Banking

Static + Current Affairs

What is money?

• Money is medium of
exchange.

• It is measure of value.
 Functions of Money

It can be categorized as :

1. Primary functions
2. Secondary functions
3. Contingent Functions
 Primary functions of money

1. Medium of exchange

2. Measure of value
 Secondary function of Money

1. Standard of deferred payment

2. Transfer of value

3. Store of value
 Contingent function of Money

1. Distribution of national Income

2. Basis of Credit

3. Liquidity of wealth

4. Measurement of utility
 Demonetization

• ( Previously 1946, 1978)

• Definition: Demonetization is the wholesale withdrawal of currency

notes from circulation

• On 8th Nov, 2016 : note of 500 Rs and 1000 Rs was demonetized

 Redenomination

involves removing zeros from currency’s face value, to

facilitate transactions during high inflation.

• Iran = Toman to replace Iranian Riyal (2020)

• “Iranian Rial” at the rate of 1 TOMAN = 10,000 Rial.

 Bank Money

• Cheque

THREE parties in a cheque:

1) Drawer (Sender),
2) Drawee (Bank),
3) Payee (Recipient)

• Demand Draft
IFSC code: Indian Financial System Code- 11 alphanumeric
numbers to identify the bank branch, just like PINCODE
identifies an area

MICR code: Magnetic Ink Character Recognition. 9 digits

code written in Iron Oxide ink for automated clearance
 Plastic money

• Credit card

• Debit card

• Hybrid card
 On the basis of security: types of card

• Magnetic tape card

• EMV card
 One nation one card model

It has 3 components:

NCMC Card. 2) SWEEKAR 3) SWAGAT

Swachalit
 One Nation One Card

One Nation One Card Model’ by

• Ministry of Housing & Urban Affairs (MoHUA) with the help of NPCi,
•
• Bharat Electronics Limited (BEL Company), and some banks.
 National common mobility Card

1. NCMC card

• To be issued by banks. Nature can be Debit/Credit/Prepaid.

• Can be used for metro, bus, suburban railways, toll, parking,

retail shopping etc.

2) SWEEKAR: Automatic Fare Collection System.

3) SWAGAT: Swachalit / Automated Gate at railway/bus

station.
 Other Current issues :

1. MDR: MERCHANT DISCOUNT RATE

• MDR is the fees that a merchant must pay to his (acquirer)

bank for every credit / debit card transaction.

• MDR fees is shared among 3 parties

1) customer’s card issuing bank
2) merchant’s acquiring bank
3) payment gateway provider
 PIDF
Payments Infrastructure Development Fund (PIDF)

• 2020-Jun
• ₹250cr from RBI + ₹250 cr from (Banks and Card
Gateway Operators)
• ₹500 cr fund setup.
 Electronic Money

• RTGS (Real Time Gross Settlement)

• NEFT (National Electronic Fund Transfer)

• IMPS (Immediate Payment service)

 RTGS (REAL TIME GROSS SETTLEMENT)

• Min ₹2 lakh to ₹2000 crores

• Businessmen wanting high value transactions

instantly

• Instant settlement

• Earlier : Only working days 8AM to 5:30PM

• From 2020-Dec: 24/7
 National Electronic Fund Transfer

• Up to ₹10 lakhs

• Ordinary retail customers

• Settles net amount between banks at interval of 30 min.

• BEFORE: from 8 am to 7 pm on working days.

• From 2019-Dec: NEFT operates on 24/7 basis

 Immediate Payment Service

• ₹ 1 to maximum ₹5 lakhs

• Ordinary retail customers

• Instant settlement

• 24/7 on all days

 Cryptocurrencies

• Cryptocurrency: is a digital / virtual currency created & stored using

blockchain technology

• Blockchain: A secured decentralized database that maintains a

continuously growing list of records / transactions.

• Old entries can’t be deleted, new entries will be visible to all.

• 2009: An anonymous user Satoshi Nakamoto launched a cryptocurrency

‘Bitcoin’.

• total 21 million Bitcoins, wherein 1 Bitcoin (BTC) = 108 Satoshi (the smallest
unit).
 Status of Crypto In india
• Since 2013: RBI had been warning Indians not to get involved in
cryptocurrency due to frauds, tax evasion and terror finance.

• 2017-18: Dinesh Sharma Committee to Fin Min & Subhash Chandra

Garg committee to Fin Min suggested Government to ban it.

• 2018: RBI directed all banks to stop relations with any

Cryptocurrency company

• 2019: Ministry of Finance→ Department of Economic Affairs has

proposed a draft bill called the ‘Banning of Cryptocurrency &
Regulation of Official Digital Currency Bill, 2019’

• 2020-March: SC revoked the RBI ban because

 Current Related with Cryptocurrency

UNICEF

United Nations International Children's Emergency Fund (UNICEF, HQ-

New York , USA; 1946, later renamed to UN Children's Fund)

2019-Oct: UNICEF setup a Cryptocurrency Fund to accept donations in

cryptocurrencies.

It has become the first UN organization to accept cryptocurrency.

 World Bank

• 2018-Aug: World Bank launched World’s first blockchain bond called

“Bond-i” in Australia,

• denomination: Australian Dollars → public invests, gets ~2% interest after

2 years.
 Others
Venezuela

• 2018: President Nicholas Maduro launched “Petro”- a

cryptocurrency whose price is linked with market price of 1 oil
barrel.

• Their Supreme Court recognized it as “Fiat money – Legal

Tender”.

Marshall Islands

• Using SOV cryptocurrency

El-Salvador: Bitcoin becomes a legal tender

 Other Miscellaneous topics

What is card Tokenization ?

 NPCI (National Payment Corporation Of India)

• 2008: NPCI is registered under Company Act as a “Not for Profit

Company”

• Originally it was founded by 10 banks with ₹ 100cr capital.

• 2020-Dec: Paytm, Phone Pe, Amazon Pay etc. also became

shareholders of NPCI
 NPCI has built following Mechanisms
• BBPS (Bharat Bill Payment system)

• NACH (National Automated Clearing House)

• NFS (National Financial switch)

• CTS (Cheque Truncation System)/ Positive Pay

Mechanism

• BHIM ( Bharat Interface for Money)

• RuPay

• AEPS
• NETC (National Electronic Toll Collection)

• UPI (Unified payment interface)

Push transaction Pull transaction

Push - when u send money by your Pull transaction - when you have
own discretion given command that every month
electricity company should cut the
e.g. sending money to a money from my bank account →
relative/friend based on your company will pull money without
mood. requiring u to push/click buttons
every month.

2022-March: RBI launched a new UPI platform named 123PAY (with help of
NPCI) to give more UPI-payment options for Featurephones/Basicphones
 DBT
DBT→E-RUPI BY NPCI (2021) - (Origin) E-rupi is an SMS /QR Code
based Prepaid Cashless Electronic Voucher created by National
Payment Corporation of India (NPCI) using its UPI Platform

- It is also supported by finance ministries Department of

Financial Services and Health ministry’s National Health
Authority (NHA)

- Can be used to provide

- 1) Food for mother, child, poor families under various schemes.
- 2) Medicines for TB, Corona etc.
- 3) Fertilizer subsidies for farmers
 Before After
maximum storage limit ₹10,000 per ₹1 lakh
code.

code can be used one-time/ Code can be used more than

single-time only once /multi-use - until the amount
of the voucher is completely
exhausted/redeemed).

⇒ e.g. Out of ₹1 lakh → ₹10,000

paid to furniture store, ₹20,000 paid
to electric-store etc
Digital Transactions Ombudsman (DTO-2019)
⇒ RBI designates senior RBI officials at 21 places across India as
DTO. They hear customer complaints upto ₹ 20 lakh against
prepaid payment instruments, Mobile wallets, Apps, NEFT/RTGS
and other digital transactions.

They can order the company / bank to fix problem and pay upto
additional ₹ 1 lakh for mental agony of customer

Higher Appeal to Dy.Gov of RBI

⇒ If matter > ₹ 20 lakh, then matter outside his jurisdiction. Victim

has to approach courts.
Financial Institution
CLASSIFICATION
 FINANCIAL INSTITUTION

BANK NON BANK

 BANK

COMMERCIAL BANK COOPERATIVE BANK

• State Cooperative Bank

Scheduled N-SCB • District Cooperative
CB Bank
• Public Sector • Primary Agriculture
Bank Credit Society
• Private Sector
Bank
• Foreign Bank
• Differential Bank
 Non Bank
All India Financial Non Banking
Primary Dealer Financial
Institution
Company
• NABARD
• EXIM
• NHB
• SIDBI

5th AIFI = Industrial Investment Bank of

India (IIBI) closed in 2012
Feature BANK NON BANK
Deposit Yes No

Loan Yes Yes

CRR YES NO

SLR YES ONLY HOUSING

DEBIT YES NO
CARD
Pass Yes No
book
RBI RBI + OTHER
Boss
 FEATURES Commercial Cooperative
Bank Bank
Deposit Yes Yes
Loan Yes Yes only to
members
Credit /Debit Yes Yes
card
Boss RBI RBI and State
Govt
Voting According to One person one
shareholder vote
Presence Anywhere Mainly on MH,
Guj, Andhra ,
Tamilnadu
 Public Sector Bank

• Government shareholding more than 50%.

• Example Dena Bank, SBI, PNB Etc.

 Private Sector Bank
• Government Shareholding less than 50%

• Example : ICICI, HDFC, Axis Bank etc.

 Foreign Bank

Banks having head quarter in

Foreign and Branches In
India.
 Differential Banks
• Payment Banks

• Small Finance Bank

• Wholesale Bank

• Regional Rural Bank

Payment Bank V/S Small Finance Bank
Feature Payment Banks Small Finance Banks
Target Consumers Promoting Small savings To serve underserved area
Remittance of migrant labors,
low income households,
unorganized sector, small
business.
Accept Deposits No NRI deposits, Fixed deposit, Yes, without any restrictions
Recurring Deposit.** - Can
accept only Demand Deposits
and Max. balance Rs.1 lakh
per customer. (In 2021- limit
increased to ₹2 lakhs)
Debit cards yes yes
Credit cards No Yes
Loans Can’t loan, So no PSL. - They’re -Yes, but 75% in PSL,
required to invest all deposits in - 50% of loan portfolio of Rs. 25
G-sec, T-Bill and in other SCBs lakhs/< loans.
Capital Required 200 Cr. 200 Cr.
 NABARD

• National Bank for Agriculture And Rural Development

• Foundation : 12 July , 1982

• Boss : Previously RBI had minority-stakes in NABARD but 2018: 100% Govt
owned

• Operates Rural Infra. Development fund (RIDF)

• Regulatory supervision: Coop + RRB

• Function : Indirect refinance to farmers, artisans

 National Housing Bank

• Original boss: RBI (100%). But, 2019- Apr: RBI sold 100% to Govt.

• Foundation : 1988

• Finance to banks and NBFCs for housing projects

• RESIDEX index to monitor residential real estate prices.

• Earlier it was Regulator of Housing Finance Cos (NBFC)

 EXIM Bank

• Export-Import Bank of India

• Foundation : Jan , 1982

• Boss: Government of India (100%)

• Promotes cross border trade and investment, helps importers-

exports with loans and foreign currency
 SIDBI

• Small Industries Development Bank of India

• Foundation : 1990

• Originally 100% owned by IDBI. Later on shareholding transferred → SBI,

LIC etc

• Operates Credit Guarantee fund

• Small Enterprises Development Fund (SEDF).

• Operates udyamimitra.in for loans to small entrepreneurs via schemes

like Mudra, Stand-up-India
 Primary Dealer

• They deal in "primary" market

• directly buy fresh G-sec from RBI’s E-Kuber platform and sell it
in the secondary market.

• Total 21 PD licensed by RBI: 14 of them are Banks.

• E.g. Standard Chartered Bank, HSBC (Hong Kong), SBI, Kotak

etc.
Quantitative Tool
With effects
Cash Reserve Ratio

• Banks must keep this much deposits (or balance) with RBI.

• RBI doesn’t pay interest on this deposit, except in extraordinary

circumstances like 1999’s Banking slowdown

• Bank earns no profit / interest, as such.

• CRR: first suggested by British economist J.M. Keynes & first introduced
in US Federal Reserves (=Central Bank of USA).

• Mandated under RBI Act, 1934

• CRR will be Increased to combat Inflation

Statutory Liquidity Ratio

• Banks must keep this much deposits in liquid assets with itself such
as cash, gold, G-Sec, T-Bill.

• Some profit may be involved.

• Mandated under Banking Regulation Act, 1949

• Presently it is 18.00% of NDTL.

• Legally, SLR can’t be made more than 40%.

• To control Inflation SLR will be Increased

 Repo Rate

The Interest rate at which RBI lends short-term loans to its clients, keeping
their G-Sec as collaterals.

Clients enter into an agreement with RBI to repurchase their G-sec at a future
date at a (higher) pre-determined price.

Banks can’t pledge their SLR-quota-G-Secs for this borrowing.

Repo Rate is our Policy Rate to control inflation.

 Reverse Repo Rate

• It’s the interest rate that clients earn when parking their surplus funds
with the RBI for short periods, to earn interest

• Mechanism similar to Repo, RBI gives its G-Sec as a collateral to client

• Reverse Repo Rate = Repo% MINUS x%

• R-65 bps
Standing Deposit Facility

Banks can park their excess funds with RBI without any
collateral to earn short term interest

In reverse repo, collateral will be deposited by RBI but in SDF

no collateral.
Long Term Repo Operations

• SPECIAL WINDOWS UNDER ATMA NIRBHAR

• Repo loans are for short term borrowing from overnight to 14-days.

• But, 2020-Feb: RBI announced Long Term Repo Operations (LTROs) of 1 yr

& 3 years tenors.

• RBI will loan > ₹ 1,00,000 crore, in various rounds through E-Kuber
platform.

• Interest rate: @repo rate. Interest rate will be compounded annually

 TLTRO
Targeted Long Term Repo Operations (TLTRO)

Up to 3 years loans @Repo% to Banks with condition that they must

invest x% of it in NBFC companies’ Bonds

(SLTRO)
Special LTRO Window

RBI loan for 3 years @Repo% to ONLY Small Finance Banks (SFB)

→ Loans to
A) Micro and small industries
B) Unorganized sector entities
OMO (OPEN MARKET OPERATION)

• Selling and purchasing of government securities by RBI

• To control inflation RBI will sell Govt securities

• To combat deflation RBI will purchase Govt securities

• Operation Twist is example of OMO

• Market Stabilization Scheme: RBI sells special type of G-sec, T-Bill &
Cash Management Bills (CMB) to suck excess liquidity
BANK RATE

• The rate of interest at which RBI Lends money to banks

without any collateral for log term .

• It will be more than Repo

• Also known as penalty rate.

MSF ( Marginal standing Facility)

Marginal Standing Facility is the Interest rate at which RBI lends short
term loans to Scheduled Commercial Banks (SCB) & Regional Rural
Banks (RRB) with their SLR-quota G-Sec as collaterals.

R+25 bps
Qualitative Tools
And effect on Inflation
Let Us Do Revision
Features Repo LTRO TLTRO STLTRO
Tenure Short term (up 1 year to 3 year 1 year to 3 year 1 year to 3 year
to 1 year)
Collateral Yes Yes Yes yes
Lender RBI RBI RBI RBI
Borrower Bank + non Bank only Bank only Bank only
bank
Interest Compounded compounded Compounded Compounded
After borrowing To anyone To any one Invest x% of it Give loans to
bank can lend in NBFC bonds 1) MSME
to 2) Unorganized
sector
 Let Us Do Revision
Features Repo Reverse repo Bank rate MSF SDF
Lender RBI Commercial RBI RBI Banks
banks
Borrower Banks And RBI Banks Banks RBI
Non Banks
Collateral Yes Yes No Yes (SLR No
quota)
Tenure Short term Short term Long term Short term Short term
Purpose To lend to To park banks For long term For short To earn
banks and excess fund without term during interest
Non Banks to RBI collateral shortage of (without
lending G-sec with collateralized)
Banks
To combat Increase Increase Increase Increase Increase
Inflation
Qualitative tools
Moral Suasion

Moral suasion meaning applying “Persuasion” without

applying punitive measures.

RBI governor tries this tactic via conferences, informal

meetings, letters, seminars etc.
2. Direct Action

RBI can punish banks (and even non-banks) for not

complying with its directives under RBI Act, Banking
Regulation Act, Payment and Settlement Systems Act,
Prevention of Money Laundering Act (PMLA), Foreign
Exchange Management Act (FEMA).

2019: RBI ordered the banks to have a “Clawback”

provision in their CEO & Top executives’ salaries
Margin Requirements / Loan to Value (LTV)

RBI can mandate Loan to Value (LTV) for a gold-loan, home loan,
auto loan or business loan etc. so a Bank/NBFC can’t lend more
than x% of the value of the collaterals. RBI can change this x% to
boost / curb demand

LTV reforms in 2020-Aug

Gold Loan

From 75% value of gold/gold jewelry raised to 90%

Selective credit control

1.Positive selective credit control: down payment

2.Negative selective credit control : credit rationing / PSL

PRIORITY SECTOR LENDING

1968: First time RBI used the word “priority sector”

Banks must give 40% of their loans to 3 priority sectors

1) agriculture
2) small industries
3) exporters by 1985

2019: RBI's UK Sinha Committee on MSME loan reforms suggested some

more reforms in the PSL
 PSL categories
• Weaker Sections 12%
• SC, ST, Women, PH, Minorities, Manual
scavengers, Artisans,
• PM-Jan Dhan Yojana Overdrafts up to Rs.10,000
• Beneficiaries of Govt's National Rural/Urban
Livelihood Mission Schemes

Agriculture 8%
Agriculture: 10%
Marginal Farmer (owns up to 1hectre land)
Small farmer (>1 up to 2ht)
• Micro Enterprises, Khadi-Village industries 2.5%
• Social Infrastructure
• Student-Education loans
• Renewable Energy Projects
• Micro Enterprises, Khadi-Village industries 7.50%
Total 40%
 PSL FACTS

• For Regional Rural Bank

• For Small Finance Bank For all three banks PSL target is 75%

• For Urban Cooperative Bank

All types of Startups allowed in PSL quota For loans up to ₹50cr

Earlier only eligible categories was Agro/Food processing related

Startup and MSME Startup
PSL REFORMS -2020: Weightage to poor District

• Low Credit penetration

• High Credit penetration

if Any bank gives ₹100 PSL loan in this district → RBI will count Axis’s quota-
fulfillment as 125 Rs. In low Credit penetrating Area.

if Any bank gives ₹100 PSL loan in this district → RBI will count Axis’s quota-
fulfillment as 90 Rs. In high Credit Penetrating Area.
 MANI App

• 2020-Jan: RBI launched ‘Mobile Aided Note Identifier

(=MANI)’ App.
• ⇒ Mobile camera scan & identifies the note (Even if it’s
half folded), gives audio notification in Hindi/English, also
works offline
• ⇒ But can’t validate whether note is genuine or fake
• ⇒ If a user is both blind and deaf, the app will tell him by
giving vibrations.
 RDAG
Deepening of G-Sec market- Retail investors’ RDAG @RBI - RBI launched “Retail
Direct Scheme” in 2021.

- Under this scheme, RBI permits “Retail Direct Gilt (RDG) account” for retail
investors on its E-Kuber online platform.

- Both Resident Indians & non-resident Indians (NRIs) can open this account.

Then Retail investors can directly buy Treasury Bills (T-Bill), G-Secs (of Union
Government), State Development Loans (SDL are ‘G-secs’ of State Govts) and
Sovereign Gold Bonds, from RBI directly

- Application fees to open the account = ₹ ZERO

RRB Act Amendment

RRB Act 1976 Amendment in 2015

Shareholding: Union 50% + ⇒ Shareholding:
State 15% + Sponsor Bank 35% (Union+State+Sponser bank)
= 100% 51% + others (pvt investors)
49%.

⇒ Benefit? RRB can issues

new / fresh shares in market
to acquire more capital from
private investors.
SFB and PB

Small Finance Banks Payment banks

Capital Small Finance 6 at present: Airtel, India
Bank (Punjab), Ujjivan Post, FINO, Paytm, Jio,
(Karnataka), Utkarsh (UP) NSDL. (Total 11 were
selected)
DICGC ACT
- 1961: Deposit Insurance and Credit Guarantee Corporation Act - mandates that
all types of banks must buy insurance on their deposit accounts from DICGC.
Banks have to pay premium for this insurance.

- DICGC is 100% owned by RBI. RBI Dy. Governor acts as chairman of DICGC.

- HQ: Mumbai. - When a bank shuts down, DICGC will pay upto ₹ 1 lakh insurance
to every deposit holder for his principal and interest

- Budget-2020: announced the insurance coverage to ₹ 5 lakhs

- 2021: Government introduces Deposit Insurance & Credit Guarantee
Corporation
Sr.
Amalgamated Banks Anchor Banks
No.
Punjab National Bank (PNB), Oriental Bank of
1 PNB
Commerce (OBC), and United Bank of India
2 Canara Bank and Syndicate Bank Canara Bank
Union Bank of India, Andhra Bank, and Corporation Union Bank
3
Bank of India
4 Indian Bank and Allahabad Bank Indian Bank
NPA related Definition

Standard Asset: Loan account where borrower is repaying the principal and
interest in timely fashion.

SMA-0: If loan principal or interest unpaid for 1-30 days from its due date,
then such loan account is classified as Special Mention Account-0

SMA-1: 31-60 days

SMA-2: 61-90 days

NPA: If loan principal or interest is not paid for more than 90 days from its due
date, then such loan account is classified as Non-Performing Asset (NPA).
Substandard asset: When loan account remains in the NPA
classification for 12 months/>

Doubtful Asset: When loan account in substandard

classification for 12 months/>

Loss Asset: When a bank, its auditor or RBI declares that given
doubtful asset has little / no salvageable value
Provisioning:

As per RBI norms, banks must set aside funds to cover losses against their NPA.
Such ‘provisioning of funds’ decrease profitability of the Bank.

NET NPA= Gross NPA- Provisioning

Restructured loan : When principal / interest rate / tenure of the loan

is modified. Banks may do it when borrower facing difficulty in
repaying loans
RBI’s 3-R Framework

Rectification

Restructuring

Recovery
SARFAESI ACT,2002

1991: Narsimham-I Committee on banking sector reforms observed that

borrowers obtain stay orders from ordinary courts so banks have
difficulty recovering NPA. So, Debt Recovery Tribunals were set up
(1993) and ordinary courts can’t interfere in the loan recovery process. ‘

1998: Narsimhan-II Committee observed that DRTs need to be

strengthened with a law, so, Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act
enacted in 2002.
• Under SARFAESI act, lenders can attach the mortgaged assets when loan is not
repaid. They can change board of directors in such companies, can auction such
assets, can also sell such assets to Asset Reconstruction Companies .

• [2021: RBI setup Sudarshan Sen Committee to suggest reforms for ARCs]

• SARFAESI not applicable on farm loans.

• If loan-defaulter wants to obtain a stay order, he cannot go to ordinary courts.

He will have to approach for DRT.

• If DRT doesn’t help then higher appeal to Debt Recovery Appellate Tribunal ,
but DRAT will require him to deposit minimum 50% of the loan dues (to
discourage frivolous appeals).

• higher appeal to high court

Which lenders have SARFAESI powers?

All types of Banks Housing Finance Companies (HFCs)

if an NBFC fulfills two conditions SIMULTANEOUSLY:

o 1) The NBFC having asset size of ₹100 cr. or more, AND

o 2) loan given is at least ₹50 lakhs. [Budget-2021 reduced minimum

limit to ₹20 lakh]

Cooperative banks also have power under SARFAESI Act,2002.

Thank you