UPSC Notes / Indian Economy / Chapter 6
Chapter 6 of 15

Banking and Financial System

The RBI, commercial banking structure, NPAs and bank recapitalisation, and financial inclusion initiatives like the Jan Dhan Yojana.

📖 ~15 min read 📊 Indian Economy

Introduction

India's banking and financial system — anchored by the Reserve Bank of India (RBI) as the central bank — has expanded dramatically in reach and complexity, from nationalisation-era public sector dominance to today's mix of public, private, foreign, and digital-first banking models.

Reserve Bank of India (RBI)

  • Established in 1935 (under the RBI Act, 1934); nationalised in 1949.
  • Key functions: Issuer of currency, banker to the government, banker's bank, regulator of the banking and financial system, and manager of monetary policy and foreign exchange reserves.
  • Monetary Policy Committee (MPC): A 6-member body (3 RBI officials + 3 external members) that decides the policy repo rate to balance growth and inflation, targeting a CPI inflation range (currently 4% ± 2%, i.e., 2-6%) under the flexible inflation targeting framework adopted in 2016.
💡 Current Snapshot (mid-2026): As of the RBI's June 2026 policy review, the repo rate stood at 5.25%, with the MPC maintaining a "neutral" stance amid elevated global energy prices and rupee volatility. Always verify the latest rate closer to your exam date, as this is reviewed bi-monthly.

Structure of the Indian Banking System

CategoryExamples/Note
Public Sector Banks (PSBs)Majority government-owned; consolidated significantly through recent mergers (e.g., SBI's associate bank mergers, and the 2020 mega-merger of several PSBs)
Private Sector BanksHDFC Bank, ICICI Bank, Axis Bank, and others
Foreign BanksOperating branches/subsidiaries of international banks in India
Regional Rural Banks (RRBs)Jointly owned by Centre, State, and a sponsor bank; focused on rural credit
Cooperative BanksUrban and rural cooperative credit institutions, regulated jointly by RBI and Registrar of Cooperative Societies
Small Finance Banks & Payments BanksNewer differentiated bank licences aimed at deepening financial inclusion for underserved segments

Non-Performing Assets (NPAs) and Bank Health

Flowchart — The NPA Problem and Policy Response
Loan not repaid (principal/interest overdue beyond 90 days) → classified as NPA
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High NPA levels (especially post-2015 "Asset Quality Review") weakened PSB balance sheets and lending capacity
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Insolvency and Bankruptcy Code (IBC), 2016 — time-bound resolution mechanism for stressed assets
Bank recapitalisation — government infusing capital into PSBs to restore lending capacity

Financial Inclusion Initiatives

SchemePurpose
Pradhan Mantri Jan Dhan Yojana (PMJDY, 2014)Universal access to basic banking accounts, especially for the unbanked; enabled Direct Benefit Transfer (DBT) at scale via the "JAM Trinity" (Jan Dhan-Aadhaar-Mobile)
Pradhan Mantri Mudra YojanaCollateral-free micro-loans to small/micro enterprises
Stand-Up IndiaBank loans for SC/ST and women entrepreneurs
✅ UPSC Focus: RBI's core functions and MPC composition · Inflation targeting band (4%±2%) · Bank category classification · NPA definition (90-day overdue rule) and IBC's role in resolution · JAM Trinity and Jan Dhan Yojana's financial inclusion impact.

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