Fundamentals of Business Economics and Management · Money and Banking

Financial Markets and Banking Reforms for CMA Foundation

Updated 10 October 2026 · Fact-checked

A financial market is where funds move from savers to borrowers. The money market deals in short-term funds (up to one year) through T-bills, commercial paper and call money. The capital market deals in long-term funds through shares and bonds. Banking reforms, NPA rules and digital banking such as UPI are tested as facts and definitions.

Understand Financial Markets and Banking Reforms

A financial market connects people who have spare money with people who need money. Savers want a return. Borrowers want funds for business or government spending. The market links them and sets the price of funds, which is the interest rate or the return.

The money market is the market for short-term funds, with maturity up to one year. It is mainly used to manage liquidity. The instruments are very safe and easy to convert to cash. Examples: Treasury Bills (issued by the government to borrow short-term, sold at a discount and repaid at face value), Commercial Paper (unsecured short-term promissory note issued by strong companies), Certificates of Deposit (issued by banks against deposits), call money (borrowing between banks for a very short period, often overnight) and repo (sale of securities with a promise to buy them back). The RBI is the main regulator.

The capital market is the market for long-term funds, with maturity above one year or no maturity at all. Companies raise money through shares and debentures or bonds. The primary market handles new issues. The secondary market, such as the stock exchange, handles trading of existing securities. SEBI is the main regulator. Risk and return are higher than in the money market.

A Non-Performing Asset (NPA) is a loan or advance on which the borrower has stopped paying interest or principal. In general, a loan becomes an NPA when interest or instalment stays overdue for more than 90 days. Banks must make provisions (set aside money) against NPAs, which cuts profit. Assets are classed as standard, sub-standard, doubtful and loss assets.

Banking reforms began after the 1991 balance of payments crisis. The Narasimham Committee (1991 and 1998) recommended lower reserve requirements (CRR and SLR), freer interest rates, prudential norms for income recognition and provisioning, capital adequacy norms, and more competition including new private banks. Later developments include bank mergers, the Insolvency and Bankruptcy Code for recovering bad loans, and digital banking: internet and mobile banking, NEFT, RTGS and UPI (Unified Payments Interface), which allows instant account-to-account payment through a mobile app.

Key formulas to remember

Money market vs capital market (maturity): Money market: up to 1 year | Capital market: more than 1 year; The most tested difference. Remember: money market = liquidity, capital market = long-term investment.
Treasury Bill yield idea: Discount = Face value − Issue price; T-bills carry no coupon. The investor's gain is the discount, received at maturity as face value.
NPA test: Overdue for more than 90 days ⇒ NPA; Applies to term loans and most advances as per RBI norms. Quote it as the general rule.
Gross NPA ratio: Gross NPA ratio = Gross NPAs ÷ Gross advances × 100; Shows the share of bad loans in total loans.
Net NPA: Net NPA = Gross NPA − Provisions; Used in simple numerical questions.
Regulators: Money market → RBI | Capital market → SEBI; Quick elimination aid for MCQs.

How to solve Financial Markets and Banking Reforms questions

Most questions are factual. Use this method to find the answer fast and avoid trap options.

1Read the question and mark the keyword: short-term, long-term, instrument, regulator, NPA, committee or digital payment.
2Decide the market first. If the word is T-bill, commercial paper, CD, call money or repo, it is money market. If it is share, debenture or bond, it is capital market.
3For difference questions, check the maturity period: up to one year or above one year.
4For NPA questions, look for the 90-day overdue rule and the asset classes. For numbers, apply Gross NPA ratio or Net NPA = Gross NPA − Provisions.
5For reform questions, link the name to the idea: Narasimham Committee means CRR/SLR cuts, prudential norms and capital adequacy.
6For digital banking, match the term to its use: UPI is instant mobile payment, RTGS is large-value, NEFT is batch settlement.
7Eliminate options that mix the two markets or give the wrong regulator, then choose the best match.

Quickest way: Maturity and keyword sort

When to use it: Use for any MCQ asking to classify an instrument, market or regulator.

Ask: does it mature within a year? If yes, think money market and RBI.
If it is shares or bonds meant for long-term funds, think capital market and SEBI.
If you see 90 days, think NPA.
If you see Narasimham, think banking reforms of 1991 and 1998.
If you see instant mobile payment, think UPI.

Common mistakes in Financial Markets and Banking Reforms

Placing commercial paper or certificates of deposit in the capital market.
Students link any company or bank instrument with long-term funding.
Fix: Remember the maturity test. Short-term instruments up to one year belong to the money market.
Saying T-bills pay regular interest.
Confusing them with bonds.
Fix: T-bills are issued at a discount and repaid at face value. The gain is the discount.
Writing that a loan is an NPA after 30 or 60 days.
Mixing it with the idea of a late payment.
Fix: The general rule is overdue for more than 90 days.
Using Gross NPA instead of Net NPA in a numerical question.
Not reading whether provisions are given.
Fix: If provisions are mentioned and the question asks net, subtract them from gross NPA.
Treating the money market as risky and the capital market as safe.
Reversing the risk and return link.
Fix: Money market instruments are low-risk and low-return. Capital market instruments carry higher risk and return.
Confusing the regulators of the two markets.
Both RBI and SEBI sound like market regulators.
Fix: Money market is regulated mainly by RBI. Capital market is regulated by SEBI.

Worked examples

Example 1

Which of the following is a money market instrument? (A) Equity share (B) Debenture (C) Treasury Bill (D) Preference share

Show the solution

Money market instruments mature in up to one year.
Equity shares, debentures and preference shares are long-term securities.
A Treasury Bill is a short-term government instrument, usually up to one year.
So option C is the only money market instrument.

Answer: (C) Treasury Bill

Example 2

A bank has gross advances of ₹500 crore and gross NPAs of ₹25 crore. It holds provisions of ₹10 crore against NPAs. Find the Gross NPA ratio and the Net NPA.

Show the solution

Gross NPA ratio = Gross NPAs ÷ Gross advances × 100.
= 25 ÷ 500 × 100 = 5%.
Net NPA = Gross NPA − Provisions.
= 25 − 10 = ₹15 crore.

Answer: Gross NPA ratio is 5% and Net NPA is ₹15 crore.

Exam tips

Learn the one-year maturity line. It settles most money market vs capital market questions.
Memorise the money market list: T-bills, commercial paper, certificates of deposit, call money, repo.
Link Narasimham Committee with prudential norms, lower CRR and SLR and capital adequacy.
Keep the 90-day NPA rule and Net NPA = Gross NPA − Provisions ready for quick numericals.
There is no negative marking, so answer every question. If unsure, remove options that mix the two markets.

Practice questions from Money and Banking

Financial Markets and Banking Reforms in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Financial Markets and Banking Reforms: frequently asked questions

What is the main difference between the money market and the capital market?

The money market deals in short-term funds, up to one year, and is used for liquidity. The capital market deals in long-term funds through shares and bonds. Risk and return are lower in the money market.

What is an NPA in banking?

An NPA is a loan on which the borrower has stopped paying interest or principal. As a general rule it is an NPA when payment is overdue for more than 90 days. Banks must set aside provisions against it.

What did the Narasimham Committee recommend?

It recommended reducing CRR and SLR, freeing interest rates, introducing prudential norms and capital adequacy, and allowing more competition in banking. These steps aimed to make banks stronger and more efficient.

What is UPI and why is it important for the exam?

UPI is the Unified Payments Interface, which lets you make instant bank-to-bank payments through a mobile app. Questions usually test its meaning and its role in digital banking.