Introduction to Banking and the Indian Financial System
What this domain tests
The exam checks whether you can place any entity, market or instrument in the correct regulatory box, and whether you know which regulator supervises what. Most marks are lost on classification, not on definitions.
The four pillars
The system rests on institutions (banks, NBFCs, insurers, funds), markets (money market and capital market), instruments (T-bills, commercial paper, equities, debentures) and regulators.
- RBI - banking, money market, payment systems, NBFCs, cooperative banks.
- SEBI - stock exchanges, brokers, mutual funds, depositories NSDL and CDSL.
- IRDAI - insurers, agents, third-party administrators.
- PFRDA - NPS and pension funds.
Institution types you must not confuse
A scheduled bank is listed in the Second Schedule of the RBI Act, 1934 and keeps reserves with RBI. Small finance banks must route 75% of advances to priority sectors and hold at least 50% of their loan book in loans up to ₹25 lakh. Payments banks accept deposits up to ₹2 lakh per customer but cannot lend or issue credit cards. Cooperative banks are registered under state cooperative law but licensed and regulated for banking by RBI under the Banking Regulation Act, 1949 (amended 2020). An NBFC may lend and invest but cannot accept demand deposits and cannot issue cheques drawn on itself.
Worked example
A firm wants to lend against gold and used vehicles, funded by its own capital and bank borrowings, and asks whether it needs a banking licence. No - it takes no demand deposits and is not part of the clearing system, so the route is registration with RBI as an NBFC under Section 45-IA of the RBI Act, 1934, after meeting the minimum net owned fund of ₹10 crore applicable to new registrations.
Traps
Money market instruments mature within one year (91/182/364-day T-bills, CP, CD) while capital market instruments are long-dated; primary market is first issue, secondary is trading. Do not credit payments banks with lending powers.