CDS Economics · Money, Banking and Public Finance
Banks and Financial Markets
What commercial banks, NBFCs, payments banks and microfinance lenders may and may not do, the instruments and agencies of the financial markets, new payment systems, and the NIIF.
Why this matters
Sixteen CDS questions, half of them HARD, and five came in the single paper of 2022 (II). Most are current-affairs facts about a named body or scheme, so this page is a list to learn rather than a method.
Concept 1 of 4: Banks, NBFCs and other lenders
A commercial bank does two kinds of work: its own business of taking deposits and lending, and errands it runs for customers and the government, such as collecting cheques and taxes. Other lenders do part of this job. An NBFC lends but cannot take ordinary savings deposits; a payments bank takes deposits but cannot lend.
Definition
The lenders:
- Commercial bank, primary functions: accepting deposits, giving loans and overdrafts, investing its funds.
- Commercial bank, agency functions: work done on behalf of customers or the government, such as collecting tax payments, cheques and bills, and paying insurance premiums.
- NBFC (non-banking financial company): gives loans, but cannot accept demand deposits, cannot issue cheques drawn on itself, and its deposits get no DICGC deposit insurance.
- Payments bank: accepts small deposits but cannot lend. The India Post Payments Bank is a public limited company fully owned by the government under the Department of Posts. Its two pilot branches opened in Raipur and Ranchi (January 2017).
- Microfinance loan: collateral-free, for low-income households, with limits on borrower income and loan size.
- Bank run: depositors panic and rush to withdraw cash at once. Since a bank keeps only a part of deposits as cash, a run can make it fail.
| Lender | Key rule |
|---|---|
| NBFC | Can lend; cannot take demand deposits or issue cheques; no deposit insuranceQ CDS 2022 (II): 'NBFCs cannot give loans' is the wrong statement. |
| India Post Payments Bank | Public limited company; pilot branches in Raipur and RanchiQ CDS 2018 (I), a HARD question: the pilots were NOT in Hyderabad and Varanasi. |
| Microfinance lender | Loans without collateral to low-income households |
| Bank run | Panic withdrawal of deposits by many depositors at onceQ CDS 2016 (II). |
Practice this conceptself-check · 4 quick reps
The same idea in a real exam question:
CDS · 2022 · CDS (II) 2022 — General Knowledge · Q50Moderate
Example 1 · Money, Banking and Public Finance · Banks and Financial Markets
Which one of the following is considered as an agency function of commercial banks in India ?
NBFCs do lend
Lending is an NBFC's main business. What it cannot do is take demand deposits, issue cheques on itself, or offer DICGC deposit insurance.
Collecting taxes is an agency function
Accepting deposits, giving overdrafts and investing surplus funds are a bank's primary functions. Collecting income tax or cheques for someone else is an agency function.
Concept 2 of 4: Financial market instruments and agencies
Savers and borrowers also meet outside banks: in markets for shares, bonds and funds. Each instrument has one fact that CDS asks: who rates the borrower, what a green bond pays for, how an exchange-traded fund differs from an ordinary mutual fund.
Definition
The instruments and bodies:
- Credit rating agencies registered with SEBI include CRISIL, ICRA, CARE, India Ratings and Brickwork.
- Exchange-Traded Fund (ETF): a fund traded on a stock exchange like a share. Its price changes throughout the day, and it usually has higher liquidity and lower fees than ordinary mutual fund units.
- Green bonds: debt whose money goes to environmentally sustainable, climate-friendly projects such as renewable energy.
- SEBI (Index Providers) Regulations, 2024: cover only providers of significant indices of Indian listed securities used in the Indian market; aim: transparency and accountability in running indices.
- Sub-prime crisis (USA, 2007-08): risky home loans failed, banks collapsed, and a global recession followed.
- Insurance density = premium per person; insurance penetration = premium as a share of GDP. In India most policies are savings-linked, so density overstates real life cover.
| Item | Key fact |
|---|---|
| Exchange-Traded Fund | Traded all day on an exchange; higher liquidity, lower fees than mutual fundsQ CDS 2018 (I), a HARD question: the false statement says ETFs have lower liquidity and higher fees. |
| Green bonds | Fund environmentally sustainable, climate-friendly projectsQ CDS 2026 (I). |
| SEBI (Index Providers) Regulations, 2024 | Cover significant indices only; aim at transparency and accountabilityQ CDS 2026 (II), a HARD question: both statements were correct. |
| Sub-prime crisis | US mortgage collapse of 2007-08 that led to a global recessionQ CDS 2019 (I). |
Practice this concept4 quick reps
The same idea in a real exam question:
CDS · 2016 · CDS (II) 2016 — General Knowledge · Q108Easy
Example 2 · Money, Banking and Public Finance · Banks and Financial Markets
Which of the following is/are credit rating agency/agencies in India?
ETFs are the more liquid, cheaper option
Because an ETF trades on an exchange all day, it is more liquid and usually cheaper than a mutual fund. A statement giving it lower liquidity and higher fees is the false one.
Concept 3 of 4: Payment systems: e-RUPI, SWIFT, Nexus, Vostro
Money now moves as messages. Inside India, e-RUPI sends a pre-paid voucher to a phone. Between countries, banks send payment instructions over SWIFT, and new links like Project Nexus join national instant-payment systems. Trade in rupees runs through special accounts that Indian banks keep for foreign banks.
Definition
The systems:
- e-RUPI (launched August 2021, built by NPCI): a pre-paid digital voucher sent as an SMS or QR code. The receiver needs no bank account and no smartphone or internet. The cap per voucher was ₹10,000 at launch and was raised to ₹1 lakh in 2022.
- SWIFT: a worldwide network over which banks send messages that instruct cross-border payments. CDS calls it a global money transfer system.
- Project Nexus: a Bank for International Settlements initiative linking national instant payment systems (India's UPI among them) for instant cross-border retail payments.
- Vostro account: an account an Indian bank holds for a foreign bank in rupees. Special rupee vostro accounts (2022) let trade be settled in rupees. A nostro account is the reverse: an Indian bank's account abroad in foreign currency.
| System | What it does |
|---|---|
| e-RUPI | Pre-paid voucher by SMS or QR code; no bank account or smartphone needed |
| SWIFT | Global messaging network for cross-border payments |
| Project Nexus | BIS initiative for instant cross-border retail paymentsQ CDS 2025 (I), a HARD question. |
| Rupee Vostro account | Account an Indian bank keeps for a foreign bank, in rupeesQ CDS 2024 (II), a HARD question. |
Practice this concept4 quick reps
The same idea in a real exam question:
CDS · 2022 · CDS (II) 2022 — General Knowledge · Q99Moderate
Example 3 · Money, Banking and Public Finance · Banks and Financial Markets
The SWIFT (The Society for Worldwide Interbank Financial Telecommunication) frequently mentioned in news, is essentially a
e-RUPI needs neither a bank account nor a smartphone
The voucher reaches the phone as an SMS string or QR code, so a basic phone is enough and no bank account is needed. A statement that a smartphone with internet is required is false.
Vostro is yours, held for them
A vostro account is held in India, in rupees, for a foreign bank. A nostro account is an Indian bank's account abroad, in foreign currency.
Concept 4 of 4: National Investment and Infrastructure Fund
Two government funds have almost the same name. The older one, the National Investment Fund, holds money the government raises by selling shares in public sector companies. The newer one, the National Investment and Infrastructure Fund, raises money from India and abroad to invest in infrastructure, and works through several separate funds.
Definition
The two funds:
- National Investment Fund (NIF), 2005: holds the disinvestment proceeds of public sector undertakings.
- National Investment and Infrastructure Fund (NIIF): announced in the Union Budget 2015-16 to finance infrastructure. It is a different body from the NIF.
- NIIF can run more than one alternative investment fund. Its funds: the Master Fund (core infrastructure), the Fund of Funds (backs other fund managers), the Strategic Opportunities Fund (also called the Private Markets Fund) and the India-Japan Fund.
- There is no 'Global Investment Fund' under NIIF.
| Fund | Purpose |
|---|---|
| National Investment Fund (2005) | Holds disinvestment proceeds |
| NIIF (Budget 2015-16) | Invests in infrastructure through several fundsQ CDS 2016 (II), a HARD question: NIIF and NIF are NOT the same organisation. |
| NIIF Master Fund | Invests in core infrastructure |
| NIIF Fund of Funds | Invests in funds run by other managers |
| NIIF Strategic Opportunities Fund | Invests in businesses beyond core infrastructure |
Practice this concept3 quick reps
The same idea in a real exam question:
CDS · 2024 · CDS (II) 2024 — General Knowledge · Q103Hard
Example 4 · Money, Banking and Public Finance · Banks and Financial Markets
Which one of the following is not a fund managed by NIIFL (National Investment and Infrastructure Fund Limited) ?
NIIF is not NIF
The NIF (2005) holds disinvestment money. The NIIF (Budget 2015-16) finances infrastructure. A statement that they are the same body is false.
Summary — formulas & gotchas at a glance
A revision cheat-sheet for the formulas and gotchas above. Click any concept name to jump back to its full explanation.
Reference tables (4)
Banks, NBFCs and other lenders4 rows
| Lender | Key rule |
|---|---|
| NBFC | Can lend; cannot take demand deposits or issue cheques; no deposit insuranceQ CDS 2022 (II): 'NBFCs cannot give loans' is the wrong statement. |
| India Post Payments Bank | Public limited company; pilot branches in Raipur and RanchiQ CDS 2018 (I), a HARD question: the pilots were NOT in Hyderabad and Varanasi. |
| Microfinance lender | Loans without collateral to low-income households |
| Bank run | Panic withdrawal of deposits by many depositors at onceQ CDS 2016 (II). |
Financial market instruments and agencies4 rows
| Item | Key fact |
|---|---|
| Exchange-Traded Fund | Traded all day on an exchange; higher liquidity, lower fees than mutual fundsQ CDS 2018 (I), a HARD question: the false statement says ETFs have lower liquidity and higher fees. |
| Green bonds | Fund environmentally sustainable, climate-friendly projectsQ CDS 2026 (I). |
| SEBI (Index Providers) Regulations, 2024 | Cover significant indices only; aim at transparency and accountabilityQ CDS 2026 (II), a HARD question: both statements were correct. |
| Sub-prime crisis | US mortgage collapse of 2007-08 that led to a global recessionQ CDS 2019 (I). |
Payment systems: e-RUPI, SWIFT, Nexus, Vostro4 rows
| System | What it does |
|---|---|
| e-RUPI | Pre-paid voucher by SMS or QR code; no bank account or smartphone needed |
| SWIFT | Global messaging network for cross-border payments |
| Project Nexus | BIS initiative for instant cross-border retail paymentsQ CDS 2025 (I), a HARD question. |
| Rupee Vostro account | Account an Indian bank keeps for a foreign bank, in rupeesQ CDS 2024 (II), a HARD question. |
National Investment and Infrastructure Fund5 rows
| Fund | Purpose |
|---|---|
| National Investment Fund (2005) | Holds disinvestment proceeds |
| NIIF (Budget 2015-16) | Invests in infrastructure through several fundsQ CDS 2016 (II), a HARD question: NIIF and NIF are NOT the same organisation. |
| NIIF Master Fund | Invests in core infrastructure |
| NIIF Fund of Funds | Invests in funds run by other managers |
| NIIF Strategic Opportunities Fund | Invests in businesses beyond core infrastructure |
Watch out for (6)
- NBFCs do lend→ Banks, NBFCs and other lenders
- Collecting taxes is an agency function→ Banks, NBFCs and other lenders
- ETFs are the more liquid, cheaper option→ Financial market instruments and agencies
- e-RUPI needs neither a bank account nor a smartphone→ Payment systems: e-RUPI, SWIFT, Nexus, Vostro
- Vostro is yours, held for them→ Payment systems: e-RUPI, SWIFT, Nexus, Vostro
- NIIF is not NIF→ National Investment and Infrastructure Fund
Test yourself on Money, Banking and Public Finance
20 past CDS questions from this chapter, timed at 20 minutes and marked the way the exam marks it. You see your score and every answer the moment you finish. Free to start.