Master10
Indian Economy Module

Reserve Bank of India & The Indian Banking Sector

The Reserve Bank of India (RBI), established on April 1, 1935, under the RBI Act of 1934 on the recommendations of the Hilton Young Commission, serves as India's central banking institution and monetary authority. The RBI regulates the commercial banking sector, manages currency issuance, oversees foreign exchange reserves under FEMA, and controls liquidity via the Monetary Policy Committee (MPC). Monetary instruments comprise quantitative tools (Repo Rate, Standing Deposit Facility, CRR, SLR, Open Market Operations) and qualitative credit selective controls. The commercial banking system encompasses Public Sector Banks, Private Banks, Regional Rural Banks (RRBs), and Small Finance Banks, actively addressing Non-Performing Assets (NPAs) through the Insolvency and Bankruptcy Code (IBC).

Key Concepts & Examination Highlights

  • The Reserve Bank of India was nationalized on January 1, 1949, following its establishment in 1935 under the RBI Act 1934.
  • The Monetary Policy Committee (MPC) consists of 6 members (3 from RBI, 3 appointed by the Central Government) and sets the policy Repo Rate.
  • Cash Reserve Ratio (CRR) represents the minimum percentage of net demand and time liabilities (NDTL) banks must hold with the RBI as cash.
  • Fourteen major commercial banks were nationalized by the Government of India in July 1969, followed by six more in April 1980.
  • The first Governor of the Reserve Bank of India was Sir Osborne Smith (1935–1937), while C.D. Deshmukh was the first Indian Governor (1943–1949).
  • Statutory Liquidity Ratio (SLR) requires commercial banks to maintain a designated percentage of NDTL in specified liquid assets like government securities, gold, and cash.
  • The Marginal Standing Facility (MSF), introduced in 2011, allows commercial banks to borrow overnight funds from the RBI against approved government securities above the SLR limit.
  • The Standing Deposit Facility (SDF), operationalized in April 2022 under Section 17 of the RBI Act, absorbs excess liquidity from banks without requiring collateral.
  • Priority Sector Lending (PSL) guidelines mandate domestic commercial banks to allocate 40 percent of Adjusted Net Bank Credit (ANBC) to designated priority sectors.
  • Non-Performing Assets (NPAs) are loans or advances where interest or principal installments remain overdue for a period of 90 days or more.
  • The Board for Financial Supervision (BFS), constituted in 1994, functions under the chairmanship of the RBI Governor to oversee commercial banking inspection and regulation.
  • Prompt Corrective Action (PCA) framework is invoked by the RBI when a bank breaches prescribed trigger points related to CRAR, Net NPA, and Return on Assets.
  • The Banking Regulation Act, 1949 (originally enacted as the Banking Companies Act) grants RBI comprehensive regulatory and supervisory powers over commercial and cooperative banks.
  • The Basel III capital adequacy framework mandates that Indian commercial banks maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 9% plus a 2.5% Capital Conservation Buffer.
  • Domestic Systemically Important Banks (D-SIBs), designated as 'Too Big to Fail' by the RBI, include the State Bank of India, HDFC Bank, and ICICI Bank.
  • Small Finance Banks (SFBs) and Payments Banks were established on the recommendations of the Nachiket Mor Committee (2014) to enhance targeted financial inclusion.
  • Payments Banks can accept demand deposits up to ₹2 lakh per individual customer but are legally barred from issuing loans or credit cards.
  • Small Finance Banks are required to extend 75% of their Adjusted Net Bank Credit to priority sectors and ensure at least 50% of loan portfolios comprise loans up to ₹25 lakh.
  • The Legal Entity Identifier (LEI) is a 20-digit globally unique alphanumeric code mandated by the RBI for entities entering into high-value financial transactions of ₹50 crore and above.
  • Central Bank Digital Currency (CBDC), known as the Digital Rupee (e₹), was launched by the RBI in wholesale (e₹-W) and retail (e₹-R) pilot phases in late 2022.
  • The Ombudsman Scheme for Non-Banking Financial Companies (NBFCs) and the Banking Ombudsman Scheme were integrated into the Reserve Bank - Integrated Ombudsman Scheme (RB-IOS) in November 2021.
  • Lead Bank Scheme was introduced by the RBI in 1969 following the recommendations of the F.K.F. Nariman Committee and the Gadgil Study Group.
  • Special Mention Accounts (SMA) are categorized by the RBI as SMA-0 (overdue 1–30 days), SMA-1 (overdue 31–60 days), and SMA-2 (overdue 61–90 days) to identify early stress in loan accounts.
  • National Asset Reconstruction Company Limited (NARCL), popular as India's 'Bad Bank', was incorporated in 2021 to acquire and aggregate stressed bad loans from commercial banks.
  • The Financial Stability and Development Council (FSDC) was set up in 2010 on the recommendations of the Raghuram Rajan Committee and is chaired by the Union Finance Minister.
  • Scheduled Commercial Banks (SCBs) are financial institutions included in the Second Schedule of the Reserve Bank of India Act, 1934, satisfying minimum paid-up capital and reserve criteria of Rs 5 lakh.
  • Cash Reserve Ratio (CRR) is the specified percentage of Net Demand and Time Liabilities (NDTL) that commercial banks must maintain as liquid cash balances with the RBI under Section 42(1) of the RBI Act.
  • Statutory Liquidity Ratio (SLR) is mandated under Section 24 of the Banking Regulation Act, 1949, requiring banks to invest a specified fraction of NDTL in unencumbered approved securities, gold, or cash.
  • The Liquidity Adjustment Facility (LAF) was operationalized by the RBI in June 2000 following the recommendations of the Narasimham Committee on Banking Sector Reforms (1998).
  • The Standing Deposit Facility (SDF) was operationalized in April 2022 under Section 17 of the RBI Act as an uncollateralized liquidity absorption tool set 25 basis points below the policy repo rate.
  • Marginal Standing Facility (MSF) allows scheduled commercial banks to borrow overnight funds against approved government securities within the SLR quota up to an RBI-notified percentage of their NDTL.
  • The Bank Rate is the standard rate under Section 49 of the RBI Act at which the central bank is prepared to buy or rediscount bills of exchange and other commercial paper.
  • The Prompt Corrective Action (PCA) framework monitors banks breaching specified risk thresholds across Capital to Risk-Weighted Assets Ratio (CRAR), Net NPA levels, and Leverage ratios.
  • Domestic scheduled commercial banks are mandated to allocate 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE) to Priority Sector Lending (PSL).
  • Small and Marginal Farmers sub-target under Priority Sector Lending is 10% of ANBC, while Micro Enterprises carry a mandatory sub-target of 7.5%.
  • The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of RBI, insures cumulative bank deposits up to Rs 5 lakh per depositor per insured bank.
  • Payment Banks are permitted to accept demand deposits up to Rs 2 lakh per individual customer and issue debit cards, but are prohibited from lending or issuing credit cards.
  • Small Finance Banks are required to extend at least 75% of their Adjusted Net Bank Credit to priority sectors and maintain at least 50% of loan portfolios below Rs 25 lakh.
  • Asset Reconstruction Companies (ARCs) are registered under Section 3 of the SARFAESI Act, 2002, to acquire non-performing assets from banks and financial institutions.
  • The National Asset Reconstruction Company Limited (NARCL) was incorporated in July 2021 as India's 'Bad Bank' to acquire stressed assets, supported by government sovereign guarantees.
  • The Reserve Bank - Integrated Ombudsman Scheme was launched in November 2021 under the 'One Nation One Ombudsman' approach, unifying banking, NBFC, and digital payment ombudsman mechanisms.
  • Under Basel III regulatory norms, commercial banks in India are required to maintain a minimum Common Equity Tier 1 (CET1) ratio of 5.5% and a Capital Conservation Buffer (CCB) of 2.5%.
  • The RBI designates State Bank of India, HDFC Bank, and ICICI Bank as Domestic Systemically Important Banks (D-SIBs), subjecting them to additional Common Equity Tier 1 capital surcharges.
  • Central Bank Digital Currency (CBDC), known as the Digital Rupee (e-Rupee), was launched by RBI in wholesale (e-Rupee-W) and retail (e-Rupee-R) pilot modes in late 2022.
  • The Trade Receivables Discounting System (TReDS) is an electronic platform institutionalized by RBI to facilitate the discounting of trade receivables of MSMEs from corporate buyers.
  • The Legal Entity Identifier (LEI) is a 20-character unique global identifier mandated by RBI for entities undertaking large-value financial transactions of Rs 50 crore and above.
  • The Lead Bank Scheme was formulated in 1969 based on the Gadgil Study Group and F.K.F. Nariman Committee reports to assign specific districts to commercial banks for coordinated credit expansion.
  • Bank Board Bureau (BBB), established in 2016 on P.J. Nayak Committee recommendations, was reconstituted as the Financial Services Institutions Bureau (FSIB) in 2022 to recommend full-time directors for public financial bodies.
  • The Insolvency and Bankruptcy Board of India (IBBI) oversees resolution processes for stressed corporate debtors, regulating insolvency professional agencies and information utilities.
  • Non-Banking Financial Companies (NBFCs) are categorized under the RBI Scale Based Regulation (SBR) framework into four distinct tiers: Base Layer, Middle Layer, Upper Layer, and Top Layer.
Curriculum & Reference Sources: RBI Bulletin and Annual Reports, Banking Regulation Act 1949, Economic Survey of India.

Sample Solved Questions & Concept Explanations

8 Verified Concept Questions
Q1.EASY

Which institution functions as the Central Bank of India?

Q2.EASY

In which year was the Reserve Bank of India nationalized?

Q3.EASY

Who issues one-rupee currency notes and coins in India?

Q4.EASY

Which institution regulates the securities and stock market in India?

Q5.EASY

What is the apex insurance regulatory body in India?

Q6.EASY

What is the official currency symbol of the Indian Rupee (₹), adopted in 2010?

Q7.EASY

Which term denotes the rate at which commercial banks borrow funds from the RBI against government securities?

Q8.EASY

Which scheme promotes financial inclusion by enabling zero-balance bank accounts for every household in India?