Indian Banking System

The Reserve Bank of India (RBI) was established on 1 April 1935 under the RBI Act, 1934, and nationalised on 1 January 1949. Its headquarters is in Mumbai. RBI is the central bank and acts as: banker to the government, banker's bank, lender of last resort, issuer of currency (except the Re 1 note and coins, issued by the Ministry of Finance), and controller of credit. Memory aid: 'RBI = Regulator, Banker, Issuer'. The current Governor heads a Central Board of Directors. RBI manages foreign exchange under FEMA, 1999. Speed tip: questions love the dates 1935 (establishment) and 1949 (nationalisation) — memorise both. RBI's first Governor was Sir Osborne Smith; the first Indian Governor was C.D. Deshmukh.

RBI controls money supply using quantitative tools. Repo Rate: rate at which RBI lends to banks (raising it makes loans costlier, cools inflation). Reverse Repo: rate at which RBI borrows from banks. CRR (Cash Reserve Ratio): % of deposits banks keep as cash with RBI — no interest earned. SLR (Statutory Liquidity Ratio): % of deposits kept in liquid assets (gold, government securities) with the bank itself. Bank Rate: long-term lending rate (no collateral). MSF (Marginal Standing Facility): emergency overnight borrowing, usually highest rate. Memory order (low to high typically): Reverse Repo < Repo < MSF/Bank Rate. The Monetary Policy Committee (MPC) has 6 members (3 RBI + 3 government-nominated) and meets bi-monthly; the Governor has a casting vote.

A high-frequency trap: CRR is maintained as cash with RBI; SLR is maintained by the bank itself in liquid forms (cash, gold, approved government securities). CRR earns no interest. If a bank has deposits of Rs 100 crore and CRR is 4%, it must keep Rs 4 crore with RBI. Higher CRR/SLR reduces a bank's lendable funds, tightening credit (anti-inflation). Lower CRR/SLR injects liquidity. Remember: 'CRR = Cash with RBI; SLR = Self-held Liquid Reserves'. Both are set by RBI. When inflation rises, RBI typically raises repo, CRR, and SLR to absorb excess money.

Indian banks are broadly classified as Scheduled and Non-Scheduled. Scheduled banks are listed in the 2nd Schedule of the RBI Act, 1934, and include: Commercial Banks (Public Sector, Private Sector, Foreign, Regional Rural Banks) and Cooperative Banks. Public Sector Banks (PSBs) are majority government-owned; SBI is the largest. After mergers (2020), India has 12 PSBs. Private banks include HDFC, ICICI, Axis. Regional Rural Banks (RRBs) were set up in 1975 (Narasimham Committee) to serve rural areas — jointly owned by Central Govt (50%), Sponsor Bank (35%), State Govt (15%). Memory aid for RRB ownership: '50-35-15'. NABARD is the apex body regulating RRBs and cooperative banks.

These differentiated banks were introduced after the Nachiket Mor Committee. Small Finance Banks (SFBs) focus on financial inclusion — they lend to small businesses, marginal farmers, and micro industries; examples: AU, Equitas, Ujjivan. They can accept deposits AND lend. Payments Banks (PBs) can accept deposits up to Rs 2 lakh per customer but CANNOT lend or issue credit cards; examples: Airtel Payments Bank, India Post Payments Bank, Paytm Payments Bank. Key trap: Payments Banks cannot give loans. Memory aid: 'Payments = no loans, only deposits & remittances'. SFBs must maintain 75% of loans to priority sector and 50% of loans should be up to Rs 25 lakh.

Quick classification practice. SBI — Public Sector Commercial Bank. HDFC Bank — Private Sector Commercial Bank. Citibank India — Foreign Bank. Prathama Bank — Regional Rural Bank. India Post Payments Bank — Payments Bank. AU Small Finance Bank — Small Finance Bank. Saraswat Bank — Urban Cooperative Bank. For exam speed: if a name contains 'Payments Bank' or 'Small Finance Bank', the type is explicit. RRBs usually carry regional/local names (e.g., Baroda Rajasthan Kshetriya Gramin Bank). Cooperative banks often have 'Cooperative' or community names. Foreign banks (Citi, HSBC, Standard Chartered, DBS) operate branches in India but are headquartered abroad.

Bank nationalisation happened in two phases: 14 major banks nationalised on 19 July 1969 (under PM Indira Gandhi, banks with deposits above Rs 50 crore), and 6 more in 1980 (deposits above Rs 200 crore). Total = 20 banks. The Banking Regulation Act, 1949 governs banking operations and gives RBI supervisory powers. The Narasimham Committee (1991 & 1998) recommended major reforms including reduction in SLR/CRR, prudential norms, and asset classification. Memory aid: '1969 = 14 banks, 1980 = 6 banks'. Liberalisation in 1991 opened the sector to new private banks (HDFC, ICICI). The Banking Regulation Act applies to cooperative banks too after a 2020 amendment.

The SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) empowers banks to recover Non-Performing Assets (NPAs) WITHOUT court intervention by seizing and selling the defaulter's secured assets. A loan becomes an NPA when interest/principal is overdue for more than 90 days. SARFAESI does not apply to agricultural land or loans below Rs 1 lakh. Related: DRT (Debt Recovery Tribunal) under the RDDBFI Act, 1993, and the Insolvency and Bankruptcy Code (IBC), 2016 for time-bound resolution (within 180+90 days). Memory aid: 'SARFAESI = Seize Assets, no court'. ARCs (Asset Reconstruction Companies) buy NPAs from banks.

BASEL norms are international banking standards issued by the Basel Committee on Banking Supervision (BCBS), headquartered in Basel, Switzerland. Basel I (1988) focused on credit risk and minimum capital. Basel II (2004) added operational/market risk and the '3 pillars'. Basel III (post-2008 crisis) strengthened capital, introduced liquidity ratios (LCR, NSFR) and leverage ratio. CRAR (Capital to Risk-weighted Assets Ratio) under Basel III is minimum 8% (RBI mandates 9% for Indian banks, plus a Capital Conservation Buffer of 2.5%, so effectively ~11.5%). Memory aid: 'Basel I-II-III = Capital, Risk, Liquidity'. The CAR formula: CAR = (Tier 1 + Tier 2 capital) / Risk-Weighted Assets x 100.

Key deposit accounts: Savings Account — for individuals, limited transactions, earns moderate interest. Current Account — for businesses, unlimited transactions, generally no interest, may allow overdraft. Fixed Deposit (FD)/Term Deposit — lump sum for a fixed period at higher interest, penalty on premature withdrawal. Recurring Deposit (RD) — fixed monthly instalments for a set tenure. NRI accounts: NRE (Non-Resident External — foreign income, fully repatriable, tax-free interest) and NRO (Non-Resident Ordinary — Indian income, partially repatriable, taxable). Memory aid: 'NRE = Earned abroad, tax-free; NRO = Origin India, taxed'. A BSBDA (Basic Savings Bank Deposit Account) requires no minimum balance — used for financial inclusion.

PMJDY (Pradhan Mantri Jan Dhan Yojana), launched 28 August 2014, is the flagship financial inclusion scheme providing zero-balance accounts, RuPay debit cards, and accident insurance. Related social security schemes: PMJJBY (life insurance, Rs 2 lakh cover, age 18-50, premium ~Rs 436/year), PMSBY (accident insurance, Rs 2 lakh cover, premium ~Rs 20/year), and APY (Atal Pension Yojana, for unorganised sector, pension Rs 1000-5000/month). MUDRA (Micro Units Development and Refinance Agency) offers loans under Shishu (up to Rs 50,000), Kishore (Rs 50,000-5 lakh), and Tarun (Rs 5-10 lakh) categories. Memory aid for MUDRA: 'Shishu-Kishore-Tarun = baby steps to big loans'.

Payment systems regulated by RBI/NPCI: NEFT (National Electronic Funds Transfer — now 24x7, batch-based, no minimum), RTGS (Real Time Gross Settlement — instant, for Rs 2 lakh and above, no upper limit), IMPS (Immediate Payment Service — 24x7 instant), and UPI (Unified Payments Interface — mobile-based, run by NPCI). Memory aid: 'RTGS = Rs 2 lakh minimum (Big amounts); NEFT/IMPS/UPI = small to any'. Negotiable Instruments Act, 1881 covers cheques, promissory notes, and bills of exchange. A cheque is valid for 3 months from the date of issue. CTS (Cheque Truncation System) speeds up cheque clearing using images. MICR codes (9 digits) identify bank branches on cheques.