Unit 1: FOUNDATIONS FOR FINANCE

Lecture on Traditional and New Banking Models- Debit and Credit Cards. Digital Payment
System- Role of RBI as banking regulator -Key Policy Rates

Traditional and New Banking Models

The Neo-banks are changing the face of fin-tech by bridging the gap between the services that
traditional banks offer and the evolving expectations of customers in the digital age.
What are Neo-banks?

 Neo-banks are online-only financial technology (fin-tech) companies that operate

solely digitally or via mobile apps.
 Neo-banks are digital banks without any physical branches offering services that
traditional banks don’t.
 In India, these firms don't have a bank licence of their own, but rely on bank partners
to offer licensed services as the RBI doesn’t allow banks to be 100% digital yet (though
some foreign banks offer digital-only products through their local units).

How are they different from other types of banks?

 Neo-bank vs Traditional bank- Neo-banks leverage technology and artificial

intelligence (AI) to offer a range of personalised services to customers while traditional
banks follow an omni-channel approach through both physical (branches and ATMs)
and digital banking presence.
 While neo-banks don’t have the funds or customer base to overthrow traditional banks,
they are powered by innovation to launch features and develop partnerships to serve
their customers more quickly than traditional banks.
 Neo-banks cater to retail customers, and small and medium businesses, which are
generally underserved by traditional banks.
 Venture capital and private equity investors have been keeping a keen eye on the market
opportunities for such banks and are taking an increasing interest in them over
traditional banks.
 Neo-bank vs Digital bank- A digital bank and a neo-bank aren’t quite the same.
 Digital banks are often the online-only subsidiary of an established and regulated player
in the banking sector while neo-banks exist solely online without any physical branches
independently or in partnership with traditional banks.

Debit Card:

A debit card is a payment card that deducts money directly from a consumer’s checking
account when it is used. Also called “check cards” or "bank cards," they can be used to buy
goods or services; or to get cash from an automated teller machine or a merchant who'll let
you add an extra amount onto a purchase.

Credit card:
A credit card is a small plastic or metal card issued by a financial company. It allows you to
make purchases by borrowing money up to an established limit. A credit card is a type of credit
facility, provided by banks that allow customers to borrow funds within a pre-approved credit
limit. It enables customers to make purchase transactions on goods and services. The credit
card limit is determined by the credit card issuer based on factors such as income and credit
score, which also decides the credit limit.

Digital Payment System

Payment and Settlement System in Indian Banking Sector
Payments systems transactions in India would comprise of transactions processes and settled
through:
 Paper Clearing (MICR), Non MICR, Cheque Truncation system (CTS), Express
Cheque Clearing system (ECCS)
 Bulk electronic transaction processing systems like Electronic Clearing Service
 Card Payments (Debit, credit and Electronic)
 Large Value (Real Time Gross Settlement (RTGS)
 Retail (National Electronic Fund Transfer (NEFT)
 Fast Payments (Immediate Payment Service (IMPS, Unified Payments Interface (UPI)
 e-Money (Prepaid Payment Instrument (PPI) Cards and Wallets

Role of RBI as banking regulator

Reserve Bank of India (RBI) is the Central Bank of India. RBI was established on 1 April 1935
by the RBI Act 1934. Key functions of RBI are, banker’s bank, the custodian of foreign reserve,
controller of credit and to manage printing and supply of currency notes in the country.
Reserve Bank of India (RBI) is the central bank of the country. RBI is a statutory body. It is
responsible for the printing of currency notes and managing the supply of money in the Indian
economy.

Initially, the ownership of almost all the share capital was in the hands of non-government
shareholders. So in order to prevent the centralisation of the shares in few hands, the RBI was
nationalised on January 1, 1949.

Functions of RBI
1. Issue of Notes —The Reserve Bank has a monopoly for printing the currency notes in the
country. It has the sole right to issue currency notes of various denominations except one rupee
note (which is issued by the Ministry of Finance).
The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the
currency notes. Since 1957, it maintains gold and foreign exchange reserves of Rs. 200 Cr. of
which at least Rs. 115 cr. should be in gold and remaining in the foreign currencies.
2. Banker to the Government–The second important function of the Reserve Bank is to act
as the Banker, Agent and Adviser to the Government of India and states. It performs all the
banking functions of the State and Central Government and it also tenders useful advice to the
government on matters related to economic and monetary policy. It also manages the public
debt of the government.
3. Banker’s Bank:- The Reserve Bank performs the same functions for the other commercial
banks as the other banks ordinarily perform for their customers. RBI lends money to all the
commercial banks of the country.

4. Controller of the Credit:- The RBI undertakes the responsibility of controlling credit
created by commercial banks. RBI uses two methods to control the extra flow of money in the
economy. These methods are quantitative and qualitative techniques to control and regulate the
credit flow in the country. When RBI observes that the economy has sufficient money supply
and it may cause an inflationary situation in the country then it squeezes the money supply
through its tight monetary policy and vice versa.

5. Custodian of Foreign Reserves:-For the purpose of keeping the foreign exchange rates
stable, the Reserve Bank buys and sells foreign currencies and also protects the country's
foreign exchange funds. RBI sells the foreign currency in the foreign exchange market when
its supply decreases in the economy and vice-versa.
6. Other Functions:-The Reserve Bank performs a number of other developmental works.
These works include the function of clearinghouse arranging credit for agriculture (which has
been transferred to NABARD) collecting and publishing the economic data, buying and selling
of Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to the
Government buying and selling of valuable commodities etc. It also acts as the representative
of the Government in the International Monetary Fund (I.M.F.) and represents the membership
of India.

Key Policy Rates

 Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as
deposits with the central bank. CRR is set according to the guidelines of the central
bank of a country.
 Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a
commercial bank has to maintain in the form of liquid cash, gold or other securities. It
is basically the reserve requirement that banks are expected to keep before offering
credit to customers
 The bank rate is the rate of interest which is charged by a central bank while lending
loans to a commercial bank. In the event of a fund deficiency, a bank can borrow money
from the central bank of a country. In India's case that would be the Reserve Bank of
India.
 Repo Rate: It is the interest rate at which the central bank of a country lends money to
commercial banks. The central bank in India i.e. the Reserve Bank of India (RBI) uses
repo rate to regulate liquidity in the economy. In banking, repo rate is related to
'repurchase option' or 'repurchase agreement'.
 Marginal Standing Facility (MSF) is a provision made by the Reserve Bank of India
through which scheduled commercial banks can obtain liquidity overnight, if inter-bank
liquidity completely dries up.
 Base rate is defined as the minimum interest rate set by the RBI below which Indian
banks are not permitted to lend to their customers. Unless there is a government
 mandate, the RBI rule specifies that no bank may offer loans at an interest rate lower
than the base rate.
 The deposit interest rate is paid by financial institutions to deposit account holders.
Deposit accounts include certificates of deposit (CD), savings accounts, and self-
directed deposit retirement accounts. It is similar to a "depo rate," which can refer to
interest paid on the interbank market.