or phone number and grew during COVID-19 distancing. Nepal adopted UPI in 2022.
- Easy : Kumar scans Piyush's QR code, enters his UPI PIN and the money reaches Piyush's account.
- Medium : A POS machine accepts a debit card payment in a shop.
- Exam-type : Why did UPI reduce cash use? Answer: it is fast, secure, available in many languages and leaves a record.
RBI = banker to banks (1935; central bank since 1949). UPI launched by NPCI in 2016.
Thinking the RBI is an ordinary bank where people hold accounts. It supervises banks and issues currency.
RBI 1935/1949; UPI 2016; Nepal 2022. Memory clue: "35-49 RBI, 16 UPI, 22 Nepal".
Spot the difference
| Term | Meaning | Example |
|---|---|---|
| Reserve Bank of India | India's central bank that supervises banks, issues currency and fixes the benchmark rate | Banker to banks |
| Cheque | A paper instrument to pay someone directly from your bank account | Rs 5000 to Rohan: debit your account, credit his |
| UPI | Unified Payments Interface, a fast digital payment system launched by NPCI in 2016 | QR code or phone number payment |
| PIN | A numeric code, usually 4 to 6 digits, used for security in transactions | ATM and UPI use it |
Practice questions
- 1Which bank is called the banker to banks?
- 2In which year was the RBI established?
- 3Which body launched UPI and when?
- 4What does PIN stand for?
- 5Why was a cheque slower than UPI?
- 6How does an ATM withdrawal work?
- 7Why did UPI become popular during COVID-19?
- 8What functions does the RBI perform for the banking system?
Show answers (try them yourself first)
- 1The Reserve Bank of India.
- 21935.
- 3The National Payments Corporation of India (NPCI) in 2016.
- 4Personal Identification Number.
- 5It needs a physical visit to the bank and takes time, while UPI transfers instantly.
- 6Insert the debit card, type the amount, input the PIN and collect cash.
- 7It allowed cashless payments during social distancing.
- 8It keeps other banks' accounts, helps funds move between banks, lends to banks and government, prints currency and fixes the benchmark rate.
Stock market and shares
If a company is a big chapati, each share is one piece — buying a piece makes you a part-owner.
A share is a unit of ownership in a company. Shares are bought and sold at a stock exchange such as the Bombay Stock Exchange (BSE), set up in 1875. Share prices rise and fall; many falling together is a crash and many rising is a boom.
In the figure : Shares let people invest and companies raise money, but prices can fall.
Rule 1: Why shares are bought and issued — A person who buys shares becomes a part-owner and hopes the price will rise. Companies issue shares to raise funds for their operations. A collection of shares is a stock, and investment means putting resources into assets expected to gain value.
- Easy : A restaurant owner borrows from friends in return for a share of profits; they become part-owners.
- Medium : Earlier, share transactions used paper tickets; now they are digital.
- Exam-type : Why do companies issue shares? Answer: to raise funds for operations.
Rule 2: Why share prices change — If a company does well, its shares become more valuable; with a bad product, a workers' strike or a big loss, fewer people want them and the price drops. Tax rules, new laws, political instability, wars and economic shocks also change prices, so trading can bring gains or losses.
- Easy : A workers' strike can lower a company's share price.
- Medium : A pandemic or war is an economic shock that moves share prices.
- Exam-type : What is a stock market crash? Answer: the share prices of many companies falling at once.
Share = part-ownership; BSE 1875; prices rise and fall.
Thinking share prices only go up. Prices fluctuate and can cause losses.
Share = ownership; Crash = fall; Boom = rise. Memory clue: "Boom up, Crash down".
Spot the difference
| Term | Meaning | Example |
|---|---|---|
| Share | A unit of ownership in a company, a portion of its capital stock | A piece of the company chapati |
| Stock exchange | The marketplace where shares and other securities are traded | Bombay Stock Exchange, set up in 1875 |
| Investment | Putting resources into assets expected to gain value over time | Buying shares hoping the price rises |
| Economic shock | A sudden unexpected event that changes how people earn, spend and save | Disaster, war, pandemic |
Practice questions
- 1What is a share?
- 2Where are shares bought and sold?
- 3When was the Bombay Stock Exchange established?
- 4What is a stock market boom?
- 5Why do companies issue shares?
- 6What can make share prices fall?
- 7Why can trading shares lead to losses?
- 8Why do people buy shares?
Show answers (try them yourself first)
- 1A unit of ownership in a company.
- 2At a stock exchange.
- 31875.
- 4A rise in the prices of shares of many companies together.
- 5To raise funds for their operations.
- 6Poor performance, new laws, tax rules, political instability, wars and economic shocks.
- 7Share prices fluctuate with many factors, so prices can fall after buying.
- 8They hope the price will rise and they will gain, and they become part-owners.
Stock market and shares
In the app you can move this figure with your finger.
Open in the appStaying safe from financial fraud
A stranger calling to 'verify your account' is like someone at the door asking for your house keys — never hand over secrets.
Digital payments are convenient but fraudsters use fake calls or messages to get bank details or an OTP. Never share personal information, passwords, card PINs or OTPs. In case of fraud, report through helpline 1930 or the National Cybercrime Reporting Portal.
In the figure : Keep secrets secret and report fraud quickly.
Rule 1: How fraudsters trick people — They trick people through fake calls or messages into downloading harmful apps or sharing bank details or OTPs. This gives them access to the phone or computer, so they can steal personal data and drain money from bank accounts.
- Easy : A message asks you to click a link and enter your bank password.
- Medium : A caller asks for the OTP you just received.
- Exam-type : Why is an OTP important? Answer: it is a temporary code that verifies identity or authorises a transaction.
Rule 2: Safe habits and what to do after fraud — Never share personal information, passwords, card PINs or OTPs with strangers, avoid clicking unknown links or videos received in messages, and do not store sensitive banking information on devices. If fraud happens, report it via helpline 1930 or the National Cybercrime Reporting Portal.
- Easy : Do not save your card PIN in your phone notes.
- Medium : Report a scam call to 1930 quickly.
- Exam-type : Where can fraud be reported online? Answer: the National Cybercrime Reporting Portal (cybercrime.gov.in).
Never share OTP or PIN; report fraud on 1930 or the cybercrime portal.
Thinking a caller who knows your name must be from the bank. Fraudsters can fake this; never share an OTP.
Never share OTP/PIN; report on 1930. Memory clue: "Don't tell, don't click, call 1930".
Spot the difference
| Term | Meaning | Example |
|---|---|---|
| OTP | One-Time Password, a unique temporary code to verify identity or authorise a transaction | Never share with anyone |
| Fraud | Cheating people to take their money or data, for example through fake calls or messages | A fake bank call asking for details |
| Helpline 1930 | The number for reporting financial cyber fraud | Also the National Cybercrime Reporting Portal |
| PIN | A numeric code, usually 4 to 6 digits, used for security in transactions | ATM and UPI use it |
Practice questions
- 1What does OTP stand for?
- 2Which helpline number is given for reporting fraud?
- 3What should you never share with strangers?
- 4Which online portal accepts cyber fraud reports?
- 5How do fraudsters trick people?
- 6Why should you avoid clicking unknown links?
- 7Why should sensitive banking information not be stored on devices?
- 8How can we balance the convenience of digital payments with safety?
Show answers (try them yourself first)
- 1One-Time Password.
- 21930.
- 3Personal information, passwords, card PINs and OTPs.
- 4The National Cybercrime Reporting Portal.
- 5Through fake calls or messages to make them download harmful apps or share bank details or OTPs.
- 6They can give fraudsters access to your device and let them steal data and money.
- 7If the device is lost or hacked, stored details could be misused to drain the account.
- 8Use digital payments but never share OTPs or PINs, avoid unknown links and report fraud quickly.