UPSC NCERT Notes – Indian Economy – Indian Banking System

Studying for the UPSC examination demands a comprehensive understanding of various subjects, including the intricacies of the Indian economy and its banking system. The National Council of Educational Research and Training (NCERT) notes serve as invaluable resources for aspirants navigating through the complexities of this domain. Specifically focusing on the Indian banking system, these notes meticulously elucidate the structure, functioning, and evolution of banks within the Indian economic landscape. Covering topics ranging from the regulatory framework to the role of banks in driving economic growth, these notes provide a solid foundation for aspirants to grasp the nuances of the banking sector. In essence, delving into the UPSC NCERT notes on the Indian economy, particularly the banking system, equips aspirants with the requisite knowledge and analytical skills vital for excelling in the examination and understanding the broader economic dynamics shaping India’s growth trajectory.

A bank, categorized as a Financial Institution (FI), offers banking and financial services to its customers. While banking systems have existed since ancient times, they lacked organization until the Britishers’ arrival.

Banking System

• The Indian banking industry is bifurcated into two parts:
  • Organized Banking Structure: This sector encompasses institutions whose parts and activities are systematically coordinated by the monetary authority. Entities like RBI, Commercial Banks, and financial institutions fall under this category.
  • Unorganized Banking Structure: These institutions operate without systematic coordination by monetary authorities. This division includes indigenous bankers, moneylenders, small-time borrowers, and Nidhis, among others.
• The history of banking in India traces back to the 17th century when the foreign banking system started declining after the arrival of the Britishers. Mayser’s Alexander and Company established the first European bank, the Bank of Hindustan, in 1770, which became defunct in 1832. The General Bank of India, established in 1786, was the first bank in India but faced failure in 1791.
• The inaugural successful bank in India, the Bank of Bengal, was established in 1806. The country’s first Commercial Bank, Awadh Commercial Bank, came into existence in 1881. In 1921, the Imperial Bank of India, operating with limited liability, was established.
• Two pivotal developments occurred in the banking sector post-independence in 1949: the Nationalisation of the Reserve Bank of India (RBI) and the Banking Regulation Act, granting RBI the authority to regulate the banking sector in the country.
• The Punjab National Bank, originating in Lahore in 1895, has endured over time and is presently one of India’s largest banks.
• The significant move of nationalizing the Imperial Bank of India transpired in 1955, subsequently renaming it the State Bank of India. This was followed by the formation of seven associates in 1959.
• A stride towards social banking was taken with the nationalization of 14 Commercial Banks on July 19, 1969. Additionally, six more Commercial Banks underwent nationalization on August 15, 1980.
• The banking crisis spanning from 1913 to 1917 and the failure of 588 banks across the country during the decade concluding in 1949 emphasized the imperative need for regulating and controlling Commercial Banks.

Banking Companies Act The Banking Companies Act, initially enacted in February 1949, underwent subsequent amendments and was rebranded as the Banking Regulation Act. Divided into 5 lakh shares of INR 100 each, the act laid the legal groundwork for regulating the banking system in India. Initially, the entire share capital was owned by non-government partners. To comprehend the evolution of the banking system in India, one can trace it back to the year of its establishment, noting that the development was hindered by events like the partition to Pakistan until June 1948.

Bank and their Year of Establishment

Banks	Year of Establishment
The Bank of Hindustan	1770
Bank of Bengal	1806
Bank of Bombay	1840
Allahabad Bank	1865
Alliance Bank of Shimla	1881
Oudh Commercial Bank	1881
Punjab National Bank	1894
Bank of India	1906
Bank of Baroda	1909
Central Bank of India	1911
Bank of Mysore	1913
Imperial Bank of India	1921
Reserve Bank of India	1935
State Bank of India	1955
Indian Industrial Development Bank	1964
Axis Bank	1993

Reserve Bank of India (RBI)

• The central bank holds a paramount position in any country, enjoying privileges and powers under payment legislation that are distinct from those granted to other banks.
• Established on April 1, 1935, the Reserve Bank of India (RBI) had an initial paid-up capital of 5 crores, divided into 5 lakh shares of 100 each. Initially, the entire share capital was owned by non-government partners.
• The first endeavor to establish a Central Bank in India was initiated by the Chamberlin Commission in 1914.
• Acting upon the recommendations of the Hilton Young Commission, the RBI was established in April 1935 through the enactment of the RBI Act, of 1934.
• The RBI served as the Central Bank of Burma (Myanmar) until the Japanese occupation in April 1947. Similarly, it continued to function as the Central Bank for Pakistan until June 1948.
• In 1949, the RBI underwent nationalization, and CD Deshmukh became its first Indian Governor.

Organization and Management of RBI

• The Reserve Bank of India is overseen by the Central Board of Directors, currently comprising 21 members as of June 2021.
• In addition to the Governor and four Deputy Governors, each of the four Local Boards of RBI nominates four directors for a four-year term.
• The Government of India nominates ten directors and two government officers to the Central Board of Directors.
• Local Boards are established in Mumbai, Kolkata, Chennai, and New Delhi, with the Head Office of RBI situated in Mumbai.
• According to the Reserve Bank of India Act, the term for all nominated members is limited to 4 years. The Governor and Deputy Governors are appointed by the government for a maximum term of 5 years.
• The RBI operates through 31 regional offices, including 4 sub-offices, predominantly located in state capitals.
• The financial year of RBI spans from April 1 to March 31, with the annual report released in August each year.

Governor of RBI

• Sir Osborne Smith served as the first Governor of RBI. Following nationalization on January 1, 1949, CD Deshmukh became the first Indian Governor.
• The standard term for the Governor’s office is 3 years, with a possible extension for an additional 2 years in certain cases.

Governors of RBI and their Period

Governors	Tenure
Sir Osborne Smith	1st April 1935 to 30th June 1937
Sir James Taylor	1st July 1937 to 17th February 1943
CD Deshmukh	11th August 1943 to 30th June 1949
Benegal Rama Rau	1st July 1949 to 14th January 1957
KG Ambegaonkar	14th January 1957 to 28th February 1957
HVR Lengar	1st March 1957 to 28th February 1962
PC Bhattacharya	1st March 1962 to 30th June 1967
LK Jha	1st July 1967 to 3rd May 1970
BN Adarkar	4th May 1970 to 5th June 1970
S Jagannathan	16th June 1970 to 19th May 1975

Governors	Tenure
NC Sen Gupta	19th May 1975 to 19th August 1975
KR Puri	20th August 1975 to 2nd May 1977
M Narasimham	2nd May 1977 to 30th November 1977
Dr IG Patel	1st December 1977 to 15th September 1982
Dr Manmohan Singh	16th September 1982 to 14th January 1985
A Ghosh	15th January 1985 to 4th February 1985
Venkataraman	4th February 1985 to 22nd December 1990
RN Malhotra	22nd December 1990 to 21st November 1992
Dr C Rangarajan	22nd December 1992 to 21st November 1997
Dr Bimal Jalan	22nd November 1997 to 6th September 2003
Dr YV Reddy	6th September 2003 to 5th September 2008
Dr D Subbarao	5th September 2008 to 4th September 2013
Dr Raghuram Govind Rajan	4th September 2013 to 5th September 2016
Urjit Patel	6th September 2016 to 11th December 2018
Shaktikanta Das	12th December 2018 to Till Date

Role of the RBI in the Indian Banking and Financial System:

RBI as the Note Issuing Authority:

• From its inception, the RBI has held the exclusive authority to issue currency notes, excluding 1-rupee notes or coins and coins of smaller denominations.
• While 1-rupee notes, coins, and smaller denomination coins are issued by the Central Government, their circulation is facilitated through the RBI.

RBI’s Issuance Against Security:

• The RBI has the prerogative to issue notes secured by coin or bullion, foreign securities, rupee coins, and Government of India securities, including eligible bills of exchange (promissory notes).

Minimum Reserve System:

• The Reserve Bank has operated under the Minimum Reserve System for note issuance since 1950.
• It maintains gold and foreign exchange reserves, with a total value of 200 crores, of which at least 115 crores should be in gold.

Printing of Securities and Minting in India

Security Press Station

Currency Notes Press (1928)

Security Paper Hoshangabad (1967 to 1968)

Bank Notes Press (1974)

Security Notes Printing Press (Established 1982)

India Security Press (1992)

Modernized Currency Notes Press (1995)

Related by

Bank notes from 1 to 100

Banks and currency notes paper (Union excise duty stamps, Postal material, postal stamps, etc)

Modern currency

1 Rupee Note Discontinuation:

• The printing of ₹1 notes was halted in November 1994, primarily due to the exorbitant cost involved and to free up capacity for printing higher-denomination currency notes.
• The printing of ₹2 and ₹5 notes was ceased in 1995. However, notes of ₹1 remain legal tender as stipulated in the Coinage Act, 2011.

Roles of RBI:

Banker to the Government:

• RBI is tasked with handling the banking transactions of both the Union and State Governments. It accepts money on their behalf, facilitates payments, and manages their exchange and remittance operations.

Banker to Banks:

• In its special relationship with banks, RBI controls their reserves (SLR and CRR), serving as the ultimate source of money and credit in India. It acts as the lender of last resort, with banks borrowing from the RBI in times of need.

Regulator and Supervisor:

• RBI establishes the overarching parameters for the functioning of India’s banking and financial system. Regulatory powers, derived from the RBI Act and the Banking Regulation Act, include issuing licenses for new banks, setting minimum requirements for capital reserves, inspecting banks’ organizational setups, and conducting investigations into complaints of fraud. RBI also plays a role in approving or enforcing amalgamations, reconstruction, or liquidation of banks, and controlling appointments or terminations of Chairman and Chief Executive Officers of Private Sector Banks.

Custodian of Foreign Reserves:

• Responsible for managing the investment and utilization of the country’s foreign reserves, RBI plays a crucial role as the custodian of foreign reserves. With the introduction of a floating exchange rate system and rupee convertibility, RBI works to stabilize the foreign exchange market, developing and regulating it to facilitate external trade and payments.

Credit Control:

• As a pivotal tool of monetary policy, credit control is employed by RBI to manage the demand and supply of money in the economy. The Central Bank administers control over the credit that commercial banks grant, aiming to achieve economic development with stability.

Need for Credit Control/Objective of Monetary Policy: Encourage overall growth in the priority sector. Monitor and regulate the channelization of credit. Control inflation and deflation. Boost the economy by facilitating the flow of adequate bank credit to various sectors, ensuring stability in exchange rates and the money market.

Work of a General Bank:

• Receive Deposit: Accept government income from taxes and deposits from commercial and other banks.
• Providing Credit: Extend loans to governments and provide short-term and long-term loans to commercial banks.
• Sale and Purchase of Bills: Engage in discounting, buying, and selling of payment bills, agricultural bills, and foreign exchange bills.
• Account Opening in World Banks: Open accounts on behalf of the country in the World Bank and represent its share.
• Account Opening in Other Central Banks: Open accounts in the Central Banks of other countries and permit foreign banks to open branches in India.

Other Functions of the RBI:

• Provide loans to export industries.
• Serve as a clearinghouse.
• Handle the exchange of Indian notes.
• Establish training centers for banking development, including the Banking Training College in Mumbai, Agricultural Banking College in Pune, and State Training College in Chennai.

Limitations of RBI:

• Cannot function as commercial banks.
• Cannot provide loans against fixed assets.
• Cannot give unsecured loans.

Monetary Policy:

• Refers to the Central Bank’s policy using monetary instruments to achieve goals specified in the Act.
• In India, the RBI’s monetary policy aims to manage the quantity of money to meet the requirements of various sectors and enhance economic growth.
• Mandated by the Reserve Bank of India Act, 1934, the flexible inflation targeting framework was introduced in May 2016, with the government setting inflation targets every five years in consultation with the RBI.

Monetary Policy Committee (MPC):

• Constituted by the Government of India, the MPC plays a crucial role in determining and enhancing the transparency of monetary policy decisions.
• MPC meetings occur at least four times a year, with published decisions after each meeting.
• As per the RBI Act, the Governor of RBI (ex-officio Chairperson), Deputy Governor of RBI in charge of Monetary Policy (Member), one RBI officer (Member), and three members appointed by the Central Government comprise the committee.
• Expansionist Monetary Policy:
  • An expansionist monetary policy, aimed at boosting the economy, may involve reducing taxes or increasing government spending.
  • RBI’s expansionist policy includes reducing the statutory liquidity ratio, marginal standing facility rate, bank rate, and repo rate.

Regulatory Functions of RBI under Monetary Policy:

• The principal function of the Reserve Bank of India is the control of credit, involving both expansion and contraction.
• RBI utilizes methods of credit control, categorized as Quantitative (controlling the quantum of credit) and Qualitative (regulating the quality of credit).

Quantitative Credit Control:

• To control the flow of the quantum of credit, the Reserve Bank adopts the following instruments of monetary policy.

Repo Rate:

• The rate at which RBI lends money to commercial banks.

• Injects liquidity into the system.

• Reduction encourages borrowing by making it less expensive.

Reverse Repo Rate (RRR):

• RBI borrows money from banks by lending securities.
• The interest rate paid by RBI is the Reverse Repo Rate.
• Absorbs liquidity in the system, and sets 100 basis points below the repo rate.

Base Rate:

• Minimum rate below which banks cannot lend to customers.
• Enhances transparency and ensures lower cost of funds passed on to customers.

Bank Rate: Controls the reserve deposit ratio value. Rate at which RBI lends to commercial banks. High bank rate makes borrowing costlier, discouraging lending, while a cut encourages borrowing and lending.

Liquidity Adjustment Facility (LAF):

• Monetary policy allows banks to borrow money through repurchase agreements.
• Helps banks adjust day-to-day mismatches in liquidity.
• Introduced in June 2000, includes repo and reverse repo operations.

Open Market Operations (OMOS):

• Involves sale and purchase of government securities by RBI in the open market.
• Controls liquidity, influences interest rates, and impacts inflation.

Effects of RBI Actions on Money Supply:

• When the RBI acquires government securities in the open market, it augments the money supply, lowers interest rates, and boosts inflation.
• Conversely, selling government securities reduces money supply, elevates interest rates, and mitigates inflation.

Marginal Standing Facility (MSF):

• Introduced in the Monetary Policy (2011-12), MSF is the penal rate for banks borrowing from the Central Bank.
• MSF is always 1% higher than RRR, and it commenced on 9th May, 2014.

Cash Reserve Ratio (CRR):

• Mandates the amount of funds banks must keep with the RBI.
• Increasing the CRR decreases available funds, helping drain excess money from banks.

Statutory Liquidity Ratio (SLR):

• Requires commercial banks to maintain liquid assets (cash, gold, and approved securities) at a maximum of 40% of their total deposits.
• Securities are held by banks, serving as liquid assets.

Market Stabilisation Scheme (MSS): Employed during exchange rate volatility, MSS involves the RBI releasing or buying foreign exchange to stabilize rates. Bonds issued on behalf of the government raise funds kept in a separate account using the auction method.

Priority Sector Lending:

• Introduced by the RBI to ensure increased bank financing for priority sectors like agriculture and small industries.

Marginal Cost of Funds-based Lending Rate (MCLR):

• New lending rate guidelines by the RBI, replacing the Base Rate system from April 2016.
• Applicable to floating rate home loans and term loans for small and medium-sized enterprises.

Qualitative or Selective Credit Control:

• Involves controlling specific credit for particular objectives.
• For instance, restricting loans against the security of wheat to check rising wheat prices.

Selective Credit Control Measures:

• Change in Margin Requirements on Loans: RBI directs member banks to alter margin requirements.
• Rationing of Credit: RBI sets credit quotas and limits for bill payments for member banks.
• Discriminatory Interest Rate (DIR): Channels credit to priority or weaker sectors by applying concessional interest rates.
• Direct Action: Severe and rarely used, involving actions like refusing to rediscount bills or canceling licenses for non-compliance with RBI directives.

Moral Persuasion:

• Periodically, the Reserve Bank conducts meetings with member banks, seeking their cooperation in effectively managing the country’s monetary system.
• It advises against credit expansion, except for the priority sectors, such as agriculture and small industries.

Divisions of Banks in India:

Scheduled Banks:

• Scheduled banks in India are those included in the Second Schedule of the Reserve Bank of India (RBI) Act, 1934.
• The RBI includes banks in this schedule based on criteria outlined in Section 42(6) (a) of the RBI Act, 1934.
  • Criteria for Scheduled Banks:
    • Banks with a minimum paid-up capital and reserve amount up to 5 lakh.
    • Weekly submission of activity details to the RBI.

Non-Scheduled Banks:

• Non-scheduled banks are not part of the Second Schedule of the RBI Act.
• They are subject to the statutory cash reserve requirement, maintaining their Cash Reserve Ratio (CRR) independently.
• Non-scheduled banks may approach the RBI for accommodation under abnormal circumstances but cannot borrow for normal banking purposes.

Scheduled Banks in India:

Commercial Bank:

• A financial institution providing banking and financial services to businesses, organizations, and individuals.
• Dominates the organized sector, including Public Sector Banks (SBI + Nationalized Banks + Regional Rural Banks), Private Sector Banks, and foreign banks.

Public Sector Banks (PSBs):

• Banks where the government holds a major share (51% or above).
• PSBs, by definition, are commercial banks focused on deposit-taking and lending.
• Emphasizes serving the public rather than solely profit-making.

List of Public Sector Banks in India:

Banks	Government’s Stake
State Bank of India	57.5%
Bank of Baroda	63.97%
Canara Bank	62.93%
Punjab National Bank	73.15%
Indian Bank	79.86%
Union Bank of India	83.49%
Bank of India	81.41%
Central Bank of India	93.08%
Bank of Maharashtra	90.97%
UCO Bank	95.39%
Indian Overseas Bank	96.38%
Punjab and Sind Bank	98.25%

Nationalization of Public Sector Banks:

• All nationalized banks fall under the category of public sector banks and are commercial banks.
• The nationalization aimed to achieve social welfare, control private monopolies, and expand banking services.
• In a move aimed at strengthening control over banks, on July 19, 1969, Prime Minister Mrs. Indira Gandhi nationalized 14 large commercial banks with reserves exceeding 50 crores. The list of banks nationalized in 1969 includes:
  • Allahabad Bank
  • Bank of India
  • Central Bank of India
  • Bank of Baroda
  • Bank of Maharashtra
  • Canara Bank
  • Indian Overseas Bank
  • Indian Bank

State Bank of India (SBI):

• Acts as an agent of RBI where the latter does not have branches.
• SBI, formerly the Imperial Bank of India, merged with the State Bank of Jaipur and the State Bank of Bikaner in 1963 to form the State Bank of Bikaner and Jaipur.
• State Bank of Saurashtra merged with SBI in 2008, and State Bank of Indore in 2010, reducing the associated banks of SBI to 5.
• On April 1, 2017, five associate banks of State Bank of India and Mahila Bank merged with SBI.
• The State Bank (Repeal and Amendment) Act, 2018 provided legislative clearance to the merger of five subsidiary banks with SBI.
• Bharatiya Mahila Bank (BMB), merged with SBI in 2017, was founded in 2013 to provide exclusive banking facilities for women.

Associated Banks of SBI and their Mergers:

• On April 15, 1980, banks with reserves exceeding 200 crores were nationalized, primarily to enhance government credit control over the financial sector. The six banks nationalized in 1980 are:
  • Andhra Bank
  • Corporation Bank
  • New Bank of India
  • Oriental Bank of Commerce
  • Punjab and Sind Bank
  • Vijaya Bank
• As part of the New Economic Policy in 1991, the government pursued the merger of nationalized banks for a better economy of scale. Mergers took place in 1993, 2017, 2019, and 2020. Notable mergers include the amalgamation of the New Bank of India with Punjab National Bank in 1993.

The merger of Vijaya Bank and Dena Bank:

• Vijaya Bank and Dena Bank merged with Bank of Baroda (BoB) on April 1, 2019.
• This merger positioned BoB as the 3rd largest public sector bank in India.

Merger of Nationalized Banks in 2020:

• In 2020, the Government of India merged with Allahabad Bank.
• On April 1, 2020, several nationalized banks underwent mergers, including the amalgamation of Indian Bank, Oriental Bank of Commerce (OBC), and United Bank of India with Punjab National Bank. Syndicate Bank joined forces with Canara Bank, while Corporation Bank and Andhra Bank merged with Union Bank of India. This consolidation resulted in a total of 12 nationalized banks in India.

Other Nationalized Banks:

1. Bank of Baroda:

• Established on July 20, 1908, by Sayajirao Gaekwad (Maharaja of Baroda).
• Currently, it boasts 3454 branches and 86 branches abroad with its Head Office in Vadodara, Gujarat.

2. Union Bank of India:

• Founded on November 11, 1919.
• The Head Office was inaugurated in 1921 in Mumbai by Mahatma Gandhi.
• Promoted by Seth Sitaram Poddar, it now has over 8700 branches.

3. Bank of India:

• Established on September 1, 1906, with Ramnarayan Ruia considered its founder.
• The Head Office is located in Mumbai.

4. Indian Overseas Bank:

• Established on February 10, 1937, with credit to MCTM Chidambaram Chettyar.
• Headquarters situated in Chennai.

5. Bank of Maharashtra:

• Founded on September 16, 1935, by BG Kole and DK Sathe.
• Headquartered in Pune.

6. Punjab National Bank:

• Founded as a public sector bank in Lahore on May 19, 1894.
• Dyal Singh Majithya and Lala Lajpat Rai are considered its founders.
• Second-largest nationalized bank in India with headquarters in New Delhi.

7. Canara Bank:

• Established on July 1, 1906, in Mangalore (Karnataka).
• Attributed to Sri Ammembal Subba Rao Pai.
• Headquarters in Bangalore.

8. Indian Bank:

• Founded on March 5, 1907, and commenced operations on August 15, 1907.
• M Ramaswamy Chettiar is credited for its establishment.
• Headquartered in Chennai.

9. Central Bank of India:

• Established on December 21, 1911, by Sir Sorabji Pocharkhanawala.
• The first commercial bank in India with ownership and control in Indian hands.
• Headquarters in Mumbai.

10. Punjab and Sindh Bank:

• Established on June 24, 1908, credited to Bhai Veer Singh, Sir Sunder Singh Majitha, and Sardar Tarlochan Singh.
• Headquarters in New Delhi.

11. UCO Bank:

• Established on January 6, 1943, credited to Ghanshyam Das Birla.
• Headquarters in Kolkata.

Private Banks:

• Private banks are those owned by individuals or general partner(s) with limited partner(s), licensed by the Reserve Bank of India.
• Recent guidelines set by the Reserve Bank for private sector banks include criteria like minimum paid-up capital, listing within two years, restrictions on certain companies establishing banks, and the exclusion of public sector involvement.

Types of Private Banks:

There are two types of private banks, namely Old Private Sector Banks and New Private Sector Banks.

• Emerging private banks established post-1991 as a result of economic and financial reforms, are distinguished by their compact size and localized focus. The Banking Regulation Act was amended in 1993 to facilitate the entry of these new private-sector banks into the Indian banking landscape.
• The Centurion Bank of Punjab became part of HDFC in 2008, while in 2015, Kotak Mahindra Bank merged with ING Vyasa Bank. Bandhan Finance secured a Universal Banking License from the RBI in 2015, with its guiding principle being “Apna Bhala, Sabki Bhalai.” In total, there are 21 private banks in India.
• The licensing of new private banks is governed by RBI guidelines released in February 2013. Parameters include a solid track record of financial integrity, a minimum of 40% equity capital held by the NOFHC (Non-Operative Financial Holding Company) with a five-year lock-in period, and the obligation to establish 25% of branches in unbanked rural areas.
• IDFC First Bank, inaugurated by Prime Minister Narendra Modi in 2015, is one such new private bank. It commenced operations on October 1, 2015, with headquarters in Mumbai, forming part of the IDFC infrastructure finance company.
• Bandhan Bank, the first bank established in Eastern India post-independence, began its operations on August 23, 2015. Its Chairman and Board of Directors were appointed on July 9, 2015.
• Foreign banks operate in India through branches and representative offices, subject to approval from the Reserve Bank of India. Notable among them are Standard Chartered Bank, HSBC Limited, Citibank, and the Royal Bank of Scotland NV.
• Regional Rural Banks (RRBs), established in 1976 based on the recommendations of the Narasimham Committee, fall under the regulatory purview of both the Reserve Bank and NABARD. The Regional Rural Banks Act, 1976, governs their incorporation, regulation, and winding up.
• Regional Rural Banks (RRBs) can offer checks and various financial instruments to customers through agreements with sponsor banks, and they may also provide locker facilities. 
• The RRB development journey began on October 2, 1975, with the establishment of five RRBs on Gandhi Jayanti. The equity contribution to RRBs comes from the Central Government, the respective State Government, and the sponsor bank in a ratio of 50:15:35.
• Prathama Bank, headquartered in Uttar Pradesh, was the inaugural RRB sponsored by Syndicate Bank (now Canara Bank), with an authorized capital of 5 crore.
• As of March 2020, there are 43 RRBs in India, with notable exclusions in states and union territories such as Goa, Sikkim, Delhi, Chandigarh, Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu.

Regional Rural Banks (Amendment) Act, 2015

• The Regional Rural Banks (Amendment) Act, of 2015, aimed to enhance the capital base of RRBs and bolster their capabilities. 
• Key amendments include the removal of the five-year limit on financial and managerial support from sponsor banks, an increase in authorized capital to 2000 crore, permission for RRBs to raise capital from sources other than the government and sponsor banks, and a mandate for RRBs to maintain a combined shareholding of the Central Government and sponsor bank up to 51%.
• Furthermore, the Act introduced changes in directorship tenure, prohibiting a director from serving on the boards of multiple RRBs, extending the tenure to 3 years from 2 years, and aligning the director’s term with the pleasure of the Central Government.
• Cooperative banks operate in both urban and rural areas, functioning on a no-profit, no-loss basis, unlike commercial banks driven by profit motives. These banks are regulated by the Reserve Bank of India under the Banking Regulation Act, of 1949, and the Banking Laws (Application to Co-operative Societies) Act, of 1965.

State Cooperative Banks (SCBs)

Scheduled Cooperative Banks consist of Scheduled State Cooperative Banks and Scheduled Urban Cooperative Banks. State Cooperative Banks (SCBs) are the principal cooperative societies in a state, focused on financing other cooperative societies.

Urban Cooperative Banks (UCBs)

 Urban Cooperative Banks (UCBs) are registered under the Co-operative Societies Acts of respective State Governments, and those with a multi-state presence are governed by the Multi-State Co-operative Societies Act and regulated by the Central Government.

Moreover, the Reserve Bank operates with regulatory authority under specific provisions of the Banking Regulation Act, of 1949. Primary cooperative credit societies, established at the village or town level, form an integral part of this regulatory framework.

Primary Credit Societies

A primary cooperative society encompasses any cooperative society, excluding primary agricultural credit societies. The society’s funds are sourced from share capital, deposits, and loans from Central Cooperative Banks.

The Banking Regulation (Amendment) Act, 2020,

The Banking Regulation (Amendment) Act, 2020, introduces modifications to the Banking Regulation Act, 1949, replacing the Banking Regulation (Amendment) Ordinance, 2020. The primary objective is to subject Cooperative Banks to the oversight of the Reserve Bank of India (RBI). This Act empowers the RBI to initiate a scheme for the reconstruction or amalgamation of a stressed lender without imposing a moratorium.

Other Types of Banks

• Diverse types of banks exist, including Payments Banks. Operating on a smaller scale, these banks fall under the category of private banks. Guidelines for licensing payments banks were released by the RBI on November 27, 2014, with Bharti Airtel launching India’s first payments bank in March 2017, named Airtel Payment Bank.
• Payment banks aim to promote financial inclusion by offering savings accounts, payment, and remittance services to migrant labor, low-income households, small businesses, and other unorganized sector entities. They are restricted to providing specific services, such as opening savings or current accounts, paying interest, issuing debit/ATM cards, and facilitating online services through mobile banking.
• Payments Banks can accept deposits up to 2 lakh per individual and offer services like fund transfers, utility bill payments, and internet banking. While they cannot undertake lending activities, they can distribute non-risk-sharing financial products like mutual fund units and insurance products.

RBI Guidelines for Payments Banks

RBI guidelines for Payments Banks include restrictions on lending services, a maximum balance limit of 2 lakh per individual customer, issuance of ATM/debit cards (not credit cards), and the ability to distribute non-risk sharing financial products. Non-Resident Indians are not permitted to open accounts in Payments Banks, and a minimum capital of 100 crore is mandatory. Foreign Direct Investment (FDI) of up to 74% is allowed in Payments Banks. They can facilitate transfers and remittances through mobile phones, and various entities, including non-bank prepaid payment companies and mobile telephone companies, are authorized to obtain licenses for Payments Banks according to RBI guidelines.

 Offering features such as seamless automatic bill payments and cashless, chequeless transactions via phone, they streamline financial processes.

India Post Payments Bank (IPPB)

• Launched on September 1, 2018, by Prime Minister Narendra Modi, India Post Payments Bank (IPPB) operates as a payment bank, aiming to bring banking services to people’s doorsteps.
• As a wholly-owned subsidiary of the Department of Post, IPPB holds 100 percent Government of India equity and operates under the governance of the Reserve Bank of India (RBI).
• The establishment of IPPB was announced in the Budget of 2015-16, and it has received the Certificate of Incorporation from the Registrar of Companies, Ministry of Corporate Affairs, under the Companies Act, 2013.
• By RBI guidelines, the savings accounts in this bank are subject to a maximum limit of 2 lakh per person.
• IPPB’s services are intricately connected with post offices and employ alternative channels that leverage modern technology, including ATMs, mobiles simplified digital payments, and Point of Sale (PoS)/m-PoS devices.

Names of Payments Banks	Headquarters
Airtel Payments Bank Limited	New Delhi
Paytm Payment Bank	Noida
Fino Payment Bank	Navi Mumbai
India Post Payment Bank	New Delhi
Jio Payment Bank	Navi Mumbai
NSDL Payment Bank	Mumbai

RBI in August 2015, gave licenses to eleven entities to launch payment banks. However, as of June 2021, only six have launched banking operations.

Aditya Birla Payment Bank which launched its services in 2018, decided to wind up its operations in 2019. Sun Pharma, Tech Mahindra Limited, and Cholamandalam Distribution Services Limited withdrew their application for the establishment of payment banks

Small Finance Banks

Small Finance Banks, a specialized category of banks in India, are designed with a specific purpose and focus on serving a particular segment of the population. The Reserve Bank of India (RBI) issued guidelines for Small Finance Banks, along with Payments Banks, on November 27, 2014.

The primary objective of Small Finance Banks is to enhance financial inclusion by providing basic banking facilities to the unbanked, thus promoting savings habits. Additionally, they aim to extend credit to small business units, and support small and marginal farmers, micro and small industries, and other entities in the unorganized sector through high-tech, low-cost operations.

Capital Small Finance Bank Limited made history by becoming India’s first Small Finance Bank on April 24, 2016, following its conversion from Capital Local Area Bank.

Key Features of Small Finance Banks

Key Features of Small Finance Banks include their ability to accept various types of deposits (savings, current, fixed deposits, recurring deposits) similar to commercial banks. In contrast to Payments Banks, Small Finance Banks are permitted to engage in lending activities. However, they require prior approval for branch expansion during the initial three years. Their operational area is restricted to creating a localized banking experience.

Non-Banking Financial Companies (NBFCs) controlled by Indian residents and individuals with at least 10 years of experience in the banking and financial sector are eligible to apply for a Small Finance Bank license. Small Finance Banks primarily target small businesses and Micro, Small, and Medium Enterprises (MSMEs) but are prohibited from lending deposited funds to large businesses or industries.

Names of Small Finance Banks	Headquarters	Taglines
Capital Small Finance Bank	Jalandhar, Punjab	Vishwas Se Vikas Tak
AU Small Finance Bank	Jaipur, Rajasthan	Chalo Aage Badhe
		Joy of Banking
ESAF Small Finance Bank	Thrissur, Kerala
Ujjivan Small Finance Bank	Bengaluru, Karnataka	We Believe in Your Belief
North-East Small Finance Bank	Guwahati, Assam
Jan Small Finance Bank	Bengaluru, Karnataka	Your Doorstep Banker
Fincare Small Finance Bank	Navi Mumbai, Maharashtra	Lächo Apni Kahani
Utkarsh Small Finance Bank	Varanasi, Uttar Pradesh	A New Era in Smart Banking Begins
Suryoday Small Finance Bank	Navi Mumbai, Maharashtra	Aapki Ummeed Ka Khata
Equitas Small Finance Bank	Chennai, Tamil Nadu	A Bank of Smiles
		It’s Fun Banking

Difference between Small Finance Banks and Payments Banks
Eligibility
Small Finance Banks	Payments Banks
Professionals with 10 years in financial services or	Card Issuers,
promoter group with 5 years track record.	finance
	companies,
	business
	correspondents,
	telecom
	companies,
	retailers, etc.

Capital Requirement
Small Finance Banks	Payments Banks
100 crore Equity Capital.	100 crore Equity Capital.

Scope of Activity
Small Finance Banks	Payments Banks
Providing basic banking facilities to poor and small	Accept deposits, issue debit cards,
businessmen. Promoter’s initial contribution should be	remittance services. Cannot issue
40%, lowered to 26% in 12 years.	credit cards. Retain 40% stake for
	promoters in the first 5 years.

Conditions for Establishing a Small Finance Bank 

Conditions for Establishing a Small Finance Bank include a minimum paid-up equity capital requirement of ₹100 crore, and every small finance bank must incorporate the words ‘small finance bank’ in its name. They are not permitted to establish subsidiaries for non-banking activities.

To promote financial inclusion, at least 75% of its Adjusted Net Bank Credit (ANBC) should be directed toward the priority sector categories defined by the RBI. The maximum loan size for a single person is restricted to 10% of total capital funds and 15% in the case of a group. Additionally, a minimum of 50% of loans should constitute amounts up to ₹25 lakh.

Small finance banks have the flexibility to offer financial services such as the distribution of mutual fund units, insurance products, and pension products, subject to prior approval from the RBI. Transformation into a full-fledged bank is possible, but only with the approval of the RBI.

A crucial requirement is that 25% of a small finance bank’s branches must be established in unbanked areas to enhance financial accessibility.

Anywhere Banking

The concept of Anywhere Banking allows customers to deposit/withdraw cash from any branch other than the one where they hold their account. This system facilitates secure and convenient online, real-time inter-branch transactions across the bank, providing flexibility, transaction power, convenience, and 24 x 7 banking services.

Key Features of Anywhere Banking

Key features of Anywhere Banking include the ability to withdraw or remit cash through AWB cheques from any branch, transfer funds between accounts within 10 seconds to any location in India, and extend cash withdrawal facilities to savings, current, loan, and overdraft accounts.

MUDRA Bank

MUDRA Bank, officially known as the Micro Units Development and Refinance Agency Bank, is a novel institution established by the Government of India to foster the development of micro units and provide refinancing for microfinance institutions (MFIs). Launched by Prime Minister Narendra Modi on April 8, 2015, MUDRA Bank operates with the singular goal of addressing the funding requirements of Non-Corporate Small Businesses.

Originally set up as a corporate subsidiary of the Small Industries Development Bank of India (SIDBI) in March 2015, MUDRA Ltd. preceded the launch of the Pradhan Mantri MUDRA Yojana (PMMY) in April 2015. As of July 2021, MUDRA Bank’s authorized capital stands at 1,000 crores, with a fully subscribed paid-up capital of 750 crores from SIDBI.

The primary functions of MUDRA Bank include regulating and refinancing all microfinance institutions (MFIs) engaged in lending to micro/small business entities in manufacturing, trading, and service activities. The bank collaborates with state-level and regional-level coordinators to extend financial support to the Last Mile Financer of small/micro business enterprises.

While initially functioning as a non-banking financial company and a subsidiary of SIDBI, the long-term objective of MUDRA Bank is to evolve into a separate entity with regulatory and refinance authority for MFIs. It aims to provide guidelines and ratings for MFIs to ensure stability and competitiveness in the micro-finance system.

The objectives of MUDRA

The objectives of MUDRA Bank encompass regulating micro-finance lending and borrowing and providing credit support to MFIs and agencies serving small businesses, retailers, self-help groups, and individuals. Additionally, MUDRA aims to register and rate MFIs, introduce competitive elements, offer credit guarantee schemes, implement efficient lending technologies, and establish a robust credit delivery system for small and micro-businesses under the Pradhan Mantri MUDRA Yojana.

MUDRA Bank categorizes 

MUDRA Bank categorizes its offerings into three products named Shishu, Kishor, and Tarun, reflecting the growth stages and funding needs of micro-units and entrepreneurs. Refinancing is carried out through state-level institutions, and loans are disbursed through various intermediaries such as NBFCs, MFIs, Rural Banks, District Banks, Nationalized Banks, Private Banks, and Primary Lending Institutions.

MUDRA Bank extends its support through various loan categories:

• Shishu Category: Designed for newly initiated businesses seeking financial assistance. Micro units falling under this category are eligible for a loan cover of up to 50,000.
• Kishor Category: Tailored for businesses in the early stages of establishment. Units falling under this category can receive a loan cover ranging from 50,000 to 5 lakhs.
• Tarun Category: Geared towards small businesses that are already set up and established, with potential financial needs for business improvement. Units falling into this category are eligible for a loan cover of up to 10 lakhs.

MUDRA Card:

• Issued as a debit card against the MUDRA Loan Account, the MUDRA Card serves the working capital portion of the loan.
• Enables multiple withdrawals and credits to efficiently manage the working capital limit.
• The card limit is valid until the due date of the Over Draft (OD) limit, with a card validity of 5 years.

Micro-Finance Banking:

• Micro-finance, also known as Micro-Credit, is a banking service catering to unemployed or low-income individuals or groups without access to traditional financial services.
• Originated by Nobel Prize winner Muhammad Yunus, Microfinance empowers financially marginalized individuals by providing capital to start businesses and achieve financial independence.
• Micro-finance institutions (MFIs) are financial entities offering small loans to those lacking access to traditional banking facilities, with the definition of small loans varying by country.

Model of Micro-Finance Companies in India:

• Micro-finance companies operate on a decentralized model, forming informal and voluntary associations.
• Self-Help Group (SHG): Informal groups of small entrepreneurs pooling funds to meet emergency business needs, with a focus on savings.
• Joint Liability Group (JLG): Introduced by NABARD, groups of 4-10 individuals with similar socio-economic backgrounds for income generation and activity-oriented purposes.

Loan:

• A loan is a borrowed sum from banks or financial institutions to manage planned or unplanned events, incurring a debt to be repaid with interest within a specified period.
• Types of loans include Home loan, Personal loan, Car loan, Education loan, etc.

Non-Performing Asset

A Non-Performing Asset (NPA) refers to a loan or advance where the principal or interest payment has been overdue for 90 days or more. The classification of NPA varies based on the duration they remain in the NPA category:

• Sub-Standard Asset: Classified as a sub-standard asset if it remains in the NPA category for less than or equal to 12 months.
• Doubtful Asset: Designated as a doubtful asset if it stays as an NPA for more than 12 months.
• Loss Asset: Considered a loss asset when it is uncollectible or has minimal value, making its continuation as a bankable asset impractical. However, some recovery value may still exist, as the asset hasn’t been entirely written off.

Write-off

A write-off is the reduction of the recognized value of an asset, acknowledging its decreased or zero value in accounting. In banking, a loan write-off is a tool used to cleanse balance sheets, typically applied in cases of bad loans or NPAs.

Insolvency and Bankruptcy Code (IBC)

Insolvency arises when individuals or companies struggle to repay their outstanding debt. The Insolvency and Bankruptcy Code (IBC), enacted in 2016, responded to the growing issue of non-performing loans. The inadequacy of older loan recovery mechanisms prompted the enactment of IBC, shifting the insolvency regime from debtor-in-possession to creditor-in-control.

Objectives of IBC include:

• Saving a business as a going concern through restructuring, ownership changes, mergers, and other methods (resolution).
• Maximizing the value of assets of the corporate debtor.
• Promoting entrepreneurship, credit availability, and balancing interests.

The IBC establishes a consolidated framework for time-bound insolvency resolution for corporations, partnership firms, and individuals.

Insolvency and Bankruptcy Code (Amendment) Bill, 2021

The Pre-packaged Insolvency Resolution Process (PIRP), or pre-packs, was proposed as an insolvency resolution mechanism for Micro, Small, and Medium Enterprises (MSMEs). The aim is to address issues faced by MSMEs due to the pandemic’s impact, recognizing their significance in the economy.

SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, known as the SARFAESI Act, serves as an effective tool for banks in recovering bad loans (NPAs). The Act allows banks to seize securities without court intervention for secured loans, such as those backed by hypothecation, mortgage, or assignment.

 The SARFAESI Act of 2002 grants banks the authority to seize and desist. Banks can issue a written notice to defaulting borrowers, demanding the discharge of their liabilities within 60 days. The Act mandates the registration and regulation of securitisation and reconstruction companies by the RBI.

SARFAESI Amendment Act, 2016:

• This amendment empowers the District Magistrate (DM) to take possession of collateral within 30 days to secure creditors. The DM is also authorized to assist banks in assuming control of a company if it fails to repay loans. Additionally, it establishes a central database to integrate property records and maintain transaction records related to secured assets.

Financial Services Institutions Bureau (FSIB):

• Established in July 2022, the FSIB, a government body under the Department of Financial Services, replaces the Bank Board’s Bureau (BBB), declared an incompetent authority.

Structure of FSIB:

• Headed by a Chairman, a Central Government nominee, the board includes the Secretaries of the DFS, the Chairman of IRDAI, and a Deputy Governor of the RBI. It also comprises three part-time members with expertise in banking and three from the insurance sector.

Primary Role of FSIB:

• Identifying manpower capabilities and ensuring proper talent selection for senior positions in government-owned financial institutions. Making recommendations for the appointment of full-time directors and non-executive chairmen of state-run financial services institutions.

Functions of FSIB:

• Advising the government on appointments, transfers, termination of services, and the management structure at the Board level for public sector banks, financial institutions, and insurers.
• Providing recommendations on performance appraisal systems, code of conduct, and ethics for directors.
• Ensuring suitable training and development programs for management in public sector banks, financial institutions, and insurers.
• Assisting institutions in developing business strategies and capital-raising plans.

Bank Board Bureau (BBB):

• Initiated its work on April 1, 2016, serving as a search committee or appointments board for the Chairman of public sector banks. Vinod Rai was appointed as the first Chairman of the Banks Board Bureau.

Banking Sector Reforms:

• Narasimham-I Committee, formed to study and recommend improvements in the efficiency and productivity of the financial system, submitted its report to the Finance Minister in November 1991.

Narasimham-II Committee:

The Narasimham-II Committee was commissioned to conduct a progress review of the banking reforms implemented since 1992, aiming to strengthen India’s financial institutions. The committee, chaired by M. Narasimham, addressed issues such as the size of banks and Capital Adequacy Ratio (CAR). The committee’s report was submitted in April 1998.

Damodaran Committee:

Headed by former SEBI Chairman M. Damodaran, the committee was established by the Central Bank to investigate customer service issues and assess the existing grievance redressal mechanism in banks. It focused on recommending measures for the speedy resolution of complaints and encouraged banks to offer no-frill savings accounts with basic facilities like a cheque book and ATM card without requiring a minimum balance.

Bimal Jalan Committee:

Constituted in 2019, the Bimal Jalan Committee was tasked with reviewing the Economic Capital Framework (ECF) for the Reserve Bank of India (RBI). The Finance Ministry sought adherence to global best practices and the transfer of more surplus to the government. Previous examinations of the ideal size of RBI reserves were conducted by committees led by V. Subrahmanyam in 1997, Usha Thorat in 2004, and Y.H. Malegam in 2013.

VG Kannan Committee:

In 2019, the RBI established a six-member committee, chaired by VG Kannan, Chief Executive of the Indian Banks’ Association, to review the ATM interchange fee structure. The goal was to boost ATM deployment in unbanked areas.

Swabhiman:

Launched on February 10, 2011, Swabhiman is a significant financial inclusion initiative aiming to provide branchless banking through technology. Banks offer basic services like deposits, withdrawals, and remittances using business correspondents. The initiative facilitates the direct crediting of government subsidies and social security benefits to beneficiaries’ accounts, allowing them to access funds through local business correspondents.

Khandelwal Committee Report:

The government formed a committee on human resources issues of Public Sector Banks (PSBs) under the chairmanship of Dr. AK Khandelwal. The committee made 105 recommendations on various aspects of manpower and recruitment planning, training, career planning, performance management, reward management, succession planning, leadership development, and HR professionalization. The recommendations were forwarded to PSBs for further deliberation.

Nachiket Mor Committee:

Appointed by the RBI, the Nachiket Mor Committee focused on comprehensive financial services for small businesses and low-income individuals. The committee recommended that every adult in the country should have a bank account by January 1, 2016, known as the Universal Electronic Bank Account (UEBA). It also proposed issuing an account to every resident upon receiving an Aadhaar number, recommending the abolition of interest subsidies and loan waivers.

The recommendation is to increase the priority sector lending cap for banks from the current 40% to 50%. Additionally, there is a proposal for the establishment of a payments bank that would offer payment services along with credit, insurance, and risk management products.

Bimal Jalan Committee/ New Bank Licenses:

• Chaired by former RBI Governor Bimal Jalan, this committee was formed to evaluate applications for new banks in India. The report, submitted in February 2014, advocated granting in-principal approval for banking licenses to Bandhan Microfinance and Infrastructure Development and Finance Corporation (IDFC).
• The RBI issued guidelines for new banks in February 2013, inviting applications from various stakeholders. The Bimal Jalan Committee selected two entities from a list that included Indian Post, Anil Ambani Group, Aditya Birla Group, Bajaj Finance, Muthoot Finance, Religare Enterprise, etc.
• The committee set conditions for the entities to obtain a banking license, requiring them to achieve a net worth of 1000 crores or more within 18 months and open at least 25% of branches in unbanked rural areas.

Upendra Kumar Singh Committee, 2019:

• Headed by Upendra Kumar Singh, former Chairman of SEBI, this expert committee on MSMEs recommended the RBI to implement a video KYC format to replace the current KYC methods.

Urjit Patel Committee:

• An expert committee was appointed to examine and strengthen the monetary policy framework of the RBI. Major recommendations include a shift to the Consumer Price Index (CPI) as the nominal anchor for inflation, setting an inflation target of 4% with a band of +/-2%, establishing a Monetary Policy Committee (MPC), and treating fixed income financial products on par with bank deposits for taxation purposes.
• The committee also suggested the re-examination of subventions on interest rates for lending to certain sectors, and a flexible setting of monetary policy in the short run due to volatility in capital inflows and outflows.

Financial Reforms in Banks:

• The banking sector in India has undergone significant reforms, transitioning from conventional to convenience banking due to competition from public sector, private, and foreign banks.

Society for Worldwide Interbank Financial Telecommunication (SWIFT):

• SWIFT is a Belgium-based secure financial messaging service used by over 11,000 banking and securities organizations in more than 200 countries worldwide.
• Operational since May 1977, SWIFT facilitates secure and standardized international money transfers, allowing for the sending or receiving of funds anywhere in the world.

SWIFT Security Principles:

SWIFT has established 16 basic security principles for securing their access points within the network. These principles encompass credentials management and the implementation of firewalls to enhance network security.

SWIFT Payments:

SWIFT payments are transactions conducted through the network. Each bank is assigned an 8 or 11-character code, known as a bank identifier. Similar to the IFSC code used for domestic interbank transfers, SWIFT is utilized for international transfers, with the first 4 characters representing the recipient bank.

Real Time Gross Settlement System (RTGS):

The RTGS system in India commenced operations on April 29, 2004. It serves as a funds transfer mechanism for real-time, gross basis transfers between banks. RTGS ensures the fastest possible money transfer within the banking channel, with transactions settled instantly and individually. The system is designed for large-value transactions, and there is no upper limit for RTGS transactions. As of December 4, 2020, RTGS is available 24x7x365. The Reserve Bank of India (RBI) waived processing charges for RTGS transactions from July 1, 2019. Additionally, RTGS facilities have been extended to non-bank entities, including Phonepe, Paytm, Visa, and other payment banks.

National Electronic Funds Transfer (NEFT):

Introduced in November 2005, NEFT is a nationwide system enabling individuals, firms, and corporates to electronically transfer funds between bank branches. NEFT operates round the clock, allowing fund transfers on a 24x7x365 basis, including holidays since December 2019. There is no minimum or maximum limit on the amount that can be transferred via NEFT. Online transactions initiated through internet/mobile banking channels are free of charge, while a maximum fee of 25 (excluding taxes) is applicable for NEFT facilities through banking channels. NEFT facilities have also been extended to non-bank payment system operators, including Paytm, Airtel wallet, and payment banks.

Magnetic Ink Character Recognition (MICR):

MICR is a technology that facilitates the rapid reading and processing of cheques. The MICR line at the bottom of cheques includes encoded information such as the document type indicator, bank code, account number, cheque number, cheque amount, and a control indicator.

National Payments Corporation of India (NPCI):

NPCI serves as the umbrella organization for all retail payment systems in India and is promoted by the Reserve Bank of India. Established in 2008 as a not-for-profit organization under Section 25 of the Companies Act, 2013, NPCI plays a crucial role in coordinating various retail payment systems in the country.

 NPCI has played a pivotal role in shaping a domestic card payment network known as RuPay, contributing to the reduction of reliance on international card schemes. The NPCI incorporates services such as RuPay Card and IMPS.

• Additional services offered by NPCI include:

National Financial Switch (NFS):

• NFS, initiated on August 27, 2004, stands as the largest shared Automated Teller Machines (ATMs) network in India. The Institute for Development and Research in Banking Technology (IDRBI) designed, developed, and deployed NFS to interconnect ATMs nationwide, fostering convenience banking.

Instant Money Transfer (IMT) Facility:

• IMT is an innovative payment tool that allows customers to authorize payments through a mobile phone linked to their bank account. Licensed by the RBI as a national payment system, it was launched in partnership with Empays Limited Payment System India Private, headquartered in Mumbai. Beneficiaries do not require a bank account and can instantly receive funds from any IMT-enabled ATM. This facility enables fund withdrawal from ATMs without a debit card, allowing transfers up to 10,000 using a mobile phone, with a monthly cap of 25,000.

Electronic Clearing Service (ECS):

• ECS utilizes electronic payment instructions instead of paper instruments for fund transfers. ECS-Credit facilitates companies in making interest or dividend payments to numerous beneficiaries through direct credit to their bank accounts. As of June 2021, there is no individual transaction amount limit.

National Automated Clearing House (NACH):

• NACH, implemented by NPCI, serves as an electronic funds-clearing platform for banks, financial institutions, corporations, and government departments. Replacing ECS on May 1, 2016, NACH handles both debit and credit transactions in real-time mode for bulk and repetitive transactions.

Mobile Money Identifier Digit (MMID):

• MMID, a seven-digit number issued by banks, facilitates financial transactions through the user’s mobile phone. Linked uniquely with the user’s bank account number, MMID is a crucial input for fund transfers. Both the remitter and beneficiary require MMIDs for mobile phone fund transfers, enabling the identification of beneficiary details. Multiple MMIDs can be linked to the same mobile number.

New Banking Platforms for Payment:

Unified Payments Interface (UPI):

• UPI, developed by NPCI for all retail payments in the country, simplifies money transfers. Launched on April 11, 2016, in Mumbai, UPI is designed to make the transfer of money easy.
• As of December 2020, 207 banks actively offer UPI services, with UPI also being accepted for payments in Bhutan. UPI is an instant real-time payment system that consolidates multiple bank accounts into a single application, facilitating inter-bank transactions.

Features of UPI:

• Both the sender and receiver must have enabled the UPI platform for the transaction.
• UPI-enabled banks allow consolidation of their apps, enabling various payment transactions.
• The transaction limit through the UPI system is ₹7011, and charges may be applied based on the transferred amount.
• The service operates 24×7, eliminating the need to carry debit or credit cards and addressing security concerns.

UPI Autopay:

• Introduced by the National Payment Corporation of India (NPCI) in August 2020, UPI Autopay enables customers to set up recurring e-mandates for payments such as mobile bills, EMI payments, entertainment/OTT subscriptions, insurance, and mutual funds using any UPI-enabled app.

National Unified USSD Platform (NUUP):

• NUUP, a USSD-based mobile banking service from NPCI, allows customers to access banking services by dialing *99# from their mobile phones. The service works across all GSM mobile handsets, and transactions can range from as low as ₹1 to as much as ₹5,000 per transaction.

Bharat Bill Payment System (BBPS):

• BBPS, conceptualized by the Reserve Bank of India and driven by NPCI, is an integrated bill payment system. Launched in 2016 under the recommendation of the RBI Executive Director G Padmanabhan Committee, BBPS offers inter-operable bill payment services online and through a network of agents, available 24x7x365.

QR Codes:

• QR (Quick Response) codes are machine-scannable images that store information and can be instantly read using a smartphone camera.
• There are two interoperable QR codes – UPI and Bharat QR – according to RBI.
• Bharat QR is a QR-based payment solution for person-to-merchant digital payments, allowing users to scan the code at a merchant’s place using a Bharat QR-enabled mobile application.

BHIM

• The National Payments Corporation of India (NPCI) developed BHIM, also known as Bharat Interface for Money, which was launched by Prime Minister Narendra Modi on December 30, 2016.
• BHIM streamlines digital payments through UPI (Unified Payment Interface) using a Virtual Payment Address (VPA).
• When utilizing BHIM UPI for payments, there’s no need for details like a bank account number or IFSC code. It also offers a static QR code for each account that can be easily downloaded.
• Currently, BHIM is available in 20 languages, including Hindi, English, Tamil, Telugu, Malayalam, Bengali, Odia, Kannada, Gujarati, Marathi, Assamese, Bhojpuri, Haryanvi, Marwari, Konkani, Manipuri, Khasi, Mizo, and Urdu.
• The BHIM app supports in-app utility bill payments to facilitate users in settling bills on the go with the help of BHIM BillPay.

New Banking Services in India

• The banking industry has emerged as one of the developed service sectors in India.
• Over the last decade, India has witnessed a shift from traditional payment methods, such as cash/paper-based payments, to modern electronic-based payment systems through various channels like core banking, prepaid payment instruments, ATMs, electronic banking, bank cards, etc.

Electronic Banking

• Electronic banking, also known as Electronic Funds Transfer (EFT), is the use of electronic means to transfer funds directly from one account to another, eliminating the need for cheques or cash.
• Some essential electronic banking services include:
  • Direct Deposit and Withdrawal Service: Enables consumers to authorize specific deposits, such as paychecks or social security cheques, regularly to their accounts.
  • Banking through Telephone: Allows consumers to pay certain bills or transfer funds between accounts by simply calling their bank. This service has gradually been replaced by mobile banking.
  • Point-of-Sale (PoS) Transfer Terminal: Permits consumers to pay for retail purchases using a cheque card, essentially a debit card, where the money is transferred immediately from their account to the store’s account.
  • Personal Computer Banking Service: Offers consumers the convenience of conducting many banking transactions electronically using a Personal Computer (PC).
  • Internet Banking: Also known as online banking, web banking, or e-banking, it is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through an online mode.
  • Home Banking: The practice of conducting banking transactions from home rather than at branch locations is known as home banking. Home banking generally refers to either banking over the telephone or on the internet.
  • Smart Card: A physical card that has an embedded integrated chip that acts as a security token. It is sometimes called a Stored-Value Card. It has a specific amount of credit embedded electronically in the card.
  • Direct Deposit System: Also known as Direct Credit, it describes a deposit of money straight from the source into a bank account, initiated by the payer rather than the payee. The money is transferred directly to the recipient bank through a payment system.
  • Mobile Banking: A system that allows customers of a financial institution to conduct a variety of financial transactions through a mobile device, such as a mobile phone or personal digital assistant.

Bank Cards

• A bank card, usually made of plastic, is issued by a bank to its clients and serves one or more purposes related to granting the client access to funds. This access can be either from the client’s bank account or through a credit account.
• Cards can be categorized based on their issuance, usage, and payment by the cardholder.

Types of Cards

• Banks issue various types of cards that allow clients to access their funds. Current accounts typically include the option of an ATM card and often a debit card. 
• Most banks offer both ATM and debit facilities on a single card. Below are different payment cards with features for a better understanding.

Smart Card

• A smart card is a plastic card, similar in size to a credit card, with an embedded microchip that can be loaded with data. It can be used for telephone calls, electronic cash payments, and other applications. The card can be periodically refreshed for additional use.

RuPay Card

• RuPay is an Indian domestic card scheme conceptualized and launched by the National Payments Corporation of India (NPCI).

Kisan Gold Card

• This hassle-free term loan card enables farmers to avail themselves of loans for various agricultural needs such as implements, land development, machinery repair, and consumption. Farmers have flexibility regarding the loan amount, duration, and purpose. The loan amount is five times the annual farm income, with a maximum limit of 5 lakhs. For consumption purposes, it should not exceed 20% of the limit.

Core Banking System

• Core banking refers to a banking system in which a person who opens an account at one branch becomes a customer not only of that branch but of all branches of the bank.
• This customer can conduct banking transactions anywhere and anytime.
• Core banking includes depositing and lending money; customer relationship management activities are integral to its functioning. 
• Normal core banking functions cover deposit accounts, loans, mortgages, and payments, accessible through multiple channels like ATMs, internet banking, and branches.
• It operates on a centralized database with online connectivity to branches, the internet, and ATM networks, and is widely adopted by major banks.

Indian Financial Network (INFINET)

• Established by the RBI in 1999 through the IDRBT, Hyderabad, INFINET is a Closed User Group (CUG) Network exclusively used by member banks and financial institutions.
• It connects all financial institutions across India, serving as the communication backbone for the Indian banking and financial sector. 
• Membership is open to all banks in the public sector, private sector, co-operative, etc. The Institute for Development and Research in Banking Technology (IDRBT) developed the National Financial Switch (NFS) in 2004 to connect ATMs nationwide.

Automated Teller Machine

• An Automated Teller Machine (ATM) is a computerized device that grants bank customers access to their accounts, enabling cash dispensing and other financial and non-financial transactions without the necessity of visiting a physical bank branch.
• Benefits to Customers:
  • Provides 24/7 service, 365 days a year.
  • Offers quick and efficient service.
  • Ensures privacy in transactions.
  • Provides error-free service.

Benefits to Banks:

• Acts as an alternative to extending banking hours.
• Serves as an alternative for opening new branches.
• Reduces the operating expenses of the bank.
• Frees bank employees from routine transactions, allowing them to focus on analytical and innovative work.

Important Facts About ATMs in India:

• HSBC introduced the first ATM in India in 1987 in Mumbai.
• ICICI was the first bank to provide a Mobile ATM.
• Union Bank of India (UBI) launched India’s first talking ATM for visually impaired individuals in Ahmedabad (Gujarat).
• The National Payments Corporation of India (NPCI) introduced India’s first rural bank ATM card with a regional rural bank in Varanasi.
• Tata Communication Payments Solutions Ltd. opened India’s first non-bank-owned ATM in Thane district, Maharashtra in June 2013.

Major Types of ATMs:

• White Label ATM: Owned and operated by non-banks, these ATMs allow customers from different banks to withdraw or deposit cash. They don’t bear any bank logo and are authorized by the RBI under the Payment and Settlement Systems Act, 2007.
• Brown Label ATM: The hardware and lease of the ATM are owned by a service provider, while cash management and connectivity to banking networks are provided by a sponsor bank. The sponsor bank’s brand is used on the ATM.
• Online ATMs: Connected to the bank’s database at all times, providing real-time transactions online. Withdrawal limits and account balances are constantly monitored by the bank.
• Offline ATMs: Not connected to the bank’s database, these ATMs have a pre-defined withdrawal limit, and customers can withdraw that amount regardless of their account balance. Banks may charge a penalty for exceeding the balance.

Basel Norms

• In 1988, central banking bodies in developed economies agreed on the Basel Accord, which provides recommendations on banking regulations related to capital, market risk, and operational risk.
• Basel I, published by the Basel Committee on Bank Supervision (BCBS), focuses on credit risk. The Capital Adequacy Ratio (CAR) is the percentage of total capital to total weighted assets.
• Capital Adequacy Ratio (CAR), also known as Capital to Risk-Weighted Assets Ratio (CRAR), is derived from the total of Tier-I and Tier-II capital divided by risk-weighted assets. This ratio is employed to safeguard depositors and enhance the stability and efficiency of the financial system.
• Basel II aims to harmonize Basel I capital standards with national regulations, establishing minimum capital requirements for financial institutions to ensure liquidity.
• It strives for international convergence on regulations governing CAR, encompassing minimum capital requirements, supervisory review, and market discipline.
• Basel III endeavors to fortify existing capital requirements and introduce a global liquidity standard to empower banks to withstand financial turbulence. It mandates banks to increase loss-absorbing capital from 2% to 4.5% by January 2015. Banks must also maintain a capital conservation buffer of 2.5% to endure future periods of stress.
• In 2015, the Reserve Bank of India (RBI) released draft guidelines on the Net Stable Funding Ratio (NSFR) under Basel III, defining the amount of available stable funding relative to required stable funding. The implementation of Basel III norms was deferred to January 2023 due to the COVID-19 pandemic.

Banking Ombudsman Scheme

• The Banking Ombudsman Scheme, introduced by the RBI in 1995, addresses customer complaints against deficiencies in certain banking services. 
• The Banking Ombudsman, a senior RBI official, can award compensation, taking into account the complainant’s loss of time, expenses, and mental anguish. Jurisdiction covers commercial banks, RRBs, scheduled primary cooperative banks, NBFCs, etc., handling matters up to ₹10 lakh.
• Key Financial Institutions in India include Development Financial Institutions (DFI), announced in the 2021 Budget with an initial capital infusion of ₹20,000 crore. 
• DFIs, owned by the government or charitable institutions, finance national infrastructure projects. Examples include National Development Banks like IDBI, SIDBI, ICICI, IFCI, IRBI, and IDFC, sector-specific financial institutions (RFCI, EXIM Bank, NABARD, HDFC, NHB), and state-level institutions (State Financial Corporations and SIDCs).
• Two types of finances are medium-term (1 to 5 years) and long-term (greater than 5 years).
• The Establishment of Development Financial Institutions (DFIs) in India
• The establishment of DFIs in India is imperative for several reasons:
  • To stimulate economic growth
  • To enhance long-term financial stability
  • To provide credit support for infrastructure and housing projects
  • To enhance debt flows toward infrastructure development

Financial Stability and Development Council (FSDC)

• The Financial Stability and Development Council is a high-level body formed by the Government of India. The concept of creating such a super-regulatory body was initially proposed by the Raghuram Rajan Committee in 2008.
• In 2010, the then Finance Minister, Pranab Mukherjee, decided to establish this autonomous body, dealing with macroprudential and financial regulations across the entire financial sector of India.
• The council, headed by the Finance Minister, includes the Reserve Bank of India (RBI) Governor and Chairpersons of the Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), and Pension Fund Regulatory and Development Authority (PFRDA), along with officials from the Finance Ministry.

Small Industries Development Bank of India (SIDBI)

• SIDBI is one of the four All India Financial Institutions regulated and supervised by the RBI. The other three are India EXIM Bank, NABARD, and NHB.
• Established in April 1990 as a wholly-owned subsidiary of IDBI, SIDBI is the principal financial institution promoting, financing, and developing small-scale industries in the economy.
• SIDBI aims to empower the Micro, Small, and Medium Enterprises (MSMEs) sector, contributing to economic growth, employment generation, and balanced regional development.

EXIM Bank (Export-Import)

• EXIM Bank was established by the Government of India under the Export-Import of India Act, serving as a provider of export credit similar to Global Export Credit Agencies.
• As a fully government-owned institution, EXIM Bank acts as a growth engine for industries and Small and Medium Enterprises (SMEs) through a diverse range of products and services.

National Housing Bank (NHB)

• NHB was established on July 9, 1988, as a wholly-owned subsidiary of the Reserve Bank of India under the National Housing Bank Act, 1987, to function as an apex-level institution for housing.
• The Finance Act of 2019 amended the National Housing Bank Act, transferring the regulation of housing finance companies to the RBI.
• In April 2019, the Union Government purchased the complete stake of NHB for ₹1450 crore from RBI, aiming to end cross-holdings in regulatory institutions.
• NHB’s objectives include providing a sound housing finance system, promoting dedicated housing finance institutions, augmenting resources for the sector, making housing credit more affordable, and regulating housing finance companies based on regulatory authority.
• Encouraging public agencies to play a role as facilitators and providers of developed land for housing.

National Bank for Agriculture and Rural Development (NABARD)

• NABARD, a subsidiary with majority ownership by the Reserve Bank, functions as an Apex Development Bank.
• It is mandated to facilitate credit flow for the promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts, and other rural crafts. 
• Additionally, NABARD supports all allied economic activities in rural areas, promotes integrated and sustainable rural development, and ensures prosperity in rural regions. Following the disinvestment of NABARD’s entire stake by RBI to the Government of India in April 2015, it became a fully government-owned subsidiary.

Industrial Finance Corporation of India Limited (IFCI)

• Established in 1948 under the IFCI Act, IFCI was the first development finance institution. Its primary goal is to provide long-term institutional credit to medium and large industries. 
• IFCI offers financial assistance through rupee and foreign currency loans and underwrites or subscribes to the issuance of stocks, shares, bonds, and debentures of industrial concerns. 
• Over the years, it has diversified its activities to include merchant banking, loan syndication, rehabilitation program formulation, and involvement in amalgamations and mergers.

Industrial Development Bank of India (IDBI)

• Founded in July 1964, IDBI is an apex financial institution for industrial development. It caters to the diverse needs of medium and large-scale industries through both direct and indirect financial assistance. 
• Direct assistance includes project loans, underwriting, direct subscription to industrial securities, soft loans, technical refund loans, etc. Indirect assistance takes the form of refinance facilities provided to industrial concerns.

Industrial Investment Bank of India Limited (IIBI)

• Originally established in 1985 under the Industrial Reconstruction Bank of India Act, 1984, as the principal credit and reconstruction agency for sick industrial units, IIBI transformed into a full-fledged development financial institution on March 17, 1997. IIBI assists industries, mainly in the medium and large sectors, offering a wide range of products and services.
• In addition to project finance, IIBI provides short-term non-project asset-backed financing, underwriting, deferred payment guarantees, and working capital or other short-term loans to companies.

National Asset Reconstruction Company Limited (NARCL)

• Incorporated on July 7, 2021, NARCL received a certificate of registration from the RBI on October 4, 2021, to operate as an Asset Reconstruction Company. Predominantly owned by Public Sector Banks, with Canara Bank as the sponsor holding up to 12%, NARCL will be capitalized through a combination of equity and debt from various banks and will have a finite life of five years. 
• Simultaneously, IDRCL, a separate company functioning as an Asset Management Company, was set up to manage and resolve assets and aid in operational aspects, including price discovery and the recovery and resolution process. While NARCL is primarily owned by public sector banks with 51% ownership, IDRCL has 51% of its shares in private hands.

Deposit Insurance in India

• The Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, enacted by the Parliament in 2021, ushered in substantial changes to the deposit insurance landscape in India.
• The Deposit Insurance and Credit Guarantee Corporation (DICGC) operates by the DICGC Act of 1961 and the DICGC General Regulations of 1961.
• Under the Act, the Corporation is responsible for disbursing the insured deposit amount to depositors of an insured bank. Such liability may arise during scenarios such as an insured bank undergoing
  • liquidation (sale of all assets upon closing down of the bank).
  • reconstruction or any other arrangement under a scheme, or
  • merger or acquisition by another bank.
• Deposit insurance provided by DICGC encompasses all Commercial Banks, including Payments Banks, Small Finance Banks, Regional Rural Banks, Foreign Bank branches in India, Local Area Banks, and Cooperative Banks in all States and Union Territories.
• DICGC automatically registers a bank as insured when it obtains a banking license. The fee for this coverage is paid by banks to DICGC and is not passed on to depositors.
• Following the announcement in the Union Budget for 2020-2021, the deposit cover was raised from 1 lakh to 5 lakh per depositor per bank.

New Gold Investment Schemes

• The government introduced Sovereign Gold Bonds and Gold Monetisation Schemes on November 5, 2015.
• The primary objective of these schemes is to diminish the demand for physical gold and redirect a portion of the annually imported gold for investment purposes into financial savings.

Sovereign Gold Bonds

• Issued by the RBI on behalf of the Government of India in rupees and denominated in grams of gold, these bonds are exclusively available for sale to resident Indian entities in both demat and paper form.
• The minimum investment in this scheme is 1 gram, with a maximum subscription limit of 4 kg for individuals, 4 kg for HUFS, and 20 kg for trusts and similar entities as notified by the government from time to time per fiscal year from April to March.
• The interest rate for the years 2020 to 2021 is 2.50% per annum, paid on a half-yearly basis.
• The band has a tenure of eight years with an exit option available from the fifth year onwards. The KYC norms are the same as those for gold, and an exemption from capital gains tax is provided. Redemption is made in the rupee value equivalent to the price of gold at the time of maturity.

Gold Monetisation Scheme

• Bureau of Indian Standards (BIS) certified Collection Purity Testing Centres (CPTC) collect gold from customers on behalf of banks.
• The minimum quantity of gold (bullion or jewelry) that can be deposited is 30 grams, with no maximum limit for deposits.
• A Gold Saving Account can be opened with any designated bank, denominated in grams of gold, for short-term periods of 1 to 3 years, medium-term periods of 5 to 7 years, and long-term periods of 12 to 15 years.
• The CPTCs transfer the gold to refiners, and banks have tripartite/bipartite Legal Agreements with refiners and CPTCs.

Non-Banking Financial Companies (NBFCs)

• NBFCs essentially function like banks, engaging in the basic twin functions of attracting the public and providing loans.
• However, unlike Commercial Banks, they are not incorporated as banks, operating under the provisions of the Banking Regulation Act of 1949.
• With the enactment of the RBI (Amendment) Act of 1997, the RBI gained control over the functioning of NBFCs. Collectively, NBFCs account for 11.2% of the total assets in the financial system.
• There are two broad categories of NBFCs:
  • Deposit-taking NBFCs (NBFCs-D).
  • Non-deposit-taking NBFCs (NBFCs-ND).
  • Capital to Risk-weighted Assets Ratio (CRAR) norms were made applicable to NBFCs-D in 1998. The CRAR norm for NBFC-D is 12% (15% in the case of unrated NBFCs-D).

Deposit Accepting NBFC Meaning:

• Deposit Accepting NBFCs must register with the RBI as per the provisions in the RBI Act of 1934. 
• They require a Certificate of Registration (CoR) from the RBI, and additional guidelines and specific regulations prescribed by the RBI apply to them.

Non-Deposit Accepting NBFC Meaning:

• Non-deposit-accepting NBFCs also need to register themselves. The only difference is that additional guidelines do not apply to them.
• Within the above broad categorization, NBFCs can be further broadly divided into:
  • Asset Finance Company (AFC): The primary business is financing physical assets.
  • Investment Company (IC): Engaged in the acquisition of securities as its principal business.
  • Loan Company (LC): Provides finance as its principal business, making loans or advances for ventures other than its own but excluding an Asset Finance Company.
  • Infrastructure Finance Company (IFC): A company that extends at least 75% of its total assets in infrastructure loans, has a minimum of 300 crores as Net Owned Funds (NOF), a credit rating of not less than, and a CRAR of 15%.
  • Systemically Important Core Investment Company: Engaged in the business of acquiring shares and securities.
  • Infrastructure Debt Fund Non-Banking Financial Company (IDF-NBFC): Facilitates the flow of long-term debt into infrastructure projects.

Types of NBFCs	Principal Business
Deposit Taking NBFCs (NBFCs-D)	Receiving deposits under any scheme and lending
Equipment Leasing Company	Equipment leasing and financing
Hire Purchase Finance Company	Hire purchase transactions
Investment Company	Buying or selling of securities
Loan Company	Making loans or advances for any activity
Residuary Non-Banking Companies (RNBCS)	Businesses are the same as NBFCs, but do not belong to any of the categories under NBFCs
Mutual Benefit Financial Company (MBFC)	Any company notified by the Central Government as a Nidhi Company under the Companies Act, 1956
Miscellaneous Non-Banking Companies (MNBCS)	Asset Finance Companies, which manage, conduct, and supervise Chit Funds

Prelim Facts

• Which is the highest bank in the banking system of India? Reserve Bank of India (BPSC (Pre) 20011
• When was the Reserve Bank of India established? 1935 (UKPSC (Pre) 2010]
• Where is the headquarters of RBI located? Mumbai (UPPSC (Mains) 2010
• Name the Governors of the Reserve Bank, who also became the Finance Ministers. CD Deshmukh Manmohan Singh (UPPSC (Pre) 2008]
• Who is the fiscal agent and advisor to the government in monetary and financial matters? Reserve Bank of India (RBI) [UP RO/ARO (Mains) 2017]
• What is the financial year for RBI? April to March (UPPSC (Mains) 2013]
• Which method of note issuance is followed by Reserve Bank of India? Minimum Fund Method (UPPSC (Mains) 2007
• Which institution regulates Foreign Commercial Borrowing (FCB)? India? Reserve Bank of India (UPPSC (Mains) 2010]
• Which policy is direct measure to control effective demand? – Monetary policy [UPPSC (Pre) 2016]
• In India, ‘currency and credit’ is controlled by as Reserve Bank of India (UPPSC (Mains) 2010]
• Official rate of interest charged by Central Bank is known – Bank rate [BPSC (Pre) 2017]
• When the Reserve Bank of India (RBI) announces an increase of the Cash Reserve Ratio (CRR), what does it mean? – The Commercial Banks will have less money to lend [IAS (Pre) 2010]
• An increase in the bank rate generally indicates that the Central Bank is following a tight money policy [IAS (Pre) 2013
• The interest rate at which the Reserve Bank of India (R lends to Commercial Banks in the short term to maintain liquidity is known as Repo Rate (UPPSC (Mains) 2000
• The rate at which banks lends to the India is known as The banks are required to maintain a certain ratio Reverse Repo Rate [UPPSC (Mains) 2000
• Which term indicates a mechanism used by Commercial Banks for providing credit to the government? Statutory Liquidity Ratio [IAS (Pre) 2010
• The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities, sometimes appearing in news, are used in relation to – Banking Operations [IAS (Pre) 2012
• If the interest rate is decreased in an economy, it will increase the Investment expenditure in the economy [IAS (Pre) 2014
• On which date, the Ombudsman scheme for the Non-Banking Financial Companies (NBFC) in 2018 effectively introduced by Reserve Bank of India? 23rd Februray, 2018 [MPPSC (Pre) 2020
• The Government of India has recently acquired the RBI’s stake in State Bank of India (UPPSC (Mains) 2007
• Financial transactions and other activities of non-banking financial intermediary are known as Shadow Banking (UP RO/ARO (Pre) 2014
• Which Basel relates to international standards for measuring the adequacy of a bank’s capital? – Basel II (UPPSC (Pre) 2008
• Treasury bills are sold in India by Reserve Bank of India (UPPSC (Mains) 2008
• When was the State Bank of India established? -1955 [MPPSC (Pre) 2017

UPSC NCERT Practice Questions

1. Which one of the following activities of the Reserve Bank of India is considered to be part of ‘Sterilization’? IAS (Pre) 2023

(a) Conducting ‘Open Market Operations’

 b) Oversight of settlement and payment systems.

(c) Debt and cash management for the Central and State Governments.

(d) Regulating the functions of Non-banking Financial Institutions.

2. Consider the following statements. IAS (Pre) 2021

1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.

2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in the public interest.

3. The Governor of the RBI draws his power from the RBI Act.

Which of the following statements) given above is/are correct?

(a) 1 and 2

(b) 2 and 3 

(c) 1 and 3 

(d) All of these

3. The banks as required to maintain a certain ratio between their cash in the hand and total assets. This is called

(a) Statutory Bank Ratio (SBR)

(b) Statutory Liquidity Ratio (SLR)

(c) Central Bank Reserve (CBR)

(d) Cash Reserve Ratio (CRR)

4. Which one of the following is not a qualitative credit control measure of the RBI?

(a) Fixing margin requirements

(b) Variable interest rates

(c) Open market operation

(d) Credit rationing

5. Consider the following statements. IAS (Pre) 2023

Statement IIn the post-pandemic recent past, many Central Banks worldwide have carried out interest rate hikes.

Statement II Central Banks generally assume that they can counteract the rising consumer prices via monetary policy means.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.

(b) Both Statement-I and Statement-II are correct and Statement-Il is not the correct explanation for Statement-I.

(c) Statement-T is correct but Statement-ll is incorrect.

(d) Statement-I is incorrect but Statement-II is correct.

6. Consider the following measures that Reserve Bank of India (RBI) uses to control inflation in the economy. UP RO/ARO (Pre) 2016

1. Increase Bank Rate

2. Increase Cash Reserve Ratio

3. Increase Statutory Liquidity Ratio

4. Purchase of Government Securities

Select the correct answer by using the codes given below.

(a) 1 and 2

(b) 1, 2 and 3

(c) 2, 3 and 4

(d) 1, 3 and 4

7. An increase in the bank rate generally indicates that the IAS (Pre) 2013

(a) market rate of interest is likely to fall.

(b) Central Bank is no longer making loans to Commercial Banks.

(c) Central Bank is following an easy money policy.

(d) Central Bank is following a tight money policy.

8. Consider the following statements about Unified Payments Interface (UPI).

1. It seeks to promote cashless economy in the country.

2. It has been developed by NPCI.

3. It facilitated the user to have a single virtual address for multiple bank accounts.

Which of the statements) given above is/are correct?

(a) Only 1

(b) 1 and 2

(c) 2 and 3

(d) All of the above

9. Which of the following is a most likely consequence of implementing the ‘Unified Payments Interface (UPI)’? IAS (Pre) 2017

(a) Mobile wallets will not be necessary for online payments.

(b) Digital currency will totally replace the physical currency in about two decades.

(c) FDI inflows will drastically increase.

(d) Direct transfer of subsidies to poor people will become very effective.

10. What is the purpose of setting up of Small Finance Banks (SFBs) in India? IAS (Pre) 2017

1. To supply credit to small business units.

2. To supply credit to small and marginal farmers.

3. To encourage young entrepreneurs to set up business particularly rural areas.

Codes

(a) 1 and 2

(c) 1 and 3

(b) 2 and 3

(d) All of these

11. ‘Basel III Accord’ seeks to UPPSC (Pre) 2015

(a) develop national strategies for the conservation of biological diversity.

(b) Improve banking sector’s ability to deal with financial risk management.

(c) reduce the greenhouse gas emissions.

d) transfer technology from developed countries to poor countries.

12. Consider the following with policy reference to Indian Economy UPPSC (Pre) 2015

1. Bank rate

2. Open market operations

3. Public debt

4. Public reverse

Which of the policies given above is/are components of monetary policy correct?

(a) Only 1

(b) 2, 3 and 4

(c) 1 and 2

(d) 1, 3 and 4

13. Consider the following statements. IAS (Pre) 2004

1. The National Housing Bank (NHB), the apex institution of housing finance in India, was set up as a wholly-owned subsidiary of the RBI.

2. The Small Industrial Development Bank of India (SIDBI) was established as a wholly-owned subsidiary of the Industrial Development Bank of India (IDBI).

Which of the statements) given above is/are correct?

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) Neither 1 nor 2

14. Which one of the following companies is eligible for financial assistance and loans from the Industrial Finance Corporation of India (IFCI)?

(a) Limited Public Companies

(b) Public Cooperatives

(c) Private Limited Companies

(d) All of the above

15. Consider the following statements.

1. A committee, under the Chairmanship of former RBI Governor Bimal Jalan, was constituted to scrutinise the application for new banks in India.

2. The committee recommended to give banking licenses to Bandhan Micro-Finance and Infrastructure Development and Finance

Corporation (IDFC).

Which of the statementS) given above is/are correct?

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) Neither 1 nor 2

16. Which of the following grant/grants direct credit assistance to rural households? IAS (Pre) 2013

1. Regional Rural Bank

2. NABARD

3. Land Development Banks

Codes

(a) 1 and 2

(c) 1 and 3

(b) Only 2

(d) All of these

17. Consider the following.

1. Regional Rural Banks

2. Lead Bank Scheme

3. NABARD

4. State Bank of India

The correct historical sequence of the establishment of these banks are 

(a) 4, 3, 1, 2

(b) 4, 2, 1, 3

(c) 2, 3, 4, 1

(d) 2, 1, 4, 3

18. Why is the offering of ‘teaser loans’ by Commercial Banks a cause of economic concern? IAS (Pre) 2011

1. The teaser loans are considered to be an aspect of sub-prime lending and banks may be exposed to the risk of defaulters in the future.

2. In India, teaser loans are mostly given to inexperienced entrepreneurs to set up manufacturing or export units.

Which of the statements) given above is/are correct?

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) Neither 1 nor 2

19. Non-Performing Assets (NPA) in Commercial Banks means

(a) bank deposits that are not invested

(b) capital assets, which are not in use

(c) debts on which interest and principal amount are no. realised

(d) low interest loans

Know Right Answer 

1 (a)

2 (c)

3 (b)

4 (c)

5 (c)

6 (b)

7 (d)

8(d)

9 (a) 

10 (a)

11 (b)

12 c)

13 (c)

14 (d)

15 (c)

16 (c)

17 (b)

18 (a)

19 (c)

Frequently Asked Questions (FAQs)

Q1: Why is the study of the Indian economy important for UPSC preparation?

A1: The study of the Indian economy is crucial for UPSC preparation as it forms a significant part of the General Studies Paper III. Understanding the economic landscape of India is essential for aspirants, as questions related to economic policies, banking systems, and financial inclusion are frequently asked in the UPSC Civil Services Examination. NCERT notes on the Indian Economy provide a solid foundation for comprehending key economic concepts, which is invaluable for candidates aiming to excel in the examination.

Q2: How does the Indian banking system contribute to the country’s economic development?

A2: The Indian banking system plays a pivotal role in the economic development of the country. It facilitates the mobilization of savings and their allocation for productive purposes. Banks act as financial intermediaries, channeling funds from savers to borrowers, thereby fostering investment and economic growth. Moreover, through various schemes and initiatives, banks contribute to financial inclusion, ensuring that the benefits of economic development reach all sections of society. A thorough understanding of the Indian banking system is imperative for UPSC aspirants, as questions related to financial institutions and policies are commonly asked in the examination.

Q3: How has the Reserve Bank of India (RBI) influenced the Indian banking system, and what are its key functions?

A3: The Reserve Bank of India (RBI) is the central banking institution in India and plays a crucial role in shaping and regulating the Indian banking system. Its key functions include formulating and implementing monetary policy, regulating and supervising banks, and maintaining the stability of the financial system. The RBI also issues currency and manages the foreign exchange reserves of the country. UPSC aspirants must have a comprehensive understanding of the functions and roles of the RBI, as questions related to monetary policy, banking regulations, and central banking are frequently tested in the examination.

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