Banking: Structure, RBI and bank types

A narrow bank accepts deposits but keeps them in very safe, liquid assets, mainly government securities and Treasury Bills, instead of making risky commercial loans. Because its assets are almost free of credit risk, depositors' money is protected and the bank cannot fail through bad loans. In India the idea was discussed by the Tarapore and Narasimham committees for weak banks, and the design of payments banks follows it closely: a payments bank cannot lend and must keep at least 75% of its demand deposit balances in SLR-eligible government securities. Option (b) describes a Local Area Bank, not a narrow bank.

CASA stands for Current Account and Savings Account. The CASA ratio is the share of these two kinds of deposit in a bank's total deposits. Current accounts pay no interest and savings accounts pay a low rate, so they are the cheapest source of funds for a bank. A higher CASA ratio therefore lowers the bank's cost of funds and usually improves its net interest margin, while a bank that depends on costly term deposits or bulk borrowing has to lend at higher rates. Option (b) describes the capital adequacy ratio (CRAR), which is a different measure.

Statements 1 and 2 are correct. A scheduled bank is a bank listed in the Second Schedule of the RBI Act, 1934. Under Section 42(6) of that Act, the RBI includes a bank in the Schedule if its paid-up capital and reserves together are worth at least ₹5 lakh and it satisfies the RBI that its affairs are not being run against the interests of depositors. Statement 3 is wrong: Regional Rural Banks are scheduled banks; so are the public sector, private sector, foreign, small finance and payments banks, and many state and urban cooperative banks. Being scheduled gives a bank access to RBI liquidity windows, and in return it keeps the cash reserve ratio with the RBI.

Statements 1, 2 and 3 are correct. Section 22 of the Banking Regulation Act, 1949 makes an RBI licence compulsory for any company that wants to do banking business in India. The Banking Laws (Amendment) Act, 2025, notified on 15 April 2025, amended five laws. From 1 August 2025 it raised the 'substantial interest' threshold from ₹5 lakh, a figure unchanged since 1968, to ₹2 crore, and from 1 November 2025 it allowed up to four nominees (simultaneous or successive) for deposit accounts. Statement 4 reverses the change: the Act increased the maximum tenure of cooperative bank directors, other than the chairperson and whole-time directors, from eight to ten years, to bring it in line with the 97th Constitutional Amendment. So three statements are correct.

Statements 1 and 3 are correct. The mega-merger announced in August 2019 and effective from 1 April 2020 merged ten public sector banks into four. Punjab National Bank absorbed Oriental Bank of Commerce and United Bank of India; Canara Bank absorbed Syndicate Bank; Union Bank of India absorbed Andhra Bank and Corporation Bank; and Indian Bank absorbed Allahabad Bank. So statement 2 is wrong, because Syndicate Bank went to Canara Bank, not Union Bank. Earlier steps were the merger of the SBI associate banks and Bharatiya Mahila Bank into SBI (April 2017) and of Vijaya Bank and Dena Bank into Bank of Baroda (April 2019).

Statements 1 and 2 are correct. A bank's balance sheet follows a simple rule: what the bank owes to others is a liability and what it owns or is owed is an asset. Deposits are money the bank must return to customers on demand or at maturity, so they are its biggest liability, along with its capital, reserves and borrowings. Cash in hand and the balance kept with the RBI for the Cash Reserve Ratio are claims the bank holds, so they sit among assets, even though the bank cannot freely use the CRR money. Statement 3 is wrong: money lent overnight in the call market, shown as 'money at call and short notice', is a claim on the borrowing bank, so it is an asset of the lender. Other assets are investments (mainly government securities held for SLR) and advances, the loans that earn most of a bank's income. The balance-sheet format is laid down in the Third Schedule to the Banking Regulation Act, 1949.

Statements 1 and 2 are correct. The first Narasimham Committee (Committee on the Financial System, 1991) found that high SLR and CRR pre-empted a large part of bank deposits for the Government; it recommended bringing the SLR down to 25% over five years and reducing the CRR, along with prudential norms, deregulated interest rates and a smaller priority-sector share. The second Narasimham Committee (1998) focused on strengthening banks: higher capital adequacy, mergers of strong banks to create larger players, and narrow banking, under which a weak bank would place its funds only in safe, short-term assets while it recovered. Statement 3 is wrong. The P.J. Nayak Committee (2014), set up by the RBI to review governance of bank boards, argued the opposite: it suggested that the Government reduce its holding in public sector banks below 51% and transfer its stake to a Bank Investment Company, so that boards could work at arm's length from the Finance Ministry. Its interim idea of a Bank Board Bureau was adopted in 2016.

All three statements are correct. On 19 July 1969 the Government nationalised the fourteen largest private banks, those with deposits of ₹50 crore or more each, to direct credit to agriculture, small industry and the 'social control' goals of the time. A second round on 15 April 1980 took over six more banks with deposits of ₹200 crore or more each. The 1969 law was challenged in R.C. Cooper v. Union of India (the Bank Nationalisation case, 1970), where the Supreme Court struck down the Act mainly on the ground of inadequate compensation; Parliament then re-enacted the scheme as the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The State Bank of India (1955) was not part of either round.

The sub-indices are Access, Usage and Quality (c). The RBI launched the FI-Index in August 2021. It covers banking, investments, insurance, postal services and pension, and gives one value between 0 and 100. Its three parameters are Access (35%), Usage (45%) and Quality (20%). Options (a), (b) and (d) list areas or ideas that are not its sub-indices; GDP contribution and affordability are not parameters.

Notice the logic: usage has the most weight, because an account that is never used does not mean real inclusion. Quality includes financial literacy and consumer protection. The index is published every July, and it has risen steadily, helped by Jan Dhan (2014) and UPI.

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Statements 1 and 4 are correct (a). The RBI lists how an NBFC differs from a bank. Statement 1 is right: NBFCs cannot accept demand deposits. Statement 4 is right: depositors of NBFCs get no DICGC insurance cover. Statement 3 is wrong: NBFCs are not part of the payment and settlement system and cannot issue cheques drawn on themselves. Statement 2 is wrong: not every NBFC registers with the RBI; insurers report to IRDAI, merchant bankers and brokers to SEBI, and chit funds to State governments. So options (b), (c) and (d) fail.

Notice the current rules: since 2021, the RBI regulates NBFCs through a Scale-Based Regulation in four layers: Base, Middle, Upper and Top. DICGC covers bank deposits up to ₹5 lakh.

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All three statements are correct (c). Statement 1 is right: the Liquidity Adjustment Facility (repo and reverse repo) is open to banks and to standalone primary dealers, which are themselves NBFCs registered with the RBI. Statement 2 is right: foreign portfolio investors may hold G-Secs within limits, and some bonds are fully open to them under the Fully Accessible Route (FAR). Statement 3 is right: NSE and BSE run separate debt segments for trading bonds.

Notice the big change: from 2024, Indian government bonds entered global indices such as JP Morgan's, bringing in large foreign money. The FAR, introduced in 2020, made this possible. Primary dealers help the RBI sell government bonds.

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Neither statement is correct (d). Statement 1 is wrong: under the RBI's 2013 scheme, a foreign bank's wholly owned subsidiary needs a minimum paid-up capital of ₹500 crore. Statement 2 is wrong as worded: on the board, at least 50% must be Indian nationals, NRIs or PIOs, and at least one-third must be Indian nationals resident in India. Statement 2 narrows the rule to Indian nationals alone, so UPSC treated it as wrong.

Notice why the RBI prefers subsidiaries to branches: a subsidiary is a separate Indian company with its own capital, so it is easier to control in a crisis. Subsidiaries also get near national treatment. SBM Bank and DBS Bank India were among the first to take this route.

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Open Market Operations are used for sterilisation (a). When the RBI buys dollars to stop the rupee rising too fast, it pays in rupees, which adds money to the system and can push up inflation. To soak up that extra money, it sells government securities through open market operations. Cancelling the effect of forex operations on money supply this way is called sterilisation. Option (b) is wrong: overseeing payment systems is a separate RBI role. Option (c) is wrong: debt and cash management for governments is its banker role. Option (d) is wrong: regulating NBFCs is supervision.

Notice other sterilisation tools: the Market Stabilisation Scheme (2004), the Standing Deposit Facility (2022) and forex swaps, which avoid selling bonds.

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Statements 2 and 3 are correct (b). Statement 1 is wrong: no local boards regulate Urban Cooperative Banks. They have dual control: the State Registrar of Cooperative Societies handles registration and management, and the RBI regulates their banking business. Statement 2 is right: the 2020 amendment to the Banking Regulation Act allowed UCBs to raise capital through equity shares, preference shares and bonds, with RBI approval. Statement 3 is right: cooperative banks came under the Banking Regulation Act through an amendment in 1966.

Notice the PMC Bank crisis of 2019, which pushed the 2020 amendment giving the RBI more power over cooperative banks. Multi-State cooperative banks are registered under the Central Registrar instead.

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