Banking & RBI — Deep Dive

Indian Banking System Structure

RESERVE BANK OF INDIA (Central Bank)
    │
    ├── Scheduled Commercial Banks
    │   ├── Public Sector Banks (PSBs): SBI, PNB, Bank of Baroda, etc.
    │   ├── Private Banks: HDFC, ICICI, Axis, Kotak, Yes Bank, etc.
    │   ├── Foreign Banks: Citibank, HSBC, Deutsche, Standard Chartered
    │   └── Small Finance Banks: Equitas, Au SF Bank, etc.
    │
    ├── Cooperative Banks
    │   ├── Urban Cooperative Banks (UCBs)
    │   └── State Cooperative Banks (rural focus)
    │
    ├── Regional Rural Banks (RRBs) — joint ownership: Centre (50%), State (15%), Sponsor bank (35%)
    │
    ├── Development Finance Institutions
    │   ├── NABARD — agriculture & rural
    │   ├── SIDBI — small industries
    │   ├── NHB — housing finance
    │   └── EXIM Bank — export-import
    │
    └── Non-Banking Financial Companies (NBFCs) — regulated by RBI but not banks

RBI — Functions & Monetary Policy

Key Functions of RBI

1.Monetary authority: Controls money supply, inflation through monetary policy

2.Issuer of currency: Sole authority to issue notes (except ₹1 coin issued by Ministry of Finance)

3.Banker to government: Manages govt accounts, sells govt securities

4.Banker to banks: Maintains CRR, provides emergency liquidity (LOLR)

5.Regulator: Licenses banks, NBFCs, regulates foreign exchange (FEMA)

6.Manager of foreign exchange: Maintains forex reserves, manages INR

Monetary Policy Committee (MPC)

•6-member committee (3 RBI + 3 external, appointed by government)

•Meets every 2 months

•Targets: CPI inflation 4% (±2% band)

•Key rates:

Rate	Description	Current trend

|------|-------------|---------------|

Repo rate	Rate at which RBI lends to banks (overnight)	RBI's primary tool
Reverse repo	Rate at which RBI borrows from banks	= Repo - 25 bps typically
SLR	Statutory Liquidity Ratio — % of NDTL in liquid assets	~18%
CRR	Cash Reserve Ratio — % of NDTL as cash with RBI	~4%
MSF	Marginal Standing Facility — emergency overnight	= Repo + 25 bps
Bank Rate	Rate for rediscounting bills — long term	= MSF rate

Transmission mechanism: RBI ↓ Repo rate → Banks ↓ MCLR → Banks ↓ Lending rates → Corporates/consumers borrow more → Investment and consumption ↑ → GDP ↑

Banking Regulation — Key Provisions

Capital Adequacy — Basel III (RBI guidelines)

•CAR (Capital Adequacy Ratio): Minimum 10.5% (Total Capital/Risk-Weighted Assets)

- Tier 1 (Core): Equity + retained earnings ≥ 8%

- Tier 2 (Supplementary): Subordinated debt, provisions ≤ 2%

•CCB (Capital Conservation Buffer): 2.5% (all equity) — must be maintained above minimum CAR

•LCR (Liquidity Coverage Ratio): High-quality liquid assets / Net cash outflows over 30 days ≥ 100%

•NSFR (Net Stable Funding Ratio): Available stable funding / Required stable funding ≥ 100%

Priority Sector Lending (PSL)

Banks must direct 40% of Adjusted Net Bank Credit (ANBC) to priority sectors:

•Agriculture: 18% (8% small/marginal farmers)

•Micro/Small Enterprises: 7.5%

•Weaker sections: 12%

•Education loans, housing, renewable energy, social infrastructure

Credit Analysis — How Banks Evaluate Loans

5 Cs of Credit:

1.Character: Borrower's track record, reputation (CIBIL score 750+ preferred)

2.Capacity: Ability to repay — DSCR (Debt Service Coverage Ratio) ≥ 1.25x

3.Capital: Borrower's own stake in the project — typically 25–30% margin

4.Collateral: Security offered — primary (hypothecation of assets) + collateral

5.Conditions: Economic environment, industry health, purpose of loan

Key financial ratios banks check:

•DSCR = Net Operating Income / Total Debt Service ≥ 1.25x

•Current Ratio = Current Assets / Current Liabilities ≥ 1.33x

•Debt-Equity Ratio ≤ 2:1 (project finance) or 3:1 (working capital)

•Net Profit Margin, EBITDA margin trends

NPA Management

NPA (Non-Performing Asset): Loan where interest/principal overdue > 90 days

Classification:

•Sub-standard: NPA for up to 12 months

•Doubtful: Sub-standard for more than 12 months (Doubtful 1/2/3)

•Loss assets: NPA written off or unrecoverable

Provisioning requirements:

Category	Provisioning %

|----------|---------------|

Standard	0.25–1%
Sub-standard	15%
Doubtful — secured	25–100%
Doubtful — unsecured	100%
Loss	100%

Recovery mechanisms:

•SARFAESI Act 2002: Banks can take possession and sell mortgaged assets without court order (commercial loans > ₹1 lakh, secured)

•DRT (Debt Recovery Tribunal): For loans > ₹20 lakh

•IBC 2016: Insolvency resolution for corporate borrowers at NCLT

•One-Time Settlement (OTS): Negotiated settlement with haircut

•Asset Reconstruction Companies (ARCs): Buy NPAs from banks at discount

RBI Exam Preparation (Grade B)

Phase I (Online): General Awareness (50), English (30), Quantitative Aptitude (30), Reasoning (60) — total 170 marks, 2 hours

Phase II (Online + Descriptive):

•Paper I: Economic & Social Issues — 100 marks, 90 min

•Paper II: English (Writing skills) — 100 marks, 90 min

•Paper III: Finance & Management — 100 marks, 90 min

Key topics for ESI paper: RBI monetary policy, banking regulation, government schemes (PM Jan Dhan, MUDRA, PMJJBY), inclusive finance, fintech regulation, inflation targeting.

Salary: RBI Grade B officer — ₹1,08,000–₹1,36,000/month (all-in, 2024)

Banking & RBI Deep Dive — Overview