Banking in India — Money, Monetary Policy, Architecture & Stress

From the Bank of Hindustan (1770) to the Unified Lending Interface (2024) — Topic 6 walks through how India intermediates savings into investment: the RBI at the apex, the Scheduled vs Non-Scheduled hierarchy, two waves of nationalisation, the mega-merger of 2020, NBFCs and differentiated banks, Basel III prudential norms, NPAs, the IBC, and the financial-inclusion agenda from PMJDY to ULI.

UPSC Prelims · Mains GS-III Ramesh Singh Ch. 13 ~28 min read RBI · PSB · NBFC IBC 2016 · Basel III

Conceptual Clarity
1. Evolution of Indian Banking
2. Structure of the Banking System
3. Commercial Banks — SCBs, PSBs, Private, Foreign
4. Cooperative Banks & RRBs
5. Differentiated Banks — PBs, SFBs, LABs
6. NBFCs & the Shadow Banking Layer
7. Nationalisation & Mergers
8. Key Banking Legislations
9. NPAs & Basel III
10. PCA, IBC & Resolution
11. PSL & Financial Inclusion
12. What is Money
13. Types & Forms of Money
14. Money Supply — M0–M4
15. Reserve Money & Money Multiplier
16. Credit Multiplier
17. The Money Market
18. RBI as Monetary Authority
19. Monetary Policy Instruments
20. MPC & Inflation Targeting
21. Demonetisation & Currency Mgmt
22. Digital Money — UPI, CBDC, DPI
23. Current Affairs Anchor
24. Prelims PYQs (2014–2026)
25. Mains PYQs (2014–2025)
26. Revision Box

Conceptual Clarity — Three Lenses

Architecture — the hierarchy: RBI → Scheduled (SCBs, RRBs, Cooperatives) and Non-scheduled banks → NBFCs and differentiated banks at the periphery.
Reform cycles — Nationalisation (1969, 1980) → Narasimham I (1991) and II (1998) → Basel III adoption → IBC 2016 → PSB mergers (2017–2020).
Stress & resolution — the twin balance-sheet problem, AQR 2015, PCA, IBC, and the move from account-wise restructuring to entity-wise insolvency.

CRAR = (Tier 1 + Tier 2 capital) / Risk-Weighted Assets ≥ 9% (RBI) / 8% (Basel III) + 2.5% CCB + 1–2.5% D-SIB surcharge

1. Evolution of Indian Banking — A Timeline

Modern Indian banking begins in the late 18^th century with Agency Houses of the East India Company and graduates, in stages, into a fully State-supervised, Basel-compliant system.

1.1 The Pre-Independence Phase

1770: Bank of Hindustan — first modern bank in India (Alexander & Co., Calcutta). Failed 1832.
1786: General Bank of India.
1806, 1840, 1843: Three Presidency Banks — Bank of Bengal, Bank of Bombay, Bank of Madras — chartered by the East India Company. Issued currency until the Paper Currency Act, 1861 ended their note-issuing power.
1865: Allahabad Bank — oldest joint-stock bank that survived until its 2020 merger with Indian Bank.
1881: Oudh Commercial Bank — first limited liability bank managed by Indians.
1894: Punjab National Bank (PNB) — first wholly Indian-managed and Indian-capital bank (Lahore). Lala Lajpat Rai a founder-shareholder.
1921: Three Presidency Banks merged into the Imperial Bank of India (Hilton Young Commission later asked it to surrender central-banking functions).
1 April 1935: Reserve Bank of India established under the RBI Act 1934 (Hilton Young Commission 1926).

1.2 The Post-Independence Phase — Six Reform Waves

Wave	Year(s)	Key Event	Significance
1. Nationalisation of RBI	1 Jan 1949	RBI fully State-owned	Foundation of public-sector central banking
2. SBI emerges	1 Jul 1955	Imperial Bank → State Bank of India (SBI Act 1955)	First public-sector commercial bank; rural credit push
3. SBI subsidiaries	1959	Seven associate banks brought under SBI	SBI Group created (merged back into SBI 2017)
4. First nationalisation	19 Jul 1969	14 banks > ₹50 cr deposits nationalised (Indira Gandhi)	91% of bank deposits now in PSU control
5. Second nationalisation	15 Apr 1980	6 more banks > ₹200 cr nationalised	PSU share rises to ~92%
6. LPG & Narasimham reforms	1991, 1998	Narasimham Committee I & II; new-generation private banks licensed; Basel norms	Competition, prudential supervision, capital adequacy
7. IBC + Mergers + Differentiated Banks	2014–2024	IBC 2016, Payments & Small Finance Banks, 10 PSB → 4 mega-mergers (Apr 2020)	Resolution, inclusion, consolidation

Etymology corner: The word "bank" derives from the Italian banca (bench) — medieval Lombard money-changers in Florence transacted on wooden benches in the marketplace. A failed banker's bench was literally broken, giving us banca rotta → "bankrupt".

2. Structure of the Indian Banking System

Indian banking is a two-tier system — the Reserve Bank of India at the apex, and a layered set of scheduled and non-scheduled banks below. A parallel non-bank ecosystem (NBFCs, AIFIs) feeds into the same capital markets.

2.1 The Apex: RBI

RBI sits at the top under the RBI Act 1934 and the Banking Regulation Act 1949 (see Topic 05, Section 7 for its monetary-authority role). For banking-supervision purposes, the relevant powers come from BR Act 1949 — licensing, branch authorisation, capital, prudential norms, inspection, and (since 1994) the Board for Financial Supervision (BFS).

2.2 Scheduled vs Non-Scheduled Banks

Scheduled Banks: Banks listed in the Second Schedule of the RBI Act, 1934. To qualify, a bank must have paid-up capital + reserves of at least ₹ 5 lakh and satisfy RBI that its affairs are not conducted in a manner detrimental to depositors. Benefits: refinance from RBI, clearing-house membership, eligibility to be a primary dealer.
Non-Scheduled Banks: Not in the Second Schedule. Few in number; mostly small Local Area Banks.

2.3 The Full Architecture

Tier	Category	Sub-categories (examples)
Apex	Central Bank	Reserve Bank of India
Scheduled Commercial Banks (SCBs)	Public Sector Banks (PSBs)	SBI + 11 nationalised (post-2020 mergers)
	Private Sector Banks	Old (Federal, Karur Vysya, J&K Bank, etc.) + New (HDFC, ICICI, Axis, Kotak, IndusInd, Yes, IDFC First, Bandhan, etc.)
	Foreign Banks	~45 foreign banks operating in India (Citi exited retail 2023, sold to Axis)
	Regional Rural Banks (RRBs)	43 RRBs after consolidation; sponsored by PSBs
	Small Finance Banks & Payments Banks	11 SFBs + 6 PBs (operationally licensed)
Scheduled Cooperative Banks	Urban Cooperative Banks (UCBs)	Scheduled UCBs (~50)
Scheduled Cooperative Banks	State Cooperative Banks	StCBs (top tier of rural cooperative pyramid)
Non-Scheduled Banks	Local Area Banks (LABs)	Capital Local Area Bank (the survivor; converted to SFB)
All-India Financial Institutions (AIFIs)	Specialised lenders	NABARD, SIDBI, EXIM Bank, NHB, NaBFID (2021)
Non-Bank Layer	NBFCs	Investment & Credit Cos, Infra Finance, Micro Finance, HFCs, AIFC, Core Investment Cos (CICs)

Two anchors to memorise: (i) Second Schedule of RBI Act 1934 — defines a Scheduled Bank. (ii) BR Act 1949 — substantive law for banking regulation. Cooperative banks were brought under full RBI banking supervision only by the Banking Regulation (Amendment) Act, 2020.

3. Commercial Banks — SCBs, PSBs, Private & Foreign

Commercial banks account for ~95% of total banking-system assets. They mobilise deposits from the public and lend for working capital, retail and infrastructure. They are profit-oriented and joint-stock in form, but regulated under the BR Act, 1949.

3.1 Public Sector Banks (PSBs)

Definition: Banks where the Government of India (alone or with RBI) holds > 50% of paid-up capital.
Constituents: State Bank of India + 11 nationalised banks (post-2020 mergers). Pre-2017, there were 27 PSBs.
Mega-merger (1 April 2020): 10 PSBs → 4 anchor banks.

Anchor Bank	Merged with (effective 1 Apr 2020)
Punjab National Bank (PNB)	Oriental Bank of Commerce + United Bank of India
Canara Bank	Syndicate Bank
Union Bank of India	Andhra Bank + Corporation Bank
Indian Bank	Allahabad Bank

Earlier consolidations: SBI absorbed 5 associate banks + Bharatiya Mahila Bank (Apr 2017); Bank of Baroda + Vijaya Bank + Dena Bank (Apr 2019); IDBI Bank reclassified as a private bank in Jan 2019 after LIC took 51%.

3.2 The 12 PSBs Today

SBI · PNB · Bank of Baroda · Canara Bank · Union Bank of India · Indian Bank · Bank of India · Central Bank of India · Indian Overseas Bank · UCO Bank · Bank of Maharashtra · Punjab & Sind Bank.

3.3 Private Sector Banks

Old Private Banks (pre-1991): Federal Bank, Karur Vysya, J&K Bank, South Indian Bank, Karnataka Bank, City Union Bank, etc. — regionally concentrated, typically Southern.
New Private Banks (post-Narasimham I): HDFC Bank, ICICI Bank, Axis Bank (UTI Bank), IndusInd, Kotak Mahindra, Yes Bank, IDFC First, Bandhan, DCB.
On-tap licensing (Aug 2016): RBI shifted from periodic licence windows to a continuous "on-tap" application route for universal banks.

3.4 Foreign Banks

~45 foreign banks operate in India through the branch mode or the wholly-owned subsidiary (WOS) route introduced by RBI in November 2013. SBM Bank (India), DBS Bank India and Standard Chartered are major operators. Citi exited its India consumer business in 2023, selling it to Axis Bank.

Prelims trap: IDBI Bank is now classified as a Private Sector Bank (since Jan 2019, after LIC took 51%). It is no longer a PSB. The government has approved further strategic disinvestment.

4. Cooperative Banks & Regional Rural Banks (RRBs)

The cooperative-credit movement in India predates modern commercial banking and is rooted in the Cooperative Credit Societies Act, 1904 and the Cooperative Societies Act, 1912. It is the institutional response to rural moneylender exploitation.

4.1 The Cooperative Credit Pyramid

Two parallel structures — rural (three-tier) and urban (single-tier).

Rural Cooperative Credit	Tier	Function
State Cooperative Bank (StCB)	Apex (State level)	Refinance to DCCBs; member of the cooperative settlement system
District Central Cooperative Bank (DCCB)	District level	Refinance to PACS; banking services to district members
Primary Agricultural Credit Society (PACS)	Village level	Direct short-term crop loan to farmers
Parallel long-term wing: State Cooperative Agriculture & Rural Development Bank (SCARDB) at State level → Primary CARDBs at district/taluka.

Urban Cooperative Banks (UCBs): Single-tier; serve middle/lower-income urban customers. ~1,500 UCBs (scheduled + non-scheduled).
Apex for long-term credit: NABARD (estd. 12 July 1982, Sivaraman Committee 1979).

4.2 The Dual Control Problem & the 2020 Fix

Until 2020, cooperative banks were under dual control: the Registrar of Cooperative Societies (State Government) for incorporation/management/audit, and RBI only for "banking" functions. This created supervisory gaps — visible in the PMC Bank crisis (Sept 2019).

The Banking Regulation (Amendment) Act, 2020 brought all UCBs and multi-state cooperative banks under full RBI supervisory powers: capital, voluntary amalgamation, supersession of boards, audit. State cooperative law continues to govern non-banking aspects.

4.3 Regional Rural Banks (RRBs)

Estd: 2 October 1975 on the recommendation of the M. Narasimham Working Group (1975); statutory basis — RRB Act, 1976.
Sponsorship model: Capital — 50% Centre + 35% Sponsor Bank + 15% State Government.
Mandate: Credit to small/marginal farmers, agricultural labourers, artisans and small entrepreneurs in their notified area of operation.
Consolidation: From 196 RRBs in 1990 down to 43 RRBs as of 2024 (Phase IV of amalgamation), targeted to fall to ~28 under "One State One RRB" (Nov 2020 roadmap).
Regulator/Supervisor: RBI; refinance & inspection assistance — NABARD.

Prelims hook: RRBs were created on the recommendation of Narasimham Working Group 1975, not the Narasimham Committee on Banking Sector Reforms (1991/1998) — same chairman, different report.

5. Differentiated Banks — Payments, Small Finance, Local Area

The traditional "universal banking" model was complemented in 2014–2015 by RBI's introduction of differentiated banking licences, following the recommendations of the Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (2014). The aim: target financial inclusion through specialised, smaller institutions.

5.1 Payments Banks (PBs)

Guidelines: 27 November 2014; first licences granted in 2015.
Min. paid-up capital: ₹ 100 crore.
Can do: Accept demand deposits up to ₹ 2 lakh per customer (raised from ₹ 1 lakh in April 2021); issue debit/ATM cards; remittances; payments; distribution of mutual funds, insurance, pension; act as BCs for other banks.
Cannot do: Issue credit cards; lend; accept NRI deposits.
Operational PBs: Airtel Payments Bank, India Post Payments Bank, Fino Payments Bank, Jio Payments Bank, Paytm Payments Bank (under restrictions since Mar 2024), NSDL Payments Bank.

5.2 Small Finance Banks (SFBs)

Guidelines: 27 November 2014; first licences 2015; on-tap licensing since 5 December 2019.
Min. paid-up capital: ₹ 200 crore (on-tap).
Can do: Full banking — deposits and lending. 75% of ANBC must go to priority sector (vs 40% for SCBs); 50% of loan portfolio must be loans up to ₹ 25 lakh.
Listed SFBs: AU SFB, Equitas, Ujjivan, Suryoday, Jana, ESAF, Capital, Fincare (merged with AU 2024), Utkarsh, Unity, Shivalik.
Transition pathway: SFBs can apply to convert to universal banks after 5 years of operation if they meet eligibility criteria (RBI framework, April 2024). AU Small Finance Bank applied in September 2024.

5.3 Local Area Banks (LABs)

Introduced in 1996 with a narrow geographic focus (max 3 contiguous districts). Of six original LABs, only Capital Local Area Bank survived — and it converted into an SFB in April 2016. The model has effectively been superseded by SFBs.

5.4 New Specialised Institutions

National Bank for Financing Infrastructure and Development (NaBFID): Established under the NaBFID Act, 2021; classified as an AIFI. Mandate: long-tenor infrastructure financing — the post-IDFC institutional gap-filler.
Account Aggregators (AA): A new class of NBFCs (Sept 2021 go-live) that act as consent managers for data sharing across financial institutions. Not banks, but core to the lending stack.

Prelims trap: Payments Banks cannot lend or issue credit cards. They can issue debit cards and distribute insurance/MF/pension as third-party agents. The deposit cap was raised to ₹ 2 lakh in April 2021 (often tested).

6. NBFCs & the Shadow Banking Layer

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act engaged in the business of loans, investments, leasing, hire-purchase, insurance, chit business or similar — but it does not accept demand deposits and cannot issue cheques drawn on itself. NBFCs supplement banks; they are not banks.

6.1 Legal Definition & Registration

Section 45-I(c) of the RBI Act, 1934 defines an NBFC. To be classified as an NBFC, a company must satisfy the 50-50 test: financial assets > 50% of total assets and income from financial assets > 50% of gross income. Registration with RBI is mandatory under Section 45-IA (since 1997 amendment).

6.2 Scale-Based Regulation (SBR) Framework — October 2021

RBI's new four-layered prudential framework (effective 1 October 2022) replaces the older "deposit-taking / non-deposit-taking systemically important" classification:

Layer	Threshold	Examples	Regulation Intensity
Base Layer (NBFC-BL)	Non-deposit-taking, asset size < ₹ 1,000 cr	Smaller ICCs, NBFC-P2P, NBFC-AA, NOFHCs	Lightest touch
Middle Layer (NBFC-ML)	All deposit-taking + non-deposit-taking with assets ≥ ₹ 1,000 cr	HFCs, IFCs, IDFs, CICs, SPDs	Banks-lite norms
Upper Layer (NBFC-UL)	Top 10–25 NBFCs by scoring methodology	Bajaj Finance, Shriram Finance, L&T Finance, Cholamandalam, M&M Financial, Tata Capital, etc.	Near-bank prudential rigour (CET-1, LCR, large-exposure)
Top Layer (NBFC-TL)	Currently empty; populated only if RBI deems supervisory concern from UL	—	Most intensive

6.3 Major NBFC Categories

Investment & Credit Company (ICC) — the residual workhorse category (merger of erstwhile AFC, LC, IC in Feb 2019).
Infrastructure Finance Company (IFC) — 75% of assets in infra loans (e.g., Power Finance Corp, REC).
Infrastructure Debt Fund (IDF-NBFC) — long-tenor infrastructure refinance.
Core Investment Company (CIC) — holding company structure (Tata Sons, Bajaj Holdings).
Microfinance Institution (NBFC-MFI) — small-ticket unsecured loans to low-income borrowers.
NBFC-Factor — receivables financing (Factoring Regulation Act 2011, amended 2021 to widen eligibility).
NBFC-P2P — peer-to-peer lending platforms (RBI directions, October 2017).
NBFC-AA (Account Aggregator) — consent manager (Sept 2021).
Housing Finance Company (HFC) — brought under RBI supervision in August 2019, transferred from National Housing Bank.
Mortgage Guarantee Company (MGC).
NBFC-AFC (Asset Finance Company), LC, IC — merged into ICC in Feb 2019.

6.4 Why the "Shadow Banking" Worry?

NBFCs perform credit intermediation outside the prudential perimeter of full bank supervision. The IL&FS collapse (September 2018) — followed by stress at DHFL, Reliance Capital and Srei — revealed system-wide ALM mismatches and triggered the Scale-Based Regulation overhaul. NBFCs do not have CRR/SLR obligations but face capital adequacy (CRAR ≥ 15% for NBFC-D and ICC; 10% Tier-I), large exposure limits and (for UL) LCR.

Bank vs NBFC — one-line distinctions: NBFCs cannot accept demand deposits, cannot issue cheques drawn on themselves, are not part of the payment-and-settlement system, and depositors are not covered by DICGC insurance.

7. Bank Nationalisation & Mergers — The Full Story

Two waves of nationalisation transferred Indian commercial banking decisively into State hands; three decades later, two waves of mergers consolidated that base into a smaller set of stronger anchors.

7.1 Pre-Nationalisation Stocktake (1947–1969)

566 commercial banks at Independence; widespread failures and concentration of credit in industrial business houses.
Banking Companies Act 1949 (renamed Banking Regulation Act in 1966) gave RBI statutory powers.
SBI Act 1955 nationalised the Imperial Bank (effective 1 July 1955); SBI (Subsidiary Banks) Act 1959 brought the seven associate banks under SBI.
Social Control of Banks (Dec 1967): Morarji Desai's reformulation requiring credit to priority sectors — widely viewed as a precursor to nationalisation.

7.2 First Nationalisation — 19 July 1969

Government: Indira Gandhi.
Instrument: Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 → Act, 1970 (after the SC struck down the Ordinance in R.C. Cooper v. Union of India, Feb 1970, on a compensation-and-fundamental-rights ground).
Coverage: 14 private banks with deposits > ₹ 50 crore as on the last Friday of June 1969.
The 14 banks: Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India.
Effect: Public-sector share of total bank deposits jumped to ~85%.

7.3 Second Nationalisation — 15 April 1980

Coverage: 6 more banks with deposits > ₹ 200 crore.
The 6 banks: Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank, Vijaya Bank.
Subsequent merger: New Bank of India merged with PNB in September 1993 — the only PSB merger before the 2017 wave.
Outcome: 20 nationalised banks + SBI group; PSU share of deposits ~92%.

7.4 Rationale and Critique

Stated Rationale	Counter / Critique
Mobilise rural savings & spread branches	Achieved — branch network rose from ~8,200 (1969) to over 60,000 (1991)
Direct credit to agriculture, SSI, exports (priority sectors)	Achieved through PSL; but also created "directed lending" inefficiencies
End concentration of bank credit with industrial houses	Achieved short-term; long-term created a different concentration in PSU lending to big corporates — root of the 2014 twin balance-sheet problem
Use bank credit as a developmental tool	Came at cost of asset quality — pre-Narasimham NPAs were chronic

7.5 The Merger Wave (2017–2020)

April 2017: SBI absorbed 5 associate banks (State Bank of Hyderabad, Mysore, Travancore, Patiala, Bikaner & Jaipur) + Bharatiya Mahila Bank — SBI Group merged into SBI.
January 2019: IDBI Bank reclassified as a private bank after LIC acquired 51%.
April 2019: Bank of Baroda + Vijaya Bank + Dena Bank (BoB-anchored).
1 April 2020: 10 PSBs → 4 anchors (PNB, Canara, Union, Indian) — the mega-merger.
Result: PSB count dropped from 27 (2017) to 12 today.

SC verdict to remember: R.C. Cooper v. Union of India (1970) struck down the 1969 nationalisation Ordinance on the grounds that the compensation provided was illusory and that fundamental rights overlapped — reversing the A.K. Gopalan "exclusive rights" doctrine. Parliament responded with a fresh Act that cured the defect.

8. Key Banking Legislations

Indian banking is regulated by a thicket of statutes. The big six to know — and a clutch of newer ones.

Year	Statute	What it does
1934	RBI Act	Constitutes RBI; lists scheduled banks in Second Schedule; gives RBI monetary-policy powers; 2016 amendment created statutory MPC
1949	Banking Regulation Act (renamed from Banking Companies Act 1949 in 1966)	Substantive bank-regulation law — licensing, CRR/SLR, branch expansion, capital, audit, inspection
1955	SBI Act	Created State Bank of India out of Imperial Bank
1959	SBI (Subsidiary Banks) Act	Brought 7 associate banks into SBI Group (since merged into SBI 2017)
1961	Deposit Insurance Act	Created DICGC (1961 + 1971 amendment); insures bank deposits
1969 / 1980	Banking Companies (Acquisition & Transfer of Undertakings) Acts	Nationalised 14 + 6 private banks
1976	RRB Act	Created Regional Rural Banks
1981	NABARD Act	Created NABARD (operational July 1982)
1993	RDB Act (DRT Act)	Created Debt Recovery Tribunals to expedite recovery
2002	SARFAESI Act	Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest — allows banks to attach and sell secured assets without court intervention; created Asset Reconstruction Companies (ARCs)
2007	Payment & Settlement Systems (PSS) Act	Statutory cover for RBI to authorise & regulate payment systems (UPI, NEFT, RTGS, CCIL)
2016	Insolvency and Bankruptcy Code (IBC)	Unified, time-bound resolution framework for stressed corporate, partnership and individual debt
2020	BR (Amendment) Act	Brought UCBs & multi-state cooperative banks under full RBI supervision
2021	NaBFID Act	Created National Bank for Financing Infrastructure and Development
2021	DICGC (Amendment) Act	Insured depositors get up to ₹ 5 lakh within 90 days of a bank being put under moratorium — without waiting for liquidation

8.1 DICGC — Deposit Insurance Cover

Statute: DICGC Act, 1961.
Coverage limit: Raised to ₹ 5 lakh per depositor per bank (principal + interest) on 4 February 2020 (from ₹ 1 lakh earlier).
Speed of payout: Under the 2021 amendment, depositors of a stressed bank under RBI moratorium get up to ₹ 5 lakh within 90 days.
Premium: Paid by the bank, not the depositor (currently 12 paise per ₹ 100 of assessable deposits per year).
Covered: All scheduled commercial banks, RRBs, local area banks, payments banks, small finance banks, cooperative banks. Not covered: Primary cooperative societies, deposits of foreign governments, inter-bank deposits.

8.2 SARFAESI Act, 2002 — The Banks' Recovery Hammer

Empowers banks and FIs to enforce security interests without court intervention for NPAs > ₹ 1 lakh (or 20% of principal + interest). Three modes:

Take possession of security;
Sell or lease the security;
Appoint a manager to run it.

The Act also created the Asset Reconstruction Company (ARC) framework. Eligible filers must give 60 days' notice to the borrower; appeals lie with DRT → DRAT.

Quick fact: SARFAESI does not apply to agricultural land — an explicit statutory carve-out. This is a recurring Prelims question.

9. NPAs, Asset Quality & Basel III

A loan turns into a Non-Performing Asset (NPA) when the borrower stops paying interest or principal for a specified period. Asset quality is the single most-discussed health metric of Indian banking.

9.1 NPA Definition & Classification (RBI Master Circular)

NPA trigger: Interest and/or principal remains overdue for more than 90 days (for a term loan). For agricultural loans — two crop seasons (short-duration) or one crop season (long-duration).

Category	Definition	Provisioning (secured)
Standard	Not an NPA; performing	0.25%–1% (general)
Sub-Standard	NPA for less than 12 months	15% (secured) / 25% (unsecured)
Doubtful	NPA for > 12 months	25–100% by sub-tranche (D1, D2, D3)
Loss	Identified as loss but not yet written off	100%

9.2 Key Ratios

Gross NPA Ratio = Gross NPAs / Gross Advances
Net NPA Ratio = (Gross NPAs − Provisions) / (Gross Advances − Provisions)
Provision Coverage Ratio (PCR) = Total Provisions / Gross NPAs
Slippage Ratio = Fresh NPAs in the period / Standard Assets at start

9.3 The Twin Balance-Sheet Problem (TBS)

Coined by then-CEA Arvind Subramanian (Economic Survey 2016-17): stressed corporate balance-sheets (over-levered infra and metals firms post-2008 stimulus) feeding into stressed bank balance-sheets (rising NPAs). The Asset Quality Review (AQR) ordered by Governor Raghuram Rajan in July 2015 forced banks to recognise hidden stress, exposing gross NPAs that peaked at 11.5% (March 2018) for the system, and ~14.6% for PSBs.

9.4 Recovery and Resolution Toolkit Pre-IBC

Lok Adalats — small-ticket settlements.
Debt Recovery Tribunals (DRT, 1993) — for claims ≥ ₹ 20 lakh.
SARFAESI 2002 — out-of-court secured-asset enforcement (see Section 8.2).
CDR → SDR → S4A → 5/25 Scheme — sequential RBI restructuring schemes, all withdrawn by the RBI 12 Feb 2018 circular in favour of IBC referral.
NCLT/IBC — current default route (Section 10).

9.5 Basel III — Capital, Liquidity, Leverage

Basel III (BCBS, December 2010, post-Lehman) brought three pillars together. India implemented it phased from 1 April 2013, fully effective 1 October 2021.

Component	Basel III	RBI (India)
Min. CET-1 (Common Equity Tier 1)	4.5%	5.5%
Min. Tier-1 capital	6%	7%
Min. Total Capital (CRAR)	8%	9%
Capital Conservation Buffer (CCB)	2.5%	2.5%
Counter-cyclical Capital Buffer (CCyB)	0–2.5%	Currently 0% (framework activated 2015)
D-SIB Surcharge	1–2.5%	0.20% (Bank of Baroda), 0.40% (ICICI), 0.60% (HDFC), 0.80% (SBI)
Leverage Ratio	3% (4% for G-SIBs)	3.5% (D-SIBs) / 4% (others)
Liquidity Coverage Ratio (LCR)	100% (since 2019)	100% — HQLA over 30-day stressed outflow
Net Stable Funding Ratio (NSFR)	100%	100% (from Oct 2021)

India's D-SIBs (2024 list): SBI, HDFC Bank, ICICI Bank, Bank of Baroda. There are no G-SIBs from India.

Examiner's favourite numbers: Minimum CRAR for an Indian bank under Basel III = 9% (vs Basel global 8%); CCB = 2.5%; total effective floor = 11.5%. NPA trigger = 90 days overdue. SMA-0/1/2 stages = 1–30 / 31–60 / 61–90 days overdue (the early-warning ladder).

10. PCA, IBC & Resolution Mechanisms

10.1 Prompt Corrective Action (PCA) Framework

RBI's PCA framework imposes graduated restrictions on banks that breach prudential thresholds, preventing further deterioration. The latest revised framework (effective 1 January 2022 for SCBs; extended to NBFC-D/ML in October 2022; to Govt-owned NBFCs in October 2024) tracks three parameters:

Capital (CRAR / CET-1)
Asset Quality (Net NPA Ratio)
Leverage (Tier-1 Leverage Ratio)

(The earlier "profitability" trigger — negative RoA for two consecutive years — was dropped in the 2021 revision.)

Restrictions escalate by risk threshold (1, 2, 3): branch expansion freeze → dividend curbs → capital raising → promoter restructuring → eventual resolution/amalgamation. PCA can lead to a merger as the terminal action.

10.2 Insolvency & Bankruptcy Code (IBC), 2016

The IBC unified eleven previous laws (SICA 1985, RDDBFI 1993, SARFAESI 2002, parts of the Companies Act, the Provincial Insolvency Act 1920, etc.) into a single, time-bound, creditor-in-control regime. It is administered by the Insolvency and Bankruptcy Board of India (IBBI).

10.3 IBC Architecture

Pillar	Body / Mechanism
Regulator	Insolvency and Bankruptcy Board of India (IBBI)
Adjudicating Authority — Corporates	National Company Law Tribunal (NCLT) → NCLAT → SC
Adjudicating Authority — Individuals & Partnerships	Debt Recovery Tribunal (DRT) → DRAT → SC
Resolution Professional (RP)	Licensed by IBBI; takes control during CIRP
Information Utility (IU)	NeSL — single source of truth on debt and default
Committee of Creditors (CoC)	Financial creditors; decisions by 66% (key) / 51% vote

10.4 The CIRP Timeline

Trigger: Minimum default threshold — ₹ 1 crore (raised from ₹ 1 lakh in March 2020 to shield MSMEs during COVID).
Statutory window: 180 days, extendable by 90 days — total outer limit 330 days (Section 12).
Moratorium: Section 14 — all suits/recovery actions stayed during CIRP.
Outcomes: Resolution plan approved by CoC (66%) → NCLT approval → binding on all stakeholders. If no plan, liquidation under Section 33.
Cross-Border Insolvency: Draft framework under consultation, based on UNCITRAL Model Law.

10.5 Key IBC Amendments

2018: Sec 29A — barred wilful defaulters and connected persons from bidding.
2019: 330-day hard limit; voting threshold harmonised at 66%.
2020: Pre-Packaged Insolvency Resolution Process (PIRP) for MSMEs (April 2021); default threshold raised to ₹ 1 crore.
2021: PPIRP enacted formally.
2023–24: Group-insolvency and real-estate project-wise resolution under consultation.

10.6 IBC Performance (latest IBBI data)

Of cases admitted to CIRP, ~16% have ended in resolution; ~46% in liquidation; rest pending or withdrawn.
Average haircut for financial creditors: ~68% (varies wildly by sector).
Behavioural impact: the credible threat of IBC has driven pre-admission settlements (~26,000+ cases withdrawn under Sec 12A before admission).
check for latest update or data for the latest IBBI Quarterly Newsletter for current case status, realisation, and average resolution time.

10.7 National Asset Reconstruction Company Ltd. (NARCL — the "Bad Bank")

Announced: Union Budget 2021-22; incorporated July 2021.
Structure: NARCL (acquires NPAs from banks under the 15:85 model — 15% cash + 85% Security Receipts) + India Debt Resolution Company Ltd. (IDRCL) (manages and resolves them).
Government guarantee: Up to ₹ 30,600 crore on Security Receipts — valid for 5 years.
Target: Acquire ~₹ 2 lakh crore of legacy stressed assets, in two phases.

One line on IBC's intent: The IBC shifted Indian insolvency law from debtor-in-possession to creditor-in-control. The CoC drives the resolution plan; the promoter is sidelined.

11. Priority Sector Lending & Financial Inclusion

11.1 Priority Sector Lending (PSL) — The Allocation

The PSL framework, traceable to the Krishnaswamy Committee (1972), mandates that a fixed share of bank credit go to identified sectors.

Category	Target (as % of ANBC or CEOBE, whichever higher)
Total Priority Sector	40% — SCBs (incl. foreign banks with ≥ 20 branches)
Agriculture	18% (within which 10% to small & marginal farmers)
Micro Enterprises	7.5%
Weaker Sections	12%
SFBs — Total PSL	75%
RRBs — Total PSL	75%
Foreign banks (< 20 branches)	40% (with sub-targets phased in)

Eligible categories (revised 2020 Master Directions): Agriculture, MSME, Export Credit, Education, Housing (up to ₹ 35 lakh in metro / ₹ 25 lakh elsewhere), Social Infrastructure, Renewable Energy, "Others" (incl. SHGs, JLGs, weaker sections).

PSLC (Priority Sector Lending Certificates): Tradeable certificates introduced in April 2016 — banks with surplus PSL achievement can sell PSLCs to banks running a shortfall, deepening the PSL market without physical loan transfer.

11.2 Financial Inclusion — The Architecture

Definition (Rangarajan Committee 2008): "The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost."

PMJDY (Pradhan Mantri Jan Dhan Yojana): Launched 28 August 2014; 53+ crore accounts opened, deposit base over ₹ 2.3 lakh crore. Includes free RuPay debit card, accident insurance, overdraft.
JAM Trinity: Jan Dhan + Aadhaar + Mobile — the plumbing for India's DBT system (over ₹ 36 lakh crore transferred to date).
BC (Business Correspondent) Model: Banking outlets through agents in unbanked areas (RBI 2006 guidelines).
RBI's Financial Inclusion Index (FI-Index): Published annually since Aug 2021 (base FY 2017 = 43.4); composite of Access, Usage and Quality. Latest reading ~ 64.2 (March 2024). check for latest update or data
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): Life cover ₹ 2 lakh.
Pradhan Mantri Suraksha Bima Yojana (PMSBY): Accident cover ₹ 2 lakh.
Atal Pension Yojana (APY): Guaranteed pension ₹ 1,000–₹ 5,000 from age 60.
Stand-Up India (Apr 2016): ₹ 10 lakh–₹ 1 cr loans to SC/ST and women entrepreneurs.
MUDRA — Pradhan Mantri Mudra Yojana (Apr 2015): Loans up to ₹ 20 lakh (Shishu/Kishor/Tarun/Tarun Plus); MUDRA Ltd. operates as a refinance arm under SIDBI.

11.3 Doorstep Banking & Digital Inclusion

India Post Payments Bank (IPPB): Launched 1 September 2018; leverages 1.55+ lakh post offices and 3+ lakh postmen as banking touchpoints.
Account Aggregator (AA) framework: Operational September 2021 — consent-based, encrypted data flows that enable cash-flow-based lending to thin-file borrowers.
Unified Lending Interface (ULI): Announced by Governor Das in August 2024 — the "UPI moment for credit". Plug-and-play digital credit underwriting using consented data flows.
e-RUPI (Aug 2021): Purpose-bound, prepaid digital voucher — precursor to programmable CBDC.

Recurring exam theme: The progression has been physical access (branches, BCs) → account ownership (PMJDY) → identity-linked transfers (JAM, DBT) → credit access (AA + ULI). India is now considered a textbook case of state-led Digital Public Infrastructure driving inclusion.

12. What is Money — Definition & Evolution

1.1 Definitions

Walker: "Money is what money does." A functional definition — anything that performs the four functions of money is money.
Crowther: "Money is anything that is generally accepted as a means of exchange and that at the same time acts as a measure of value and as a store of value."
RBI (operational): Currency in circulation + bank deposits net of CRR-locked balances + post-office savings deposits, etc. — measured as M0 through M4.

1.2 The Four Functions of Money

Category	Function	Why it matters
Primary	Medium of Exchange	Replaces barter's "double coincidence of wants."
Primary	Measure of Value (Unit of Account)	A common yardstick that prices everything.
Secondary	Store of Value	Allows wealth to be held across time.
	Standard of Deferred Payment	Enables credit and contracts.
	Transfer of Value	Wealth can move between persons / places.
Contingent	Basis of credit, liquidity, distribution of national income, equalising marginal utility	The "modern" functions Keynes & Robertson added.

1.3 Evolution of Money — Eight Stages

Barter: Direct exchange of goods. Failed on the "double coincidence" problem.
Commodity money: Cowrie shells (India, Africa, China), cattle (Latin pecus → pecuniary), salt (Latin sal → salary), grain.
Metallic money: Gold, silver, copper coins. Karshapana coins date back to the 6th century BCE in India; Mauryan punch-marked coins.
Paper money: First in Tang-era China (7th century CE); in India, issued by the Bank of Hindostan (1770) and Bank of Bengal (1806).
Credit money: Bills of exchange, cheques, demand drafts — bank-issued claims on deposits.
Plastic money: Credit and debit cards, since 1980s in India.
Electronic / Digital money: NEFT, RTGS, IMPS, UPI — the architecture that made India the world's largest real-time payments market.
Sovereign digital money (CBDC): RBI's e-Rupee, in pilot since November 2022 (wholesale) and December 2022 (retail).

Etymology corner: The word "rupee" comes from the Sanskrit rūpyakam — "wrought silver." Sher Shah Suri minted the first silver "rupiya" in 1540, with a weight of 178 grains; the Mughals adopted it and the East India Company standardised it — an unbroken 480-year lineage to today's e-Rupee.

13. Types & Forms of Money

2.1 By Material Backing

Commodity / Full-bodied money: Intrinsic value = face value (gold sovereign). Obsolete.
Token money: Face value > intrinsic value (today's coins). The State guarantees acceptance.
Representative money: Paper certificates backed 100% by metallic reserves (Bretton Woods gold-standard dollars, pre-1971).
Fiat money: Money by State decree (Latin fiat = "let it be done"). Has no intrinsic value; accepted because law and trust make it so. All modern currencies are fiat.
Fiduciary money: Accepted by trust between parties, not by State decree — cheques, drafts, bills of exchange.

2.2 By Legal Status — Legal Tender

Unlimited Legal Tender: Must be accepted in payment of any amount. In India, all RBI-issued banknotes are unlimited legal tender.
Limited Legal Tender: Can be refused beyond a certain limit. In India, coins are legal tender as follows under the Coinage Act 2011: 50 paise and above — up to ₹ 10; one rupee and above — up to ₹ 1,000.
Optional / Non-legal tender: Cheques, drafts, e-wallets — acceptance is at the option of the payee.

Prelims trap: Cryptocurrency (Bitcoin, Ether) is not legal tender in India. Only the e-Rupee (CBDC) issued by RBI is — with the same legal tender status as cash. The Union Budget 2022-23 introduced a 30% tax on Virtual Digital Assets without legalising them as currency.

2.3 Other Classifications

Near Money / Quasi Money: Highly liquid financial assets that are not currency itself but can quickly convert — time deposits, savings deposits, government bonds, treasury bills. Part of M2/M3, not M1.
Hot money: Capital that moves rapidly across borders chasing short-term yield. Volatile; a major source of EM currency stress.
Helicopter money: Milton Friedman's metaphor (1969) for direct, non-repayable distribution of money by the central bank to households — the most aggressive form of monetary expansion. Briefly debated in India during COVID-19; not adopted.
Plastic money: Credit and debit cards. Credit cards ≈ revolving short-term credit; debit cards ≈ instant withdrawal from your demand deposit.
Digital money: Money held and transferred electronically — UPI, NEFT, RTGS, IMPS, e-wallets, CBDC.

14. Money Supply — The Four Monetary Aggregates (M0–M3) and M4

The RBI's Second Working Group on Money Supply (1977, chaired by M.L. Ghosh) recommended the M0–M4 framework still in use today. A subsequent Y.V. Reddy Working Group (1998) refined the definitions to reflect financial innovation. The aggregates are arranged in decreasing order of liquidity.

M0 = Currency in Circulation + Bankers' Deposits with RBI + Other Deposits with RBI (Reserve Money / High-Powered Money)
M1 = Currency with the Public + Demand Deposits with Banks + Other Deposits with RBI (Narrow Money)
M2 = M1 + Savings Deposits with Post-Office Savings Banks
M3 = M1 + Time Deposits with the Banking System (Broad Money — the headline measure)
M4 = M3 + Total Deposits with Post Offices (excluding NSCs)

Aggregate	Name	Components	Liquidity	Issued/Compiled By
M0	Reserve / High-Powered Money	Currency in circulation + Bankers' deposits with RBI + Other deposits with RBI	Highest	RBI (weekly)
M1	Narrow Money	Currency with public + Demand deposits + Other deposits with RBI	Very High	RBI (fortnightly)
M2	—	M1 + Post-office savings deposits	High	RBI (fortnightly)
M3	Broad Money (Aggregate Monetary Resources)	M1 + Time deposits with banks	Moderate	RBI (fortnightly)
M4	—	M3 + Total post-office deposits (excl. NSCs)	Lowest	RBI

Mnemonic anchor: Move from M0 → M4 you add less-liquid items. M0 is what the RBI directly controls (its own liabilities). M3 is what the economy uses (the headline "money supply" reported by RBI every fortnight).

3.1 Demand Deposits vs Time Deposits

Demand Deposits (DD): Withdrawable on demand without notice — current account, savings account (chequable portion). Part of M1.
Time Deposits (TD): Repayable after a fixed maturity — fixed deposits, recurring deposits, NRE/NRO term deposits. Part of M3 only.
Other Deposits with RBI: Demand deposits of quasi-government bodies, foreign central banks, IMF; a tiny share of M0/M1.

3.2 New Monetary & Liquidity Aggregates (Y.V. Reddy Group, 1998)

The Reddy Working Group introduced parallel measures to capture financial-sector liquidity beyond traditional bank money:

NM1, NM2, NM3 — New monetary aggregates that reclassify deposits by residual maturity (less than one year vs more than one year) rather than the rigid demand/time split.
L1, L2, L3 — Liquidity aggregates that progressively add post-office deposits, FI deposits/borrowings, and finally non-bank public deposits with NBFCs.

Latest data — check for latest update or data
As per RBI's Weekly Statistical Supplement, M3 (broad money) growth has been hovering in the 10–11% YoY band in FY 2024-25, with currency-in-circulation growth moderating after the ₹ 2,000 note withdrawal (May 2023). Reserve Money (M0) growth has fallen sharply because the ₹ 2,000 returns reduced "currency in circulation". Always cross-check the latest RBI Bulletin or WSS for current figures.

15. Reserve Money & the Money Multiplier

The relationship between the money the RBI creates (M0) and the money the economy actually circulates (M3) is captured by the money multiplier (m). This is the single most important equation in this chapter for Prelims.

M3 = m × M0 ⇒ m = M3 / M0

m = (1 + c) / (c + r) where c = currency-deposit ratio, r = reserve-deposit ratio

4.1 Components of the Multiplier

Currency-Deposit Ratio (c or CDR): Currency held by public ÷ demand deposits. Driven by public preference for cash — high in rural/informal economies; falls as banking and digital payments spread.
Reserve-Deposit Ratio (r or RDR): Bank reserves ÷ deposits. The legally-required portion (CRR + SLR) plus voluntary excess reserves banks choose to hold.

Intuition: A lower c (less cash hoarding) or lower r (lower CRR/SLR) makes the multiplier larger — the same M0 supports more M3. Demonetisation 2016 briefly compressed c, raising the multiplier; the move to digital payments has had the same long-run effect.

4.2 Reserve Money — The "High-Powered" Money

Reserve Money (M0) is called high-powered because every ₹ 1 of it can support several rupees of M3 via the multiplier. Its sources (RBI's balance-sheet view):

Net RBI Credit to Government (Centre + States) — via G-Secs held by RBI
Net RBI Credit to Commercial Sector — via OMO purchases / refinance
Net Foreign Exchange Assets of RBI — the largest source today (forex reserves ≈ USD 650+ bn)
Government's Currency Liabilities to Public
Less: Net Non-Monetary Liabilities of RBI

Examiner's favourite: Which is NOT a component of M0? — Time deposits with banks. Which is the largest source of Reserve Money creation in India today? — Net Foreign Exchange Assets of RBI (a structural shift from the 1990s when net credit to government dominated).

16. Money Creation by Commercial Banks — Credit Multiplier

Commercial banks create money endogenously through the credit creation process. They do not lend out deposits one-for-one; they lend a multiple of their reserve base. This is the operational mechanism that gives the money multiplier its theoretical underpinning.

5.1 The Mechanism (assuming CRR = 10%, no leakage)

RBI injects ₹ 100 of fresh reserves into Bank A (say, by an OMO purchase).
Bank A retains ₹ 10 as CRR, lends ₹ 90. Borrower deposits the ₹ 90 with Bank B.
Bank B retains ₹ 9, lends ₹ 81. And so on, in a geometric series.
Total deposits created = 100 + 90 + 81 + … = 100 × (1/0.10) = ₹ 1,000

Credit (Simple Deposit) Multiplier = 1 / r where r = required reserve ratio
Maximum Credit Creation = (1 / r) × Initial Excess Reserves

5.2 Limits to Credit Creation

Cash leakage — not every borrower redeposits 100% of the loan; some is held as currency, reducing the multiplier.
Excess reserves — banks may hold reserves above the CRR for liquidity, voluntarily shrinking lending.
Demand for credit — if borrowers don't want loans (recession, balance-sheet repair), the multiplier stalls. This is the liquidity trap.
SLR & capital-adequacy norms — statutory liquidity and Basel III capital requirements cap how much a bank can lend.
Monetary policy stance — CRR/SLR/repo rate changes directly squeeze or release the multiplier.

Modern view: The post-2008 endogenous money view (BoE Quarterly Bulletin 2014, widely cited in RBI working papers) argues banks create deposits by lending, then seek reserves to meet CRR — reversing the textbook causality. Both views are syllabus-relevant; Prelims tests the textbook version.

17. The Money Market in India

The money market is the market for short-term debt instruments with maturity up to one year. It complements the capital market (long-term securities). RBI is its principal regulator and provides liquidity through the LAF (Liquidity Adjustment Facility).

6.1 Major Instruments

Instrument	Issuer	Maturity	Min. Lot	Key Feature
Call / Notice Money	Banks & PDs	Overnight to 14 days	—	Inter-bank; rate = "call rate" — the operational target proxy
Treasury Bills (T-Bills)	Govt. of India (via RBI)	91, 182, 364 days	₹ 25,000	Zero-coupon; sold at discount; risk-free
Cash Management Bills (CMBs)	Govt. of India (via RBI)	Less than 91 days	₹ 25,000	Introduced 2010 to manage temporary cash mismatches
Commercial Paper (CP)	Corporates, PDs, FIs	7 days – 1 year	₹ 5 lakh	Unsecured promissory note; min A2 credit rating
Certificates of Deposit (CDs)	Scheduled Commercial Banks, FIs	7 days – 1 year (FIs: 1–3 yrs)	₹ 5 lakh	Negotiable; demat form mandatory
Commercial Bills	Trade parties	Usually 90 days	—	Bill of exchange arising from genuine trade
Money Market Mutual Funds (MMMFs)	Asset Management Cos.	Open-ended	SEBI norms	Channel retail investors into money market; regulated by SEBI
Repo / Reverse Repo	RBI & eligible banks	Overnight & term	RBI prescribed	Secured lending against G-Secs; operational rate of monetary policy
Tri-party Repo (TREPS)	CCIL (clearing house)	Overnight & short term	—	Anonymous, electronic, central-counterparty-cleared; replaced CBLO in 2018

6.2 Money Market vs Capital Market

	Money Market	Capital Market
Maturity	Up to 1 year	More than 1 year
Instruments	T-bills, CPs, CDs, call money, repo	Equity shares, debentures, G-Secs (long), corporate bonds
Regulator	RBI	SEBI (equity), RBI (G-Secs)
Purpose	Working capital, liquidity	Long-term capital formation
Risk	Low (short tenor, mostly govt./bank paper)	Higher
Liquidity	High	Variable

Tri-party Repo (TREPS): Operated by Clearing Corporation of India Ltd. (CCIL) since November 2018. Mutual funds — not allowed in the call money market — can lend through TREPS, which has made it the deepest money-market segment by volume.

18. RBI as the Monetary Authority

The Reserve Bank of India was established on 1 April 1935 under the RBI Act, 1934 (based on the Hilton Young Commission, 1926). It was nationalised on 1 January 1949. Its preamble was amended in 2016 to add an explicit price-stability mandate.

RBI Preamble (post-2016 amendment): "… to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."

7.1 Organisational Structure

Central Board of Directors: Governor + up to 4 Deputy Governors + 4 directors nominated by GoI from local boards + 10 directors nominated by GoI + 2 government officials.
Four Local Boards: Mumbai (Western), Kolkata (Eastern), Chennai (Southern), New Delhi (Northern).
Monetary Policy Committee (MPC): Six members — statutory body since 2016 (covered in Section 9).
Headquarters: Mumbai (since 1937; originally Kolkata).

7.2 The Two Departments — Issue vs Banking

	Issue Department	Banking Department
Function	Issues currency notes	All other RBI banking functions
Backing	Minimum Reserve System (1956): ₹ 200 cr of gold + foreign securities (of which ₹ 115 cr gold)	Government deposits, banker to banks, FX operations
Liability	Currency notes issued	Deposits, advances

7.3 Functions of RBI

Monetary Authority: Formulates and implements monetary policy (MPC).
Issuer of Currency: Sole authority to issue notes (except ₹ 1, issued by GoI Ministry of Finance and signed by the Finance Secretary).
Banker to Government: Maintains Centre's accounts; auctions G-Secs; manages public debt.
Banker to Banks: Maintains CRR balances; lender of last resort (LoLR).
Regulator & Supervisor of the Financial System: Banks (BR Act 1949), NBFCs, payment systems (PSS Act 2007), credit information cos.
Manager of Foreign Exchange: FEMA, 1999; manages forex reserves (the largest source of M0 today).
Developmental Role: Priority sector lending norms, financial inclusion, payment-system innovation (UPI, CBDC).

Prelims trap: The ₹ 1 note is the only note not issued by RBI — it is a Government of India note signed by the Finance Secretary. All coins (under the Coinage Act 2011) are also issued by GoI, but distributed by RBI.

19. Monetary Policy Instruments — Quantitative & Qualitative

Monetary policy works by changing the cost and availability of money. RBI's toolkit is divided into quantitative (general) tools that affect overall money supply, and qualitative (selective) tools that target specific credit flows.

8.1 Quantitative Instruments

Instrument	Definition	Statutory Basis	Effect of Increase
Repo Rate	Rate at which RBI lends overnight to banks against G-Secs under LAF (the operational policy rate).	RBI Act 1934	Costlier borrowing → tightens money supply
Reverse Repo Rate (now SDF)	Rate at which RBI absorbs surplus liquidity. Replaced by Standing Deposit Facility (SDF) as the floor in April 2022.	RBI Act 1934	Higher absorption → tightens money supply
SDF (Standing Deposit Facility)	Uncollateralised overnight deposit facility; sets the floor of the LAF corridor. Repo − 25 bps.	RBI Act 1934 (s.17 amended)	Higher SDF → tightens
MSF (Marginal Standing Facility)	Overnight borrowing against SLR securities (up to 2% of NDTL). Ceiling of the corridor. Repo + 25 bps.	RBI Act 1934	Higher MSF → tightens
Bank Rate	Penal rate for default in CRR/SLR. Aligned with MSF since 2012; no longer an active policy lever.	RBI Act 1934 s.49	Higher → tightens
CRR (Cash Reserve Ratio)	% of NDTL banks must hold as cash with RBI. No statutory floor/ceiling since 2007.	RBI Act 1934 s.42	Higher → less lendable funds → tightens
SLR (Statutory Liquidity Ratio)	% of NDTL banks must hold in safe liquid assets (G-Secs, gold, cash). Ceiling: 40%.	BR Act 1949 s.24	Higher → tightens; also captive demand for G-Secs
OMO (Open Market Operations)	RBI buys/sells G-Secs in the secondary market to inject/absorb liquidity.	RBI Act 1934	Sale → absorbs liquidity → tightens
LAF (Liquidity Adjustment Facility)	Daily framework of repo (injection) & SDF (absorption) operations to anchor the call rate to the policy repo rate.	RBI Act 1934	Operational framework, not a lever
Operation Twist	Simultaneous purchase of long-tenor & sale of short-tenor G-Secs — flattens yield curve without changing total liquidity.	OMO variant	Compresses long-term rates

The LAF Corridor (post-April 2022): Floor = SDF (Repo − 25 bps); Centre = Repo Rate; Ceiling = MSF (Repo + 25 bps). Width = 50 bps. The earlier Reverse Repo continues to exist as an instrument but is no longer the operational floor — SDF replaced it because it does not require G-Sec collateral, giving RBI unlimited absorption capacity.

8.2 Qualitative / Selective Instruments

Margin Requirements: Difference between loan amount and value of collateral. Raising the margin reduces loan size against given collateral — used to curb speculative lending against shares, commodities.
Credit Rationing: Direct ceilings on credit to specific sectors (e.g. sensitive commodities).
Moral Suasion: Informal persuasion of banks via letters, speeches, meetings. Frequently used during stress episodes.
Direct Action: Penal measures — cancelling licences, restricting refinance — against banks violating norms.
Consumer Credit Regulation: Down-payment / instalment rules on hire-purchase loans for durables.
Priority Sector Lending (PSL): 40% of ANBC must go to priority sectors (agri 18%, MSE, weaker sections, etc.). A targeted credit-allocation tool.

Latest policy rates — check for latest update or data
Verify the most recent MPC resolution on rbi.org.in. The current corridor is anchored on the Repo Rate, with SDF at Repo−25bps and MSF at Repo+25bps. CRR was last changed in Dec 2024 (cut by 50 bps in two tranches). SLR has remained at 18% since 2020.

20. Monetary Policy Committee & Inflation Targeting

India formally adopted Flexible Inflation Targeting (FIT) through an amendment to the RBI Act, 1934 in May 2016, following recommendations of the Urjit Patel Committee on Monetary Policy Framework (2014). The amendment created the statutory MPC and codified the inflation target.

9.1 The Inflation Target

Target: 4% CPI (Combined) inflation with a tolerance band of ± 2% (i.e. 2–6%).
Set by: Central Government, in consultation with RBI, every five years. Current target: 4% ± 2% for the period April 2021 – March 2026.
Index used: CPI (Combined) — the headline number published by NSO, base year 2012 = 100.
Failure clause: If average CPI breaches the band for three consecutive quarters, RBI must send a written report to the Centre explaining (a) reasons, (b) remedial actions, (c) estimated time to return. This happened for the first time in November 2022.

9.2 Composition of MPC (Section 45ZB, RBI Act)

Member	Designation	How Appointed
1	RBI Governor — Chairperson	Ex-officio
2	Deputy Governor in charge of monetary policy	Ex-officio
3	One officer of RBI nominated by Central Board	RBI nomination
4–6	Three external members — experts in economics/banking/finance	Appointed by Central Government on the recommendation of a Search-cum-Selection Committee headed by the Cabinet Secretary; 4-year fixed term, non-renewable.

Voting: One member, one vote. In case of a tie, the Governor has a casting vote.
Quorum: 4 members, of whom at least one must be the Governor or the Deputy Governor.
Meetings: At least four times a year (in practice, six bi-monthly meetings).
Transparency: Resolution released same day; minutes published on the 14th day; Monetary Policy Report (MPR) published twice a year.

9.3 Stance Vocabulary

The MPC declares a stance alongside the rate decision. The standard ladder:

Accommodative — only rate cuts or status quo are on the table.
Neutral — both rate cuts and hikes are possible.
Calibrated tightening — only rate hikes or status quo.
Withdrawal of accommodation — ensuring inflation aligns with the target while supporting growth (introduced April 2022).

Prelims trap (recurring): The inflation target of 4% ± 2% is set by the Central Government in consultation with RBI, not by RBI alone. The target is reviewed every five years, not annually.

21. Demonetisation & Currency Management

Demonetisation is the act of stripping a currency unit of its legal-tender status. India has done it three times.

10.1 The Three Demonetisations

Year	Government	Notes Withdrawn	Stated Purpose
12 Jan 1946	Viceroy's Executive Council	₹ 1,000 and ₹ 10,000	Curb black money from war profiteering
16 Jan 1978	Janata Party (Morarji Desai)	₹ 1,000, ₹ 5,000 and ₹ 10,000 — under the High Denomination Bank Notes (Demonetisation) Act, 1978	Curb black money
8 Nov 2016	NDA-II (Modi)	₹ 500 and ₹ 1,000 (old series) — 86% of currency in circulation by value	Black money, counterfeit notes, terror financing, push to digital

10.2 The 2016 Demonetisation — Key Facts

Legal basis: Sub-section 2 of Section 26 of the RBI Act, 1934 (upheld 4-1 by Supreme Court Constitution Bench in Vivek Narayan Sharma v. Union of India, January 2023).
Notes returned: 99.3% of the demonetised currency came back to the banking system (RBI Annual Report 2017-18).
New ₹ 2,000 notes introduced — subsequently withdrawn from circulation by RBI on 19 May 2023 (status of legal tender retained, but no longer being issued).
Effects: Short-term GDP shock (Q4 FY17), surge in bank deposits, accelerated UPI adoption (UPI volumes rose 7× in the year after).

10.3 Currency Management Infrastructure

Banknote Printing: Two presses owned by RBI's Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (BRBNMPL) — Mysore (Karnataka) and Salboni (West Bengal); two owned by GoI's Security Printing & Minting Corporation of India Ltd. (SPMCIL) — Nashik and Dewas.
Coin Minting: Four India Government Mints under SPMCIL — Mumbai, Kolkata, Hyderabad, Noida.
Paper: Security Paper Mill, Hoshangabad (MP), and a new mill at Mysuru.
Clean Note Policy (since 1999): Soiled notes withdrawn, fresh notes pushed out through 4,000+ currency chests across the country.

Coinage Act, 2011: Coins are issued by the Government of India (Department of Economic Affairs) under this Act. Maximum denomination authorised: ₹ 1,000. Coins of 50 paise and below are legal tender up to ₹ 10; coins of ₹ 1 and above are legal tender up to ₹ 1,000.

22. Digital Money — UPI, CBDC, Crypto & the DPI Stack

India's digital-payments transformation is now a core public-finance story. The architecture rests on the India Stack (Aadhaar + UPI + DigiLocker + Account Aggregator) regulated by RBI, NPCI and MeitY.

11.1 UPI — Unified Payments Interface

Launched: 11 April 2016 by NPCI; built on the Immediate Payment Service (IMPS) rails.
Architecture: Inter-bank, account-to-account, real-time, push-and-pull, mobile-first — identified by a Virtual Payment Address (VPA).
Regulator: RBI (under PSS Act 2007); operator: NPCI (a Section-8 company owned by banks).
Scale: Crossed 16 billion+ transactions in a single month in FY 2024-25 — the world's largest real-time payments system by volume. check for latest update or data
Globalisation: Live in Bhutan, Nepal, Sri Lanka, Mauritius, France (first European country), UAE, Singapore (PayNow linkage Feb 2023). Discussions underway with several others.

11.2 CBDC — The Digital Rupee (e-Rupee, e₹)

Legal basis: Finance Act 2022 amended Section 2 of the RBI Act, 1934 to include "digital currency" in the definition of "banknote".
Wholesale CBDC (e₹-W): Pilot launched 1 November 2022 for settlement of secondary-market G-Sec transactions; nine banks initially.
Retail CBDC (e₹-R): Pilot launched 1 December 2022; closed-user-group (CUG) covering customers and merchants in select cities; token-based, denomination same as currency, distributed via banks.
Comparison vs UPI: UPI is a payment system that transfers commercial-bank money. CBDC is sovereign money in digital form — a direct liability of RBI. CBDC offers offline functionality and (programmable) traceability that UPI cannot.

11.3 Crypto & Virtual Digital Assets

Status: Not legal tender. Not banned (after the Supreme Court struck down RBI's 2018 banking circular in IAMAI v. RBI, March 2020).
Taxation (Budget 2022-23): Flat 30% tax on income from VDAs + 1% TDS above thresholds + no set-off of losses. The tax acknowledged VDAs as assets, not currency.
PMLA cover (March 2023): Virtual digital asset service providers brought under the Prevention of Money Laundering Act — KYC, reporting obligations to FIU-IND.
G20 New Delhi Summit (Sept 2023): Endorsed the IMF-FSB Synthesis Paper for a coordinated global crypto regulatory framework — an India-led outcome.

11.4 The Digital Public Infrastructure (DPI) Stack

Identity layer: Aadhaar (1.4 bn+ enrolments).
Payments layer: UPI, AePS (Aadhaar Enabled Payment System), BBPS (Bharat Bill Payment System), FASTag.
Data-sharing layer: Account Aggregator (RBI 2021), DigiLocker, Data Empowerment and Protection Architecture (DEPA).
Commerce layer: ONDC (Open Network for Digital Commerce, MoCI, 2022).
Credit layer: OCEN (Open Credit Enablement Network), ULI (Unified Lending Interface, RBI 2024).

Design philosophy — "presence-less, paperless, cashless"; open APIs let any public/private entity build atop shared rails (a platform, not a product). Aadhaar is issued by UIDAI under the Aadhaar Act, 2016; K.S. Puttaswamy v. Union of India (2017) made privacy a fundamental right (Art. 21), shaping later safeguards.

11.5 JAM Trinity & Direct Benefit Transfer (DBT)

JAM Trinity = Jan Dhan (PMJDY accounts) + Aadhaar (identity) + Mobile — the delivery backbone for DBT.
DBT credits subsidies/benefits directly into beneficiary accounts, cutting leakages & ghost/duplicate beneficiaries (PDS, LPG-PAHAL, MGNREGA wages, scholarships). check for latest update or data
Exclusion vs inclusion error — exclusion error = an eligible beneficiary wrongly denied (biometric/connectivity failure); inclusion error = an ineligible one wrongly included — opposite targeting failures.

11.6 Data Protection (DPDP Act 2023) & DPI Diplomacy

Digital Personal Data Protection Act, 2023 — India's first comprehensive data-protection law: consent-based processing, purpose limitation, a Data Protection Board of India (adjudicatory), Significant Data Fiduciary obligations, & a negative-list (blacklist) approach to cross-border data transfer (vs the EU GDPR whitelist/adequacy model). check for latest update or data
DPI as a global public good — India championed DPI during its G20 Presidency (2023) ("One Future Alliance"); India Stack-style architecture has been shared with African, Southeast-Asian & Caribbean nations — a soft-power, "solutions-exporter" dimension.

Recurring exam angle: Treat CBDC as currency in digital form (RBI liability) vs UPI as a payment rail moving commercial-bank deposits. Crypto is neither — it is a private asset class taxed at 30% with no legal-tender status. DPI = open public rails (India Stack) that private innovation builds on.

23. Current Affairs Anchor

Unified Lending Interface (ULI): Governor Das announced (Aug 2024) ULI as the "UPI moment for credit" — plug-and-play digital credit underwriting using consented data flows.
SFB → Universal Bank pathway (April 2024): RBI framework allowing SFBs with 5+ years' track record, listed status, minimum ₹ 1,000 cr net worth and Gross NPA ≤ 3% to apply. AU SFB filed first in Sept 2024.
NaBFID operations: Sanctioned over ₹ 1 lakh crore of infrastructure credit cumulatively by FY 2024-25. check for latest update or data
Paytm Payments Bank restrictions (Mar 2024): RBI barred fresh deposits/credit transactions over KYC violations — the highest-profile PB enforcement so far.
Citi exit: Sold its Indian consumer business to Axis Bank in 2023 — signalling structural shift in foreign-bank retail strategy in India.
DICGC payout speed: Under the 2021 amendment, depositors of stressed UCBs (PMC, Punjab & Maharashtra, Sangli Sahakari etc.) have received ₹ 5 lakh payouts within 90-day windows.
NPA recovery: Gross NPA ratio of SCBs has fallen sharply from the FY18 peak of 11.5% to under 3% by FY 2024-25 — the lowest in over a decade (RBI FSR Dec 2024). check for latest update or data
One State One RRB (Phase IV): Roadmap announced Nov 2020 progressing — target ~28 RRBs from 43.
HDFC Ltd. — HDFC Bank merger (1 July 2023): India's largest-ever corporate merger; HDFC (NBFC-HFC) absorbed into HDFC Bank — reshaping the housing-finance market.
RBI Scale-Based Regulation (SBR): The Upper Layer of NBFCs (15–16 firms) now under near-bank prudential rigour.
FI-Index FY24: ~64.2 — consistent improvement across access, usage and quality.

24. Previous Year Questions — Prelims (2014–2026)

Prelims 2014

The terms 'Basel II' and 'Basel III' are associated with:
(a) Functioning of the IMF (b) Reform of the WTO (c) Reform of the international banking system (d) Reform of the international monetary system
Answer: (c). Basel Accords reform banking-system capital, liquidity, leverage norms.

Prelims 2015

In the context of Indian economy, 'Open Market Operations' refer to:
(a) borrowing by SCBs from the RBI (b) lending by SCBs to industry & trade (c) purchase and sale of government securities by the RBI (d) None
Answer: (c). OMO is the buy/sell of G-Secs by RBI.

Prelims 2016

What is/are the purpose/purposes of Government's 'Sovereign Gold Bond Scheme' and 'Gold Monetisation Scheme'?
1. To bring the idle gold lying with households into the economy
2. To reduce India's dependence on import of gold
3. To curtail the current account deficit
(a) 1 only (b) 2,3 (c) 1,3 (d) 1,2,3
Answer: (d). All three apply.

Prelims 2017

What is/are the most likely advantages of implementing the 'Goods and Services Tax (GST)'? — not banking-specific.

Prelims 2018

Consider the following statements about Capital Adequacy Ratio (CAR):
1. CAR is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
2. CAR is decided by each individual bank.
(a) 1 only (b) 2 only (c) Both (d) Neither
Answer: (a). CAR is mandated by RBI per Basel III, not by individual banks.

Prelims 2019

In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?
1. Ad Hoc Committees set up by Parliament
2. Parliamentary Department Related Standing Committees
3. Finance Commission
4. Financial Sector Legislative Reforms Commission
5. NITI Aayog
(a) 1,2 (b) 1,3,4 (c) 3,4,5 (d) 2,4,5
Answer: (a). Only Parliamentary committees actively review regulators.

Prelims 2020

With reference to the Indian banking system, consider the following statements regarding Non-Banking Financial Companies (NBFCs):
1. They cannot engage in the acquisition of securities issued by the government.
2. They cannot accept demand deposits like Savings Account.
(a) 1 only (b) 2 only (c) Both (d) Neither
Answer: (b). NBFCs can hold G-Secs (in fact, statutory liquid investments); they cannot accept demand deposits.

Prelims 2021

With reference to 'Urban Cooperative Banks' in India, consider the following statements:
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
(a) 1 only (b) 2,3 (c) 1,3 (d) 1,2,3
Answer: (b). Post BR (Amendment) Act 2020, UCBs are fully under RBI; Statement 1 is wrong. UCBs were brought under BR Act in 1966.

Prelims 2022

With reference to Non-Fungible Tokens (NFTs), consider the following statements: — not banking-specific.

Prelims 2023

With reference to Central Bank Digital Currencies (CBDCs), consider the following statements:
1. It is possible to make payments in a digital currency without using US dollar or SWIFT system.
2. A digital currency can be distributed with a condition programmed into it such as a time-frame for spending it.
(a) 1 only (b) 2 only (c) Both (d) Neither
Answer: (c). Both are correct — key CBDC properties.

Prelims 2023

In India, which one of the following compiles information on industrial disputes, closures, retrenchments and lay-offs in factories employing workers? — not banking.

Prelims 2024

With reference to the Insolvency and Bankruptcy Code (IBC), consider the following:
1. The Corporate Insolvency Resolution Process must be completed within 330 days from the insolvency commencement date including any extension.
2. The Committee of Creditors approves a resolution plan with at least 66% voting share.
3. The default threshold for initiating CIRP against a corporate debtor was raised from ₹ 1 lakh to ₹ 1 crore in 2020.
(a) 1,2 (b) 2,3 (c) 1,3 (d) 1,2,3
Answer: (d). All three are correct.

Prelims 2025

Which of the following is/are correct regarding Payments Banks in India?
1. They can accept demand deposits up to ₹ 2 lakh per individual customer.
2. They can issue credit cards.
3. They can distribute mutual funds, insurance and pension products as a third party.
(a) 1,2 (b) 1,3 (c) 2,3 (d) 1,2,3
Answer: (b). Payments Banks cannot issue credit cards; the deposit cap was raised to ₹ 2 lakh in April 2021.

Prelims 2026

With reference to Indian banking, which of the following statements is/are correct?
1. Under DICGC cover, bank deposits are insured up to ₹ 5 lakh per depositor per bank.
2. The minimum CRAR (including Capital Conservation Buffer) for an Indian commercial bank is 11.5%.
3. Domestic Systemically Important Banks (D-SIBs) in India currently include SBI, HDFC Bank, ICICI Bank and Bank of Baroda.
(a) 1,2 (b) 2,3 (c) 1,3 (d) 1,2,3
Answer: (d). All three are correct as of FY 2024-25.

25. Previous Year Questions — Mains (2014–2025)

Mains 2014, GS-III

Discuss the rationale and impact of the policy of disinvestment in the public-sector banks of India.

Mains 2015, GS-III

"In the villages itself no form of credit organisation will be suitable except the cooperative society." — All India Rural Credit Survey. Discuss this statement in the background of rural finance in India.

Mains 2016, GS-III

"The Reserve Bank of India's recent directives relating to 'Pre-payment Penalty' have implications for the dynamics of the banking sector." Comment.

Mains 2017, GS-III

Examine the role of supervisory bodies in correcting the malpractices of banks in India. Have the recent regulatory reforms been adequate in checking the rise in NPAs?

Mains 2018, GS-III

"What are the salient features of the Insolvency and Bankruptcy Code, 2016? How far will it be effective in tackling the menace of huge non-performing assets (NPAs) in India?"

Mains 2019, GS-III

"Public-sector bank mergers will result in stronger banks with greater capital absorption capacity." Critically examine the consolidation drive in Indian public-sector banking.

Mains 2020, GS-III

Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realising its potential GDP? — cross-link to banking constraints (credit growth).

Mains 2021, GS-III

Distinguish between Capital Budget and Revenue Budget. Explain the components of both. — peripheral.

Mains 2022, GS-III

Comment on the important changes introduced in respect of the Insolvency and Bankruptcy Code, 2016 in the recent past. Discuss the rationale of bringing in a Pre-Packaged Insolvency Resolution Process (PIRP) for MSMEs.

Mains 2023, GS-III

"Bringing all Urban Cooperative Banks under the regulatory ambit of RBI has been a long-pending reform." Examine the rationale behind the Banking Regulation (Amendment) Act, 2020 and its likely impact on depositor protection.

Mains 2024, GS-III

"India's twin-balance-sheet problem has eased considerably." Discuss the contribution of the Asset Quality Review (AQR), Insolvency and Bankruptcy Code (IBC) and Public Sector Bank mergers in restoring asset quality of Indian commercial banks.

Mains 2025, GS-III

"The Unified Lending Interface (ULI) has the potential to do for credit what UPI did for payments." Critically examine this claim with reference to the Account Aggregator framework, Scale-Based Regulation of NBFCs and the future of cash-flow-based lending in India.

26. Revision Box — 15-Minute Recap

15-Point Recap

RBI: Estd 1 April 1935 (RBI Act 1934, Hilton Young Commission); nationalised 1 Jan 1949; banking regulator under BR Act 1949.
Scheduled vs Non-Scheduled: Second Schedule of RBI Act 1934; paid-up & reserves ≥ ₹ 5 lakh; brings refinance and clearing-house access.
Nationalisation: 1969 (14 banks > ₹ 50 cr) and 1980 (6 banks > ₹ 200 cr) under the Banking Companies Acquisition Acts. R.C. Cooper v. UoI (1970) struck the Ordinance; Act 1970 cured it.
Mega-merger 1 Apr 2020: 10 PSBs → 4 anchors (PNB, Canara, Union, Indian). Today 12 PSBs.
RRBs: 2 Oct 1975 (Narasimham WG 1975); 50:35:15 capital (Centre:Sponsor Bank:State). 196 (1990) → 43 (2024).
Cooperatives: Three-tier rural (StCB → DCCB → PACS) + parallel SCARDB/PCARDB for long term. UCBs brought fully under RBI by BR (Amendment) Act 2020 after PMC Bank crisis.
Differentiated Banks (Nachiket Mor 2014): Payments Banks (₹ 100 cr; ₹ 2 lakh deposit cap; no lending/credit cards); SFBs (₹ 200 cr; 75% PSL; on-tap since Dec 2019; universal-bank pathway Apr 2024).
NBFCs: Sec 45-I(c) RBI Act; 50-50 test; Scale-Based Regulation (Oct 2021/2022) — Base/Middle/Upper/Top layers.
Basel III in India: CRAR 9% + CCB 2.5% = effective floor 11.5%. D-SIBs: SBI, HDFC, ICICI, BoB. No G-SIB from India.
NPA: 90 days overdue. Classes: Standard / Sub-Standard / Doubtful / Loss. Gross NPA peaked 11.5% (Mar 2018), now under 3% (FY24-25).
Twin Balance Sheet: CEA Arvind Subramanian, Econ Survey 2016-17. Triggered AQR (Jul 2015) by Raghuram Rajan.
IBC 2016: Default ≥ ₹ 1 crore; CIRP within 330 days; CoC 66%/51%; NCLT (corp) / DRT (individual). Bad bank = NARCL + IDRCL.
DICGC: Insures up to ₹ 5 lakh per depositor per bank; 2021 Amendment → payout within 90 days during moratorium.
SARFAESI 2002: Out-of-court recovery for NPAs > ₹ 1 lakh; does not apply to agricultural land.
Financial Inclusion: PMJDY (28 Aug 2014); JAM Trinity → DBT (₹ 36 lakh cr+); FI-Index since Aug 2021 (~64 in FY24); ULI (Aug 2024) = next leap into credit.

PSBs	12
Private Banks (new + old)	~21
Foreign Banks	~45
RRBs	43
Small Finance Banks	11
Payments Banks	6
UCBs	~1,500
NBFCs (registered)	~9,400

SBI	+0.80%
HDFC Bank	+0.60%
ICICI Bank	+0.40%
Bank of Baroda	+0.20%

Banking in India — Money, Monetary Policy, Architecture & Stress

On this page

Conceptual Clarity — Three Lenses

1. Evolution of Indian Banking — A Timeline

1.1 The Pre-Independence Phase

1.2 The Post-Independence Phase — Six Reform Waves

2. Structure of the Indian Banking System

2.1 The Apex: RBI

2.2 Scheduled vs Non-Scheduled Banks

2.3 The Full Architecture

3. Commercial Banks — SCBs, PSBs, Private & Foreign

3.1 Public Sector Banks (PSBs)

3.2 The 12 PSBs Today

3.3 Private Sector Banks

3.4 Foreign Banks

4. Cooperative Banks & Regional Rural Banks (RRBs)

4.1 The Cooperative Credit Pyramid

4.2 The Dual Control Problem & the 2020 Fix

4.3 Regional Rural Banks (RRBs)

5. Differentiated Banks — Payments, Small Finance, Local Area

5.1 Payments Banks (PBs)

5.2 Small Finance Banks (SFBs)

5.3 Local Area Banks (LABs)

5.4 New Specialised Institutions

6. NBFCs & the Shadow Banking Layer

6.1 Legal Definition & Registration

6.2 Scale-Based Regulation (SBR) Framework — October 2021

6.3 Major NBFC Categories

6.4 Why the "Shadow Banking" Worry?

7. Bank Nationalisation & Mergers — The Full Story

7.1 Pre-Nationalisation Stocktake (1947–1969)

7.2 First Nationalisation — 19 July 1969

7.3 Second Nationalisation — 15 April 1980

7.4 Rationale and Critique

7.5 The Merger Wave (2017–2020)

8. Key Banking Legislations

8.1 DICGC — Deposit Insurance Cover

8.2 SARFAESI Act, 2002 — The Banks' Recovery Hammer

9. NPAs, Asset Quality & Basel III

9.1 NPA Definition & Classification (RBI Master Circular)

9.2 Key Ratios

9.3 The Twin Balance-Sheet Problem (TBS)

9.4 Recovery and Resolution Toolkit Pre-IBC

9.5 Basel III — Capital, Liquidity, Leverage

10. PCA, IBC & Resolution Mechanisms

10.1 Prompt Corrective Action (PCA) Framework

10.2 Insolvency & Bankruptcy Code (IBC), 2016

10.3 IBC Architecture

10.4 The CIRP Timeline

10.5 Key IBC Amendments

10.6 IBC Performance (latest IBBI data)

10.7 National Asset Reconstruction Company Ltd. (NARCL — the "Bad Bank")

11. Priority Sector Lending & Financial Inclusion

11.1 Priority Sector Lending (PSL) — The Allocation

11.2 Financial Inclusion — The Architecture

11.3 Doorstep Banking & Digital Inclusion

12. What is Money — Definition & Evolution

1.1 Definitions

1.2 The Four Functions of Money

1.3 Evolution of Money — Eight Stages

13. Types & Forms of Money

2.1 By Material Backing

2.2 By Legal Status — Legal Tender

2.3 Other Classifications

14. Money Supply — The Four Monetary Aggregates (M0–M3) and M4

3.1 Demand Deposits vs Time Deposits

3.2 New Monetary & Liquidity Aggregates (Y.V. Reddy Group, 1998)

15. Reserve Money & the Money Multiplier

4.1 Components of the Multiplier

4.2 Reserve Money — The "High-Powered" Money

16. Money Creation by Commercial Banks — Credit Multiplier

5.1 The Mechanism (assuming CRR = 10%, no leakage)

5.2 Limits to Credit Creation

17. The Money Market in India

6.1 Major Instruments

6.2 Money Market vs Capital Market

18. RBI as the Monetary Authority

7.1 Organisational Structure

7.2 The Two Departments — Issue vs Banking

7.3 Functions of RBI