Indian Banking System

The Indian banking system is a tiered structure with the RBI at the apex. Below it sit Scheduled and Non-Scheduled Banks. Scheduled Banks (listed in the 2nd Schedule of the RBI Act, 1934) include Commercial Banks and Co-operative Banks. Commercial Banks split into Public Sector Banks (PSBs), Private Sector Banks, Foreign Banks, Regional Rural Banks (RRBs) and Small Finance Banks/Payments Banks. To be 'scheduled', a bank needs paid-up capital + reserves of at least Rs 5 lakh and must satisfy RBI that its affairs are not detrimental to depositors. Co-operative banks are split into urban (UCBs) and rural (StCB > DCCB > PACS) layers. After the 2019-20 mergers, there are 12 PSBs. Memory aid: 'RBI commands SCHEDULED soldiers — Commercial & Co-operative'.

Imperial Bank of India (1921) became State Bank of India in 1955 after the Gorewala Committee — SBI is the only bank nationalised under a special SBI Act. The big nationalisation happened on 19 July 1969 when 14 banks (deposits > Rs 50 crore) were nationalised, followed by 6 more on 15 April 1980 (deposits > Rs 200 crore), making 20. The Narasimham Committee I (1991) and II (1998) drove liberalisation, introduced CRAR/Basel norms, asset classification and prudential norms. RBI was nationalised on 1 Jan 1949. Memory hook: '14 in 69, 6 in 80' and 'Narasimham = New-era reforms'.

Q: Bandhan Bank, AU Small Finance Bank, Paytm Payments Bank, and Bank of Baroda — classify each. Fast method: Bandhan Bank = Universal Private Sector Bank (got universal banking licence in 2014, started 2015). AU = Small Finance Bank (converted from NBFC in 2017, can lend but priority-sector focused). Paytm = Payments Bank (CANNOT lend or issue credit cards; deposit cap was Rs 2 lakh per customer). Bank of Baroda = Public Sector Bank (govt majority stake). Trick: if a name carries 'Small Finance' or 'Payments' it cannot be treated as a full universal bank — Payments banks especially do NO lending.

RBI (est. 1 April 1935) is the central bank performing: (1) Banker to Government, (2) Banker's Bank & lender of last resort, (3) Sole currency authority — issues notes of Rs 2 and above (Re 1 note and coins are issued by the Government/Ministry of Finance but circulated by RBI), (4) Custodian of forex reserves, (5) Controller of credit/monetary policy, (6) Regulator & supervisor of banks. Currency is issued under the Minimum Reserve System (since 1957): RBI must hold a minimum of Rs 200 crore in gold + foreign securities, of which gold is at least Rs 115 crore. Memory aid: 'RBI is the Banker, Issuer, Custodian, Controller, Regulator' = BICCR.

Quantitative (general) tools: Repo Rate (RBI lends to banks against securities), Reverse Repo (RBI borrows), CRR (cash with RBI, no interest), SLR (liquid assets banks hold — gold, cash, G-secs), MSF (emergency overnight borrowing, above repo), Bank Rate (long-term, = MSF). Qualitative (selective) tools: margin requirements, moral suasion, consumer-credit regulation, direct action, rationing of credit. The Monetary Policy Committee (MPC) has 6 members (3 RBI + 3 govt-nominated), Governor chairs with a casting vote, and targets CPI inflation of 4% (+/- 2%). Repo cut = cheaper money = expansionary. CRR/SLR are ratios on NDTL (Net Demand & Time Liabilities).

Q: To control rising inflation, what should RBI do to repo rate, CRR and SLR? Fast logic: Inflation = too much money chasing goods, so RBI must SUCK liquidity OUT (contractionary). Therefore INCREASE repo (loans costlier), INCREASE CRR (more cash locked with RBI), INCREASE SLR (more funds parked in G-secs). All three move UP to fight inflation. Reverse for recession/slowdown (cut all to inject money). Quick rule: 'Inflation = rates UP, Slowdown = rates DOWN.' Also: if repo is 6.50% and MSF is 6.75%, the corridor width is 0.25% above repo, and reverse repo/SDF sits below repo as the floor.

Deposit accounts: (1) Savings — for individuals, interest-bearing, withdrawal limits; (2) Current — for businesses, no interest, overdraft allowed, unlimited transactions; (3) Fixed/Term Deposit — lump sum locked for a tenure, highest interest; (4) Recurring — fixed monthly instalments. Special accounts: NRE (repatriable, in INR), NRO (non-repatriable income in India), FCNR (foreign currency term deposit). CASA = Current Account + Savings Account; a high CASA ratio means cheaper funds for the bank. Negotiable Instruments Act, 1881 covers Promissory Notes, Bills of Exchange and Cheques. A cheque is valid for 3 months from the date of issue. Memory aid: 'Current = Company, Savings = Self'.

An asset becomes a Non-Performing Asset (NPA) when interest/principal is overdue for more than 90 days. Classification: Standard (performing) > Sub-standard (NPA up to 12 months) > Doubtful (NPA beyond 12 months) > Loss asset (uncollectible). Provisioning rises as quality falls. Recovery tools: SARFAESI Act, 2002 lets banks seize and sell secured assets WITHOUT court intervention (threshold: secured creditor holding 75% by value can act; minimum loan Rs 1 lakh and outstanding > 20% of principal+interest). DRTs (Debt Recovery Tribunals) under the RDDBFI Act, 1993 handle claims above Rs 20 lakh. The IBC, 2016 provides time-bound (330-day) resolution. Lok Adalats handle smaller dues. Memory: '90 days = NPA; SARFAESI = Seize without court'.

Q: A loan account's interest has been overdue since 1 January. As on 1 December the same year, classify it. Method: Count overdue days. Jan-Dec is ~11 months (>90 days), so it crossed into NPA after ~31 March. From NPA date, if it remains NPA up to 12 months it is 'Sub-standard'. Since only ~8 months have passed since it became an NPA (April to Dec), it is still SUB-STANDARD (not yet doubtful, which needs 12 months as NPA). Trick ladder: 0-90 days overdue = Standard; NPA 0-12 months = Sub-standard; NPA >12 months = Doubtful; unrecoverable = Loss.

Financial inclusion brings affordable banking to the unbanked. PMJDY (2014) is the flagship — zero-balance accounts, RuPay debit card, Rs 2 lakh accident insurance, overdraft up to Rs 10,000. Social-security schemes: PMJJBY (life cover Rs 2 lakh, age 18-50, premium ~Rs 436/yr), PMSBY (accident cover Rs 2 lakh, age 18-70, premium ~Rs 20/yr), APY (pension for unorganised sector, age 18-40). Priority Sector Lending (PSL): banks must lend 40% of ANBC to priority sectors — agriculture (18%, with 10% to small/marginal farmers), MSME, education, housing, weaker sections (12%). Memory aid: 'Jan Dhan opens the door; Jeevan(life)/Suraksha(accident)/Pension protect inside'.

Key apex/development institutions: NABARD (1982) — apex for agriculture & rural development, refinances RRBs & co-operatives. SIDBI (1990) — apex for MSME financing. EXIM Bank (1982) — finances and promotes foreign trade. NHB (1988) — apex for housing finance (now ownership shifted to Govt from RBI). IRDAI regulates insurance; SEBI regulates securities markets; PFRDA regulates pensions. DICGC (subsidiary of RBI) insures bank deposits up to Rs 5 lakh per depositor per bank (raised from Rs 1 lakh in 2020). BSBDA (Basic Savings Bank Deposit Account) replaced the 'no-frills' account. Memory aid: 'NABARD-farm, SIDBI-small industry, EXIM-export, NHB-house'.

Q: A commercial bank has Adjusted Net Bank Credit (ANBC) of Rs 50,000 crore. What is its overall priority-sector target, and the agriculture sub-target? Method: Overall PSL = 40% of ANBC = 0.40 x 50,000 = Rs 20,000 crore. Agriculture sub-target = 18% of ANBC = 0.18 x 50,000 = Rs 9,000 crore. Weaker-sections target = 12% of ANBC = Rs 6,000 crore. Speed tip: convert percentages directly — 40% is 'two-fifths', 18% is roughly 'one-fifth minus a bit'. Always apply the percentage on ANBC (or Credit Equivalent of Off-Balance-Sheet Exposure, whichever is higher), not on total deposits.