Universal Banking; FDI into Banking; Guidelines for opening Banks
1.0 Universal Banking & Bank Licensing (Static)
Concept
Detail
Universal Banking
A bank that provides all financial services under one roof — commercial banking, investment banking, insurance, mutual funds, broking. Examples: SBI, HDFC Bank.
Differentiated Banks
Banks licensed for specific purposes — SFBs (financial inclusion), Payment Banks (payments/remittances). Cannot provide all services.
FDI in Banking
PSBs: 20% (govt approval). PVBs: 49% automatic, up to 74% with govt approval. PVB + PSB combined FDI: aggregate foreign holding must not exceed 74% for PVBs.
Guidelines for New Banks
RBI's "Guidelines for Licensing of Universal Banks (2025)": Minimum paid-up capital ₹1,000 crore; Initial promoter holding 40% (dilute to 15% in 15 years); Listed within 6 years; 25% branches in unbanked rural centres.
On-tap Licensing
RBI allows applications round the year (not periodic windows). Available for: Universal Banks and SFBs since 2016.
Chapter
Current Affairs
Static Topic
Cooperative Banking Developments (PCA for UCBs, SBR)
Cooperative Banks: Structure & Regulation
50 Years of RRBs
RRBs: Establishment, Ownership, PSL, Regulation
AU SFB → Universal Bank; Fino PB → SFB
Universal vs Differentiated Banks; Transition Criteria
% of deposits expected to be withdrawn in 30 days of stress. Higher for wholesale deposits (more flighty). Lower for retail (sticky).
Current
RBI revised LCR — proposed increasing run-off factor for internet/mobile banking-linked deposits (higher flight risk in digital era).
AT-1 Bonds (Additional Tier 1) — Static:
Feature
Detail
Nature
Perpetual bonds — no maturity date. Quasi-equity.
Coupon
Higher than regular bonds (compensates for risk). Bank can skip coupon if in financial stress — no default.
Loss Absorption
If bank's CET-1 falls below threshold → AT-1 bonds written down (value reduced) or converted to equity. Investors may lose principal.
Example
Yes Bank AT-1 bonds written off (2020) — ₹8,415 crore wiped out. SC upheld legality.
Current
RBI issued new guidelines mandating better disclosure and risk communication to AT-1 investors.
Project Financing & Risk Weightage (Static):
Project Financing
Long-term lending for infrastructure/industrial projects. Repayment from project cash flows, not borrower's balance sheet. High risk due to long gestation, cost overruns.
Risk Weightage
Under BASEL, loans assigned weights based on risk. Higher weight = bank holds more capital. RBI increased risk weights for project finance loans from 100% to 150% — makes such lending costlier for banks.
Rationale
History of large NPAs from project loans (power, steel, infra). Higher risk weight = disincentivises reckless lending.
1.10 PCA Framework
Regulatory tool by RBI to identify stress before crisis and compel corrective action.
PSL Certificates: Tradable on RBI's eKuber. Bank exceeding target sells to bank falling short. Does not transfer loan/risk.
If unable to meet → shortfall deposited to RIDF, UIDF etc.
Current: RBI issued collateral-free loans limit to MSEs enhanced from ₹10 lakh to ₹20 lakh under PMEGP. Gold/silver pledged voluntarily up to this limit is not a violation.
1.12 Gold Loan Rules (Current)
RBI released draft directions to harmonise gold loan rules across banks and NBFCs.
Combined gold loan portfolio grew >50% in FY24.
LTV remains 75% but for bullet loans, accrued interest included → lower disbursable amounts.
Proof of gold ownership mandated; gold valued at 22-carat price.
Concurrent loans (consumption + income generation) prohibited.
Delay in returning collateral beyond 7 days → ₹5,000/day compensation.
1.12a Digital Lending (Static + Current)
Concept
Detail
FLDG (First Loss Default Guarantee)
Fintech/LSP guarantees to compensate bank/NBFC for initial losses on loans sourced through its platform. RBI capped at 5% of loan portfolio. Ensures fintechs have "skin in the game".
BNPL (Buy Now Pay Later)
Short-term credit at point of sale — consumer buys now, pays later (in instalments or lump sum after interest-free period). RBI classified as digital lending — must comply with digital lending guidelines. KYC mandatory.
Digital Lending Guidelines (2024)
All digital loans must be disbursed/repaid only through borrower's bank account (no pass-through via LSP). Cooling-off period for borrower to exit without penalty. Full disclosure of APR, fees, T&C upfront.
LSP
Lending Service Provider — fintech that sources loans on behalf of regulated entity (bank/NBFC). Cannot disburse or collect money directly.
1.12b NRI Accounts (Static)
NRE
NRO
FCNR(B)
Full Form
Non-Resident External
Non-Resident Ordinary
Foreign Currency Non-Resident (Banks)
Purpose
Park foreign earnings in India
Manage India-earned income (rent, pension, dividends)
Park foreign earnings in foreign currency
Currency
INR
INR
Foreign currency (USD, GBP, EUR, JPY, CAD, AUD)
Repatriability
Fully repatriable
Restricted (up to $1 mn per FY after tax)
Fully repatriable
Interest Tax
Tax-free in India
Taxable in India
Tax-free in India
Types
Savings, Current, FD, RD
Savings, Current, FD, RD
Only Term Deposit (1-5 years)
Joint Holder
Only with another NRI/PIO
Can be with resident Indian
Only with another NRI
Rupee Depreciation Impact
NRI benefits — gets more INR when converting foreign earnings
No direct impact (already in INR)
Protected — deposits in foreign currency
Current: Record surge in NRI deposits driven by rupee depreciation (higher returns on conversion) and attractive interest rates.
Interest rates on NRE/FCNR regulated by RBI — banks can't offer above prescribed ceilings.
1.12c Provisioning Coverage Ratio (Static)
PCR
= (Total Provisions for NPAs / Gross NPAs) × 100
Meaning
Measures how much of bad loans are covered by provisions. Higher PCR = better buffer.
RBI norm
Minimum 70% PCR recommended (not mandatory but strong expectation).
Current
RBI proposes shifting to Expected Credit Loss (ECL) approach — banks provision based on forward-looking probability of default, not just after loan turns NPA. Aligns with IFRS 9 / Ind AS.
PCR vs CRR/SLR:
PCR
CRR
SLR
Purpose
Buffer against NPAs
Monetary tool (liquidity)
Monetary tool (solvency)
What
Provisions set aside
Cash with RBI
G-Secs/gold/cash held
Earns interest
No (it's an expense)
No
Yes (G-Secs earn coupon)
Applied on
Gross NPAs
NDTL
Demand + Time liabilities
1.12d Non-Fund Based Credit Facilities (Static)
Facility
Detail
Letter of Credit (LC)
Bank guarantees payment to seller on behalf of buyer. If buyer defaults, bank pays. Used in trade finance (domestic and international). Types: Sight LC, Usance LC, SBLC (Standby).
Bank Guarantee (BG)
Bank guarantees performance/payment obligation of its client. If client fails, bank compensates beneficiary. Used for: Contract performance, bid security, advance payment.
Co-Acceptance of Bills
Bank adds its acceptance on a bill of exchange already accepted by the drawer. Enhances creditworthiness of the bill. RBI restricts co-acceptance to genuine trade transactions only.
Partial Credit Enhancement (PCE)
Bank provides partial guarantee on a bond/debenture issued by a company. Improves credit rating of the bond → lower borrowing cost. RBI allows banks to provide PCE up to 20% of bond issue.
Non-fund based = Bank doesn't disburse cash upfront. Only a contingent liability (pays only if client defaults).
Current: RBI issued revised guidelines tightening due diligence for non-fund based facilities to prevent misuse.
1.12e Business Correspondent Model (Static)
What
Agents appointed by banks to provide banking services in unbanked/underbanked areas where setting up a branch is not viable.
Individuals, NGOs, Section 8 companies, post offices, retail agents, CSCs.
Cannot be BC
NBFC (except for specific purposes), large corporates.
Key Feature
BCs are agents of the bank, not independent entities. Bank remains liable for all transactions.
PMJDY link
BCs are the backbone of PMJDY — critical for last-mile financial inclusion.
Current
RBI issued revised norms: Enhanced due diligence, grievance mechanism, fair compensation, training standards.
1.13 Other Banking Developments
Topic
Details
Lead Bank Scheme
Introduced 1969 (Nariman Committee). Each district assigned to a bank. Service Area Approach (1989): 15-25 villages per branch. Mandate: 60% CD ratio for rural/semi-urban.
Mandatory explicit consent for digital services. Banks can't force digital channels. Risk mitigation: transaction limits, velocity limits, fraud checks.
Loan Recovery
RBI proposed restraint on harsh methods. No excessive/threatening calls. Dedicated grievance mechanism. Effective July 1, 2026.
Bank Mitras
Business Correspondents — intermediaries in unbanked areas. Critical pillar of PMJDY. Commissions last revised 2014.
Unclaimed Assets
"Aapki Poonji Aapka Adhikar" — unified portal for claiming unclaimed bank deposits, pension, shares, dividends.
Co-lending
Banks + NBFCs jointly finance. Both must retain ≥10% on balance sheet. SMA/NPA status must be synchronised.
SWIFT
Secure messaging (not money transfer). Founded 1973, Belgium. 11,000+ institutions in 200+ countries. BRICS working on BRICS Pay alternative.
RB-IOS 2021
Integrated Ombudsman — merged 3 schemes (Banking 2006, NBFC 2018, Digital 2019). Max ₹20 lakh compensation.
FSIB
Replaced BBB in 2022. Selects top PSB/FI officials. Appointment by DFS, Ministry of Finance.
BAANKNET
PSB Alliance portal for e-auction of attached assets.
Highest in Telangana (per capita volume). Average ticket size declining → broader adoption for small payments.
Digital Payments
Grew 17.9% in value (2024-25), accounting for 97.6% of India's total payments. Paper instruments: 2.4%.
Transaction share
UPI: majority by volume; RTGS: largest by value.
Global Acceptance
Accepted in 8 countries: Bhutan, Singapore, Qatar, Mauritius, Nepal, UAE, Sri Lanka, France. Expanding to East Asia.
NPCI-NIPL-PayNet
Agreement with Malaysia's PayNet for QR-based merchant payments.
Cash Persistence
High in NE States, Kerala, Goa, Delhi — tourism, remittances, rural cash dependence.
Payment System Operators: RBI recognised their association as SRO under 2024 Omnibus Framework.
Post Office Digital Payments: India Post integrating UPI via APT system. 86,000+ post offices upgraded (>50% of network).
2.2 UPI — Static Concepts
Concept
Detail
Settlement Type
UPI uses deferred net settlement — transactions accumulated and settled in batches. NPCI settles via RBI. Not real-time gross settlement (that's RTGS).
Authentication
Two-factor: Device binding (phone registered) + UPI PIN (set by user). For UPI LITE: single-factor (no PIN for small amounts).
Push Transaction
Payer initiates payment (sends money). Example: You scan QR and pay.
Pull Transaction
Payee requests payment (collect request). Example: Merchant sends you a collect request. Requires payer's approval.
VPA
Virtual Payment Address (yourname@bankhandle) — eliminates need to share bank details.
Interoperability
Any UPI app can transact with any bank — enabled by NPCI as central switch.
UPI Variants:
Variant
Detail
UPI LITE
For small-value transactions (≤₹500). On-device wallet — pre-loaded from bank account. No UPI PIN needed. Near-offline capability.
UPI LITE X
Fully offline UPI — works without internet using NFC (Near Field Communication). Ideal for rural areas with poor connectivity.
UPI 123PAY
UPI for feature phones (non-smartphones). Works via IVR (missed call), app-based, or proximity sound-based technology. No internet needed.
UPI Circle
User can delegate UPI payments to trusted person (like family member). Delegator sets spending limit. Delegatee can pay using delegator's account.
UPI Current Developments:
Biometric authentication: UPI payments now possible via face, fingerprint, or wearable devices.
Increased limits (2025): P2M (person-to-merchant) limit raised to ₹5 lakh for select categories (tax, education, healthcare).
Global expansion: Linked with payment systems of Cyprus, Qatar, Bahrain, Europe (in addition to existing 8 countries).
2.3 CTS & Positive Pay System (Static)
CTS (Cheque Truncation System)
Electronic image-based clearing — physical cheque is not moved between banks. Image + MICR data transmitted digitally. Faster clearing (same day). Managed by RBI.
Current
RBI introduced continuous clearing under CTS — cheques now cleared multiple times a day instead of single batch. Reduces settlement time.
Positive Pay System
For cheques of ₹50,000 and above, drawer must electronically confirm key details (date, payee, amount) to the bank before the cheque is presented for clearing. Bank cross-verifies. Prevents cheque fraud.
2.4 AePS — Aadhaar Enabled Payment System (Static)
What
Bank-led payment system using Aadhaar number + biometric (fingerprint/iris) for authentication. No need for debit card, phone, or internet.
Transactions
Cash withdrawal, balance enquiry, cash deposit, Aadhaar-to-Aadhaar fund transfer.
Where
At Banking Correspondent (BC) points — primarily rural/semi-urban.
Fee charged to merchant by acquiring bank for processing card/UPI payment. Typically 0.5-2% of transaction value. Shared between acquiring bank, issuing bank, and card network.
Interchange Fee
Component of MDR paid by acquiring bank to issuing bank. Set by card networks (Visa/Mastercard) or NPCI (for RuPay).
UPI MDR
Government mandated zero MDR on UPI and RuPay debit card transactions (since Jan 2020). Govt compensates banks through annual subsidy.
Budget 2026
Government continued subsidy for UPI and RuPay — ₹3,631 crore allocated to reimburse banks for zero-MDR transactions.
Issue
Zero MDR reduces banks' revenue from digital payments → disincentivises investment in infrastructure. RBI and industry have debated reintroducing small MDR.
2.2 Creditworthiness Measurement
CIC
CRA
Measures
Credit worthiness of individuals
Credit worthiness of companies, govts
Regulator
RBI (Credit Information Companies Act, 2005)
SEBI
Examples
CIBIL, Experian, Equifax, CRIF High Mark
CRISIL, CARE, ICRA, Brickworks
Financial Fraud Risk Indicator — risk-based metric classifying mobile numbers. Developed by DoT.
🎯 Trap vs. Reality — Part 2
#
Trap
Reality
1
Payment Banks can give loans
Payment Banks cannot give loans — no PSL target, can't issue credit cards. Can only issue debit cards.
2
NBFCs can accept demand deposits
NBFCs cannot accept demand deposits — can't issue chequebooks or debit cards. Can accept time deposits only.
3
NBFC deposits are insured by DICGC
NBFC deposits are not insured under DICGC Act. Only bank deposits are covered.
4
PACS are regulated by RBI
PACS are regulated by State Govt only (Registrar of Cooperative Societies). They are credit societies, not banks under BR Act.
5
RRBs are owned entirely by Central Govt
RRB ownership: Central Govt 50%, State Govt 15%, Sponsor Bank 35%.
6
NABARD directly lends to farmers
NABARD provides refinance to RRBs and Co-op Banks — not direct lending to individuals.
7
NPA = loan overdue for 30 days
NPA = loan overdue for >90 days. 30 days = SMA-0 (early warning).
8
SARFAESI applies to all loans
SARFAESI only for secured loans. Not applicable to unsecured, agricultural land, loans <₹1 lakh, or <20% of principal.
9
SWIFT transfers money between banks
SWIFT transfers information/instructions that trigger fund transfers — it does not transfer money itself.
10
SFBs and Payment Banks were recommended by different committees
Both were recommended by the Nachiket Mor Committee (2014).
11
All cooperative banks are under dual regulation
UCBs are regulated by RBI (since 1966 amendment). Rural co-ops have dual regulation (RBI + State Govt). But PACS = only State Govt.
12
PCA Framework applies only to commercial banks
PCA now applies to Banks (since 2002), NBFCs (since 2022), and UCBs (since 2025).
13
AIFIs are a type of NBFC
AIFIs are not NBFCs — they are statutory institutions under separate Acts of Parliament.
14
CRR applies to NBFCs
CRR is not applicable to NBFCs. SLR applies only to NBFC-D (deposit-taking).
