Banking & Monetary Policy

Expanding funding base of NBFC

Context: National lending ecosystem requires the growth of Non-Banking Financial Company (NBFC) to promote inclusive and sustainable growth. However, NBFCs are burdened due to limited funding sources which hinder their ability to scale.

Relevance of the Topic: Prelims: Basics of NBFC institutions. Mains: Funding prospects, issues and suggestions for NBFCs.

About Non-Banking Financial Company:

NBFCs are the Non-banking financial institutions, registered under the Companies Act, 1956, that provide diverse financial facilities like lending, pension and insurance.
They do not have a full banking license and cannot accept deposits from the public.
NBFCs have played a pivotal role in making formal credit accessible to MSMEs, retail sectors and underserved populations.
- The sector contributes 12.5% to the country's GDP.
- The sector's credit share has grown from 15% in 2014 to 22.5% of total Scheduled Commercial Bank credit in 2024.
- The growth of NBFCs has been supported by diverse funding streams like bank loans, commercial papers and other debt instruments- where term loans and debentures consist of 75% of borrowings.

Role of NBFCs in Economy:

Credit access to the underserved sectors like small businesses, rural areas, and the informal sector.
Promoting financial inclusion by institutionalisation of the lending market in India, eliminating the unregulated lenders.
Driving infrastructural growth by funding the long-term and risky infrastructure projects, as banks lack the capacity to fund large projects due to their asset-liability mismatch.
Strengthening the financial market through the activities like leasing, hire-purchase and securitisation, improving the overall efficiency of the financial system.
Contributing capital formation as the NBFCs mobilises the resources, savings and investments to foster economic growth.

Constraints in NBFC funding:

Over-regulated bond market: As pension and insurance companies have a mandate to invest 75% on pools in AAA rating bonds only pose funding constraints for NBFC.
Liquidity challenge: NBFC often face liquidity challenges as they borrow short-term funds but lend long-term loans in the real estate and infrastructure sector.
- Example- IL&FS crisis of liquidity.
Limited Foreign funding: High regulatory restrictions and limited allowance of FDI in the financial sector like NBFC pose a challenge to funding.
High cost of borrowing: NBFCs, as compared to banks, get high interest market loans influenced by their credit rating to sustain their operations.
Limited access to public deposits: Only a few NBFCs are allowed to accept public deposits limiting their sources for sustainable funding.

Steps taken to address issues:

Extending liquidity support to the banks by measures like Targeted Long-Term Repo Operations by RBI.
Promoting co-lending models to reduce the burden of funding on the NBFC.
- Co-lending is a mechanism in which NBFCs partner with banks to co-lend to reduce asset-liability burden.
SEBI’s recent Liquidity Window Facility (LWF): It aims to improve the liquidity of corporate bonds (by significantly expanding retail participation in the corporate bond market). LWF can bridge the gap between public deposits and bond investments by providing investors with an exit option on predetermined dates.

What more can be done? There is a need to liberalise the bond market for the NBFC. The mandate to invest a major chunk in high-rated bonds needs to be relaxed to some extent, so that NBFCs can receive long-term and sustainable funding contributing to the economic growth of the nation.

New Bill to punish Unregulated Lending

Context: Recently, the government has proposed a new bill ‘BULA (Banning of Unregulated Lending Activities)’ which seeks to make unregulated lending a cognisable and non-bailable offense.

Relevance of the topic:

Prelims: Questions of various banking and finance regulation bodies.

Mains: Analytical question scope on need and impact of such law.

Major Highlights:

The draft bill aims to address both traditional and digital lending.
Definitions:
- The draft bill defines ‘unregulated lending activities’ as lending that is not covered by any laws governing regulated lending, whether conducted digitally or through other means.
- It defines ‘public lending activity’ as the business of financing by any person whether by way of making loans or advances or otherwise of any activity other than its own at an interest, in cash or kind, but does not include loans and advances given to relatives.
Punishment: Violation of the law would be considered a cognisable and non-bailable offense.
- Lenders who offer unregulated loans will be punished with a minimum 2 years of jail term that can be extended to 7 years, along with a fine ranging from Rs 2 lakh to Rs 1 crore.
- Lenders who use unlawful methods to harass borrowers or recover loans will face imprisonment from 3 to 10 years and fines.
The investigations would be transferred to the Central Bureau of Investigation (CBI) if the lender, borrower, or properties are located across multiple states or union territories, or if the total amount involved is large enough to significantly impact public interest.

Impacts of Unregulated Lending:

Unregulated lending is an umbrella term that includes the non-institutional financing i.e., loans from moneylenders, shroffs, unregistered fintech companies etc. It leads to:

Parallel Economy: Unregulated lending paves a way for parallel economy or the shadow economy that is often used for money laundering.
Undermines Monetary Policy efforts, as the unregulated lenders are beyond the purview of RBI. Example: If RBI increases Repo to control inflation, it will only reduce lending from regulated entities, while the unregulated entities will continue to lend leading to limited impact on inflation targeting.
Exploitation of Borrowers: Unregulated loans leads to the exploitation due to the exaggerated interest rates resulting in suicides. Example: Chennai IT professional succumbed to harassment by loan application.
Threatens National Security as the majority of the fraud digital lending applications were funded from China, posing threat to Indian economic security.

Regulating Mechanisms for Lending Activities:

Regulating bodies
- Reserve Bank of India, 1934
- Security and Exchange Board of India oversees corporate lending activities.
Regulating Acts
- RBI Act, 1934
- Banking Regulations Act, 1949
- State Moneylenders Act (specific to states)

Way Forward to control menace of Unregulated Lending:

Create accessible complaint portals to report complaints about the fraud lenders and lending applications.
Carpet ban on illegal lending applications. Example: Over 300 fraudulent loan Applications were banned in India under the IT Intermediary Guidelines and Digital Media Ethics Code, 2021.
Promoting institutional lending by simplifying access to formal credit or incentivising people to choose Banking and NBFC institutions to get loans. Example: Easy loans via Small Finance banks.

Conclusion: Lending is a critical activity to sustain economic growth especially in nations like India where a major chunk of the economy is dominated by small businesses and MSMEs. Prompt regulation and intelligence about the lending market dynamics can resolve the issue of unregulated lending.

Written off Assets of the Banks

Context: According to the Reserve Bank of India (RBI), the Banks have written off loans worth Rs 10 lakh crores in the last 5 years leading to fall in NPA to 12-year low of 2.8%. However, Banks have recovered only 18% of the written off loans. Banks were unable to recover 82% of the remaining loans despite adopting various recovery measures.

Relevance of the Topic: Prelims: Key concepts- Non-Performing Asset; Wilful Default; Diversion and Siphoning of Loans; Writing off loans.

Non-Performing Asset (NPA):

A loan is categorised as NPA if it is due for a period of more than 90 days. Depending upon the due period, the NPAs are categorized as under:
- Sub-Standard Assets: >90 days and less than 1 year.
- Doubtful Assets: greater than 1 year.
- Lost Assets: loss has been identified by the bank or RBI.

RBI’s Concept of Wilful Default:

Person/company defaults on loan repayment:

Despite having the capacity to repay loans.
Diverts the loan for some other purpose. E.g., Kingfisher Airlines owned by Vijay Mallya diverted the loans for other related businesses such as Kingfisher Calendar and Formula 1 racing Team.
Siphoning of funds. E.g., Nirav Modi took loans for business operations but used the loans for personal purposes.
Sell off the collateral without the knowledge of the Bank.

What is the difference between Diversion and Siphoning of Loans?

In case of “Diversion of Loans”, loans are used for related businesses. However, in case of “Siphoning”, loans are used for unrelated businesses or personal purposes.

Recovery Measures:

Why do Banks write-off loans?

The Bank removes the written off loan from its balance sheet and reports the amount as a loss. Hence, the Banks can show lower profits and hence reduce their tax liability.
E.g., Let's say, the Bank has total profits worth Rs 1000 crores and written off loans worth Rs 100 crores. Then the Net profits (Profits- Written off loans) of the Bank would be Rs 900 crores. Thus, the Bank would be required to pay tax on Rs 900 crores (and not Rs 1000 crores).

Recent controversy over RBI's Framework for Compromise Settlement and Technical Write-offs (2023)

Under this framework, Banks can undertake compromise settlements or technical write-offs of loans of wilful/fraud defaulters. Further, the RBI also allowed wilful defaulters or a company involved in fraud to get fresh loans after 12 months of executing a compromise settlement.
It is considered to be a detrimental step as it only rewards wilful/fraud defaulters but also sends a wrong message to the honest borrowers who strive to meet their financial obligations.

RBI develops AI tool to detect Mule Accounts

Context: The Reserve Bank of India (RBI) has created an artificial intelligence (AI) powered model ‘MuleHunter.AI’ that could reduce digital fraud by helping banks deal with the increasing problem of “mule” bank accounts.

Relevance of the Topic: Prelims- Mule Accounts; MuleHunter.A; RBI’s Initiatives.

What are Mule Accounts?

A mule account refers to a bank account that is used by criminals to launder illicit funds. Such accounts are often set up by individuals who are either unknowingly recruited through promises of easy money or coerced into participating in illegal activities.
While high valued transactions are routinely screened as per the Prevention of Money Laundering Act (PMLA), mule accounts are very difficult to track.

Who is the Money Mule?

Money Mule is a term used to describe innocent victims who are duped by fraudsters into laundering stolen/ illegal money via their bank account(s).
When such frauds are reported, the money mule becomes the target of police investigations because it is their accounts that are involved, while the actual criminals remain undetectable.

What is MuleHunter.AI?

MuleHunter.AI is an AI-model that enables detection of mule bank accounts being used for committing financial frauds.
Developed by: Reserve Bank Innovation Hub (RBIH), Bengaluru (a subsidiary of the RBI).
The tool has undergone successful pilot testing at two public sector banks that has yielded encouraging results.
Benefits: As compared to conventional rule-based systems, advanced machine learning algorithms can anticipate mule accounts more quickly and accurately by analysing datasets pertaining to transactions and account details.

RBI's measures against Financial Frauds:

As reported by the National Crime Records Bureau (NCRB), online financial frauds make up 67.8% of cybercrime complaints, underscoring the urgent demand for AI-powered fraud prevention solutions. Mule bank accounts are seen as a key element in the majority of online financial frauds in India.

RBI has issued the Revised Master Directions on Fraud Risk Management (July 2024) in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions (AIFIs).
- Early detection of frauds through a robust framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA). Integrate EWS with their Core Banking Solutions to monitor transactions effectively.
- External and Internal Audit can be conducted on red-flag accounts.
- Banks to report payment system related disputes, suspected or attempted fraudulent transactions to Central Payments Fraud Information Registry maintained by RBI.
  - The Central bank has fixed a threshold of Rs 1 crore above which banks have to report fraud incidents to state police.
  - Private banks have to report frauds above Rs 1 crore to the Serious Fraud Investigation Office and the Ministry of Corporate Affairs.
  - Public sector banks have to report frauds over Rs 6 crore to the Central Bureau of Intelligence (CBI).
- Banks are required to constitute a ‘Special Committee of the Board for Monitoring and Follow-up of cases of Frauds’. It would comprise of minimum three members to monitor, review and propose risk management framework for reducing cases of fraud.

RBI is running a hackathon on the theme “Zero Financial Frauds”, to encourage development of innovative solutions to tackle financial frauds, particularly mule accounts.

The RBI's measures aim to strengthen the banking system's resilience against financial fraud and ensure better protection for customers against the misuse of their accounts.

RBI’s Rate Dilemma

Context: India’s retail inflation has eased to around 5% in November from October’s 14-month high of 6.2%. This assumes significance ahead of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) meeting in the backdrop of a spike in October’s inflation and a sharp slump in economic growth with GDP rising just 5.4% in the July-September quarter.

Relevance of the Topic: Prelims: Monetary Policy and its Components.

What is Monetary Policy?

Monetary policy refers to a policy of the Central Bank (Reserve Bank of India) to regulate money supply in the economy.
It is aimed to achieve certain objectives like Price stability, accelerating economic growth or exchange rate stabilization.
RBI uses various tools to achieve these objectives. One such tool is Liquid Adjustment Facility (LAF).

Liquid Adjustment Facility (LAF):

LAF is a facility provided by RBI to scheduled commercial banks to avail of liquidity in case of need or to park excess funds with RBI on an overnight basis against the collateral of government securities. The components of LAF are:
- Repo rate is the interest rate charged by the RBI on overnight loans given to the commercial banks under the Liquidity Adjustment Facility.
- Reverse repo rate is an interest rate given by the RBI to commercial banks when the latter parks one-day deposits with the RBI.

These rates are referred to as key policy rates.

	Expansionary Monetary Policy	Contractionary Monetary Policy
Action	To infuse liquid into the market	To absorb liquid from the market
Tool	Reduce policy rates	Increase policy rates
Goal	Accelerate economic growth	Inflation control

Banking Laws (Amendment) Bill 2024

Context: The Lok Sabha passed the Banking Laws (Amendment) Bill, 2024 to streamline the banking process and governance in India.

Relevance of the Topic: Prelims- Key provisions of Banking Laws (Amendment) Bill, 2024.

Aim: The bill aims to improve the governance and operational efficiency of India’s banking sector.

Key provisions of the Bill and their benefits:

The proposed amendment allows bank account holders to designate up to four nominees for their accounts.
- The depositors have been given the option of successive or simultaneous nomination facility.
- Additionally, locker holders will have only successive nominations.

Benefit: It benefits the depositors by offering more options for ensuring smooth process and the management of their accounts.

It increases the limit for ‘substantial limit’ in a bank’s directorship from Rs. 5 lakh to Rs. 2 crore. The current limit was fixed almost six decades ago.

Benefit: It will strengthen governance in the banking sector.

It extends the tenure of directors (except the chairperson and whole-time director) in co-operative banks from 8 to 10 years, in line with the 97th Constitutional Amendment Act, 2011.

Benefit: It will enhance the continuity of leadership and strengthen governance within the cooperative banks.

Allows a director of the Central Cooperative Bank to also serve on the board of State Cooperative Bank.

Benefit: It enables greater cross-collaboration between different levels of cooperative banks, thereby strengthening their overall functioning and improving coordination within the sector.

It seeks to grant the banks greater freedom in deciding the remuneration of statutory auditors.

Benefit: It will enhance the autonomy of banks in managing their internal operations and budgeting, allowing for more flexibility and efficiency in financial decision-making.

It changes the reporting dates for banks regarding the regulatory compliance from second and fourth Fridays to the 15th and last day of every month.

Benefit: Streamlines the compliance process, providing greater clarity and consistency in meeting regulatory requirements.

Criticism of the bill:

The opposition has raised concern that the bill is a “step towards privatisation.”
The opposition also stressed the need for better cybersecurity and fraud detection, criticising frequent KYC updates as burdensome.

Conclusion: These amendments are designed to strengthen the governance in the banking sector and improve customer convenience by making India’s banking system safer, more stable and healthier, pointing to the positive outcomes achieved over the past decade.

Time to Review Inflation Targeting

Context: Despite extensive research and econometric studies, there is no conclusive evidence that inflation targeting is the most effective monetary policy framework.

What is Inflation Targeting?

Inflation Targeting is a monetary policy framework where the Central Bank of a country aims to maintain the rate of Inflation within a targeted (pre-defined) range.
India adopted inflation targeting through the Monetary Policy Framework Agreement in 2015, signed between the Reserve Bank of India (RBI) and the Central Government.
Objective: RBI's primary objective would be to maintain price stability while keeping in mind the objective of growth.
Target: The RBI is required to maintain inflation of 4% (with a deviation of +/- 2%), i.e., between 2% to 6%.

Why the Need to Review Inflation Targeting?

1. Inflation-Growth Dichotomy:

Inflation targeting relies on contractionary monetary policy (higher interest rates) to control inflation. However, such a policy would lead to an increase in rate of interest on loans, will raise borrowing costs, reduce private investment and consumption expenditure, thereby causing a decline in GDP growth rates.

2. Persisting Inflation:

In Inflation targeting, controlling the money supply only alters demand-side inflation but does not address the inflation caused by supply-side constraints.

E.g., Rise in prices of vegetables, pulses highlight supply side constraints, which are out of the purview of the RBI and hence they continue to erode household savings.

3. Inefficient Monetary Policy Transmission:

Despite a cumulative hike in repo rate of 250 bps (during May 2022 to October 2023), banks revised their marginal cost of funds-based lending rate (MCLR) only by 152 bps. Hence, the cost of credit still remains high for prospective borrowers, thereby discouraging capital investment.

Way Forward:

Shift to flexible inflation targeting: Post-Global Financial crisis, the dominant view around the world is that flexible inflation targeting (FIT), rather than pure inflation targeting, is more efficient for monetary policy formulation. By FIT, during times of extraordinary shocks (pandemics or financial crises), Central banks could temporarily adjust their inflation target to allow for more economic flexibility.
Address supply-chain constraints: Strengthening policy coordination with the government and undertaking structural reforms in the agriculture and developing efficient logistics and transport networks to address inflationary pressure due to supply-side shocks.

What is Inflation Targeting?

Inflation Targeting is a monetary policy framework wherein the Central Bank of a country focuses only on maintaining the rate of Inflation within a targeted range.

It was first adopted by New Zealand and subsequently, a large number of countries including India have been following inflation targeting as their core element of monetary policy.

In case of India, the inflation targeting was introduced through the Monetary Policy Framework Agreement signed between the RBI and Government in 2015.

As per terms of the agreement, RBI's primary objective would be to maintain price stability, while keeping in mind the objective of growth. The RBI is required to maintain a rate of inflation of 4% with a deviation of 2% i.e. inflation has to be maintained between 2% to 6%.

What Are Benefits of Inflation Targeting?

Spur investment rate: Flexible inflation target (4+2) would help in achieving sustainable price levels in the markets and as a result may increase savings rate in the economy. This may spur investment rate in the economy leading eventually to higher GDP growth.
Promotes export competitiveness: Stable price levels in an economy keeps a check on input prices of goods and services produced in the economy. This maintains the competitiveness of our goods in export markets thereby promoting export growth and reducing current account deficit.
Increase Foreign investments: Improved transparency in inflation targeting reduces investor uncertainty allowing them to predict changes in interest rates, and anchors inflation expectations. This will lead to an increased foreign portfolio and direct investments in the longer run.
Clear Policy Signal to Markets: The Inflation targeting explicitly states as to what would be the targeted rate of inflation in an economy. Such explicitly mandated targets bring in more clarity and predictability with respect to the rate of inflation and monetary policy formulation.
Autonomy and Accountability of RBI: As per the Monetary policy framework agreement, the RBI has been given complete autonomy in maintaining the rate of inflation within the mandated targets. If the RBI fails to maintain the Inflation within the target, then it would be required to submit in writing the reasons for its failure. Such a provision enables the RBI to enjoy autonomy and at the same time, enables the Government to have enhanced accountability over the actions of the RBI.
Empirical Evidence: Inflation targeting has been quite successful in some of the advanced economies such as the UK, New Zealand etc. These advanced economies have been able to maintain moderate rates of inflation for a much longer time leading to increased macro-economic stability.

What are Problems and Challenges with Inflation Targeting?

Disregards the Multi-faceted role of RBI: In a developing country like India, it is not practical for the central bank to focus exclusively on inflation without taking into account the larger development context. The RBI needs to balance between growth, price stability and financial stability.
Inflation-growth Dichotomy: Controlling inflation requires following contractionary monetary policy. However, such a policy would lead to an increase in rate of interest on loans leading to decrease in investment and consumption expenditure causing a decline in GDP growth rates. For example, during 2013-2015, the higher interest rates in the country on account of higher rate of inflation had led to decrease in the GDP growth rates.
Poor Monetary Policy Transmission: The Inflation targeting is more suited to the developed economies since the monetary policy transmission in such economies is quite efficient. However, in case of India, the monetary policy transmission is quite inefficient and this can in turn reduce the effectiveness of Inflation Targeting. In response to the cumulative hike in repo rate of 250 basis points during May 2022 to October 2023, banks have revised their marginal cost of funds-based lending rate (MCLR) only by 152 basis points.
Supply Side Constraints: Controlling the money supply only alters demand-side inflation and not inflation arising out of supply-side constraints. E.g. rise in prices of vegetables, pulses highlight supply side constraints which are out of the purview of the RBI and hence they continue to erode household savings.
No Clear link between Price Stability and Financial Stability: Prior to 2008 Global Financial Crisis, advanced economies were able to maintain moderate rate of inflation for a long term mainly due to adoption of Inflation Targeting. It was believed that Inflation targeting was responsible for overall macroeconomic stability of the country. However, the 2008 Global Financial Crisis has clearly proved that price stability alone cannot lead to financial stability and the excessive focus of the Central banks on price stability may lead to neglect of other crucial functions such as regulation leading to the economic crisis.
Empirical Evidence against Inflation Targeting in India: The RBI was able to maintain a stable rate of Inflation within the mandated range before pandemic. However, in spite of a stable rate of Inflation, the Indian economy faced challenges on multiple fronts. The GDP growth rate reduced to 25 quarter low of 5% for the first quarter of financial year 2019-20. The unemployment increased to a 45-year high of 6.1%. There was a contraction in the manufacturing activity as evident in declining IIP. The agriculture sector stared at agrarian distress. All these clearly highlight that the inflation targeting has failed to promote growth and development.

Conclusion

Post-Global Financial crisis, the dominant view around the world is that flexible inflation targeting, rather than pure inflation targeting is more efficient for monetary policy formulation. During times of extraordinary shocks (e.g., pandemics or financial crises), central banks could temporarily adjust their inflation target to allow for more economic flexibility.
Additionally, strengthening policy coordination with the government and undertaking structural reforms in the agriculture and transport sector will help India address inflationary pressure due to supply-side shocks.

Unified Lending Interface

Context: The Reserve Bank of India (RBI) Governor has informed that a nationwide launch of the Unified Lending Interface (ULI) will transform the lending landscape.

What are Issues with Credit Delivery?

For digital credit delivery, the data required for credit appraisal are available with different entities like Central and State governments, account aggregators, banks, credit information companies and digital identity authorities.
However, these data sets are in separate systems, creating hindrance in frictionless and timely delivery of rule-based lending.

Unified Lending Interface (ULI)

Seamless Flow of Information: The ULI platform will facilitate a seamless and consent-based flow of digital information, including land records of various states, from multiple data service providers to lenders. It will cut down the time taken for credit appraisal, especially for smaller and rural borrowers.
Quicker Delivery of Credit: The platform will reduce the complexity of multiple technical integrations, and will enable borrowers to get the benefit of seamless delivery of credit, and quicker turnaround time without requiring extensive documentation.
Standardised API: The ULI architecture has common and standardised APIs (Application Programming Interface), designed for a ‘plug and play’ approach to ensure digital access to information from diverse sources.
Enhance Financial Inclusion: By digitising access to customer’s financial and non-financial data that otherwise resided in disparate silos, ULI is expected to cater to large unmet demand for credit across various sectors, particularly for agricultural and MSME borrowers.
Further Digitalisation of Economy: With rapid progress in digitalisation, India has embraced the concept of digital public infrastructure which encourages banks, NBFCs, fintech companies and start-ups to create and provide innovative solutions in payments, credit, and other financial activities. The ‘new trinity’ of JAM-UPI-ULI will be a revolutionary step forward in India’s digital infrastructure journey.

Bank for International Settlements (BIS)

Context: The Bank for International Settlements (BIS) released a document ‘Core Principles for Effective Banking Supervision, crucial for global banking supervision. This document will serve as a guiding framework for central banks supervising banks in over 90 jurisdictions.

About Bank for International Settlements (BIS):

Established in 1930
Headquartered in Basel, Switzerland
The BIS was created out of the Hague Agreements of 1930 and took over the job of the Agent General for Repatriation in Berlin.
The goal is to foster international monetary and financial cooperation while serving as a bank for central banks.
It aids central banks in their pursuit of monetary and financial stability through international cooperation.
It provides a platform for responsible innovation and knowledge-sharing in-depth analysis and insights on core policy issues sound and competitive financial services.
This organisation is owned by 63 central banks, including the Reserve Bank of India (RBI) representing countries from around the world that together account for about 95% of world GDP.

Reserve Bank of India

Context: The Reserve Bank of India (RBI) celebrated its 90th year in Mumbai. In this context let us understand the organisational structure and functions of Reserve Bank of India.

About Reserve Bank of India:

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
The Board of the RBI is headed by the Governor and assisted by not more than four Deputy Governors

Functions of RBI:

Issuing currency: RBI has the sole right to issue currency/banknotes in India. The RBI Act, 1935 also enables RBI to recommend to Central Government the denomination of bank notes, which can be of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or other denominations not exceeding ten thousand rupees.
Monetary Policy functions: As per the new monetary policy framework, the major objective of the RBI’s monetary policy to control the inflation.

Inflation Target

The Central Government, in consultation with the RBI shall determine the inflation target in terms of the Consumer Price Index, once in every five years.

Determination of Policy Rate

o The Monetary Policy Committee has been entrusted with the statutory duty to determine the Policy Rate required to achieve the inflation target. The decision of the Monetary Policy Committee is binding on the RBI.o The Monetary Policy Committee shall consist ofa) the Governor of the RBI;b) Deputy Governor of the RBI in charge of Monetary Policy;c) One officer of the RBI to be nominated by the Central Board; andd) three persons to be appointed by the Central Government.

Public debt management: Manages public debt of centre and state governments and issues securities on behalf of them.
Forex management: The RBI is entrusted with the duty of development and maintenance of foreign exchange market in India the Foreign Exchange Management Act, 1999 (‘FEMA"). RBI Intervenes in the forex market and checks large scale volatility in exchange rates.
Lender of last resort: As a Banker to Banks, the Reserve Bank acts as the ‘lender of the last resort’. It can come to the rescue of a bank which is facing temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank.
Oversight of Payment and settlements: The Payment and Settlement Systems Act, 2007 entrust the responsibility of oversight of payment and settlement system to RBI.
Banking Regulation & Supervision: The power to regulate and supervise banking companies has been provided by the provisions of the Banking Regulation Act, 1949 (BR Act, 1949) to the RBI.
Consumer Protection and promotion Functions: Protection of the interests of the depositors is one of the vital mandates of the RBI. Apart from depositors, the resolution of grievances of customers who deal with its regulated entities is also important for the Reserve Bank of India.

Restrictions on Paytm Payments Bank

Context: The Reserve Bank of India has imposed restrictions on Paytm Payments Bank and barred the entity from offering incremental banking services effective March 2024

Why were Restrictions Imposed?

Comprehensive System Audit report and subsequent compliance validation report by the external auditors revealed persistent non-compliance and continued material supervisory concerns in the bank.
Hence RBI took this supervisory action under Section 35A of Banking Regulation Act, 1949.

Implications

Paytm Payments Bank will not be allowed to accept deposits or undertake credit transactions or top ups in any customer accounts, prepaid instruments, wallets, FASTags and NCMC (National Common Mobility Cards) post February 29, 2024.
Further, the bank will also not be able to provide BBPOU (Bharat BillPay Operating Units) and UPI facilities.

Exemptions

Interest, cashbacks or refunds may be credited anytime.
Withdrawal or utilisation of balances by customers from their savings and current bank accounts, prepaid instruments, FASTags and NCMC are permitted without any restrictions and up to the available balance.

About Payment Banks

Criteria	Payment Banks
Registration and Licensing	Registered under Companies Act, 2013 Licensed under Banking Regulation Act, 1949
Eligibility	Prepaid Payment Instrument (PPI) Providers, Resident individuals; NBFCs; Telecom Companies, supermarket chains, public sector entities etc.
Min. Capital Requirements	Rs 100 crores
FDI allowed?	Yes. Up to 74%
Accept Deposits	Only Demand Deposits. No Fixed Deposits and NRI Deposits
Restrictions on Deposits	Up to Rs 2 Lakhs
Deposit Insurance Available?	Yes
Can Lend Loans	No
Issue Debit/ Credit Card	They can issue debit cards but not credit cards unless under a co-branded or co-lending arrangement with a partner bank or NBFC.
Set up based upon recommendations of	Nachiket Mor Committee
SLR and CRR applicable	CRR Applicable; SLR: 75% of Deposits.
BASEL Norms applicable	Yes. 15% of RWAs
PSL Norms applicable	No. Can’t lend Loans
Examples	Airtel, India Posts Payment Bank, Paytm, FINO etc.