Understand the Indian financial system, its institutions, markets, instruments, infrastructure, regulators, RBI’s role, micro-prudential and macroprudential regulation, and differentiated banking.

The Indian financial system is the network through which money, savings, credit, investment, risk and financial services move through the economy. It is much broader than banks alone.

For RBI Grade B and other banking examinations, this distinction is critical. A candidate who memorises only definitions of banks, financial markets and regulators will struggle with questions that test the architecture and relationships within the financial system.

The Indian financial system consists broadly of money, financial institutions, financial markets, financial instruments, financial-market infrastructure and financial services.

Understanding this architecture also makes it easier to understand why the Reserve Bank of India regulates and supervises certain institutions and why other regulators such as SEBI, IRDAI, NABARD and NHB have separate roles.

What is the Indian Financial System?

The Indian financial system can broadly be divided into six components.

1. Money

Money includes:

physical money
digital money.

Money is the basic medium through which economic transactions take place.

2. Financial Institutions

These include:

banks
non-banking financial companies
insurance companies
mutual funds and other financial institutions.

Financial institutions perform intermediary and financial-service functions.

3. Financial Markets

Major financial markets include:

money markets
Government Securities market
foreign-exchange market
capital markets
commodity markets.

4. Financial Instruments

Financial instruments include:

shares
bonds
loans
deposits.

5. Financial Market Infrastructure

The financial system requires infrastructure that enables transactions to be cleared, settled and recorded.

Examples include:

central counterparties
payment and settlement systems
trade repositories.

6. Financial Services

The system provides services such as:

savings
exchange
insurance
borrowing.

Why Does the Financial System Need Regulation?

A financial system performs several economically important functions.

It connects savers with investors, facilitates payments, enables risk-sharing, provides liquidity and helps reduce information asymmetry between borrowers and lenders.

Information asymmetry exists when one participant in a transaction possesses materially more information than another. This can create problems in financial markets, particularly in lending.

A properly functioning financial system therefore contributes to economic welfare.

A dysfunctional or unstable financial system, on the other hand, can adversely affect the real economy.

The fundamental purpose of financial regulation is therefore to ensure that the financial system performs its important functions without adversely affecting the real economy.

Microprudential Regulation

Traditional prudential regulation primarily focused on individual financial institutions.

This is known as microprudential regulation.

The focus is on the soundness of an individual institution and its ability to withstand shocks.

For example, a microprudential question would be:

Is an individual bank adequately capitalised and capable of absorbing losses?

Microprudential regulation therefore operates at the level of the individual institution.

Macroprudential Regulation

The global financial crisis demonstrated that regulating individual institutions in isolation was not sufficient.

The financial system could accumulate systemic risks even when individual institutions appeared sound.

This led to increased emphasis on macroprudential regulation.

Macroprudential regulation focuses on the financial system as a whole and seeks to address systemic risks.

Therefore:

Microprudential = individual institution

Macroprudential = entire financial system

The two approaches are complementary rather than mutually exclusive.

The objective is a financial system that is resilient and capable of maintaining financial stability.

Principle-Based Regulation

The Reserve Bank has also been moving toward principle-based regulation.

Under this approach, the regulator establishes broad principles while allowing regulated entities greater flexibility in designing their own risk-management approaches.

This seeks to balance:

flexibility
effective risk management
regulatory objectives.

Principle-based regulation therefore does not mean deregulation.

It means that regulation is built around broad principles rather than attempting to prescribe every possible operational detail.

Who Regulates the Indian Financial System?

India has multiple regulatory and supervisory authorities.

The RBI regulates and supervises commercial banks, co-operative banks and certain categories of NBFCs.

Other authorities also have important responsibilities.

The Ministry of Corporate Affairs regulates other financial companies registered with it.

Certain powers concerning Housing Finance Companies were transferred to the RBI through amendments to the National Housing Bank Act.

The insurance sector is regulated by IRDAI, while the capital market and related areas such as credit-rating agencies are regulated by SEBI.

This makes India’s financial regulatory system a multi-regulator architecture.

RBI and Co-operative Banks

Co-operative banking involves a special dual-regulation structure.

For single-State co-operative banks, the State Registrar of Cooperative Societies has a role.

For multi-State co-operative banks, the Central Registrar of Cooperative Societies has a role.

The RBI is concerned with the banking function, while management control rests with the relevant cooperative authority.

This division is important because regulation and supervision are not necessarily concentrated entirely in one institution.

RBI and NABARD

The PDF distinguishes regulatory and supervisory responsibilities for certain rural institutions.

RRBs are regulated by RBI while their supervisory powers are vested with NABARD.

NABARD also supervises:

State Co-operative Banks
District Central Co-operative Banks.

This is an important examination distinction.

Do not simply memorise:

“NABARD regulates RRBs.”

The PDF specifically describes the division as:

RBI — regulation; NABARD — supervision.

Universal Banks and Differentiated Banks

Indian banking has traditionally included universal banking.

Until 2015, only universal banking licences were being issued.

From 2015 onward, differentiated banking licences were also issued.

The differentiated models include:

Payments Banks
Small Finance Banks.

The idea of differentiated banking originated in the recommendations of the committee chaired by Dr Nachiket Mor in 2013.

The objective was to provide financial services to small businesses and low-income households.

RBI subsequently issued SFB and Payments Bank guidelines in November 2014.

Payments Banks

Payments Banks were designed primarily to promote financial inclusion through:

small savings accounts
payment and remittance services.

Their target users include:

migrant labour
low-income households
small businesses
unorganised-sector entities.

The model therefore addresses access to basic financial and payment services.

Small Finance Banks

Small Finance Banks were designed to advance financial inclusion through:

savings facilities
credit supply.

Their target customers include:

small business units
small and marginal farmers
micro and small industries
other unorganised-sector entities.

The model emphasises high-technology and low-cost operations.

The PDF states that SFB licensing was made on-tap in 2019 and that eligibility criteria for transition from an SFB to a Universal Bank were issued in April 2024.

Why Are Banks Special?

Banks are different from ordinary companies because they accept deposits that can be withdrawn on demand and use those resources for lending and investment.

This allows banks to mobilise savings and support investment and consumption.

But it also creates structural vulnerabilities.

Banks transform:

size
risk
liquidity
maturity.

A particularly important feature is maturity transformation.

Banks may use short-term, liquid liabilities such as demand deposits to finance long-term, relatively illiquid assets such as mortgages.

This creates an asset-liability mismatch.

If depositors suddenly demand their money, a bank can face serious liquidity pressure.

A loss of confidence can therefore produce a bank run.

Why Protect Depositors?

Banks are highly leveraged.

They operate with very large amounts of deposits and borrowings relative to their own equity capital.

Depositors may also lack the information and expertise necessary to continuously evaluate the bank.

This creates information asymmetry.

Therefore, depositor protection is one of the central reasons for bank regulation.

Bank stability is also important because banks are central to:

payment and settlement systems
monetary-policy transmission.

A banking crisis can therefore have consequences extending far beyond the bank itself.

Banking Regulation Does Not Guarantee Every Bank’s Survival

An important conceptual point is that banking regulation is not primarily designed to prevent every individual bank from failing.

If:

depositors remain protected,
financial stability is not threatened, and
adequate banking services continue,

the failure of an individual institution is not necessarily itself a regulatory failure.

Regulation also should not replace the commercial judgement of bankers or shield banks from competition.

This distinction is important when answering descriptive questions on the purpose of financial regulation.

Bank Licensing

Banking operations generally require an RBI licence, subject to the statutory exceptions described for entities established under specific enactments.

The RBI applies tests of entry before issuing licences.

Private-sector bank ownership is also regulated to ensure:

diversified ownership and control
fit-and-proper major shareholders
compliance with prescribed shareholding limits
eventual dilution according to the applicable schedule.

On-Tap Bank Licensing

The earlier licensing model was described as Stop and Go.

The policy was changed in 2016 to a continuous authorisation/on-tap licensing approach.

The objective was to:

increase competition
encourage new ideas
bring new participants into the banking system.

This represents an important evolution in India’s banking-regulatory framework.

Branch Expansion and Financial Inclusion

Banking-outlet expansion is another regulatory instrument with a financial-inclusion dimension.

Domestic commercial banks, other than RRBs, Local Area Banks and Payments Banks, may open banking outlets in Tier 1 to Tier 6 centres without obtaining individual RBI permission in every case, subject to restrictions.

Banks have also been advised to locate at least:

25% of such banking outlets in unbanked rural centres.

The RBI also introduced Digital Banking Units in April 2022 to expand digital financial inclusion and digital banking infrastructure.

Prudential Regulation of Banks

Prudential regulation seeks to ensure bank safety and soundness.

Important areas include:

asset quality
income recognition
provisioning
capital adequacy
exposures
investment management
liquidity
risk management.

These are the tools through which regulators attempt to prevent excessive risk-taking from becoming a threat to depositors or the financial system.

Basel Framework

Basel I, introduced in 1988, initially focused on capital against credit risk.

Basel II expanded the framework to cover:

credit risk
market risk
operational risk.

The global financial crisis demonstrated shortcomings in the pre-crisis framework and resulted in Basel III.

Basel III strengthened:

capital quantity
capital quality
risk coverage
leverage controls
liquidity management
macroprudential resilience.

Important components include:

leverage ratio
capital conservation buffer
countercyclical capital buffer
LCR
NSFR.

Asset Quality and NPAs

Banks must objectively identify stressed assets.

Under the framework described in the PDF, a term loan becomes non-performing when interest and/or principal remains overdue for 90 days.

Once classified as non-performing:

income is not recognised on accrual basis;
provisioning is required.

The extent of provisioning varies depending on factors such as ageing and security.

Exposure Norms

Banks must avoid excessive concentration of exposures.

RBI therefore has a Large Exposure Norms Framework governing exposures to:

individual counterparties
groups of connected counterparties.

Banks also use internal limits for industry and sector exposures.

This reduces concentration risk.

In simple terms:

A bank should not become excessively dependent on the financial health of one borrower, one connected group or one sector.

Investment Portfolio Regulation

Banks invest in instruments such as:

government securities
bonds
shares
debentures
commercial paper
mutual funds.

The revised investment framework classifies investments into:

HTM
AFS
FVTPL.

HFT is a separate sub-category within FVTPL.

The revised framework also strengthened rules relating to transfers, valuation, HTM sales, trading books and disclosures.

Stressed-Asset Resolution

Resolution of stressed assets is important for freeing capital and improving bank balance sheets.

The Banking Regulation Amendment Act, 2017 enabled RBI to issue directions concerning stressed-asset resolution, including referral under the Insolvency and Bankruptcy Code.

The Prudential Framework for Resolution of Stressed Assets was issued on 7 June 2019.

The emphasis is on:

early resolution
time-bound action
transparency
value maximisation.

Risk Management and Stress Testing

Banks face interconnected financial and non-financial risks.

These include:

credit
liquidity
interest-rate
foreign-exchange
market
operational
legal
regulatory
reputational risks.

Banks therefore require systems to identify, measure, monitor and control risk.

Formal stress testing helps determine whether banks can survive shocks of different severity.

Climate Risk and Green Finance

Climate change can create financial risks for banks and other regulated entities.

RBI created the Sustainable Finance Group.

The PDF describes three areas of regulatory work:

green deposits
climate-related financial-risk disclosures
climate scenario analysis and stress testing.

Green-deposit guidelines were issued in April 2023.

Governance, Disclosure and Market Discipline

As banking regulation became more prudential, banks received greater flexibility in making business decisions.

That increased the importance of corporate governance.

RBI’s governance framework covers:

Board responsibilities
director suitability
Board committees
MD & CEO tenure
remuneration
Whole-Time Directors.

Disclosure is another regulatory tool.

Banks disclose information relating to:

capital adequacy
asset quality
liquidity
earnings
regulatory penalties.

Disclosure enables market participants to discipline bank behaviour.

Deposit Insurance

Deposit insurance protects depositors against insured losses.

The PDF states the insurance limit as:

₹5 lakh per depositor

for deposits held in the same capacity and same right across all branches of a bank.

The premium is borne by the bank rather than the depositor.

Digital Lending Regulation

Digital lending has created new regulatory challenges involving:

data
outsourcing
customer consent
transparency
credit risk
third-party lending platforms.

The RBI framework requires transparency in loan costs and appropriate handling of customer data.

Most importantly:

The regulated entity remains responsible even when lending functions are outsourced to a service provider or digital lending app.

Default Loss Guarantee

The PDF describes RBI’s framework permitting DLG arrangements subject to safeguards.

The maximum DLG cover is:

5% of the loan portfolio

and may be provided in the form of:

cash
fixed deposit
bank guarantee.

DLG cannot substitute for credit appraisal.

Credit Information

Credit information reduces information asymmetry between borrowers and lenders.

India’s credit-reporting framework includes four CICs identified in the PDF:

TransUnion CIBIL
Experian
Equifax
CRIF High Mark.

Credit institutions use credit information as an input into credit appraisal.

However, first-time borrowers should not be rejected merely because they lack a previous credit history.

Individual borrowers can obtain a Free Full Credit Report once per calendar year.

Recent Consumer Protection Measures

Recent measures described in the PDF include:

prohibition on penal interest being used as a substitute for penal charges;
borrower options when floating rates reset;
release of property documents within 30 days after full repayment;
enhanced credit-information correction mechanisms;
digital-lending transparency;
green-deposit safeguards;
KFS requirements;
strengthened cardholder protections.

These demonstrate a broader evolution of banking regulation:

From pure prudential safety toward safety + transparency + consumer protection + responsible innovation.

Final Exam Takeaway

The Indian financial system should not be memorised as a collection of disconnected institutions.

Understand the architecture:

Savers → financial institutions/markets → investment/credit → economic activity

while the regulatory framework attempts to ensure:

stability + soundness + transparency + depositor protection + financial inclusion + consumer protection + orderly innovation.

For RBI-oriented examinations, the most important conceptual distinction is:

Microprudential regulation protects individual institutions; macroprudential regulation addresses systemic risk.

And the most important institutional distinction from this chapter is:

RBI does not perform every regulatory and supervisory function in isolation. India’s financial system has a multi-regulator structure, with responsibilities distributed across RBI, NABARD, NHB, SEBI, IRDAI, MCA and other authorities.

RAPID REVISION SHEET — CHAPTERS 6–7

Fact	Answer
Components of financial system	Money, institutions, markets, instruments, infrastructure, services
Microprudential	Individual institution
Macroprudential	System-wide/systemic
Principle-based regulation	Broad principles + flexibility
Nachiket Mor Committee	2013
SFB/PB guidelines	November 2014
Differentiated banks alongside universal banks	Since 2015
On-tap universal-bank licensing	2016
RRB equity	50:15:35
LAB original minimum capital	₹5 crore
LAB original area	3 contiguous districts
Additional LAB expansion	2 districts, December 2012
Banking outlet	4 hours/day × 5 days/week
Unbanked rural outlet target	At least 25%
DBUs introduced	April 2022
NPA illustrative overdue period	90 days
Basel I	1988
Basel II	2006
LCR effective	June 9, 2014
NSFR effective	October 1, 2021
Stressed-asset Prudential Framework	June 7, 2019
Securitisation directions	September 24, 2021
Loan Transfer Directions	September 24, 2021
Green Deposit framework	April 2023
IRRBB final guidelines	February 17, 2023
Deposit insurance	₹5 lakh
DLG ceiling	5% of loan portfolio
Wilful-defaulter scheme	April 1, 1999
NPA → wilful-default review	Within 6 months
CIC reporting	Fortnightly from Jan 1, 2025
CIC ingestion timeline	5 days from Jan 1, 2025
Credit-card closure	7 working days
Credit-card closure delay penalty	₹500/day
Property-document release	30 days
KFS applicability	Retail + MSME term loans
KFS compliance for new loans	On/after October 1, 2024
AIFIs under RBI	EXIM, NABARD, NaBFID, NHB, SIDBI

RBI Functions & Working — Continuation

CHAPTER 6 — OVERVIEW OF THE INDIAN FINANCIAL SYSTEM

Priority: VERY HIGH

Chapter 6 is short, but it is conceptually important because it gives you the architecture of the Indian financial system and, more importantly, tells you who regulates/supervises what.

6.1 What constitutes the Indian Financial System?

The Indian financial system broadly consists of six major components:

Money
- Physical money
- Digital money
Financial Institutions
- Banks
- Non-banks
- Insurance companies
- Mutual funds, etc.
Financial Markets
- Money market
- Government Securities market
- Foreign exchange market
- Capital markets
- Commodity markets
Financial Instruments
- Shares
- Bonds
- Loans
- Deposits
Financial Market Infrastructure
- Central counterparties
- Payment & settlement systems
- Trade repositories
Financial Services
- Savings
- Exchange
- Insurance
- Borrowings

Memory trigger

M-I-M-I-I-S

Money → Institutions → Markets → Instruments → Infrastructure → Services

Think of the financial system as:

Money moves → through Institutions → across Markets → using Instruments → supported by Infrastructure → delivering Services.

6.2 Why is financial regulation necessary?

The financial system performs several vital economic functions:

connects savers and investors
facilitates payments
enables risk sharing
provides liquidity
reduces information asymmetry between borrowers and lenders.

A well-functioning financial system supports economic welfare.

A dysfunctional or unstable financial system can produce economic hardship.

Therefore, the objective of regulation is:

To ensure that the financial system performs its vital functions without adversely affecting the real economy.

Exam logic

Do not reduce financial regulation to:

“RBI regulates banks to prevent bank failures.”

That is incomplete.

The broader objective is to preserve the proper functioning of the financial system and its contribution to the real economy.

6.3 Microprudential vs Macroprudential Regulation

This is an extremely important distinction.

Microprudential regulation

Traditional prudential regulation focused on the individual financial institution.

It examines how an individual institution responds to shocks and seeks to ensure its soundness.

Focus:

Individual institution

Example conceptual question:

“Is Bank X sufficiently capitalised and resilient?”

That is microprudential thinking.

Macroprudential regulation

The global financial crisis demonstrated that individually sound institutions could still collectively generate systemic risk.

Therefore, regulation increasingly acquired a macroprudential character.

Focus:

Financial system as a whole

Question:

“Could the actions/interconnections of many institutions together destabilise the financial system?”

The PDF emphasises that both approaches are required:

Microprudential + Macroprudential = resilient financial system + financial stability.

Do not confuse

Microprudential	Macroprudential
Individual institution	Financial system as a whole
Institution-specific soundness	Systemic stability
Responding to shocks	Preventing/building resilience against systemic risk
“Is this bank safe?”	“Is the system safe?”

One-line memory

Micro = microscope on one institution. Macro = map of the entire system.

6.4 Principle-based regulation

The RBI has been endeavouring to adopt principle-based regulation.

Meaning:

Instead of prescribing every operational detail, the regulator establishes broad principles, allowing regulated entities some flexibility in designing their own risk-management approaches.

The objective is to balance:

Flexibility + Regulatory objectives.

Exam trap

Principle-based regulation ≠ absence of regulation.

It means:

Broad regulatory principles + entity-level responsibility for implementation/risk management.

6.5 Regulatory and Supervisory Structure in India

This is one of the highest-value sections of Chapter 6.

India has multiple financial regulators/supervisors, rather than a single regulator controlling the entire financial system.

Key regulatory architecture

Area / Entity	Regulator / Supervisor as stated in PDF
Commercial banks	RBI
Co-operative banks	RBI + cooperative authorities, depending on aspect
Certain NBFCs	RBI
Other financial companies registered with MCA	Ministry of Corporate Affairs
HFC regulation	RBI — certain powers transferred from NHB through Finance (No.2) Act, 2019
Insurance	IRDAI
Capital market, credit rating agencies etc.	SEBI
RRBs	RBI regulates; NABARD supervises
StCBs	NABARD supervises
DCCBs	NABARD supervises
HFCs	NHB supervises, according to this chapter’s description

Important nuance

For co-operative banks, regulation is characterised by dual regulation.

For:

Single-State Co-operative Banks → State Registrar of Cooperative Societies
Multi-State Co-operative Banks → Central Registrar of Cooperative Societies

The RBI is concerned with their banking function, while management control rests with the relevant RCS/CRCS.

Memory trigger

RBI = banking function; RCS/CRCS = management control
(for the dual-control structure described in the PDF).

6.6 Differentiated Banks

The concept of Differentiated Banks was introduced based on recommendations of a committee chaired by Dr Nachiket Mor in 2013.

Purpose:

To provide comprehensive financial services to small businesses and low-income households.

The concept of the Payments Bank was first discussed in the report of this committee.

Subsequently, RBI issued guidelines for setting up:

Small Finance Banks (SFBs)
Payments Banks (PBs)

in November 2014.

Conceptual distinction

Universal bank → broad banking activities.

Differentiated/niche bank → specialised purpose/customer/service model.

6.7 Supervision vs Regulation — Important Distinction

The PDF specifically separates the regulatory and supervisory roles.

RBI’s supervisory role covers:

commercial banks, including SFBs and PBs
Urban Co-operative Banks
certain Financial Institutions
NBFCs registered with RBI.

Meanwhile:

RRBs, StCBs and DCCBs → supervised by NABARD
HFCs → supervised by NHB, according to the chapter.

Exam warning

Do not mechanically assume:

“If RBI regulates something, RBI must also supervise it.”

The chapter itself demonstrates that regulation and supervision can be distributed differently.

CHAPTER 6 — RAPID REVISION

Financial system =

Money + Institutions + Markets + Instruments + Infrastructure + Services

Regulation

Purpose: financial system performs vital functions without adverse impact on real economy.

Microprudential

Individual institution

Macroprudential

Systemic/system-wide risk

Principle-based

Broad principles + flexibility for regulated entities

Differentiated banking

Nachiket Mor Committee → 2013 → SFB/PB guidelines → November 2014

Co-operative banking

RBI → banking function
RCS/CRCS → management control

RRBs

RBI → regulation
NABARD → supervision

CHAPTER 7 — REGULATION OF COMMERCIAL BANKS

Priority: EXTREME

This is one of the most examination-rich chapters in the PDF.

The chapter moves from:

Why regulate banks? → Legal framework → Types of banks → Licensing → Branches → Reserves → Prudential norms → Risk management → Governance → Disclosure → Deposit insurance → Resolution → Para-banking → AIFIs → Credit information → Recent regulatory measures.

7.1 Why do banks require special regulation?

Banks perform a unique function:

They accept deposits that can be withdrawn on demand and use those funds for lending and investment.

This allows banks to:

mobilise savings
encourage investment
support consumption.

But banking inherently involves several transformations:

Size transformation
Risk transformation
Liquidity transformation
Maturity transformation

7.2 Why are banks fragile by design?

A bank may finance:

Long-term illiquid assets

with:

Short-term liquid liabilities such as demand deposits.

This creates an asset-liability mismatch.

Therefore:

Deposits → short-term/liquid

while

Loans/assets → potentially long-term/illiquid

If depositors lose confidence and demand their money simultaneously, the bank may face a run.

Connection with Chapter 1

This directly connects with the lender-of-last-resort concept discussed earlier.

Bank fragility → possibility of run → liquidity crisis → central-bank liquidity support.

7.3 Moral hazard

Two mechanisms that can protect banking stability are:

depositor insurance
central-bank liquidity support.

But these mechanisms can themselves create moral hazard.

Why?

If an institution expects protection against losses, it may have weaker incentives to control risk.

Therefore:

Safety nets solve one problem but can create incentive problems.

7.4 Depositor protection

Banks are highly leveraged.

They mobilise enormous amounts of:

deposits
borrowings

against a comparatively small amount of their own equity capital.

Therefore, depositor protection becomes a central reason for regulation.

Another problem is asymmetric information.

Depositors may not possess enough information or expertise to continuously evaluate a bank’s financial condition.

7.5 Banks and systemic stability

Banks are central to:

payment and settlement systems
monetary-policy transmission.

Therefore, banking instability can:

disrupt payment and settlement systems;
weaken monetary-policy transmission;
generate output losses;
increase unemployment.

Hence banking regulation is not merely about protecting individual depositors.

It is also about macroeconomic stability.

7.6 What banking regulation does NOT intend to accomplish

This is a very testable conceptual section.

Banking regulation is not primarily intended to:

1. Prevent every individual bank failure

If:

depositors are protected,
financial stability is not compromised, and
adequate banking services continue,

preventing the failure of every individual bank is not the primary regulatory objective.

2. Replace commercial decisions of bankers

Regulation should not substitute the regulator’s judgement for the banker’s commercial decisions about ordinary operations.

3. Protect banks from competition

Regulation should not favour particular groups.

Banks should not be shielded from competition by other institutions.

Remember

Regulation protects the system — it does not guarantee every bank survival.

7.7 Legal framework of banking regulation

Before the Banking Regulation Act, 1949, banking-company law was largely contained in company law.

The Companies Act was introduced in India in 1850, based on the English Companies Act, 1844.

The RBI Act, 1934 subsequently gave RBI important banking-related responsibilities, including:

custody of cash reserves
discretionary accommodation
credit control
lender-of-last-resort function.

The Banking Regulation Act was passed on 17 February 1949.

It comprehensively addressed banking matters ranging from:

setting up a bank → operations → amalgamation.

Other important statutes

Depending on the category of bank:

SBI Act, 1955
Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980
Regional Rural Banks Act, 1976
Banking Regulation Act, 1949

Section 56 was inserted into the BR Act in 1965 to regulate co-operative banks.

7.8 Evolution of banking regulation

The fundamental objective remained:

Soundness and stability of the banking system.

But the approach evolved.

Broad shift:

Rule-based + entity-based

↓

Activity-based + scale-based

The RBI’s regulatory approach also increasingly focused on:

systemic instability
competition
market practices
balance-sheet transparency
depositor protection
social needs
efficiency
reducing information asymmetry
preventing money laundering.

Memory chain

Rules → Activities → Scale → Systemic stability

7.9 Indian Banking System — Commercial Banks

Commercial banks can broadly be classified by ownership into:

Public sector banks

Includes:

State Bank of India
nationalised banks
RRBs, which are constituted under respective parliamentary enactments.

Private sector banks

Banking companies under the BR Act.

Foreign banks

Also treated as banking companies under the BR Act.

7.10 Universal vs Differentiated Banks

Until 2015, only universal banking licences were being issued.

Since 2015, differentiated/niche banking licences have also been issued alongside universal-bank licences.

These include:

Payments Banks
Small Finance Banks

Conceptual difference

Universal Bank	Differentiated Bank
Broad banking model	Niche/specialised model
Wide range of activities	Specific functional/customer focus
General banking licence	Payments/SFB model

7.11 Regional Rural Banks

RRBs were established to develop the rural economy.

Target beneficiaries include:

small and marginal farmers
agricultural labourers
artisans
small entrepreneurs.

They play a critical role in delivery of:

agricultural credit
rural credit.

Ownership/equity structure

Central Government : State Government : Sponsor Bank

= 50 : 15 : 35

Extremely important

RRB regulation = RBI
RRB supervision = NABARD

7.12 Local Area Banks

LABs were designed as low-cost structures to provide efficient and competitive financial intermediation in:

rural areas
semi-urban areas.

Original scheme:

minimum capital = ₹5 crore
area = three contiguous districts

In December 2012, LABs were permitted to expand operations to two additional districts.

Memory

LAB = Low-cost + Area-specific + 3 districts originally

7.13 Foreign Banks

Foreign banks can operate in India through:

Branches
Wholly Owned Subsidiaries (WOS)

Opening of branches is guided by India’s commitments under the WTO.

7.14 Salient Banking Regulation Architecture

Bank regulation spans the bank’s lifecycle.

Ex-ante regulation

Before/problems arise:

Entry regulation
Activity regulation
Prudential regulation
Governance regulation
Conduct regulation
Information regulation

Ex-post regulation

After distress/failure:

Resolution policies

Memory

E-A-P-G-C-I → R

Entry → Activity → Prudential → Governance → Conduct → Information → Resolution

7.15 Bank Licensing

For commencing banking operations in India, a licence from RBI is required for an Indian or foreign bank, subject to the statutory exceptions described in the PDF.

Public sector banks and RRBs established under specific enactments are exceptions to the ordinary BR Act licensing requirement.

RBI issues a licence after “tests of entry” are satisfied.

Ownership regulation

Private-sector bank ownership is regulated to ensure:

diversified ultimate ownership/control
fit-and-proper major shareholders
compliance with shareholding limits
prescribed dilution schedule.

Why?

Because concentrated ownership can create:

ownership concentration → excessive control → related-party/conflict risks → governance problems.

7.16 From Stop-and-Go to On-Tap Licensing

Earlier universal-bank licensing followed a “Stop and Go” approach.

The PDF states:

10 licences under the 1993 guidelines
2 licences under the 2001 guidelines
2 licences under the 2013 guidelines.

In 2016, the policy shifted to:

Continuous authorisation / On-tap licensing

Purpose:

increase competition
bring new ideas into the banking system.

Chronology

1993 → 2001 → 2013 → 2016

Stop-and-Go → On-Tap

7.17 Payments Banks

Guidelines were issued in 2014.

Objective:

Financial inclusion through:

small savings accounts
payments/remittance services

Target groups include:

migrant labour
low-income households
small businesses
unorganised-sector entities
other users.

The PDF states that seven PB licences were issued, of which one bank voluntarily wound down its business.

7.18 Small Finance Banks

Objective:

Financial inclusion through:

savings vehicles
credit supply

Target segments:

small business units
small and marginal farmers
micro and small industries
other unorganised-sector entities.

The model emphasises:

High technology + low-cost operations

The PDF states:

10 SFB licences were initially issued;
one SFB was amalgamated with another;
SFB licensing was made on-tap in 2019;
two SFBs were licensed under these guidelines;
eligibility criteria for transition from SFB to Universal Bank were issued in April 2024.

Payments Bank vs SFB

Payments Bank	Small Finance Bank
Small savings	Savings
Payments/remittances	Credit + savings
Financial inclusion	Financial inclusion
Migrant labour, low-income groups etc.	Small businesses, farmers, MSMEs etc.

7.19 Branch Expansion

Opening or shifting a banking outlet is governed by the BR Act.

The general principle is that prior RBI approval is required for:

opening a new place of business in India or abroad;
shifting an existing place of business outside the same city/town/village.

However, RBI liberalised branch licensing to support financial inclusion.

Domestic commercial banks, except:

RRBs
Local Area Banks
Payments Banks

may open banking outlets in Tier 1 to Tier 6 centres without obtaining individual RBI permission in each case, unless specifically restricted.

They have also been advised to open at least:

25% of such banking outlets in unbanked rural centres.

7.20 What is a Banking Outlet?

The PDF defines a banking outlet as a fixed-point service-delivery unit staffed by:

bank staff, or
a Business Correspondent,

where services include:

acceptance of deposits
cheque encashment
cash withdrawal
lending.

It must provide these services for:

minimum 4 hours/day on at least 5 days/week.

Memory

Banking Outlet = 4 × 5

4 hours/day × 5 days/week

7.21 Digital Banking Units

RBI introduced Digital Banking Units (DBUs) in April 2022.

They represent a digitally focused differentiated banking model.

Dual objectives:

accelerated digital financial inclusion
greater availability of digital banking infrastructure.

The broader purpose is to increase awareness and reduce customer hesitation in using digital financial services.

7.22 CRR and SLR

Commercial banks must maintain reserves.

CRR

A prescribed portion of NDTL is maintained as:

Cash with RBI

= Cash Reserve Ratio

SLR

Banks must maintain assets in India equal to the prescribed percentage of NDTL in the form of:

unencumbered approved securities
cash
gold
other RBI-notified instruments.

= Statutory Liquidity Ratio

Connect with Chapter 3

You already studied:

CRR → RBI-held cash

SLR → qualifying liquid assets

Do not confuse the two.

7.23 Prudential Norms

Prudential norms are guidelines intended to ensure:

Safety + Soundness of banks

Major areas include:

Income Recognition
Asset Classification
Provisioning
Capital Adequacy
Exposures
Investments
Risk management.

7.24 IRACP Norms

Income Recognition, Asset Classification and Provisioning

The objective is to achieve:

consistency
transparency
objective recognition of stressed assets.

A bank must identify assets that cease to generate income.

The PDF’s illustrative benchmark:

If interest and/or principal instalment of a term loan remains overdue for 90 days, the loan is classified as non-performing.

NPA treatment includes:

no accrual-based income recognition on such assets;
provisioning;
progressively higher provisioning depending on NPA ageing, security and grade.

Memory

NPA logic = Income stops → Classification → Provision

7.25 Basel Framework

Bank capital serves as a:

Loss-absorbing buffer

protecting depositors against unexpected losses.

Capital also affects the bank’s leverage.

The Basel framework links capital requirements to the risk profile of assets.

D-SIBs are required to maintain additional capital buffers.

Basel chronology

Basel I — 1988

Initially focused on:

capital against credit risk exposures.

Basel II — 2006

Expanded risk coverage to:

credit risk
market risk
operational risk.

It also provided flexibility to use:

standardised models
internal models.

Basel III

Developed following the global financial crisis.

Objectives:

improve quantity of capital
improve quality of capital
improve risk coverage
strengthen resilience
introduce macroprudential elements.

7.26 Basel III — Important Components

The PDF specifically highlights:

Capital-side

Leverage Ratio
Capital Conservation Buffer
Countercyclical Capital Buffer

Liquidity-side

Liquidity Coverage Ratio — LCR
Net Stable Funding Ratio — NSFR

The liquidity framework addresses weaknesses revealed during the crisis, including:

poor liquidity governance
funding concentration
inadequate cash-flow projections
inadequate high-quality liquid assets
weak stress testing
poor linkage between contingency plans and stress tests.

The PDF states:

LCR effective from June 9, 2014
NSFR effective from October 1, 2021

7.27 Operational Risk — New Standardised Approach

The RBI prescribed a new standardised approach for determining minimum operational-risk capital requirements.

Banks consider:

Business Indicator Component (BIC) — financial-statement based
Internal Loss Multiplier (ILM) — loss-data based, for larger banks.

7.28 Exposure Norms

A bank can become excessively concentrated in:

one counterparty
a group of connected counterparties
one industry/sector.

RBI therefore has a:

Large Exposure Norms Framework

which imposes limits on exposures to:

single counterparty
group of connected counterparties.

Banks are also advised to establish internal limits for industry/sector exposures.

There are additional statutory/regulatory limits concerning:

shareholding in companies
capital-market exposures
intra-group exposures.

Certain exposures, including those to governments and specified regulatory bodies, receive exemptions under the framework described in the PDF.

Principle

Don’t put too many eggs in one counterparty/sector basket.

7.29 Investment Guidelines

Banks can invest in:

government securities
approved securities
shares
debentures
bonds
subsidiaries/JVs
commercial paper
mutual-fund units
other permitted instruments.

RBI issues investment-portfolio guidelines considering:

financial-market developments
international practices.

7.30 Investment Portfolio Classification

The revised framework classifies the entire investment portfolio into:

Held to Maturity — HTM
Available for Sale — AFS
Fair Value through Profit and Loss — FVTPL

Within FVTPL:

Held for Trading — HFT is a separate sub-category.

Important features

The revised framework included:

principle-based classification
tighter HTM transfer rules
tighter rules on sales out of HTM
inclusion of non-SLR securities in HTM subject to conditions
removal of HTM ceiling
symmetric treatment of fair-value gains/losses
identifiable HFT book
removal of 90-day HFT holding-period ceiling
enhanced disclosures.

7.31 Resolution of Stressed Assets

Swift and time-bound resolution is important for:

cleaning bank balance sheets
efficient capital reallocation
preserving value.

The Banking Regulation (Amendment) Act, 2017, along with subsequent government authorisation, empowered RBI to issue directions for stressed-asset resolution, including referral to the:

Insolvency and Bankruptcy Code, 2016

RBI’s Prudential Framework for Resolution of Stressed Assets was issued on:

7 June 2019

The framework emphasised:

early resolution
transparency
time-bound action
collective action clauses
value maximisation.

Banks could formulate resolution plans according to their own:

internal policies
risk appetite.

7.32 Credit Risk Market

RBI has sought to deepen India’s credit-risk market.

One initiative was facilitating the establishment of the:

Secondary Loan Market Association

as a self-regulatory organisation for developing the secondary market for corporate loans.

Transfer of Loan Exposures

The Master Directions on Transfer of Loan Exposures were issued on:

24 September 2021

They provide a framework for transfers by:

banks
NBFCs
AIFIs.

They also facilitate transfer of stressed loan exposures to a wider range of market participants, subject to conditions.

7.33 Securitisation

Directions on:

Securitisation of Standard Assets

were issued on 24 September 2021.

The framework:

rationalised securitisation regulation
simplified minimum holding period requirements
simplified minimum retention requirements
aligned capital requirements with Basel III
provided concessional capital treatment for certain Simple, Transparent and Comparable (STC) securitisations
established requirements for facility providers.

7.34 Risk Management

Banks face multiple risks:

Financial

credit risk
interest-rate risk
foreign-exchange risk
liquidity risk
equity-price risk
commodity-price risk.

Non-financial

legal risk
regulatory risk
reputational risk
operational risk.

These risks are interdependent.

Therefore banks need systems for:

identifying risk
measuring risk
monitoring risk
controlling risk
aggregating risks
allocating capital.

7.35 Stress Testing

Banks must maintain formal stress-testing frameworks.

Purpose:

Determine whether banks can withstand shocks of different severity.

They should be capable of surviving at least the baseline shocks indicated by the regulator.

Conceptual chain

Risk identification → Stress scenario → Impact assessment → Resilience assessment → Corrective action

7.36 Climate-related Risks

Climate change can generate financial risks for regulated entities and potentially create broader financial-stability consequences.

RBI created:

Sustainable Finance Group (SFG)

for regulatory and risk assessment work concerning climate-related risks.

A Discussion Paper on Climate Risk and Sustainable Finance was placed on the RBI website on:

27 July 2022

Following feedback, the PDF identifies three areas for guidelines:

Framework for acceptance of Green Deposits
Disclosure framework on Climate-related Financial Risks
Guidance on Climate Scenario Analysis and Stress Testing

The green-deposit guidelines were issued on:

11 April 2023

while the other two were stated as forthcoming in the PDF.

7.37 Regulation of Interest Rates

Deposit rates

Deposit rates have progressively been deregulated.

However, banks must ensure:

uniformity across branches/customers for comparable deposits;
no discriminatory treatment between similar deposits;
transparency;
reasonableness;
supervisory reviewability.

Higher interest may be allowed for:

senior citizens
eligible bank staff/executives and certain staff associations, subject to conditions.

7.38 Interest Rates on Advances

Banks can offer fixed or floating rates.

But rates must be:

fair
transparent
based on internal/external benchmarks.

For new floating-rate:

personal/retail loans
MSME loans

banks must link rates to specified external benchmarks such as:

Repo Rate
3-month T-bill yield
6-month T-bill yield
other FBIL-published benchmark market rates.

Banks are advised to reset external-benchmark-linked rates at least:

once every three months

and use a uniform external benchmark within a loan category.

Connect with Chapter 3

This is the practical transmission mechanism:

Policy rate → external benchmark → floating lending rate → borrower cost → spending → aggregate demand.

7.39 KYC / AML / CFT

RBI’s KYC framework is intended to:

protect banks
preserve banking-system integrity
prevent money laundering
understand customer risks
manage risks prudently.

The framework is based on:

Prevention of Money Laundering Act, 2002
PML Rules, 2005
FATF recommendations.

Banks must:

conduct KYC
establish customer identity
report suspicious transactions to the Financial Intelligence Unit.

Memory

KYC = Know customer + Know risk + Keep system clean

7.40 Corporate Governance

Banking regulation shifted during the 1990s from a prescriptive approach toward a prudential approach.

As banks received greater freedom to formulate:

business plans
implementation strategies,

the importance of bank-board governance increased.

Key areas included:

role of Board
fit-and-proper criteria
director expertise
Board review
governance structures
Chairman/MD separation
compensation.

A Discussion Paper on Governance in Commercial Banks in India was issued in June 2020.

Instructions followed in April 2021.

The PDF states these covered:

independent part-time Chairman
composition of significant Board committees
age/tenure/remuneration of directors
appointment of WTDs
tenure of MD & CEO.

Relevant committees include:

Audit Committee of the Board — ACB
Risk Management Committee of the Board — RMCB
Nomination and Remuneration Committee — NRC

The ceiling on fixed remuneration of NEDs was increased to:

₹30 lakh per annum in February 2024.

Banks were also advised to have at least:

two Whole-Time Directors, including MD & CEO.

7.41 Disclosure Norms

Public disclosure supports:

Market discipline

Banks are required to disclose relevant information, including:

capital adequacy
asset quality
liquidity
earnings
regulatory penalties, where applicable.

Concept

Disclosure → information → market discipline → better behaviour

7.42 Deposit Insurance

Deposit insurance protects depositors when an insured deposit institution cannot meet its obligations.

Covered under the scheme:

commercial banks
foreign-bank branches in India
local area banks
regional rural banks.

Coverage:

₹5 lakh per depositor

for deposits held in the:

same capacity and same right

across all branches of the bank taken together.

The insurance premium is borne by:

the insured bank, not the depositor.

Very high-yield fact

₹5 lakh + same capacity & same right + bank bears premium

7.43 Resolution of Banks

Weak banks are closely monitored.

RBI’s approach is:

Stage 1

Try to restore the weak bank to health.

The bank is given time/latitude to formulate:

credible capital plan
revival plan.

Stage 2

If no credible capital infusion or merger proposal exists:

RBI may initiate:

compulsory amalgamation / reconstruction.

Under Section 45 of the BR Act, RBI applies to the Central Government.

After the 2020 amendment to Section 45(4), amalgamation can be decided:

during moratorium, or
at another time.

A draft scheme is placed on the RBI website for stakeholder comments/objections before being sent to Government for approval and notification.

7.44 Cancellation of Banking Licence

RBI may cancel a banking company’s licence under Section 22(4) where, as described in the PDF:

it is in the public interest;
the bank ceases banking business in India;
it fails to comply with licence conditions under specified subsections.

An aggrieved banking company can appeal to the:

Central Government

within 30 days from communication of the decision.

7.45 Para-Banking Activities

Deregulation and financial-sector development encouraged banks to undertake non-traditional activities.

Section 6(1) of the BR Act lists businesses that banking companies may undertake in addition to core banking.

Permitted activities include:

mutual fund business
insurance
merchant banking
factoring
card business
pension fund management
investment advisory
agency business
membership of SEBI-approved stock exchanges.

Some activities can be conducted departmentally.

Others require:

subsidiary / joint venture route

subject to prudential requirements.

7.46 All India Financial Institutions

The PDF identifies five AIFIs under RBI regulation and supervision:

EXIM Bank
NABARD
NaBFID
NHB
SIDBI

They provide medium- to long-term finance through:

refinance
direct lending.

They support sectors such as:

exports
rural/agriculture
housing
small industries
infrastructure.

They are subject to prudential norms concerning:

income recognition
asset classification
provisioning
exposures
investments
capital adequacy
disclosures.

They are also subject to:

on-site inspection
off-site surveillance.

Memory

E-N-N-N-S

EXIM – NABARD – NaBFID – NHB – SIDBI

7.47 Credit Information Companies

Credit reporting addresses:

Asymmetric information in credit markets.

Without adequate credit information, problems can include:

adverse selection
credit rationing
moral hazard.

The credit-reporting system comprises:

institutions
individuals
statutes
procedures
standards
technology

that facilitate credit-relevant information flows.

The PDF identifies four CICs:

TransUnion CIBIL
Experian
Equifax
CRIF High Mark

Credit institutions include:

banks
AIFIs
NBFCs
HFCs
State Financial Corporations
credit-card companies, etc.

7.48 Credit Reports

Credit institutions are advised to use a credit-information report from at least one CIC as an input to credit appraisal.

But:

A first-time borrower should not be rejected merely because there is no credit history.

Individuals can obtain credit reports.

The PDF states that CICs must furnish:

Free Full Credit Report (FFCR) including credit score

to individual borrowers:

once in a calendar year.

7.49 RBI’s Consultative Approach

For major regulatory changes, RBI generally seeks stakeholder/public feedback.

This can involve:

working-group reports
discussion papers
draft circulars/guidelines.

In-house consultation may also be undertaken.

Advisory committees can be established.

RBI also uses:

FAQs

to clarify regulatory measures and maintain engagement with stakeholders.

7.50 Recent Regulatory Measures in the PDF

This section is especially useful for descriptive answers and contemporary exam questions.

A. Investments in AIFs

Concern:

Evergreening

Certain investments by regulated entities in AIF schemes could indirectly facilitate repayment of stressed borrowers’ loans.

Measures included:

restrictions on investments in AIF schemes with downstream investment in debtor companies;
liquidation of existing investments within stipulated timelines in specified circumstances;
full provisioning where required;
deduction of junior-tranche investment from regulatory capital.

Clarifications included:

downstream investments exclude equity shares but include other instruments;
provisioning applies proportionately to the RE’s investment;
capital deductions affect Tier 1 and Tier 2;
certain indirect AIF investments through intermediaries such as FoFs/MFs were outside the scope described.

7.51 Penal Charges in Loan Accounts

The revised approach required:

Board-approved policy
transparent disclosure of amount and reason for penal charges.

Crucially:

Penal charges should not be levied as penal interest.

Also:

Penal charges should not be capitalised.

Therefore, no additional interest should be calculated on those penal charges.

Exam trap

Penal charge ≠ penal interest

7.52 Reset of Floating Interest Rates on EMI-based Personal Loans

The PDF identifies customer complaints arising from:

longer loan tenors
higher EMIs
inadequate communication/consent.

Regulated entities must assess at sanction whether sufficient headroom exists to absorb rising rates.

On reset, borrowers should be offered options including:

switch to fixed rate, according to Board policy;
increase EMI;
extend tenor;
combination of EMI increase and tenor extension;
prepayment partly or fully.

Loan-tenor extension should not create:

negative amortisation.

7.53 Release of Property Documents

After full repayment/settlement of personal loans, regulated entities must release original:

movable-property documents
immovable-property documents

and remove registered charges within:

30 days

The framework also provides for compensation for delay and responsibility where documents are lost/damaged.

7.54 Credit Information Customer Service

The PDF describes a compensation framework for failure to update/rectify credit information within:

30 days

Other measures include:

SMS/email notification
nodal grievance points
half-yearly root-cause analysis
reasons for rejection of correction requests.

CIC data ingestion timeline:

originally 7 days, revised to 5 days effective January 1, 2025.

7.55 Digital Lending

Digital-lending guidelines apply to:

commercial banks
primary urban co-operative banks
state co-operative banks
district central co-operative banks
NBFCs including HFCs.

Important principles:

Flow of funds

Money should move between lender and borrower through their bank accounts rather than third-party pass-through/pool accounts.

Fees

Loan service providers should not directly collect fees from customers.

Transparency

Key facts/all-inclusive cost should be disclosed.

Data

Data collection must be:

need-based
supported by explicit customer consent
accompanied by audit trails.

Privacy

Appropriate data-privacy policies must exist.

Outsourcing

Using an LSP or digital lending app does not remove the regulated entity’s responsibility.

Golden principle

Outsourcing does not outsource regulatory responsibility.

7.56 Default Loss Guarantee — DLG

The PDF discusses DLG arrangements in digital lending.

Concern:

Some arrangements placed up to 100% of credit risk on the digital lending/fintech side, potentially allowing the regulated entity to earn a guaranteed yield without sharing sufficient risk.

RBI permitted DLG arrangements subject to safeguards.

Maximum DLG cover:

5% of the loan portfolio

It can be provided only through:

cash
fixed deposit
bank guarantee.

The RE must have:

Board-approved policy;
proper credit appraisal.

DLG cannot substitute for credit appraisal.

Must remember

DLG ceiling = 5%

7.57 Compromise Settlements and Technical Write-Offs

A comprehensive framework was issued on:

8 June 2023

It covers:

compromise settlements
technical write-offs.

It includes provisions relating to:

sacrifice/waiver
delegation of powers
prudential treatment
reporting
Board oversight
cooling period
fraud accounts
wilful defaulters.

7.58 Consumer Credit and Bank Credit to NBFCs

Post-COVID, strong growth was observed in:

consumer credit
especially unsecured consumer credit.

At the same time, increasing NBFC dependence on bank borrowing generated regulatory concerns.

A circular was issued on:

16 November 2023

with quantitative and qualitative measures.

7.59 Green Deposits

A green deposit is an:

interest-bearing deposit received for a fixed period where proceeds are earmarked for green finance.

The framework was issued in:

April 2023

Objectives include:

protecting depositors
reducing greenwashing
increasing credit flow to green activities/projects.

REs must establish a:

Board-approved Financing Framework

covering:

eligible green activities/projects
project evaluation and selection
allocation of proceeds
reporting
third-party verification/assurance
impact assessment
temporary allocation.

The framework covers sectors such as:

renewable energy
energy efficiency
clean transportation
sustainable water/waste management
green buildings.

A Board review report is required within three months of the end of the financial year.

7.60 Wilful Defaulters

The RBI scheme for wilful defaulters dates to:

1 April 1999

The updated framework extends beyond Scheduled Commercial Banks to specified:

UCBs
AIFIs
Tier 3 and Tier 4 non-scheduled primary UCBs
NBFCs in Middle and above layers
RRBs
LABs.

The definition of wilful default was broadened to include borrowers who committed to infuse capital but failed to do so.

Early detection requires review of NPA accounts for wilful default within:

6 months of classification as NPA.

Penal consequences described

institutional finance barred
one-year cooling-off period after removal from wilful-defaulter list for additional credit
five-year restriction after removal for credit facilities to start new ventures
ineligibility for restructuring.

A two-level structure exists:

Identification Committee
Review Committee

The framework includes:

disclosure of material relied upon
written representation
personal hearing before Review Committee.

7.61 Credit Information Reporting Frequency

Earlier reporting:

Monthly

From:

January 1, 2025

the frequency was increased to:

Fortnightly

or a shorter mutually agreed interval.

Credit institutions were also advised to submit fortnightly information within:

7 calendar days

of the relevant reporting fortnight.

Remember

Monthly → Fortnightly → 1 January 2025

7.62 Credit and Debit Card Conduct

The Master Direction on Credit Card and Debit Card — Issuance and Conduct Directions was issued:

21 April 2022

and updated:

7 March 2024.

Customer consent is central.

Important measures include:

Acquisition

Key Fact Sheet
telemarketing window 10:00–19:00
signed agreement copy
digital consent.

Underwriting

transparency in EMI conversion
no usage beyond sanctioned credit limit.

Interest

Interest must be justifiable relative to:

cost incurred
reasonable expected return.

Closure

Credit-card closure:

7 working days

Delay penalty:

₹500 per calendar day

7.63 Key Facts Statement — KFS

RBI issued KFS requirements for:

retail and MSME term-loan products

sanctioned by all regulated entities.

Borrowers must receive key information in a simple format, including:

all-in-cost
Annual Percentage Rate (APR)
amortisation schedule.

APR includes relevant charges levied by the RE and certain charges recovered from borrowers on behalf of third-party providers.

The PDF states that REs had time until:

30 September 2024

to establish systems/processes.

New retail and MSME term loans sanctioned on or after:

1 October 2024

were to comply with the guidelines.

7.64 Banking Regulation Amendment — 2020

The PDF briefly notes amendments to the BR Act through the Banking Regulation (Amendment) Act, 2020.

Objective:

Enhance RBI’s regulatory oversight over co-operative banks in areas including management, capital, audit and liquidation.

It also mentions the:

Multi-State Co-operative Societies (Amendment) Act, 2023

with the objective of aligning provisions with constitutional requirements and addressing governance/functioning concerns.

7.65 Interest Rate Risk in Banking Book — IRRBB

IRRBB = Interest Rate Risk in Banking Book

It refers to the current or prospective risk to:

bank capital
bank earnings

arising from adverse interest-rate movements affecting banking-book positions.

When rates change:

Present value + timing of future cash flows change.

This affects:

rate-sensitive assets
liabilities
off-balance-sheet items
economic value (EV)
net interest income (NII).

Excessive IRRBB can threaten current capital and future earnings.

The RBI issued final guidelines aligned with the revised Basel framework on:

17 February 2023

The PDF states that the final implementation date had not yet been communicated, while banks were advised to prepare.

CHAPTER 7 — MASTER MEMORY MAP

Memorise this sequence:

Why regulate?

↓
Bank fragility + leverage + depositor protection + systemic importance

↓

Legal framework

↓

Licensing

↓

Branch expansion

↓

CRR + SLR

↓

Prudential norms

↓

IRACP

↓

Capital/Basel

↓

Exposure norms

↓

Investment norms

↓

Stressed-asset resolution

↓

Risk management + stress testing

↓

Climate risk

↓

Interest rates

↓

KYC/AML/CFT

↓

Corporate governance

↓

Disclosure

↓

Deposit insurance

↓

Resolution

↓

Para-banking

↓

AIFIs

↓

Credit information

↓

Digital lending + DLG

↓

Consumer protection

↓

KFS + cards + credit reporting

↓

IRRBB

That is the entire regulatory lifecycle.

CHAPTERS 6–7: HIGH-YIELD “DO NOT CONFUSE” BOX

1. Microprudential vs Macroprudential

Micro = individual institution
Macro = system-wide

2. Regulation vs Supervision

They are related but not identical.

RRBs: RBI regulates, NABARD supervises.

3. Universal vs Differentiated banks

Universal = broad banking

Differentiated = niche/specialised banking

4. Payments Bank vs SFB

PB = savings + payments/remittances

SFB = savings + credit to underserved segments

5. CRR vs SLR

CRR = cash with RBI

SLR = specified liquid assets maintained in India

6. Basel I vs II vs III

Basel I → credit risk

Basel II → credit + market + operational risk

Basel III → resilience + better capital + macroprudential + liquidity

7. Penal charge vs Penal interest

Penal charge allowed under framework

Penal interest prohibited in the described context

8. DLG

Maximum cover in the described framework = 5%

9. Credit reporting

Earlier monthly → fortnightly from 1 January 2025

10. Banking outlet

4 hours × 5 days

11. Deposit insurance

₹5 lakh per depositor, same capacity & same right

12. RRB ownership

50 : 15 : 35

Central Government : State Government : Sponsor Bank

CHAPTER 6–7 CHRONOLOGY CHAIN

Memorise this as a single chain:

1850 — Companies Act introduced in India
↓
1934 — RBI Act
↓
1949 — Banking Regulation Act
↓
1955 — SBI Act
↓
1965 — BR Act Section 56 for co-operative banks
↓
1970 & 1980 — Banking Companies Acquisition/Transfer statutes
↓
1976 — RRB Act
↓
1988 — Basel I
↓
1990s — shift toward prudential regulation/governance
↓
1993 — private-bank licensing guidelines
↓
1999 — wilful-defaulter scheme
↓
2001 — another private-bank licensing round
↓
2006 — Basel II
↓
2012 — LABs allowed two additional districts
↓
2013 — Nachiket Mor Committee / new private-bank licensing round
↓
2014 — SFB/PB guidelines
↓
2014 — LCR effective
↓
2015 — differentiated banks alongside universal banks
↓
2016 — on-tap licensing
↓
2017 — BR Amendment enabling stressed-asset directions
↓
2019 — SFB on-tap licensing
↓
2019 — Prudential Framework for Stressed Assets
↓
2020 — BR Amendment strengthening co-operative-bank oversight
↓
2021 — governance instructions; loan-transfer/securitisation framework
↓
2021 — NSFR effective
↓
2022 — DBUs; digital-lending framework; IRRBB work
↓
2023 — climate/green-deposit framework; compromise settlement framework; IRRBB final guidelines
↓
2024 — SFB → Universal Bank eligibility criteria; governance remuneration change; card-direction update; KFS implementation timeline
↓
1 Jan 2025 — fortnightly credit-information reporting / 5-day CIC ingestion timeline as stated in the PDF.