Topic 1

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

• RBI Act 1934: Governs RBI’s structure and functions; RBI issues notes “on the security of the Governor”
• Banking Regulation Act 1949: Principal legislation regulating all banks; gives RBI extensive supervisory powers including PCA framework
• LIC (Life Insurance Corporation of India): 1956 nationalisation; largest insurer in India; 100% government-owned
• GIC (General Insurance Corporation of India): 1972 nationalisation; includes subsidiaries: New India Assurance, Oriental Insurance, United India Insurance, National Insurance
• NBFCs (Non-Banking Finance Companies): Not banks; regulated by RBI under RBI Act; cannot accept demand deposits; Play important role in financial inclusion
• ⚡ For SBI PO, you need to know specific sections of the Banking Regulation Act — particularly around licensing, powers of RBI to supersede boards

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Indian Banking System — Advanced

The SBI PO exam requires deeper knowledge than the Clerk exam. Here we cover the advanced aspects of the Indian banking system including regulatory frameworks, Basel norms, and systemic risk management.

Legislative Framework for Banking

RBI Act 1934

The primary Act governing the Reserve Bank of India.

Key Provisions:

• Section 22: RBI has sole authority to issue bank notes in India (except ₹1 note)
• Section 42: RBI must maintain reserves — minimum 200 crore rupees in gold and foreign securities
• Monetary Policy Framework: Section 45ZB established the Monetary Policy Committee (MPC)
• Banking Regulation: Sections 45A-45V gave RBI extensive powers over banks including licensing, branch authorization, audit requirements

Banking Regulation Act 1949

The principal legislation for regulation of commercial banks.

Key Features:

• Applies to all banking institutions in India
• Section 5: Definition of banking
• Section 6: Forms of business banks may undertake
• Section 10: Board composition requirements
• Section 11: Minimum paid-up capital and reserves
• Section 17: Mandatory transfer of 20% of profit to reserves before dividend
• Section 18: RBI can direct banks to allocate profits to reserves

RBI’s Supervisory Powers under BR Act:

Section 35: RBI can inspect any bank (scheduled or non-scheduled) Section 36: RBI can order special audit Section 35A: RBI can give directions to banks in public interest Section 36AAA: RBI can remove managerial personnel from banks

Power to Supersede Board (Section 36AC): RBI can supersede the board of a bank for up to 5 years if:

• The bank is unable to meet its obligations
• There has been substantial deterioration in financial condition
• It is necessary in public interest or to prevent harm to the banking system
• Note: Used for YES Bank (2020) — RBI superseding board and appointing administrator

Types of Banking Institutions

Commercial Banks

Scheduled Commercial Banks (SCBs): Listed in Second Schedule of RBI Act

• Public Sector Banks (>50% government ownership)
• Private Sector Banks (Indian and foreign)
• Regional Rural Banks
• Payments Banks (limited: accepts deposits, payments, no lending)

Non-Banking Finance Companies (NBFCs)

NBFCs are companies that provide financial services but are not licensed as banks. They:

• Cannot accept demand deposits (checking accounts)
• Are regulated by RBI under RBI Act (not Banking Regulation Act)
• Must be registered with RBI
• Must maintain CRR and SLR (selected NBFCs)

NBFC Categories:

• NBFC-D (Deposit taking): Can accept public deposits (heavily regulated; many restrictions)
• NBFC-ND (Non-Deposit taking): Cannot accept public deposits; includes HFCs, MFIs, asset finance companies

Important NBFCs in India:

• HDFC (housing finance)
• Bajaj Finance (consumer finance)
• Mahindra Finance (vehicle finance)
• Muthoot Finance (gold loans)
• Bandhan Bank (started as NBFC, converted to universal bank)

Regulatory Changes:

• Scale Based Regulation (SBR) framework introduced 2022
• Upper layer NBFCs (NBFC-UL) treated like banks for regulatory purposes

Cooperative Banks

Urban Cooperative Banks (UCBs):

• Regulated by RBI (since 2020; previously state-level regulation)
• Can have either “Scheduled” or “Non-Scheduled” status
• Examples: Saraswat Bank, Cosmos Bank, Karnataka Bank

Rural Cooperative Banks:

• Short-term credit structure: PACS → DCCBs → SCBs
• Long-term credit: PLDBs (Primary Land Development Banks)
• Regulated by NABARD

Basel Norms — Capital Adequacy

Basel norms are international banking regulations set by the Basel Committee on Banking Supervision (BCBS), hosted at the Bank for International Settlements (BIS) in Basel, Switzerland.

Basel I (1988)

• Introduced minimum capital requirement of 8% of risk-weighted assets (RWA)
• RWA: Credit risk weighted assets only
• Simple framework; limited risk differentiation

Basel II (2004)

• Three Pillars:

  1. Minimum Capital Requirements: 8% of RWA (same capital ratio but better risk measurement)
  2. Supervisory Review Process: Regulators to ensure banks have adequate capital
  3. Market Discipline: Disclosure requirements to allow market participants to assess risk

• Introduced Operational Risk alongside Credit and Market risk

• More sophisticated risk measurement (internal ratings for credit risk)

Basel III (2010+, implemented in India from 2016)

Post-2008 financial crisis reforms:

Capital Requirements:

• Minimum CET1: 4.5% of RWA
• Capital Conservation Buffer (CCB): 2.5% (additional CET1)
• Total SIF (Systemically Important Banks): 1-3.5% additional CET1
• Total Minimum Capital: 8% + 2.5% = 10.5% (including CCB)

Liquidity Requirements:

• Liquidity Coverage Ratio (LCR): High-quality liquid assets (HQLA) / Net Cash Outflows over 30 days ≥ 100%
• Net Stable Funding Ratio (NSFR): Available stable funding / Required stable funding ≥ 100%

Leverage Ratio: Tier 1 Capital / Total Exposure (on and off-balance sheet) ≥ 3%

RBI Implementation in India:

• Basel III guidelines fully implemented in India by April 1, 2023
• Additional requirements for Indian banks (higher minimum capital)

Systemically Important Banks (SIBs/D-SIBs)

Banks whose failure could cause systemic damage to the economy.

• Global SIBs (G-SIBs): Designated by FSB (Financial Stability Board); includes SBI, ICICI (as of recent lists)
• Domestic SIBs (D-SIBs): Designated by RBI; SBI, ICICI, HDFC Bank, Axis Bank, Punjab National Bank, etc.

Higher Loss Absorbency (HLA): SIBs must hold additional capital (1-3.5% additional CET1)

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

SARFAESI Act 2002 (Securitisation and Reconstruction of Financial Assets)

Purpose: Enable banks and financial institutions to recover NPAs without court intervention.

Key Powers:

• Banks can issue demand notice to borrower for repayment
• Banks can take possession of secured assets (mortgaged property)
• Banks can sell assets without court intervention
• banks can appoint receivers

SARFAESI vs DRT Process: SARFAESI allows direct action; DRT (Debt Recovery Tribunal) requires legal proceedings

DRT (Debt Recovery Tribunal)

• Established under the Recovery of Debts and Bankruptcy Act, 1993 (DRI Act)
• Tribunals to adjudicate bank recovery cases
• Debts above ₹20 lakhs can be filed in DRT
• Recovery Officers enforce DRT orders
• Appeal lies to DRAT (Debt Recovery Appellate Tribunal)

Lokpal and Lokayukta

• Lokpal: National anti-corruption ombudsman for Central Government
• Lokayukta: State-level anti-corruption ombudsman
• Established under Lokpal and Lokayuktas Act, 2013

Banking Ombudsman Scheme

• RBI introduced Banking Ombudsman Scheme in 1995
• Handles complaints about: Non-payment/delay in payment, unauthorized transactions, non-adherence to fair practices code, etc.
• Awards up to ₹20 lakhs
• If not satisfied, can approach appellate authority or Consumer Forum

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