4.

Money, RBI, Banking and NBFCs

➢ Money
o Money is the commonly accepted medium of exchange
o If there is an economic transaction (buying and selling)
without money being used, then such transaction is referred
to as Barter System (This presumes double coincidence of
wants; the buyer and seller’s demand are complementary
i.e. what A wants to sell is being sought/purchased by B and
what B wants to sell will be bought by A. This is also referred
to as diametrically opposite demand) are Economic
exchanges without the mediation of money are referred to
as barter exchanges. However, they presume the rather
improbable double coincidence of wants
▪ Other issues with Barter system
• The wealth cannot be carried forward
o If the farmer cultivates crops/vegetables.
Upon its sales earnings can be done.
However, these are perishable commodities
and end up losing value very quickly.
• Under the barter system, one must spend money
and other resources to find the buyer
o To smoothen the transactions, there’s is a need for an
intermediate good and this must be acceptable to both the
parties. The good used is money.
▪ The individuals can then sell their produces for money
and use this money to purchase the commodities they
need. The facilitation of exchanges is the principal role
of money

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
o Functions of money
▪ Primary Functions
• Medium of exchange
o Is used to make exchanges in transactions
o Money acts as an intermediary in sales and
purchases
• Measure of value
o The value of goods and services are
measures in money i.e. price is determined
in rupees
▪ Secondary Functions
• Store of value
o The people make savings in terms of money
(the savings in terms of commodities are
not permanent)
o Money serves as excellent store of wealth
(as it can be easily converted into other
assets such as land, machinery etc)
• Standard of deferred payments
o Borrowing and lending under barter system
is difficult
o Because of modern day money the
borrowing and lending is much easier
o It (money) acts as a standard of deferred
payments
• Transferring Purchasing Power
o The money can be transferred from one
person to another
o This will help the second person to
purchase goods or services

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Contingent Functions
• Basis of credit system
o Business transactions are conducted on
credit
o Banks create credit on the basis of
adequate cash reserve
• Distribution of national income
o The invention of money has helped in
distribution of income as rent, wages etc.
• Increases productivity of capital
o Money (as capital) can be used to invest
and generate better returns
▪ Other Functions
• Maintain repayment capacity
o The companies hold certain amount of cash
(cash is held by government, banks etc.)
o This is used to make repayments
• Gives liquidity to capital
o Money is the most liquid form of capital
and can be put to any use
o People desire to hold money for following motives
▪ Transaction motive –
• Refers to the need of the people to hold money
in the form of cash
• People will hold to money as they keep on
spending money continuously whereas they earn
on periodic basis
▪ Precautionary motive
• There could be certain events which are not
expected

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 • For conducting these transactions, people keep
money/cash
▪ Speculation motive
• It is the desire of the people to hold on to cash to
exploit attractive investment opportunities is the
market
o For example, when bond prices are very
high, people would expect the prices to
drop in the coming days so would keep cash
to purchase them when they drop
o When the bond prices drop, the people
would be investing in these rather than
keeping the cash

o Types of money
▪ Commodity Money
• Earlier the commodity (anything that has value)
was used as money
• Example of commodity money are – gold, silver,
beads etc.
• This has intrinsic value (the money was made up
of something that had value, hence the money
had value)
▪ Fiat Money
• The money that will have value because of the
order of the government
• Examples of Fiat money are the currency notes
and coins that we are using
• These do not have intrinsic value. Rather their
value is based on the government order

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Fiduciary Money
• The money issued by the banks in the form of
cheques
• This money is not legal tender. Thus, may or may
not be accepted in the market
• Legal Tender – The money that can be used to
settle the debt
▪ Commercial Bank Money
• The banks accept deposits and use part of these
deposits to issue loans in the market. This is done
as the banks practice Fractional Reserve System
(FRS)
• FRS – The practice of keeping part of the deposits
and using the remaining to issue loans/credit
• In this case the banks are not printing money and
rather are simply creating credit

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Bank
o Is a financial institution which is mainly involved in collecting
deposits (mobilization of deposits) and providing loans
(issuing credit)
o In addition to the above two main functions (primary
functions), the banks perform many other functions
(secondary functions) such as providing insurance, locker
facilities etc.
o The banks in India are regulated by the Reserve Bank of
India
▪ Scheduled and non-scheduled banks
• The Commercial Banks includes both scheduled
and non-scheduled commercial banks which are
regulated under Banking Regulation Act, 1949.
• Scheduled and non-scheduled
o Scheduled can borrow from RBI but non-
scheduled cannot borrow unless there is
emergency
o Former are registered under schedule 2 of
RBI act
o Scheduled Banks will have to maintain CRR
with RBI whereas non-scheduled will have
to maintain CRR with themselves

➢ RBI (Reserve Bank of India)

o Basics
▪ It was set up on the recommendations of the “Hilton
Young Commission” in 1935 and later it was shifted to
Mumbai in 1937.
▪ Initially it was Privately Owned and was in Calcutta.

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Since Nationalization in 1949, the Reserve Bank is fully
owned by the Government of India.
o Functions
▪ Issue of currency - RBI is the sole authority to print and
issue the currency notes (except ₹ 1 note). The printing
will be done in order to infuse/replace old series note,
replacing soiled notes etc.
▪ Banker to government –
• The central banker on behalf of the government
collects the receipts and makes the payment
• Under Ways and Means Advances (WMA)
o RBI provides short term loans (up to 90
days) to the central and state governments.
o This is done to address the issue of cash
mismatches faced by the government
o The central banker charges certain rate of
interest (linked to repo rate) on these loans
o will represent the government at
international financial institutions, raise
revenues for the government and
• Maintain the Public Debt
o The government borrows from domestic
and foreign market. This is referred to as
internal and external debt
o The central banker maintains the public
debt (the liabilities of the government

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 which is charged upon the consolidated
fund of India)
o Public debt is the total amount borrowed by
the government of a country.
o The public debt management is mainly
concerned with
▪ The form of issue of public securities
▪ The terms on which new bonds and
securities are sold
▪ Maturing debts are redeemed or
refunded
▪ The pattern of maturities of debt and
its ownership
▪ Banker to banks/ Regulations of banking system - RBI
will lay down broad guidelines from setting up of the
bank to functioning and closing down.
• Lender of last resort - This role of RBI, that of
being ready to lend to banks at all times is
another important function of the central bank,
and due to this central bank is said to be the
lender of last resort
▪ Role of RBI in inflation control -
• Government has given the function of controlling
inflation to RBI
• MPFA was signed between GoI (Government of
India) and RBI

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 • As per this the RBI has to maintain Inflation at 4%
(+/- 200 basis points)
• If inflation goes above 6% or below 2% for three
successive quarters, then the RBI has to give an
explanation to the government listing out-causes
and the framework to bring inflation under
control
• Every 6 months it has to bring out a report
stating-present level and future movement of
inflation
▪ Manager of foreign exchange reserve - The forex
reserves (Gold + SDR + basket of foreign currencies +
Gold Tranche/Reserve Tranche) are maintained by RBI.
RBI is the custodian and uses the reserves whenever
there is a shortage of the foreign currencies in the
market (Will be discussed in International Trade
Chapter)
▪ Clearing house functions - In settling inter-bank
cheque transactions RBI plays the role of clearing
house
▪ Formulate monetary policy - the main objective of the
policy is to vary the flow of money in the economy
• Qualitative tools – The tools under this are used
to regulate the overall money supply in economy
• Quantitative tools – The tools under this are
used to regulate the money supply in the specific
sectors of the economy
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Quantitative tools
o Cash Reserve Ratio (CRR) – The ratio of Net Demand and
Time Liabilities (NDTL) that the banks will keep with RBI (the
NDTL refer to the time deposits and demand deposits
collected by the bank after adjusting for inter-bank
deposits).
o Statutory Liquidity Ratio (SLR) – It is the percentage of NDTL
that the bank has to keep with itself either in the form of
liquid cash/gold/government securities (approved securities)
G-securities - are classified into two types based on the
maturity-Treasury bills (maturity period is lesser than a year)
and dated securities (maturity period greater than 1 year)

o Repo and reverse repo -

▪ Repo
• Under Repo (Repurchasing Order) the central
bank buys g-securities with a promise of reselling
them again in future on a specific date and at a
specific price.
• This type of agreement is called a repurchase
agreement or repo.
• The interest rate at which the money is lent in
this way is called the repo rate.
▪ Reverse Repo
• Under Reverse Repo (Reverse Repurchasing
Order) the central bank sells g-securities with a
promise of repurchasing them again in future on
a specific date and at a specific price.

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 • This type of agreement is called a reverse
repurchase agreement or Reverse repo.
• The interest rate at which the money is lent in
this way is called the Reverse Repo Rate.
▪ The Reserve Bank of India conducts repo and reverse
repo operations for various days (at various maturities)
such as overnight, 7-days, 14-days, etc.
▪ These types of operations have now become the main
tool of monetary policy of the Reserve Bank of India.
o OMO (Open Market Operations) – Refers to buying and
selling of G-securities (or bonds) in the open market
▪ Outright
• Outright open market operations are permanent
in nature
• The central bank buys these government
securities (or bonds)
• Under this there is no promise of selling them
again in the future
• This will lead to injecting the money into the
system. Hence under this the money supply
change (either increase or decrease) is
permanent in nature
▪ Repo (already covered above)
o Bank rate – It is the rate at which RBI gives loans to
commercial banks. The RBI can influence money supply by
changing this rate. By increasing the bank rate, the loans
taken by commercial banks become more expensive and this
reduces the reserves held by the commercial bank and
hence decreases money supply. A decrease in the bank rate
can increase the money supply and vice versa

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Qualitative tools
o Rationing of credit – RBI tries to regulate portion of the
loans to be given to certain specified sectors. Under Priority
Sector Lending (PSL), 40% of the loans are given to
agriculture, education, export credit, housing, MSMEs
(Micro, Small, Medium Enterprises), Renewable energy,
social infrastructure, weaker sections
o Restrict Credit and Vary the margin rates - under this RBI
can ask the banks to restrict the flow of credit to a segment
or vary the margin (down payment) values so that the higher
demand for this will not add to inflation.
o If banks do not follow the guidelines, then RBI can go for
moral suasion and direct action
o Moral suasion - RBI will ask the banks to cooperate and
implement the credit policies
o Direct action - RBI may start penalizing these banks by
charging higher RoI (Rate of Interest)
o Publicity - Promote an effective public opinion for the policy
implementation
o Regulation of consumer credit - May change the EMI
(Equated Monthly Installment) and reduce the number of
instalments
o Variation of margin requirements - safe/collateral that has
to be kept for borrowing requirements may be changed. This
will have an impact on the demand for the loans

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Use of these tools
o If RBI needs to control inflation (it will reduce the liquidity)
▪ Increase the rates such as repo, CRR, SLR
▪ Sell more government securities
o If RBI wants to promote growth (it will infuse liquidity)
▪ Lower repo, CRR, SLR
▪ Repurchase the g-securities

➢ Supply of money
o The money is created by a system comprising two types of
institutions – central bank (RBI) and commercial banks
o RBI - The currency issued by RBI is called as High-Powered
Money / Reserve Money / Monetary Base and this can be
held by the public or by the commercial banks. The reserve
money will help in credit creation
▪ M0 – It is the liability of the central banker - which
must be given back. RBI will collect securities which
have to be returned when the bank gives back the
money. The change in the monetary base will also lead
to change in the money supply (in the same direction)

M0 = Currency in Circulation + Bankers Deposits with

RBI + Other Deposits with RBI

Other deposits with RBI comprise – deposits of quasi-

government and other financial institutions including
primary dealers; balances in the accounts of foreign
Central banks and Governments; accounts of
international agencies such as the International
Monetary Fund, etc.
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ M1 – it is referred to as Narrow Money. It is the most
liquid form of money supply which is held by the public
M1 = currency held by public + demand deposits with
the banks + other deposits held by RBI

▪ M2 = M1 + Post-Office Savings deposits

(The post office deposits are not considered as a part
of the money supply because they do not serve as a
medium of exchange because of absence of cheque
facility; Savings deposits held in post offices are not as
liquid as deposits in a bank)

▪ M3 – is also referred as broad money. Time deposits

which involve a fixed time for which the money is kept
with the banks are not part of the narrow money but
are part of broad money
M3 = M1 + Time Deposits with the banks

▪ M4 = M3 + Post office savings deposits

o In terms of liquidity, M1 has the highest and M4 the lowest

liquidity
o Money Multiplier – It is the ratio of narrow money to
reserve money or broad money to reserve money. The
money multiplier in a functional economy is at least 1
(because of the Fractional Reserve System)
o Money supply – The total stock of money in circulation
among the public at a particular point of time is called
money supply

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ All India Financial Institutions (AIFI)
o All India Financial Institutions (AIFIs), Non- Banking Financial
Companies (NBFCs) and Primary Dealers (PDs) form three
important segments of the Non-Banking Financial
Institutions (NBFIs) sector in India that are regulated and
supervised by the Reserve Bank.
o AIFIs constitute institutional mechanism entrusted with
providing sector-specific long-term financing.
o India has five AIFIs regulated by the central bank
▪ Export-Import Bank of India (EXIM Bank)
▪ National Bank for Agriculture and Rural Development
(NABARD)
▪ National Bank for Financing Infrastructure and
Development (NaBFID)
▪ National Housing Bank (NHB)
▪ Small Industries Development Bank of India (SIDBI)
o AIFIs have been asked to maintain a minimum total capital
of 9% by April 2024
▪ Minimum tier 1 capital will need to be at 7%
▪ Common equity tier-1 (CET-1) capital at 5.5%.

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Nationalization of banks
o 1st round – 1970 – 14 banks (which had NDTL over ₹ 50 Cr)
o 2nd round – 1980 – 6 banks (which had NDTL over ₹ 200 Cr)
o Reasons
▪ Concentrated in the hands of the rich-these banks
were owned by industrialists
▪ Concentrated in the urban areas-there banks were
majorly concentrated in urban areas as in rural areas
mobilization of deposits is very low
▪ Loans not reaching the needy- most of the credit was
accessed by rich customers whereas customers such as
(farmers, poor) did not get access to institutionalized
credit
▪ Providing institutional credit- especially in rural areas
there was presence of huge unorganized money
lending which led to farmers falling into debt trap

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Lending rate
o Monetary Policy Transmission (MPT) - RBI lowers the policy
rate (repo rate) so that the banks can pass on this benefit to
the consumers but with the previous method of Base rate
regime, the banks did not transfer the full reduction to the
borrowers. Hence RBI has done away with BRR and instead
introduced MCLR (Marginal Cost of Funds based Lending
Rate).

o Marginal Cost of funding-based Lending Rate (MCLR) –

▪ Was introduced by RBI in 2016 to have better
monetary policy transmission.
▪ MCLR includes
• The base repo rate
• Operating costs
• Current cost of carry-in cash reserve ratio (CRR)
• Tenor premium
o External Benchmark Lending Rate
▪ Introduced in 2019
▪ Under this the lending rates were linked (connected
to) an external parameter/benchmark such as repo
rate, yield rates of 91 or 182 days treasury bills,
interest rate published by Financial Benchmarks of
India Pvt Limited (FBIL)
▪ Under this the banks will have to revise the lending
rates once every three months

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Basel Guidelines
o Basics
▪ Basel is a place in Switzerland which houses Bank of
International Settlement (BIS). It also houses, BCBS
(Basel Committee on Banking Supervision) of which
Indian Central Bank is a member.
▪ The BCBS meets and on deliberations issues guidelines
and these guidelines are only regarding financial
stability of the banks.
▪ So far, the BCBS has issued the guidelines - Basel I,
Basel II and Basel III
o Concepts
▪ Total Capital – The bank has the capital in two forms -
Tier I and Tier II. The Tier I is a form of capital which
can absorb the losses without the bank winding up
(also referred to core capital - paid up capital, disclosed
reserves, reserves arising as a result of sale proceeds
etc.) and Tier II can absorb the losses but upon the
bank’s failure (also referred to sub-ordinate capital eg-
debt capital instruments, revalued reserves, long term
unsecured loans).
▪ Risk Weighted Assets (RWA) – The loans are allocated
certain risk weights (loans such as personal loans are
given higher risk weights and loans given to
government will have lower risk weight). All the
assets/loans that are issued by the bank will be

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 allocated the risk and the total of these risk weights
will give Risk Weighted Assets.
▪ CAR (Capital Adequacy Ratio) or CRAR (Credit to Risk
weighted Assets Ratio) – in simple terms it represents
the ability of the bank in meeting the needs of
creditors and depositors (capacity of the banks to pay
off the liabilities). The CAR also represents the capital
(Tier I + Tier II) the bank must have to absorb the losses

▪ Basel I Guidelines
• It was introduced in 1988 and were adopted by
India in 1999 and the banking sector in India are
BASEL I complaint
• Credit Risk – when the banks issue loans, there is
a danger that the loans are not repaid hence it is
referred to as credit risk
• Under Basel I, the CAR has been set at 8% of RWA
(The CAR can be changed by the central banks to
suit their requirements. In case of India, it has
been kept at 9%)

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Basel II Guidelines
• Introduced in 2004
• 3 types of risks have been listed under Basel II
o Credit Risk – when the banks issue loans,
there is a danger that the loans are not
repaid hence it is referred to as credit risk
o Market Risk – It arises from unfavorable
changes in market parameters such as
interest rate, foreign exchange rate, equity
price and commodity price etc. The banks
make investments in gold or government
securities as a part of maintaining SLR and
are exposed to the market risk as the prices
of gold will vary
o Operational Risk – attributed to internal
systems, processes, people and external
factors.
• 3 pillars have been introduced under Basel II
o CAR – the CAR has been set at 8% of RWA
o Supervisory Review – the banks have to
develop and use better risk management
techniques in monitoring and managing the
three risks
o Market Discipline – the banks have to
mandatorily disclose CAR, risk exposure etc
to the central bank

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Basel III
• Introduced in 2010 because of 2008 financial
crisis
• CAR has been increased to 9% of which the tier I
capital has been set at 7% of RWA
• Tier-1 capital of 7% RWA has two components -
4.5% of Tier I capital and 2.5% of capital
conservation buffer
• The banks will have to maintain Capital
Conservation Buffer (CCB) of 2.5% of Risk
Weighted Assets (RWA). The buffer capital will be
used to absorb the losses during the emergency
• Liquidity Coverage Ratio – the banks will have to
maintain the 100% of the cash outflow for the
next 30 days in the form of high-quality liquid
assets (HQLA). This will be used to ensure that
there is no shortage of funds to fulfill cash
payment obligations

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ NPA (Non-Performing Asset)
o The banks are the financial institutions whose primary
activities are to collect the deposits and give it to borrowers.
Hence the banks play a very important role if there needs to
be movement from capital surplus sectors (eg-households)
to capital deficient sectors (eg-corporates).
o Once the loan has been issued the borrower needs to make
the payment back to the bank. This payment usually consists
of two components - Principal and interest. If the borrower
has made timely payments, then such an account is referred
to as Standard Asset, otherwise the account is classified as
an NPA.
▪ NPA - If the payment/repayment (either interest or
principal or both) remains overdue for a period of
greater than 90 days from the end of the quarter
▪ Classification of NPA based on duration
• Substandard – if an account remains as NPA for a
period lesser than or equal to 12 months
• Doubtful – if an account remains as NPA for a
period greater than 12 months
• Loss making – once the account has remained as
n doubtful NPA for a period of 3 years or greater
will be classified as loss making by the banks
during internal/external auditing.
▪ Factors contributing to rise in NPAs
1. Slowdown in the domestic economy and the
global economy

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 2. Governance issues – In many cases there have
been delays in the projects or stalling of the
projects on account of the changes introduced in
the policies by the government, change in the
government, delays in giving clearances etc.
3. Willful defaulters – Are those who have
borrowed money, have the capacity to repay but
willingly (purposely) default on the repayment
4. Inefficient functioning DRTs – The number of
cases filed at DRTs are higher and this has led to
delayed resolution of cases at DRTs
5. Bad lending practices (ex-Poor credit appraisal
system) – In many cases, the banks are said to be
involved in evergreening of the loans (loans
issued to the existing borrower. The new loan will
be used to repay the old loan)
▪ Impact of high NPA’s
1. Will affect the bottom line (profit) of the banks
2. Will reduce their lending capacity (volume of
loans that are given)
3. Will lead to erosion of investors’ confidence
(drop in the share prices)
4. The cost of capital will go up (lending rates will be
increased for both retail and corporate)
5. The higher cost of capital is going to deter the
investors

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 6. Twin Balance Sheet Problem (Or Twin Balance
Sheet Syndrome) – The borrower (company may
not have sufficient revenues to repay the debt,
this results in stress in the balance sheet of the
company. As it doesn’t repay the loan this will
affect the balance sheet of the banks as well)
▪ Ways through which banks can recover NPA’s
1. The Insolvency and Bankruptcy Code
a. Provides for a speedy insolvency resolution
(IR) – maximum period of 330 days
b. It will consolidate all the previous laws such
as NCLT, SICA etc.
c. IR for Individuals and Partnerships will be
directed to DRTs (Debt recovery Tribunals).
d. IR for Limited Liability Partnerships (LLPs)
and Companies will be directed to NCLT
(National Company Law Tribunal)
e. DRT/NCLT can be approached by lender or
the borrower
f. Once the application is accepted, Insolvency
Professional (IP, certified, an expert in the
insolvency resolution, once appointed all
the assets of the company will come under
the control of IP)
g. The IP will seek information from Insolvency
Agencies about the concerned borrower
and set up CC (Creditors’ committee) and

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 the CC will have to deliberate and decide
(whether to liquidate or sell it to another
buyer)
h. If no decision is made, then the IP will
recommend the authority to liquidate the
concerned asset
2. Debt Recovery Tribunal (DRT) – the DRTs were
set up under section 3 of the Recovery of Debt
Due to Banks and Financial Institutions Act 1993.
Under this expeditious disposal of suits was
provided (around 6 months)
3. Asset Reconstruction companies (ARCs) -
Purchase NPA’s from the banks at a discounted
price and tries to recover/revive the account. The
ARCs usually give the banks security receipts
when they purchase the loan account. In 2014,
RBI allowed ARCs to convert their debt to equity
(ceiling of 26%)

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Twin Balance Sheet Problem to Twin Balance Sheet Advantage
o Background
▪ Post 2000, many of the corporates borrowed heavily
from the banking sector
• The money invested was mainly from external
sources rather than internal sources such as
owner’s capital
• The growth prospects were dealt a blow with the
2008 global financial crisis. The companies now
were not able to repay the debt
• This contributed to what is now known as India’s
Twin Balance Sheet problem, where both the
banking sector (that gives loans) and the
corporate sector (that takes and has to repay
these loans) have come under financial stress.

o Features of Twin Balance Sheet Syndrome

▪ Many companies were having an interest coverage
ratio of below 1, which indicated that their operations
did not generate sufficient revenues to pay interest
▪ Banks were saddled with NPAs of ₹ 8 tn and NPA ratio
had reached 12% in 2016-17
• Many banks reported that their NPAs were
higher than the total interest earned by them
which limited their lending ability
• The companies on the other hand also were not
able to borrow from the banks

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
o Reforms introduced to address the issue
▪ CRILC (Central Repository of Information on Large
Credits)
▪ Was introduced in 2014
• The banks would be reporting information on
large loan accounts of ₹ 5 Cr
• This would help in detecting early signs of
weakness in loan accounts
▪ Special Mention Accounts
• These are accounts in which there is a delay in
repayment
• If continued these will be becoming non-
performing assets
• The classification
o If the default is up to 30 days - SMA0
o Delayed by 31 to 60 days - SMA1
o Delayed by 61 to 90 days - SMA2
• Once classified as SMA, it will trigger penal
actions such as impacting credit score (SMA-1)
and restricting credit access (SMA-2)
▪ Asset Quality Review (AQR)
• Introduced in 2105
• RBI mandated the AQR to know the true status of
the quality of the assets
• It had found that banks had unevenly classified
the loans exposures to same borrower
• It found that many banks had had suppressed or
hidden bad loans to show a healthy balance
sheet
▪ IBC (Insolvency and Bankruptcy Code)
• IBC was introduced in 2016

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 • Under this insolvency resolution will be provided
in 330 days
• This has helped free the capital which would be
otherwise rendered unproductive
• According to the government data, it has rescued
808 corporate debtors through resolution plans
• 32% of the admitted claims have been realized
▪ NARCL (National Asset Reconstruction Company
Limited)
▪ Was established to handle bad debts
• It is a bad bank - financial entity which has been
proposed to acquire and resolve the NPAs
• It is 51% owned by the public sector banks
• It will have an operational entity - IDRC Ltd (India
Debt Resolution Company Ltd) to
o Manage these assets
o Find potential buyers
• NARCL was registered with registrar of
companies in July 2021
o Benefits
▪ The two balance sheets have been strengthened. The
capital base also has improved. The corporate balance
sheet is said to be the healthiest in the last 10 years.
Most of the sectors have deleveraged their balance
sheet by using the profits and excess funds to repay
the debt
▪ The twin balance sheet problem has been addressed
and will translate into private investment revival. This
will lead to broad based revival in the economy rather
than K-shaped recovery

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Payment Banks
o These are specialized/differentiated/niche banks which are
stripped down versions of the traditional banks. Under this
concept the banks provide the limited services through the
mobile phones
o RBI has issued the preliminary licenses or in-principal-
approval (valid for 18 months) to 11 entities to start the
payment banks. This has been done in order to drive the
Financial Inclusion
o The Payment Banks can provide the following services-
remittance services, demand deposits etc.
o The features of Payment banks are
▪ Customers can deposit only up to ₹ 2,00,000
▪ Are allowed to issue only debit/ATM cards
▪ No credit cards can be issued
▪ No lending activities can be conducted
▪ Payments and remittance services will be provided
▪ Insurance and mutual funds will be provided to the
customers
▪ Initial capital of ₹ 100 Cr.
o Other conditions applicable are
▪ Payments banks are targeting migrant labour, low-
income households, small businesses, and other
unorganized sector entities.
▪ Eligibility – Existing pre-paid payment instrument
issuers, individuals, professionals, NBFCs, corporate
business correspondents, telecom companies, super-

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 market chains, real estate sector cooperatives that are
owned and controlled by residents and public sector
entities may apply.
▪ Promoter’s contribution initially must be 40% for the
first 5 years. For foreign holding, it is up to 74% of paid-
up capital, on a par with private banks.
▪ The banks must maintain CRR, minimum 75% of
demand deposits in government bonds of up to one
year and maximum 25% in current and fixed deposits
with other scheduled commercial banks for
operational purposes and liquidity management.

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Small Finance Banks
o Small Finance Bank (SFB) are specialized / differentiated /
niche banks
o SFBs are allowed to accept deposits and are allowed to give
loans.
o The SFBs will now be able give loans to MSMEs, small and
marginal farmers etc. and bring them under the ambit of
financial system
o These will also further the objective of financial inclusion
o The features and conditions
▪ Minimum capital to be ₹ 200 Cr
▪ 75% of the credit must be given in the PSL
▪ At least 50% of the loans should constitute
loans/advances up to ₹ 25 lakh
▪ Must maintain CRR and SLR
▪ With the prior approval of RBI, SFBs can undertake
financial services
▪ Must have the word “Small Finance Bank” in the name
▪ 25% of the branches to be set up in unbanked areas
▪ Capital Adequacy Ratio (CAR) of 15% of RWA

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ NBFC (Non-Banking Finance Companies)
o Definition
▪ According to RBI – “A Non-Banking Financial Company
(NBFC) is a company registered under the Companies
Act, 1956 engaged in the business of loans and
advances, acquisition of
shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable
securities of a like nature, leasing, hire-purchase,
insurance business, chit business but does not include
any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale
of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable
property. A non-banking institution which is a
company and has principal business of receiving
deposits under any scheme or arrangement in one
lump sum or in installments by way of contributions or
in any other manner, is also a non-banking financial
company (Residuary non-banking company)”.
o Features
▪ Non-banking financial companies are the financial
institutions which provide banking services but without
meeting the legal definition of the bank. These are
registered under the companies act 1956
▪ These have been kept under the regulatory control of
RBI from 1997
▪ Have been classified into deposit taking and non-
deposit taking

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ The deposit taking NBFCs must be registered with the
RBI and some of the NBFCs are regulated by other
agencies
o NBFCs are classified as under
▪ Asset Finance Company (AFC)
▪ Investment Company (IC)
▪ Loan Company (LC)
▪ Infrastructure Finance Company (IFC)
▪ Infrastructure Debt Fund
▪ Non-Banking Financial Company - Micro Finance
Institution (NBFC-MFI) etc.
o Importance of NBFCs
▪ NBFCs provide credit to that part of the Indian
economy where the private sector banks prefer not to
lend (either because the risks are too high or because
the returns are too low).
▪ Many NBFCs specialize in lending in a particular sector
for example real estate, gold, SMEs etc
▪ Many unbanked borrowers avail credit from NBFCs,
repay on time and improve their credit rating. They use
their track record to become bankable borrowers.
▪ Non-bank firms fund everyone from poor
entrepreneurs to rich businessmen. This has helped in
strengthening of the economy
▪ NBFCs have in fact contributed in addressing economic
demand, and that has helped in financial inclusion.
▪ They play an important role in sustaining consumption
demand as well as capital formation.
o Issues
▪ Funding - they’re finding it difficult to get access to
funds from banking sector, investors in the market

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Banks have slowed down lending to NBFCs, virtually
closing a major resource avenue for NBFCs.
▪ They are facing repayment issues and this has been
accentuated by the pandemic and moratorium
▪ They also face the issue of asset-liability mismatch
o Scale Based Regulation (SBR) for NBFCs by RBI
▪ The framework is based on scale based approach and
will have a four layered structure
• Base layer (NBFC-BL)
• Middle layer (NBFC-ML)
• Upper layer (NBFC-UL)
• Top Layer
▪ As we move from Base Layer to Top Layer, the
regulations will increase and become strict
▪ Base Layer (BL)
• For NBFC-BL, the central banker has proposed to
harmonise the extant NPA classification norm of
180 days to 90 days
• The entry norms have been tightened by
increasing the minimum net owned funds from ₹
2 Cr to ₹ 20 Cr
▪ Middle Layer (ML)
• ML would cover NBFC non-deposit taking
systemically important deposit taking NBFCs,
housing finance companies, infrastructure
finance companies etc
• Concentration Norms for NBFCs are laid down
separately for lending and investment exposures
(15% each for single borrower and 25% for group
of borrowers)

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 ▪ Upper Layer (UL)
• These will have to maintain CET-1 at 9%
• Higher provisioning and leverage ratios
▪ Top Layer (TL)
• For now this will remain empty
• If there is a systemic is perceived from specific
NBFCs in the upper layer then RBI can push some
of these NBFCs into the top layer

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Regional Rural Bank (RRB)
o RRBs were set up after the recommendation of Narasimhan
Working Group in 1975 and passage of RRB Act 1976
o Objective was to provide banking services to the rural parts
of India - to provide credit to the weaker sections of society
and to mobilize rural savings
o The central govt, state govt and the sponsoring nationalized
bank contribute 50%, 15% and 35% respectively
o The areas for which they would be providing the services
would be notified to few districts
o Consolidation
▪ First round of consolidation was done in 2005, when
the numbers were reduced from 196 (2005) to 133
(2006)
▪ By March 2012 it was further reduced to 82 and
further consolidation reduced it to 56
o As of March 31, 2023
▪ There are 43 RRBs sponsored by 12 Scheduled
Commercial Banks,
▪ operating 21,995 branches across 26 states and 3
Union Territories (Puducherry, Jammu & Kashmir, and
Ladakh). These RRBs manage 30.53 crore deposit
accounts and 2.90 crore loan accounts.
▪ All public sector banks, except Punjab & Sind Bank,
sponsor one or more RRBs, while J&K Bank is the only
private sector bank that sponsors an RRB.
 State Bank of India (SBI) sponsors the most 14
RRBs
• Punjab National Bank – 9 RRBs
• Canara Bank – 4 RRBs etc.
▪ 92% of RRB branches are in rural or semi-urban areas.

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Cooperative banking in India
o Are registered under co-operative societies act (cooperation
is a state subject)
o In 1966 those banks with a paid-up share capital and
reserves of over ₹ 1 lakh were brought under the purview of
Banking Regulation Act 1949
▪ This led to dual regulation of UCBs. While the state
registrar of co-operatives is responsible for monitoring
and administration of these banks, the banking
functions are regulated by RBI
▪ The issue is that there is no professional board i.e.
board of directors of co-operative banks is elected by
the members of the bank (so the problem is not with
the ownership but with the structure)
▪ According to the Banking Regulation Amendment Act
of 2020, the regulatory powers are under RBI
• The RBIs powers over regulation, supervision of
UCBs, DCCBs and state co-operative banks are
extended
• The matters pertaining to management, capital,
audit, management will be covered under this
o Cooperative banking structure
▪ Urban
• Scheduled
• Non-Scheduled
▪ Rural
• Short term
o State Co-operative bank - at the state level
o Central cooperative bank at the district
level (District Central Cooperative Bank –
DCCB)
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
 o Primary cooperative credit societies at the
village level
• Long term
o State cooperative agriculture and Rural
Development Banks (SCARDBs) at the apex
level
o Primary Cooperative Agriculture and Rural
Development Banks (PCARDBs) at the
district level or block level

SHYAM SHANKAR KAGGOD

(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)