JAIIB Paper 1 Module C Quiz 7

[Indian Financial System – Overview] A financial system brings together financial institutions, markets, instruments and payment arrangements. It channels funds from surplus units to deficit units, helps mobilise savings, supports payments and enables risk transfer. It cannot guarantee investment returns, and it is broader than currency issuance or taxation.

[Financial system evolution and Narasimham Committee] The 1991 Committee recommended reforms that strengthened banking soundness and efficiency, including prudential norms, capital adequacy, transparency, competition and operational autonomy. The reforms did not abolish regulation or replace the banking system.

[Indian banking structure – Scheduled Commercial Banks] A scheduled bank is one included in the Second Schedule to the RBI Act, 1934. Scheduling is not determined solely by government ownership or geographic reach, and scheduled banks remain subject to applicable regulation.

[Payment Banks and Small Finance Banks] Payments Banks are designed to provide small-value deposits and payment/remittance services, but they are not permitted to undertake lending. Small Finance Banks, by contrast, are licensed to provide basic banking services and extend credit, subject to RBI conditions.

[Regional Rural Banks] RRBs were established to expand institutional credit and banking services in rural areas, particularly for weaker sections and small borrowers. They are banks, not insurance regulators or specialised foreign-exchange dealers.

[Co-operative banking structure] Co-operative banks are based on co-operative ownership and member-oriented governance. Banking activities are subject to the relevant regulatory framework, including RBI regulation; state co-operative laws and authorities may also be relevant depending on the type of institution.

[Banking Regulation Act, 1949] Section 22 of the Banking Regulation Act, 1949 deals with licensing of banking companies. Section 5 contains important definitions, Section 35A empowers RBI to issue directions in specified circumstances, and Section 45 concerns suspension of business and winding up proceedings in specified contexts.

[Reserve Bank of India Act, 1934] Section 22 of the RBI Act provides for the right to issue bank notes. Section 42 relates to cash reserves of scheduled banks, Section 17 covers the business the Bank may transact, and Section 45ZB relates to the Monetary Policy Committee framework.

[Development Financial Institutions – NABARD] NABARD is the apex development financial institution focused on agriculture and rural development, including refinance, institutional development and support for rural credit. EXIM Bank focuses on export-import finance, NHB on housing finance development, and NaBFID on infrastructure financing.

[Development Financial Institutions – SIDBI] SIDBI (Small Industries Development Bank of India) is the principal financial institution for promotion, financing and development of the MSME sector. NABARD focuses on agriculture and rural development, while PFRDA and IRDAI regulate pensions and insurance respectively.

[NaBFID and infrastructure financing] NaBFID was established as a specialised development financial institution to address long-term financing needs for infrastructure and to support development of the infrastructure-finance ecosystem. Deposit insurance, stock-market regulation and retail insurance are separate functions.

[Microfinance – RBI framework] The RBI framework defines a microfinance loan as a collateral-free loan to a household with annual income up to ₹3 lakh. The framework applies across specified regulated entities and includes household-level assessment and repayment-obligation safeguards. A loan secured by collateral is not treated as collateral-free microfinance.

[SHG–Bank Linkage Programme] The SHG–Bank Linkage Programme connects self-help groups with formal banking, often building on group savings, internal lending and collective repayment practices. It is intended to improve access to finance and financial inclusion rather than require every member to provide property collateral.

[NBFCs – Regulatory framework] NBFCs are financial intermediaries regulated primarily by RBI under the relevant framework, with different rules based on type and activity. They generally cannot accept demand deposits, and deposits accepted by eligible NBFCs are not covered by DICGC bank-deposit insurance. Certain NBFC activities may also fall under other regulators’ jurisdiction.

[NBFC Scale-Based Regulation] The RBI’s Scale-Based Regulation framework provides four layers—Base, Middle, Upper and Top—reflecting size, activity and systemic risk. The Top Layer is ideally expected to remain empty but can be populated if the RBI identifies substantial additional systemic risk in an Upper Layer NBFC.

[Insurance regulation and intermediaries] IRDAI regulates and develops the insurance sector in India. SEBI oversees securities markets, PFRDA regulates the pension sector within its mandate, and NHB has a housing-finance development and regulatory role as prescribed by law.

[Insurance repositories and e-Insurance accounts] Insurance repositories maintain policies in electronic form through e-Insurance Accounts, allowing policyholders to access policy records and details. They do not act as the insurer, set monetary policy or operate as stock exchanges.

[Financial regulators – SEBI and PFRDA] SEBI is the securities-market regulator. NABARD is associated with agriculture and rural development, PFRDA with pension-sector regulation, and NaBFID with infrastructure financing.

[Banking-sector reforms – bad bank] An ARC acquires financial assets such as stressed loans from lenders and undertakes resolution or recovery in accordance with the SARFAESI Act and applicable RBI directions. It does not perform central-bank functions or operate as a universal deposit-taking bank merely by being an ARC.

[Banking-sector reforms – EASE] EASE is a reform agenda for public-sector banks focused on better customer experience, responsible lending, technology, data-driven operations, governance and performance. It does not replace RBI regulation or remove prudential requirements.