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MONEY AND BANKING

Economics Project (Class XII)
Academic Session 2025‑26\ Submitted by: _____________________ (Student Name)\ Roll Number: __________\
School: __________________________\ Teacher‑in‑charge: ______________________

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CERTIFICATE
This is to certify that ________________________ of Class XII has successfully completed the Economics project
titled “Money and Banking” during the academic year 2025‑26. The work embodies the student’s own
research, analysis and presentation under my supervision.

Signature of Teacher‑in‑charge\ Name: __________________\ Date: __ / __ / 2025

Signature of Principal\ Name: __________________

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ACKNOWLEDGEMENT
I would like to express my sincere gratitude to my Economics teacher ______________________ for her
valuable guidance and constant encouragement throughout the project. I am also thankful to the
Reserve Bank of India (RBI), Ministry of Finance, and various online databases for providing authentic
data. Finally, I thank my family and friends for their support.

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INDEX

S. No CONTENTS Page

1 Introduction 5

2 Evolution & Functions of Money 6‑7

3 Banking System in India 8‑10

4 Current Scenario (Data‑based) 11‑13

5 Causes of Issues Identified 14‑17

6 Consequences 18‑19

7 Remedies & Policy Suggestions 20‑22

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 S. No CONTENTS Page

8 Stakeholder Analysis 23‑25

9 Advantages & Disadvantages 26‑27

10 Short‑ vs Long‑term Implications 28‑29

11 Data Validity & Reliability 30

12 Conclusion 31

13 Bibliography 32‑33

14 Glossary 34

15 Appendices 35

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1. INTRODUCTION
Money and banking constitute the backbone of any modern economy. Money acts as a medium of
exchange, a unit of account, a store of value and a standard of deferred payments, while the banking
system channels savings into productive investment, facilitates payments and implements monetary
policy. In India, the Reserve Bank of India (RBI) regulates money supply and supervises banks, playing a
pivotal role in maintaining price stability and financial stability. This project delves into the mechanics of
money creation, the structure of Indian banking, the challenges currently faced, and strategic remedies.

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2. EVOLUTION & FUNCTIONS OF MONEY (I)

2.1 Evolution of Money

1. Barter Era – direct exchange of goods; double coincidence of wants required.

2. Metallic Money – precious metals (gold, silver) introduced standardised value.
3. Paper Money – promissory notes first issued by private bankers, later by central banks.
4. Fiat Currency – value derived from government decree after gold standard era ended (1971
globally; 1966 in India for domestic convertibility).
5. Plastic & Digital Money – credit/debit cards, mobile wallets, UPI, CBDC‑Pilot (e‑Rupee).

2.2 Primary Functions

• Medium of Exchange – removes inefficiencies of barter.

• Unit of Account – common measure of value, enabling price system.
• Store of Value – transfers purchasing power over time.
• Standard of Deferred Payment – contracts denominated in money.

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2. EVOLUTION & FUNCTIONS OF MONEY (II)

2.3 Secondary & Contingent Functions

• Transfer of Value – remittances, digital transfers.

• Distribution of National Income – wages, interest, rent and profit paid in money.
• Basis of Credit System – deposits form basis for bank lending.

2.4 Money Supply Measures in India

• M1 – Currency with the public + Demand deposits + Other deposits with RBI.
• M2 – M1 + Savings deposits with post office savings banks.
• M3 – M2 + Time deposits with banks (Broad Money) – the most watched aggregate.

Latest Data: As on May 30 2025, India’s M3 stood at ₹2 80 lakh crore, recording 9.5 % YoY growth (RBI
Weekly Statistical Supplement).1

Footnote 1: Data compiled from RBI Weekly Statistical Supplement, 30 May 2025.
(investing.com)

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3. BANKING SYSTEM IN INDIA (I)

3.1 Organisational Structure

Reserve Bank of India (Central Bank)

│
├── Scheduled Commercial Banks (Public & Private Sector, Foreign)
│ ├── Public Sector Banks (e.g., SBI, PNB)
│ ├── Private Sector Banks (e.g., HDFC, ICICI)
│ └── Regional Rural Banks
│
├── Cooperative Banks (Urban & Rural)
│
└── Development Finance Institutions / NBFCs / Payment Banks / Small Finance
Banks

3.2 Functions of RBI

1. Issue of Currency – sole authority to print legal tender.

2. Banker’s Bank – lender of last resort, holds CRR.
3. Government’s Banker & Debt Manager.
4. Custodian of Foreign Exchange.
5. Monetary Policy Formulation – via the Monetary Policy Committee (MPC). Key rate: Repo Rate =
6.75 % (June 2025).
6. Regulation & Supervision – Basel‑III compliance, prompt corrective action (PCA) framework.

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3. BANKING SYSTEM IN INDIA (II)

3.3 Recent Trends

• Digital Payments Boom – UPI transactions crossed 14 billion in May 2025.

• Asset Quality Improvement – Gross NPA ratio fell to 2.8 % in March 2024 and is projected at
2.5 % by March 2025.2
• Capital Adequacy – average CRAR of commercial banks at 16.8 % (well above 9 % norm).
• Financial Inclusion – Jan‑Dhan accounts exceed 520 million.

Footnote 2: RBI Financial Stability Report (June 2024). (reuters.com)

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3.4 Role of Commercial Banks

• Mobilise savings via deposits.

• Provide credit for consumption and investment.
• Facilitate payments (cheques, NEFT, RTGS, UPI).
• Create money through credit multiplier process.

3.5 Money Creation Mechanism

If CRR = 4 % and SLR = 18 %, cash reserve ratio limits reserve leakage. Assuming no excess reserves,
credit multiplier = 1/CRR = 25. Hence, an initial deposit of ₹100 can expand money supply by ₹2 500
under ideal conditions.

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4. CURRENT SCENARIO – DATA‑BASED ANALYSIS (I)

Indicator Value (Latest) YoY Growth

Broad Money (M3) ₹2 80 lakh crore 9.5 %

Bank Credit ₹1 60 lakh crore 14.8 %

Repo Rate 6.75 % –

CPI Inflation (May 2025) 4.1 % ▼ from 4.3 %

Gross NPA Ratio 2.8 % ▼ from 3.9 %

Interpretation: Robust credit growth alongside moderate broad money expansion signals a balanced
monetary stance, though vigilance is required against potential inflationary pressures.

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4. CURRENT SCENARIO – DATA‑BASED ANALYSIS (II)

4.1 Liquidity Conditions

Systemic liquidity surplus averaged ₹3.8 lakh crore in Q1 FY26 (RBI LAF data). RBI continues fine‑tuning
via variable rate reverse repo (VRRR) auctions.

4.2 Digital Currency Pilot

The e‑Rupee CBDC pilot covers 1 million customers across 13 cities. Early feedback suggests faster
settlement and reduced cash‑handling costs.

4.3 Global Linkages

Fed rate trajectory and crude‑oil prices remain key exogenous variables influencing rupee liquidity and
inflation.

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5. CAUSES OF ISSUES IDENTIFIED (I)

1. Inflationary Pressures – supply‑side shocks (food, fuel) and demand revival post‑pandemic.
2. Non‑Performing Assets – legacy corporate stress (steel, power) and MSME vulnerabilities.
3. Shadow Banking Risks – NBFC‑HFC asset‑liability mismatches.
4. Cyber Security Threats – increase in digital fraud cases.
5. Financial Exclusion – rural‑urban divide in credit access.

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5. CAUSES OF ISSUES IDENTIFIED (II)

1. Climate‑related Financial Risks – extreme weather affecting agriculture loan portfolios.
2. Regulatory Arbitrage – fintech lending platforms operating outside prudential norms.
3. Fiscal‑Monetary Coordination Challenges – elevated government borrowing can crowd out
private credit.

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6. CONSEQUENCES (I)
• Macroeconomic Instability – high inflation erodes purchasing power, hurts savers.
• Reduced Investment – NPAs tie up bank capital, curbing fresh lending.
• Inequality – uneven credit distribution widens rural‑urban income gaps.

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6. CONSEQUENCES (II)
• Financial Contagion – unchecked NBFC stress can spill into banks via interconnected exposures.
• Currency Depreciation – persistent inflation expectations may weaken INR.

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 • Loss of Confidence – cyber frauds can undermine trust in digital payments.

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7. REMEDIES & POLICY SUGGESTIONS (I)

1. Tight but Flexible Monetary Policy – maintain repo rate stance but use standing deposit facility
to absorb excess liquidity swiftly.
2. Strengthen Asset‑Quality Review – adopt forward‑looking expected credit‑loss (ECL) model for
provisioning.
3. Deepen Secondary Corporate Bond Market – reduce over‑reliance on bank credit.
4. Enhance Cyber Resilience – mandatory red‑team testing, real‑time fraud analytics.

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7. REMEDIES & POLICY SUGGESTIONS (II)

1. Green Finance Guidelines – differential risk weights for climate‑aligned lending.
2. Credit Guarantee for MSMEs – broaden Emergency Credit Line Guarantee Scheme (ECLGS) with
risk‑sharing.
3. Promote Financial Literacy – integrate in school curricula and digital skilling programs.
4. RegTech & SupTech Adoption – RBI to leverage AI for supervisory data analytics.

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8. STAKEHOLDER ANALYSIS (I)

Stakeholder Positive Effects Negative Effects

Inflation reduces real income; fraud

Households Efficient digital payments; access to credit
risk

Easier working‑capital finance; export

Businesses Higher interest cost during tightening
credit

Banks Profit from loan growth; tech adoption Credit risk, compliance cost

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8. STAKEHOLDER ANALYSIS (II)

Stakeholder Positive Effects Negative Effects

Seigniorage revenue; improved tax Debt servicing costs; coordination

Government
compliance via digital trail challenges

Greater policy transmission; enhanced data Balancing inflation‑growth

RBI
analytics trade‑off

Fintechs Market expansion; innovation Regulatory uncertainty

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9. ADVANTAGES & DISADVANTAGES OF IDENTIFIED SITUATIONS

9.1 Digitalisation of Money

• Advantages – lower transaction costs, transparency, inclusion.

• Disadvantages – cybersecurity threats, data privacy concerns.

9.2 Low NPA Environment

• Advantages – frees bank capital, boosts investor confidence.

• Disadvantages – complacency risk, possible credit exuberance.

9.3 CBDC Introduction

• Advantages – settlement efficiency, reduced cash logistics.

• Disadvantages – potential disintermediation of banks if not carefully designed.

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10. SHORT‑TERM IMPLICATIONS OF STRATEGIES

• Immediate inflation control via repo hikes may slow GDP growth in next 2‑3 quarters.
• Expanding credit guarantees boosts MSME survival, preserving jobs.
• Tight cyber regulations increase compliance expenditure for banks in the near term.

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11. LONG‑TERM IMPLICATIONS OF STRATEGIES

• Stable inflation anchors expectations, fostering sustainable growth.
• Green finance orientation shifts capital towards resilient sectors, mitigating climate risk.
• Digital currency could lower remittance costs by up to 30 % over five years.

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12. VALIDITY, RELIABILITY & APPROPRIATENESS OF DATA

• Primary Sources Used: RBI Weekly Statistical Supplement (WSS), Financial Stability Report (FSR,
June 2024), Ministry of Finance “Indian Economy” annual report, IMF World Economic Outlook
Database (April 2025).
• Reliability: All quantitative figures are retrieved from statutory or peer‑reviewed bodies; RBI
datasets follow international statistical standards (SDDS‑IMF).
• Validity: Data are the most recent available (as of June 24 2025); cross‑checked across multiple
releases.
• Appropriateness: Indicators selected (M3, CPI, GNPA) directly relate to money‑banking linkages.
• Limitations: Fortnightly money‑supply data may exhibit seasonality; projections assume ceteris
paribus.

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13. CONCLUSION
The study confirms that a robust, tech‑enabled banking sector and judicious monetary policy are
indispensable to India’s growth aspirations. While current indicators such as low NPAs and moderate
inflation are favourable, emerging risks—climate, cyber, and shadow banking—necessitate proactive,
nuanced strategies. Stakeholder‑centric reforms, underpinned by reliable data, can secure both
short‑term stability and long‑term prosperity.

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14. BIBLIOGRAPHY (I)

1. Reserve Bank of India. Weekly Statistical Supplement, various issues, 2025.
2. Reserve Bank of India. Financial Stability Report, June 2024.
3. Ministry of Finance, Government of India. Economic Survey 2024‑25.
4. International Monetary Fund. World Economic Outlook Database, April 2025.
5. Reuters. “Indian banks’ asset quality to further improve through March 2025,” June 27 2024.
6. Business‑Standard. “India’s money supply rises 9.5 %,” May 16 2025.

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14. BIBLIOGRAPHY (II)

1. TradingEconomics. “India Money Supply M3,” accessed June 2025.
2. BIS. Annual Economic Report 2024 – Chapter III: Central Bank Digital Currencies.
3. Basel Committee on Banking Supervision. Principles for the Effective Management and Supervision
of Climate‑related Risks, 2023.

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15. GLOSSARY
• Broad Money (M3): The sum of currency with the public, demand deposits, and time deposits
with the banking system.
• Repo Rate: The rate at which the RBI lends funds to commercial banks against securities.
• NPA (Non‑Performing Asset): A loan on which interest or principal is overdue for 90 days or
more.
• CBDC: Central Bank Digital Currency; legal‑tender digital form of central‑bank money.
• CRAR: Capital to Risk‑Weighted Assets Ratio.
• Liquidity Adjustment Facility (LAF): RBI’s tool to manage liquidity via repo and reverse repo
operations.

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16. APPENDICES (SELECT DATA TABLES)

Appendix A: Money Supply Components (₹ lakh crore)

Date Currency with Public Demand Deposits Time Deposits M3

30 Apr 2025 37.02 30.48 200.9 278.4

15 May 2025 37.10 30.61 201.0 278.9

30 May 2025 37.13 30.66 201.2 279.0

Appendix B: GNPA Ratio Trend (%)

Mar 2021 Mar 2022 Mar 2023 Mar 2024 Forecast Mar 2025

7.5 5.9 4.4 2.8 2.5

(End of Project)