Financial Awareness, Banking Terminologies, Government Schemes

I. Financial Awareness

Financial awareness is the understanding of how money works, including how it is earned, managed, invested, and how economic systems function. It encompasses a broad range of knowledge related to personal finance, corporate finance, public finance, and the global financial system. For competitive exams, a strong grasp of financial awareness is crucial as it forms the bedrock of many questions related to the economy and banking.

A. Key Concepts in Financial Awareness

Understanding core financial concepts is essential. These include inflation, deflation, interest rates, fiscal policy, monetary policy, and various financial instruments.

1. Inflation and Deflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. A small amount of inflation is generally considered healthy for an economy.

Deflation is the opposite of inflation; it's a decrease in the general price level of goods and services. While it might sound good to consumers, deflation can be harmful to an economy. It can lead to a cycle of declining demand, production, and employment.

2. Interest Rates

An interest rate is the amount charged by a lender to a borrower for any loan, expressed as a percentage of the principal. Interest rates are a key tool used by central banks (like the Reserve Bank of India - RBI) to control inflation and stimulate economic growth. Higher interest rates can discourage borrowing and spending, while lower rates can encourage it.

3. Fiscal Policy

Fiscal policy refers to the use of government spending and taxation to influence the economy. Governments use fiscal policy to manage aggregate demand, control unemployment, and stabilize the economy. Key instruments include government expenditure (on infrastructure, subsidies, salaries, etc.) and taxation (income tax, corporate tax, GST, etc.).

4. Monetary Policy

Monetary policy is the set of actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity. In India, the RBI is responsible for monetary policy. Its primary objectives include price stability (controlling inflation) and ensuring adequate flow of credit to productive sectors.

Tools of Monetary Policy:

• Repo Rate: The rate at which the RBI lends money to commercial banks for short periods, against government securities.
• Reverse Repo Rate: The rate at which the RBI borrows money from commercial banks, absorbing excess liquidity from the system.
• Cash Reserve Ratio (CRR): The percentage of a bank's total deposits that it must hold as reserves with the RBI.
• Statutory Liquidity Ratio (SLR): The percentage of a bank's net demand and time liabilities that it must maintain in the form of liquid assets like cash, gold, or government securities.
• Open Market Operations (OMO): The RBI buys or sells government securities in the open market to inject or absorb liquidity.

5. Financial Instruments

These are assets that can be traded, such as stocks, bonds, and derivatives. Understanding these is vital for grasping investment and market dynamics.

• Stocks (Equities): Represent ownership in a company.
• Bonds: Debt instruments where an investor loans money to an entity (corporate or governmental) which borrows the money for a defined period of time at a variable or fixed interest rate.
• Derivatives: Financial contracts whose value is derived from an underlying asset (like stocks, bonds, commodities, or currencies). Examples include futures and options.

B. Economic Indicators

Economic indicators are statistical data that reflect past, present, or future economic activity. Key indicators include GDP, CPI, WPI, and unemployment rate.

1. Gross Domestic Product (GDP)

GDP is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. It serves as a broad measure of a nation's overall economic activity.

2. Consumer Price Index (CPI)

CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is a key indicator of inflation from the consumer's perspective.

3. Wholesale Price Index (WPI)

WPI measures the average change over time in the prices of goods sold in bulk and traded at the wholesale level. It is considered a leading indicator of inflation as it reflects price changes before they reach the consumer.

4. Unemployment Rate

The percentage of the total labor force that is unemployed but actively seeking employment and willing to work. A high unemployment rate typically indicates a weak economy.

II. Banking Terminologies

The banking sector uses a specialized vocabulary. Understanding these terms is fundamental for comprehending banking operations, regulations, and news related to the financial world.

A. Basic Banking Terms

These are the foundational terms you encounter in everyday banking.

• Account: A record of financial transactions. Types include Savings Account, Current Account, Fixed Deposit Account, Recurring Deposit Account.
• Deposit: Money placed into a bank account.
• Withdrawal: Money taken out of a bank account.
• Interest: The cost of borrowing money or the return on savings/investments.
• Principal: The original amount of a loan or deposit.
• EMI (Equated Monthly Installment): A fixed amount paid by a borrower to a lender at a specified date each calendar month.
• ATM (Automated Teller Machine): An electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller.
• Debit Card: A payment card that deducts money directly from a consumer's checking account when it is used.
• Credit Card: A card that allows you to borrow money from the card issuer up to a certain limit to make purchases.

B. Advanced Banking Terms

These terms are more specific to banking operations, regulations, and financial markets.

• Non-Performing Asset (NPA): A loan or advance for which the principal or interest payment remained 'past due' for 90 days.
• Capital Adequacy Ratio (CAR): A measure of a bank's capital in relation to its risk-weighted assets. It ensures banks have enough capital to absorb unexpected losses. (Basel Norms are related to this).
• Liquidity: The availability of liquid assets (cash) to a market or company. In banking, it refers to a bank's ability to meet its short-term obligations.
• Net Interest Margin (NIM): The difference between the interest income generated by a bank and the amount of interest it has paid out to its lenders.
• KYC (Know Your Customer): A set of standards for financial institutions that the government enables to help identify and verify the identity of clients.
• AML (Anti-Money Laundering): Laws and regulations designed to prevent criminals from disguising illegally obtained funds as legitimate income.
• SWIFT (Society for Worldwide Interbank Financial Telecommunication): A global network that enables financial institutions to exchange information about financial transactions securely and consistently.
• NEFT (National Electronic Funds Transfer): A nationwide payment system facilitating the transfer of funds from one bank account to another on a one-to-one basis. Transactions are settled in batches.
• RTGS (Real-Time Gross Settlement): A continuous, transaction-by-transaction settlement system. Funds are transferred in real-time, making it the fastest way to transfer money between banks.
• IMPS (Immediate Payment Service): An instant inter-bank electronic fund transfer system. It works 24x7, including holidays.

C. Banking Regulation Terms

These terms relate to the rules and oversight governing the banking industry.

• Reserve Bank of India (RBI): India's central bank, responsible for monetary policy, regulation, and supervision of the banking system.
• Monetary Policy Committee (MPC): A committee constituted by the Central Government to decide on the measures of the repo rate required to maintain the consumer price index (CPI) inflation within the target range.
• Basel Accords: International banking regulations set by the Bank for International Settlements (BIS). They aim to ensure banks have enough capital to absorb unexpected losses (Basel I, II, III). Basel III is the current standard.
• Financial Inclusion: Ensuring access to affordable financial products and services (banking, insurance, credit, etc.) for all sections of society, especially the weaker sections.
• Digital Banking: Banking services delivered through digital channels like mobile apps, internet banking, etc.

III. Government Schemes

The Indian government launches numerous schemes to address socio-economic issues, promote development, and provide welfare to its citizens. These schemes are a significant part of the General Economy and Banking Awareness section.

A. Schemes for Financial Inclusion and Banking Penetration

These schemes aim to bring more people into the formal banking system.

1. Pradhan Mantri Jan Dhan Yojana (PMJDY)

Objective: To provide access to financial services, namely banking, savings & deposit accounts, remittance, credit, insurance, pension in an affordable manner. Launched on August 28, 2014.

Key Features: Zero balance accounts, RuPay debit card, accidental insurance cover of ₹1 lakh (enhanced to ₹2 lakh for new accounts opened after 28.08.2018), life insurance cover of ₹30,000 for accounts opened between 15.08.2014 and 31.01.2015, overdraft facility up to ₹10,000.

2. Atal Pension Yojana (APY)

Objective: To provide a defined pension benefit, primarily for the unorganized sector workers. Launched on May 9, 2015.

Key Features: Subscribers receive a guaranteed pension of ₹1,000 to ₹5,000 per month upon reaching 60 years of age, based on their contribution. The government co-contributes 50% of the subscriber's contribution or ₹1,000 per annum, whichever is less, for eligible subscribers.

3. Pradhan Mantri Mudra Yojana (PMMY)

Objective: To provide refinance support to banks/MFIs for lending to micro and small enterprises. Launched on April 8, 2015.

Key Features: Loans up to ₹10 lakh are provided to non-corporate, non-farm small/micro enterprises. Three categories: Shishu (loans up to ₹50,000), Kishore (loans from ₹50,000 to ₹5 lakh), Tarun (loans from ₹5 lakh to ₹10 lakh).

B. Schemes for Social Security and Welfare

These schemes focus on providing safety nets and improving the quality of life.

1. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

Objective: To provide life insurance cover. Launched on May 9, 2015.

Key Features: Provides life insurance cover of ₹2 lakh for a premium of ₹330 per year for individuals aged 18-50 years. Covers death due to any reason.

2. Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Objective: To provide accident insurance cover. Launched on May 9, 2015.

Key Features: Provides accident insurance cover of ₹2 lakh for accidental death or ₹1 lakh for total disability for a premium of ₹12 per year for individuals aged 18-70 years. Covers death or disability due to an accident.

3. Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PMJAY)

Objective: To provide health insurance cover to vulnerable families. Launched on September 23, 2018.

Key Features: Provides a health cover of ₹5 lakh per family per year for secondary and tertiary care hospitalization. It targets more than 10 crore poor and vulnerable families.

C. Schemes for Economic Development and Employment

These schemes aim to boost economic growth and create job opportunities.

1. Stand-Up India Scheme

Objective: To promote entrepreneurship among Scheduled Caste (SC), Scheduled Tribe (ST), and women by providing financial assistance. Launched on April 5, 2016.

Key Features: Provides composite loans of ₹10 lakh to ₹1 crore to at least one SC/ST borrower and one woman borrower per bank branch for setting up Greenfield enterprises.

2. National Rural Employment Guarantee Act (NREGA) / Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)

Objective: To provide at least 100 days of guaranteed wage employment to every rural household whose adult members volunteer to do unskilled manual work. Enacted in 2005, implemented in phases.

Key Features: Legal guarantee for employment, focus on rural development, women's participation, and environmental sustainability.

3. Skill India Mission

Objective: To train over 40 crore people in India in different skills by 2022. Launched on July 15, 2015.

Key Features: Includes schemes like Pradhan Mantri Kaushal Vikas Yojana (PMKVY), National Policy for Skill Development and Entrepreneurship.

D. Schemes Related to Agriculture and Rural Development

1. PM Kisan Samman Nidhi (PM-KISAN)

Objective: To provide income support to all landholding farmer families. Launched on February 24, 2019.

Key Features: Provides ₹6,000 per year to eligible farmer families in three equal installments of ₹2,000 each.

2. Pradhan Mantri Gram Sadak Yojana (PMGSY)

Objective: To provide all-weather road connectivity to unconnected rural habitations. Launched in 2000.

E. Schemes Related to Digital India and Fintech

1. Digital India Programme

Objective: To transform India into a digitally empowered society and knowledge economy. Launched on July 1, 2015.

Key Components: Digital infrastructure, digital services, digital literacy.

2. Unified Payments Interface (UPI)

Objective: To enable instant, real-time, inter-bank, inter-operable, and robust payment system. Developed by NPCI (National Payments Corporation of India).

Key Features: Single mobile application for accessing various banking services and paying in one click. Supports various payment methods like QR code, Aadhaar, phone number, etc.