PRELIMS MASTER PROGRAM (PMP) 2025

ECONOMY-7
REGULATING BANKING SECTOR,
FINANCIAL INCLUSION, CASHLESS
ECONOMY
TABLE OF CONTENTS

1. Some Basics Terms .......................................................................................................................... 2

1) Risk Weighted Asset Ratio ........................................................................................................................ 2
2) Additional Tier-1 Capital ........................................................................................................................... 2
A) AT-1 Bonds in India ........................................................................................................................................................3
3) Classification of Loans (Basic Understanding, useful for prelims) .............................................................. 4
A) Classification of Loans: Secured or Unsecured ..............................................................................................................4
B) Classification of loans: Fixed Interest Rate/ Variable Interest Rates .............................................................................4
C) Classification of loans: Fixed Amount vs Credit Line ......................................................................................................4
D) Classification of loans: By Credit Quality........................................................................................................................4
E) Syndicate Loans: ............................................................................................................................................................4
2. Basel Norms .................................................................................................................................... 5
3. Domestic Systemically Important Banks .......................................................................................... 8
4. Banking Ombudsmen Scheme, 2006................................................................................................ 9
5. Deposit Insurance ........................................................................................................................... 9
6. NPA Issue ...................................................................................................................................... 10
7. Insolvency and Bankruptcy (IBC) ................................................................................................... 14
8. Pre-Packeged Insolvency Resolution Process (PPIRP) For Corporate MSMEs .................................. 16
9. Cross Border Insolvency (International Insolvency) Law in India .................................................... 17
10. Bad Bank: National Asset Reconstruction Company Limited (NARCL) and India Debt
Management Agency (IDMA) ............................................................................................................... 18
11. Financial Inclusion ..................................................................................................................... 20
12. Pradhan Mantri Jan Dhana Yojna (PMJDY) ................................................................................ 21

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13. RBI’s Surplus Transfer ................................................................................................................ 22
14. Understanding some key terms ................................................................................................. 25
1) CHeques ................................................................................................................................................. 25
A) MICR............................................................................................................................................................................ 25
B) Positive Pay System .................................................................................................................................................... 25
2) Core Banking Solution ............................................................................................................................ 26
15. Understanding Cashless Economy ............................................................................................. 26
C) Digital Payment Index of RBI ....................................................................................................................................... 27
16. Understanding various mechanisms of Cashless Economy in More Details ................................ 28
1) RTGS (Real Time Gross Settlement System) ............................................................................................ 28
2) NEFT (National Electronic Fund Transfer)................................................................................................ 28
3) IMPS (Immediate Payment Service) ........................................................................................................ 29
17. Understanding NPCI (National Payment Corporation of India) .................................................. 29
4) Unified Payment Interface (UPI) ............................................................................................................. 30
D) Key Changes made in Dec 2023: ................................................................................................................................. 31
E) Cardless Cash withdrawal system at ATMs ................................................................................................................. 31
18. UPI LITE – On DeVice wallet for small value transaction ............................................................ 32
19. UPI LITE-X.................................................................................................................................. 33
20. UPI Circle................................................................................................................................... 33
21. UPI 123Pay ................................................................................................................................ 33
22. UPI Overdraft ............................................................................................................................ 34
23. Ensuring Inter-operability of QR Codes ...................................................................................... 34
24. NACH (National Automated Clearing House) ............................................................................. 34
25. Aadhar Payment Bridge and Aadhar Enabled Payment System (AePS) ...................................... 34
26. Rupay........................................................................................................................................ 35
27. E-RUPI ....................................................................................................................................... 36
28. Merchant Discount Rate (MDR) ................................................................................................. 36
29. Different types of Cards: ............................................................................................................ 37
1) Debit Cards and Credit Cards: ................................................................................................................. 37
2) Magnetic Stripe card vs EMV Chip Card: ................................................................................................. 37
30. Card Tokenization ..................................................................................................................... 38
31. Different types of ATMs............................................................................................................. 39
32. Micro-ATMs .............................................................................................................................. 40
33. Payment Infrastructure Development Fund (PIDF) Scheme ........................................................ 40
34. Local CUrrency Settlement System ............................................................................................ 41

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1. SOME BASICS TERMS

1) RISK WEIGHTED ASSET RATIO

- Risk Weighted Assets:

» Risk weighted assets of a bank are its assets weighted by their degree of credit risk.
• For e.g.in India, according to RBI Regulations loans issued to government are weighted
at 0.0% risk, while those given for housing purposes is given a weight of 50%.

- Capital to Risk Weighted Asset Ratio (CRAR) / Capital Adequacy Ratio (CAR)
» CAR is a measurement of a bank's available capital expressed as a percentage of a bank's risk-
weighted credit exposure. It is used to protect depositors and promote the stability and
efficiency of financial systems around the world.
» It is calculated by adding a bank's Tier 1 Capital and Tier 2 Capital and dividing the total by its
total risk-weighted assets

- CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets

§ Tier 1 Capital
§ It is bank's core capital, which is used when it needs to absorb losses without ceasing its
operation.
§ It consists of Paid up Capital, capital reserves out of sale of assets, Balance in P&L
account.
§ Additional Tier-1 capital are perpetual bonds which carry a fixed coupon payable
annually from past or present profits of the bank.

- Tier 2 Capital
» It is bank's supplementary capital used to absorb losses if a bank is winding up its assets.
This provides a lesser degree of protection to depositors.
» They include revaluation reserves, general provisions, subordinated term debt, and
hybrid capital instruments.

- Significance of CAR: Minimum CAR makes sure that banks have enough cushion to absorb a reasonable
amount of losses before they become insolvent and consequently loss depositor's funds.

2) ADDITIONAL TIER-1 CAPITAL

- AT-1 bonds are perpetual debt instruments issued by banks to raise money and build up their core
equity capital. There is no maturity date, implying that the issuer doesn't pay the principal amount back
to investors but makes periodical interest payments throughout the life of the bond.

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 » 'Call Option': In practice, AT-1 bonds typically come with a 'call option', which means that the
bank issuing these instruments can redeem them or repay investors after a specified period.

» These bonds were introduced according to Basel banking norms made after the Global Financial
Crisis. These are a form of "contingent convertible (cocos)" bonds which were created to
CoCos have a prevent the need for government-funded bail-outs of precarious banks.
strike price at
which the bond
can be converted- AT-1 bonds are riskier for investors: AT-1 Bonds have equity like characteristics (quasi-Equity
into stock.
They're are used instruments), which permit banks to absorb losses.
by the banking » If the bank faces financial stress, with capital requirement dropping below a specific level,
industry to
absorb losses the covenants of AT-1 bonds typically permit the lender to hold off on interest payments
automatically and or pay a lower amount. The bonds may also be converted into equity, helping to preserve
to satisfy
regulatory capital the capital. Some provisions allow the banks to write-off AT-1 bonds in case of severe
requirements. financial crisis.
A bank that's
struggling » Further, AT-1 bond investor (unlike other bond investors) are not at the top of pecking
financially does order when it comes to receiving pay-outs from a bank facing financial stress. In fact, details
not have to repay
the bond, make sometimes put equity investors above than the bond investors.
interest
payments, or
- How are AT-1 bonds triggered? -> These have different trigger mechanisms:
convert the bond
to stock. ▫ For e.g. if the Bank's capitalization level falls below a preset threshold, the bond may be converted to
CoCo investors
receive interest shares, which eliminates bank's liabilities on the AT-1.
payments that
are typically
much higher than » To compensate for these risks, banks pay investors a higher rate of interest for AT-1 bonds
those from
traditional bonds.
than other debt instruments or deposits.

A) AT-1 BONDS IN INDIA

- Indian Banks don't depend on AT-1 bonds much: In a study, brokerage firm Macquarie sad that while
India's PSU banks have an exposure of 1-2 percent to AT-1 bonds, private sector banks only have an
exposure of 0-1 percent.
- The Indian market for AT-1 bond was upended in March 2020 following the crisis in Yes Bank.
§ Following severe financial stress, RBI and Yes Bank had decided to write-off additional tier-1 (AT-
1) bonds worth Rs 8,415 crores. Mutual funds were amongst the biggest sufferers.

- In 2021, SEBI amended valuation rule for perpetual bonds.

» From 1st April 2023, the residual maturity of AT-1 bonds will become 100 years from the date
of issuance of the bond.
- Note:
» AT-1 bonds are subordinate to Tier-2 bonds.
» Tier-2 Bonds are subordinate to unsecured creditors, banks depositors, and senior bonds. They
are not perpetual instruments. They have a maturity period of minimum 5 years.

- Global News: In Nov 2023, Swiss banking giant UBS sold additional tier-1 (AT-1) bonds for the first time
and after taking over beleaguered banking peer Credit Suisse in March 2023.
- Earlier, it was decided to write-off around $17 billion in AT-1 bonds issued by Credit Suisse. This
had invoked fury from investors.

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3) CLASSIFICATION OF LOANS (BASIC UNDERSTANDING, USEFUL FOR PRELIMS)

A) CLASSIFICATION OF LOANS: SECURED OR UNSECURED

» Secured (backed by collateral -> if the borrower defaults, lender can seize the collateral) (Lower risk
for banks) (Lower interest rates) [E.g. house mortgage, car mortgage etc.]
» Unsecured (not backed by collateral -> personal loans, credit cards, education loans etc.) (Higher
Risk for banks) (Higher Interest rates) [Bankers depend on borrower's creditworthiness]

B) CLASSIFICATION OF LOANS: FIXED INTEREST RATE/ VARIABLE INTEREST RATES

» Fixed Interest Rate: The interest rate on loan is not fixed throughout the year.
» Variable Interest Rate/ Floating Interest Rates: For e.g. loans linked to External Benchmark Based
Lending Rates.
o Teaser Loans: Initial interest rates are low and later increases. This attracts customers but
can be dangerous as the increased interest rates may become difficult to pay. Therefore, RBI
has been increasing restrictions against these kinds of loans.
• Note: Teaser loans was one of the reasons for sub-prime crisis in USA in 2007-08.

C) CLASSIFICATION OF LOANS: FIXED AMOUNT VS CREDIT LINE

» Loan: The final loan amount is given all at one go to customer in the beginning. A loan is a non-
revolving credit limit, which means the borrower only has access to the funds once.
» Credit Line (Revolving Credit): It is a predetermined amount of money which a borrower can access
from a financial institution. The borrower can take the money in phases (as the project is getting
over or as per other needs), but it can't exceed the credit limit. Loans of credit limit can be used and
repaid repeatedly.

D) CLASSIFICATION OF LOANS: BY CREDIT QUALITY

- Prime Loans: Loans to borrowers with excellent credit history (excellent credit ratings)
- Subprime loans: Loans to borrowers with poor credit rating.
o One of the reasons for 2007-08 financial crisis (also known as sub-prime crisis) was lots of
loans given to sub-prime borrowers who were unable to repay these loans.
o Sub-Prime Companies are also called over-leveraged companies.
• Zombie Lending: When Bank is giving loans to sub-prime borrowers and over
leveraged companies

E) SYNDICATE LOANS:
It is a type of loan that is offered by a group of lenders. It generally occurs when a project requires too large
a loan for a single lender or when project needs a specialized lender with expertise in certain asset class.
» Lead Bank or Underwriter: In a syndicate loan, there is a lead bank or underwriter. This institution
is also known as the arranger, the agent, or the lead lender. This lead bank may also put a
proportionally bigger share of the loan.
» Syndicate lending can be both fixed loan or in the form of Credit line.
» Advantages: Allows lenders to spread the risk and take part in financial opportunities that are too
large for their individual capital base.

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2. BASEL NORMS

- What?
» Basel norms/standards are global, voluntary, regulatory framework on bank Capital Adequacy,
Stress Testing and Market Liquidity risks. It is formulated by the Basel Committee on Banking
Supervision (BCBS).
▫ BCBS aims to enhance the understanding of key supervisory issues and improve the
quality of banking supervision worldwide. The committee's secretariat is located at the
Bank of International Settlement (BIS) in Basel, Switzerland.

» About Bank of International Settlement (BIS), Basel

▫ BIS, situated at Basel, Switzerland, is a promoter of Central Banks' cooperation in an
effort to ensure global monetary and financial stability. It was established in 1930 and is
the oldest global financial institution and operates under international law. It is owned
by 60 central banks.

» Need?
▫ Ensuring Risk preparedness
▫ Uniform standards ensures better understandability of banking system's stability.
▫ Global Village -> vulnerability in one country affects other countries (e.g. the 2007-08
crisis). Therefore, the banking system should be stable throughout the world.

- Basel 1 and Basel 2

» In 1988, BCBS introduced capital measurement system called Basel Capital Accord, also called
Basel 1. It focused entirely on credit risk. Here minimum CAR was kept at 8%.
» BASEL II: These were introduced in 2004 by BCBS and were considered a refined and reformed
version of Basel-I accord.
§ It expanded the scope of regulation to include operational risk and introduced more
sophisticated risk assessment methods.
§ In India Basel-II was implemented from 2009.

- Basel 3: They were released in Dec 2010 and

were a response to the 2007-08 financial
crisis where the banking system realized that
the BASEL-II guidelines were not enough to
protect bank depositors. It was realized that
banks were under-capitalized, over-
leveraged, and had a greater reliance on
short-term funding.
» Pillar -1: Enhanced Minimum Capital
& Liquidity Requirements: It sets out minimum amount of capital that banks must hold to cover
their credit, market and operational risks. They are also required to hold a capital conservation
buffer to absorb losses during period of stress.
» Pillar -2: Supervisory Review Process: Regulators are required to conduct a regular supervisory
review of a bank's risk management practices and capital adequacy.

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» Pillar-3: Market Discipline: It requires banks to disclose information about their risk profile,
capital adequacy, and risk management practices.

» Major Changes in the Basel Norm for Banking

▫ Better Capital Quality: Minimum Common Equity and Tier 1 Capital Requirements:
» The minimum requirement of common equity, the highest form of loss-
absorbing capital, has been raised under Basel-III from 2% to 4.5% of total risk-
weighted assets.
» The Overall Tier 1 Capital Requirement, consisting of not only common equity
but also other qualifying financial instruments, will also increase from the current
minimum 4% to 6%.
» Although the minimum total capital requirement will remain at the current 8%,
yet the required total capital will increase to 10.5% when combined with
conservation buffer.
▫ Capital Conservation Buffer: Now banks are required to hold a capital conservation
buffer of 2.5%. The aim of asking to build capital conservation buffer is to ensure that
banks maintain a cushion of capital that can be used to absorb losses during period of
financial and economic stress.
▫ Counter cyclical Capital Buffer (CCCB) is another key element of Basel-III norms
» Objective is to increase capital requirements in good times and decrease them in
bad times.
» The buffer will range from 0% - 2.5% consisting of common equity or other full
loss-absorbing capital and will be stored with Central Bank.

▫ Leverage Ratio
» A leverage ratio is a relative amount of capital to total assets (not risk-weighted).
The aim is to put a cap on swelling of leverage in the banking sector on a global
basis.
§ LR = (Tier1 Capital)/ (Total Assets)
» Banks are expected to maintain a leverage ratio of 3% under BASEL-III norms.

- Liquidity Ratio
» A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) got
introduced in 2015 and 2018 respectively.
» Liquidity Coverage Ratio refers to proportion of highly liquid assets held by
financial institutions, to ensure their ongoing ability to meet short-term
obligations. Banks are required to hold an amount of high-quality liquid assets
that's enough to fund cash outflow for 30 days. This is aimed to ensure that
financial institutions possess suitable capital preservation, to ride out any short-
term liquidity disruptions, that may plague the market.
§ LCR is calculated by dividing a bank's high quality liquid assets by its total
net cash flows, over a 30-day stress period.
§ Note: Urjit Patel Committee has recommended that India should move
onto LCR and do away with Statutory Liquidity Ratio (SLR) mechanism.
This will make our system aligned with international mechanism. India is
still using SLR.

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 ▫ Net Stable Funding Requirement (NSFR)
» Introduced by BASEL-III it is a liquidity standard requiring banks to hold enough
stable funding to cover the duration of their long-term assets. Banks must
maintain a ratio of 100% to satisfy the requirement.
• It is defined as the amount of available stable funding (ASF) in relation to
the amount of required stable funding.
» The ratio ensures that banks do not undertake excessive maturity
transformation, which is the practice of using short-term funding to meet the
long-term liability.

- Systematically Important Financial Institutions (SIFI): As part of the macro-prudential

framework, systematically important banks will be expected to have a loss absorbing
capability beyond the Basel-III requirements.
» Also called G-SIBs (Globally Systematically important banks)
» No Indian bank has been listed in this.

- Implementation: The Basel-III norms were implemented from 1st Jan 2023 after several
extension due to COVID-19 crisis.

- Basel III and India:

» Basel III norms has been introduced in India in a phased manner:
▫ In 2013, RBI started with implementation of Capital Adequacy Ratio (CAR).
▫ By 2019, full implementation was expected, but it was delayed.
» What are the norms in India?
» Capital Adequacy Ratio: 11.5% (stricter than Basel-III norm of 10.5%)
§ Indian banks need to maintain a minimum capital adequacy ratio (CAR) of 9%, in addition
to a capital conservation buffer, which would be in the form of common equity at 2.5%
of the risk weighted assets.
§ Indian banks as per RBI directions are required to maintain 5.5% of Common
Equity Tier 1 (CET1) as against 4.5% required under the BASEL-III framework.
§ Note1: CAR requirements applied by RBI is stricter than the BASEL-III norms.
§ Note2: In case of SFB and PB, the CAR requirement is that of 15% from 1st March
2019.

» Countercyclical Buffer: The RBI introduced a countercyclical buffer (CCB) for Indian banks, which
ranges from 0% - 2.5% of risk weighted assets depending on macro-economic conditions.
» Leverage Ratio: The RBI introduced a leverage ratio requirement for Indian banks, which
measures leverage ratio (LR) = (Tier1 Capital)/ (Total Assets).
▫ The minimum requirement was set at 4.5%, with a buffer of 2.5%.
» LCR requires banks to hold a minimum amount high-quality liquid assets (HQLA) to meet the
short term liquidity needs.
▫ In India LCR was introduced in a phased manner with a minimum requirement of 60% in
2015, increasing to 100% by Jan 2019.
» NSFR of at least 100% has been mandated by RBI

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 ▫ Individual banks may have to adopt stricter standards to reflect funding risks and
compliance.
▫ Date of applicability will be announced later.
» Disclosure requirements (under Pillar-3) have also been introduced.
» RBI has also revised regulation on the implementation of leverage ratio for banks in India
under the BASEL-III capital regulation. (July 2019)
▫ RBI has decided that the minimum leverage ratio shall be 4% for D-SIBS and 3.5% for
other banks.
▫ These guidelines shall be effective from the quarter commencing Oct 01, 2019.

» In 2021, RBI extended Basel-III capital framework to AIFIs (All India Financial Institutions) (Oct
2021)
▫ All India Financial Institutions include EXIM Bank, NABARD, NHB, SIDBI and NaBFID
§ The AIFIs are increasingly being seen as key institutions to promote the flow of
direct or indirect credit to the economic sectors they cater to.
▫ AIFIs will implement all the three pillars of BASEL-III capital regulations:
▫ The RBI wants AIFIs to achieve minimum total capital of 9% and capital conservation
buffer of 2.5%, with the minimum total capital and CCB adding to 11.5% by 1st April
2022.
§ For NHB, since the financial year is July-June, the implementation shall
commence on 1st July 2022.

» Current Situation in India: ESI 2022-23:

▫ The CRAR of SCBs has been rising sequentially in the post-asset quality review period.
§ It remains well-above the minimum capital requirement, including Capital
Conservation Buffer (CCB) requirements of 11.5%.

3. DOMESTIC SYSTEMICALLY IMPORTANT BANKS

- D-SIBs means the bank is too big to fail i.e. their failure would be significant disruption to the essential
services they provide to the banking system and the overall economy.
» According to RBI, these banks have become systemically important due to their size, cross
jurisdictional activities, complexity and lack of substitution and inter-connection. Banks
whose assets exceed 2% of the GDP are considered part of this group.
» An additional common equity requirement has to be applied to DSIBs.
» Too big to fail indicates that in case of distress government is expected to support these
banks. Due to this perception, they enjoy certain advantages in funding/investment.

- Beginning of DSIB-Framework: The RBI issued the framework for dealing with D-SIBs in July 2014.
» SBI was included in the list in 2015, HDFC in 2016 and ICICI in 2017. But they are placed in
different list.

- The list of D-SIBs is as follows (as of Nov 2024)

» SBI, HDFC, and ICICI continue to be identified as DSIBs.
» In 2023, ICICI was continued in Bucket-1; but HDFC was moved to Bucket-2 (from Bucket-1) and
SBI was moved to Bucket-4 (from Bucket-3). This situation was retained in Nov 2024 review also.

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 » So, starting 1st of April 2025, both SBI and HDFC will have to fulfill higher buffer requirements
of the higher bucket.
§ Till 31st March 2025, surcharge applicable will be 0.60% for SBI and 0.20% for HDFC Bank.

- Note: Global SIBS:

» The Basel - Switzerland based Financial Stability Board (FSB), an initiative of G20 nations, has
identified, in consultation with the Basel Committee on Banking Supervision (BCBS), a list of G-
SIBS.
• There are 29 G-SIBs currently (no Indian Bank), including JP Morgan Chase, Citibank,
HSBC, Bank of America, Agricultural Bank of China, Bank of China, Barclays, BNP Paribas,
Deutsche Bank, and Goldman Sachs.
» In case a foreign bank having branch presence in India is a G-SIB, it has to maintain additional
CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate to its Risk Weighted
Assets (RWAs) in India i.e., additional CET1 buffer prescribed by the home regulator (amount)
multiplied by India RWA as per consolidated global Group books divided by total consolidated
global Group RWA.

4. BANKING OMBUDSMEN SCHEME, 2006

- About Banking Ombudsmen Scheme
» It is a mechanism created by RBI to address the complaints raised by bank customers. The
scheme was first introduced under section 35A of the Banking regulation Act, 1949 in 1995.
Current scheme was introduced in 2006.
» Banking ombudsmen is appointed by RBI and is responsible for redressal of customer's
complaint against deficiencies in services. The complaint must be first filed in the bank before
approaching the ombudsmen.
» The scheme covers all schedule commercial banks, RRBs and Scheduled Primary Cooperative
Banks.

5. DEPOSIT INSURANCE
- Introduction: Deposit Insurance Situation in India
» The deposit insurance provisions in India were introduced through the Deposit Insurance
Corporation Act, 1962.
▫ This insurance cover is provided by Deposit Insurance and Credit Guarantee
Corporation (DICGC), a fully owned subsidiary of RBI. The banks pay deposit insurance
premium (0.1% per annum i.e. 10 paisa for Rs 100 insured), which is held by the DICGC
and in turn is used to pay deposits if needed.
▫ Under the act, the Corporation is liable to pay the insured deposit to depositors of an
insured bank. Such liability may arise when an insured bank undergoes:

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 i. Liquidation (sale of assets or closing down of the bank)
ii. Reconstruction or any other arrangement under the scheme
iii. Merger or acquisition by another bank

▫ Note:
§ Deposit Insurance and Credit Guarantee Corporation (DICGC) came into
existence in 1978 with the merger of Deposit Insurance Corporation (DIC) and
Credit Guarantee Corporation of India Ltd. (CGCI).
§ It is a fully owned subsidiary of RBI.

- This insurance cover is available to:

» Commercial banks including SFBs, PBs, Indian branches of foreign banks, RRBs, Local Area
Banks and Cooperative Banks.
» All bank deposits - savings, fixed, current and recurring - payable in India are covered. However,
deposits of central/state/foreign governments, inter-bank deposits, deposits of the state land
development banks with the state cooperative banks etc. are not covered.

- Budget 2020-21 increased the deposit insurance to Rs 5 lakh.

» This is the first time since 1993 that the deposit insurance cover has been raised.
» The raised cover will address 98.3% of all deposit accounts by number, and 50.9% of deposits
by value.
§ Globally, deposit insurance coverage is only 80 per cent globally and it covers only 20-30
per cent of deposit value

- Note-1: If the funds are in different types of ownership or are deposited into separate banks, they would
then be separately insured.

- Problems that remained even after this increased in insured deposit to 5 Lakh:
» When various restrictions, such as moratorium, etc are imposed on a bank by RBI, genuine
depositors continued to face serious difficulties and were unable to access their own money
even to the extent of the insured value, despite insurance being in place. Therefore, the Deposit
Insurance and Credit Guarantee Corporation (Amendment) Act, 2021 was enacted.

- Key Features of the 2021 amendment

» Introduced interim payments
» Timeline for interim payments
» No ceiling on premium: The earlier act earlier had a ceiling of 15 paise on premium, which has
been removed. Now, the ceiling on premium will be notified by DICGC, with the prior approval
of RBI.

6. NPA ISSUE
- Non-Performing Assets - Basics
» If the interest/ principal instalment of a loan is not paid until due date, it is called bad loan.
» According to RBI A Non-Performing Asset is a loan or advance where instalment/interest is
due for more than 90 days in case of a term loan or overdraft account/ credit account.

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 Similarly in case of agriculture loans an account becomes an NPA if the instalment/interest
remains overdue for two crop season for a short duration crop, or one crop season for a long
duration crop.

» Stressed Assets refers to all NPAs plus restructured assets plus written off assets.

» NPA Classifications: Banks are required to classify NPAS into one of the following three
categories.
• A substandard asset is an asset classified as an NPA or less than 12 months.
• A doubtful asset is an asset that has been non-performing for more than 12 months.
• Loss assets are loans with losses identified by the bank, auditor, or inspector that
need to be fully written off.

- NPAs of Indian Banking System had reached 11.18% in 2018.

- Why had NPAs increased so much in the last decade?

I. Credit Boom in mid 2000s and then the global financial crisis
II. Indian creditors used the strategy of "Giving time to time" and hoped that economic
revival will reduce NPAs -> this only led to evergreening of NPAs
III. Poor Recognition: Banks were initially reluctant to recognize NPAs. The true extent of NPA
problem only started becoming clear once the RBI initiated the Asset Quality Review in 2015.
IV. Poor Governance and Regulation of Banks - Crony Capitalism - Poor Recovery
V. Lack of specialization of banks in recovering bad loans / NPAs
VI. Other Factors which negatively impacted businesses
• Key Judicial Decisions -> Abrupt cancellation of coal mines and spectrum allocation.
• Land Acquisition and environmental clearance issues also blocked a number of
projects and contributed towards increasing NPAs.
VII. Insolvency and Bankruptcy Procedure had not proved very effective yet.
VIII. Absence of strict action against bank frauds of high magnitude

- IMPACT Of High NPAs

» On Banking Sector: Decreased income; downgrading of credit rating; negatively impacts
achievement of capital adequacy; reduced competitiveness of PSBs to private banks.
» Hinders Economic Growth: Reduction in bank credit; higher interest rates
» On Government: Increased fiscal burden due to the need of recapitalizing PSBs.
» On Individuals/ Society
§ Relatively expensive loans and decreased interest on deposits.
§ Less budget/credit available for social welfare programs.
§ Eventually its common man's money in the form of deposits which have been lend
by banks and is put at risk in case the bank fails.

- Balance Sheet Syndrome with Indian Characteristics: High NPAs (TBS problem) have derailed
growth in other countries. But huge NPAs have not had as huge an impact as in case of other
countries. This is being considered 'Balance Sheet Syndrome with Indian Characteristics'
» This is because the NPA's are concentrated in public sector banks which not only hold their
own capital, but are ultimately backed by the government who would eventually come to

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 save these banks in case situation gets out of hand. Therefore, creditors have retained
confidence in the banking system and there has been no bank runs, no stress in the inter-
bank market etc.
» Mid 2000s boom had created enough infrastructure (in India's severe supply constraint
economy), that there was ample room for the economy to grow after the GFC.

- 4 Key steps in solving the NPA problem (As suggested by Economic Survey of India 2015-16)
» 4Rs, Recognition, Recapitalization, Resolution, Reform
» Recognition: Asset Quality Review by RBI has done this and brought the real numbers
forward.
» Recapitalization: Bank recapitalization has been a regular feature of the Union
Budget since 2016-17. Between FY17 and FY21, the centre has infused about 3.31
lakh crore into banks.
» Resolution: The underlying stressed assets in the corporate sector must be sold or
rehabilitated (resolution) as the government has been desiring.
• IBC has played an important role in increasing recovery.
» Reform: Future incentives for private sector and corporates must be set-right to
avoid repetition of the problem.
• Reform is one area where least progress has been made.
• Governance structure of the banks have almost remained the same

- Steps Taken So Far

1. Know your customer (KYC) norms have been strengthened
2. Early identification and reporting of stress - Special Mention Account (As per revised
framework for resolution of stressed assets - Feb 2018)
§ Lenders are required to identify incipient stress in loan accounts, immediately on
default, by classifying assets as Special Mention Account (SMA) as per the following
categories
SMA Basis for classification - principal or interest payment or
Subcategory any other amount wholly or partly overdue
SMA-0 1-30 days
SMA-1 31-60 days
SMA-2 61-90 days
§This has to be reported to Central Repository of Information on Large Credit (CRILC)
on all borrowers entities having aggregate exposure of Rs 5 crore and above with
them.
3. Asset Quality Review by RBI
4. Indradhanush Scheme: Improving 7 different areas of banks (including capitalization)
5. Insolvency and Bankruptcy Code (IBC-2016)
6. Fugitive Economic Offenders Act, 2018, is also acting as a deterrent and may prevent future
offenders from running to other countries.
7. Project Sashakt (July 2018)

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 • It is a five pronged strategy to resolve bad loans outline - SME resolution approach,
bank led resolution approach, AMC/AIF led resolution approach, NCLT/IBC approach
and asset trading platform

8. Prompt Corrective Action (PCA) Framework

• What is PCA?
§ It is a framework under which banks with weak financial matrices are put under
watch by RBI.
§ The framework uses three parameters to measure the weakness of a bank:
• Capital Ratio
• Asset Quality
• Profitability
• RBI's revised PCA framework for banks applicable from 1st Jan 2022.
§ The framework would apply on all banks operating in India, including foreign
banks.
§ Three parameters to measure the weakness of the bank: Capital, Asset Quality
and Leverage Ratio.
§ Indicators to be tracked for capital, asset quality and leverage would be
CRAR/Common Equity Tier-1 Ratio, Net NPA Ratio, and Tier 1 Leverage Ratio.
§ Breach of any risk threshold may result in invocation the PCA.
§ Entry: A bank will generally be placed under PCA framework based on the
Audited Annual Financial Results and the ongoing Supervisory Assessment made
by RBI.
• RBI's corrective action plan based on risk threshold
§ RBI can put mandatory restrictions on dividend distribution, branch
expansion, and management compensation based on the risk threshold.
§ In an extreme situation, breach of third threshold, would identify bank
as likely candidate for resolution through amalgamation,
reconstruction or winding up.
§ Further there can be discretional restrictions on bank's lending limit, special
audit etc.
§ RBI can supersede the bank's board, under the PCA.

• Idea behind PCA:

§ Handle problems before they attain crisis situation.
§ Essentially PCA helps RBI monitor key performance indicators of banks, and
taking corrective measures, to restore financial health of a bank.
9. UDAY Scheme (for state power discoms)-> As they were one of the largest NPA holders.
10. Governance Reform in banks
• E.g. Separation of the post of CMD and Chairman
§ Impact: Current Situation:
• As per RBI's Financial Stability report released in Dec 2023, SCB's gross NPAs ratio continued
to decline to a multi-year low of 3.2% and the net Non-Performing Asset (NNPA) ratio to
0.8% in Sep 2023.
• Why decrease: Lower slippages and reduction in outstanding GNPAs through recoveries,
upgrades, and write offs led to this decrease.

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7. INSOLVENCY AND BANKRUPTCY (IBC)
- IBC 2016 is based on the recommendations of the Bankruptcy Law Reform Committee headed by TK
Viswanathan.
- Ministry:
» IBC was spearheaded in Parliament by Ministry of Finance.
» However, the administration of the IBC, 2016 has been transferred to the Ministry of Corporate
Affairs from July 2016.
- Objectives:
» Maximize the value of debtor's asset
» Promote and encourage entrepreneurship
» Ensure timely and effective resolution of insolvency and bankruptcy cases
» Balance the interest of all stakeholders including creditors, debtors and staff
» Facilitate the promotion of a competitive market and economy
» Provide for a framework to deal with cross border insolvency

- Provisions:
i. Unified Framework: Applicable to both Individuals and companies
ii. Clear Coherent and Speedy Process
» Corporate debtors (LLPs and companies):
ú Corporate Insolvency Resolution Process (CIRP):
§ Under this, step are taken for revival, selling the company to a suitable
buyer, etc.
§ Resolution plan has to be approved by CoC (at least 66% of the creditors
in CoC).
ú Insolvency Resolution initiation can be done by any of the two types of creditors:
Financial and Operational.
ú As soon as the matter is admitted in NCLT, NCLT appoints an Interim Resolution
Professional (IRP) who takes over the management of the defaulting debtor.
ú Committee of Creditors (CoC): A committee consisting of only financial creditors
is formed by the IRP.
§ Operational creditors having aggregate dues of at least 10% of the total
debt are invited into the meeting of COC. But they are not members of
CoC and thus don't have any voting rights.
§ It is the committee of creditors which steers the resolution process and
all significant decisions, thus reducing further erosion of the value during
the resolution process.
ú Time Bound Resolution: Insolvency resolution - Max (180 + 90 Days) 330 days
(including the liquidation process) (after the Aug 2019 Amendment)
§ Liquidation - if the insolvency resolution fails. (Note: through the SC
Judgment in the Essar Steel case, the 330-day deadline is no more
mandatory).
ú Came into force on 1st Dec 2016).
iii. It offers a paradigm shift from the existing 'Debtor in possession' to a 'Creditor in control'
regime.
iv. Institutional Infrastructure for Insolvency and Bankruptcy Process under IBC

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 • Insolvency and Bankruptcy Board of India -> Insolvency regulator, oversees the
functioning of insolvency intermediaries (IPs, IPAs, IUs)
• Insolvency Professionals and Insolvency Professional Agencies -> private bodies ->
specialized in helping sick companies -> license from IBBI required
• Information Utilities
§ Collate all information about debtors to prevent serial defaulters from misusing
the system.
• Adjudication (Corporates: NCLT->NCLAT->SC; Individuals: DRT -> DRAT -> SC)
v. Insolvency and Bankruptcy fund: For establishment and use by Insolvency and Bankruptcy
Board of India and also for implementing various provisions of the act.
vi. Provisions to address cross border insolvency through bilateral agreements with other
countries.
vii. Protection of worker's interest
• The code has provision to ensure that the money due to workers and employees from
the provident fund, the pension fund and the
gratuity fund shouldn't be included in the
estate of the bankrupt company or
individual.
• Further, worker's salaries for upto 24 months
will get first priority in case of liquidation of
assets of a company, ahead of secured
creditors.
• It also enables workers to initiate the
insolvency process and they will be first in
line to get the proceeds of liquidations.

viii.Disqualification of bankrupt from holding public office

• Provisions that disqualify anyone declared
bankrupt from holding public office, thereby
ensuring that politicians and government
officials cannot hold any public office if
declared bankrupt.

- During COVID-19 pandemic, the Insolvency and Bankruptcy (Amendment) Ordinance, 2020 was
promulgated, which suspended initiation of CIRP of a corporate debtor (CD) for any default arising on
or after 25th March 2020. This suspension of code was extended twice for 3 months each on 24th Sep
2020 and 22nd Dec 2020.

- Significance/Key Achievements of IBC:

» IBC has created a cohesive and comprehensive insolvency ecosystem.
» It has made it easy for creditors to deal with default.
» It has professionalized insolvency services by creation of two professions namely: the
insolvency profession and the valuation profession
» It has fast tracked the insolvency and bankruptcy process and has resulted into higher recovery
and thus has benefitted all the creditors including banks. As per ESI 2021-22:
ú In value terms 74% of distressed assets were rescued.

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 ú The average time for resolution (428 days) and liquidation (375 days) is a reduction over
the pre-IBC times.
» IBC has also ensured fast track closing of businesses enhancing a key component in India's Ease
of Doing Business.
» IBC has also led to Behavioural change.
ú Increased responsibility and accountability have been ensured among borrowers. This
has ensured that business entities are paying upfront before being declared insolvent.
ú Further, in case of distress, thousands of debtors are resolving distress in the early stage
of distress.

- Concerns:
» Little Realizable Value: RBI's Financial Stability report in Dec 2023 mentions little realizable
value to the creditors (16.9% in 2020-21; 22.4% in 2021-22; and 37.1% in 2022-23).
• Also, according to the 32nd report on Parliamentary Standing Committee on Finance,
submitted to Parliament on Aug 3, 2021: the recovery rates are low upto 5% with
haircuts as much as 95%.
» Numerous issues with Resolution Professionals (RPs) for which regulators IPA and IBBI have
taken disciplinary action on 123 Insolvency Professionals (IPs) out of 203 inspections conducted
till date (i.e. around 60% of IPs inspected were found to be indulging in malpractices).
» Capacity of NCLT: Large number of pending cases

8. PRE-PACKEGED INSOLVENCY RESOLUTION PROCESS (PPIRP) FOR CORPORATE MSMES

- In April 2021, GoI amended the IBC Code, 2016 to introduced PPIRP for corporate MSME with defaults
up to Rs 1 crore.
- Key Features of PPIRP
» Voluntary Initiation: It is initiated voluntarily by the debtor. The debtor and creditor mutually
work on a resolution plan and approach NCLT for its approval.
» Expedited Resolution: Unlike CIRP, where 330 days are given, PPIRP is expected to be a faster
process, with a maximum timeline of 120 days for the submission and approval of the pre-
packaged plan.
» It has rigour and discipline of the CIRP. At the same time, it is informal upto a point and formal
thereafter.
» Minimal Disruption: PPIRP minimizes disruptions to the debtor's business operations as
negotiations are conducted before the formal insolvency process begins. The management of
the affairs of the CD shall continue to vest in the Board of Directors/ partners of the CD and the
resolution professional conducts the process under the guidance and oversight of the creditors.
» Creditor's involvement in the resolution plan make it more likely to be feasible and acceptable
by them.
» The informality in the beginning (pre-initiation phase) offers flexibility for the CD and its
creditors to swiftly explore and negotiate the best way to resolve stress in the business.
» The post-initiation stage drives value maximization and bestows the resolution plan with
statutory protection.

- Advantages:
» Time efficient resolution; Early revival of stressed assets; Improved business continuity ;
Enhanced stakeholder involvement; Reduction in cost in insolvency resolution process; Preserve

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 asset value: Early resolution can help preserve the value of the debtor's assets, preventing
further deterioration and maximizing creditor's recovery

- Performance Analysis:
» Poor Start: In two years of the program, only four cases have been admitted.
ú Banks are reluctant to get into an agreement with borrowers with no chance of full
recovery.
• If banks allow these promoters to escape with a haircut, there will be a flood of
such requests, creating asset quality challenges.
ú Further, small companies were not well equipped to approach banks with a clear plan,
which was another reason for its failure.

9. CROSS BORDER INSOLVENCY (INTERNATIONAL INSOLVENCY) LAW IN INDIA

- Intro: Cross border Insolvency mechanisms deals with financially distressed debtors who have assets or
creditors in more than one country. Currently, the Cross Border Insolvency has no clear legal framework
in India.

- Key components of Cross border insolvency:

i. Which law is applicable in case of cross border insolvency
ii. Who has the jurisdiction to administer the insolvency process.
iii. How are judgments asserting control on assets enforced.

- The UN Commission on International Trade Law (UNCITRAL) Model law

» This is a model law issued by UNCITRAL in 1997, to assist countries in regulating cross border
insolvency. Over the years it has emerged as the most widely accepted legal framework to deal
with cross-border insolvency issues.
» It is based on the principle of Modified Universalism (as opposed to Territorialism and
Universalism).
» The law addresses the core issues of cross border insolvency cases with the help of four main
principles:
i. Access: It allows foreign professionals and creditors direct access to domestic courts and
enables them to participate in and commence domestic insolvency proceedings against
a debtor
ii. Recognition: It allows recognition of foreign proceedings and enables courts to
determine relief accordingly.
iii. Cooperation: It provides a framework for cooperation between insolvency professionals
and court of countries.
iv. Coordination: It allows for coordination in the conduct of concurrent proceedings in
different jurisdiction.
v. Main Proceeding: Principle for identifying where the insolvency proceeding (the main
proceeding) should be initiated?
• The law sets out the Centre of Main Interests (COMI) in deciding where the main
proceedings should be commenced.
§ The law doesn't define COMI, but it is generally presumed to be debtor's
registered office or location of its assets and its significant operations.

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 • Further, the resolution professionals in this jurisdiction (where the main
proceeding is initiated) are granted recognition and access in proceedings in
other jurisdictions, where the insolvent entity may have assets (the non-main
proceedings).

§ Other Facts for Pre

§ UNCITRAL, established in 1966, is a subsidiary body of the General Assembly of the UN.
§ It is mandated with harmonization and unification of the international trade law, as per
the website.

- Cross Border Insolvency in India

» India has not yet adopted UNCITRAL Model Law. (as of Oct 2023)
» Earlier, Justice V. Balakrishna Eradi Committee in 2000 and N.L. Mitra Committee had
recommended the adoption of the model law.
» Under the current IBC, 2016, two sections deal with cross border insolvency.
§ Section 234 of the code empowers government to sign treaties to enable the provisions
of the code.
§ Section 235 provides for a 'letter of request' by the liquidator for action on the assets of
the company situated in other country. However, a reciprocal arrangement must exist
there.
» India has not yet initiated the bilateral treaty mechanism to deal with cross border insolvency
provisions.

- The Report of Insolvency Law Committee (ILC) - chaired by Corporate Affairs Secretary Injeti Srinivas
(Oct 2018)
» Key Findings: Section 234 and 235 of the IBC, don't provide a comprehensive framework on
cross-border insolvency.
» Key recommendations
ú Adoption of the UNCITRAL Model Law as it provides a comprehensive framework to
deal with cross border insolvency issues.
ú Some changes to ensure consistency with IBC
ú Incorporate Reciprocity Provision
ú Foreign Creditors should be treated on par with domestic creditors.
ú Centre should draw up a list of such indicative factors in subordinate legislation which
can help while ascertaining the COMI (Centre of Main Interests)

10. BAD BANK: NATIONAL ASSET RECONSTRUCTION COMPANY LIMITED (NARCL) AND INDIA DEBT
MANAGEMENT AGENCY (IDMA)
- Understanding Bad Bank: A bad bank refers to a financial institution set up to buy the bad loans of
another bank with significant NPAs and to resolve the stressed asset. This frees the original bank from
the burden of resolving their bad loans.
▫ Advantages
» Specialized and Efficient Recovery.
» Banks can focus on core business
» Availability of fresh credit will further boost economic growth in the count

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- Understanding the two layered structure of Bad Bank in India
» The bad bank's structure is two-layered with the National Asset Reconstruction Company
Limited (NARCL) operating as an ARC and a separate asset management company called India
Debt Management Agency (IDMA) restructuring and turning around bad loans.
» NARCL was incorporated on 7th July 2021 and has received a certificate of registration from the
RBI to commence the business as an ARC in Oct 2021.
▫ The NARCL is 51% owned by PSBs and the remaining by private sector lenders.
• Canara bank is the sponsor of the NARCL and would be holding 12% equity in
NARCL. Other public sector banks would pick up less than 10% each in the ARC.
▫ The NARCL has an authorized capital of Rs 100 crore and the paid-up capital of Rs 74.6
crores. This is going to rise going forward as NARCL is expected to have a capital base of
Rs 6,000 - 7,000 crore eventually.
▫ The capital structure of NARCL will have component of both equity and debt.
▫ NARCL is expected to acquire stressed assets at net book value by offering 15% of it in
upfront cash, and the rest (85%) in the form of security receipts (SRs).
§ The government will not have any direct equity contribution to NARCL. But it will
guarantee the security receipts issued by NARCL, which will buy the bad loans
from banks.
» IDRCL was incorporated on 3rd Sep 2021 and will have a min 51% ownership of private sector
banks and balance will be held by Public Sector banks.
» NARCL and IDCRL's relationship will be defined through a debt management agreement where
in NARCL will aggregate and acquire the stressed assets and IDRCL, in turn, will provide stressed
assets management and resolution services to NARCL on an exclusive basis. The term of IDRCL
will be co-terminus with that of NARCL.

- Resolution Mechanism
» NARCL will acquire assets by making an offer to the lead bank and the lead bank with an offer in
hand (of NARCL) will run a ‘Swiss Challenge’ process wherein other interested ARCs / Bidders
will be invited to better the anchor offer made by NARCL. NARCL will have the right of first
refusal to match the best counterproposal.
» If NARCL is declared as a preferred bidder, NARCL shall initiate asset acquisition process and
acquire the assets in the underlying Trusts.
§ After acquiring the assets, IDRCL shall prepare and suggest the proposed restructuring /
resolution plan, strategies, etc. for each Underlying Trust Assets. Post the approval of
resolution from NARCL, IDRCL shall also assist in implementation of resolution. The
assets acquired shall be resolved using existing resolution tools within the RBI framework
for ARCs.

- E.g:
» In Jan 2023, NARCL acquired its first stressed asset - Jaypee Infratech - from lenders. It acquired
their exposure aggregating about Rs 9,200 crore at a 55% haircut.
§ IDBI Bank, the lead bank to the consortium of lenders with an exposure of Rs 3,750 crore,
received Rs 253 crore (15% of Rs 1,687.5 crore recovery in cash) and Rs 1,435 crore (85%
of the recovery) in the form of security.
- Performance Analysis: NARCL aims to take over Rs 2 lakh crores worth banks' stressed or NPAs by
FY26. It has reached Rs 1 lakh crore mark in FY24.

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 - Some Issues:
» Primary issue plaguing NARCL's progress is the dual structure of NARCL and IDRCL, which many
within NARCL believe is not delivering the expected results.
» NARCL's protracted due diligence process and its tendency to present offers that banks
consider inadequate have also contributed to the challenge faced by the initiative.
» Bid-Offer Spread has remained a concern:
» Public sector ARCs like NARCL, subject to government audit and preferring safer options, may
end up incurring higher due diligence costs by paying substantial fees to external consultants
compared to private sector stressed asset firms.

11. FINANCIAL INCLUSION

- Financial inclusion is defined as the process of ensuring access to adequate financial services
(Banking, Credit, Investment, Insurance, financial literacy, remittance etc) in a cost effective and
timely manner for vulnerable and low-income groups.

- Advantages:
» Need of Financial Inclusion
▫ Increased Economic output; Social Benefit; Reducing Inequalities and Poverty Reduction;
Efficiency in implementation of government schemes; Protects low-income households from
money lenders (loans) and Ponzi schemes (savings); Promoting gender equality and women
empowerment.

- Key steps taken so far to promote financial inclusion

» Nationalization of Banks; RRBs, Cooperatives; Lead Bank Scheme;
» JAM Trinity: The JAM Trinity, comprising Jan Dhan (bank accounts), Aadhaar (biometric ID), and
Mobile (digital access), is a framework designed to enhance financial inclusion in India.
» Pradhan Mantri Jan Dhan Yojana (PMJDY)
» Niche Banking:
» Priority Sector Lending initiative of RBI
» Various saving schemes under post office
» Various Insurance and Pension initiatives
§ Schemes such as the Pradhan Mantri Suraksha Bima Yojana to provide accidental death
or disability cover and Atal Pension Yojana to provide pension cover to subscribing bank
account holders
» Initiatives to promote digital payments - like UPI, BHIM App, RuPAY Card etc.
» Financial Literacy Programs like Financial Education Program for Adults (FEPA), National Centre
for Financial Education (NCFE) and Digital Financial Literacy Campaigns.

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12. PRADHAN MANTRI JAN DHANA YOJNA (PMJDY)

- PM Modi announced PMJDY in his independence day speech on 15th Aug 2014 and the scheme was
launched on 28th Aug 2014.

- Objectives: Ensure access of financial products & services at an affordable cost; Use of technology to
lower cost and widen reach.

- The scheme is aimed at providing key financial inclusion services like banking facilities, financial literacy,
insurance cover etc. to all the households (adult individuals) in the country.

- Eligibility: Any person who is Indian citizen above the age of 10 and does not have a bank account can
open an account with zero balance. It also provides for a relaxed KYC norm.

- Basic Tenets of the scheme

» Banking the Unbanked
» Securing the Unsecured
» Funding the Unfunded

- Six Pillars of PMJDY (National Mission on Financial Inclusion)

i. Banking Service in every 5 kilo meters: The country has been divided into a number of Sub
Service Areas (SSA), each with 1000-1500 households. One banking outlet (branch or BC) have
been established within a distance of five km from every SSA.
ii. Account for each family Individual: Bank account for each adult individual with accident
insurance of Rs 1,00,000 2,00,000 for Rupay debit card holders and overdraft facility of Rs 5,000,
Rs 10,000.
iii. Financial Literacy
iv. Credit Guarantee Funds to cover potential defaults in overdrafts;
v. Micro Insurance:
§ Accidental insurance cover on RuPay cards holders has been increased from Rs 1 Lakh to
Rs 2 Lakh for PMJDY accounts opened from 28.8.2018.
vi. Pension Transfers: Pension payments under the Swavalamban Yojana scheme for workers in
the unorganized sector is being paid through bank accounts.
- Other Features
• Zero balance accounts etc.
- Achievements so far:
i. RBI's FI-Index, capturing the extent of financial inclusion across the country, rose to 64.2 in
March 2024 (vis-a-vis 60.1 in March 2023), showing growth across all parameters.
» Prelims: The index captures information on various aspects of financial inclusion in a single
value ranging from 0 to 100, where 0 represent complete financial exclusion and 100
indicates full financial inclusion. It consists of three parameters (access (35%); usage (45%),
and quality (20%)) - with each of these consisting of various dimensions, which are computed
based on a number of indicators.
▫ It incorporates banking, investment, insurance, postal as well as pension sector.
ii. Near Universal Banking Coverage with more than 53 crore accounts by Aug 2024 have ensured
that almost all Indian households are withing the formal banking sector.

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 ▫ More than 80% of adults have a formal financial account, compared to around 50% in
2011.
▫ Gender gaps in account ownership has reduced
▫ Further, around 1.26 lakh Bank Mitras are providing branchless banking services in the
sub-service areas.
▫ This has led to higher savings for the poor, reducing rural inflation, starting self-
employment initiatives, better accidental insurance and promote cashless transactions
▫ Around 81.2% accounts are operative.
▫ Note:
▫ More than 78% of these accounts have been contributed by PSBs.
▫ UP (9 crores) and Bihar (6 crores) have opened highest number of PMJDY
accounts.
iii. Empowering the weaker sections: For e.g.: As of Aug 2024, 55.5% of the account belong to
women, and 67% have been opened in Rural/ Semi-Urban areas.
iv. DBT Schemes more successful now
v. With bank accounts government can also provide access to cheaper credit.
vi. Increased coverage of accidental insurance:
§ Around 34 crore RuPay cards have been issued to these accounts without charge,
which also provide Rs 2 lakh accident insurance cover.
vii. International organizations have lauded the initiatives as revolutionary one

- Key changes made in Sep 2018 (Jan Dhan 2.0)

i. Open Ended Scheme -> the scheme will now run indefinitely.
ii. Higher Insurance Cover: Accident insurance cover for the Rupay card holder has been raised to
Rs 2 Lakh (from Rs 1 lakh earlier)
iii. Higher Overdraft facility (OD) to Rs 10,000 (from earlier Rs 5,000)
iv. Revision of age range for availing the OD facility
▫ 18-65 (from earlier 18-60 years)

13. RBI’S SURPLUS TRANSFER

- Background:
» Where does RBI get its Revenue from?
▫ Foreign exchange transactions (RBI buys when dollar is cheap and sells when it is
expensive (i.e. high in demand)
▫ Interest Income (from government bonds, Liquidity Adjustment Facilities etc.)
▫ It also earns a management commission on handling the borrowing of state
governments and the central government.
» Where does RBI spend money? Most of the RBI's expenditure is on printing of currency notes,
and on staff, besides the commission it gives to banks for undertaking transactions on behalf of
the government across the country and to primary dealers, including banks, for underwriting
some of these borrowings.
» The Surplus (Revenue - Expenditure) is used for transfers to government and increasing the RBI
reserves.

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 ▫ Section 47 of the RBI Act, 1934: "After making provision for bad and doubtful debts,
depreciation in assets, contributions to staff and superannuation fund [and for all other
matters for which] provision is to be made by or under this Act or which are usually
provided for by bankers, the balance, of the profits shall be paid to the Central
Government"
▫ Section 48 of the RBI Act, 1934 exempts the bank from paying any income tax, wealth
tax or super tax.

- RBI's Reserves:
» The RBI has three mains funds that together comprise its reserves. These are:
▫ Currency and Gold Revaluation Account (CGRA) (basically the Economic Capital Buffer)
» It is mantained by RBI to take care of currency risk, interest rate risk and
movement in gold prices risk.
» Unrealized gains or losses on valuation of foreign currency assets (FCA) and gold
are not taken to the income account but instead accounted for in the CGRA. Net
balance in CGRA therefore varies as per the size of the asset base, its valuation
and movement in the exchange rate and price of gold.
» When CGRA is not sufficient to fully meet exchange losses, it is replenished from
the CF.
» It is by far the largest reserve account of RBI and makes up the significant bulk of
RBI's reserve.
▫ Contingency Fund (CF):
» It is a provision meant to meet unexpected and unforeseen contingencies
» The CF is the second biggest fund of RBI after the CGRA
▫ Asset Development Fund (ADF)
» It makes up a much smaller share of reserves and is also focused on contingent
times.

- In 2018, there was a difference between RBI and Finance Ministry on the amount of reserve RBI should
keep.
- Following this, RBI in consultation with the Central Government, had constituted a committee chaired
by former RBI governor Bimal Jalan to review the Extant Economic Capital Framework (ECF) for the
RBI.
» Key Recommendations of the Revised Economic Capital Framework (ECF) for the RBI:
▫ Make a distinction in the economic capital of the RBI between 'revaluation reserves' and
'realized equity'.
§ Revaluation Reserves are risk buffer against market risks and not available for
transfers.
▫ Economic Capital Levels (basically CGRA) should be in the range of 20-24.5% of the
balance sheet

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 ▫ RBI should maintain a Contingent Risk Buffer - which mostly comes from CF - of between
5.5-6.5% of the Central Bank's Balance Sheet. The excess amount should be transferred
to government.
▫ A transfer of surplus from the RBI to the government in a phased manner in accordance
with the existing practice
- In Aug 2019, RBI board accepted all the above recommendations of the Bimal Jalan Panel committee
to transfer Rs 1.76 lakh crore of surplus to government.

- RBI's Central Board approves the transfer of surplus (i.e dividend) to the Union government for every
accounting year.

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14. UNDERSTANDING SOME KEY TERMS

1) CHEQUES

A) MICR
- Work on the basis of Cheque Truncation System (CTS).
- Cheque Truncation System (CTS) or Image-based Clearing System (ICS) is an initiative of RBI that began
in 2010, for faster clearing of cheques.
- Understanding Cheque Truncation:
» Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some
point by the presenting bank en-route to the paying bank branch.
» Instead of the physical cheque, an electronic image of the cheque is transmitted to the paying
bank branch through the clearing house, along with relevant information like data on the MICR
band, date of presentation, presenting bank etc.
» It thus eliminates the associated cost of movement of the physical cheques and reducing the
time required for the cheque processing.

- Understanding MICR (Magnetic Ink Character Recognition): It is a technology used primarily to identify
and process checks.
» MICR on the checks is the strings of characters that appears at the bottom left of the cheque.
» It consists of three groups of numbers - the Cheque number, Bank routing number the
customer's checking account number.
» It is called a magnetic ink character recognition line in reference to the print technology,
that is used to enable a machine to read, process, and record information.
▫ Note: it is designed to be readable by both individuals and sorting equipment
(Machine).
» They can't be faked or copied, due to the use of magnetic ink and unique fonts.
» Advantages:
▫ Mechanization of cheque processing, and enhanced security against fraud.

B) POSITIVE PAY SYSTEM

- What is positive pay system for cheques?
» Under the system, the drawer/issuer of a cheque needs to submit customer's account number,
cheque number, cheque date, amount and the beneficiary’s name.
» It is a measure by RBI to prevent frauds perpetrated through cheque payments in the form of
tampering or alteration of the cheque.
» The drawer of the cheque reconfirms key details of the cheque which can then be cross checked
at the time of presentation of the cheque while processing of the payment.
» If the cheque detailed provided through positive pay match with the details of the
cheque presented, the payment is processed, else, the cheque is returned.

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 » Some banks have made it mandatory for cheques with value of Rs 50,000 and above.

2) CORE BANKING SOLUTION

- Core Banking Solution is the backend software used by banks to manage primary operation. It is a
centralized system that allows customers or businesses to carry out transaction from any branch rather
than only from one branch where the account is opened.
» Thus, it removes the impediment of geo-specific transactions.
» In fact, CORE is an acronym for 'Centralized Online Real-time Exchange'.
- E-Kuber is the CBS of RBI.
» It provides the provision for a single current account for each bank across the country, with
decentralized access to this account from anywhere anytime.

15. UNDERSTANDING CASHLESS ECONOMY

- Cashless economy refers to a scenario when monetary transaction in an economy happens mostly
electronically and use of cash is absent or negligible.

- Advantages: Cash economy is expensive; Fighting Corruption; Increased tax compliance and thus tax
revenue; Financial inclusion -> A key enabler of financial inclusion drive has been the digitalization of
the financial system; Reduced chances of petty crimes; Environment Friendly;

- Evolution of Digital Payment in India

» Digital Payments system in India has been steered by the Reserve Bank of India (RBI). It first
published the Payment Systems in India, in 1998.
» RTGS - Real Time Gross Settlement System was launched by RBI in 2004.
» NEFT (National Electronic Funds Transfer) was introduced in 2005.
» NPCI functions under the Payment and Settlement Systems Act, 2007 in order to create a
robust payments and settlement infrastructure for India. It is a not-for-profit organization set
up under the section 8 of the Companies Act, 2013.
§ Several of its initiatives like IMPS, UPI, Rupay, e-RUPI etc. have played a crucial role in
promoting cashless economy in India.
» Increased focus on Digital Public Infrastructure (DPI) such as Aadhar, e-KYC, AEPS, UPI, Bharat
QR, Digilocker, e-sign, Open Network for Digital Commerce etc.

- Steps taken to promote less cash economy:

» Key Policy Measures: Demonetization; PMJD; Various Tax initiatives; Ombudsmen Scheme for
Digital Transaction; Digidhan Mission launched in 2017 seeks to promote and oversee the
establishment, growth, and sustenance of a robust, secure, and inclusive national digital
payments ecosystem; Various initiatives for digital literacy like PMDISHA

» Further, RBI has also announced that all charges for NEFT and RTGS collected from banks will
be waived off from 1st July 2019 and have asked banks to pass on the benefits to customers.

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 » No MDR payment charges on payment via RUPAY, UPI from 1st Jan 2020 (Dec 2019)

» E-RUPI: It is a person-specific, and purpose-specific digital voucher where it is not required for
the customer to have a bank account and is operable on basic phones, even in areas which lack
an internet connection. The first use case of e-RUPI was implemented for COVID-19 vaccination
program which saw more than 2.2 lakh beneficiaries being issued the voucher
» Launch of CBDC.
» UPI123Pay - launched in March 2024 by RBI

- The advances in Digital Financial Inclusion are based on India Stack, a comprehensive digital identity,
payment, and data-management system.
§ The three critical components of India stack are the Identity Layer, Payment Layer and Data
Governance Layer.
• Regarding the identity layer, Aadhar has been instrumental in transforming India's
authentication ecosystem. It has facilitated the KYC process, reducing the cost of e-KYC
from USD 12 to 6 cents, extending banking to millions of Indians and improving financial
inclusion.
• In Payment Layer, UPI has revolutionized country's payment system. The success of UPI
has been enhanced by increased penetration of smart phones with more than 116.5
crore smartphone subscribers as of 31st March 2024.
• The value of transaction conducted on UPI platform has increased multifold from
Rs 0.07 lakh crore in FY17 to Rs 200 lakh crore in FY24.
• The Data Governance Layer has focused on ensuring ownership and control over the
user data to its rightful owners.

C) DIGITAL PAYMENT INDEX OF RBI

- It captures the extent of digitization of payments across the country.
» The index captures (i) Payment Enablers (weight 25%), (ii) Payment Infrastructure – Demand-
side factors (10%), (iii) Payment Infrastructure – Supply-side factors (15%), (iv) Payment
Performance (45%) and (v) Consumer Centricity (5%).

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 • The RBI-DPI has been constructed with March 2018 as the base period, i.e. DPI score for March 2018
is set at 100.
• The DPI for March 2019 and March 2020 work out to 153.47 and 207.84 respectively, indicating
appreciable growth.
• The Digital Payments Index increased from 100 in March 2018 (base period) to 304.06 in September
2021

16. UNDERSTANDING VARIOUS MECHANISMS OF CASHLESS ECONOMY IN MORE DETAILS

1) RTGS (REAL TIME GROSS SETTLEMENT SYSTEM)

- RTGS is a system where there is continuous and real-time settlement of fund transfers, individually on
a transaction-by-transaction basis (without netting).
» Real Time - Processing of instructions at the time they are received
» Gross Settlement - Settlement of the funds transfer instruction occurs individually.

- The system was introduced by RBI in 2004 and is meant for large-value instantaneous fund transfers.
The minimum amount of transaction is Rs 2 Lakh, there is no maximum limit. It provided a major thrust
towards large value digital payments.

- Other features:
» Available Round the Clock (RTC) (365X24X7): From 15th Dec 2020, 00:30 am, the RTGS systems
is available round the clock. India has thus become one of the few countries in the world to
operate its RTGS system around the clock throughout the year. Earlier, the RTGS facility was
available between 7 am - 6 pm.
» No processing charges by RBI: From 1st July 2019, RBI has waived processing charges levied by
it for RTGS transactions. Banks may pass on the benefits to its customers. And even if bank
decides to charge customers for RTGS transaction, the charges are capped by RBI.
» Time taken for effecting funds transaction - the beneficiary bank must credit the beneficiary's
account within 30 mins of receiving the fund transfer message.

- How is it different from NEFT?

» In NEFT, transactions received upto a particular time are processed in batches.
» In RTGS, transaction is processed continuously on a transaction by transaction basis throughout
the day.

2) NEFT (NATIONAL ELECTRONIC FUND TRANSFER)

- It is a nationwide centralized payment system owned and operated by RBI. It was started by RBI in
2005 to support retail payment system.

- How does NEFT system operate:

» Initiation of the fund transfer request (internet/mobile banking facility/ offline-branch facility)
• Note: Remitter can also visit his/her bank branch for initiating NEFT funds transfer
through branch/ offline mode.

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 » The originating bank prepares a message and sends the message to its pooling centre, also
called the NEFT Service Center. The Pooling centre will forward the message to the NEFT
Processing Center, operated by RBI, to be included in the next available batch.

- Key features
» Round the clock availability on all days of the year: From Dec 2019, RBI operationalized NEFT
and IMPS 24X7
» Near-real time funds transfer: Unlike RTGS (Real-time gross settlement), fund transfers
through the NEFT system don't occur in real-time basis. It settles funds in 48 half-hourly batches
occurring between 00.30 am to 00:00 am everyday regardless of holiday or otherwise. (Before
Dec 2019, there were 23 hourly batches).
» No Levy or charges by RBI
» No charges to the saving bank account customers for online NEFT transaction.
» There is no limit, either minimum or maximum on the amount of funds that could be transferred
using NEFT.
• But, banks may impose their own restrictions.

• Note: Before 2021, only banks provided RTGS and NEFT facilities. But in 2021, RBI announced that non-
banking entities can also become member of Centralized Payment Systems. So, in future, Amazonpay,
Phonepe etc could also directly allow it.

3) IMPS (IMMEDIATE PAYMENT SERVICE)

- IMPS was launched by NPCI in Nov 2010.

- It provides robust & real time fund transfer which offers an instant 24x7, interbank electronic fund
transfer service that could be accessed on multiple channels like mobile, internet, ATM, SMS.
- The facility is provided by NPCI through its existing NFS facility.
- It sub-serves the goal of RBI to promote digital payment.
- Service difference between IMPS and NEFT
§ 24X7 availability of IMPS was a major advantage over NEFT and RTGS, but now even NEFT and
RTGS are available 24X7.
§ IMPS is chargeable, where RTGS and NEFT's charges have been waived off from 1st Jan 2020.
§ IMPS has a transaction limit of Rs 5 Lakh, whereas in NEFT there is not such upper limit.
§ IMPS transfers can also be done using 7 digit Mobile Money Identifier, whereas in NEFT we have
to use Account number and IFSC.

17. UNDERSTANDING NPCI (NATIONAL PAYMENT CORPORATION OF INDIA)

- Introduction
» It is an umbrella organization for operating retail payment and settlement system in India.
• It is an initiative of Reserve Bank of India (RBI) and Indian Bank Association (IBA) under
the provisions of the Payment and Settlement System Act, 2007, for creating a robust
Payment and Settlement Infrastructure in the country.
• Considering the utility nature of the objects of NPCI, it has been incorporated as a "not
for profit" company under the provisions of section 8 of the companies act 2013, with
an intention to provide infrastructure to the entire banking system in India for physical
as well as electronic payment and settlement systems.

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 » The organization is owned by consortium of major banks and has been promoted by RBI.
» The ten core promoter banks are SBI, PNB, Canara Bank, BoB, UBI, BoI, ICICI Bank, Citibank and
HSBC.
» In 2016, the shareholding was broad-based to 56 member banks to include more banks
representing all sectors.
» In 2020, new entities regulated by RBI were introduced, consisting of payment service operators,
payment banks, SFBs etc.

- The Aim of NPCI is to create infrastructure of large dimension and operate on high volumes resulting
in payment services at a fraction of present cost.

- Important projects taken by it

» RuPay; IMPS; UPI.
» NACH (National Automated Clearing House): It is an offline web-based system for bulk push
and pull transaction.
» Aadhar Based Payment Bridge (APB) System: It is helping the government and government
agencies make direct benefit transfers for various central and state sponsored schemes.
» Aadhar Enabled Payment System (AePS);
» National Financial Switch: It is the largest network of shared Automated Teller Machines
(ATMs) in India, facilitating inter-operable cash withdrawal, card-to-card fund transfer, and
interoperable cash deposit transactions, among other value-added services in the country.
» Bharat Bill Payment System; Rupay Credit Card; National Common Mobility Card.
» National Electronic Toll Collection (NETC) - To meet the electronic tolling requirements of the
Indian market.

4) UNIFIED PAYMENT INTERFACE (UPI)

- UPI is a real time payment system that allows money transfer between any two bank accounts by using
a mobile device. It was developed by NPCI and is controlled by RBI and IBA (Indian Bank Association).
» UPI has been build using IMPS payment architecture system and hence transactions are very
fast.
» It was launched in April 2016.
- How Safe is UPI
» The UPI is as much secure as internet banking or mobile banking.
» A two-step authentication:
§ To open the UPI app, you have to give a pin
§ To transfer the money, again you have to enter the MPIN (Mobile Banking Personal
Identification Number) or UPI PIN
» It is safe as customers only share a Virtual Payment Address (VPA) and provide no other sensitive
information. Receiver won't get your bank account details.
» Only while connecting your bank account to UPI, you have to authenticate it through the card
details and OTP.

- Benefits of UPI

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 • UPI is revolutionary. It had made the banking transaction a breeze. Former RBI governor Rajan
considered the launch of UPI as the Whatsapp moment.
i. 24X7 Immediate transfer
ii. Simple: No need of bank account number and IFSC code of the recipient
iii. Less costly: A transaction through UPI is much cheaper than the other methods.
iv. Many bank accounts can be connected to one VPA: However, the BHIM app only links
one account at a time
v. Enabled many apps: PhonePe, BharatPay, PayTM etc. .
vi. Benefits of UPI over IMPS: No need of bank account details and IFSC code (both required
in IMPS)
vii. Allows both push transaction and pull transaction.
viii. Benefits over other mobile wallets
§ No need of transfer of money into wallet, so always getting interest on the
money.
§ Mobile wallets generally allow transfer between wallets, here the transfer can be
between different banks.

- Other key terms associated with UPI

• Virtual Payment Address (VPA)

D) KEY CHANGES MADE IN DEC 2023:

§ In Dec 2023, RBI increased the limits for UPI Transactions for payments made to hospitals and
educational institutes to Rs 5 lakh per transaction

§ E-Mandate limit has also been increased from Rs 15,000 to Rs 1 lakh.

• Background: The framework for processing of e-mandates for recurring transactions was
introduced in Aug 2019 to balance the safety and security of digital transactions with customer
convenience. UPI Mandate can be used in scenario where money is to be transferred later by
providing commitment at present. It is used for recurring payments to buy mutual funds, pay
insurance premiums and credit card repayments. The limits for execution of e-mandates
without Additional Factor Authentication (AFA) currently stands at Rs 15,000.
• RBI has proposed to exempt he requirement of AFA for transactions upto Rs 1 lakh for the
following categories viz. subscription to mutual funds, payment of insurance premium and
payment of credit card bills.
• Note: This change in limit is expected to increase the usage of e-mandate.

E) CARDLESS CASH WITHDRAWAL SYSTEM AT ATMS

§ In April 2022, RBI announced cardless cash withdrawals at ATMs in the country.
§ How will it function?
• Cardless cash withdrawal are to be authenticated via UPI. So, ATMs will show an option for
withdrawing cash using UPI. Once, a user selects the option, they can input the amount to be
withdrawn.
• A QR code will be generated on the ATM. Users will then need to scan that code via their UPI
App, and enter password to withdraw cash from the ATM. Until now, only fund transfers

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 between accounts were enabled via UPI. With this option, consumers can take cash out from
ATMs without a card.
• The feature will let consumers use UPI on their smartphones to withdraw cash from ATMs. All
ATMs across the country will enable this feature in their cash-dispensing machines.
§ Advantages: Enhance security of cash withdrawal (no card skimming or card cloning risk)
§ Progress: Currently, only existing customers of a few banks are allowed to withdraw cash without cards,
and from specific Bank's ATM networks. However, RBI's move to allow interoperability in cardless
withdrawals will enable users to take cash from all bank's ATM

18. UPI LITE – ON DEVICE WALLET FOR SMALL VALUE TRANSACTION

- UPI Lite is a payment solution created by NPCI to process low value transactions that have been set at
below Rs 1000 (increased from Rs 500 to Rs 1000 in Oct 2024)
• It is intended to be customer friendly and enable transactions without utilizing a bank's core
banking system in real-time, while providing adequate security. It doesn't require UPI PIN for
transaction.
• It allows for offline debits for payment.
• Note: You can authorize the payment offline, but final settlement happens online
only.

- Technicality:
• With the consent of its UPI registered customer, an issuing bank an create an escrow on the
customer's account up to a set limit.
• This refillable, 'stored value' resides in the common library of the Customer's UPI App, and can
only be used for low value payments without leaning into core-banking infrastructure.

- UPI LITE permits a 'stored value' balance limit of Rs 5,000 (increased from Rs 2,000 in Oct 2024), which
the registered customer can use for a single transaction below Rs 1000 each and refill the stored value
as necessary from the linked bank account.
- Replenishment of funds is only permitted in an online mode with additional factor authentication (AFA)
or using the UPI Autopay feature.
• Note: While debit is allowed offline in UPI-Lite, credit can only happen in online mode.

- UPI Lite auto top-up features: Using this feature, UPI-Lite balance could be reloaded automatically
when it falls below a certain threshold.
» This feature enables users to establish a pre-defined balance threshold. When the account
balance falls below this threshold, it will automatically be replenished with a selected amount
specified by the user.
» This eliminates manual to-ups, ensuring uninterrupted digital transactions through UPI Lite.
» Auto top-up feature was enabled from 1st Nov and wallets are bringing it slowly.

- Note: Several popular UPI apps, including Google Pay, PhonePe, Paytm, and BHIM offer UPI Lite
Functionality to their users.

- Benefits:

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 • For Banks:
• Scalable through enhanced transaction capacity.
• No-real time load on Core Banking System
• Functionality in poor internet areas
• Better customer experience
• For Merchants:
• Seamless instant payments from customers; Huge success rate
• For Customers:
• Round the clock availability; Convenient to track;
• Spend management with daily limit
• No worry of hiding UPI pin in crowded areas.

19. UPI LITE-X

- It is a new feature launched by the RBI that enables offline transaction.
§ It allows users to send and receive money without needing an internet connection. It uses Near
Field Communication (NFC) technology. It allows quick payments between on-device wallets.
§ This features is particularly useful in poor connectivity areas such as underground stations or
remote locations.

20. UPI CIRCLE

- UPI Circle is a feature that allows you to authorize someone else to transact from your UPI account
with a set limit as per requirements.
» This allows secondary user to conduct transactions from your UPI-linked bank account without
having their bank account linked to UPI.
» In fact, UPI Circle allows many individuals to use one bank account to make UPI payments.
These individuals can be family members like senior citizens, spouses or children, who may not
have a bank account or where the family members use a single bank account.
» A primary user can delegate upto five secondary users and secondary users can accept
delegation from only one primary user.

- There are two access type options:

» Spend with limits - here the primary user sets a pre-defined limit and the secondary user can
transact only within that limit.
» Approve every payment - Here you have to approve each transaction initiated by secondary
user.

- These delegated payments through UPI will help consumers in many ways.
» Help consumers manage payments or their dependents.

21. UPI 123PAY

- UPI 123Pay is a payment system designed for feature phone users who don't have smartphones.
» It allows you to make UPI payment without any internet connection.

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 - It work through four convenient technology options:
i. Calling an IVR number
ii. Using App Functionality on feature phones
iii. Missed call based approach: User gives a missed call on designated IVR number. Post giving a
missed call, user receives an immediate incoming call on the registered mobile number. The call
then promotes user to authenticate the transaction by entering their PIN.
iv. Exploring proximity sound-based payments: It allows users to make contactless payments to
merchants. Users call the IVR number, choose Pay to Merchant, tap their phone on the
merchant's device (Sound Box), press # upon hearing the unique tone, enter the payment
amount and UPI Pin, and complete the transaction.
- Update: In Oct 2024, the RBI has proposed to increase the transaction limit of UPI123Pay from Rs 5,000
to Rs 10,000.
» Banks and other service providers have been asked to follow limits before 1st Jan.

22. UPI OVERDRAFT

"Pre-Sanctioned credit line/ Overdraft in UPI"

- It is an innovative financial offering developed in alignment with RBI's vision to transform customer's
access to credit.
- This product empowers individuals and small businesses to obtain pre-sanctioned credit lines from
banks, which can be utilized immediately for transactions through UPI.

23. ENSURING INTER-OPERABILITY OF QR CODES

- Interoperability in QR payment systems means enabling seamless transactions across different QR code-
based payment platforms. This capability can ensure enhanced user convenience, increased merchant
adoption; cost efficiency (for both merchants and payment service providers); increased penetration of
digital payments; increased innovation and competition.
- UPI has revolutionized QR payments by ensuring inter-operability between various banks and payment
service providers.
§ BharatQR is another initiative that supports interoperable QR Code payments.

24. NACH (NATIONAL AUTOMATED CLEARING HOUSE)

- NPCI has implemented NACH for Banks, Financial Institutions, Corporates and Government, as a web-
based solution to facilitate interbank, high volume, electronic transaction which are repetitive and
periodic in nature.
» It is used for making bulk payments towards distribution of subsidies, dividends, interests,
salary, pension, etc.
» It is also used for bulk transactions towards collection of payments pertaining to telephone,
electricity, water, loans, investments in mutual funds etc

25. AADHAR PAYMENT BRIDGE AND AADHAR ENABLED PAYMENT SYSTEM (AEPS)

i. Aadhaar Payments Bridge

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 » It is a repository of Aadhaar number of residents and their primary bank account number used
for receiving all social security and entitlement payments from various government agencies.
» It requires using Aadhaar number as the primary key for all entitlement payments.
» This would weed out all fakes and ghosts from the system and ensure that the benefits reach
the intended beneficiary.

i. Aadhaar Enabled Payment System (AEPS1)

» Aadhaar Enabled Payment System is a payment service empowering a bank customer to use
Aadhaar as his/her identity to access his/ her respective Aadhaar enabled bank account and
perform basic banking transactions like balance enquiry, cash deposit, cash withdrawal,
remittances through a Business Correspondent.
§ It allows online interoperable financial transaction at PoS (Point of Sale/ Micro ATM)
through the Business correspondent (BC)/ Bank Mitra of any bank using the Aadhaar
authentication.

» Services available under AEPS?

§ Under AEPS currently following services are present:
• Balance Enquiry
• Aadhaar to Aadhaar fund transfer
• Cash Withdrawal
• Cash Deposit
• BFD
§ The above services are available in both inter-bank and intra-bank modes.
§ Except fund transfer, you can perform all the transactions through the banking
correspondent of any bank. For fund transfer, you need BC of your own bank.

» Requirements for AEPS transaction

i. Aadhaar number
ii. Bank IIN or Name
iii. Fingerprint
It means, you have to only remember your Aadhaar number to do the bank
transaction.

» Fund transfer limit: Bank defined limit. No limit for RBI.

26. RUPAY
- Details
» RuPay is the first of its kind domestic card payment network of India with wide acceptance at
ATMs, POS devices and e-commerce websites across India.
» It is highly secure network that protects against Phising.
» It was launched by NPCI in 2012 and is a step towards RBI's vision of "less cash economy" and
establishing a domestic, open, and multilateral system of payments.
§ The name is derived from the words 'Rupee and 'Payment', and emphasizes that it is
India's own initiative for card payments.
» It has a comparatively lower processing cost and processing time in comparison to Visa and
Master Card.

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 - In addition to the Government Scheme cards, RuPay Classic, Platinum & Select variant cards are
designed for the masses and affluent customers.

- RuPay offers excellent privileges and benefits such as International Acceptance, Domestic and
International Lounge Access, free personal accidental death and permanent total disability insurance
coverage, various merchant offers etc.

- Other Important products developed

» RuPay Contactless: It has a vision of One Card for all Payment systems.
§ Rupay Contactless has revolutionized payments by introducing offline wallet-based
payment mechanism.
§ This product enables seamless payment across all use cases, including travel by different
metros and other transport systems across the country, retail shopping, and purchases.

- RuPay Cards in other countries

» RuPay cards have already been launched in UAE, Bahrain, Singapore, Saudi Arabia and Bhutan.
» Phase-2 in Bhutan
• The implementation of Phase-1 of RuPay cards in Bhutan has enabled visitors from India
to access ATMs and Point of Sale (PoS) terminals across Bhutan.
• Phase-2 will now allow Bhutanese card holders to access RuPay network in India.

27. E-RUPI
- E-RUPI is a one time, cashless and contactless
instrument for digital payment. It is a QR code or
SMS string-based e-Voucher, which is delivered to
the mobile of beneficiaries. The beneficiary can go
and redeem it at any centre that accepts it. It is a
person specific, even purpose specific digital
voucher.

§ It has been developed by NPCI on its UPI

Platform, in collaboration with the Department of
Financial Services, MoH&FW and National Health
Authority.

§ Advantages for Consumers: No need of bank account (which is needed in other forms of digital
payments); Easy, contactless two-step process that doesn't require sharing of personal details; it can
also operate on basic phones and without internet.
§ Advantages for Sponsors: Strengthen DBT and make it more transparent;
§ Advantages for service providers: since these are pre-paid vouchers, it would ensure real time payment
to the service providers.
§ Are there global examples of a voucher-based welfare system?
• School voucher systems in USA, Colombia, Chile, Sweden, Hong Kong, etc.

28. MERCHANT DISCOUNT RATE (MDR)

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 - MDR is a fee that merchants and other businesses pay to a payment processing company on debit card
or credit card transaction. It typically comes in the form of percentage of transaction amount. It is also
referred as transaction discount rate (TDR) or a discount rate.
-
- MDR fee is distributed amongst - Customer Bank, Merchant Bank and Payment Gateway (Rupay, Visa,
Master card etc.)

- No MDR charges applicable on payment via RuPay, UPI from 1st Jan, 2020: Finance Ministry
» Further, all companies with a turnover of Rs 50 crore or more will be mandated by Department
of Revenue to provide the facility of payment through RuPay Debit card and UPI QR code to their
customers.
» It will thus provide an edge to indigenously developed digital payment medium like RuPay and
BHIP UPI over the payment gateway promoted by foreign companies.

» Advantage: Promote digital payment

Some criticism: It will negatively impact whole digital payment industry.

»
• Some experts feel that a market driven pricing policy should be there as suggested by
Nandan Nilkeni Panel on Digital Payment.
29. DIFFERENT TYPES OF CARDS:

1) DEBIT CARDS AND CREDIT CARDS:

i. Both types of cards allow cardholders to obtain cash and make purchases.
ii. Credit Card: A user uses credit card to access a credit line provided by bank which the user can pay back
later.
§ Credit cards charge interest on the money the cardholders borrows unless it's paid back within
the grace period.
§ Use of Credit cards help build your credit history, while debit cards don't.
iii. Debit Card: These are linked to user's bank account and can access saving/current account of the user.
iv. Hybrid Cards:
Debit-cum-Credit Cards:

These cards come with two Magnetic Strips &

EMV Chips.

2) MAGNETIC STRIPE CARD VS EMV CHIP CARD:

- In Magnetic strip card, the POS terminal reads information off the tracks on the strip. It contains the
card number, the customer’s name, the expiration date, service code, and Card Verification Code (CVC).
Most of this information is on the first two tracks, with the third one used for country or currency codes.

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 » The POS terminal then sends an authorization request to the issuing bank. This sets up an
exchange of information between the bank, merchant's acquiring bank, and the card network
(Visa, Mastercard, Rupay) etc.
» Problems: There is no way to individualize a transaction. Fraudster can install a skimmer on
POS device to collect payment details. He can then use this information for a different
transaction.

- EMV Chip:
» EMV Meaning:
▫ Initially, when Chip cards started getting used, every network had their own standards
hampering inter-operability.
▫ Europay, Mastercard, and Visa banded together to form the EMV standard. This guarantees the
global acceptance of chip cards. These three payment processors in Europe created a behind-
the-scenes toolbox to facilitate worldwide interoperability.

» How does it work?

▫ A card is inserted into the terminal, chip-end first. The terminal and chip make contact, and the
terminal verifies the card issuer. The chip verifies the pin details input by the customer on the
terminal.
▫ This chip provides the terminal with one time code to be used instead of the card number.
Which means that every single transaction is individualized.
» In this method, the merchant never receives a customer's card number and neither can
anyone else. Because it is never part of the transaction.

- Summary:
▫ Magnetic Strips use a type of transaction that involves collection of static data. While Chip card
transaction involve dynamic, encrypted data. This makes it much harder for Chip cards to
become subject to fraudulent transactions.

30. CARD TOKENIZATION

- Card tokenization is a security measure that replaces your sensitive 16-digit card number info into a
unique, randomly generated code called "Token". This token can then be used for online payments
without exposing your actual card details.
» Note: Token will be unique for every Card-Merchant pair. I.e. different merchants will have
different tokens stored instead of your unique card number. And future transaction can happen
through these unique tokens with each merchant.

- Benefits of tokenization:
» Greater safety and security -> fraud risk is lower with tokenization transactions
» Payment approval rates are higher -> which means lesser chance of your bank declining
transactions.

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 •

- Note: Tokenization is available for RuPay cards also. In 2021, NPCI launched its own tokenization system
(NTS). It allows RuPay cardholders to tokenize their cards for online transactions, just like Visa and
Master card.

31. DIFFERENT TYPES OF ATMS

- ATMs is an abbreviation of Automated Teller Machine. It is an electronic device that allows customers
to perform financial transactions such as cash withdrawals, deposits, balance inquiries, bill payments,
or fund transfers without the need for a bank teller or representatives.
- Types of ATMs:
i. On Site ATMs: Located within or adjacent to bank branch, generally offer full banking services
like cash withdrawals, deposits, balance enquiries, and account transfers. They are generally
considered more secure and are staffed.
ii. Off-Site ATMs: Positioned away from bank branches like in shopping malls, busy roads etc.
Typically only provides cash withdrawals and balance enquiries.
iii. Orange Label ATMs: They are designed to handle share related transactions, such as buying or
selling shares or managing investments in stock markets.
iv. Yellow Label ATMs: They are tabled to support e-commerce transactions.
v. Green Label ATMs: Agriculture Transactions
vi. White Label ATMs (WLAs): These ATMs offer standard banking services like cash withdrawals,
but don't belong to any specific bank.
• They are generally operated by non-banking entities. For e.g. in India ATMs under brand
name "Indicash" is being run by Tata Communications Payment Solutions Limited
(TCPSL).
• Note: The Non-bank ATM operators are authorized under Payment & Settlement
Systems Act, 2007 by RBI.
• This is different from Brown Label ATMs and Bank-Label ATMs.
vii. Pink Label ATMs: For female customers; generally placed at secure locations and is aimed at
encouraging women to participate in more banking activities.

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 viii. Brown Label ATMs: Operated by a third party service provider. The bank handles branding and
cash management, while the service provider is responsible for the infrastructure and
maintenance.

32. MICRO-ATMS
- Micro ATMs are low-cost devices which are compact version of traditional ATMs. These ATMs have
played a pivotal role in extending financial services to remote and underserved areas. These platforms
enable Business Correspondents (who could be a local kirana shop owner and will act as ‘micro ATM’)
to conduct instant transaction
» These are connected to banks across the country. This enables a person to instantly deposit or
withdraw funds regardless of the bank associated with a particular BC.
» This device are based on a mobile phone connection and will made available at every BC.
» Customers would just have to get their identity authenticated and withdraw or put money into
their bank accounts. This money will come from the cash drawer of the BC. Essentially, BCs will
act as bank for the customers and all they need to do is verify the authenticity of customer using
customers’ UID.
» The basic transaction types, to be supported by micro ATM, are Deposit, Withdrawal, Fund
transfer and Balance enquiry.

33. PAYMENT INFRASTRUCTURE DEVELOPMENT FUND (PIDF) SCHEME

- It was initially established as Acceptance Development Fund (ADF) in 2019. It is aimed at subsidizing
the cost of banks incurred while deploying card payment infrastructure in the country.

- PIDF is a fund which has been set up by RBI, with major contribution from the central bank itself, and
additional funds being brought in by banks and card networks.
» It is intended to subsidize deployment of payment acceptance infrastructure (PoS, QR Codes,
etc.) in teir-3 to tier-6 centres, with a special focus on north-eastern states of India, and Uts of
J&K and Ladakh.
» The target is to manage a Rs 500 crore fund at all the time.
» The fund is managed by an advisory council (chaired by deputy governor of RBI) which has
members from the RBI, industry as well as the card networks and was operationalized for three
years from Jan 1 2021.
- Target: In 3 years, RBI wants to deploy 30 lakh touch points, 10 lakh physical PoS machines, and 20 Lakh
digital acceptance points.
- IN 2023, RBI decided to extend PIDF Fund Scheme till 31st Dec 2025. The scheme was first launched
on 2021 for thee years.
» RBI has also widened the scope to provide subsidy by including sound box instruments and
Aadhaar enabled biometric devices.

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 » Subsidies for special focus area (NE, and Uts of J&K and Ladakh), have been made uniform at
90% of the cost of the device.

34. LOCAL CURRENCY SETTLEMENT SYSTEM

- In 2023, the Reserve Bank of India (RBI) and Central Bank of UAE signed two memoranda of
understanding (MoUs).
» First MoU: For promoting the use of local currencies for cross-border transaction.
» Second MoU: For interlinking payment system.
- First MoU aims at establishing a Local Currency Settlement System (LCSS) to promote the use of rupee
and dirham bilaterally.
» It will cover all current and permitted capital account transaction.
» This will allow exporters and importers to send invoices and pay in their respective domestic
currencies. This will help develop INR-AED foreign exchange market. It will also promote
investments and remittances between the two countries.
▫ This will reduce exchange rate risks for exporters.
▫ It will enhance avenues of cooperation among the banking systems of the two countries.
- 2nd MoU links India UPI with its UAE-counterpart Instant Payment Platform (IPP). This is alongside the
linking of card switches, i.e. RuPay and UAESWITCH.

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