National Finance Olympiad

Chapter 2

Banking in the Digital

Age

Learning Outcomes:

Students will be able to:

•
•
•
•
•
•

2.1 Introduction to the Chapter • Financial intermediaries: Banks facilitate the

This chapter provides an overview of banking and savings into productive investments.

play in the economy. It covers the different types of • Regulated entities: Banks are heavily regulated
banks, including central and commercial banks, their
protect depositors, and prevent widespread

transfer methods, digital wallets, loans, and the role of economy (systemic risk).
technology in transforming banking. It also addresses
2.2.1 Products and Services Offered
protect yourself.
by Banks:
2.2 Understanding Banks 1. Deposit accounts: Banks offer various types of
deposit accounts, including current accounts for
businesses and frequent transactions, savings
accounts for individuals to save money and
services, such as managing deposits, lending
money, and facilitating payments. Banks act as accounts for customers seeking secure, long-term
intermediaries between those who have surplus funds investment with guaranteed returns.
(depositors) and those who need funds (borrowers),
2. Loans: Banks provide a range of loan products
to individuals and businesses. These include
• Financial institutions: A bank is essentially a personal loans for individual needs, home loans
place where people and businesses can safely for purchasing or renovating homes, car loans
store their money, access credit, and invest. for vehicle purchases, and business loans to
support the expansion or operation of businesses.

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Banks offer secured loans requiring collateral Reserve Bank of India, the U.S. Federal Reserve,
and unsecured loans based on creditworthiness and the European Central Bank, regulate the
without collateral. . money supply and banks follow the central bank’s
directives, which helps stabilise the economy.
3. Payment services: Banks offer payment services
that allow customers to transfer money, pay bills, For example, during times of economic slowdown,
and handle transactions via online banking, a central bank may lower interest rates, making
mobile banking, and credit card services. These borrowing cheaper for businesses and consumers.
services enable easy, convenient access to This encourages borrowing and investment,
stimulating economic growth.
transactions, including wire transfers, which
allow fast and secure electronic money transfers 3. Economic stability: Banks provide a safe place
between bank accounts, and bill payments, for people and businesses to store their money.
enabling users to pay utilities, rent, and other By offering deposit accounts with protections
expenses online. such as insurance (e.g., DICGC insurance in India,
FDIC insurance in the U.S.), banks ensure that
4. Insurance: Many banks offer insurance products individuals’ savings are secure. Additionally,
to help individuals and businesses protect banks provide credit to businesses and
consumers, enabling them to handle unexpected
life insurance, health insurance, and property
insurance, providing coverage against unexpected banks, individuals would have to rely on less
secure ways to store and manage their money,
policyholders. potentially risking their savings.

5. Foreign exchange (Forex): Banks provide 4. Facilitating payments and trade: Banks make
foreign exchange services that allow individuals it easy to transfer money both domestically and
and businesses to exchange currencies for internationally. They provide payment services
international travel, trade, or investment. They that facilitate trade and commerce. Banks
also facilitate international money transfers, offer electronic funds transfers, wire transfers,
providing fair exchange rates to ensure customers cheques, and credit cards, all of which ensure that
get good value when converting currencies,
This helps businesses engage in domestic and
and more accessible. international trade and consumers purchase
goods and services without hassle.
2.2.2 Role of Banks in the Economy
2.3 Types of Banks: Central and
1. Resource allocation: Banks are intermediaries
that collect deposits from individuals and Commercial Banks
businesses and then lend these funds to others.
Banks play a vital role in any economy by providing
where they are most needed, facilitating
investment and driving economic growth. and supporting economic growth. The two primary
types of banks are Central Banks and Commercial
For example, when a bank receives deposits from Banks, each with different roles, objectives, and
savers, it uses a portion of these funds to offer

reallocating resources, banks help stimulate 2.3.1 Central Banks

economic growth and contribute to the overall
The central bank is the national bank that manages
the currency, money supply, and interest rates of a
2. Monetary policy implementation: Banks play country. It is responsible for the economic stability
a key role in implementing monetary policy set of the nation by regulating the banking system,
by central banks. Central banks, such as the

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reserves, and serving as the lender of last resort to • Lender of last resort: The central bank provides
commercial banks. In India, the central bank is the emergency loans to commercial banks facing
Reserve Bank of India. The Reserve Bank of India acts liquidity crises, helping maintain stability in the
as the apex body which monitors and regulates all the
other banks of India. treasury bills, it prevents the collapse of banks

2.3.1.1 Functions of Central Banks:

• Bank to the government: The central bank
• Issuance of currency: The central bank holds the serves as the government’s banker, managing
exclusive authority to issue the national currency, its deposits, facilitating payments, and issuing
making it the “bank of issue.” This function is funds. It also provides short-term loans to the
critical for maintaining control over the money government, offering expertise on economic
supply and ensuring the currency retains its
stability, purchasing power, and credibility in the
economy. borrowing.

• • Custodian of cash reserves: Commercial banks

institutions: The central bank oversees hold a portion of their cash reserves with the
central bank, which helps manage liquidity in the
to ensure they follow banking practices. This economy. The central bank also plays a role in the
helps reduce systemic risks and protects credit creation process by regulating the reserves
that commercial banks can lend out. The credit

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creation process is how banks lend a portion of • Central banks control the national currency’s
their deposits, increasing the money supply. value and ensure its stability, which is vital for a
healthy economy and global trade.
• Clearing house for transfer and settlement: A
clearing house is an intermediary that processes • They ensure the proper functioning of the

banks to ensure smooth and secure payments. promote balanced economic growth.
The central bank acts as a clearing house for
interbank transactions, facilitating the settlement •
of mutual debts between commercial banks.
measures to stabilise the economy, ensuring that
• Management of foreign exchange and gold commercial banks have enough liquidity to lend
reserves: The central bank is responsible for to businesses and consumers, thus preventing a
managing the country’s foreign exchange reserves broader economic collapse.
and gold holdings. This helps stabilise exchange
rates, supports international trade, and provides Let us take a real-time example of how central banks
intervene during times of crisis to understand their
shocks. role better.

Case study: The Reserve Bank of India (RBI)

and the 2008 Global Financial Crisis

• Background to the crisis: The world experienced

Great Depression of 1929. India, like many other

countries, was impacted by this global crisis,
facing challenges such as a severe credit crunch
(a sharp decline in the availability of loans and

out of the country than coming in), a slowdown in

exports, and job losses. During this period, several
key stakeholders, including the Reserve Bank of
India (RBI), the Securities and Exchange Board of
India (SEBI), and the government, played a crucial
2.3.1.2 Why Are Central Banks Important in role in mitigating the impact of the crisis on the
an Economy? Indian economy.

• Central banks play a crucial role in stabilising • Action taken by RBI: The Reserve Bank of India
the economy by controlling the money supply (RBI), as the central bank, responded with a series
of monetary policy measures aimed at stabilising
prices do not rise too quickly. the economy. The RBI adjusted various key

• the Repo Rate (the rate at which banks borrow

of individuals and businesses by adjusting from the central bank), Reverse Repo Rate (the
interest rates to maintain steady economic rate at which banks deposit excess funds with
growth. the central bank), Cash Reserve Ratio (CRR), and
Statutory Liquidity Ratio (SLR). In response to
• They act as a safety net for commercial banks by
the RBI raised the Repo Rate and Cash Reserve
bank faces a liquidity crisis, preventing potential Ratio between 2007 and late 2008. However,
collapse.
lowered the Reverse Repo Rate, Repo Rate, Cash

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Reserve Ratio, and SLR from late 2008 to 2009

to provide liquidity support and stabilise the that provide a wide range of banking services to
individuals, businesses, and government entities.
Their primary role is to accept deposits and provide
this tool has the quickest effect on the economy,
either absorbing or injecting liquidity to address money by lending out funds at higher interest rates
than they pay on deposits.
while simultaneously boosting domestic demand.
2.3.2.1 Functions of Commercial Banks
If the RBI had not stepped in during the crisis, things
could have been much worse. Banks might have • Accepting deposits: Commercial banks provide
run out of money, making it hard for people and a safe place for individuals and businesses to
businesses to borrow. This could have led to more deposit their money in various forms, such as
job losses, a bigger slowdown in the economy, and
higher prices for everyday things. People could have interest.
lost their savings, and the value of the rupee could
have dropped, making everything more expensive. • Providing loans and advances: Banks lend
The RBI’s actions helped keep the economy stable and money to individuals and businesses for various
protected people’s money. purposes like buying a home, funding education,
or expanding a business, charging interest to earn
Conclusion: Importance of central banks in times of
crisis
• Central banks like the RBI play a vital role • Facilitating payments and transfers: They offer
during economic crises by managing liquidity, services like cheques, electronic transfers, and
online banking, allowing customers to make
system. payments and transfers easily and securely.

• RBI’s quick actions in adjusting rates and • Locker facilities: Banks provide locker services to
ensuring enough money was available in the customers for securely storing valuables, such as
banking system helped India navigate the global jewellery, documents, and other important items.
crisis better than many other countries. Customers are charged an annual fee for renting
these lockers, with varying sizes and security
• The crisis also highlighted important lessons, features available depending on the bank’s
such as the dangers of excessive risk-taking offerings.

prevent future crises. • Issuing credit: Banks provide credit cards,

overdraft facilities which allow account holders
2.3.2 Commercial Banks to withdraw more money than they have in their
account up to a set limit, and other credit options
to help individuals and businesses meet short-

• Foreign exchange services: They help facilitate

currency exchange, making international trade
and travel easier, and enabling customers to buy
and sell foreign currencies.

2.3.2.2 Why Are Commercial Banks

Important in an Economy?

• By accepting deposits and providing payment

of money in the economy. They also facilitate

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currency exchange and payment processing, each method serves a unique purpose, catering
making domestic and international trade more to different transaction needs. Understanding the

methods helps in selecting the most suitable option

• By offering loans to businesses and individuals,
commercial banks promote job creation,
investment, and long-term economic
development. Making capital accessible fosters
entrepreneurship and expansion, strengthening
the overall economy.

• Commercial banks make banking services

accessible to more people, enabling individuals to
save, invest, and access credit. This contributes

economic stability by supporting government

While central banks and commercial banks play

pivotal roles in maintaining the stability and growth of
the economy, it is important to recognise the presence
of other specialised types of banks that cater to
different segments of the population. India’s banking
structure is diverse, with a variety of banks designed 2.4.1 UPI
groups and regions. These include public sector UPI is a real-time payment system developed by the
banks, private sector banks, foreign banks, regional National Payments Corporation of India (NPCI). It
allows users to make instant bank-to-bank transfers
banks, and development banks. Each type of bank has using smartphones, without needing any third-party
its own functions and characteristics, ensuring that applications or intermediaries. UPI can link multiple
bank accounts to a single platform for convenient
centres to remote rural areas. payments across a variety of apps.

These specialised banks bridge the gap in the • Minimum/Maximum amount:

tailored services that meet the diverse needs of set by the user’s bank account). If the payment
individuals, businesses, and communities. By is being made to an educational or healthcare
addressing the distinct requirements of different institution or for tax compliance, the maximum
population segments, these banks contribute

ensuring that every section of society has access to • Fees: No transaction fees for UPI transfers. Some
banks or third-party apps may charge small fees
and commercial banks form the backbone of the for services like merchant payments or recharges,
but these are typically minimal or zero.
in fostering an inclusive and well-rounded banking
environment. • Transaction time: Instant (Real-time transfers
with immediate settlement).
2.4 Money Transfer Methods:
• Accessibility: Yes

payment systems have emerged to facilitate quick, Fact: In January 2025, UPI transactions in India
reached a record high of 16.99 billion, with a value
domestic transfers to international remittances, exceeding Rs 23.48 lakh crore.

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2.4.2 UPI Lite day-to-day payments without needing an active

internet connection.
UPI Lite functions as a digital wallet that allows users
to store a balance for making small transactions • Minimum/Maximum amount:
without requiring an internet connection. To use

• Fees: No transaction fees for UPI Lite.

• Transaction time: Instant (Immediate settlement)

• Accessibility:
In payment apps like Google Pay, if UPI Lite is areas with weak or no internet connectivity.

automatically becomes the default payment method. Here is how you can activate and use UPI Lite on
This makes it a convenient option for small-value, Google Pay. Note that a similar process can be
followed to enable UPI Lite on other payment apps.

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2.4.3 RTGS
RTGS is a payment system for high-value
transactions. Unlike NEFT, which processes payments
in batches, RTGS processes payments on a real-
time, gross settlement basis. This means funds are
transferred immediately, with no delay.

• Minimum/Maximum amount:
no upper limit (banks may impose their own
internal limits)

• Fees: The maximum charges that the originating

bank can levy for NEFT transactions (excluding
GST) are as follows:
•
• Minimum/Maximum amount:
Lakhs and no upper limit (banks may impose •
their own internal limits)
•
• Fees: RTGS transfers usually incur a fee,
which varies depending on the amount being •
transferred. Typical fees are as follows (though
they may differ by bank): These charges are subject to GST as applicable,
• and some banks may charge a lower or no fee
Rs 24.50 + GST depending on their policies. Fees are usually
•
through bank branches.

which are done through bank branches. • Transaction time: Batch processing with
settlement in batches every 1-2 hours. It can take
• Transaction time: Instant (Real-time settlement) several hours for completion.

• Accessibility: RTGS can be accessed 24/7 through • Accessibility: NEFT is accessible through online
online banking portals, bank websites, and mobile banking portals, mobile banking apps, and can
apps. However, there are some restrictions on also be performed at bank branches if needed.

bank branches, and the request can be initiated If RTGS or NEFT is done at bank branches, you need
in person during banking hours. However, the
availability of RTGS at branches and the timings payment either in cash or by cheque. A sample of the
for processing requests may differ from bank to application form is provided below.
bank.
For online transfers, you can use the bank’s mobile
2.4.4 NEFT
enter the amount to be transferred, and authenticate
NEFT is an electronic funds transfer system that the transaction using your transaction PIN. Once

transfer money between banks in India using

NEFT, typically for medium-to-large payments. It is
governed by the Reserve Bank of India (RBI).

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2.4.5 IMPS • Transaction time: Instant

(Real-time settlement)
IMPS is a payment system that allows instant money
transfers between participating banks in India. IMPS • Accessibility: Available
operates 24/7, offering an immediate settlement of 24/7, including weekends and public holidays.
funds, making it a reliable system for transferring
money at any time of the day.

• Minimum/Maximum amount:

• Fees: IMPS charges are largely subject to the

amount which is being transferred along with
the bank’s policies. However, the regular IMPS
charges range from Rs. 2.50 to Rs. 25 for amounts
of Rs. 10,000 to Rs. 5 lakh.

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Criteria NEFT RTGS IMPS

Minimum transfer value

Maximum transfer No limit No limit

value

Transfer type Processed in batches One-on-one settlement One-on-one settlement

Transfer speed Not instant, subject to Immediate transfer Instantaneous transfer

cut-off times

Availability Operates 24/7 Depends on individual Operates 24/7

bank hours

Mode Exclusively online

Transaction charges, No charges for inward No charges for inward Varies based on banks
inward transactions transactions

Transaction charges, Outward charges If between 2 and 5 lakhs, Varies based on banks
outward up to 25 rupees + GST. If
25 based on the transfer above 5 lakhs, up to 50
amount rupees + GST.

Reliability Reliable Reliable Reliable

2.4.6 SWIFT methods such as cash, cheques, and debit/credit

cards. These traditional methods are still widely used
SWIFT is an international messaging network for day-to-day transactions and payments.

2.5 Digital Wallets

globally. While SWIFT itself is not a payment system,
it is essential for enabling international wire transfers. A digital wallet (also known as an e-wallet) is a secure
online system that stores payment information,
• Minimum/Maximum amount: allowing users to make electronic transactions. Digital
minimum, but depends on the sending and wallets can hold a variety of data such as credit/debit
receiving banks. No upper limit, but banks may card details, loyalty cards, cryptocurrencies, and
impose internal transaction limits. other personal information. They are commonly used
for making online purchases, in-store payments, and
• Fees: even money transfers between individuals.
fees) Additional charges for currency conversion,
corresponding banks, and receiving banks. How they work and their advantages for
consumers?
• Transaction time: Typically takes 1-5 business
days, depending on the countries involved and Digital wallets store consumers’ payment information
intermediary banks. securely, enabling quick and easy transactions. Credit
or debit cards can be linked to the wallet, or funds can
• Accessibility: Available 24/7, but actual be transferred from a connected bank account. Once
transaction processing depends on business linked, the wallet allows instant payments without
hours in the sending and receiving countries. requiring payment details to be entered for each
transaction.
In addition to advanced methods like UPI, NEFT,
RTGS, IMPS, and SWIFT, there are basic transfer

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2.5.1 Advantages for Consumers

planning, and larger transactions.
1. Easy payments: Users can make purchases with
just a few taps or clicks, without needing to carry
physical cash or cards.
Both digital wallets and bank accounts serve different
2. Faster checkouts: By storing payment details
securely, digital wallets enable faster checkout, digital wallet is ideal for small, frequent transactions
which is especially useful for online shopping. and adds convenience to your day-to-day purchases,
while a bank account is essential for managing larger
3. Enhanced security: Digital wallets often employ
encryption and multi-factor authentication, activities. By using both in tandem, consumers can
providing a secure way to store and use payment
information. needs and the comprehensive services offered by a
traditional bank account.
4. Convenience: Many wallets also store transaction
history and can keep track of loyalty points 2.6 Loans
or reward programs, enhancing the overall
convenience for consumers. A loan is a sum of money that is borrowed from a

2.5.2 E-Wallets vs Bank Accounts

time. Loans help individuals and businesses meet

investment purposes, or business expansion.

However, loans come with certain responsibilities,
and understanding their types, repayment processes,
and key factors like credit score and interest rates is
essential. There are two main types of loans: secured
loans, which are backed by collateral, and unsecured
loans, which are not tied to any assets and are granted
based on the borrower’s creditworthiness.

While digital wallets and bank accounts serve the 2.6.1 Types of loans
same general purpose—facilitating the movement of
money—they function differently. 1. Personal loan: An unsecured loan typically
used for personal expenses, such as medical
• Digital wallets store and manage payment data, bills, home renovation, or education. It does not
allowing for quick and convenient transactions, require collateral and is based on the borrower’s
often for small purchases, in-app payments, creditworthiness.
and online shopping. They do not usually hold
large sums of money and are primarily used for 2. Home loan: A secured loan that helps individuals
transactions. purchase or build a home. The property itself
serves as collateral. Home loans usually come
• Bank accounts are traditional accounts that with longer repayment terms.

transactions, including savings, investments, 3. Car loan: A type of secured loan taken to purchase
loans, and payments. Bank accounts offer a a car, where the vehicle itself is used as collateral.
broader range of services compared to digital The repayment term typically ranges from 1 to 7
wallets. years.

• Digital wallets allow instant, secure transactions 4. Education loan: A loan granted to students
for day-to-day purchases, while bank accounts for funding their education. This loan may

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cover tuition fees, accommodation, and other 2.6.3 Repayment of Loan and EMI
educational expenses.
• EMI (Equated Monthly Instalment): An EMI is a
5. Business loan: Loans provided to businesses for
the purchase of long-term assets like equipment, the lender towards the repayment of a loan. Each
property, or infrastructure (capital expenditure), EMI consists of two parts: the principal amount
expansion, or funds needed for daily operations and the interest. The EMI ensures that the loan
like paying wages, rent, and inventory purchases is repaid in equal monthly instalments over the
(working capital). These loans may be secured tenure.
or unsecured, depending on the lender’s
requirements. Calculation of EMI: The EMI depends on the loan
amount, interest rate, and the repayment period.
6. Gold loan: A secured loan where the borrower
pledges gold ornaments as collateral to secure the The formula to calculate EMI is:
loan. Interest rates for gold loans tend to be lower
due to the collateral. EMI= P × r × (1+r)^n / ((1+r)^n- 1)

7. Payday loan: Short-term, high-interest loans Where:

intended to be repaid by the borrower’s next P = Principal Loan Amount
paycheck. They are usually small amounts and r = Monthly Interest Rate
come with very high interest rates. (Annual Interest Rate
divided by 12)
2.6.2 Process of Taking a Loan n = Loan Tenure in Months

1. Application: The borrower submits a loan

application to the bank or lending institution, • Interest on loans: The
providing personal details, employment interest on a loan is the
information, and the loan amount they wish to cost the borrower pays
borrow. for borrowing money. The

2. Loan assessment: The lender assesses the

credit score, income, debt-to-income ratio, and rate can change based on market conditions.
ability to repay the loan.
Let us understand this through an example:
3. Approval:

approval may take anywhere from a few hours (in rate of 9% for 3 years. Using the formula mentioned
the case of instant loans) to a few days (for larger earlier, you can calculate your EMI (Equated Monthly
loans like home loans). Instalment). The EMI amount will stay the same
throughout the loan period.
4. Disbursement: After approval, the loan amount
is disbursed to the borrower, either through a Loan Amortisation / Repayment
bank transfer or as a cheque. The disbursement Schedule
method depends on the type of loan.
Loan Amount

Annual Interest Rate 9.00%

Loan Term (years) 3

Term in months 36

EMI

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Beginning Ending
Interest
Month principal EMI Principal Paid principal
paid
balance balance
1

35

36

In the beginning, the interest paid is higher because • A lower credit score may result in loan rejection
or higher interest rates, as lenders perceive a
loan, the remaining balance decreases, so the interest higher risk.
also decreases. By the end of the loan, the amount
of interest you pay is much lower. Keep in mind that
the EMI and interest rate might slightly vary due to
rounding during calculations. Understanding the types of loans, how to apply for
them, and the repayment process is crucial. Key
2.6.4 Credit Score and Credit History factors like credit scores and interest calculations
determine loan eligibility and the overall cost of
A credit score is a numerical representation of an borrowing. By managing loans wisely and ensuring
individual’s creditworthiness. It is calculated based on timely payments, individuals can build a good credit
their credit history, which includes information about
past loans, credit card usage, repayment history, and
any defaults or late payments. A good credit score
2.7 The Role of Technology in
(typically above 750) increases the chances of loan
approval and often results in better interest rates. Transforming Banking Services
and Financial Products
Importance of credit score:

• A higher credit score indicates a strong history of

timely payments, making you a low-risk borrower products are delivered. Innovations in digital
for lenders.

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secure data storage, smart contracts, and real-

time settlements.
customer experiences. This section explores the key
technological advancements that are shaping the 3. AI and automation in banking:
intelligence (AI) and automation are transforming
the way banks interact with customers and
2.7.1 Digital Transformation of manage operations. AI-powered chatbots are
providing 24/7 customer service, answering
Banks
The digital transformation of banks refers to the also playing a crucial role in detecting fraudulent
transition from traditional brick-and-mortar banking activities by analysing patterns in transaction
data. In loan processing, AI is helping banks
of neobanks—banks that operate solely online, with assess creditworthiness quickly and accurately,
no physical branches. These digital-only banks offer enabling faster loan approvals and reducing
services such as savings accounts, payments, loans, human bias.
and money transfers, all accessible via mobile apps
or websites. Neobanks provide customers with lower 4. Security and privacy: As banking services
fees, faster services, and more personalised offerings, move online, ensuring security and privacy
driving the adoption of digital banking. has become a priority. Advanced technologies
such as encryption, multi-factor authentication,
While neobanks do not exist in India yet, they are
actively operational in countries like the United sensitive data during transactions. Banks are
States and United Kingdom where they have gained continuously upgrading their security protocols
to protect against cyber threats and ensure that

Blockchain technology, with its secure and

2.7.2 Fintech Innovations immutable nature, is also playing a role in
enhancing data privacy and preventing fraud.
1. Robo-advisors: Robo-advisors are automated
platforms that use algorithms and AI to provide
on banking is its ability to serve the regions where
leveraging technology, robo-advisors can offer traditional banking infrastructure is limited, mobile
personalised portfolio management at a fraction banking and digital wallets are providing a much-
needed solution. Through smartphones and mobile
These platforms allow users to invest based on apps, people can access banking services such as
money transfers, bill payments, and savings accounts,
horizon, making investment strategies accessible even without a physical bank branch nearby. This
to a wider audience, including individuals with digital inclusion is empowering millions of people
smaller portfolios.

2. Blockchain and cryptocurrency: Blockchain

technology has the potential to revolutionise 2.8 Financial Frauds
decentralised, and transparent way to conduct
transactions. Blockchain’s use in cryptocurrencies
like Bitcoin has already shaken traditional
banking systems. Banks are exploring blockchain loss, emotional stress, and long-term consequences.
Fraudsters use various tactics to deceive people
reduce fraud, and streamline operations.
Additionally, many banks are using blockchain for information.

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2.8.1 Common Types of Financial the sender’s identity before providing personal or

Frauds
1. Phishing: Fraudsters impersonate legitimate 2. Use strong, unique passwords for each of your
organisations via emails, messages, or phone accounts, and enable two-factor authentication
calls to trick people into revealing sensitive (2FA) wherever possible to add an extra layer of
information such as passwords, credit card protection.
details, or bank account numbers.
3. Regularly monitor your bank statements, credit
2. Identity theft: Criminals steal personal details, card statements, and credit reports for any
such as Social Security numbers or bank account unauthorised transactions or activities.
information, to commit fraud or open fraudulent
accounts in someone else’s name. 4. Ensure websites are legitimate by checking for
“https” in the URL and look for secure connection
3. Pharming: Fraudsters redirect legitimate indicators like a padlock symbol before entering
sensitive data.
infecting computers or servers, leading users to
enter their sensitive information unknowingly. 5. Always verify requests for money or sensitive
information directly with the person or
4. Card skimming: Criminals use small devices
(skimmers) to capture credit/debit card details if the request seems unusual or urgent.
when you swipe your card at ATMs or point-of-
sale machines. 6. Inspect ATMs and point-of-sale machines for any
suspicious devices or attachments before using
5. Deepfake scams: Fraudsters use AI-generated them, and cover the keypad while entering your
deepfake videos or audio recordings to PIN.

executives or family members to manipulate 7. Be cautious when receiving unsolicited phone

victims into sending money or revealing sensitive calls or messages, especially those requesting
information.
action.
6. Voice scams: Fraudsters impersonate a trusted
voice, such as a bank representative, through 8.
phone calls or voice messages, asking for personal contact numbers.
details or money transfers.
9. Update your antivirus and anti-malware software
2.8.2 How to Prevent Ourselves from regularly to prevent your devices from being
infected by viruses or malicious programs that
Falling Victim to Financial Frauds
can redirect you to fraudulent websites.
1. Avoid clicking on suspicious links in emails, text
messages, or social media posts, and always verify

Summary of the Chapter

1. Understanding Banks
•
payments, insurance, and forex. Acting as intermediaries, they manage deposits, extend

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and savings accounts, personal and business loans, digital payments, insurance policies, and

• Banks support economic growth by allocating resources, implementing monetary policies,

through their payment infrastructure.

2. Central and Commercial Banks
• Central banks are national institutions responsible for managing a country’s currency, money

institutions, act as lenders of last resort, manage government accounts, and maintain foreign
exchange and gold reserves.
•

banking operations, and sustained economic growth through effective monetary policy and
regulation.
•
individuals, businesses, and governments. Their core functions include accepting deposits,
providing loans and advances, facilitating payments, offering locker facilities, issuing credit,
and handling foreign exchange.
• By mobilising savings and extending credit, they promote investment, job creation, and

across regions. Alongside central banks, commercial banks are vital to maintaining a stable,

3. Money Transfer Methods

• India offers six key money transfer methods: UPI allows instant bank-to-bank transfers via

international fund transfers. Each method varies in speed, limits, fees, and accessibility,

4. Digital Wallets
• Digital wallets offer secure, fast, and convenient payments by storing card or bank details,
enabling easy transactions, faster checkouts, and access to loyalty rewards and transaction
history.
• E-wallets are ideal for quick, everyday transactions, while bank accounts handle larger sums,

5. Loans
• Loans can be personal, home, car, education, business, gold, or payday, with secured or
unsecured options based on purpose and collateral.
•

through bank transfer or cheque.

• Loan repayment happens through EMIs, which include principal and interest, calculated
based on loan amount, rate, and tenure. A good credit score, built through timely repayments
and responsible credit usage, increases approval chances and ensures lower interest rates,
impacting overall borrowing cost positively.
6. The Role of Technology
•
enhancing convenience, speed, and personalised banking.
•
Robo-advisors enable low-cost investing, blockchain ensures transparency and security, while

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 National Finance Olympiad

AI enhances customer service, fraud detection, and loan processing. These innovations boost

7. Financial Frauds
• Phishing, identity theft, card skimming, deepfake scams, voice scams,
and pharming are common fraud tactics used to steal personal or

• Avoid suspicious links, use strong passwords and 2FA, monitor accounts
regularly, verify sources, inspect ATMs, and update antivirus software to

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 National Finance Olympiad

Chapter 03

Financial Planning
for Present and
Future Goals

Learning Outcomes:

Students will be able to:

•
•

3.1 Introduction to the Chapter

This chapter introduces you to the essentials of stability and growth, both in the short term and long

begin to manage your money, it is important to help individuals achieve their goals, whether it is
understand how to budget, save, invest, and plan buying a house, funding education, or preparing for
for both short-term and long-term goals. You will retirement.

interest, make informed decisions about insurance, Let us break down the key concepts of personal
and manage debt. By mastering these concepts, you

3.2.1 Income Management

explore the key tools and strategies for taking control
Income management refers to the process of tracking
and controlling the money you earn. Effectively
3.2 What is Personal Finance? managing your income is the foundation of all

much you can spend, save, and invest. Understanding

the different sources of income and how to manage
earning, saving, spending, investing, and planning

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 National Finance Olympiad

3.2.1.1 Below Are the Common Sources of Example:

Income:
(15,000 × 12).
1. Salary & wages:
paid on a regular basis, typically monthly. This • Capital gains:
investment for more than you paid for it. This
positions, and professions like teaching or applies to assets like stocks, bonds, or real
consulting. Wages are typically paid based on estate.
the hours worked. Hourly wage earners are paid
for each hour worked, and their income can vary Example:
depending on how many hours they work in a
week or month.

2. Allowances: Allowances refer to money provided 3.2.1.2 The Goal of Income Management
by someone else, typically parents or guardians,
The main goal of income management is to
amounts given regularly (weekly or monthly) and understand how much money you earn from all
sources and how best to allocate it toward your
expenses, travel etc.
income allows you to:
3. Investments: Investments generate income by
using your savings to purchase assets that have 1. Track spending: Knowing where your money goes
the potential to appreciate in value or generate
returns. Investments are an important aspect
of long-term wealth building because they can 2. Prioritise needs vs. wants: By budgeting
provide passive income over time. Common types properly, you ensure your needs (housing, food,
of investment income include:
spending on wants (entertainment, luxury items).
• Dividends: Earnings paid to stockholders of a
company. These are typically paid out from the 3. Build savings: Setting aside money for
emergencies or future goals ensures you are
prepared for the unexpected.
Example: If you own shares in a company and
4. Invest for the future: Using part of your income to
make investments can generate additional wealth
(5 × 100) in dividend income. over time.

• Interest: Income earned on savings or Income management is the starting point for all
investments, such as in savings accounts or
income, the easier it will be to save, invest, and plan
you interest for lending them your money.

Example: 3.2.2 Budgeting

deposit with an annual interest rate of 6%, you
Budgeting is the process of planning and controlling
your spending to ensure you can live within your
• Rental income: Income earned from renting means. By tracking both your income and expenses,
out a property that you own. If you have an you can make informed decisions about how to
extra house or apartment, you can rent it out
for monthly income. goal is to balance essential expenses, discretionary
spending, and savings.

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