Learn RBI supervision in detail, including RBS, SPARC, CAMELS, PCA, UCB and NBFC supervision, enforcement, money markets, G-Secs, forex and financial-market regulation.

RBI Supervision: Complete Guide to Bank, NBFC, UCB and Financial-Market Oversight

The Reserve Bank of India’s role in India’s financial system goes far beyond setting monetary policy.

It also regulates financial institutions, supervises regulated entities, enforces regulatory requirements and develops financial markets.

For examination purposes, the distinction between regulation, supervision and enforcement is one of the most important ideas to understand.

Regulation establishes the framework within which financial entities operate. Supervision examines whether individual entities comply with that framework and whether their risk management is adequate. Enforcement addresses violations through appropriate action.

The Reserve Bank’s supervisory architecture has evolved considerably. The older compliance-oriented CAMELS approach has been replaced for Scheduled Commercial Banks by a risk-based framework known as SPARC — Supervisory Program for Assessment of Risk and Capital.

At the same time, RBI supervises different categories of entities through differentiated approaches, including commercial banks, NBFCs, UCBs and other RBI-regulated institutions.

What is RBI Supervision?

Supervision is the process through which regulatory rules and norms are enforced at the individual-entity level.

This differs from regulation.

Regulation establishes rules applicable to market participants generally, whereas supervision assesses the behaviour, risk profile and compliance of specific institutions.

The intensity of supervision depends on the perceived risk of the entity.

The ultimate objectives are:

depositor protection
safety and soundness
financial stability.

Why Does RBI Supervise Banks?

Banks are structurally vulnerable because they undertake:

maturity transformation
liquidity transformation
leverage.

They may fund long-term illiquid assets with short-term liabilities.

They are also central to payment systems and monetary-policy transmission.

A banking failure can therefore affect depositors, other financial institutions and the real economy.

Supervision helps ensure that banks comply with regulations and maintain appropriate:

risk culture
governance
internal controls
solvency.

Regulation vs Supervision

This distinction is frequently tested.

Regulation asks:

What rules should financial institutions follow?

Supervision asks:

Is this particular institution following the rules and managing its risks properly?

Regulation therefore has a system-wide character.

Supervision is entity-specific.

This also explains why supervision can be differentiated according to an institution’s risk profile.

Evolution from CAMELS to Risk-Based Supervision

Historically, RBI’s banking supervision used the CAMELS framework.

CAMELS stands for:

Capital Adequacy
Asset Quality
Management
Earnings
Liquidity
Sensitivity to Market Risk.

In India’s implementation, however, the final “S” represented Systems and Control.

The framework relied on annual on-site examinations supported by off-site surveillance.

The global financial crisis exposed weaknesses in such relatively uniform approaches.

Financial institutions were becoming more complex, while supervisory resources remained limited.

The logical response was to allocate supervisory resources according to risk.

The K.C. Chakrabarty Committee recommended movement toward risk-based supervision, which RBI implemented from 2013 onwards.

The PDF states that Scheduled Commercial Banks are now under the RBS framework and the earlier CAMELS framework is no longer in vogue for them.

SPARC — RBI’s Risk-Based Supervisory Framework

RBI’s RBS framework is known as:

Supervisory Program for Assessment of Risk and Capital — SPARC

Unlike CAMELS, SPARC is:

risk-based
forward-looking
proactive
dynamic.

Its three principal objectives are:

differentiated supervision based on risk profile;
concentration on materially significant risks;
improvement of risk-management systems and controls.

How Does Risk-Based Supervision Work?

RBS evaluates two dimensions.

Risk of failure

This considers:

inherent risk
controls
governance
oversight
capital.

Impact of failure

This considers the institution’s importance to the wider financial system.

Thus, a large systemically important bank may receive greater supervisory attention than a much smaller bank even if both appear financially sound.

Off-Site and On-Site Supervision

RBI combines off-site surveillance with on-site examination.

Off-site supervision

RBI analyses:

returns
financial statements
business plans
group structures
internal audit
external audit observations
macroeconomic conditions
market intelligence.

Its purpose is to identify risk areas and determine where on-site examination should concentrate.

On-site examination

Supervisors investigate identified risks directly.

They examine:

policies
processes
controls
regulatory reporting
Board oversight
risk management
internal audit
compliance.

Therefore:

Off-site = risk discovery; on-site = detailed verification.

Senior Supervisory Manager

One of SPARC’s important features is the Senior Supervisory Manager, or SSM.

The SSM acts as a single supervisory point of contact within RBI for the bank.

The SSM develops a deep understanding of:

the bank
its operations
its risk profile
its controls.

This helps make supervision more continuous and coherent.

Prompt Corrective Action

PCA is a structured early-intervention mechanism.

It was introduced in:

December 2002

The revised framework was notified in 2017 and revised again in 2021, becoming effective from 1 January 2022.

For Scheduled Commercial Banks, the revised framework monitors:

capital
asset quality
leverage.

The relevant indicators include:

CRAR/Common Equity Tier 1 ratio
Net NPA ratio
Tier 1 leverage ratio.

SFBs, Payments Banks and RRBs are excluded from the SCB PCA framework described in the PDF.

Supervision of Urban Co-operative Banks

UCBs operate within India’s distinctive dual-regulation architecture.

The RBI regulates their banking functions.

Co-operative authorities retain responsibility for specified administrative/management matters.

UCBs are subject to:

on-site inspection
off-site surveillance
prudential regulation
governance requirements
capital requirements
cyber-security requirements.

The revised framework categorises UCBs into four tiers based primarily on deposits.

The tiers range from:

Tier 1 → Tier 4

with Tier 4 comprising UCBs having deposits above ₹10,000 crore.

The PDF also describes differentiated net-worth and CRAR requirements.

Supervision of Rural Co-operative Banks

The rural short-term co-operative credit structure is:

State Co-operative Bank → District Central Co-operative Bank → PACS

RBI regulates StCBs and DCCBs.

NABARD supervises them.

PACS fall outside RBI’s banking-regulation framework as described in the PDF and are regulated by State Governments.

This division is a favourite conceptual distinction:

RBI = regulation; NABARD = supervision.

NBFC Regulation and Supervision

NBFCs provide bank-like financial intermediation without being banks.

Their importance comes from their ability to:

reach underserved borrowers
provide last-mile credit
innovate
diversify financial risks.

But their interconnectedness can transmit stress to the wider financial system.

RBI therefore applies a scale-based framework.

The four layers are:

Base Layer
Middle Layer
Upper Layer
Top Layer.

The Top Layer is intended to remain empty except in circumstances of substantial systemic risk.

Principal Business Criteria for NBFCs

A company generally falls within the NBFC framework if both of the following exceed 50%:

financial assets as a proportion of relevant total assets;
income from financial assets as a proportion of gross income.

Therefore:

Financial assets > 50% + financial income > 50%

Both conditions matter.

NBFC Digital Innovation

RBI has created regulatory frameworks for emerging models including:

NBFC-P2P

Connects borrowers and lenders through a platform.

NBFC-AA

Facilitates consent-based aggregation of financial information.

These demonstrate an important regulatory philosophy:

Regulation should permit innovation while controlling systemic, consumer and operational risks.

RBI Enforcement

Enforcement is the third component of the oversight architecture.

Regulation → Supervision → Enforcement

The Enforcement Department was established on:

3 April 2017

to create a more structured and separate enforcement function.

Its mandate subsequently expanded to several RBI-regulated entities and payment-system operators.

Enforcement action is based on principles such as:

materiality
proportionality
intent
consistency
predictability.

It is primarily concerned with monetary-penalty violations and is not a substitute for consumer grievance redressal.

RBI and Financial Markets

RBI’s financial-market responsibilities cover:

money market
G-Sec market
forex market
related derivatives.

SEBI broadly regulates the equity market.

RBI combines:

market development + regulation

to improve market depth, transparency, resilience and integrity.

Money Market

The money market deals in short-term financial assets.

Key segments include:

Call Money
Notice Money
Term Money
Repo
CP
CD
NCDs.

Remember:

Call = 1 day
Notice = 2–14 days
Term = 15 days–1 year

Government Securities Market

The G-Sec market determines the risk-free benchmark rate and provides the foundation for the fixed-income market.

Central Government issues:

Treasury Bills
dated securities.

State Governments issue:

State Government Securities.

The G-Sec market is crucial for:

government borrowing
monetary operations
collateral
liquidity
yield-curve formation.

Forex Market

India’s exchange-rate evolution can be remembered as:

Par value → Basket peg → Managed float

Important milestones:

1978 — intra-day forex trading
1991 — exchange-rate adjustment
1992 — LERMS
1993 — unified market-determined exchange rate
1994 — current-account convertibility.

The modern market contains:

spot
forwards
swaps
options
currency futures
currency options.

Final Conceptual Framework

The entire Part 1 can be compressed into one architecture:

Regulation

↓

Supervision

↓

Risk discovery

↓

Risk-based assessment

↓

Early intervention / PCA

↓

Enforcement where violations occur

while simultaneously:

Money Markets + G-Sec Markets + Corporate Bonds + Forex + Derivatives

support:

Liquidity + Price Discovery + Monetary Transmission + Capital Formation + Risk Management

That is the conceptual backbone connecting Chapters 8–12.

Part 1 Rapid Revision — 30 Facts You Must Know

DoS = Department of Supervision.
Regulation = rules; supervision = entity-specific enforcement.
BFS established November 1994.
DoS carved from DBOD in December 1993.
Unified DoS restored in November 2019.
Basel Core Principles first published September 1997.
Latest revision mentioned = September 2012.
29 Basel supervisory principles.
CAMELS was the earlier supervisory model.
SCB RBS implemented from 2013.
SPARC = Supervisory Program for Assessment of Risk and Capital.
SSM = single supervisory contact.
CIMS replaced OSMOS in June 2023.
CRILC introduced in 2014.
CFR operational from 20 January 2016.
DAKSH launched 6 October 2022.
PCA introduced December 2002.
Revised SCB PCA effective 1 January 2022.
UCBs have four tiers.
UCB Tier 1 CRAR = 9%; Tier 2–4 = 12%, as stated.
RRB/StCB/DCCB supervisory distinction: NABARD supervises specified rural institutions.
NBFC PBC = both financial assets >50% and financial income >50%.
NBFC SBR = Base/Middle/Upper/Top.
NBFC-AA = consent-based financial-data aggregation.
NBFC-P2P = lending platform, not own-book lender.
EFD established 3 April 2017.
Call/Notice/Term = 1 / 2–14 / 15 days–1 year.
CP unsecured; NCD secured.
FAR introduced March 2020.
LEI = 20-character identifier.

CHAPTER 8 — SUPERVISION OF COMMERCIAL BANKS

Priority: EXTREME

Chapter 7 dealt primarily with regulation. Chapter 8 deals with supervision.

The distinction is fundamental:

Regulation = making the rules.
Supervision = enforcing and assessing compliance with those rules at entity level.

The PDF defines supervision as the enforcement of rules and regulations and the identification of loopholes or areas where regulatory reinforcement may be required. RBI supervises commercial banks in India as well as branches of Indian banks abroad.

8.1 Regulation vs Supervision

Regulation	Supervision
Lays down rules/norms	Enforces rules/norms
System-wide	Entity-specific
Applies uniformly to market participants	Intensity depends on perceived risk
“What are the rules?”	“Is this entity following them?”

Memory trigger

Regulation writes the rulebook; supervision checks the player.

Both ultimately pursue:

depositor protection
financial stability.

8.2 Why supervise banks?

Banks:

perform maturity and liquidity transformation;
are highly leveraged;
have asset-liability mismatches;
support critical payment systems;
receive liquidity/depositor-support mechanisms.

These characteristics create the possibility of:

excessive risk-taking;
deterioration in balance sheets;
bank failures;
systemic instability.

A failed banking system can impair financial intermediation between savers and borrowers and damage the real economy.

Therefore, supervision ensures that banks comply with rules in letter and spirit, while their risk culture and governance do not threaten solvency.

8.3 Evolution of Banking Supervision

Pre-1990s

Supervision was largely an adjunct to regulation.

Focus included:

licensing
pricing of banking services
interest-rate administration
credit
reserve requirements
liquid-asset requirements.

Post-1991

The balance-of-payments crisis and banking-sector reforms changed the supervisory approach.

Supervision moved:

Intrusive micro-level intervention → broader prudential supervision

This coincided with:

interest-rate deregulation
private ownership
adoption of Basel standards
movement toward international best practices.

8.4 Important Committees/Working Groups

Know the chronology:

Year	Committee / Group	Key theme
1995	S. Padmanabhan Working Group	On-site supervision
2001	Vipin Malik Working Group	Consolidated accounting/supervision
2004	Shyamala Gopinath group	Systemically important financial intermediaries/financial conglomerates
2012	K.C. Chakrabarty High-Level Steering Committee	Supervisory processes
2018	Sudarshan Sen group	FinTech and digital banking
2021	Jayant Kumar Dash group	Digital lending

8.5 Basel Core Principles

The Basel Committee on Banking Supervision (BCBS) originally published its Core Principles for Effective Banking Supervision in:

September 1997

They became a benchmark for countries assessing their supervisory systems.

The latest revision mentioned in the PDF was:

September 2012

with 29 core principles.

These address:

supervisory powers/responsibilities
supervisory expectations of banks
corporate governance
risk management
compliance with supervisory standards.

8.6 Five Attributes of Good Supervision

The IMF note cited by the PDF identifies five qualities.

1. Intrusive

Supervisor should deeply understand:

business model
risk culture
governance.

2. Sceptical but proactive

Supervisors should question banks even during good times.

3. Comprehensive

Supervision should include:

subsidiaries
off-balance-sheet structures
peripheral risks.

4. Adaptive

Supervisors must continually upgrade skills as financial innovation changes.

5. Conclusive

Supervisory findings must be followed through to their logical conclusion.

Memory

I-S-C-A-C

Intrusive – Sceptical – Comprehensive – Adaptive – Conclusive

8.7 Ability vs Will to Act

Good supervision needs two supporting pillars.

Ability to act

Requires:

legal authority
resources
clear strategy
robust internal setup
effective relationship with other regulators.

Will to act

Requires:

clear mandate
operational independence
accountability
skilled staff
healthy industry relationship
effective relationship with bank boards.

8.8 RBI’s Institutional Supervisory Structure

RBI’s statutory supervisory authority derives from:

RBI Act, 1934
Banking Regulation Act, 1949.

Section 35 of BR Act

Inspection of banks verifies whether the conditions attached to their banking licence continue to be fulfilled.

Board for Financial Supervision — BFS

Established:

November 1994

It is a sub-committee of RBI’s Central Board.

Objective:

Dedicated and integrated supervision of credit institutions.

It covers:

scheduled commercial banks
urban co-operative banks
financial institutions
NBFCs.

Composition

RBI Governor → Chairman
Deputy Governor in charge of banking supervision → Vice-Chairman
other Deputy Governors → ex-officio members
four non-official Central Board directors → co-opted members for two years.

DoS acts as Secretariat.

BFS normally meets monthly and deliberates supervisory issues, including bank ratings.

8.9 Department of Supervision

Before 1993:

DBOD handled banking supervision and regulation.

In:

December 1993

the Department of Supervision was carved out to separate supervisory functions from regulatory functions.

It was subsequently divided into:

Department of Banking Supervision — DBS
Department of Non-Banking Supervision — DNBS
Department of Co-operative Bank Supervision — DCBS.

In:

November 2019

these supervisory functions were reintegrated into a unified:

Department of Supervision (DoS)

to address:

size
complexity
interconnectedness
systemic risk
supervisory arbitrage
information asymmetry.

A College of Supervisors was established for specialised training.

8.10 CAMELS

Before the shift to risk-based supervision, banks were supervised using:

CAMELS

C — Capital Adequacy

A — Asset Quality

M — Management

E — Earnings

L — Liquidity

S — Sensitivity to Market Risk

However, in India’s CAMELS framework:

S = Systems and Control

The approach involved:

annual on-site examination
off-site surveillance.

It primarily assessed financial condition, solvency and liquidity.

The PDF identifies a major weakness:

It was essentially a single-size-fits-all approach and struggled to keep pace with innovation.

8.11 Risk-Based Supervision — RBS

The global financial crisis strengthened the case for risk-based supervision.

Why?

Reason 1

Banking became more complex.

Reason 2

Supervisory resources are scarce.

Therefore:

Resources must be concentrated where risks are greatest.

The K.C. Chakrabarty Committee recommended movement from compliance-based supervision to a risk-based approach.

Implementation began:

2013 onwards

The PDF states that all Scheduled Commercial Banks are now under RBS and the erstwhile CAMELS framework is no longer in vogue for them.

8.12 What is RBS?

Risk-Based Supervision is an ongoing process in which:

risks of a bank are assessed;
appropriate supervisory plans are designed;
those plans are implemented.

It identifies material/critical risks and assesses:

the bank’s ability to manage them;
vulnerability to adverse outcomes.

Two fundamental objectives

Safety and soundness of individual banks + depositor protection
Financial-system stability

8.13 RBS vs Compliance-Based Supervision

Both involve:

on-site examination
off-site data analysis.

But RBS adds:

structured risk identification
risk quantification
assessment of risk-management systems
interaction between different risks
proportional allocation of supervisory resources
early identification of emerging risks.

The key difference

Compliance-based:

“Did you follow the rule?”

Risk-based:

“What can go wrong, how serious is it, and are your controls/capital sufficient?”

8.14 SPARC

RBI’s RBS framework is called:

SPARC — Supervisory Program for Assessment of Risk and Capital

CAMELS

performance-based
reactive
point-in-time.

SPARC

risk-based
forward-looking
proactive
dynamic.

Three key objectives of SPARC

Differentiated supervision
Focus on high-risk areas
Improve bank risk-management systems, oversight and controls

8.15 Two Dimensions of RBS

RBS considers:

Dimension 1 — Risk of failure

Based on:

inherent risks
entity-level controls
governance
oversight
available capital.

Dimension 2 — Impact of failure

Considers:

How important is the bank/group to the overall financial system?

Brilliant exam formulation

Risk of failure × Impact of failure = supervisory attention

8.16 Off-site vs On-site Supervision

Off-site

Uses:

returns
data
documents
management discussions
financial information.

Purpose:

Identify key risk areas and determine where on-site investigation is required.

On-site

Conducted by supervisors at the bank.

Examines:

processes
products
policies
regulatory reporting
controls
Board oversight
risk management
internal audit
regulatory compliance
accounting standards.

Memory

Off-site discovers. On-site verifies.

8.17 Senior Supervisory Manager — SSM

A key SPARC feature.

Purpose:

Single point of supervisory contact for a bank within RBI.

The SSM develops deep knowledge of the bank through:

off-site monitoring
on-site examination
continuous engagement.

8.18 Types of Supervisory Approaches

1. Full Scope Supervision — FS

Most detailed/intrusive.

Covers:

all material risks.

2. Select Scope Supervision — SS

Off-site supervision dominates.

On-site work focuses on critical operations.

Examples:

IT/cyber risks in private banks
compliance in SFBs.

3. Thematic Assessment — TA

Examines a specific theme across a group/all banks.

Examples:

asset quality
cyber risk.

4. Targeted Scrutiny — TS

Specific issue based on:

supervisory intelligence
market intelligence.

8.19 SAKAR

Supervisory Assessment of KYC/AML Risks

A risk-based KYC/AML supervisory framework was implemented for SCBs in:

2020–21

It uses:

KYC/AML-specific data templates
risk indicators
risk profiling
focused on-site assessments.

It was extended to selected:

UCBs
NBFCs.

8.20 Micro Data Analysis — MDA

RBI receives data dumps from banks covering:

customer level
account level
transaction level.

These are analysed for:

compliance
banking ethics
best-practice implementation.

Results can be passed to SSM teams for further examination and Risk Assessment Reports.

8.21 Advanced Supervisory Analytics Group — ASAG

Uses:

AI
machine learning
SupTech.

Purpose:

forward-looking risk assessment
standardisation
scalable data collection/analysis
reducing excessive dependence on manual analysis while retaining human judgement.

Applications include:

supervisory-data validation
social-media insights
Board oversight assessment
management analysis
fraud-vulnerability assessment
market/operational/concentration risks.

8.22 Grouping of Banks

RBI uses differentiated supervision.

Banks are grouped based primarily on:

market share of reported assets

Supervisory intensity generally rises with the category, but can be modified depending on the actual risks of an entity.

8.23 CIMS and CRILC

CIMS

The earlier:

OSMOS — Off-site Monitoring and Surveillance System

was replaced by:

CIMS — Centralised Information Management System

in:

June 2023

CIMS collects returns with various periodicities:

weekly
fortnightly
monthly
quarterly
half-yearly
annual.

CRILC

Central Repository of Information on Large Credits

introduced in:

2014

It collects credit information on large borrowers.

It helps:

reduce information asymmetry
improve credit appraisal
support supervisors
support policymaking.

8.24 Central Fraud Registry — CFR

Operational since:

20 January 2016

It is a searchable central database used by banks to identify fraud risks.

Banks are expected to use CFR information for:

credit-risk management
fraud-risk management.

8.25 Cyber Security Supervision

A dedicated:

Cyber Security & IT Examination Cell — CSITE

was established in:

June 2015

An Expert Panel on Cyber Security and IT Examination preceded this.

The RBI subsequently issued comprehensive cyber-security guidance and further instructions covering:

digital-payment security
IT outsourcing
IT governance.

IT examination focuses on

IT governance
third-party service providers
IT assurance
technology investment
fintech technological agility
emerging technologies
cyber hygiene.

8.26 DAKSH

RBI’s advanced supervisory monitoring system:

DAKSH

was launched on:

6 October 2022

It is a web-based end-to-end workflow platform.

It supports:

supervisory compliance monitoring
communication
inspection planning/execution
cyber-incident reporting
MIS reporting.

8.27 Early Warning Indicators

At the macro level, indicators include:

credit-to-GDP ratio
debt-service ratios.

At the bank level:

stress testing
capital planning
asset-quality review
liquidity monitoring.

A new EWI framework was developed/back-tested in:

2022–23

and uses 18 significant ratios.

8.28 Prompt Corrective Action — PCA

PCA was introduced in:

December 2002

Purpose:

Early intervention when banks breach specified prudential conditions.

Originally, trigger areas included:

capital adequacy
asset quality
profitability.

Possible actions included restrictions on:

dividend payments
new business
fresh deposits.

Revised PCA Framework

Revised:

April 2017

Again revised in:

2021

Effective:

1 January 2022

Applicable to Scheduled Commercial Banks, including foreign banks through branches/subsidiaries, but excluding:

SFBs
Payments Banks
RRBs.

Key areas:

Capital
Asset Quality
Leverage

Indicators:

CRAR / Common Equity Tier 1 ratio
Net NPA ratio
regulatory minimum Tier 1 leverage ratio.

PCA actions

Mandatory/discretionary actions can concern:

dividends
branch expansion
provisioning
special audits
business-process reengineering
governance
high-risk exposures
loan review
derivatives
staff training
capital expenditure.

8.29 Stress Testing

RBI issued stress-testing guidelines in:

December 2013

Stress testing became mandatory for banks.

Banks must be able to withstand at least:

baseline shocks

The supervisory framework subsequently moved from a single-factor to a multi-factor model.

Factors include:

inflation
GDP growth
exchange rate
unemployment

plus bank-specific/idiosyncratic factors.

8.30 Supervisory Outcomes

Three major outputs:

1. Risk Assessment Report — RAR

Focuses on:

unexpected losses.

2. Inspection Report — IR

Covers expected losses through:

regulatory-operations/compliance review
capital review.

3. Conduct of Business Assessment

Covers:

customer conduct
market conduct.

8.31 Cross-Border Supervision

International banks create risks in both:

host countries
home countries.

Therefore, supervisory cooperation is essential.

RBI conducts on-site examinations of Indian bank branches abroad.

It also cooperates with foreign supervisors.

Supervisory Colleges

RBI has established colleges for six major internationally active Indian banks:

State Bank of India
Bank of Baroda
Bank of India
ICICI Bank
Axis Bank
Punjab National Bank.

Purpose:

information exchange
supervisory cooperation
understanding group-wide risk
better supervision.

8.32 Financial Conglomerates — IRF

The:

Inter-Regulatory Forum — IRF

for Financial Conglomerates was established in:

August 2012

under the FSDC Sub-Committee.

It follows a:

lead regulator principle

Members include:

RBI
SEBI
IRDAI
PFRDA
NHB.

Purpose:

coordinated supervision
information sharing
emerging-risk identification
systemic-risk assessment.

CHAPTER 8 — CORE MEMORY CHAIN

CAMELS

↓

1991 crisis + Basel

↓

Risk-based supervision

↓

2013 implementation

↓

SPARC

↓

Off-site risk discovery

↓

Targeted on-site examination

↓

SSM

↓

CIMS + CRILC

↓

CFR + cyber supervision

↓

DAKSH + EWI

↓

PCA + stress testing

↓

RAR + IR + Conduct

↓

Cross-border supervision

CHAPTER 9 — REGULATION AND SUPERVISION OF CO-OPERATIVE BANKS

Priority: VERY HIGH

Co-operative banks are important because they combine:

co-operative structure + banking activity + dual regulatory architecture.

9.1 Co-operative Principles

The co-operative movement is based on:

community camaraderie
mutual help
democratic decision-making
open membership.

9.2 History

5 February 1889

Anyonya Sahakari Mandali

was formed at Baroda, Gujarat.

1904

Co-operative Societies Act.

The:

Kancheepuram Co-operative Credit Society

became the first credit society registered under this Act.

1919

Co-operation was transferred from Central Government to Provincial States.

9.3 Characteristics of Co-operative Institutions

They generally have:

focused geographical area
democratically elected Board
borrowing linked to membership/shareholding
one member, one vote
restrictions on lending to non-members, subject to specified exceptions
unlisted/untraded shares.

Critical principle

One member = one vote

regardless of number of shares.

9.4 Co-operative Credit Societies vs Co-operative Banks

Constitutional division:

Co-operative societies → State List
Banking → Union List

Therefore, ordinary co-operative societies are outside RBI’s banking regulatory purview.

A co-operative credit society mainly:

mobilises deposits from its own members and lends to members.

When appropriately licensed to undertake banking business, it functions as a:

co-operative bank

and can accept public deposits.

9.5 Legal Framework

The Banking Regulation Act became applicable to co-operative societies in:

March 1966

through insertion of:

Section 56 / Part V

This is commonly referred to as the BR Act, 1949 as applicable to co-operative societies.

This produced dual control.

Government / cooperative authority

Handles administrative aspects such as:

registration
recruitment
liquidation.

RBI

Handles:

banking aspects

under the BR Act.

Some matters involve concurrent powers.

9.6 2020 Amendment

The Banking Regulation (Amendment) Act, 2020 sought to strengthen RBI’s oversight over co-operative banks concerning:

management
capital
audit
liquidation.

It enabled UCBs to raise capital through:

shares
debentures
similar securities,

subject to RBI approval/conditions.

RBI also received powers concerning:

removal of directors
appointment of additional directors
Board supersession, after consultation with State Government in specified cases
exemptions from specified provisions.

9.7 Which Co-operative Banks Does RBI Regulate?

UCBs

RBI regulates + supervises

StCBs

RBI regulates + NABARD supervises

DCCBs

RBI regulates + NABARD supervises

SCARDBs and PCARDBs

Outside RBI’s regulatory/supervisory purview as described in the PDF.

9.8 Definition of UCB

Section 5(ccv) of the BR Act defines UCB as a co-operative society, other than a PACS, satisfying conditions including:

principal object/business is banking;
paid-up share capital and reserves ≥ ₹1 lakh;
bye-laws do not permit admission of another co-operative society as a member.

9.9 UCB Growth and Consolidation

When BR Act provisions became applicable in 1966:

around 1,100 UCBs
deposits = ₹167 crore
advances = ₹153 crore.

Liberal licensing later increased the number.

From:

1,311 UCBs in 1993

to:

2,104 in 2003

But almost one-third of newly licensed UCBs became financially unsound within a short period.

Consequently, fresh licensing was stopped after the comprehensive policy decision of 2004–05.

As on:

31 March 2024

the PDF states:

1,472 UCBs

after mergers, conversions and licence cancellations.

9.10 TAFCUB

RBI entered into MoUs with governments from:

2005

and established:

TAFCUB — Task Force for Co-operative Urban Banks

at State level.

A Central TAFCUB was established for multi-State UCBs.

It identifies:

potentially viable UCBs
non-viable UCBs.

Possible outcomes:

Viable

revival

Non-viable

merger / conversion into society / liquidation as last resort.

9.11 UCB Reforms

Important measures include:

voluntary transition of UCBs into SFBs — 2018
Board of Management in addition to Board of Directors — 2019
PSL target increased from 40% to 75% in graded manner
tighter exposure norms
at least 50% of aggregate loans/advances to comprise small-value loans, to be achieved in phases.

9.12 UCB Cyber Security

The RBI’s:

Technology Vision for Cyber Security: 2020–2023

was released in:

September 2020

It had five pillars:

governance oversight
useful/appropriate technology investment
regulation and supervision
collaboration
IT/cyber-security skills.

9.13 UCB Regulatory Powers

RBI regulates:

branch licences
area-of-operation expansion
CRR/SLR
capital adequacy
income recognition
asset classification
provisioning
exposure norms
PSL targets
Second Schedule inclusion
governance.

9.14 UCB Services

UCBs may undertake various services including:

specialised branches
currency chests
ATMs
mobile/internet banking
RTGS/NEFT
NDS-OM access
current accounts/SGL accounts with RBI
insurance/mutual fund distribution
PFRDA Point-of-Presence
BC/BF arrangements
prepaid instruments
demat-related facilities.

Scheduled UCBs have access to:

LAF
MSF.

9.15 Four-Tier UCB Framework

Based on deposits as per audited balance sheet on 31 March immediately preceding the financial year:

Tier	Deposit size
Tier 1	Unit/salary-earner UCBs regardless of deposits + other UCBs up to ₹100 crore
Tier 2	>₹100 crore to ₹1,000 crore
Tier 3	>₹1,000 crore to ₹10,000 crore
Tier 4	>₹10,000 crore

A bank moving to a higher tier may receive a glide path of up to:

3 years

to meet higher requirements.

9.16 UCB Net Worth

Tier 1 single-district UCB

Minimum net worth:

₹2 crore

All other UCBs

Minimum:

₹5 crore

For those below the requirement:

50% by 31 March 2026
full requirement by 31 March 2028

as stated in the PDF.

9.17 UCB CRAR

Tier 1

Minimum:

9% of RWAs

Tier 2–4

Minimum:

12% of RWAs

Phased target for Tier 2–4 UCBs below 12%:

10% by March 2024
11% by March 2025
12% by March 2026.

9.18 UCB PCA

The revised PCA framework for UCBs was issued:

26 July 2024

Applicable to:

Tier 2, Tier 3 and Tier 4 UCBs

except UCBs under All Inclusive Directions.

Tier 1 UCBs were not covered but were subject to enhanced monitoring.

Effective:

1 April 2025

Key monitoring areas:

Capital
Asset Quality
Profitability

Indicators:

CRAR
Net NPA ratio
net profit.

Exit from PCA requires:

no threshold breaches for four continuous quarterly financial statements, one audited annual statement;
RBI supervisory comfort and sustainable financial improvement.

9.19 UCB Standard-Asset Provisioning

On:

24 April 2023

RBI harmonised provisioning norms.

Category	Provision
Agriculture & SME	0.25%
CRE	1.00%
CRE-RH	0.75%
Other standard advances	0.40%

Tier 1 UCBs previously at 0.25% for other standard advances were allowed to move to 0.40% in a staggered manner by 31 March 2025.

9.20 Rural Co-operative Structure

Long-term structure

SCARDB → State level
PCARDB → district/block level

These serve long-term agricultural-credit requirements and are outside RBI’s regulatory purview as stated.

Short-term structure

Three-tier structure:

StCB → DCCB → PACS

PACS

The PDF states there are:

more than 95,000 PACS

and they are not regulated by RBI because they fall outside the BR Act’s scope.

They are regulated/monitored by State Governments.

StCBs and DCCBs:

RBI regulation + NABARD supervision

CHAPTER 10 — REGULATION AND SUPERVISION OF NBFCs

Priority: EXTREME

NBFCs perform bank-like functions without being banks.

They are particularly important because they:

provide last-mile credit
serve segments underserved by banks
diversify financial risks
innovate in financial products.

The challenge is:

Innovation + resilience

The PDF notes that there are over 9,000 NBFCs, making supervision complex.

10.1 Definition of NBFC

Under Section 45-I(f) of the RBI Act, an NBFC includes:

a financial institution that is a company;
a non-banking institution that is a company whose principal business involves receiving deposits or lending;
other specified non-banking institutions notified by RBI with Central Government approval.

10.2 Financial Institution

Section 45-I(c) covers activities including:

lending/financing
acquisition of securities
leasing
hire-purchase
insurance
chit business
collection of money.

But entities whose principal business is:

agriculture
industrial activity
trading in goods
services
sale/purchase/construction of immovable property

are excluded from the financial-institution definition as described.

10.3 Principal Business Criteria — PBC

A company is treated as an NBFC if both tests are satisfied:

Asset test

Financial assets:

more than 50% of total assets, excluding fixed deposits and after specified adjustments.

Income test

Income from financial assets:

more than 50% of gross income

Both must be satisfied.

The concept was clarified through RBI’s press release dated:

8 April 1999.

Memory

50–50 test, but BOTH must cross 50%.

10.4 Shadow Banking / NBFI

The FSB originally defined shadow banking as:

credit intermediation involving entities/activities outside the regular banking system.

In:

October 2018

FSB replaced the term “shadow banking” with:

Non-Bank Financial Intermediation — NBFI

to emphasise resilience and the forward-looking nature of the framework.

10.5 Three NBFI Measures

NBFI

Broadest measure of non-bank financial entities.

OFIs

Subset excluding:

central banks
banks
public financial institutions
insurance corporations
pension funds
financial auxiliaries.

Narrow NBFI measure

Entities involved in bank-like credit intermediation involving risks such as:

maturity transformation
liquidity transformation
leverage
imperfect credit-risk transfer
regulatory arbitrage.

10.6 NBFC Exemptions

Certain NBFC-like entities are regulated by other authorities.

To avoid dual regulation, RBI exempts categories regulated elsewhere.

Entity	Other regulator
AIFs	SEBI
Merchant banking	SEBI
Stock brokers	SEBI
Stock exchanges	SEBI
Insurance companies	IRDAI
Nidhi companies	MCA
Chit companies	State Governments

10.7 Type I vs Type II NBFC-ND

Type I

does not accept public funds
does not intend to accept them
no customer interface
does not intend to have one.

These receive less intensive scrutiny.

If they later want public funds/customer interface:

approval from Department of Regulation is required.

Type II

Accepts/intends to accept public funds and/or has/intends customer interface.

10.8 Scale-Based Regulation — Four Layers

RBI’s SBR framework was issued:

October 2021

Effective:

1 October 2022

Four layers:

NBFC-BL — Base Layer
NBFC-ML — Middle Layer
NBFC-UL — Upper Layer
NBFC-TL — Top Layer

The Top Layer is intended to remain empty unless systemic risk rises substantially.

Memory

Base → Middle → Upper → Top

Risk rises as you climb.

10.9 Base and Middle Layer

Non-deposit-taking NBFCs:

asset size < ₹1,000 crore → Base Layer
₹1,000 crore or more → Middle Layer

However, activity can place an NBFC in Base or Middle irrespective of size.

Deposit-taking NBFCs are at least in:

Middle Layer

because of public-deposit sensitivity.

10.10 Upper Layer

The top ten eligible NBFCs by asset size are included in the Upper Layer.

Other NBFCs may also be specifically identified based on:

parameters
scoring methodology
systemic importance.

Top Layer is reserved for situations of substantial systemic-risk increase.

10.11 Major NBFC Categories

NBFC-ICC

Investment and Credit Company

Activities:

lending
physical-asset financing
securities acquisition.

Gold-loan companies can fall here where gold lending represents at least 50% of financial assets.

NBFC-IFC

Infrastructure Finance Company

Infrastructure loans:

at least 75% of total assets

CIC

Core Investment Company

At least:

90% of net assets in group-company investments/loans

and:

60% of net assets in equity/equity-like group investments.

10.12 Other NBFC Categories

IDF-NBFC

Refinances completed infrastructure projects.

NBFC-MFI

Collateral-free small loans.

At least:

75% of total assets in microfinance loans.

NBFC-Factors

Factoring/receivables financing.

Mortgage Guarantee Companies

Mortgage guarantees for housing loans.

NOFHC

Non-Operative Financial Holding Company used for setting up new private-sector banks.

NBFC-AA

Account Aggregator.

NBFC-P2P

Peer-to-peer lending platform.

HFC

Housing Finance Company.

SPD

Standalone Primary Dealer.

10.13 Account Aggregator

NBFC-AA retrieves, consolidates and presents financial information of customers with:

explicit consent

It does not conduct ordinary customer transactions.

The system is based on:

standardised data
encryption
APIs
consent architecture
audit trails.

Core idea

AA = data sharing with consent, not lending.

10.14 P2P Lending

NBFC-P2P:

connects borrowers and lenders electronically.

The platform itself:

does not lend from its own books / take the underlying credit risk.

The PDF states there were:

26 registered NBFC-P2P platforms as of 31 March 2024.

10.15 ARCs

Asset Reconstruction Companies are registered under:

Section 3 of SARFAESI Act, 2002

They acquire and deal with financial assets sold by banks/FIs and play a role in NPA resolution.

Minimum NOF:

increased from ₹2 crore → ₹100 crore in April 2017
increased further to ₹300 crore in October 2022, to be achieved by March 31, 2026.

10.16 NBFC Regulatory History

RBI obtained regulatory/supervisory powers over NBFCs through:

Chapter III-B of RBI Act — 1963

The 1996 CRB Capital failure became an important watershed.

Following the Shah Committee recommendations, 1997 amendments introduced/strengthened:

compulsory RBI registration
minimum NOF
liquid-asset requirements
reserve fund
RBI directions
special audit
prohibition on deposits/asset alienation
winding-up powers
nomination facility
restrictions on unincorporated deposit-taking
penalties.

10.17 1999 NOF

NOF requirement for fresh registration increased from:

₹25 lakh → ₹2 crore

in 1999.

10.18 2014 NBFC Framework

Key changes included:

minimum NOF for legacy NBFCs = ₹2 crore
harmonisation of deposit rules
systemic-significance threshold increased from ₹100 crore to ₹500 crore
differentiated regulation according to public funds/customer interface
harmonisation of asset classification with banks for specified NBFCs
stronger corporate governance requirements.

10.19 2019 Strengthening

RBI obtained additional powers to:

prescribe different NOF levels
remove directors, excluding government-owned NBFCs
supersede Boards, excluding government-owned NBFCs
remove/debar auditors for up to 3 years
resolve NBFCs through amalgamation/reconstruction/splitting
call group-company information and inspect group companies.

10.20 HFCs and IBC

The Finance (No.2) Act, 2019 amended the NHB Act and transferred:

HFC registration and regulation → RBI

The PDF also states that from:

November 2019

RBI became entrusted with insolvency-resolution processes of NBFCs, including HFCs, under the relevant IBC framework.

10.21 NBFC Prudential vs Conduct Regulation

Prudential regulation

Includes:

capital adequacy
borrower exposure
income recognition
asset classification
provisioning
LTV
leverage
public deposits.

Conduct regulation

Includes:

Fair Practices Code
KYC.

10.22 NBFC vs Bank — Key Comparison

Area	Base-layer NBFC	Middle/Upper NBFC	Banks
Legal basis	RBI Act, Ch. III-B	RBI Act, Ch. III-B	BR Act
Capital	No CRAR; leverage framework	CRAR requirements	Basel III framework
Credit concentration	Internal Board policy in BL	Prescribed limits	Large exposure framework
LCR	Specified NBFCs	Wider applicability	Commercial banks
KYC/AML/CFT	Similar broad norms	Similar	Similar
NSFR	Not applicable	Not applicable per table	Applicable as stated

10.23 Ind AS and NBFCs

NBFCs transitioned to Ind AS according to the roadmap.

The PDF states:

net worth ≥ ₹500 crore → 1 April 2018
net worth ≥ ₹250 crore and other listed NBFCs → 1 April 2019

Ind AS introduces concepts including:

Expected Credit Loss
Other Comprehensive Income
symmetric fair-value accounting.

RBI issued regulatory guidance in:

March 2020

to improve consistency and comparability.

10.24 NBFC Supervision — Five-Pronged Framework

RBI’s supervisory framework includes:

On-site inspections
Off-site monitoring
Market intelligence
Statutory auditors’ exception reports
Stakeholder interaction

10.25 Sachet Portal

Launched:

4 August 2016

Purpose:

Help public and regulators identify unauthorised deposit-taking.

Public can:

submit information
upload advertisements
ask queries
lodge complaints.

It also connects regulators and supports coordination against unauthorised deposit collection.

10.26 SBR Changes — NOF

For specified NBFCs:

NBFC-ICC

₹2 crore → ₹5 crore by March 31, 2025 → ₹10 crore by March 31, 2027.

NBFC-MFI

₹5 crore → ₹7 crore → ₹10 crore.

NER exception:

₹2 crore → ₹5 crore → ₹10 crore.

NBFC-Factors

₹5 crore → ₹7 crore → ₹10 crore.

For:

P2P
AA
no-public-funds/no-customer-interface NBFCs

NOF remains:

₹2 crore

No change in specified minimums for:

IDF
IFC
MGC
HFC
SPD.

10.27 NBFC NPA Norm

Under SBR, NPA classification moves to:

more than 90 days overdue

for all NBFC categories.

Base Layer glide path:

150 days by March 31, 2024
120 days by March 31, 2025
90 days by March 31, 2026.

10.28 NBFC-UL Capital

NBFC-ML and NBFC-UL must undertake:

ICAAP — Internal Capital Adequacy Assessment Process

It assesses capital needs against:

credit risk
market risk
operational risk
residual risks.

NBFC-UL must maintain:

CET1 ≥ 9% of RWA

and is also subject to leverage requirements and differential standard-asset provisioning.

10.29 NBFC Compensation

NBFCs are required to establish:

Nomination and Remuneration Committee — NRC

Compensation should consider risk.

Variable pay can include:

deferral
malus
clawback.

10.30 NBFC PCA

Effective:

1 October 2022

based on financial position on/after March 31, 2022.

Applies to:

all deposit-taking NBFCs except government companies;
specified non-deposit NBFCs in Middle/Upper/Top Layers.

Exclusions include:

no-public-funds/no-intention entities
government companies
Primary Dealers
HFCs.

For NBFC-D and NBFC-ND:

Capital + Asset Quality

Indicators:

CRAR
Tier I Capital Ratio
NNPA.

For CICs:

Capital + Leverage + Asset Quality

CHAPTER 11 — ENFORCEMENT IN RBI

Priority: VERY HIGH

Think of oversight as:

Regulation → Supervision → Enforcement

Regulation

Creates framework.

Supervision

Checks compliance.

Enforcement

Acts when non-compliance is detected.

11.1 Why was EFD created?

Previously monetary penalties were distributed across regulatory/supervisory departments.

This was inconsistent with international best practice of separating:

supervision from enforcement.

A Supervisory Enforcement Framework was approved in:

2016

The:

Enforcement Department — EFD

was established on:

3 April 2017

Initially focused on Scheduled Commercial Banks.

Its mandate subsequently expanded to:

UCBs
NBFCs
HFCs
CICs
Payment System Operators.

11.2 EFD Mandate Expansion — Chronology

3 April 2017

EFD established.

3 October 2018

Enforcement over:

co-operative banks
NBFCs

brought under EFD.

9 August 2019

HFC regulation/enforcement transferred to RBI.

28 June 2022

CIC enforcement added.

1 April 2023

PSS Act monetary penalties/compounding transferred to EFD.

11.3 Important Exception

Enforcement under:

FEMA
Government Securities Act

continues with respective regulatory/supervisory departments for the matters described in the PDF.

11.4 EFD Regional Offices

Established:

May 2019

at:

Ahmedabad
Chennai
Kolkata
Mumbai
Nagpur
New Delhi.

11.5 Enforcement Policy

The Enforcement Policy Framework was:

drafted in 2017
revised after mandate expansion
approved by BFS on 25 September 2019
placed before Central Board on 13 December 2019.

Principles:

materiality
proportionality
intent
consistency
predictability
risk focus.

More serious/systemically significant violations attract stronger action.

11.6 What Enforcement Policy Does NOT Do

It deals primarily with:

monetary-penalty violations.

It does not:

handle individual consumer grievances;
substitute for supervisory compliance;
automatically cover non-monetary supervisory actions.

Exam trap

Enforcement ≠ grievance redressal

11.7 Materiality

Actionable violations depend on:

fact of violation
materiality.

Materiality considers:

extent
frequency
seriousness.

Seriousness considers:

absolute amount
proportion to business size
repeat/persistent violations
false compliance.

11.8 Enforcement Process

Enforcement is:

quasi-judicial

and follows principles of natural justice.

Process:

Show Cause Notice

↓

Reasonable opportunity to be heard

↓

Adjudication

↓

Speaking order

The Adjudication Committee can consist of:

three Executive Directors at Central Office, including ED-in-charge of EFD;
or Regional Director + two Senior Officers at Regional Office, as applicable.

Penalty is determined according to:

proportionality
intent
mitigating factors

within statutory maximum limits.

11.9 Enforcement Philosophy

Enforcement produces:

monetary deterrence
reputational deterrence
demonstration effect on other entities.

The PDF notes that current laws empower RBI to impose monetary penalties on regulated entities rather than directly on individuals responsible for violations.

Enforcement can be:

Formal/ex-post

compliance enforcement
monetary penalties.

Informal/ex-ante

clarifications
cautionary advice.

CHAPTER 12 — DEVELOPMENT AND REGULATION OF FINANCIAL MARKETS

Priority: EXTREME

This is a very large chapter conceptually.

The Indian financial markets broadly include:

Money market
Government Securities market
Foreign Exchange market
Equity market.

The system historically developed within a bank-centric financial system.

After financial-sector reforms in the early 1990s, market development accelerated.

12.1 Who Regulates Which Market?

SEBI

Broadly regulates:

Equity market

RBI

Regulates:

Money market
Government Securities market
Foreign Exchange market
related derivatives markets, including credit derivatives.

Key point

RBI performs both:

Developmental + Regulatory roles

Development:

orderly growth.

Regulation:

prudential + conduct rules for integrity/stability.

12.2 Market Development Objectives

RBI’s reforms seek to:

improve capital raising
reduce onshore/offshore segmentation
broaden participation
promote innovation
strengthen market infrastructure
ensure fair conduct
improve resilience.

12.3 Market Representative Bodies

Important bodies:

FIMMDA
FEDAI
PDAI.

They have supported:

market development
self-regulation
codes of conduct
broker oversight
arbitration.

RBI also facilitated:

Financial Benchmarks India Private Limited — FBIL

established jointly by:

FIMMDA
FEDAI
IBA.

FBIL administers key benchmarks for:

money market
G-Sec
forex
derivatives.

12.4 CCIL

Established:

2001

Operations began:

February 2002

Clearing Corporation of India Ltd — CCIL

provides clearing/settlement infrastructure for:

G-Secs
money market
foreign exchange.

It later expanded into:

CCP-based settlement
trade repository for OTC forex, interest-rate and credit derivatives.

12.5 FMRD

A dedicated:

Financial Markets Regulation Department — FMRD

was created to focus on market development and regulation.

12.6 Money Market

Money market deals with:

short-term financial assets close substitutes for money.

It balances:

short-term demand for funds
short-term supply of funds.

Therefore it is crucial for:

liquidity management
monetary-policy transmission.

12.7 Money Market Development

RBI:

removed interest-rate ceilings on inter-bank call/notice money in 1989
introduced instruments such as:
- T-Bills
- CDs
- CP
- Repo

between 1986 and 1992.

Other reforms included:

DFHI in 1988
primary/satellite dealers
market-determined rates
stronger money-market/forex-market linkage.

Important committees:

Chakravarty — 1985
Vaghul — 1987
Narasimham — 1991 and 1998.

12.8 Money Market Infrastructure

Important systems:

NDS-Call
CROMS
TREPS
STP
RTGS
CCIL.

Participants include:

commercial banks
co-operative banks
PDs
insurance companies
mutual funds
NBFCs
other permitted entities.

SFBs, PBs and RRBs were also allowed participation in:

Call Money
Notice Money
Term Money.

12.9 Call, Notice and Term Money

These are uncollateralised transactions.

Call Money

1 day

Notice Money

2–14 days

Term Money

15 days to 1 year

Transactions occur:

OTC
NDS-Call.

Memory

Call = 1
Notice = 2–14
Term = 15–365

12.10 Repo Market

Repo:

short-term collateralised borrowing against securities.

From borrower perspective:

Repo

From lender perspective:

Reverse Repo

RBI repos are:

LAF-Repo

Market participant repos are:

Market Repo

Eligible market-repo securities include:

Central/State Government securities
T-Bills
CP
CDs
debt ETFs
listed corporate bonds/debentures.

12.11 Tri-Party Repo

A third party acts between borrower and lender.

The:

Tri-Party Agent

helps with:

collateral selection
payment
settlement
custody
collateral management.

12.12 Commercial Paper and NCD

Commercial Paper — CP

Unsecured money-market instrument.

NCD

Secured money-market instrument

with original/initial maturity up to one year.

Eligible issuers include:

companies
NBFCs/HFCs
InvITs/REITs
AIFIs
certain ₹100 crore+ net-worth corporates
other permitted entities.

Minimum credit rating:

A3

as assigned according to the applicable SEBI rating framework described in the PDF.

Trades are reported to:

F-TRAC of CCIL.

12.13 Certificate of Deposit — CD

A CD is:

negotiable + unsecured money-market instrument.

Issued by:

Scheduled Commercial Banks including RRBs/SFBs
eligible AIFIs.

Bank CD maturity

7 days to 1 year

AIFI CD maturity

1 year to 3 years

Banks/AIFIs cannot grant loans against CDs unless RBI specifically permits.

12.14 Government Securities Market

The G-Sec market is crucial because it determines:

risk-free interest rates

G-Sec yields become benchmarks for pricing other financial assets.

It is also fundamental to:

public borrowing
monetary policy
fixed-income markets
collateral
liquidity management.

12.15 Central vs State G-Secs

Central Government

Issues:

Treasury Bills
dated securities/bonds.

State Governments

Issue:

State Government Securities — SGS

only bonds/dated securities.

Dated securities have maturity:

more than 1 year

The PDF states tenor can currently extend up to:

50 years.

12.16 Why G-Secs Matter for Monetary Policy

G-Secs provide:

high-quality collateral
yield-curve benchmarks
liquidity
monetary-operation infrastructure.

Virtually all monetary operations are connected with the G-Sec market.

Therefore:

Efficient G-Sec market → efficient monetary transmission.

12.17 G-Sec Market Development

Major reforms:

abolition of automatic monetisation
primary auction process
FRBM Act, 2003
auction calendars from April 2002
electronic auctions
When-Issued trading in 2006
short selling from February 2006
product diversification.

Instruments introduced include:

floating-rate bonds
capital-indexed bonds
inflation-indexed bonds
STRIPS
Sovereign Gold Bonds
savings bonds.

12.18 NDS-OM

Negotiated Dealing System – Order Matching

is an anonymous screen-based order-matching platform owned by RBI and operated by CCIL.

It supports trading in:

Central Government securities
SGS
special securities
Treasury Bills.

Settlement is STP-based and flows to CCIL for guaranteed settlement.

Anonymity protects market integrity and facilitates large transactions without distorting market sentiment.

12.19 RBI Retail Direct

The:

RBI Retail Direct Scheme

was introduced to make G-Secs easier for retail investors.

A mobile application was launched in:

May 2024

to facilitate access.

12.20 FPI Investment in G-Secs

The:

Medium-Term Framework — MTF

was introduced in:

2015

It provides a predictable framework for FPI investment in rupee debt.

FPI limits are reviewed:

half-yearly

The PDF describes limits including:

6% for Central Government Securities
2% for State Government Securities,

as percentages of relevant outstanding stock in the framework described.

12.21 VRR

Voluntary Retention Route

introduced in:

2019

Purpose:

Encourage long-term FPI debt investment through greater operational flexibility and specified regulatory exemptions.

12.22 FAR

Fully Accessible Route

introduced:

March 2020

Allows eligible non-residents to invest in specified Government of India dated securities without specified macroprudential limits/investment ceilings.

It operates alongside:

MTF
VRR.

Memory

MTF = predictable framework
VRR = voluntary retention/flexibility
FAR = fully accessible specified G-Secs

12.23 When-Issued Trading

WI trading allows trading in G-Secs:

after announcement but before actual issuance.

Benefits:

extends distribution period
allows market absorption
improves price discovery
reduces auction uncertainty.

12.24 STRIPS

Separate Trading of Registered Interest and Principal of Securities

Separates:

coupon payments
principal repayment

into individually tradable instruments.

Introduced:

April 2010

Revised directions in 2018 broadened eligibility to fixed-coupon GOI securities meeting specified SLR and transferability conditions.

Memory

STRIPS = one bond becomes many cash-flow pieces.

12.25 G-Sec Securities Lending and Borrowing

Permitted in:

2023

Purpose:

deepen liquidity
improve price discovery
support special-repo activity
allow investors to earn from idle securities.

Eligible lenders:

entities authorised to undertake G-Sec repos.

Eligible borrowers:

entities authorised for G-Sec short sales.

12.26 Corporate Bond Market

A strong corporate bond market:

diversifies funding away from banks
provides long-term capital
gives institutional investors long-term assets
spreads financial risk
supports financial stability.

SEBI is the primary regulator of the corporate bond market.

RBI regulates aspects involving:

banks/RBI-regulated entities
FPI investment
corporate-bond repo
credit derivatives.

12.27 Corporate Bond Market Measures

RBI has:

permitted long-term bank bonds for infrastructure/affordable housing
encouraged bank/PD participation
increased FPI access
introduced corporate-bond repo
introduced DvP for OTC corporate bonds in 2009
required reporting of trades
enabled CDS
permitted partial credit enhancement.

12.28 Credit Default Swaps — CDS

CDS enables hedging of:

credit risk

RBI permitted CDS in:

December 2011

and revised directions in 2022.

Eligible market makers include specified:

commercial banks
standalone PDs
NBFCs with minimum NOF ₹500 crore and required approval
permitted AIFIs
other authorised institutions.

Retail users may buy protection only for:

hedging underlying exposure

while non-retail users have broader permitted purposes.

12.29 Partial Credit Enhancement — PCE

Banks may provide PCE as:

non-funded subordinated facility

in the form of an:

irrevocable contingent line of credit.

It is drawn if cash flows are insufficient to service bonds.

Effect:

PCE → better perceived credit quality/rating

RBI prescribes limits on individual and aggregate bank PCE.

12.30 Interest Rate Derivatives

1999

Interest Rate Swaps — IRS
Forward Rate Agreements — FRA

introduced to deepen markets and hedge interest-rate risk.

2011

Futures on 91-day T-Bill.

2016

futures based on other money-market instruments/rates
rupee interest-rate options.

2018

Swaptions introduced.

2019

Consolidated Rupee Interest Rate Derivatives Directions.

Permitted instruments include:

FRA
IRS
European IROs
caps
floors
collars
reverse collars
swaptions
specified structured derivatives.

12.31 Offshore FCS-OIS

In 2022, authorised market-makers with AD Category-I licences and standalone PDs were allowed to participate in:

offshore Foreign Currency Settled Overnight Indexed Swap — FCS-OIS

with non-residents and market makers through:

India branches
foreign branches
IFSC Banking Units.

12.32 Forex Market Evolution

India moved through:

Par value → Basket peg → Managed float

The forex market began in:

1978

when banks were permitted intra-day trading.

July 1991

Two-step exchange-rate adjustment.

March 1992

LERMS — Liberalised Exchange Rate Management System

Dual exchange-rate system:

60% at market rate
40% at RBI official rate.

March 1993

Unified market-determined exchange rate.

August 1994

Current-account convertibility.

Memory

78 → 91 → 92 → 93 → 94

Market trading → crisis adjustment → LERMS → unified rate → current-account convertibility

12.33 Forex Market Growth

Average daily forex turnover:

approximately USD 3 billion in 2001

to:

approximately USD 53 billion in 2022

according to the BIS Triennial Survey cited in the PDF.

12.34 NDF Market

The offshore INR derivative market is dominated by:

Non-Deliverable Forwards — NDFs

These are largely OTC offshore.

Important centres mentioned:

Singapore
Hong Kong
London
Dubai
New York.

12.35 Forex Instruments

The Indian forex market includes:

Spot
Cash
Tom
Forwards
FX swaps
Currency swaps
FX options
exchange-traded currency futures/options.

12.36 FX-Retail

RBI facilitated:

FX-Retail

through CCIL in:

2019

Purpose:

transparent pricing
competition
better pricing for retail users
reduce transaction costs.

It operates on an anonymous, order-driven basis for USD/INR.

12.37 FX Derivatives and Underlying Exposure

Historically, access to OTC INR-linked forex derivatives was tied to documentary evidence of an underlying exposure.

Purpose:

Promote genuine hedging and limit speculative use.

In 2020, the framework unified resident/non-resident hedging facilities and permitted hedging of:

contracted exposures
anticipated exposures.

It also allowed freer cancellation/rebooking.

The PDF notes a USD 100 million OTC facility without underlying-exposure evidence, subject to the framework.

A user-classification framework was also introduced for complex derivatives.

12.38 ETCDs

For Exchange-Traded Currency Derivatives:

SEBI prescribes position limits.
AD Category-I banks may act as trading/clearing members subject to prudential requirements.

From February 2018, residents and FPIs could take INR-related currency positions up to:

USD 100 million equivalent

across INR currency pairs and exchanges, under the framework described.

12.39 Forex Market-Making Limits

AD banks must operate within:

NOOPL — Net Overnight Open Position Limit
AGL — Aggregate Gap Limit

These are fixed by the Board within prescribed regulatory limits.

12.40 Rupee Derivatives at IFSCs

In 2020, AD Category-I banks operating IBUs could offer:

INR Non-Deliverable Derivative Contracts

to non-residents.

Further expansion occurred:

2023 → resident non-retail users for hedging
January 2024 → all residents for hedging.

Objective:

Develop onshore NDF markets and improve hedging flexibility.

12.41 Unauthorised Forex Trading

Residents may transact in forex only for permitted transactions and through:

authorised persons
authorised ETPs
recognised stock exchanges, according to applicable rules.

RBI began publishing an:

Alert List

of entities/platforms not authorised for forex trading.

Critical exam point:

Absence from the Alert List does NOT mean an entity is RBI-authorised.

The list is explicitly stated to be non-exhaustive.

12.42 Market Abuse Regulation

Introduced:

2019

Covers:

market manipulation
benchmark manipulation
misuse of information
similar misconduct.

Objective:

fair + open + transparent markets with high ethical standards.

12.43 Electronic Trading Platforms — ETP

RBI introduced ETP authorisation directions in:

2018

Objectives:

transparency
lower transaction time/cost
audit trails
risk controls
better monitoring.

Both new and existing ETPs must obtain RBI authorisation under the framework.

12.44 Legal Entity Identifier — LEI

LEI is:

20-character unique alphanumeric identifier

for parties to financial transactions globally.

Implemented in:

June 2017

initially for non-individual participants in OTC:

rupee interest-rate derivatives
foreign-currency derivatives
credit derivatives.

Expanded in 2018 to broader RBI-regulated money, G-Sec and forex transactions.

Phased implementation was completed in:

2020.

12.45 OTC Derivatives — Market Makers

2021 directions aimed to:

establish principle-based regulation
remove overlaps
accommodate sophistication of derivative markets.

They address:

governance
risk management
customer suitability
appropriateness.

For non-centrally cleared OTC derivatives, RBI requires exchange of:

initial margin
variation margin

to mitigate counterparty credit risk.

12.46 Financial Benchmark Administration

The PDF identifies key benchmarks including:

USD/INR Reference Rate
Treasury Bill Rates
Government Securities valuation
State Government Securities valuation
MMIFOR.

A comprehensive risk-based regulatory framework for RBI-regulated financial benchmarks was implemented in:

December 2023

Financial Benchmark Administrators must maintain:

governance
oversight
controls
transparency
conflict-of-interest safeguards.

MASTER COMPARISON — CHAPTERS 8–12

Topic	Key takeaway
Regulation	Makes rules
Supervision	Enforces/assesses rules at entity level
CAMELS	Earlier supervisory model
RBS	Current SCB supervisory approach
SPARC	RBI’s RBS framework
SSM	Single supervisory contact
PCA	Early corrective intervention
CIMS	Centralised supervisory-return system
CRILC	Large-credit information
CFR	Central fraud database
DAKSH	Advanced supervisory workflow
UCBs	RBI regulation/supervision
StCB/DCCB	RBI regulation + NABARD supervision
PACS	Outside RBI banking regulation
NBFC	Bank-like financial intermediary, not a bank
PBC	Financial assets >50% + financial income >50%
NBFC SBR	Base → Middle → Upper → Top
NBFC-P2P	Platform, not own-book lending
NBFC-AA	Consent-based financial-data aggregation
EFD	RBI enforcement
Enforcement	Primarily monetary-penalty framework
Money market	Short-term funds
G-Sec market	Risk-free benchmark/yield curve
Corporate bonds	Diversifies funding away from banks
Forex	Managed float framework
NDF	Offshore non-deliverable INR derivative
FAR	Fully Accessible Route
VRR	Voluntary Retention Route
STRIPS	Separates coupon/principal
LEI	20-character transaction-party identifier
ETP	RBI-authorised electronic trading platform

HIGH-YIELD “DO NOT CONFUSE”

1. CAMELS vs SPARC

CAMELS = old, compliance/condition-oriented

SPARC = current RBS, forward-looking and risk-focused

2. Regulation vs Supervision vs Enforcement

Regulation → rules

Supervision → compliance/risk assessment

Enforcement → consequences for violations

3. Off-site vs On-site

Off-site → discover

On-site → verify/investigate

4. PCA vs Enforcement

PCA = supervisory corrective intervention

Enforcement = action for identified regulatory violations

5. UCB vs PACS

UCB = banking institution under RBI banking regulation

PACS = outside RBI banking regulation under the framework described

6. StCB/DCCB

RBI = regulation

NABARD = supervision

7. NBFC vs Bank

NBFCs perform bank-like financial intermediation but are governed primarily through the RBI Act/other applicable frameworks rather than the same BR Act framework applicable to banks.

8. NBFC-P2P vs NBFC-AA

P2P = connects lenders and borrowers

AA = aggregates financial data with consent

9. MTF vs VRR vs FAR

MTF → predictable FPI debt framework

VRR → long-term retention + flexibility

FAR → specified G-Secs accessible without specified macroprudential limits

10. CP vs NCD

CP = unsecured

NCD = secured

11. Call vs Notice vs Term

Call = 1 day

Notice = 2–14 days

Term = 15 days–1 year

12. Repo vs Market Repo

LAF Repo = RBI ↔ financial entity

Market Repo = market participant ↔ market participant

MASTER CHRONOLOGY — CHAPTERS 8–12

1889 — Anyonya Sahakari Mandali
↓
1904 — Co-operative Societies Act
↓
1919 — Co-operation transferred to Provinces
↓
1949 — Banking Regulation Act
↓
1963 — RBI obtains NBFC powers under Chapter III-B
↓
1966 — BR Act made applicable to co-operative societies
↓
1978 — Indian banks permitted intra-day forex trading
↓
1985 — Chakravarty Committee
↓
1986–92 — Major money-market instruments introduced
↓
1988 — DFHI
↓
1989 — Call/notice money interest-rate ceilings removed
↓
1991 — BoP crisis; banking reform; exchange-rate adjustment
↓
1992 — LERMS
↓
1993 — Unified market-determined exchange rate; DoS created
↓
1994 — BFS established; current-account convertibility
↓
1997 — Basel Core Principles; NBFC regulatory strengthening
↓
1999 — PBC clarification; NBFC NOF ₹25 lakh → ₹2 crore; IRS/FRA
↓
2001 — CCIL established
↓
2002 — CCIL operations; PCA introduced
↓
2006 — Basel II; WI trading; G-Sec short selling
↓
2010 — STRIPS
↓
2011 — CDS; 91-day T-Bill futures
↓
2012 — IRF for financial conglomerates
↓
2013 — RBS implementation begins; stress-testing guidelines
↓
2014 — CRILC; UCB/financial-sector reforms; LCR
↓
2015 — MTF for FPIs
↓
2016 — EFD; CFR; Sachet; differentiated bank licensing
↓
2017 — revised Basel/RBI frameworks; LEI; EFD regional structure later
↓
2018 — ETP; VRR later; stronger cyber framework
↓
2019 — NBFC statutory strengthening; FX-Retail; FAR later; market-abuse framework
↓
2020 — SBR preparation; forex-hedging framework; FAR; COVID-era changes
↓
2021 — SBR framework; SPARC; governance/capital changes
↓
2022 — SBR effective; DAKSH; FCS-OIS; NDDC expansion; NBFC PCA
↓
2023 — benchmark framework; G-Sec securities lending; green/other financial-market developments
↓
2024 — Retail Direct mobile app; revised forex hedging; INR NDDC expansion; UCB PCA framework
↓
2025 — UCB PCA framework effective, as stated in PDF