Topic 9

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

• RBI’s New Monetary Policy Framework 2024: Repo rate unchanged at 6.5%; inflation trending toward 4% target; focus on growth while maintaining inflation discipline
• Digital Lending Guidelines (RBI 2022): All digital loans must be disbursed to borrower’s bank account; balance sheet loans vs co-lending model; mandatory disclosure of all fees
• Co-Lending Model (CLM): RBI-authorised framework where banks and NBFCs jointly originate loans; bank takes 80% of risk, NBFC takes 20% on priority sector loans
• RBI’s Fintech Vision 2025: Promoting responsible innovation; creating a “Regulatory Sandbox” for fintech testing; setting up an Innovation Council
• Cryptocurrency Regulation: RBI has maintained caution; RBI advised banks to not deal with crypto exchanges (though Supreme Court set aside RBI’s circular in 2020); 30% TDS on crypto gains; RBI exploring CBDC
• ⚡ RBI is piloting Digital Rupee (e₹) — Central Bank Digital Currency — for wholesale and retail segments

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Current Banking and Economic Affairs

This topic covers the latest developments in the banking sector, regulatory changes, and emerging issues that are particularly relevant for the SBI PO exam.

RBI’s Monetary Policy — Recent Developments (2023-2024)

Current Policy Stance

Repo Rate: 6.50% (unchanged since February 2023) Inflation: Moderating toward 4% target; food inflation remains volatile GDP Growth: India projected at 6.5-7% for FY25

MPC Stance: “Withdrawal of accommodation”

• Means RBI is still hawkish (inflation-focused) but won’t hike further
• Will wait to see if inflation sustains at target before cutting

Key Rates (2024-25)

Rate	Current
Repo	6.50%
Reverse Repo	3.35%
MSF	6.75%
SDF	6.10%
CRR	4.50%
SLR	18.00%

Liquidity Management

• RBI using Variable Rate Reverse Repo (VRRR) and Standing Deposit Facility (SDF) to manage liquidity
• Surplus liquidity from forex inflows being mopped up
• Banking system’s cash reserve ratio (CRR) at 4.5% — unchanged

Digital Lending — Regulatory Framework

RBI Digital Lending Guidelines (2022)

RBI issued comprehensive guidelines to regulate the fast-growing digital lending ecosystem (apps, fintech partnerships).

Key Guidelines:

1. Mandatory Account Linking:

   • All digital loans MUST be disbursed to the borrower’s own bank account
   • No disbursement to third-party accounts (prevents predatory practices)

2. Balance Sheet Loans vs Co-Lending:

   • Balance Sheet Loans: fintech acts as agent; loan on bank’s books
   • Co-Lending Model (CLM): Bank and fintech jointly originate; RBI guidelines for CLM

3. Disclosure Requirements:

   • All fees and charges must be disclosed upfront
   • Annual Percentage Rate (APR) must be shown
   • Cooling-off period for loan cancellation

4. Data Privacy:

   • Fintech must obtain explicit consent for data collection
   • Data can only be used for the stated purpose

5. Recovery Practices:

   • Recovery agents must follow fair practices code
   • No harassment, calling at odd hours, third-party threats
   • Audio recording of calls mandatory

Digital Lending Apps (DLAs)

• RBI mandated that DLAs must be registered with RBI
• Banks and NBFCs responsible for DLAs operating on their behalf
• Strict action against unregistered lending apps (illegal loan apps)

Co-Lending Model (CLM)

RBI Guidelines for Co-Lending

Structure:

1. Original Lender (NBFC/Fintech): Does credit assessment, initial underwriting, ongoing servicing
2. Co-Lender (Bank): Takes 80% of the loan on its books; provides 20% risk participation

Process:

• Customer applies through fintech/NBFC platform
• Bank approves based on own credit criteria
• Loan originated jointly: 80% bank, 20% NBFC on books
• NBFC services the loan (collection, follow-up)

PSL Benefit:

• Loans originated under CLM for priority sector count as PSL for the bank portion

Why Banks Like CLM:

• Reach of fintech + lower cost of funds from bank
• Credit assessment done by NBFC
• Risk shared 80/20

Central Bank Digital Currency (CBDC) — Digital Rupee

RBI’s CBDC Initiative

What is CBDC? A digital form of the Indian rupee issued by RBI, backed by the full faith and credit of the government.

Types Being Piloted:

1. Wholesale CBDC (e₹-W):

   • For financial institutions
   • Pilot launched in November 2022
   • Use case: Interbank settlements, treasury transactions
   • Could reduce cost of cross-border transactions

2. Retail CBDC (e₹-R):

   • For public use; pilot launched August 2023
   • Digital rupee accessible to citizens
   • Issued through participating banks
   • No interest paid (like cash); anonymous for small transactions

Key Features:

• Legal tender (must be accepted)
• Not a crypto-asset (no volatility; issued by RBI)
• Can be exchanged 1:1 with bank deposits
• Interoperable across platforms

Participating Banks: SBI, HDFC Bank, ICICI Bank, Yes Bank, Kotak Mahindra Bank, IDFC First Bank, etc.

Cryptocurrency and Virtual Digital Assets

Regulatory Framework (2022-2023)

Taxation Framework:

• 30% TDS on gains from transfer of VDAs (Virtual Digital Assets)
• 1% TDS on TDS (collected at source by exchanges)
• No set-off of losses against VDA gains (except within VDA category)
• No deduction for expenditure except cost of acquisition

RBI’s Position:

• Has consistently warned about risks of private cryptocurrencies
• Advised banks to exercise caution in dealing with crypto exchanges (circular set aside by Supreme Court in 2020)
• RBI exploring possibility of India’s own digital currency (CBDC)

Global Context:

• India’s approach is cautious; no outright ban
• Global standard-setting bodies (FATF, FSB) monitoring crypto-asset risks

Fintech Disruptions and Regulatory Sandboxes

RBI’s Approach to Fintech

Regulatory Sandbox Framework:

• RBI allows fintech companies to test new products in a controlled environment
• Sandbox period: 6 months (extendable by 3 months)
• Must comply with applicable regulations
• Consumer protection requirements apply

Sandbox Areas Tested:

• Retail payments
• Digital KYC
• Cross-border payments
• MSME financing
• Blockchain-based applications

Open Credit Enablement Network (OCEAN)

• RBI’s initiative for open credit ecosystem
• Enables sharing of credit data across platforms
• Promotes digital credit access for underserved segments

Account Aggregator Framework

• Account Aggregator (AA) RBI-licensed entities that help individuals share their financial data securely
• Uses the account aggregator system to share data (bank statements, MF holdings, insurance, pension)
• Requires explicit consent of the individual
• Promotes financial inclusion by enabling alternative credit assessment

Recent Banking Sector Developments

Large Bank Mergers

Post-2019 Consolidation Wave:

• SBI + Associate Banks: 5 associate banks merged into SBI (2017-18)
• PNB + OBC + United Bank: Largest bank merger in India; created the second-largest PSB
• Bank of Baroda + Dena Bank + Vijaya Bank: Third-largest PSB
• Canara Bank + Syndicate Bank
• Union Bank of India + Andhra Bank + Corporation Bank

Basel III Implementation

• India’s Basel III implementation completed by April 1, 2023
• Banks now required to maintain:
  • Minimum CET1: 4.5%
  • Capital Conservation Buffer: 2.5%
  • Total Minimum Capital: 8% + 2.5% = 10.5%

Frauds in Banking

Types of Frauds:

• Loan fraud: Wilful default, embezzlement, KYC fraud
• Digital fraud: Phishing, vishing, UPI scams, SIM swap fraud
• Cheque fraud: Forged signatures, alteration
• Card fraud: Card cloning, OTP fraud

RBI Measures:

• Mandatory fraud reporting within prescribed timelines
• Central Fraud Registry (CFR) maintained by RBI
• Strengthening of internal controls, audit

ESG in Banking

Environmental, Social, and Governance (ESG)

RBI’s Guidance:

• RBI issued guidelines on ESG for banks (2021)
• Banks must incorporate ESG factors in lending decisions
• Green Deposits: Banks accepting green deposits for funding ESG projects

Green Financing:

• Priority Sector Lending includes renewable energy, green infrastructure
• Banks required to disclose ESG risk exposure
• Climate risk assessment for bank portfolios

Social:

• Financial inclusion (PSL targets)
• Gender lens investing
• Rural credit

Governance:

• Board composition requirements
• Related party transactions
• Whistle-blower policy

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Cybersecurity in Banking

RBI’s IT Framework:

• Master Direction on IT Governance (2017)
• Cyber Security Framework (2016)
• Outsourcing of IT services guidelines

Key Requirements:

• Cyber crisis management plan
• Minimum IT Controls
• Customer awareness programs
• Reporting of cyber incidents to RBI within prescribed timelines

Digital Banking Security:

• Two-factor authentication (2FA) mandatory
• Risk-based transaction monitoring
• Bot detection systems

RBI’s Proposed New Monetary Policy Framework Review

RBI’s 5-Year Review (2024):

• Monetary Policy Committee framework reviewed
• Potential changes to inflation targeting methodology
• Discussion on using multiple indicators beyond CPI

Regulatory Architecture for Fintech

Proposed “India Stack”

• e-KYC: Aadhaar-based digital KYC
• e-Sign: Digital signature service
• DigiLocker: Document storage
• Account Aggregator: Data sharing framework

Credit Guarantee Scheme for Digital Lending

• CGS-II: Credit Guarantee Scheme for digital lending (proposed)
• Guarantee for banks lending through fintech platforms
• Reduce credit risk and promote digital lending

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