1B1 Bank Classification PCB11

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Pillar#1B-1: Classification of Financial Intermediaries: Bank & NBFC

🚩👶🏻FAQ: This handout is very lengthy, contains lot of Banking GK😰!!.


Ans. (1) UPSC gotten into bad habit of asking factual GK (2) Some Banking-GK for helping UPSC
aspirants trying for Bank-exam as backup/Plan-B. Then, which GK is imp/notimp for UPSC =
Watch lecture/PYQs, you’ll get idea.
 Table of Contents
13 🏛 Financial Intermediaries → Banks.........................................................................................122
13.11 🐯🏦 ₹ 🖨 Banks → Reserve Bank of India (RBI): भारतीय रिजर्व बैंक.........................................................123
13.11.1 🏦 ₹ 🖨 RBI Central Board Composition............................................................................................................124
13.11.2 🏦 ₹ 🖨 RBI Governor & Dy Governor................................................................................................................124
13.11.3 🏦 ₹ 🖨 RBI Offices & Departments.....................................................................................................................125
13.11.4 🏦 ₹ 🖨 RBI: Functions of......................................................................................................................................125
13.12 🪜Agency Banks of RBI........................................................................................................................126
13.13 R🐯: 🦋RBI’s notable portals...............................................................................................................126
13.13.1 🐯: 🦋 UDGAM Portal: Unclaimed Bank Deposits (2023)...............................................................................126
13.13.2 🐯: 🦋 PRAVAAH Portal for license from RBI (2023)......................................................................................126
13.13.3 🐯: 🦋 Daksh Web Portal for supervision (2022)...............................................................................................127
13.13.4 🐯: 🦋 E-Kuber Portal............................................................................................................................................127
13.14 🏦 👨‍⚖️ Scheduled Banks (अनुसूचित बैंक)......................................................................................................127
13.15 🏦 👨‍⚖️FI Commercial Banks Pre-Independence..............................................................................129
13.15.1 🦄 → 🦁 Nationalization of Banks After Independence ( आजादी के बाद निजी बैंकों का राष्ट्रीयकरण)....................................130

13.16 🏦 👨‍⚖️ 🔂Consolidation of PSBs [एकत्रीकरण]............................................................................................131


13.16.1 →Consolidation of PSBs → A) Merger (विलीनीकरण)..............................................................................................131
🔂
13.16.2 Consolidation of PSBs → B) Privatization (निजीकरण).......................................................................................132
13.16.3 PSB Privatization: Banking Investment Company (BIC- बैंकिं ग निवेश कं पनी).............................................................133

13.17 🏦 👨‍⚖️Commercial Banks  Pvt. Sector Banks (PvB) निजी-क्षेत्र के बैंक........................................................133


13.17.1 🏦 👨‍⚖️ 🚗📜 ‘On-Tap’ License to open Private Sector Banks ( जब मन चाहे तब अर्जी डाल दो)..........................................134

13.18 🚫🏦 👨‍⚖️ 🚗📜 Allowing NBFC/Large Corporate to setup Banks......................................................135


13.19 🏦 👨‍⚖️ 🈶 Commercial Banks  Foreign Banks (विदेशी बैंक).....................................................................135

13.20 🏦 👨‍⚖️ 🌎🚫Commercial Banks  Differential Banks..........................................................................136


13.20.1 🏦 👨‍⚖️ 🌎🚫
Commercial Banks  Differential Banks RRB and LAB..............................................................136
13.20.2 🏦 👨‍⚖️ 🌎🚫
RRB’s Shareholding pattern / IPO...................................................................................................136
13.20.3 🏦 👨‍⚖️ 🌎🚫
Commercial Banks  Differential Banks  SFB & PB.....................................................................137
13.20.4 🏦 👨‍⚖️ 🌎🚫🚗📜 On-Tap Licenses for starting SFB (मन चाहे तब अर्जी डालो)..............................................................138
13.20.5 → Payment Bank → Paytm Payments Bank - RBI takes action (2024).....................................................139
📬
13.20.6 Payment Banks → India Post Payment Bank (IPPB)....................................................................................139
📮
13.20.7 (Yearbook) Dept of Post: POSB vs IPPB........................................................................................................140
13.20.8 🚐⏳ (Proposed) Wholesale & Long Term Finance Banks (WLTF)...............................................................141
13.20.9 💸📡 🏦
: Digital Payments- (Proposed) Digital Banks by NITI Aayog (2021)..............................................141

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13.20.10 💸📡: 🏦 Digital Banking Units in Budget 2022...............................................................................................142
13.20.11 💸📡: 🏦 Digital Payments- NeoBanks / full-stack digital banks...................................................................142
13.20.12 🚩👶🏻FAQ : DIFFERENCE between digital banking unit vs Neobank...........................................................142
13.21 🏦 👨‍🌾FI  Banks  Cooperative Banks (सहकारी बैंक).................................................................................142
13.21.1 🏦 👨‍🌾😥 Cooperative Banks: Negative News (2019): PMC Bank ( )....................................................144
कांड हो गया
13.21.2 ⚖️🐯💪💪🦵👻💬🤚Banking Regulation (Amendment) Ordinance/Act, 2020...........................................145
13.22 🕵🏻☂️ NUCFDC: Umbrella org / SRO for UCB (2024)........................................................................146
13.22.1 🕵🏻☂️ NUCFDC ko Funding ( वित्त पोषण /पैसा कहां से लाएगा).............................................................................................146
13.22.2 🕵🏻☂️ NUCFDC ke Functions ( कार्य).......................................................................................................................146

13.23 🚫🏦👨‍⚖️ Formal FI  Non-Banking Financial Institutions.................................................................146


13.23.1 Development Finance Institutions (DFI: विकास वित्त सं स्थान)......................................................................................146
13.23.2 🚫🏦👨‍⚖️
What is Bad Bank- NARCL-IDRCL?.....................................................................................................147
13.23.3 🚫🏦👨‍⚖️
Non Bank  All India Financial Institutions (AIFI: अखिल भारतीय वित्तीय सं स्थान)............................................147
13.23.4 NABFID, the 5th AIFI (2022-Mar)......................................................................................................................149
13.23.5 🚫🏦👨‍⚖️
FI  Non-Bank  Primary Dealers (PD)- (प्राथमिक विक्रे ता)...........................................................................149
13.23.6 🚫🏦👨‍⚖️
FI  NBFCs (गेर-बैंकिं ग वित्तीय कं पनिया).................................................................................................................150

13.24 💳 NBFCs can directly issue credit card..............................................................................................151


13.24.1 💳 🥰 NBFC’s Direct Credit Cards- Pros and Cons of.......................................................................................152
13.25 🚫🏦👨‍⚖️ NBFCs Regulated by RBI 🐯 (नियंत्रण/देखरेख)..............................................................................153
13.26 🤖💳 FinTech Companies....................................................................................................................154
13.26.1 🐯Fintech regulated by RBI...................................................................................................................................154
13.26.2 🐯Fintech regulated by NON-RBI org (e.g SEBI, IRDAI).................................................................................155
13.26.3 🔪📡👿Digital Lenders..........................................................................................................................................155
13.26.4 🚫🏦👨‍⚖️Credit Information Companies (CIC) versus Credit Rating Agencies (CRA) .................................156
13.27 🚫🏦👨‍⚖️ NBFCs Regulated by SEBI 🐱 (📑More in Pillar#1C)..........................................................157
13.28 🚫🏦👨‍⚖️ NBFCs Regulated by Others 🦊.............................................................................................158

13.29 👻(🚫🏦): NBFC: Shadow Banking (आभासी / प्रतिछाया बैंकिं ग प्रणाली)..............................................................158

13.30 🧕NBFC-not allowed in India: Islamic Banking.................................................................................159

13.31 🧔💪🏻🔪💵😱 Informal Financial Intermediaries (अनौपचारिक वित्तीय मध्यस्थ/ब्याजख़ोर)....................................159


13.31.1 ✍️ Mains Answer Writing.....................................................................................................................................160

13 🏛F INANCIAL INTERMEDIARIES → BANKS


- A Financial Intermediary is an entity that acts as the middleman between two parties in a
financial transaction- between lenders vs. borrowers, investors vs. entrepreneurs, households vs
business firms. (FI: वित्तीय मध्यस्थ)
- Such FI can be subdivided into (1) Formal (औपचारिक) (2) Informal (अनौपचारिक). But presently we’ll
focus on Formal Financial intermediaries, given in following chart:

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13.11 🐯🏦 ₹ 🖨 B ANKS → RESERVE BANK OF INDIA (RBI): भारतीय रिजर्व बैंक

1913 Commercial banks were required to register under the Companies Act, but monitoring
was lax. No CRR, SLR, BASEL Norms. (उन पर पहले नियम सख्त नहीं थे)
1926 Royal Commission on Indian Currency Hilton Young Commission) recommends setting
up a central bank named 'Reserve Bank of India'. ( एक ब्रिटिश आयोग ने सिफारिश की निगरानी के लिए रिज़र्व
बैंक बने)
1929 Great Depression in USA leads to collapse of 450+ banks in India. So British Indian Govt
becomes serious about setting up RBI. अमेरिकी महामंदी के बाद कें द्रीय बैंक की स्थापना की आवश्यकता महसूस हुई
1934 Reserve Bank of India Act was enacted. (इसकी स्थापना के लिए कानून बनाया गया)
1935, RBI becomes operational from 1st April, with 1st Governor Sir RBI Gov: Osborne Smith.
April India’s Viceroy: Willingdon. Government ownership was ~4.4% only.
1935, Commercial Banks fulfilling certain conditions were listed in the 2 nd Schedule of RBI Act,
July & such “Scheduled Banks” were required to keep CRR with RBI.
1943- C.D. Deshmukh 2nd FM of India becomes the first INDIAN Governor of RBI. He had also

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49 participated in the Bretton Woods Conference, USA (1944).
1948- All private investors’ shares transferred to Govt of India under the RBI transfer of
49 ownership act 1948. Therefore, RBI governor answerable to Parliament, has to pay
dividend to Govt from its profits. (रिज़र्व बैंक अपने मुनाफे मे से सरकार को लाभांश वितरण करता है)
1949

Banking Regulation Act (बैंकिं ग विनियमन अधिनियम) empowered the RBI to


 Give license to companies to open banks,
 Give permission banks to open new branches.
 Prescribe auditing norms, liquidity norms for Banks such as SLR.
 Protect interest of depositors. Force elimination / merger of weak banks.
 Related Topic: banking regulation ordinance 2020 → Pillar#1B2: Bad loans & other
burning issues in the banking sector.
🔠❓ MCQ. Which was the earliest event to take place? (UPSC Prelims-2009)
A) Nationalization of insurance companies B) Nationalization of State Bank of India
C) Enactment of Banking Regulation Act D) Introduction of first Five year plan

13.11.1 🏦 ₹ 🖨 RBI Central Board Composition


(Non-Official Directors) (Official Directors)
- 2 Government officials - RBI Governor
- 10 directors nominated by Government. - 4 Dy. Governors
- 4 directors from RBI’s local boards @West, East, North, South
13.11.2 🏦 ₹ 🖨 RBI Governor & Dy Governor
- RBI Act (Section 8) provides for “NOT MORE than 4” Dy. Governors.
- They’re selected by Financial sector regulatory appointment search committee (FSRASC)
headed by the Cabinet Secretary (IAS) → successful candidates’ names sent to
Appointments Committee of the Cabinet headed by the Prime Minister for final approval.
- Governor and Dy.Govs’ tenure usually (not always) 3 years. Re-appointment is possible.
कार्यकाल

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- 2018-Dec: Shaktikanta Das appointed as Governor for 3 years, he replaced Urjit Patel. 2021:
Modi Govt renewed his tenure for three years till Dec- 2024, thus giving him a total tenure of
six years (रिज़र्व बैंक के गवर्नर के रूप में पुनः नियुक्ति)
- Shaktikanta Das is Retd. IAS, Former finance secretary, Member of 15 th Finance
Commission.

📑 Related Topics: RBI Autonomy, Dividend Controversy, Section 7, PCA/BASEL:


[Handout 1B2 → Burning Issues in Banking Sector]

13.11.3 🏦 ₹ 🖨 RBI Offices & Departments


- RBI 4 regions: Northern: Delhi, Eastern: Kolkata, Southern: Chennai, Western: Mumbai
- RBI has various dept after Banks, NBFCs, Payment Systems, Foreign Exchange Management etc.
13.11.4 🏦 ₹ 🖨 RBI: Functions of

1) Controller of Money Supply: Issues M0 under RBI Act, Makes Monetary Policy. ( 📑more in
Pillar#1A2) (मुद्रा आपूर्ति नियंत्रक)
2) 📑
Controller of Foreign Exchange: through FEMA Act. (विदेशी मुद्रा का नियं त्रक, more in Pillar#3)
3) Banker to Union & State Governments & Public Debt Manager (सार्वजनिक ऋण प्रबं धक).
4) Banker’s Bank: Lender of Last resort, Advises in monetary matters.
5) Regulator of all “BANKS”: through BR Act’49, Payment Systems’07 (नियामक)
6) Regulator of AIFI, NBFC-D (Deposit Taking NBFC) & others.
7) Promotional Roles (सं वर्धक भूमिका):
a. Customer protection through Ombudsman (शिकायत निवारण अधिकारी),
b. Financial Inclusion through PSL norms. Requires bank to open 25% of branches in rural
areas
8) Data Publication & awareness e.g. Annual Financial Stability Report (वार्षिक वित्तीय स्थिरता रिपोर्ट)
9) International Cooperation e.g. BASEL, IMF, G20’s Financial Stability Board etc.
a. E.g. 2021: RBI became member of “Network For Greening The Financial System
(NGFS)”. NGFS is a group of central banks to contribute to the development of
environment. HQ: Paris, Foundation Year: 2017 (वित्तीय प्रणाली की हरियाली के लिए नेटवर्क - ताकि
अक्षय ऊर्जा, पर्यावरण आदि को मदद मिले)

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🚩👶🏻FAQ: Article 371-F of Constitution gives special status to Sikkim, as a result their State Bank
of Sikkim is outside RBI’s regulation!! Ans. Such JamesBond/obscure GK = poor cost benefit.

13.12 🪜A GENCY BANKS OF RBI

🙋🏼‍♀️FAQ: How can a bank collect the tax? isn’t it the work of the income tax officers? Ans. Yes, it is
the function of income tax officer. But, Tax money is to be transferred from tax payers’ bank account
to govt’s account. Agency banks deal with that aspect of money collection/storage/transfer work.

13.13R 🐯: 🦋RBI’ S NOTABLE PORTALS

13.13.1 🐯: 🦋 UDGAM Portal: Unclaimed Bank Deposits (2023)


- If deposits remain unclaimed for 10 years in a bank → banker need to transfer it to “Depositor
Education and Awareness FUND” (DEA) OF RBI.
- 2023: RBI setup UDGAM portal for it. (Unclaimed Deposits Gateway To Access inforMation)
- Beneficiary can easily search unclaimed deposits across multiple banks at one place. (e.g. by
searching the Aadhaar card / PAN Card number of the dead parent etc.)

13.13.2 🐯: 🦋 PRAVAAH Portal for license from RBI (2023)


- Banks/NBFC/ Digital payment related companies need to obtain license from RBI.
- They can apply for such licenses using PRAVAAH Portal (Platform for Regulatory Application,
Validation And AutHorisation)

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- 😍 Benefit? Ease of doing business. The entrepreneur does not have to visit RBI office offline
multiple times.

🐯🦋
13.13.3 : Daksh Web Portal for supervision (2022)
- Web system wherein Banks, NBFC send their reports to RBI
- Then RBI can monitor them more effectively. E.g. how many credit card frauds this month, new
guidelines to prevent it etc.

🐯🦋
13.13.4 : E-Kuber Portal
- Core banking solution (CBS) portal of RBI.
- All bankers have current accounts here.
- RBI handles NEFT/RTGS, Repo, OMO & other instruments from here.
- Retail Investors can buy G-Secs from here.
🔠❓ MCQ. RBI acts as a bankers’ bank. What does it mean? (UPSC-Pre-2012)
1) Other banks retain their deposits with the RBI.
2) The RBI lends funds to the commercial banks in times of need.
3) The RBI advises the commercial banks on monetary matters.
Answer codes: (a) 2 & 3 only (b) 1 and 2 only (c) 1 and 3 only (d) 1, 2 and 3
🔠❓ MCQ. RBI regulates the commercial banks in matters of (Asked in UPSC-Pre-2013)
1) Liquidity of assets 2) Branch expansion 3) Merger of banks 4) Winding-up of banks
Answer Codes: (a) 1 & 4 only (b) 2, 3 & 4 only (c) 1, 2 & 3 only (d) 1, 2, 3 & 4
🔠❓ MCQ. In India, the central bank’s function as the ‘lender of last resort’ means what? (कें द्रीय बैंक
को अंतिम उपाय का ऋणदाता कहा जाता है इस शब्द का मतलब क्या है) (Prelims-2021)
1. Lending to trade and industry bodies when they fail to borrow from other sources. [व्यापार औद्योगिक
सं स्थाओं को जब कहीं और से कर्ज नहीं मिले तो कें द्रीय बैंक कर्ज देता है]
2. Providing liquidity to the banks having a temporary crisis.[अस्थाई सं कट के दौरान बैंकों को तरलता देता है]
3. Lending to governments to finance budgetary deficits [बजट घाटा पूरा करने के लिए सरकार को कर्जा देता है]
Codes: a) 1 and 2 b) 2 Only c) 2 and 3 d) 3 Only

13.14 🏦 👨‍⚖️S CHEDULED BANKS (अनुसूचित बैंक)


When RBI is satisfied with TWO conditions simultaneously ( दो शर्तों का एक साथ पालन होना चाहिए)
- #1: That a public sector or pvt sector bank has (Paid Up Capital + Reserves #1) = Min ₹5 Lakhs
- #2: Bank is not conducting business in a manner harmful to its depositors. (जमाकर्ताओं के हितों का
नुक़सान न हो इस हिसाब से बैंक अपना कार्य कर रहा है)
then such bank is listed in the 2nd Schedule of RBI Act → then it is known as a Scheduled Bank.

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 🚩👶🏻FAQ: What is paid up capital? Ans. Explained in the video.
 🚩👶🏻FAQ: Which reserves are included in this ₹5 lakh formula? Ans. Routine books did not
bother to elaborate so I did not bother to do Google search. Such technical things not imp4exam.
 🚩👶🏻FAQ: “₹5 lakh is very small!!! It should be ⏫ to ensure safety in bank”. Ans 1) neither
economic survey, NITI Aayog, Court-PIL, nor any big columnists have demanded reform here.
So we need not apply our brain here. 2) Send your suggestion to PM to amend the British Era
provisions of ₹5 lakh from RBI Act. Until that happens, prepare the present facts.
 🚩👶🏻FAQ: “nowadays every bank will easily have five lakh rupees of deposits so automatically
all bank will become schedule bank from DAY1!” Ans. No. Because, RBI will also check
condition#2. Usually RBI ticks condition#2 after observing bank for one year from its birth. So
the Scheduled status will not be given on DAY1. (धंधा चालू करने की एक साल तक तो रिज़र्व बैंक उसका मुआयना
करेगी की दूसरी शर्त का अनुपालन हो रहा है कि नहीं. पहले ही दिन से रिज़र्व बैंक उसको अनुसूचित नहीं बना देगी।)

🐴 Scheduled Bank (अनुसूचित बैंक) 🐭 Non-Scheduled Bank (गैर- अनुसूचित)


Can be subdivided into two parts Many cooperative banks are non-Schedule. But
1) Scheduled Commercial Banks (SCB) e.g. we need not see their list at
SBI, Axis, ICICI Rbi.org.in/CommonPerson/English
2) Schedule Cooperative Banks like Haryana /scripts/banksinindia.aspx
Rajya Sahakari Bank, Tamil Nadu State
Apex Cooperative Bank

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🐴 Scheduled Bank (अनुसूचित बैंक) 🐭 Non-Scheduled Bank (गैर- अनुसूचित)
Need to deposit CRR money to RBI’s office Can maintain the CRR money with themselves
(CRR का पैसा ट्रक में भरके रिज़र्व बैंक में पहुँचाना होगा) in their own office/vault. (खुद की तिजोरी में रख सकते हैं)
Eligible to borrow / deposit funds in RBI’s Depends on RBI’s discretion. (विवेकाधीन/रिज़र्व बैंक
window operations. E.g. LAF-Repo, MSF, etc. की मर्ज़ी – आने भी दे सकता है, लात मार के भगा भी सकता है)
are required to protect the interests of Ofcourse, they also have to do it, else RBI can
depositors and abide to RBI norms. (जमाकर्ताओ के shut them down under Banking Regulation Act.
हितो की रक्षा करनी होगी, और रिजर्व बेंक के नियमो का पालन करना
होगा)
Govt depts and big private sector companies are Less likely to happen. (ग़ैर अनुसूचित बैंकों में सरकारी विभाग
more likely to open their bank accounts/ या बड़ी कं पनियों वाले अपने बेंक-खाते खोले इसकी सं भावना कम होती
employees’ salary deposit accounts in it. है)
Bank becomes eligible to partner in the govt’s Usually not eligible. (वित्तीय समावेशन की सरकारी
financial inclusion scheme e.g. PM Jan Dhan योजनाओं में ग़ैर अनुसूचित बैंकों को सामान्यत: शामिल नहीं किया जाता
Scheme for opening bank accounts of poor है. जैसे कि प्रधानमं त्री जनधन योजना में गरीबों का बैंक खाता इन बेंको
people. (Ref Pillar1D3: financial inclusion) में नहीं खोला जा सकता.)

- Airtel Payments Bank and Paytm Payment Bank categorised as a scheduled bank in 2021-22.
🚩👶🏻FAQ: “After getting scheduled status, Can Payment Banks give loans/credit cards or accept
Fixed Deposits?” Ans. No, they’re prohibited from such activities. Paytm doing such activities as “an
Agent” of a federal bank, IndusIndia bank etc but Paytm cannot do it as ‘its own Banking business’.

13.15 🏦 👨‍⚖️FI C OMMERCIAL BANKS PRE-INDEPENDENCE

Table 1: Before Independence (Exact Years Not-IMP.)


1770 Bank of Hindustan, Calcutta (Europeans owned it. So it was not truly ‘Swadeshi’)
1806-42 - Three Presidency Banks at Bengal then Bombay then Madras.
- 1861: all three were given the right to issue currency.
- 1921: They were combined into Imperial Bank of India SBI (1955)
1865 Allahabad Bank (Europeans owned)
1894 PNB: Indian owned, Lala Lajpat Rai helped in foundation.
1908 Bank of Baroda by Maharaja Sayajirao Gaekwad III
1913-30s State Bank of Mysore, State Bank of Patiala, the rise and collapse of Banking
industry, then Birth of RBI (1935)
1940s State bank of Bikaner, Jaipur, Hyderabad, Travancore by the respective princely

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states / Nawabs. Post-Independence, these banks became ‘Associated Banks of SBI’,
and ultimately, merged in SBI (2017).
13.15.1 🦄 → 🦁 Nationalization of Banks After Independence (आजादी के बाद निजी बैंकों का राष्ट्रीयकरण)

 NEXUS between Banks and Industrialists: From 1950s to 60- only 188 elite people controlled
the economy by being in board of top 20 banks, 1452 companies.
 This led to reckless lending to directors and their firms. So, Banks failed frequently, RBI had to
close them. (रसूखदार लोग के कब्जे में थी बैंकिं ग व्यवस्था. भाई भतीजावाद में अंधाधुन कर्ज देते थे)
 Private Banks unwilling to open in rural areas- this did not help in financial inclusion of poor,
farmers, MSME or achievement of Five Year Plan (FYP) targets or reducing regional imbalance.
(वित्तीय समोवेशन, पंचवर्षीय योजनाओ के लक्ष्याक हासिल करने में निजी क्षेत्र के बैंक मदद नहीं करते थे. क्षेत्रीय असमनाताए बढ़ी)
Table 2: Nationalization & Merger of Banks after Independence
1948 RBI Transfer of Ownership Act.
1948 1948: Op. Polo, Hyd. → 1951:1st FYP, → 1953: Air India nationalized from Tata
1955 Imperial Bank nationalized and became SBI.
1955-56 LIC Act took over private life insurance cos.
57: 1st Communist Govt in Kerala
61: Operation Vijay for liberation of Goa, Daman and Diu.
1963 State Bank of Jaipur and Bikaner merged together.
1969  'Banking Companies (Acquisition and Transfer of Undertakings) Ordinance,
1969: 14 Private banks with ₹ 50 cr/> deposits were nationalized e.g. Bank of
Baroda, PNB, Dena, Canara etc. (बड़ी जमा-राशि वाले निजी बेंको का राष्ट्रीयकरण)
 Catholic Syrian Bank (1920, Kerala), Ratnakar Bank, Dhanlaxmi Bank, etc., did
not have such large deposits, so they were not nationalized. So, they are called
“Old Private Banks”.
1972-73 GIC Act- took over private Non-Life (=General) insurance cos. Later GIC was re-
organized with 4 subsidiaries: National Insurance, New India Assurance, Oriental
Insurance and United India Insurance. More in Pillar#1D 📑
1980 6 banks with ₹ 200 cr/> deposits were nationalized e.g. Corporation Bank, Vijaya
Bank, Oriental bank of Commerce etc.
2019 Previously, State Government of J&K owned 60% shares in J&K bank → Article
370 removal → Union Government took-over this shareholding. 🎓✋Further 500

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type historical-GK things NOTIMP.
Reform following Committees were made for reforms in banking sector
Committee M Narasimham-I (1991), M Narasimham-I (1997), Dr. Raghuram Rajan
s Committee (2007) and P J Nayak Committee (2014)
Death 2021: Death of M Narasimham. He was ex-Governor of RBI and chairman various
देहांत Committees on Banking Sector Reforms, therefore known as “father of Indian
banking system reforms” (एम नरसिंहम भारतीय बैंकिं ग प्रणाली सुधार के पितामह माने जाते है। )
🔠❓(Prelims 2009) Q. In independent India's economy, which was earlier event to take place?
A) Nationalization of insurance companies B) Nationalization of State Bank Of India
C) Enactment Of Banking Regulation Act D) Introduction of first Five year plan
🔠❓(Prelim-2018) Q. Consider the following events:
1. The first democratically elected communist party government formed in a State in India.
2. India’s then largest bank, ‘Imperial Bank of India’, was renamed ‘State Bank of India’.
3. Air India was nationalised and became the national carrier.
4. Goa became a part of independent India.
Codes: A) 4 – 1 – 2 – 3 B) 3 – 2 – 1 – 4 C) 4 – 2 – 1 – 3 D) 3 -1-2 -4

13.16 🏦 👨‍⚖️🔂C ONSOLIDATION OF PSBS [एकत्रीकरण]


PSB consolidation = made up of two types of reforms: A) Merger B) Privatization

13.16.1 🔂Consolidation of PSBs → A) Merger (विलीनीकरण)


Table 3: Notable PSB Mergers before 2019, April. ✋You need not memorize exact years/ HQ for IAS Exam
2008-10 State Bank of Saurashtra and State Bank of Indore merged into SBI.
2013 - Bharatiya Mahila Bank setup as PSB, HQ Delhi, 100% ownership by Union
Government. (भारत सरकार ने स्वयं बनाया था)
- BMB’s Board of Directors: All women. Staff & Deposit Holders: both men and

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women, Loans given predominantly to women- and that too without collaterals
2017 BMB & 5 Associated Banks of SBI viz. State Bank of Bikaner and Jaipur (SBBJ), State
Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP)
and State Bank of Travancore (SBT), merged with SBI.
2017 - Alternative Mechanism Panel setup under the Finance Minister’s chairmanship.
- This panel examine the proposals for merger/consolidation of the Public Sector
Banks (PSBs) and forward to Cabinet for approval.
- Department of Financial Services coordinates the filework.
2019, 1st Vijaya & Dena to be merged into Bank of Baroda.
April - Among these three oldest: BoB (1908) > Vijaya (1931)> Dena (1938)
Table 4: 2019, merger of 10 banks into 4 anchor banks (NOTIMP UNLESS preparing for IBPS)
Amalgamating Banks → → → Anchor Bank
(एकीकृ त / विलीन होनेवाली) (सहारा देनेवाली)
 Oriental Bank of Commerce (1943, HQ: 1) PNB. (1984, HQ: Delhi, It’ll become the 2nd
Gurugram, Haryana), largest bank after SBI, in terms of business size
 United Bank of India (1950, Kolkata) and branch network)
Syndicate Bank (1925, HQ: Manipal, 2) Canara Bank (1906, HQ: Bengaluru,
Karnataka) → Karnataka)
 Andhra Bank (1923, Hyderabad) 3) Union Bank of India (1919, Mumbai)
 Corporation Bank (1906, Mangaluru)
 Allahabad Bank (1865, Kolkata) → 4) Indian Bank (1907, Chennai)
After this process is over, we’ll be left with only 12 PSBs (+1 India Post Payment Bank).
- Benefit? Geographical & technological synergies in ATM, Branches, Security Staff, Servers cost
etc. (भौगोलिक और तकनीकी तालमेल)
- More Argument in favour / against = Mains QEP handout. This is Prelims #RAFTAAR.

🔂
13.16.2 Consolidation of PSBs → B) Privatization (निजीकरण)
It involves Government selling 51% or larger shareholding to private parties. Then such Public Sector
Bank will convert into a private sector bank. For example, (i) Axis Bank (Earlier called UTI Bank)
and (ii) IDBI Bank.

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13.16.3 PSB Privatization: Banking Investment Company (BIC-बैंकिं ग निवेश कं पनी)
Removed from handout because outdate/faded topic until Finance Ministry implements it.

13.17 🏦 👨‍⚖️C OMMERCIAL BANKS  PVT. SECTOR BANKS (PVB) निजी-क्षेत्र के बैंक

While the nationalization of banks was done with the lofty objectives, but politicization in Public
Sector Banks (PSBs) created new set of problems:
- Govt administered loan interest rates for populism= Low profitability for PSBs. (मुनाफा कम)
- Political Interference= Low recovery difficult (राजनीतिक हस्तक्षेप के चलते दबं ग तत्वो से ऋण वसूली मुश्किल)
- Employees Unions hampering innovation or customer delight. (नवाचार, ग्राहक सुविधा कम)
- 1991: Balance of Payment crisis (BoP: भुगतान सं तुलन,More in Pill#3) finally forced Govt. to set up a
committee for Banking Sector Reforms under The former RBI Governor M.Narasimham. He
suggested:
o Govt should ↓ its shareholding in Public Sector Banks. (सरकार अपनी शेयर हिस्सेदारी कम करे)
o RBI should ↓ CRR and SLR (सीआरआर, एसएलआर मे कटोती करे)
o Govt should not dictate interest rates to Banks. Liberalize the branch expansion policy
(बेंकों को लोनदर, शाखा विस्तार नीति तय करने मे सरकार दखल न करे।)
o Allow entry of New Private Banks and New Foreign Banks. (विदेशी बैंक और निजी क्षेत्र के बैंकों को
अनुमति)
Table 5: Three rounds of bank licensing in India. Names not that IMP unless giving Banking-exams
Round-1 (1993-95) Round-2 (2001-04) Round 3 (2013-16)
1) ICICI 1) Kotak Mahindra Rajan invited applications,
2) HDFC 2) Yes Bank (Founder Rana Bimal Jalan Committee made
3) IndusInd Kapoor). Related Topic: selections:
4) DCB Yes bank scam/Crisis 📑 1. Bandhan (A Microfinance
5) #
UTI → later Axis bank Pillar#1B2: Bad loans & company based in
6) #IDBI → now owned by other Burning issues in W.Bengal)
LIC Bank/NBFC sector 2. IDFC (An infra finance

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Round-1 (1993-95) Round-2 (2001-04) Round 3 (2013-16)
7) Global Trust Bank → NBFC based in
Merged with Oriental Bank Maharashtra). Later on,
No. 8-9-10: Bank of Punjab, another NBFC “Capital
Centurian Bank, Times Bank First” merged so renamed
were merged into HDFC into IDFC-First
Above banks are also known as new-generation private banks in India. (नयी पीढ़ी के निजी क्षेत्र के बैंक)

🚩👶🏻FAQ: In early 90s- UTI Bank & IDBI Bank were not private sector banks, then why have you
kept them here in table? Ans. Because presently, they’re private sector banks. I don’t have to submit
this handout as evidence in the Supreme Court so I don’t care being so pedantic about everything.
You need to change your approach towards studies, to finish syllabus faster. #RAFTAAR

13.17.1 🏦 👨 🚗📜 ‍⚖️ ‘On-Tap’ License to open Private Sector Banks (जब मन चाहे तब अर्जी डाल दो)
A private entity can open Bank only after getting license from RBI under Banking Regulation Act,
1949. Previously, one had to wait till RBI invited applications. But in the On-Tap system (from
2016), one can apply to RBI whenever he wishes (like a driving license), provided that he meets the
eligibility requirements e.g. min. 10 years’ XP in banking finance, minimum 500 crore capital etc.

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🚩👶🏻FAQ: isn’t above Rs.500 cr capital conflicting with Scheduled Commercial Bank Definition?
Ans. It works in step by step fashion. Observe above chart peacefully and watch video lecture.

13.18 🚫🏦 👨‍⚖️🚗📜 A LLOWING NBFC/LARGE CORPORATE TO SETUP BANKS


This controversy shifted to Mains-QEP Handout.

13.19 🏦 👨‍⚖️🈶 C OMMERCIAL BANKS  FOREIGN BANKS (विदेशी बैंक)


In Nehruvian Socialist Economy there was disdain & apprehensions about Foreign Banks. So, only a
handful of them were allowed to open branches. But, Post-1991-Reforms: system liberalized. ( नेहरू-
समाजवादी विचारधारा के नीति निर्माताओं में विदेशी ताकतों के प्रति घृणा और डर → बहुत कम विदेशी बैंकों को अनुमति दी थी)

- They’re Incorporated abroad (i.e. registered under the Companies Act of a


foreign nation) & opening branch / subsidiary in India e.g. Citibank, Bank of
America, HSBC. (उन्होंने किसी अन्य देश के कं पनी कानून में पंजीकरण करवाया है और फिर भारत
आकर शाखाएं खुली है)

🤠 Foreign - While CRR, SLR & other norms applicable, but PSL norms vary depending on
Bank in India 📑
number of branches. [ Ref: Prev. Handout: PSL]
- RBI gives them ‘on-tap’ license on reciprocal basis. i.e. if foreign nation allows
Indian banks to operate in their country, THEN RBI allows that nationa’s
banks to operate in India.
- 2023: Axis bought/tookover Citibank’s Indian branches.
🧔 Indian - Foreigners can invest max. 20% in its shareholding. E.g. BoB (15%), SBI
Public Sector (14%), PNB (13%) भारत की सार्वजनिक क्षेत्रों में विदेशी निवेश की सीमा
Bank
🤵 India - Foreigners can invest upto 49% (automatic-स्वचालित तरीके ) and upto 74% by
Private approval of Government (सरकार की अनुमति लेकर). (More in 📑Pillar#3A: FDI)
Sector Bank
- e.g. HDFC (73%), ICICI (59%) Axis Bank (52%) is owned by Foreigners.
- Although Govt thinking of ⏫ to 100% to help capital mobilization for
📑
BASEL-III norms . [ More in Next Pillar#1B2: NPA handout]

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13.20 🏦 👨‍⚖️🌎🚫C OMMERCIAL BANKS  DIFFERENTIAL BANKS

Difference 🌎Universal Bank (सार्वत्रिक बेंक) 🌎🚫Differential Bank (भेदकर बेंक)


Open Anywhere: example SBI, ICICI Geographical Restrictions on branch opening
Branches [*After opening 25% of branches in for Local Area Bank (LAB), Regional Rural
शाखाएं unbanked rural areas] Banks (RRB)
Both Time & Demand Deposits of Payment Bank – Accept Max. 1 lakh deposit
Accept
any amount. only. In 2021- This limit increased to ₹2 lakh.
Give Loans Anyone [After 40% PSL] - SFB, RRB: 75% to PSL
to - ✋Payment Bank can’t give loans;
Chronology of differential banks: RRB(1976) → Local Area Bank (1996) → Small Finance Bank &
Payments bank(2015) → Wholesale banks (proposed)

13.20.1 🏦 👨‍⚖️🌎🚫 Commercial Banks  Differential Banks RRB and LAB


Regional Rural Banks (क्षेत्रीय ग्रामीण बैंक) Local Area Bank (स्थानीय क्षेत्र बैंक)
- Based on M.Narasimham’s Committee on - Based on Budget-1996 by Finance Minister
Financial Inclusion in 1970s# Manmohan Singh
- Setup under the provisions of RRB act - Unlike RRBs, they're not setup by Union or
- e.g. Uttar Bihar Gramin Bank (Sponsor State govts or by any special act or
bank- Central Bank of India) parliament. But by pvt entities simply
applying to RBI under Banking Regulation
- Subjected to CRR, SLR norms but RBI
Act.
could prescribe separate norms.
- PSL: 75%.(More in 📑Pillar#1A1) - Can open branches in Max. 3 districts
sharing borders with each other. only 1
- Their loan interest rates can’t be more than urban centre per district allowed.
prevailing lending rates of Cooperative Remaining branches need to be opened in
Banks in the area. rural areas of that district.
- Restricted to few districts. E.g. Baroda - They’re Non-Sch. Banks so while CRR, SLR,
Gramin Bank branches confined to PSL etc very apply but every norm may be
Gujarat’s southern districts. different, decided by RBI.
- Ultimate regulator: RBI but immediate - E.g. Subhadhra Local Area Bank, Kolhapur
regulator NABARD.

13.20.2 🏦 👨‍⚖️🌎🚫 RRB’s Shareholding pattern / IPO


RRB Act 1976 Amendment in 2015

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Shareholding: Union 50% + State 15% +  Shareholding: (Union+State+Sponser
Sponsor Bank 35% = 100% bank) 51% + others (pvt investors) 49%.
 Benefit? RRB can issues new / fresh shares
in market to acquire more capital from
private investors. #
# Govt has Issued guidelines related to RRB’s IPO (Initial public offer) in sharemarket. But technical-
stuff notIMP for IAS Exam. More about IPOs in Pillar#1C.

🚩👶🏻FAQ : M.Narasimham committee was made in 1990s so how can he be in 1970s? Ans. Same
#

gentleman was chairman of many committees ✅(1) Financial inclusion (1970s) ✅(2) banking
reforms-I (1990s) ✅(3) banking reforms-II (1990s).
13.20.3 🏦 👨‍⚖️🌎🚫Commercial Banks  Differential Banks  SFB & PB

On Nachiket Mor Committee’s recommendations (2013-14), Governor Raghuram Rajan approved


these new types of banks for (1) financial inclusion (2) competition & innovation among players.
Table 6: Need not memorize all the FACTs, UNLESS Preparing for Banking Exams as PLAN-B

Parameters Small Finance Banks लघु वित्त बैंक Payment banks भुगतान बैंक
Examples Capital Small Finance Bank (Punjab), 6 at present: Airtel, India Post, FINO,
Ujjivan (Karnataka), Utkarsh (UP): Paytm, Jio, NSDL. (Total 11 were
Total 10 list at selected; but AdityaBirla-Idea & other
rbi.org.in/scripts/banklinks.aspx withdrew later)
Eligibility Min.100cr. capital-walla Resident Min.100cr. capital-walla resident
during 1st Indian, Local Area Bank, NBFC, Indians, NBFCs, PPI-wallets (pre-paid
round of Micro-finance, with 10 years exp. in payment instrument), mobile telephone
licensing banking / finance companies, super-market chains,
cooperatives & companies controlled by
resident Indians
📌Area RBI Committee gave selection Anywhere
preference North East & Central
India clusters where Universal Banks’
penetration is poor
CRR, SLR, Same as Indian private banks Same as Indian Private Banks, but
Repo, FDI? special terms & condition in SLR.
Rural Must have 25% branches in unbanked No need but 25% access points must be
Penetration rural areas in rural areas like Kiraana Stores
🛒Target Unserved Underserved Farmers, Promoting Small savings

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Parameters Small Finance Banks लघु वित्त बैंक Payment banks भुगतान बैंक
Consumers Micro, Small industries: किसान, सूक्ष्म, लघु Remittance of migrant labors, low
उद्योग income households, unorganized sector,
small business.
💰Accept Yes, without any restrictions ✋
No NRI deposits, No Fixed✋
Deposits डिपॉजिट स्वीकार करने में कोई पाबं दी नहीं है deposit**
- Can accept only Demand Deposits
and Max. balance Rs.1 lakh per
customer. (In 2021- limit increased
to ₹2 lakhs)
Debit cards 💳 YES can give. 💳 YES can give.
Credit cards 💳 YES can give. ✋No (because can’t give “loan”)
Loans - Yes, but 75% in PSL, - Can’t loan, So no PSL.
- 50% of loan portfolio of Rs. 25 - They’re required to invest all
lakhs/< loans. deposits in G-sec, T-Bill and in other

SCBs. How much% notimp.
Evolve/ After 5 years can become Universal After 5 years can become Small Finance
future Commercial Bank, If RBI is satisfied. Bank, If RBI is satisfied with their record.
growth?
- BASEL-III norms applicable on both of SFB & PB. (More in 📑Pillar#1B2:BASEL Norms)
- Both SFB & PB can sell Mutual Fund (MF), Pension, Insurance policies with approvals of
respective regulators i.e. SEBI, IRDAI, PFRDA.
🚩👶🏻FAQ: You wrote that Payment Banks can't accept FD or give loans or credit card but Paytm is
doing that!!?? Ans: Paytm doing FD/Credit Card/Loan activities as “an Agent” of a federal bank,
IndusIndia bank etc. Similarly, Although India Post Payments Bank (IPPB) cannot give loans
because it is a payment bank but signed a deal with HDFC Bank to give home loans as an ‘Agent’.

🚩👶🏻FAQ: if payment banks cannot give loans, then what do they do with deposit money? Ans. It is
answered within the above table itself. Read properly. If you’re going to glance over this handout
casually & carelessly like a WhatsApp message then handout cannot help you in the UPSC exam.

13.20.4 🏦 👨‍⚖️🌎🚫🚗📜 On-Tap Licenses for starting SFB (मन चाहे तब अर्जी डालो)
- RBI reviewed & found SFBs have achieved their priority sector targets and helped in financial
inclusion. More competition and new players will help. (अधिक बैंकों को अनुमति देने से स्पर्धा में बढ़ोतरी
वित्तीय समावेशन में मदद)
- so 2019, RBI announced it’ll allow ‘On-Tap’ license for SFB soon. (i.e. no need to wait for
notification unlike IAS exam, apply whenever you wish like a driving license)

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- Eligibility conditions to start SFB license ‘On Tap’: ( ✋Exact norms NOT IMP for IAS Exam)

🔠❓ MCQ. Find correct Statement(s) about Payment Banks? (Prelims-2016)


1) Mobile telephone companies and supermarket chains that are owned and controlled by residents
are eligible to be promoters of Payment Banks.
2) Payment Banks can issue both credit cards and debit cards.
3) Payment Banks cannot undertake lending activities.
Codes: (a) 1 and 2 only (b) 1 and 3 only (c) 2 only (d) 1, 2 and 3
🔠❓ MCQ. What is the purpose of setting up of Small Finance Banks in India? (Prelims-2017)
1. To supply credit to small business units
2. To supply credit to small and marginal farmers
3. To encourage young entrepreneurs to set up business particularly in rural areas.
Codes: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

13.20.5 🤒🚨 Payment Bank → Paytm Payments Bank - RBI takes action (2024)
• 2017: Paytm Payments Bank Ltd (PPBL) starts operation.
• Its parent company is called ‘One97’. Founder Vijay Shekhar Sharma.
• Early Investors: Warren Buffett’s Berkshire Hathaway Group (USA), Jack Ma’s Alibaba
Group (China) etc. Although most of them sold their shares at a loss & exited by 2023.
✋🚨 2024: RBI stopped Paytm bank from accepting deposits, adding money in PayTM wallet,
Fastag, etc., for the following reasons: 👇
 Non-compliance with Know-Your-Customer (KYC) norms while opening bank accounts.
 Same PAN number used for activating multiple accounts, and these accounts were conducting
crores of rupees of transactions. (एक ही पैन कार्ड नंबर द्वारा कई बैंक खातों को खोला गया था और वहां धन शोधन यानी
काले धन को सफे द करने का गैर कानूनी काम चल रहा था ऐसे आरोप.)
 Allegations of Money laundering (converting black money into white)
 RBI’s inspection revealed that there was no separation in servers or physical space occupied by
the Paytm bank and other One97 group entities e.g. Paytm Insurance, PayTM Mall, Paytm
Games, etc. = data security issue, possible spams/marketing offers by misusing the user data.
✅ However, RBI has allowed Paytm to continue its UPI/App related activities e.g. Paytm QR,
Paytm Card Machine; financial services, such as loan agent work, insurance agent work, and equity
(share) broking etc.

📬
13.20.6 Payment Banks → India Post Payment Bank (IPPB)
- Registered as a Public Limited Company under Companies Act, 100% owned by Department of
Posts (Ministry of Communication and Information Technology.) → Obtained RBI’s License
under Banking Regulation Act to start working as a Payment Bank.
- Airtel Payments Bank was first to launch operations in 2017. Later, IPPB launched in 2018.

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- Largest customer reach with 1.55 lakh Post offices across India.
- Doorstep banking through Postmen.
- Bank Account Types: Safal, Sugam, Saral (internal differences not imp4UPSC).
- Account can be opened with zero balance, no minimum balance requirement.
- Minor Customer Aged 10 years or more can also open account. ( नाबालिग का भी खाता खुलवा सकते हैं)
- 2019: IPPB announced it desires to convert itself from Payment Bank into a Small Finance Bank
(SFB), so it can offer loans to customers. (But as per RBI guidelines, Payment bank need 5 years’
experience before upgrading their license to SFB. यानि की अभी मंजिल दूर है। )

13.20.7 📮 (Yearbook) Dept of Post: POSB vs IPPB


Don’t loose sleep unless preparing for Postal- Assistant etc. exams

Ministry of Communications two dept: 1) Depart of Telecommunications 2) Department of Posts →


 Setup by Clive (1766), expanded by Warren Hastings (1774)
 1854: Dalhousie- Post Office Act; 1st postal stamp, rates by weight & not by distance.
 2008: Project Arrow for modernization.
 2013: Telegram stopped by India Post, due to onset of SMS & email.
 Dept of Post sells
o Gangajal sourced from Rishikesh and Gangotri.
o UTI-Mutual funds and Sovereign Gold bonds.
 Post Shoppe = special outlet in big post offices for philately (stamp collection hobby)
 RTI fees can be submitted by buying Indian Postal Orders (IPO). E-IPO = overseas Indians can
pay RTI fees online using this mechanism.
 Deen Dayal SPARSH Yojana: Students in class 6-9 given scholarship for philately.
 Dhai Akhar Letter Writing Competition-students asked to write letters to Mother Teresa,
Tagore etc.
 Officers’ training conducted at Rafi Ahmed Kidwai National Postal Academy at Ghaziabad, UP.
Kidwai was India's first Minister for Communications.
Table 7: ✋No need to loose sleep, UNLESS preparing for Post-Office staff exams.
Dept of Post → Post Office Savings India Post Payments Bank (IPPB)
Bank (PoSB)
foundation Govt Savings Bank Act Companies act 2013 → Public ltd company
1873 registered in 2016
Accept demand Savings account only 1. Current account
deposits? 2. Savings account
Accept time YES No, bcoz it is a payment bank
deposits?

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Dept of Post → Post Office Savings India Post Payments Bank (IPPB)
Bank (PoSB)
Can keep more than YES No, bcoz it is a payment bank. But u can link
₹2 lakh balance? IPPB account with PoSB account to auto-
transfer (=SWEEP) excess balance to PoSB.
E-Banking and Not directly but you can yes , UPI, BHIM, NEFT, IMPS and BBPS
online bill payment do it by linking PoSB (Bharat Bill pay) available.
account with IPPB
account
Sukanya Smriddhi Can be opened Not possible. Because time deposits are not
(daughter’s fixed allowed in Payment Banks.
deposit account)
loans to individual? No. ₹₹ goes to NSSF. Not until it becomes Small Finance Bank
More in Pillar2A.
Objective? Promote savings habits Remittance & digital payments
among poor
- 👜Budget-2022: Post Office Savings Bank (POSB) will be connected with Core Banking System
(CBS). So, their depositors too can use E-banking/net-banking, mobile banking, ATMs etc.
- 🤩
Benefits? 1) Convenience for POSB depositors esp. villagers, farmers and senior citizens. 2) 🤩
interoperability= (ability to use POSB deposit money in above NEFT/ATM etc facilities)
- Interoperability is the ability of customers to transact across commercially and technically
independent payment platforms. व्यावसायिक और तकनीकी रूप से स्वतंत्र प्लेटफार्मों के बीच लेन-देन करने की सुविधा

🔠❓ MCQ. Find correct about India Post Payments Bank (IPPB)? [Asked in UPSC-CDS-2018-1]
1) It has been incorporated as a Public Limited Company.
2) It started its operation by establishing two pilot branches at Hyderabad and Varanasi.
Answer codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

13.20.8 🚐⏳ (Proposed) Wholesale & Long Term Finance Banks (WLTF)


- 2017: RBI proposed WLTF Bank. दीर्घकालिक थोक वित्त बैंक.
- NOT Yet made. Topic Outdated, not much in news, so removed from handout.

13.20.9 💸📡 🏦
: Digital Payments- (Proposed) Digital Banks by NITI Aayog (2021)
 2021: NITI Aayog proposed setting up 'full-stack digital banks’.
 This will be new type of banks under the Banking Regulation Act, 1949 (BR Act).
 Digital Banks will not have physical branches. They will rely on internet for delivering banking
services. 🤩Benefit? financial inclusion of rural area. (नीति आयोग ने ऐसा प्रस्तावित किया है कि नए क़िस्म के

(Batch:PCB11- RATFAAR-ONLY-Prelims) Mrunal’s Economy Pillar#1B1: Bank-NBFC Classification → Page 141


डिजिटल बैंक बनाए जाएं जो की भौतिक भौगोलिक रूप से ब्रांच न हो किन्तु इंटरनेट के ज़रिए बैंकिं ग सुविधा दे इसे गाँव गाँव तक
वित्तीय समावेशन में मदद मिलेगी)
 🎓✋But since it’s not yet formed, so we need not loose sleep about how exactly it’ll work.
13.20.10 💸📡: 🏦 Digital Banking Units in Budget 2022

 Budget-2022 announced to setup 75 DBUs. Then RBI announced rules.


 Basically commercial banks open a fancy office wherein every service provided digitally / paper-
less manner, with help of digital kiosks e.g. opening bank account, getting credit cards etc.
 How is this similar or different than NITI Aayog's Digital Banks? NOT IMP.

13.20.11 💸📡 🏦
: Digital Payments- NeoBanks / full-stack digital banks
- Neo-banks/full-stack digital banks= are completely online-based digital banking platforms. They
don’t have physical branches.
- NITI Aayog proposed this to increase banking penetration in India. But RBI not keen to allow.
- RBI believes our existing banks are capable to deliver the banking services both online and thru
physical branches.
But this is “fancy term” (Neobank) comes in news every once in a while due to Startup-company ke
PR (public relations)/paid promo-articles in newspapers. . (निवेशकों को आकर्षित करने के लिए स्टार्टअप कम्पनीओ
द्वारा चिकने चुपड़े शब्दों वाले समाचार प्लांट किए जाते हैं. अपने को अभी से बहुत नींद खोने की ज़रूरत नहीं, क्योकि आरबीआई इसको
अनुमति देने की जल्दी में नहीं है।)

13.20.12 🚩👶🏻FAQ : DIFFERENCE between digital banking unit vs Neobank


Digital banking unit (DBU) Neobank
Do they’ve physical Yes. But Everything done via No physical branch.
branch automatic machines. Scroll up and Everything done online.
see photograph.
Do they exist in reality? Yes. E.g. Axis bank DBU No. RBI yet to permit them.

13.21 🏦 👨‍🌾FI  B ANKS  COOPERATIVE BANKS (सहकारी बैंक)


Type 🏦 👨‍⚖️Commercial 🏦 👨‍🌾Cooperative Banks
Banking Reg. Applicable since 1949 Applicable since 1966.

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Type 🏦 👨‍⚖️Commercial 🏦 👨‍🌾Cooperative Banks
Act
Regulator RBI Under RBI’s supervision:
- Multistate Cooperative Banks
- Urban Cooperative Banks
Under Dual supervision
- Other types of cooperative banks are under
dual supervision of RBI + respective State
govt’s registrar for cooperative society.
CRR, SLR, Yes Yes, but, RBI could keep different slabs/ norms.
BASEL-III
Repo, MSF Eligible to borrow Yes, but only selected category of Cooperative
Banks
PSL Lending Yes 40-75% Only urban cooperative banks
Who can Anyone First preference to members
borrow
Vote power Based on Shareholding, According to Cooperative Society norms, members
like a Commercial have vote power. So, 1 member = 1 vote
Company irrespective of how much capital contributed.
Profit Motive Yes, purely profit motive, Desire to help community. So, lending rates little
(मुनाफा करने की so lending rates may be lower than commercial bank
चाह?) higher than Coop.
Presence (कहा पाई All India & overseas Mainly in Gujarat, Maharashtra, Andhra,
जाती है?) branches. Tamilnadu.
😰Challenges: Politicization, casteism, poor recovery of loans, scams, money laundering. (राजनीतिकरण
, जातिवाद, कर्जा वसूली में अनियमितता, घोटाले, धन-शोधन/ काले धन को वैध बनाना)

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Table 8: Classification of Cooperative Banks
Urban Cooperative Banks (UCB: शहरी) Rural Cooperative Banks (ग्रामीण)
Further subcategories depending on 1) Notable State Cooperative Bank → District
- Scheduled / Non-Scheduled; OR Central Cooperative Bank (DCCB) →
- Single State / Multi State. Primary Agricultural Credit Societies
From 2018, RBI allowed them to voluntarily (PACS: प्राथमिक कृ षि ऋण समितियां)**
upgrade to Small Finance Banks, with certain 2) Misc Types: Land Banks, Cooperative
conditions. Agriculture & Rural Development Banks.
(they give longer duration loans compared
to above banks. How long-duration?
NOTIMP)
**PACS are not ‘banks’. They can’t issue
chequebooks. RBI doesn’t regulate them. Only
State registrar regulates them.

🔠❓ MCQ. Find correct statement(s) (asked in UPSC-Prelims-2020)


1. In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks
(DCCBs) deliver more credit in comparison to Scheduled Commercial Banks and Regional Rural Banks
2. One of the most important functions of DCCBs is to provide funds to the PACS.
Answer Codes: [a) 1 only [b) 2 only [c) Both 1 and 2 [d) Neither It nor 2

13.21.1 🏦 👨🌾😥‍ Cooperative Banks: Negative News (2019): PMC Bank (कांड हो गया)
Outdated for 2024-25. So removed from handout. Brief idea given in the video lecture.

🔠❓ MCQ. Recently the RBI has imposed limitations, initially for a period of six months, on the
withdrawal of amount by account holders of this banks: (UPSC-CDS-i-2020) (a) IndusInd Bank

(Batch:PCB11- RATFAAR-ONLY-Prelims) Mrunal’s Economy Pillar#1B1: Bank-NBFC Classification → Page 144


(b) Dhanlaxmi Bank (c) Punjab and Maharashtra Cooperative Bank (d) South Indian Bank

13.21.2 ⚖️ 🐯💪💪🦵👻💬🤚Banking Regulation (Amendment) Ordinance/Act, 2020


- 2020-June: Ordinance issued to amend the Banking Regulation Act, 1949. 2020-Sept: Act passed
- Objective? protect depositors, prevent cooperative banks from falling into fraudulent activities.
Table 9:भूतकाल में दोहरे नियंत्रण के चलते घोटाले/कांड के बाद कार्यवाही धीमी होती थी, इसलिए अब ज्यादातर सहकारी बेंको को सिर्फ रिजर्व बेंक के दायरे मे लाया गया
Type of Bank 😰BEFORE: Regulator(s) 🤩After: Regulator(s)
Commercial (SBI Axis) 🐯RBI 🐯RBI
Coop (Single State: rural) 🐯RBI + 👨‍🦲State Govt 🐯RBI + 👨‍🦲State
(=dual regulation) Govt
Coop (Single State: urban) 🐯RBI + 👨‍🦲State Govt 🐯RBI ONLY
(=dual regulation)
Coop (Multi State 🐯RBI + 🧔Union Govt 🐯RBI ONLY
Cooperative) (=dual regulation)
Coop: Primary Agricultural 👨‍🦲State Govt 👨‍🦲State Govt
Credit Societies ("PACS")
 👨‍🦲State Government = State Govt’s Registrar for Coop Societies
 🧔Union= Ministry of Cooperation's Registrar Multi-State Coop Societies. (previously, this
registrar was part of Agri-ministry, but later shifted to Cooperation Ministry.)

🔠❓MCQ. Find correct Statements about ‘Urban Cooperative Banks’ in India (Pre-21)
1. They are supervised and regulated by local boards set up by the State Governments. [राज्य सरकार
उनकी निगरानी और नियंत्रण करता है]
2. They can issue equity shares and preference shares. [वे इक्विटी शेयर और वरीयता शेयर जारी कर सकते हैं।]
3. They were brought under the purview of Banking Regulation Act, 1949 through an Amendment
in 1966. [उन्हें 1966 में एक सं शोधन के माध्यम से बैंकिं ग विनियमन अधिनियम, 1949 के दायरे में लाया गया था।]
Codes: a) 1 only b) 2 and 3 only c) 1 and 3 only d) 1, 2 and 3’
Related topics: Refer to
DICGC, UCB’s Supervisory Action Framework Pillar##1B2: Bad loans & other burning issues in
(SAF), UCB 4 tier regulation→ refer to Banking Sector

Jan Dhan Yojana, Lead Bank Scheme etc → Pillar##1D: Financial Inclusion

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13.22 🕵🏻☂️ NUCFDC: U MBRELLA ORG / SRO FOR UCB (2024)
• National Urban Cooperative Finance and Development Corporation Limited (NUCFDC,
राष्ट्रीय शहरी सहकारी वित्त और विकास निगम लिमिटेड)
• Launched by Ministry of Corporation, at Delhi.
• Type: Non Banking Finance Company (NBFC), regulated by RBI.

13.22.1 🕵🏻☂️
NUCFDC ko Funding (वित्त पोषण /पैसा कहां से लाएगा)
• NUCFDC will receive funding from National Cooperative Development Corporation
(NCDC, a statutory body under Ministry of Cooperation)
• NUCFDC aims to collect ₹300 cr capital (from investors) → use this money for developing
IT-Technology for UCB.

13.22.2 🕵🏻☂️ NUCFDC ke Functions (कार्य)


• Develop technology for Urban Cooperative Banks (UCB). Reduce the cost of technology
development by individual UCB. (सभी सहकारी बैंको के लिए साजा टेक्नोलॉजी बनाना)
• Self-Regulatory Organization (SRO) for UCB (स्व नियंत्रक सं स्था)
• Umbrella organization for UCB. (छतरी सं स्था के रूप में कार्य करें)
• Facilitate dialogue between UCB-banks and regulators ( सं वाद बेहतर करें)
• Give Advisory/consultancy services to UCB for business operations, fund management, etc.
(धंधा कै से किया जाए- उसकी सलाह/विमर्श देना)
⚠️ Disclaimer: This org very recently formed (March-2024)- so not much exact details known yet. It
is possible some facts may get changed or added.

13.23 🚫🏦👨‍⚖️F ORMAL FI  NON-BANKING FINANCIAL INSTITUTIONS


13.23.1 Development Finance Institutions (DFI: विकास वित्त सं स्थान)

 are meant for Medium to long term loans to industries, including support services like arranging
foreign currency, underwriting, technical / management consultancy, Bank guarantee etc.
 They don't accept DEPOSITs from ordinary people.
 Previously the financial intermediaries (वित्तीय मध्यस्थ) were classified into three categories 1) Bank,
2) Non-Bank 3) DFI

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 But M.Narasimham-II Committee on Banking sector reforms (1998): recommended only two
categories: Bank or non-bank. DFI were required to join either one category.
Table 10: Exact Years, Full Forms not very important but Chronology is important.

Industrial Finance Corporation of India (IFCI) owned by the Finance Ministry's


1948
Department of Financial Services.
National Small Industries Corporation (NSIC) under the Ministry of Micro, Small and
1955
Medium Enterprises (MSME).
ICICI: Industrial credit and Investment Corporation of India Ltd was setup by GoI, World
1955
Bank etc. Later became a Private Sector Bank.
Industrial Development Bank Of India (IDBI) Act. 2004: Transformed into a Public Sector
1964
Bank. 2018: Government sold its majority shareholding to LIC.
India Infrastructure Finance Company Ltd (IIFCL) owned by the Finance Ministry's
2006
Department of Financial Services.
National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021 ( बुनियादी
2021
अवसं रचना और विकास के वित्त पोषण के लिए राष्ट्रीय बैंक)

13.23.2 🚫🏦👨‍⚖️What is Bad Bank- NARCL-IDRCL?


📑Ref: HDT-Pillar#1B2: Bad Loans

13.23.3 🚫🏦👨‍⚖️Non Bank  All India Financial Institutions (AIFI: अखिल भारतीय वित्तीय सं स्थान)
These are setup by respective acts of Parliament
EXIM (Jan 1982) NABARD (Jul 1982) NHB (1988) SIDBI (1990)
आयात निर्यात के लिए कृ षि और गाँव विकास के लिए गृह/आवास निर्माण छोटे उद्योगों के विकास के लिए
Export-Import National Bank for National Housing Small Industries
Bank of India Agriculture and Bank Development
Rural Development Bank of India
Boss: Government Previously RBI had Original boss: Originally 100% owned by
of India (100%) minority-stakes in RBI (100%). But, IDBI. Later on shareholding
NABARD but 2018: 2019: RBI sold transferred → SBI, LIC etc
100% Govt owned. 100% to Govt.
Promotes cross - Regulatory - Finance to - Operates Credit
border trade and supervision: banks and Guarantee fund, Small
investment, helps Coop + RRB NBFCs for Enterprises Development
importers-exports housing Fund (SEDF).
- + Indirect
with loans and projects.
refinance to - Operates udyamimitra.in

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EXIM (Jan 1982) NABARD (Jul 1982) NHB (1988) SIDBI (1990)
आयात निर्यात के लिए कृ षि और गाँव विकास के लिए गृह/आवास निर्माण छोटे उद्योगों के विकास के लिए
foreign currency. farmers, artisans -
RESIDEX for loans to small
- Operates Rural index to entrepreneurs via schemes
Infra. monitor like Mudra, Stand-up-
Development residential India. ( Ref: HDT- 📑
fund (RIDF) real estate Pillar#1D: to know more
prices. abt these schemes)
 AIFIs are not ‘banks’ because can’t accept direct deposits from the public.
 RBI is the regulator over AIFI.
 BASEL norms applicable but RBI can prescribe different / slabs norms / deadlines.
What/why/how?NotIMP.

🚩👶🏻FAQ: Whether NABARD is 100% owned by govt or 100% owned by RBI- what difference does
it make? Ans. Shareholders select board of directors via Voting. Shareholders receive dividend from
the profit of the organization. So Govt or RBI gets benefits depending on who owns majority
shareholding.

🚩👶🏻FAQ: What is the difference between Owner and Regulator? Ans. Ans. Government owns SBI.
But Government doesn’t regulate SBI’s banking business. RBI regulates it using powers of Banking
regulation Act.

🔠❓ MCQ. Who grants direct credit assistance to rural households? (UPSC-Pre-2013)


1) RRB 2) NABARD 3) Land Development Banks
Codes:(a) 1 and 2 only (b) 2 only (b) 1 and 3 only (d) 1, 2 and 3
🔠❓MCQ. Find Correct Statement(s) (Asked in UPSC-Prelims-2004)
A) NHB, apex institution of housing finance in India, was setup as a wholly owned subsidiary of RBI
B) SIDBI was established as a wholly owned subsidiary of the Industrial development bank of India
C) Both A and B D) Neither A nor B

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13.23.4 NABFID, the 5th AIFI (2022-Mar)

2021: NaBFID: National Bank for Financing Infrastructure and Development was setup by an
law/act of Parliament, with an initial capital of ₹20,000cr capital.
 NaBFID will get funding from RBI, Govt, Financial institutions, World Bank etc. It’ll also issuing
bonds in market etc
 NaBFID will give loans worth ₹5 lakh crore in 3 years. It’ll help in National Infrastructure
📑
Pipeline (NIP) project.( Ref: HDT-Pillar#5:Infrastructure)
 Chairman: K.V. Kamath.
 HQ: Mumbai (Presently it is working from the office of SIDBI in Mumbai)
 Regulator? RBI will regulate NaBFID.
 2022: RBI ordered that NaBFID will be treated as All India Financial Institution (AIFI).
 Thus, NABFID is the fifth AIFI after EXIM Bank, NABARD, NHB and SIDBI.
(सरकार ने क़ानून द्वारा बुनियादी ढांचे और विकास के वित्तपोषण के लिए राष्ट्रीय बैंक बनाया था. और उसे रिज़र्व बैंक द्वारा अखिल भारतीय वित्तीय सं स्थान
(एआईएफआई) का दर्जा दिया गया है।)

13.23.5 🚫🏦👨‍⚖️FI  Non-Bank  Primary Dealers (PD)- (प्राथमिक विक्रे ता)

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- They deal in "primary" market i.e. directly buy fresh G-sec from RBI’s E-Kuber platform and
sell it in the secondary market. Total 20+ PD licensed by RBI: 14 of them are Banks. E.g.
Standard Chartered Bank, HSBC (HongKong), SBI, Kotak etc. (Numbers not important)
- Related Topic: Retail/Ordinary Investors also buy G-Sec directly from RBI by opening a
‘Retail Direct Gilt Account’ (RDG Account). (More in 📑Pillar#1C: Deepening of Capital
Market)
13.23.6 🚫🏦👨‍⚖️FI  NBFCs (गेर-बैंकिं ग वित्तीय कं पनिया)

Parameter Commercial Banks Non-Banking Financial Companies (NBFCs)


Registration Banking Regulation Act Companies Act
Supervision RBI Depends.Mutual funds-SEBI, Insurance Co:
IRDAI etc.
Entry Capital 500 Cr. Different-different norm depends on organization
Numbers 13 Public Sector (incl. Post Total 10,190. Out of them 108 deposit Taking,
Payment Bank), 56 RRBs, 39 remaining are non-deposit-taking (ND).
private sectors (including SFB, [figures not imp]
PB), 44 Foreign Banks.
[figures not imp]
Can accept - Can accept Time & Demand - Only NBFC-Deposit-Taking (NBFC-D) &
Deposits? deposits [also known as even they can accept only Time Deposits. E.g.
chequable deposit]. Bajaj Finance.
- Payment banks- can’t accept - Deposits are not insured under DICGC Act.
time deposits e.g. Fixed 📑 More in Pillar#1B1
Deposits.
- Their deposits are insured
under DICGC Act.
Can issue - Yes, Banker can issue these - Can’t issue their chequebook or Debit card
Chequebook, instruments.
Debit Card?
Can issue - Yes - Yes. For More details refer to next section.
Credit Card?

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Parameter Commercial Banks Non-Banking Financial Companies (NBFCs)
Prudential CRR, SLR, applicable - SLR applicable ONLY on NBFC-D. but RBI
Norms सावधानी can prescribe different slabs / formulas than
के मानदंड banks.
- CRR not applicable on any type of NBFC.
BASEL Yes, Applicable. - Applicable on 108 NBFC-D and
norms 📑 More in Pillar#1B2 - Applicable on 276 NBFCs – ND – SI (non-
deposit taking Systematically Important with
assets over ₹ 500 crores)
- e.g. L&T Finance, Cholamandalam etc.
But RBI can prescribe different slabs / norms
/deadlines.
Investment They can keep depositor’s money Can invest clients’ money in share market. E.g.
ग्राहक का पैसा in RBI approved securities. But Mutual Funds, Insurance Companies.
किधर निवेश करते can’t invest in share market,
directly.
Loan Interest Decided as per RBI’s methodology Varies & depends on nature of biz.
Rate ब्याज दर from time to time (BPLR, MCLR,
External Benchmark etc.) Ref:
Pillar#1A1
Recovery Loan recovery powers under - Housing Finance Companies have SARFAESI
बकाया राशि की SARFAESI Act. powers. But, all types of NBFCs don’t have it.
वसूली
📑 More in Pillar#1B2 (More in Pillar#1B2) 📑
Consumer RBI’s Ombudsman, Bank’s RBI’s separate Ombudsman for NBFCs starting
Complaints Internal Ombudsman ** शिकायत the NBFC-D since 2018**.
निवारण
**More about these Ombudsman in 📑Pillar#1D: Insurance handout
🔠❓ Find correct Statement(s) about NBFCs in India [Asked in UPSC-Prelims-2010]
A) They cannot engage in the acquisition of securities issued by government.
B) They cannot accept demand deposits like savings account.
C) Both A and B D) Neither A nor B
🔠❓ The main functioning of the banking system is to [Asked in UPSC-CDS-2013-II]
(a) accept deposits and provide credit (b) accept deposits and subsidies
(c) provide credit and subsidies (d) accept deposits, give credit and subsidies

13.24 💳 NBFC S CAN DIRECTLY ISSUE CREDIT CARD

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BEFORE After 2022- Reform
NBFC can issue only co-branded credit cards after tying up with a
This facility is continued.
banker. (e.g. Bajaj Finserve Credit with help of RBL Bank)
NBFC cannot also directly issue credit card in its own capacity (i.e. Henceforth, NBFCs can
without co-branding with a banker) do this also.
NBFC could not directly tie with the card-payment gateway such as
can do this.
MasterCard, Visa, Rupay.

💳 🥰 NBFC’s Direct Credit Cards- Pros and Cons of


13.24.1
🥰 Pros 😰 Cons
🥰 Financial inclusion: This will improve the 😰 Most NBFCs do not have adequate manpower to
penetration of credit cards in rural areas, as handle consumer complaints/frauds in the credit
more NBFCs enter the credit card business. card business. (क्रे डिट कार्ड शिकायत निवारण के लिए पर्याप्त
(गाँव वालों का वित्तीय समावेशन होगा) मानव बल ऐसी एनबीएफसी कं पनियों के पास नहीं है)
🥰 If a farmer or villager uses the credit card 😰 Due to a lack of financial literacy, if villagers
responsibly, it can help save them from the don’t use the credit card responsibly, they may end
clutches of informal moneylenders who up in a debt trap (यदि गाँव वाले वित्तीय साक्षरता के अभाव में ग़ैर
charge exorbitant interest rates. (ब्याजखोरो की ज़िम्मेदार तरीक़े से क्रे डिट कार्ड का इस्तेमाल करेंगे तो वहाँ पर भी कर्ज के
चंगुल से बच सकें गे) विषचक्र में फँ सने का भय होता है।)

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13.25 🚫🏦👨‍⚖️NBFC R S EGULATED BY RBI 🐯 (नियं त्रण/देखरेख)
Table 11: 🎓✋no need to remember examples, just observe pattern
Investment and They mainly help buying ‘assets/machinery’ like tractor, bulldozer, etc
Credit Company E.g. SREI Equipment Finance, Limited
Consumer Durable - Help buying TV, Fridge, Mobile, AC etc. with Buy now Pay later
Loan Finance /BNPL (BNPL) / Equated Monthly Instalment (EMI) model.
- Eg. Bajaj Finserv, Flexpay, Zestpay etc.
Core Investment - They do long term investment in Companies. E.g. Tata Capital,
Company (CIC) Reliance Capital, Infrastructure Leasing & Financial Services Limited
(IL&FS)
- IL&FS in controversy because couldn’t repay interest to lenders. 📑
More in next Pillar1B1: NPA handout.
Infrastructure Basically, they give loan for infra. Projects like highway, airport,
Finance Company powerplants. ( बुनियादी अवसं रचना के लिए दीर्घ अवधि के लोन)
(IFC) - E.g. Rural Electrification Company ltd. (REC)
- L&T IDF, Kotak IDF, IDFC IDF (“IDFC First” has separate license
Infrastructure Debt
for Private Sector Bank).
Fund (IDF)
Asset Reconstruction They buy bad loans / NPA from Banks & other NBFCs, and try to salvage
Companies (ARC) value from the underlying assets. E.g Anil Ambani’s Reliance ARC.
Factoring They lend short term money to client against his invoices / accounts
Companies receivable. E.g. IFCI Factors, Siemens Factoring. (What is Factoring? Ans.
📑Pillar#1C)
Gold Loan e.g. Muthoot gold loan, Mannapuram Gold.
Companies RBI decides their Loan to Value ratio (LTV) (More in 📑Pillar#1A2).
🏠 Home Loan - such as DHFL, Muthoot Housing finance etc. Housing Finance
Companies Companies.
- RBI regulates them since 2019. [Before 2019, National Housing Bank /
NHB regulated them. Some very old PYQ asked about it. so I gave
this historical info, Otherwise donot loose Blood Pressure over this.]
Micro Finance - 2010: RBI’s Y. H. Malegam Committee → RBI created a new NBFC
Institutions category called Micro Finance Institution (MFI)
(MFI: सूक्ष्म वित्त सं स्थान)
- eg:Bandhan (W.Bengal, separately got PvB license), Disha (A'Bad:
separately got SFB license), SKS (Andhra), Cashpor (UP), Ujjivan
(Karnataka).
- They provide financial services to the poor such as micro-savings,

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micro-credit, micro-insurance.
- They give small loans (micro-credit) to poor without collateral.
- Who regulates them? RBI. Plus some regulation also done by
Ministry of Corporate Affairs. (What/HOW? NOTIMP)
- Who can borrow from MFI? Ans. Household whose annual income is
not more than ₹ 1.25 lakh (rural) or ₹ 2 lakhs (urban).
- How much can one person borrow from an MFI? Ans. Not More
than ₹ 1.25 lakh.
MUDRA (2015) - A non-deposit taking NBFC owned by SIDBI. It gives indirect loans to
Micro enterprises through PM Mudra Yojana.
- 📑 More in Pillar1D- Financial Inclusion.
Money Changers/ - They help the clients buy/sell foreign currencies e.g. Rupee to Dollars
Authorised dealers
- They have to obtain license from RBI under FEMA (Foreign Exchange
(AD) for foreign
Management Act, 1999)
currency
- Both banks & NBFC can get this license from RBI.
Residuary (अवशिष्ट) - Any NBFC not regulated by any other regulator (e.g. SEBI, IRDAI,
PFRDA)- falls under RBI’s purview.

MCQ. The service(s) rendered under microfinance is/are : (Prelims-2011)


1. Credit facilities 2. Savings facilities 3. Insurance facilities 4. Fund Transfer facilities
Codes: (a) 1 only (b) 1 and 4 only (c) 2 and 3 only (d) 1,2,3 and 4

13.26 🤖💳 F INTECH COMPANIES


FinTech Companies provide innovative solutions for money/financial transaction/loan/sharemarket
etc using digital technology. (प्रौद्योगिकी की मदद से पारंपरिक वित्तीय लेनदेन आदि की क्रियाओ को बेहतर बनाता है)

13.26.1 🐯Fintech regulated by RBI


P2P Lenders - It is like Olx-Quickr connecting sellers of second hand goods with buyers.
the P2P lending websites connect borrowers and lenders. E.g.
Faircent.com, Cashkumar.com, CRED Mint etc.
- 2021- CRED Mint launched. Newspapers gone crazy so Babushonas are
demanding that I should teach them PHD thesis on its business model. ✋
Bhai, I’ll not teach it. Look @PYQ in this Handout
Account - They manage information of a customer’s financial assets & display it to
Aggregators him or to third party (like loan giver, credit rating company & Apps).
(AA)

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- 2018: RBI gave license to 5 companies- NeSL,Cookiejar etc.
Loan E.g. Loanadda.com, Moneytap.com, Loanbazaar, Paisabazaar etc. portals
Aggregators - 😰Challenges? Often these digital platforms that act as outsourced agents of
(ऋण समूहन) banks/NBFCs to sell loans.
- But, customers face difficulty in complaint/grievance redressal.
- Now even Google Pay app developing features for loans. So RBI has
expressed its displeasure and is presently working on rules to fix this.
Payment - They help sellers to accept payment from buyer by providing technological
Aggregators solutions
- E.g. Razerpay. Seller opens account on Razerpay website-> embeds the
code/link in his own website-> can accept payment through credit card,
debit card, netbanking, UPI JioMoney, Mobikwik, Airtel Money
- Further subtypes: Online Payment Aggregators Vs Offline Payment
Aggregators but internal difference not imp. for IAS exam.
Mobile Wallet - PhonePe, MobiKwik, Paytm etc many apps/services.
App
- Learned enough about them in Pillar1A1 subtopic digital payments.

13.26.2 🐯Fintech regulated by NON-RBI org (e.g SEBI, IRDAI)


Type Examples Regulator
Discount brokers e.g.Zerodha, Upstox, 5paisa, Groww. They help the clients SEBI
buy/sell shares/bonds etc online via mobile apps / webportals.
Insurance Web e.g Policybazaar.com. Help client find & compare the insurance IRDAI
Aggregator policies of various companies.
🙋🏼‍♀️FAQ: Tell me about Fintech pension companies regulated PFRDA? Ans. Nothing newsworthy/
important in that category YET- to deserve our time / energy.

13.26.3 🔪📡👿 Digital Lenders


RBI classified them into 3 groups

Sr Organization Examples 👨🏻‍⚖️️Regulator


1 giving loans online and regulated by Banks, P2P lenders RBI itself
RBI
2 Giving loans online but NOT regulated Venture Capital Funds (VCF) SEBI
RBI but some other regulator e.g. SEBI
3 Giving loans online but not regulated unauthorized digital lenders : Nobody /
by anyone = their App will be shut Goonda/mafia ke online mobile illegal.
down. Legal action will be taken. app for giving online loans.

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Note: RBI keeps releasing guidelines for digital lending. But daily-commentary not important.
Sufficient to know that such guidelines mostly deal with customer protection.

13.26.4 🚫🏦👨‍⚖️Credit Information Companies (CIC) versus Credit Rating Agencies (CRA)

Credit Information Credit Rating Agencies (CRA)


Companies (CIC)
👨🏻‍⚖️️Regulator RBI regulates them SEBI regulates them
EXAMPLES CIBIL TransUnion, CRIF  Standards and Poor's, Moody’s,
(उदाहरण) High Mark, Equifax and CRISIL, CARE, ICRA, FITCH
Experian. Ratings India Pvt. Ltd, SMERA.
 Brickwork Ratings India = SEBI
ordered it to shut office due to
malpractices.
They check the credit “Individual Persons” (एकल companies, NBFCs, governments, local
worthiness/ loan व्यक्ति के कर्ज वापस चुकाने की औकात है bodies, non-profit organizations.
repayment capacity of कि नहीं उसका मूल्यांकन करते हैं) They do not check it for individual
persons. ( सं स्थानों की कर्जा वापस चुकाने की औकात
का मूल्यांकन करते हैं. एक एक इंसान के लिए नहीं करते)
Rating numerical scores. alphabetical symbols
e.g. CIBIL Score 300-900. e.g. AAA, AA-, D- etc.
Utility? Better the score → similar to the left cell.
(उपयोगिता)
🤩1) Loan application will
be passed faster.
🤩2) You'll may to pay
lower interest rate.
🔠❓MCQ. Find Correct about credit rating agencies (CRA) in India? (Prelims-2022)
1. They are regulated by the Reserve Bank of India.
2. The rating agency popularly known as ICRA is a public limited company.

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3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct ?
(a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

13.27 🚫🏦👨‍⚖️NBFC R S EGULATED BY SEBI 🐱 (📑M ORE IN PILLAR#1C)

- They help clients buy-sell Shares/Bonds depending on his instructions


Stock Broker E.g. Motilal Oswal, Sherkhan, Indiabulls, , Karvy etc.
- Karvy did a fraud/scam → SEBI banned Karvy for 7 years from 2023.
- e.g.Zerodha, Upstox, 5paisa, Groww. They help the clients buy/sell
shares/bonds etc online through mobile apps. Discount-brokers’
operational costs are lowers, as they do not keep large number of sales-
Discount Broker
agents or physical offices.
- Therefore, discount-brokers charge less commission than traditional
Stock brokers such as Motilal Oswal or Sherkhan.
- They pool clients’ money and MF-manager invests it in shares/bonds
using his own discretion & expertise.
Mutual Funds (MF) - E.g. SBI's Shariah Equity Mutual Fund: clients' money invested in
Sharia compliant Cos. That don’t deal with alcohol, pork, debt, tobacco
or weapons.

REITs / InvITs
- Pool & invest money in real estate / infra projects e.g. IRB. < More in 📑
Pillar#1C: SEBI Handout>
 Underwriting, Merger & Acquisition, Wealth Management of rich
Investment Banks: people:
(USA term) &  E.g. Kotak Mahindra, Citigroup, Bank of America, DSP Merrill Lynch,
Merchant Banking Morgan Stanley, SBI capital
Companies:  2021: SEBI allowed payments banks to act as investment bankers (after
(UK term) fulfilling the rules/regulations of SEBI). सेबी से अनुमति लेकर भुगतान बैंक ये कर
सकते हैं
Venture Capital VCF Help startup companies to arrange capital e.g. IFCI-VCF, IDG-VCF
Fund (VCF)
Market 3 sub-types (Ref: Pillar#1C for more)
Infrastructure - 1) Stock exchanges (BSE/NSE etc) - help buyer/seller connect in
Institutions (MII) secondary market

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- 2) Depositories (NSDL/CDSL etc): help clients store shares, bonds etc
DIGITALLY in the demat account.
- 3) Clearing houses/Central Counter-Parties (e.g. CCIL): help settling
the trade by transferring money to seller and transferring shares to
buyer.

13.28 🚫🏦👨‍⚖️NBFC R S EGULATED BY OTHERS 🦊

Regulator Example NBFC Companies


Insurance Regulatory and Development Authority (IRDAI) regulates:
IRDAI
- 1) Life Insurance companies e.g. LIC, HDFC Standard Life Insurance
( 📑More in - 2) Non-Life (=General) insurance e.g. IFFCO-Tokyo General Insurance.
Pill1D)
- 3) Policy aggregator web-platforms such Policybazaar.com
PFRDA Pension Fund Regulatory and Development Authority (PFRDA) regulates all
( 📑More in Pill1D) Pension Funds, except EPFO & other statutory funds.
1. NIDHI Companies: Mutual benefit club, only members can borrow. e.g.
Ministry of South Madras Benefit Fund ltd, Maben Nidhi Ltd (of Mannapuram group)
Corporate 2. Microfinance Companies: learned in previous section. Microfinance
Affairs Companies’ some regulation by RBI. and some of the regulation done by
Corporate Affairs Ministry. (Why/How=NOTIMP. थोड़ा-पढ़ो-आगे-बढ़ो.)
It regulates ‘Chit funds’. e.g. Shriram Chit fund. It is a type of collective
State Registrar
investment scheme with monthly contributions & borrowing by contributing
of Chit Funds
members Chits. (Ref 📑Pillar#1D)
13.29 👻(🚫🏦): NBFC: S HADOW BANKING (आभासी / प्रतिछाया बैंकिं ग प्रणाली)

 📔📔ES20 observed: Shadow banking is a set of activities and institutions. They operate partially
(or fully) outside the traditional commercial banking sector. They are not fully regulated by the
RBI. ये सं स्थाए पारंपरिक बैंकिं ग नियमो के दायरे से बाहर काम करती है.
 They mobilize funds by borrowing from banks, issuing Commercial Papers (CP) and Bonds
(=Non-convertible debentures)
Table 12: Three important segments of the shadow banking system in India
HFCs Housing Finance Companies. E.g. Dewan Housing Finance Limited (DHFL)
LDMFs - Liquid Debt Mutual Funds invest clients money into short term debt instruments
such as T-bill (of Govt) and Commercial Papers (of companies).

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- e.g. certain schemes by UTI, Kotak, L&T, Tata mutual funds
Retail- Retail Non-Banking Financial Companies such As Gold Loan Companies, Asset
NBFCs Finance Companies etc.
Shadow banking system’s assets are risky. Sometimes they can’t honour their obligations/bond
repayments. It results into severe crisis, as seen in the ILFS crisis (2019). ( उनकी सं पतिया जोखिमपूर्ण होती है)
(More in 📑Pillar#1B2: Burning issues in Banking Sector)
13.30 🧕NBFC- NOT ALLOWED IN INDIA: ISLAMIC BANKING

- Interest (Riba) is prohibited (Haram) in Islam. So, Islamic Banking operates through Ijara,
Murbaha, Musharaka mechanisms- in which depositors’ money is invested in borrower’s
property / business and returns are shared in form of rent / profit but not in the form of Interest.
- Some committees said give permission to Islamic Banks in India, but RBI is opposed (2017).
- 2017: Kerala Govt allowed opening of a Islamic Bank by registering it as “co-operative society”,
so as to avoid the RBI’s ban. But further, legal controversy notimp. 🎓✋
- 👍Pro-Arguments? Financial inclusion of Minorities/Muslims. अल्पसं ख्यकों का वित्तीय समावेशन
👎Anti-Arguments against allowing Islamic Banking in India?
- Specialized Manpower required. Secular India’s PM-Jan-Dhan Yojana & Post Office Payment
bank efforts are sufficient. (भारत में बैंक-बचत की सेक्यूलर/धर्मनिरपेक्ष सेवाएं उपलब्ध. अलग से एक धर्म विशेष के लिए
वित्तीय सेवा देने की कोई ज़रूरत नहीं)
- USA Govt alleges their involvement in terror finance & money laundering. (अमरीकी सरकार का आरोप
है कि ये सं स्थाएँ आतंकीओ को पैसा पहुँचाना, और काले धन को वैध/सफ़े द बनाने जैसे ग़ैर-क़ानूनी काम करती है।)

13.31 🧔💪🏻🔪💵😱 I NFORMAL FINANCIAL INTERMEDIARIES (अनौपचारिक वित्तीय


मध्यस्थ/ब्याजख़ोर)
- Unlike banks/NBFCs, they provide loans without formal application procedure, etc but require
Property/Vehicle/Home/Goods/Crop/Gold etc. as collaterals/pawn. (सं पत्ति गिरवी रखवा के कर्ज)
- They charge very high compound interest rates & use muscle power for recovery (ऊं चे ब्याजदर, वसूली
के लिए धमकाना-बलप्रयोग करना.)
- For every Rs.100 borrowed by a rural household, 33% from informal money lenders, remining
from banks, friends-family etc. (2012 data)
- They don’t fall under RBI purview, but State Govts have individual laws to regulate them e.g.
Bombay Moneylenders Act 1947, Kerala (1958), Gujarat (2011). These laws require such
informal lenders to register, impose ceiling on the interest rate & prohibit strong-arm tactics.
(रिजर्व बैंक की निगरानी में नहीं किं तु राज्य सरकारों ने नियंत्रण के लिए कानून बनाएं - पंजीकरण, ब्याज की महत्तम सीमा निर्धारित
करना, बलप्रयोग/जबरन वसूली पर रोक)

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Table 13: Following Examples/Differentiation not imp for IAS Exam but Banking Exams

Types → Indigenous Banker (देशी बैंकर) Moneylender / Brokers


Shroff, Shikarpuri, Chettiar, Kabuli Pathan, Quistwala, Arhatia,
Medieval time
Marwari, Aiyar, Rastogi Village Bania, Soni, Mahajan & Seth,
known as →
Pawnbrokers, Financial Brokers
They used to mobilize money They use their own savings-money
Money
from Public via: 1) Hundi: bill of (or sometimes some villain’s black
mobilization →
exchange; money- स्वयं का पैसा कर्जे पर देते या किसी भ्रष्ट नेता
पैसा कहां से लाते हैं
2) Commercial bills अफसर का काला धन कर्जे पर घुमाते)

13.31.1 ✍️Mains Answer Writing


- From this particular topic, the Mains angles are centred around – problems of
PSBs/nationalization, is privatization of banks a panacea? importance of bank-NBFC in
economic growth and human development ? etc.
- This Raftaar-courses deals purely with Prelims and NOT with Mains. There is separate course for
Mains. Go to my profile page.
📑Next HDT: 🔥 1B2: Burning Issues in Banking: Bad Loans, NPA, IBC, SARFAESI, BASEL etc.

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