Finance

29 June 2025 23:01

RBI

📘 Detailed Table: Subsidiaries of Major DFIs

Subsidiary Name Parent DFI Purpose / Role Ownership / Structure HQ /
Notes
SIDBI Venture Capital Ltd. SIDBI Provides venture capital to innovative Wholly owned by SIDBI Mumbai
(SVCL) MSMEs & startups
India SME Technology SIDBI Offers technology consulting to MSMEs Promoted by SIDBI along with Mumbai
Services Ltd. (ISTSL) for upgrades & efficiency banks & FIs
Receivables Exchange of SIDBI TReDS platform for invoice discounting Joint venture: SIDBI + NSE (National Mumbai
India Ltd. (RXIL) (helps MSMEs get payments faster) Stock Exchange)
India SME Asset SIDBI Resolves MSME NPAs via asset Sponsored by SIDBI + banks (BoB, Mumbai
Reconstruction Company reconstruction BOB Capital, SIDBI, LIC, SIDBI
Ltd. (ISARC) Venture)
MUDRA Ltd. (now merged SIDBI Refinancing agency for MFIs & small Now a part of SIDBI New
with SIDBI) enterprises under PMMY (MUDRA Delhi
scheme)
NABARD Financial Services NABARD Provides microfinance and loans to NABARD = majority shareholder Bengalur
Ltd. (NABFINS) SHGs, rural households, FPOs, etc. u
NABKISAN Finance Ltd. NABARD Lends to agri-entrepreneurs, FPOs, NABARD = major stakeholder Chennai
agri-infra projects
NABSAMRUDDHI Finance NABARD Lends to non-farm enterprises, rural NABARD = parent; others include Hyderab
Ltd. projects, etc. corporates ad
NABARD Consultancy NABARD Provides technical & management Wholly owned subsidiary of New
Services (NABCONS) consultancy in agri & rural sectors NABARD Delhi
India Exim Finserve Ltd. EXIM Bank Provides advisory services for cross- Wholly owned by EXIM Bank Mumbai
border projects, risk analysis, etc.
Lines of Credit (LoCs) (not a EXIM Bank Offers soft loans to foreign Funded by GoI through EXIM Global
company but key arm) governments to promote Indian
exports
India Mortgage Guarantee NHB (partial Offers mortgage guarantees to lenders, JV: NHB + Genworth (US) + ADB + New
Corporation (IMGC) stakeholder) encourages affordable home loans IFC Delhi

✅ Summary by DFI:
DFI Key Subsidiaries
SIDBI SVCL, ISTSL, RXIL, ISARC, MUDRA Ltd.
NABARD NABFINS, NABKISAN, NABSAMRUDDHI, NABCONS
EXIM Bank Exim Finserve Ltd., Lines of Credit arm
NHB IMGC (partial), no full subsidiary now

🏛 MAJOR REPORTS, PUBLICATIONS, INDICES & CIRCULARS OF RBI

(Updated till 2024–25)

📘 I. Major Reports by RBI

Report Name Frequency Purpose
Monetary Policy Report (MPR) Biannual Explains inflation trends, forecasts, policy stance
Financial Stability Report (FSR) Biannual (June & Dec) Reviews health of financial system (NPAs, stress tests)
Report on Trend and Progress of Banking in Annual Performance & trends in banking sector
India
Report on Currency and Finance Annual (revived in Deep research on a specific theme (e.g., FinTech, Climate
2019) Finance)

Page 1
 2019) Finance)
Annual Report of RBI Annual Contains RBI’s own financials, economic outlook
Report on Foreign Exchange Reserves Weekly Details composition and change in India’s forex reserves
Handbook of Statistics on Indian States Annual State-wise data on economy, banking, inflation
Report on State Finances Annual Fiscal position of Indian states
Report on Municipal Finances Occasional Review of ULB finances and governance
Report on Benchmarking India’s Payment Occasional India’s position vs. global peers on digital payments
Systems

📑 II. Major Publications / Bulletins

Publication Frequency Key Features
RBI Bulletin Monthly Data + articles on macro, banking, finance
Monthly Data on India’s International Trade in Services Monthly Balance of payments – services side
Weekly Statistical Supplement (WSS) Weekly Data on reserve money, CRR, SLR, G-Sec yields
Handbook of Statistics on the Indian Economy (HSIE) Annual RBI's most comprehensive data compendium
Basic Statistical Returns (BSR) Annual Returns from SCBs on credit, deposits
State of the Economy Report (SoE) Monthly (in RBI Bulletin) Covers GDP, inflation, fiscal indicators
Time-Series Publications Variable Historical data across sectors

📢 III. Major Circulars / Notifications

RBI issues Directions / Guidelines / Circulars via:
Type Description
Master Circulars Issued annually, consolidate all past circulars on a topic
Master Directions Updated from time to time — binding legal directions
Notifications Immediate updates — policy rates, limits, norms, compliance
Press Releases Communication with public/media
FAQs Clarify compliance doubts on major schemes (like FEMA, RBI Retail Direct)
🔁 Examples of Key Circular Areas:
• Priority Sector Lending Guidelines
• KYC / AML Master Directions
• NBFC Directions, 2023
• FEMA Regulations
• Large Exposure Framework
• Liquidity Adjustment Facility (LAF) updates
• Payments & Settlement System guidelines
• Moratorium circulars (2020, COVID-related)

📊 IV. Indices / Data Released by RBI

Index What It Tracks Remarks
OBICUS (Order Book, Inventory and Capacity Utilisation Capacity use in manufacturing Quarterly
Survey) sector
Inflation Expectations Survey of Households (IESH) Perception of inflation Quarterly
Consumer Confidence Survey (CCS) Households’ economic perception Quarterly
Bank Lending Rate Data MCLR, Repo-linked lending rates Monthly
Forex Reserve Composition USD, gold, SDR holdings Weekly
Digital Payments Index (DPI) Growth in digital transactions Semi-annual (base: Mar 2018 =
100)
Financial Inclusion Index (FI-Index) Access, Usage, Quality of inclusion Annual
Money Market Survey Call/Notice/Term money rates Daily/weekly
Bank Credit & Deposits Report Sectoral credit flow Fortnightly/Monthly

🔎 V. Other RBI Documents You Must Know

Document Use

Page 2
Document Use
RBI Retail Direct Scheme (2021) G-Sec investment by individuals
Framework for Regulatory Sandbox Controlled FinTech innovation
Prompt Corrective Action (PCA) Framework Early intervention in weak banks
RBI Directions for NBFCs / UCBs / SFBs (2023–24) Updated compliance norms
RBI Master Directions – Know Your Customer (KYC), 2023 Latest AML/CFT updates
>

Kisan Credit Card (KCC) Scheme – Detailed Notes (RBI-Focused)

📌 1. What is KCC?
The Kisan Credit Card (KCC) is a credit scheme for farmers, introduced in 1998 by:
• NABARD (designed it)
• In consultation with RBI and the Ministry of Agriculture
🎯 Goal: To provide timely and hassle-free short-term credit to farmers for cultivation and other agri-needs.

🏛 2. Regulatory & Policy Oversight

Authority Role
RBI Issues guidelines to banks, fixes interest subvention, coverage
NABARD Designs policy, monitors credit flow, refinances co-op banks and RRBs
GoI (MoAFW) Administers the interest subvention & insurance schemes under KCC

🌿 3. Who Can Avail KCC?

• Individual farmers
• Joint borrowers (e.g., SHGs, JLGs)
• Tenant farmers / oral lessees / sharecroppers
• Fisheries & animal husbandry farmers (added in 2018)

💳 4. What Does KCC Offer?

Category Details
Crop Loan For seeds, fertilizers, harvesting, etc. — up to ₹3 lakh
🐄 Animal Husbandry & Fisheries Loan ₹2 lakh limit for working capital
🏡 Post-harvest / Consumption For household needs during crop cycle
🚜 Term Loans For agri-assets like pump sets, tractors
🛡 Insurance Covered under PMFBY or RBI norms for crop loan security

🏦 5. Institutional Coverage
RBI mandates all banks to issue KCC:
• Public Sector Banks (PSBs)
• Private Sector Banks
• Regional Rural Banks (RRBs)
• Co-operative Banks
• Small Finance Banks (licensed to do agri-credit)

💰 6. Loan Features
Feature Description
Tenure 5 years (can be extended to 10 years)
Credit Limit ₹3 lakh (Crop Loan) + additional for AH/Fisheries
Interest Rate Base rate (usually ~7%)
Interest Subvention 2% by GoI + 3% prompt repayment incentive → Effective 4% interest
Collateral ❌ Not required for loans up to ₹1.6 lakh
Repayment Flexible – linked to crop harvesting season
Mode of Access RuPay debit card or cheque-based

🔁 7. Recent Developments & Updates (2023–24)

Update Description

Page 3
Update Description
RBI pushed digitisation of KCC KCC-linked smart cards being issued with RuPay
Saturation drive for KCC GoI targeting uncovered farmers (especially AH & fisheries)
Doorstep banking for KCC via BCs Especially through India Post Payments Bank
KCC for Animal Husbandry Allowed separate KCC limit of ₹2 lakh (working capital)
RBI allowed interoperability via KCC-RuPay Digital credit access via ATMs & PoS
Moratorium & Restructuring during COVID RBI allowed rescheduling of KCC dues

🧠 8. Why KCC Is Important for RBI

• Key tool in RBI’s Priority Sector Lending (PSL) strategy
• Used to monitor agri-credit flow
• Integrated with Financial Inclusion plans
• Helps reduce dependence on moneylenders
• RBI uses BSR data to track KCC usage and credit penetration

💰 Interest Subvention – Detailed Notes (RBI + GoI Scheme Based)

📌 1. What is Interest Subvention?

Interest subvention means the government pays part of the interest on a loan on behalf of the borrower, effectively reducing
the burden for the end-user.
It is a targeted government subsidy designed to:
• Lower credit cost for farmers, MSMEs, exporters, students, etc.
• Encourage timely repayment
• Improve credit flow to priority sectors

🧾 2. Who Gives the Subvention?

• Central Government (primarily)
• State Governments (sometimes add extra subsidy)
• Managed/supported by RBI, NABARD, SIDBI, etc. for implementation

🎯 3. Objective
• Promote agricultural & rural credit
• Improve financial inclusion
• Encourage timely repayment through incentive
• Make formal loans cheaper than informal lending

🧱 5. Structure of Subvention Schemes

Feature Details
Eligible Institutions Public Sector Banks, RRBs, Co-op Banks, Private Banks, sometimes NBFCs/MFIs
Eligible Borrowers Farmers, MSMEs, Exporters, SHGs
Mode of Payment GoI reimburses banks quarterly/half-yearly via RBI/NABARD
RBI’s Role Issues circulars, manages claim processing, auditing

🧮 6. Sectors Where Subvention Is Offered

Sector Scheme Name Subvention Details
Agriculture (KCC) Interest Subvention Scheme for Short Term Crop Loans 2% regular + 3% prompt repayment
benefit
Animal Husbandry & KCC for AH/Fisheries (2018 onward) Same 2% + 3%
Fisheries
MSMEs Interest Subvention Scheme for MSMEs (now closed as Earlier: 2% for GST-registered MSMEs
standalone)
Exporters Pre- and Post-Shipment Export Credit 2% to 5% based on sector (till Mar
2024)

🔄 7. Recent Updates (2023–24)

• Merged agricultural interest subvention into PMFBY/KCC ecosystem
• DBT-based claim settlement started for banks

Page 4
 • DBT-based claim settlement started for banks
• Tightened verification norms to avoid ghost beneficiaries
• RBI circulars (latest Feb 2024) updated reporting/claim forms

📢 9. RBI’s Role
• Publishes Master Circular on Interest Subvention
• Audits & verifies claims made by banks
• Releases subvention funds from GoI to banks
• Sets rules for eligibility, documentation, and delays

🧠 10. Mains Answer Tip

“Interest subvention schemes are fiscal tools aimed at incentivising timely credit repayment and enhancing access to affordable
finance. RBI’s role as an implementing agency ensures transparency and financial discipline among lending institutions.”

Recent Developments in Global Financial System and its impact on Indian Financial System

🌍 Global Financial Crisis (2007–08) – Detailed Notes

📌 1. What was the Global Financial Crisis (GFC)?

The Global Financial Crisis (GFC) of 2007–08 was the worst worldwide economic crisis since the Great Depression of 1929,
originating in the US housing and financial sector and spreading globally.

🧱 2. Root Cause: US Subprime Mortgage Crisis

Subprime = Loans given to borrowers with poor credit history
• A Mortgage-Backed Security (MBS) is a financial product that is made by pooling together home loans (mortgages) and
selling shares of that pool to investors.
• Banks in the US issued housing loans to subprime borrowers
• These loans were packaged into Mortgage-Backed Securities (MBS) and sold to investors globally
• The illusion of safety caused widespread investment in these assets
🔥 What Went Wrong?
• Housing prices began falling in 2006–07
• Subprime borrowers defaulted en masse
• MBS lost value → banks faced massive losses → credit froze globally

📊 3. How It Unfolded
Year Events
2007 Rising home loan defaults in US subprime market
2008 Collapse of Lehman Brothers (Sept 2008) triggered global panic
2008–09 Stock markets crashed, global trade fell, unemployment rose
2009–10 Global recession set in → huge bailouts, s mulus packages launched

🏛 4. Major Ins tu ons Affected

• 🏦 Lehman Brothers: Filed for bankruptcy (largest in history)
• 🏦 Merrill Lynch: Acquired by Bank of America
• 🏦 AIG: Rescued by US govt ($182 billion)
• 🏦 Citigroup, Morgan Stanley: Needed emergency funding
• 🌍 Global banks (Barclays, Deutsche Bank, etc.) also affected

🌐 5. Global Spillovers
• Europe: Deep recession, sovereign debt crisis (esp. Greece)
• Asia: Export-driven economies like China, Japan, Korea saw demand fall
• India: FII withdrawal, stock market crash, GDP slowdown

🇮🇳 6. Impact on Indian Economy

Sector Effect
Capital Markets 🔻 Sensex fell ~60% in 2008
FII Flows Sharp outflow → ₹ net negative
GDP Growth Dropped from ~9% to ~6.7%

Page 5
GDP Growth Dropped from ~9% to ~6.7%
Exports Fell due to global demand slump
Rupee Depreciated sharply
Jobs Impact on IT, BPO, export sectors
Banking India’s banks remained safe due to RBI’s conservative regulation (no exposure to toxic assets)

🏦 7. RBI & Government Response

Authority Measures
RBI Cut CRR, Repo Rate, SLR to inject liquidity
GoI Stimulus packages, PSU investment, tax sops
SEBI Tightened rules for derivatives and FII activity

🧠 8. Lessons Learned
• Importance of strong regulation and banking supervision
• Avoid over-leveraging and complex financial products
• Risk of global contagion in an interconnected financial system
• Reinforced idea of "Too Big to Fail" banks needing oversight
🏦 Silicon Valley Bank (SVB) Collapse – 2023 Crisis Explained

📌 1. What Was SVB?

• Silicon Valley Bank (SVB) was the 16th largest bank in the US before collapse.
• Focused on startups, tech firms, and venture capital clients.
• Held large deposits from unicorns, VCs, and tech CEOs (like Y Combinator-funded startups).

🧨 2. What Triggered the Collapse?

The root cause = Asset-Liability Mismatch + Interest Rate Shock
🔁 Here's how it happened:
Step What Went Wrong
SVB received massive deposits from tech startups during the pandemic boom
Instead of lending, SVB invested those deposits into long-term US Treasury Bonds
The US Fed hiked interest rates sharply in 2022–23 to control inflation
Bond prices fell (inverse relation with interest rates) → SVB’s portfolio lost value
Startups began withdrawing money due to funding winter
SVB had to sell its bonds at a loss to meet withdrawals
The bank announced a $1.8B loss on sale of investments, spooked the market
Panic → bank run → deposits withdrawn in billions in 24 hours
SVB collapsed → FDIC took over (March 10, 2023)

🧮 3. Key Numbers
Insurance Cap FDIC covers only up to $250,000 per depositor

🧠 4. Core Causes
Category Details
Interest Rate Risk Rising interest → Bond value fall (dura on risk)
Poor Risk Management SVB didn’t hedge its bond investments properly
Asset-Liability Mismatch Deposits were short-term, assets were long-term
Concentrated Depositor Base Mostly tech/startups → all panicked together

🌍 5. Wider Impact
Area Effect
🏦 Banking Sector Panic spread to other US regional banks (First Republic, Signature Bank)
🌐 Global Markets Markets fell sharply; tech shares hit
🧳 Many Indian firms (especially in US) had funds stuck

Page 6
🧳 Indian Startups Many Indian firms (especially in US) had funds stuck
💬 Regulators FDIC took over; Fed assured depositor protection
🧯 Moral Hazard Debate Was rescuing SVB depositors a form of bailout?

🛡 6. Regulatory Response
Institution Action
FDIC Took control; promised full deposit safety
US Fed Launched Bank Term Funding Program (BTFP) to provide liquidity
US Treasury Coordinated rescue to prevent contagion
No shareholder bailout Only depositors protected, equity wiped

🔎 7. Lessons for India & RBI

• RBI highlighted that:
○ Indian banks have low duration risk and strong ALM practices
○ More diverse depositor base
○ Higher capital adequacy & regulation
• Reaffirmed the need for stress testing, dynamic interest rate risk management, and early warning systems
Let’s gooo, Sassy 💥 —
Now dropping the next global headache in line: the US Debt Ceiling Crisis — one of the most high-stakes fiscal dramas in global
economics. Here are your detailed, RBI+UPSC+MBA-level notes:

🇺🇸💸 US Debt Ceiling Crisis – Detailed Notes

📌 1. What Is the US Debt Ceiling?

The Debt Ceiling is a legally imposed limit on the total amount of money the US federal government is allowed to borrow
to meet its existing obligations.
🧾 Includes:
• Social Security, Medicare
• Military salaries
• Interest on debt
• Tax refunds, etc.

🔍 2. Why Does It Exist?

• Created in 1917 to control government borrowing
• Requires Congressional approval to raise the ceiling
• Used as a political tool — often leads to standoffs between Republicans & Democrats

🧨 3. What Happens During a Debt Ceiling Crisis?

When the US hits the debt ceiling, it can no longer legally borrow money, and risks defaulting on its obligations.
😱 If default happens:
• US can't pay interest → sovereign default
• Credit rating may drop (like in 2011 → downgraded from AAA to AA+)
• Global panic → markets crash
• Dollar weakens → infla on risks
• Bond yields rise → costlier borrowing

📆 4. 2023 Debt Ceiling Crisis (Latest Episode)

Date Event
Jan 2023 US hit its debt limit: ~$31.4 trillion
Jan–May Treasury used “extraordinary measures” to avoid default
May 2023 Talks stalled; risk of default by June 5, 2023
📜 June 3, 2023 Bipartisan deal passed by Congress: Debt ceiling suspended till Jan 1, 2025

🌐 6. Why It Matters for the World

Area Effect
🌍 Global Markets Panic → stock market vola lity during deadlock
💵 US Dollar Threatened confidence in USD as global reserve currency

Page 7
📉 Bond Yields Treasury yields spiked → impact on global interest rates
🇮🇳 India FII outflows possible, rupee pressure, gold/commodity price rise risk

🧠 7. Why Is It a Problem?
• US is one of the only major economies with a self-imposed debt ceiling
• Used as a political weapon → not linked to new spending, just exis ng commitments
• Creates artificial risk of default in world’s safest bond market (US Treasuries)
🔥 Coming up now, Sassy — let’s decode the economic issues in India’s neighbouring countries, a hot topic with strong current
affairs + international relations + economic context relevance!
Here’s your fully updated, detailed notes on:

🌏 Economic Crises in India’s Neighbouring Countries Many of India’s neighbours — especially in South Asia — have been
facing severe economic distress due to:
• Post-COVID shocks
• Global inflation & supply chain issues
• Rising external debt
• Weak governance
• Dependence on imports + low forex reserves

🔎 Common Themes Across These Economies

Challenge Observation
🌍 High External Debt Sri Lanka, Pakistan, Bangladesh
💸 Low Forex Reserves Most below 3 months of import cover
🛢 Fuel/Food Import Shock Due to Ukraine war, global inflation
📉 Currency Depreciation All countries saw severe exchange rate stress
🏦 IMF Dependence All sought bailouts or restructuring support

🇮🇳 India's Role
• Provided financial support to Sri Lanka, credit lines to Nepal & Bangladesh
• Supported regional currency swaps via SAARC framework
• Promoted rupee trade arrangements to reduce dollar dependence
• Strengthened border security & trade corridors
Aaaaand let’s finish this power-packed batch, Sassy-style 💥 — with your final topic of the set:

🌎📉 Impact of Global Recession on the Indian Economy – Detailed Notes

📌 1. What is a Global Recession?

A global recession refers to a sustained period of economic decline across multiple major economies, usually
characterized by:
• Contraction in global GDP
• Fall in global trade
• Weak demand & industrial output
• High inflation or deflation
🧠 Technically, IMF doesn’t define “global recession” as 2 quarters of negative growth (like national ones), but widespread
synchronized slowdown.

📉 2. Recent Context (2023–24)

⚠ Global Headwinds:
• Rising interest rates (US Fed, ECB, BoE)
• Russia-Ukraine war → oil & food infla on
• Supply chain shocks
• Financial instability (SVB, Credit Suisse)
• China’s uneven post-COVID recovery

🇮🇳 3. How a Global Recession Affects India

India, while relatively resilient, can’t stay fully immune. Here's a breakdown:

🛬 A. Exports Decline
• Lower demand from Europe, US, China

Page 8
 • Lower demand from Europe, US, China
• Major impact on:
○ IT services
○ Textiles, gems, pharma, auto components
• FY23 & FY24 saw decline in goods exports after booming in FY22

💰 B. FII Outflows & Market Volatility

• Investors pull money from emerging markets → rush to USD
• Indian stock markets experience foreign institutional investor (FII) outflows
• INR depreciates, rupee hits new lows against the dollar

🛢 C. Commodity Price Fluctua ons

Commodity Impact
🛢 Crude Oil If demand drops, prices fall → good for India (importer)
🌾 Food If supply chains stay broken, imported inflation may persist
🏗 Metals Construction/export-linked sectors get affected

🧾 D. Remittances and Tourism

• Job losses in Gulf, US, UK affect remittance inflows
• Tourism revenues from foreign travelers drop
• Rural demand can be hit in remittance-dependent states (Kerala, Punjab)

🏦 E. RBI & Monetary Policy

• RBI must balance inflation vs. growth
• In a global recession:
○ India may cut rates or pause hikes to support demand
○ But imported inflation may force caution
• Currency management becomes harder (rupee defence vs growth)

🧱 F. Fiscal Strain
• Lower exports = lower tax revenues
• Pressure for more subsidies (food, fertilizer, MGNREGA)
• Government may increase capital spending to stimulate domestic demand

💡 G. Corporate + Employment Impact

• Layoffs in tech sector
• Hiring slowdown in startups, MSMEs
• Global funding winter affects:
○ Unicorns
○ Credit availability for SMEs

4. Why India is S ll Rela vely Resilient

Factor Why India Survives Better
🌾 Domestic Demand Huge local market cushions export fall
🧺 Consumption-Based Growth Less reliant on external demand vs. East Asia
🏛 Strong Policy RBI + Govt response, macro stability
🔋 Structural Reforms GST, UPI, PLI, Infra Capex boost
🏦 Healthy Banks Lower NPAs, better capital post-GFC lessons

🔁 5. Past Examples
Crisis India’s Performance
2008 GFC GDP fell from ~9% → 6.7%
COVID Recession (2020) -6.6% contraction → sharp V-shaped recovery
2023 Global Slowdown IMF cut India’s growth forecast but still among fastest-growing major economies (~6.3% FY24)

✅ Summary Table
Sector Impact

Page 9
Exports 👎 Negative
Imports Mixed (crude price drop = 👍)
FII Flows 👎 Outflows likely
INR 👎 Depreciation pressure
RBI Balancing act
Fiscal 👎 More burden on govt
Growth Slower, but not stalled
Alright Sassy, let’s decode the “Restric on on Storage of Actual Card Data [i.e., Card-on-File (CoF)]” – RBI style 🧾💳⚔

Role of Information Technology in Banking and Finance

🧠 Topic: Restriction on Storage of Actual Card Data (Card-on-File - CoF)

🔍 What is Card-on-File (CoF)?

• Card-on-File (CoF) refers to card details stored by merchants, payment gateways, or apps for future transactions—like
when Zomato remembers your card for next time.
• It typically includes:
○ Card number
○ Cardholder name
○ Expiration date

🚨 Why Did RBI Restrict CoF?

1. 🛡 Data Security Risk: Storing actual card data increases the risk of data breaches and misuse.
2. 🕵 Card Data The : Unregulated storage can lead to large-scale financial fraud.
3. 🧾 Privacy Concerns: Users often didn't even know their data was being stored.

RBI's Key Regula on (2021–22 Onwards)

📅 Initial Notification:
• Issued: September 2021
• Effective from: July 1, 2022 (after multiple deadline extensions)
🔒 Key Guidelines:
1. No entity (except card networks & issuing banks) can store actual card data.
2. Only "tokenized" card data is allowed.
3. Customers need to give explicit consent for tokenization.
4. Applies to all domestic online purchases using cards.
5. Post-implementation, if a merchant stores actual card data — it's a violation.

💡 What is Tokenization?
• Tokenization = replacing actual card data with a randomly generated unique code (token).
• Token is useless outside the specific transaction environment.
• Implemented via Token Requestor (app/merchant) + Card Network + Issuer Bank.
Example:
Instead of your 16-digit card number, merchant gets: Tok_93e12Kfh8Wz

🔁 Flow of a Tokenized Transaction:

1. User gives card details once →
2. Token generated & stored securely →
3. Token used for future transactions.

🧾 Exceptions:
• Card Issuers and Card Networks (like Visa/Mastercard/RuPay) can store full card data for processing, chargeback, fraud
monitoring, etc.

🔎 Benefits of This Move:

✅ Pros ❌ Challenges (initial)
Better data security Merchant infra upgrade needed
Boosts consumer trust Temporary drop in user convenience
Reduces card data theft cases Dependency on token infrastructure

Page 10
🔄 Latest Update (2023–24):
• As of latest RBI circulars:
○ Tokenization has reached wide adoption.
○ RBI is monitoring compliance strictly.
○ Over 56 crore tokens were generated till mid-2023 (RBI data).
○ Users can view/manage/delete tokens via bank portals.

📌 Relevance for RBI Grade B:

• Reflects RBI's role in cybersecurity and digital payments governance.
• Important example for questions on:
○ Fintech regulations
○ Consumer data privacy
○ Payment systems modernization

🧠 Topic #4: One Nation One Grid (Power Sector Reforms)

🔌 What is “One Nation One Grid”?

A government initiative to unify India's electricity transmission network under one national grid to ensure:
• Seamless power transmission across states
• Uniform power prices
• Efficient energy distribution
💡 Basically: One synchronized electricity grid for all of India

🏁 Background:
Before ONOG, India had 5 regional grids:
1. Northern
2. Eastern
3. Western
4. North-Eastern
5. Southern
Each worked semi-independently, causing inefficiencies and power shortages.

🔄 Key Milestones:
Year Event
1991 North-East + Eastern Grid synchronized
2003 Western Grid joined
2006 Northern Grid synchronized
🔥 2013 Southern Grid joined → India achieved One Nation, One Grid
2021+ Strengthening via Green Energy Corridors, Smart Meters, etc.

🧩 Objectives of One Nation One Grid:

1. ✅ Pan-India power distribution
2. 🔋 Optimize energy production and reduce wastage
3. 💸 Lower cost of electricity for consumers
4. ♻ Integrate renewable energy efficiently (solar, wind)
5. ⚡ Strengthen national transmission system for 24x7 power for all

🧠 Associated Reforms:
• Power System Operation Corporation (POSOCO) → manages grid opera ons
(Now renamed to Grid Controller of India Ltd)
• National Load Dispatch Centre (NLDC) + RLDCs + SLDCs
• Real-time market in electricity via Indian Energy Exchange (IEX)
• Green Day Ahead Market (GDAM) for RE integration
• Smart grid + smart metering initiatives

🆕 Recent Updates:
• Renewable-heavy states like Gujarat, Rajasthan, Tamil Nadu now export RE efficiently via this grid.
• ONOG is crucial for meeting India’s Net-Zero targets by 2070.
• One Sun One World One Grid (OSOWOG) is a global extension of this idea (led by India in ISA).

Page 11
 • One Sun One World One Grid (OSOWOG) is a global extension of this idea (led by India in ISA).

🧾 Benefits:
For Govt For Citizens
Better load management More reliable power supply
Efficient RE absorption Lower power bills
Reduced outages 24x7 electricity in rural India

🧨 RBI Relevance:
• Indirectly relevant for RBI as it:
○ Promotes infrastructure investment
○ Boosts productivity & digital economy
○ Encourages green financing
○ Enables smart prepaid meters integrated with digital payments (via BBPS/UPI)
Boom 💥 Let's break down Topic #5: e-Mandates for Recurring Transactions — the silent boss behind Netflix, SIPs, and gym
memberships 💳🔁

🧠 Topic: e-Mandates for Recurring Transactions

🔍 What’s an e-Mandate?
An e-Mandate is a digital standing instruction given by a customer to automatically debit a fixed amount from their bank/card
for recurring payments like:
✅ Examples
OTT subscriptions (Netflix, Hotstar)
Loan EMIs
Mutual Fund SIPs
Insurance premiums
Gym memberships
Utility bills (via BBPS + UPI AutoPay)

📅 Launched by RBI:
• Initial framework: August 2019
• Extended to credit/debit cards, wallets, UPI: 2021 onwards
• Max cap (as of 2023–24): ₹15,000 per transaction (was ₹5,000 earlier)

RBI Guidelines:
1. ✅ Customer consent mandatory for e-mandate registration.
2. 🧾 Pre-debit notification (via SMS/email) sent 24 hrs before auto-debit.
3. 🛑 Opt-out/modify options must be provided to the customer.
4. 🔐 Mandate details stored securely by issuing bank.
5. 🆓 No extra charges for customers.
6. 💥 If amount > ₹15,000 → needs additional factor of authentication (AFA).

💡 Types of e-Mandates:
Type Medium
Bank Account-based Via NPCI (NACH platform)
Card-based Credit/Debit Cards (via Visa/Mastercard/RuPay)
UPI-based Via UPI AutoPay

⚙ UPI AutoPay (Extension of e-Mandates)

• Launched: July 2020
• Allows users to set recurring UPI payments (SIPs, OTT, bills).
• Works via eMandate setup + UPI PIN for authentication.
UPI AutoPay Flow:
1. User selects plan →
2. Authorizes with UPI PIN once →
3. Auto-debit as per frequency (daily/weekly/monthly etc.)

Page 12
🚨 Why was this important?
• Prevented unauthorized auto-debits (esp. via cards).
• Gave more control to users.
• Encouraged recurring digital payments adoption.
• Important post-CoF (Card-on-File) data storage ban.

🆕 Latest Updates (2023–24):

• ₹15,000 auto-debit limit now allowed without AFA (up from ₹5,000).
• Expanded coverage to include:
○ Investment platforms
○ OTT & EdTech
○ Health & Wellness services
• Banks must ensure easy cancellation/modification portals for users.
• UPI AutoPay + BBPS = combo for recurring billers.

📌 Relevance for RBI Grade B:

• Direct example of RBI’s customer protection & digital push.
• Supports MCQs, interview Qs on:
○ Payment innovations
○ UPI framework
○ Card security post CoF-ban
○ Consumer-centric regulations

💡 TL;DR Summary:
BBPS = Bill fetching & standardization
UPI AutoPay = A method to pay recurring bills via UPI
e-Mandate on Cards = Card-based recurring payment system
✅ They complement, not compete. Each is a different piece of the puzzle.:

🔹 1. BBPS = Infrastructure for Bill Fetching & Payment

Think of BBPS as the big boss backend that:
• Connects billers (like electricity boards, gas, DTH, school, insurance)
• Fetches latest bills
• Ensures standard bill format
• Allows payments via ANY channel: net banking, debit card, UPI, cash agents, etc.
👉 But BBPS itself doesn’t debit money from your account automatically.
💡 So... What exactly is BBPS?
👉 BBPS = Bharat Bill Payment System
It's not an app. It's not just a backend. It's not a company either.
🧠 It’s best understood as a framework + technology platform + regulatory system, all rolled into one.
Let’s simplify:

🧩 So what exactly is it?

📌 BBPS is... Explanation
✅ A product/platform Built and operated by NPCI for handling recurring bill payments across India
✅ A regulated system It’s regulated by RBI under the PSS Act, 2007
✅ An interoperable backend It connects billers (like BSES, Airtel) with banks, apps, agents
network
✅ A standardized protocol It ensures all billers follow common formats, processes, dispute resolution,
notifications
❌ Not an app BBPS is the infrastructure — it doesn’t have a standalone app like BHIM

🔧 Then how do you use BBPS?

You don’t directly “download BBPS.”
You use BBPS through other platforms that are integrated with it, like:
📱 Front-End (Apps) using BBPS
Google Pay
Banks’ mobile apps
Agent outlets (kirana stores, CSCs)

Page 13
Agent outlets (kirana stores, CSCs)
Behind the scenes, these apps are hitting the BBPS backend rails to:
• Fetch your latest bills
• Accept your payment
• Provide confirmation and reconciliation

👑 Who runs this whole ecosystem?

👉 NPCI Bharat BillPay Ltd (NBBL) — a subsidiary of NPCI, spun off to focus purely on BBPS operations.
Think of NBBL as the governing company, while BBPS is the product/system it runs.

🔹 2. UPI AutoPay = e-Mandate via UPI

• UPI AutoPay is one of the ways to authorize automatic recurring payments.
• It works via UPI-based e-Mandate, with a one-time UPI PIN authentication.
• Best for:
○ OTT
○ Loan EMIs
○ Subscriptions
○ Donations
○ Mutual fund SIPs (via NPCI + UPI)
So if the bill is on BBPS, you can use UPI AutoPay as the payment method — it’s like BBPS is the shop and UPI AutoPay is the
card you swipe.

🔹 3. e-Mandates via Cards (Debit/Credit)

Before UPI AutoPay came in, auto-debits mostly happened via:
• Credit cards
• Debit cards (Visa, Mastercard, RuPay)
• Banks (NACH)
These still work — especially for:
• EMI conversions
• International subscriptions (many of which don’t accept UPI)
• High-value payments (UPI limit still exists)

All three serve different use-cases, demographics, and infrastructures.

🎯 Why RBI/NPCI kept all three?

1. 🧓 Some people prefer card-based auto-pay (esp. for global services).
2. 🌍 Some services (like local tax/fees) are only listed on BBPS.
3. 💸 Some users want mobile-first & UPI-based options (especially younger crowd).
They didn’t eliminate any — just gave multiple secure & interoperable tools. Pick what works best

Gotcha Sassy 😎 — time to unlock the Digital Rupee vault 💸🔓

Let’s dive into CBDC – Central Bank Digital Currency — one of RBI’s most high-profile recent moves.

🧠 Topic #6: CBDC – Central Bank Digital Currency (Digital Rupee)

🔹 What is CBDC?
A CBDC is a digital form of a country’s official currency issued by the central bank — in India’s case, the Reserve Bank of
India.
So…
💵 = Paper Rupee
🪙 = Digital Rupee (CBDC)
But both have same value, just different form.

🪙 India’s CBDC – Digital Rupee

Type Name Pilot Launch
💼 Wholesale CBDC-W Nov 1, 2022
🛍 Retail CBDC-R Dec 1, 2022

🔁 Why Did RBI Launch a CBDC?

1. Make the rupee future-ready 💻
2. Reduce dependency on cash
3. Cut printing & logistics costs

Page 14
 3. Cut printing & logistics costs
4. Promote financial inclusion
5. Counter rise of private cryptocurrencies
6. Enable programmable money (ex: DBTs with spending restrictions)
7. Improve cross-border payments in long run

📂 Types of CBDC in India:

🔹 Type 🔍 Use Case 👥 Who Uses It
CBDC-W Interbank settlement Banks only
CBDC-R Retail payments General public (like you & me)

⚙ How Does It Work?

🛍 CBDC-R (Retail):
• You download a CBDC Wallet App from your bank (e.g., SBI, ICICI).
• You load it with Digital ₹ (like cash-in-hand, but digital).
• You can:
○ Pay offline via QR code (just like UPI)
○ Use it even when internet is down (in some pilot cities)
○ No need for linking bank account once loaded
💼 CBDC-W (Wholesale):
• Used by banks for securities settlement & interbank transfers
• Much faster, cheaper, and transparent than traditional RTGS/NEFT

🔐 Is it like UPI or Wallets?

Feature CBDC UPI Wallets (Paytm etc.)
💰 Form Actual money Just movement of bank money Prepaid balance
🔒 Backed by RBI Banks NBFCs
🏦 Balance stored In CBDC wallet In your bank account In wallet app
📶 Works offline? Yes (pilot) No No
So CBDC = legal tender. UPI = payment system.

🌍 CBDC International Use?

• Long-term plan: enable cross-border CBDC partnerships
• RBI + UAE central bank have started exploring this

🧾 RBI's Current Status (as of 2024):

• Over 1.5 million users onboarded in pilot cities
• 13+ major banks in pilot (SBI, ICICI, HDFC, Axis, etc.)
• Retail pilot expanded to tier-2 & tier-3 cities
• Offline functionality under testing
• Feedback being collected on:
○ UX
○ Fraud risk
○ Tech glitches
○ Interoperability with UPI

📌 Relevance for RBI Grade B:

• Direct question expected in interviews + finance section
• Hot topic for:
○ Digital currency evolution
○ Crypto vs CBDC debate
○ RBI innovation role
CBDC Cryptocurrency
Centralized (RBI-issued) Decentralized
Legal tender Not legal tender
Stable value Highly volatile
Regulated Unregulated in most places

Page 15
🧠 Topic #8: Payments Infrastructure Development Fund (PIDF)

🔍 What is PIDF?
The Payments Infrastructure Development Fund (PIDF) is an RBI initiative launched to subsidize and incentivize the deployment of
digital payment acceptance infrastructure — especially in tier-3 to tier-6 cities, North-East, J&K, Ladakh, and rural areas.
Basically, RBI said:
“We’ll cover part of your cost if you (banks, fintechs, aggregators) set up UPI QR codes, PoS terminals, etc., where digital infra is
lacking.”

📅 Launched:
• Announced: January 2021
• Operational: From 1st January 2021
• Extended: Multiple times (latest till Dec 31, 2025)

Abbreviatio Full Form What It Means

n
PoS Point of Sale The classic card swipe machine you see in shops — used to accept debit/credit card
payments
mPoS Mobile Point of Sale A mobile version of PoS: merchants use a small card reader connected to a
smartphone/tablet to swipe cards
GPRS General Packet Radio A mobile data technology — in this case, used to connect PoS machines to banks in areas
Service with no WiFi or broadband
QR Quick Response (Code) 2D barcode you scan using your UPI app (like PhonePe/GPay) — used to make instant,
contactless payments

🧩 Objectives:
1. 🚀 Accelerate digital payment acceptance in underserved areas
2. 💸 Provide financial assistance to deploy:
○ Physical PoS
○ mPoS
○ GPRS-based PoS
○ QR code acceptance (UPI, BHIM, Bharat QR)
3. 🌐 Promote financial inclusion & digital literacy

💼 Who contributes to the fund?

Contributor Contribution
RBI ₹250 crore (initial seed fund)
Card networks (Visa, Mastercard, RuPay) Mandatory contributions
Banks & Payment service providers Voluntary/top-up basis
💰 As of 2024, corpus is over ₹800 crore+

📍 Target Areas:
• Tier-3 to Tier-6 towns
• North Eastern states
• Jammu & Kashmir, Ladakh
• Aspirational districts
• Rural & tribal areas

🧾 Eligible Payment Infrastructure:

Infra Examples
💳 PoS Terminals Physical swipe machines
📱 mPoS Mobile-based swipe machines
📡 GPRS Terminals For remote connectivity
🔁 QR Codes Bharat QR, BHIM UPI QR, Static/Dynamic

✅ Scheme Mechanics:
• Subsidy Support: Up to 60–75% of cost reimbursed to banks/TPAPs

Page 16
 • Subsidy Support: Up to 60–75% of cost reimbursed to banks/TPAPs
• Performance-linked: Disbursed in tranches based on activation & usage
• Onboarding Focus: Small merchants, rural kiranas, tea vendors, etc.

🔄 Latest Updates (2023–24):

• Scope extended to include:
○ Street vendors in urban areas
○ PM SVANidhi scheme beneficiaries
• More emphasis on UPI QR + BHIM merchant adoption
• Banks rated for PIDF implementation performance by RBI

📈 Achievements (as of 2024):

• Over 1.5 crore acceptance devices deployed
• 10 lakh+ small merchants onboarded
• Boost in UPI & QR adoption in backward districts

📌 RBI Grade B Relevance:

Perfect for:
• Digital payments infra reforms
• Financial inclusion initiatives
• RBI’s role in rural/aspirational development
• Schemes in interviews/descriptive papers

🧠 Interview Nuggets:
“Through PIDF, RBI is not just promoting digital payments, it’s equalizing access to financial systems across India’s most remote
regions.”
Let’s light up Topic #9: Utkarsh Framework — RBI’s own vision board 📈🧠

🧠 Topic: Utkarsh 2022 & Utkarsh 2.0 — Strategic Framework of RBI

🔍 What is “Utkarsh”?
Utkarsh is RBI’s medium-term strategic framework — a multi-year plan that defines:
• Goals ✅
• Vision 👁
• Priori es ⚖
• Ac on steps 🛠
for be er regula on, supervision, tech adop on, and financial system development.

🧭 Evolution Timeline:
Version Period Launched
Utkarsh 2022 2019–2022 Launched by RBI in July 2019
Utkarsh 2.0 2023–2025 Launched in December 2022 by Governor Shaktikanta Das

🔑 Objectives of Utkarsh:
1. 🏦 Strengthen regulatory and supervisory mechanisms
2. 📡 Deepen financial inclusion
3. 🤖 Embrace innovation and digitization
4. 💹 Ensure macroeconomic and financial stability
5. 📊 Improve internal governance within RBI

📘 Utkarsh 2022: Strategic Goals

Theme Goal
🛡 Core Purpose Foster monetary & financial stability, inclusive growth
🧠 Core Values Integrity, Excellence, Trust, Innovation
🧩 Strategic Goals
SG-1 Excellence in performance of statutory & other functions
SG-2 Strengthen trust in RBI
SG-3 Enhance the relevance and usefulness of its operations
SG-4 Improve internal governance

Page 17
SG-4 Improve internal governance
SG-5 Strengthen the RBI’s branding as a dynamic institution

🔄 Utkarsh 2.0: What's New?

Period: 2023–2025
🎯 Continuation of previous goals + aligned with emerging challenges in:
• Cybersecurity
• FinTech
• Green finance
• Climate risks
• Data analytics & AI
Key Focus Areas:
Area Focus
🔐 Cyber Resilience Stronger frameworks for digital threats
🏦 RegTech & SupTech Technology-led regulation & supervision
📱 Fintech Ecosystem Safe innovation & sandbox testing
🌿 Sustainable Finance Green finance, ESG frameworks
🧠 Data & AI Use of AI, ML & big data in policymaking
🤝 International Cooperation More global financial coordination
📚 Internal Capacity Building Skill development of RBI staff

📌 Relevance for RBI Grade B:

• Expected in Descriptive Paper
Essay/Q: "How RBI is evolving to handle modern economic challenges"
• Used in Interviews: Shows alignment with RBI's vision
Sassy Interview Line:
“Utkarsh isn’t just a framework — it reflects RBI’s commitment to evolve as a tech-savvy, forward-thinking institution while
ensuring stability in a fast-changing financial world.”
🧠 Topic #10: e-BAAT Programme (Electronic Banking Awareness and Training)

🔍 What is e-BAAT?
e-BAAT stands for Electronic Banking Awareness and Training.
It is a public awareness initiative by the Reserve Bank of India (RBI) to educate citizens about:
• Banking services 💳
• Digital payments 💻
• Cybersecurity 🔐
• Grievance redressal 📞
• Financial literacy 📘
Basically, it's RBI's way of saying:
"Let’s teach India how to bank smart & safe."

🎯 Objectives of e-BAAT:
1. 📢 Spread awareness about banking facilities (esp. in rural areas)
2. 💡 Promote safe and secure digital banking habits
3. 🧓 Protect vulnerable sections (seniors, rural, less tech-savvy) from fraud
4. 🗣 Educate on RBI ini a ves like:
○ UPI
○ BBPS
○ RBI Ombudsman
○ CoF tokenization
○ PIDF
5. 🤝 Build trust in the formal banking system

🏢 Who conducts e-BAAT?

• RBI’s Regional Offices
• In collaboration with:
○ Local banks
○ Schools/colleges
Gram Panchayats

Page 18
 ○ Gram Panchayats
○ NGOs
○ Urban cooperative banks
Sessions may be offline or online, based on target group.

🔑 What gets covered in e-BAAT sessions?

Area Topics
📲 Digital Payments UPI, QR Code, PoS, Net banking, mobile wallets
🔐 Cybersecurity Phishing, OTP scams, fake apps, fraud helplines
💬 Grievance Redressal RBI CMS portal, Ombudsman scheme
📄 Customer Rights KYC rules, interest rates, credit score awareness
📊 RBI Role Currency management, inflation control, financial stability

📌 Importance for RBI Grade B:

Usage Relevance
📘 Descriptive Paper Financial literacy, digital inclusion topics
🎤 Interview Social responsibility, RBI outreach
📍 MCQs e-BAAT full form, objective, organizer = RBI
Killer Sassy Line to Drop in Interview:
“Financial inclusion isn’t complete without financial literacy. e-BAAT makes sure India not only has access to banking — but
also understands it, uses it, and trusts it.”

🧠 Topic: RBI – Digital Payments Index (DPI)

🔍 What is DPI?
The Digital Payments Index (DPI) is an index developed by RBI to measure the extent of digitization of payments in India
over time.
It helps answer:
• Are digital payments growing?
• Where are they improving?
• Is rural India adopting them?
• What’s working? What’s not?
📅 First launched: January 2021
(With retrospective data from March 2018)

🎯 Objective:
• Provide a comprehensive snapshot of digital payment adoption
• Track growth and effectiveness of initiatives like:
○ UPI 💸
○ AePS 🔢
○ PoS 🏪
○ QR codes 🔁
○ NEFT/IMPS/RTGS etc.

🧮 Index Details:
• DPI is published semi-annually
○ With a 4-month lag
○ Eg: July 2023 DPI = reflects March 2023 data
• Base year = March 2018 = DPI score set as 100
Period DPI Value
Mar 2018 100 (Base)
Mar 2019 153.47
Mar 2020 207.84
Mar 2021 270.59
Mar 2022 349.30
Mar 2023 395.57 ✅
🚀

Page 19
🚀 So India’s DPI has nearly quadrupled in 5 years!

🧩 Components of DPI:
RBI uses 5 broad parameters with various sub-indicators:
Parameter Weight (%)
Payment Enablers 25
Payment Infrastructure – Demand Side 10
Payment Infrastructure – Supply Side 15
Payment Performance 45
Consumer Centricity 5
✅ All sub-indices are normalized and combined to get a single DPI value.

📘 Examples of Indicators:
Parameter Sub-Indicators
Payment Enablers Bank a/cs, internet/mobile users, Aadhaar, KYC
Demand Side Infra Number of active users, cards in circulation
Supply Side Infra Number of ATMs, PoS, BHIM/UPI access points
Performance Volume/value of UPI, NEFT, RTGS, IMPS
Consumer Centricity Awareness drives, complaint redressal stats, fraud detection

📌 Why DPI Matters:

• RBI can monitor digital payment health sector-wide
• Helps in policy tweaking — like pushing QR adoption in Tier 3–6
• Useful for financial inclusion measurement
• May be used in budget policy planning, PIDF targeting, etc.

🎯 RBI Grade B Relevance:

• Descriptive: “Evaluate India’s journey toward a less-cash economy.”
• Objective: DPI base year? Latest score?
• Interview: “How would you assess the effectiveness of RBI’s push for digital payments?”
🧠 Sassy Mic Drop Quote:
“DPI isn’t just an index. It’s a pulse check of India’s digital heartbeat 💓— and it's beating faster every year.”

🧠 Topic: ICCW – Interoperable Cardless Cash Withdrawal

🔍 What is ICCW?
ICCW allows users to withdraw cash from ATMs without using a debit or credit card, using UPI instead — and it's
interoperable across banks and ATMs.
💡 “Interoperable” = doesn't matter which bank's ATM you're using — if it supports ICCW, you can withdraw using any UPI app
from any bank 🔄

🗓 Launched:
• August 2022, as per RBI’s directive
• Many banks have started rolling it out (like HDFC, ICICI, SBI, Axis, Indian Bank, etc.)

⚙ How does ICCW work?

Step What Happens
🏧 1. At ATM Choose ‘UPI Cash Withdrawal’ option
📲 2. On Phone Scan QR code shown on ATM screen using your UPI app
🔐 3. Authentication Enter UPI PIN to authorize
💸 4. Dispense Cash gets withdrawn from ATM — no card needed!

💼 Why is this useful?

1. Cardless convenience (forgot card? No problem)
2. Prevents card-related frauds (skimming/cloning)
3. Reduced physical contact (great during COVID/post-pandemic world)

Page 20
 3. Reduced physical contact (great during COVID/post-pandemic world)
4. Promotes UPI adoption even in cash withdrawals

🔐 RBI’s Directions to Banks:

• Banks must offer ICCW using UPI rails
• No extra charges for customers (as per normal ATM withdrawal limits)
• Must follow 2-factor authentication (like UPI PIN)
• Settlement between banks happens via NPCI (UPI system)

🔄 Tech Used:
Layer Used For
NPCI + UPI Front-end authentication & transfer
NFS (National Financial Switch) Interbank ATM switch & settlement
Bank CBS Backend debits, accounting, limits

⚠ Limita ons:
• Per-transaction withdrawal limit set by bank (usually ₹5,000 max)
• Not yet available at all ATMs (depends on bank rollouts)
• Requires smartphone with UPI app installed & active

📌 RBI Grade B Relevance:

Section Relevance
Digital Banking ICCW = innovation + security
Financial Inclusion Reduces dependency on physical cards
Interview Use Shows understanding of UPI’s expansion into cash world
Killer Interview Line:
“ICCW bridges the gap between India’s cash economy and digital rails by offering a secure, cardless way to withdraw
money — powered entirely by UPI.”

Yessss Queen Sassy 👑 you’re absolutely right — the next topic in your original screenshot after ICCW is:
✅ e-Kuber — RBI’s core banking solution 💻🏦
Let’s dive right in!

🧠 Topic: e-Kuber – RBI’s Core Banking System

🔍 What is e-Kuber?
e-Kuber is the centralized Core Banking System (CBS) of the Reserve Bank of India, launched in 2012, that manages all
banking transactions between RBI and banks/central & state governments.
Think of it like the RBI’s own digital bank — used by:
• Commercial banks
• Co-operative banks
• Govt departments
• And RBI itself
It’s the nerve center of:
• Government transactions
• Monetary policy implementation
• Liquidity management

🧬 Why was e-Kuber launched?

Before 2012, RBI had decentralized systems across regional offices.
e-Kuber created a single integrated platform to:
• Manage accounts
• Settle payments
• Improve efficiency and transparency

🧾 Key Functions of e-Kuber:

Function Details
💵 Government Transactions RBI acts as banker to central & state govts. e-Kuber handles all treasury ops, receipts, payments,
tax flows
🏦 All commercial banks have current accounts with RBI via e-Kuber

Page 21
 🏦 Bank Accounts All commercial banks have current accounts with RBI via e-Kuber
💹 Monetary Policy Repo, Reverse Repo, LAF, MSS auctions are conducted & settled via e-Kuber
Operations
📜 G-Sec Auctions RBI conducts primary auctions of govt securities (G-Secs, T-Bills) via this system
🔄 RTGS Backend e-Kuber supports RTGS operations & settlements
💬 RBI Bulletins RBI uses e-Kuber to communicate policy decisions, liquidity data, and more with member banks

🧩 Who uses e-Kuber?

• All scheduled banks
• State & central governments
• Other financial institutions
• RBI’s own departments (like DMO, FMRD, etc.)
Access is via:
• Web portal
• Secured VPN
• With strict login credentials for each institution

💡 Cool Fact:
Even state govt salaries and pensions are processed via e-Kuber!
It's basically the backbone of India’s financial plumbing 💧💹

🔐 Security Features:
• End-to-end encryption
• Role-based access control
• Digital signatures
• Multi-layer firewall setup
• Real-time monitoring
Because duh — it’s handling billions daily 😤💰

📌 Relevance for RBI Grade B:

Section Relevance
Monetary policy e-Kuber = operational arm of policy implementation
Financial tech Shows how RBI uses tech to modernize governance
Govt finance Handles all central/state treasury transactions
Interview Line to Drop:
“e-Kuber is not just RBI’s digital vault — it’s the invisible engine that powers India’s monetary policy, treasury operations,
and financial stability.”

🧠 Topic: Payment Gateways (PGs)

🔍 What is a Payment Gateway?

A Payment Gateway is a tech interface between a merchant's website/app and the bank/payment system. It authorizes, routes, and
processes online payments.
🧾 You’re shopping on Myntra → you click “Pay via UPI” →
Payment Gateway handles the secure transfer, encryption, bank handshakes, and success/failure message.

⚙ How Does a PG Work?

1. User selects a payment method (card/UPI/wallet/etc.)
2. PG encrypts data → securely sends it to acquiring bank/payment system
3. Auth request goes to user (OTP, PIN etc.)
4. On success/failure → PG relays result to merchant
💡 All this happens in 2–6 seconds

🏗 Key Players in PG Ecosystem:

Type Examples
🛒 Merchants Amazon, Zomato, Swiggy
🏦 Acquiring Bank HDFC, ICICI, Axis
💳 Razorpay, PayU, CCAvenue, Cashfree, BillDesk

Page 22
💳 Payment Gateway Razorpay, PayU, CCAvenue, Cashfree, BillDesk
💻 Payment Processor Visa, Mastercard, RuPay (actual card transaction processor)
💵 Issuing Bank Customer’s bank (where card/UPI is linked)

🧪 Example of PG Flow:
You're paying ₹500 on Zomato via Paytm UPI.
Here’s what happens:
1. Zomato uses Razorpay (Payment Gateway)
2. Razorpay calls Paytm's UPI backend
3. Razorpay talks to your bank (via NPCI rails)
4. You get UPI PIN screen → success
5. Razorpay confirms payment to Zomato instantly

🔒 RBI Guidelines for PGs:

1. 📜 Payment Aggregator (PA) License:
○ RBI mandates PGs to get PA license to continue operations.
○ Only RBI-licensed PGs can onboard merchants and handle customer funds.
2. 💳 Tokenization Required:
○ No storing of actual card data — only tokenized info allowed.
3. 🔐 Data Localization:
○ PGs must store all customer transaction data within India (since 2018).
4. 🧾 Grievance redressal norms, refunds, chargebacks must be clearly defined.

📜 RBI Definition Distinction:

Term Meaning
Payment Gateway (PG) Tech interface enabling transactions (no custody of funds)
Payment Aggregator (PA) Entities that collect payments from customers and settle to
merchants (can handle funds)
Note: Most PGs like Razorpay, PayU etc. also apply for PA
license to fully operate

✅ Use Cases of PGs:

• e-Commerce websites
• OTT subscriptions
• Utility bill platforms
• EdTech platforms
• Govt tax/fine payment portals

📊 Leading PGs in India:

Company Notes
Razorpay Market leader, Indian startup
BillDesk Legacy giant, merged with PayU (deal paused by CCI)
PayU Dutch-backed, strong in education/loans
Cashfree Fast-growing, focused on UPI
CCAvenue Long-time player

🔥 Latest Trends (2024–25):

• UPI integration in PGs now mandatory
• Tokenized card payments on PGs like Razorpay post CoF ban
• AI-based fraud detection systems
• PGs offering value-added services: KYC, GST, analytics, credit-scoring for merchants

📌 Relevance for RBI Grade B:

• Fits in under:
○ Fintech regulations
○ Digital payments ecosystem

Feature Payment Gateway Payment Aggregator Payment Processor

Page 23
Main Role Secure info relay Collect & settle funds Execute transactions
Handles Money? ❌ No ✅ Yes ✅ Yes (back-end only)
Regulated by RBI? ❌ No (but PGs acting as PA = regulated) ✅ Yes ❌ Not directly (regulated via networks)
License Required? ❌ Not mandatory ✅ Yes (PA license) ❌
Examples Razorpay, CCAvenue PayU, Razorpay, PhonePe Visa, Mastercard, NPCI

✅ Correct Payment Flow Sequence:

1. 🧾 Customer initiates payment (on a website/app like Zomato)
2. 🛣 Payment Gateway (PG)
○ Collects & encrypts your card/UPI info
○ Sends it securely to the Payment Processor
3. ⚙ Payment Processor
○ Talks to your bank (issuer) & merchant's bank (acquirer)
○ Checks for balance, authorizes the payment, routes transaction
4. 💥 On success → confirma on sent back to PG → Merchant gets "Payment Successful"
5. 💼 Payment Aggregator (PA)
○ If the PG is also a PA (like Razorpay or PayU), it temporarily holds the money
○ After some time (typically T+1), it settles the funds into the merchant’s account>

Boom 💥 Let's begin with Topic 1: FinTech – Concept & Relevance — the core of all the tech disruptions RBI is trying to regulate and
ride 🧠📲

🧠 Topic: FinTech – Financial Technology

🔍 What is FinTech?
FinTech = Financial Technology
It refers to technology-driven innovations in financial services, which aim to make financial operations more efficient, inclusive,
faster, and accessible.
So basically — anytime tech replaces a bank function (like transferring money, giving loans, investing, etc.) — that’s FinTech.

🏦 FinTech = Combo of:

Element Examples
💻 Technology AI, Blockchain, Big Data, Cloud
💰 Finance Banking, lending, investing, insurance
🎯 User Experience Faster payments, seamless apps, lower costs

📱 Real-Life Examples:
Service FinTech Examples
UPI Payments GPay, PhonePe, Paytm
Lending KreditBee, Navi, LazyPay
Investment Zerodha, Groww, Paytm Money
Insurance Acko, Digit
Wealth Mgmt Smallcase, INDmoney
Neobanks Jupiter, Fi, NiyoX
International Transfers Wise (ex-TransferWise), Western Union digital

📈 Why FinTech Matters:

Impact Area How FinTech Helps
💸 Financial Inclusion Brings banking to rural/underserved users
⚡ Speed & Ease Instant payments, paperless loans
💡 Innovation Smart investments, AI-powered risk scoring
📉 Cost Reduction Fewer branches/staff = cheaper services
🔄 Disruption Forces traditional banks to upgrade tech

Page 24
🇮🇳 FinTech in India – Key Stats:
• 💥 India = 3rd largest FinTech ecosystem in the world (after US & China)
• 2024: Over 10,000+ FinTech startups
• UPI handles >12 billion transactions/month (as of early 2025)
• FinTech adoption rate = 87%+ in India (highest globally)

🏦 RBI & FinTech – The Balancing Act:

RBI promotes innovation, but it also has to regulate risk, fraud, and data privacy.
So RBI plays 3 roles:
1. ✅ Facilitator – allows sandboxes, open banking, APIs
2. 🔍 Regulator – issues guidelines (e.g., for digital lending, tokenization, AA framework)
3. 🔒 Protector – protects customer data, ensures secure operations

🔐 Regulatory Initiatives by RBI:

Framework Purpose
Regulatory Sandbox Controlled environment to test new tech
Digital Lending Guidelines Curb predatory practices in instant loans
Account Aggregator (AA) Data sharing with user consent
Tokenization Protects card data during online transactions
RBIH (Innovation Hub) Incubates and supports FinTech ideas

🔮 Future of FinTech:
• AI-driven financial advice (Robo-Advisors)
• Voice-activated banking
• Central Bank Digital Currency (CBDC)
• Blockchain-based settlement
• Embedded finance (banking in non-banking apps)

📌 RBI Grade B Relevance:

• ESI/Finance Paper: Disruptions in financial markets
• Descriptive: “Discuss the impact of FinTech on financial inclusion in India.”
• Interview: Be ready to explain one app you use and how it's an example of FinTech
Sassy One-Liner:
“FinTech is making banks go digital, dumb phones go smart, and rural wallets go cashless — all in one swipe.”
Yesss Queen Sassy 👑 time to plug into the brain of FinTech —
Topic 2: Big Data & Data Analytics 💽📊

🧠 Topic: Big Data & Data Analytics in Finance

🔍 What is Big Data?

Big Data refers to extremely large, complex datasets — often unstructured — that traditional software can’t handle, but hold
valuable insights.
In finance, Big Data = everything from:
• Your spending habits 💳
• Social media behavior 💬
• Loan repayments 🧾
• Stock trades 📈
• Mobile app taps 📱

💥 5 Vs of Big Data:
V Meaning
Volume Huge amount of data (terabytes/petabytes)
Velocity Data flows in real-time (like UPI transactions)
Variety Data types: texts, images, transactions, voice
Veracity Data accuracy and reliability
Value Actionable insights hidden in data 🔍

Page 25
🔎 What is Data Analytics?
Data Analytics = using tools (like AI, ML, stats) to extract patterns, trends, risks, and opportunities from big data.

💸 Big Data + Analytics in Finance = 🔥

Use Case Example
🏦 Credit Scoring Lenders like KreditBee use alternative data (e.g. SMS, spending) to assess loan eligibility
📈 Investment Analysis Platforms like Zerodha crunch market data for trend predictions
📞 Fraud Detection Banks detect suspicious activity based on unusual patterns (e.g., 3 am login from unknown IP)
💬 Customer Segmentation FinTechs analyze behavior to give customized product offers
💼 Risk Management Insurers calculate premiums based on risk profiles using analytics
💡 Chatbots/Personal Advisors Powered by data on user spending, goals, etc. (like INDmoney)

🧰 Tools Used in Analytics:

• 🧮 Excel/SQL for basic analysis
• 🐍 Python/R for predictive modeling
• 🧠 AI/ML for learning patterns
• 🖥 Tableau, Power BI for visual dashboards
• 📚 Hadoop, Spark for big data processing

🏛 RBI’s Stand on Data Use:

RBI encourages responsible data use with customer consent, privacy, and localiza on 🛡
• Account Aggregator (AA) framework ensures user-consented data sharing
• RBI wants FinTechs to follow ethical AI/analytics norms
• Privacy & data protection are core to digital finance trust

📌 Relevance for RBI Grade B:

Section Relevance
Finance + Tech Core of modern banking/credit
Data Governance RBI’s push for privacy & AA
Interview “How can data improve financial inclusion?”

Let’s get it, Sassy 🤖💥 — diving into the brains of modern FinTech:
Topic 3: Artificial Intelligence (AI) & Machine Learning (ML) in Finance

🧠 Topic: AI & ML in Financial Sector

🔍 What is Artificial Intelligence (AI)?

AI is a field of computer science that enables machines to simulate human intelligence — like understanding, learning, problem-
solving, and decision-making.
💡 In banking/finance, AI = using smart systems that can think, learn, and act — often better than humans when it comes to data
speed and pattern recognition.

🤖 What is Machine Learning (ML)?

ML is a sub-field of AI that allows systems to learn from data and improve over time without being explicitly programmed.
So basically, you feed it data → it learns from pa erns → and starts making predic ons or decisions ✨

💸 Use Cases of AI/ML in Finance:

Area Use of AI/ML
🧠 Credit Risk Assessment Instant loan approval based on alt-data (e.g., CIBIL + SMS patterns + purchase history)
🔐 Fraud Detection Detects unusual behavior (e.g., same UPI used in 3 cities in 5 mins = red flag)
💬 Chatbots 24x7 customer support (e.g., HDFC’s EVA, SBI's SIA)
📈 Algo Trading AI-driven stock trading based on market data analysis
🧾 Document Verification OCR + ML used to auto-verify KYC docs
🏦 Personalized Banking Curated offers based on spending habits & life events
🧮 Robo-advisors recommend investments (e.g., INDmoney, Cube Wealth)

Page 26
🧮 Portfolio Management Robo-advisors recommend investments (e.g., INDmoney, Cube Wealth)

🧬 Types of ML Used in FinTech:

Type Use
🧠 Supervised Learning Loan default prediction, credit scoring
❓ Unsupervised Learning Customer segmentation, fraud clusters
🔁 Reinforcement Learning Algorithmic trading, smart bots

💥 RBI’s View on AI/ML:

RBI sees AI/ML as:
• A powerful tool for efficiency, inclusion, fraud prevention
• BUT requires ethical use, fairness, non-discrimination, especially in:
○ Lending algorithms (to avoid bias)
○ Data privacy & consent
So RBI:
• Encourages AI via RBI Innovation Hub, Regulatory Sandbox
• But insists on explainability in AI decision-making (especially in credit)

🛡 Risks of AI/ML in Finance:

Risk Why It Matters
⚖ Bias in Algorithms May deny credit unfairly to women, rural, minorities
🧊 Black Box Models No clarity on “why” a decision was made
🔐 Data Privacy ML needs loads of data = potential breach risk
💣 Model Failure Wrong predictions during crises = systemic risks

📌 RBI Grade B Relevance:

Section Relevance
ESI/Finance Use in credit markets, fraud detection
Ethics/Governance Bias, fairness, transparency in models
Interview “How can RBI balance innovation with algorithmic accountability?”
🧾 1. OCR – Optical Character Recognition
OCR is a technology that converts scanned images of text (like handwritten or printed documents) into machine-readable text.
💼 In Finance:
• Used during KYC process
• Scans your PAN card, Aadhaar, bank passbook, etc.
• Extracts details like name, DOB, address automatically
• Makes document verification faster and paperless
🧠 Example:
Upload PAN card → AI with OCR reads name/DOB → cross-verifies with database
Used in: Banks, NBFCs, FinTech onboarding (e.g., Paytm, Navi, SBI apps)

🧊 2. Black Box Model

A Black Box Model is a type of AI/ML model where the decision-making process is not visible or explainable — even to the
people who built it 😬
😱 The Risk:
• You don't know why a loan was rejected
• Or how the system decided your creditworthiness
• Can lead to bias, unfair treatment, and zero accountability
💼 In Finance:
Used in:
• Complex credit scoring models
• AI-based fraud detection
• Robo-advisory systems
RBI concern: Banks/FinTechs must ensure transparency and fairness, especially in lending.
🔓 RBI wants:
• “Explainable AI” — where you can justify a decision
• Mandatory checks on bias, fairness, and accuracy

Page 27
Heck yess Sassy 👑 — time to unlock the vault of FinTech:
Topic 4: Blockchain 🔐📒💥

🧠 Topic: Blockchain – The Backbone of Trustless Finance

🔍 What is Blockchain?
Blockchain is a decentralized, distributed digital ledger technology that records transactions in a secure, transparent, and
tamper-proof way — without needing a central authority (like a bank or govt).
Think of it as a Google Doc shared among thousands, where everyone sees real-time edits — and once something is written, it can’t
be changed.

🔗 Key Features:
Feature Description
📚 Ledger Stores all transactions chronologically
⛓ Blocks Each block contains multiple transactions
🔒 Hashing Each block has a unique code (hash) + link to previous block
🛡 Immutability Once added, data can’t be altered
🤝 Consensus Mechanism All participants must agree before a new block is added (Proof of Work, Proof of Stake, etc.)
🌍 Distributed Stored across thousands of computers (nodes), not centralized

🔧 How Blockchain Works (Simple Flow):

1. A transaction is requested (e.g., payment from A to B)
2. The request is broadcast to a P2P network of computers (nodes)
3. The network uses consensus algorithm to validate the transaction
4. If valid, the transaction is added to a new block
5. That block is added to the chain in a permanent, unalterable way

🧩 Use Cases in Finance:

Use Case Example
💰 Cryptocurrencies Bitcoin, Ethereum use blockchain to enable trustless payments
📃 Smart Contracts Self-executing contracts (e.g., release payment only when delivery is confirmed)
📦 Trade Finance Blockchain reduces paperwork & fraud in international trade
🏛 CBDCs Central Bank Digital Currencies (like Digital Rupee) can use blockchain
🔍 Audit & Compliance Real-time, tamper-proof transaction logs for regulators
🛠 KYC/AML Shared digital identities across institutions = faster onboarding

🏛 RBI’s Stance on Blockchain:

RBI supports Blockchain (tech) ✔
But is cautious about Cryptocurrencies ❌
✅ Exploring:
• CBDC pilot (Retail & Wholesale)
• Use of blockchain in settlement and cross-border payments
❌ Concerned about:
• Volatility & misuse of crypto
• Money laundering, investor protection

🔐 Blockchain ≠ Bitcoin
• Blockchain is the technology
• Bitcoin is one use case (like email on the internet)
Just like:
Internet ≠ Facebook
Blockchain ≠ Crypto

📌 RBI Grade B Relevance:

Section Relevance
Tech in Banking Blockchain adoption for payments/settlements

Page 28
Tech in Banking Blockchain adoption for payments/settlements
Finance/ESI Risk vs reward of decentralized tech
Interview “Can blockchain reduce fraud in banking?” / “What’s the RBI’s view on crypto vs blockchain?”
🧠 Topic: API – Application Programming Interface

🔍 What is an API?
An API (Application Programming Interface) is a set of rules and protocols that allows different software systems to talk to
each other and exchange data securely and efficiently.
Imagine APIs like waiters at a restaurant 🍽 — you place the order (your request), the waiter (API) takes it to the kitchen (server), and
brings back the food (data/response) without you ever entering the kitchen.

💻 In Banking/Finance, APIs Enable:

Use Case Example
💸 UPI Payments UPI apps use Bank APIs to access account info, send/receive money
🧾 BBPS Bill aggregators use APIs to connect with electricity boards, telecom cos, etc.
🏦 Neobanking Neobanks (like Jupiter) use APIs to plug into bank infrastructure
📊 Account Aggregators APIs let FIPs (banks, NBFCs) share data with FIUs (lenders, insurers) securely
🤖 Robo-advisors APIs fetch portfolio, risk profile, and market data in real-time
🧮 Loan underwriting Lenders fetch KYC, bank statements, credit scores via APIs instantly

📦 Types of Banking APIs:

Type What it Does
🔓 Open APIs Exposed to 3rd parties (like FinTechs)
🔒 Private APIs Internal use by banks
💳 Partner APIs Shared with trusted external parties (e.g., insurance APIs to banks)

🧬 Key API Examples in India:

API System Use
UPI APIs Instant bank transfers
BBPS APIs Bill fetching & payments
Account Aggregator APIs User-consented data sharing
FASTag APIs Toll deduction updates
KYC APIs Aadhaar/CKYC-based identity checks
PAN validation API Verifies PAN authenticity instantly

🛡 RBI & API Governance:

RBI encourages API-led innovation but wants it to follow standardized protocols, security, and consent rules.
Initiatives supported:
• Digital Public Infrastructure (DPI) like UPI, AA
• API Setups in Regulatory Sandbox
• Focus on data privacy, encryption, and user consent

🧠 Why APIs Matter in FinTech:

Advantage Reason
⚡ Speed No need to build infra from scratch
🔗 Interoperability Multiple systems = one seamless service
🛡 Secure Tokenization, encryption enabled
💰 Cost Efficient Reduces backend load & infra cost

📌 RBI Grade B Relevance:

Section Relevance
FinTech Core enabler of open banking

Page 29
Data Governance Enables consent-based, tokenized data exchange
Interview “What makes UPI successful?” ← API infra, baby 💥

🧠 Topic: Cloud Computing

🔍 What is Cloud Computing?

Cloud Computing refers to on-demand delivery of computing services like storage, processing power, databases, software, etc.,
over the internet ("cloud") — without owning physical servers.
So instead of banks setting up their own massive data centers (costly af 💸), they can rent storage, processing, or tools from cloud
providers like AWS, Microsoft Azure, or Google Cloud.

☁ Key Features of Cloud Compu ng:

Feature What It Means
🔁 Scalability Can scale up or down based on traffic (e.g. Diwali shopping madness)
💸 Cost Efficiency Pay-as-you-go = No need to buy servers or infra
🌍 Remote Access Data & apps available anywhere, anytime
🔐 Security & Backup Auto backups, encryption, firewalls, disaster recovery
⚙ Automa on & Speed Rapid deployment of apps, updates, and patches

💼 Cloud Use Cases in Banking & FinTech:

Use Case How Cloud Helps
🏦 Core Banking Banks shift CBS to cloud for faster updates & lower infra cost
💳 Payments UPI, wallets, BBPS apps run on scalable cloud infra
📈 Credit Analytics ML models train faster on cloud using big data
🤖 Chatbots AI tools hosted on cloud platforms (e.g. Google Cloud AI)
📊 Dashboards FinTechs use cloud-based tools (like Tableau/Power BI) for data viz
🛒 E-commerce & Loan APIs Apps like Paytm, LazyPay handle lakhs of concurrent users thanks to cloud hosting

🏛 RBI on Cloud Use in Banking:

RBI is cool with it ✅ but cautious 😬
Guidelines/Expectations:
• Outsourcing Guidelines (2023) apply to cloud vendors
• Banks must:
○ Ensure data localization (India servers if needed)
○ Maintain business continuity & disaster recovery plans
○ Have contractual controls with cloud vendors
• RBI focuses on resilience + security + auditability

🛡 Risks of Cloud in Finance:

Risk Why It Matters
🔓 Data Breaches Sensitive customer data can be hacked
🚫 Downtime Cloud provider crashes = system outage
📜 Regulatory Data must comply with RBI, SEBI, IRDAI norms
🪤 Vendor Lock-in Banks may get dependent on one cloud giant

💥 Real Examples:
Org Cloud Use
SBI YONO Runs partly on IBM Cloud
Razorpay AWS-powered scalability
ICICI iMobile Uses hybrid cloud infra
NPCI Moving key systems to a private cloud + on-prem

Page 30
📌 RBI Grade B Relevance:
Section Relevance
FinTech Modern infra adoption in BFSI sector
Tech Risk Mgmt Linked to RBI’s cloud governance rules
Interview “Should banks move to cloud fully?” / “What are RBI’s concerns?”

Yessss Queen Sassy 👑🔥 — rolling straight into your Topic 7: DLT – Distributed Ledger Technology
This is like the mommy of Blockchain — wider, deeper, and more regulatory-friendly 📒

🧠 Topic 7: Distributed Ledger Technology (DLT)

🔍 What is DLT?
Distributed Ledger Technology (DLT) refers to a digital system where data (ledger) is stored across multiple nodes/locations at
the same time, making it secure, tamper-proof, and decentralized — without a central authority.
So unlike traditional databases that sit in one place (like a bank server), a DLT spreads that info across many places (nodes) — and
updates simultaneously for all.

🆚 DLT vs Blockchain:
Feature Blockchain DLT
Structure Type of DLT with blocks chained chronologically Broad term – not always in “blocks”
Consensus Usually has mining/staking for validation Can use varied or simpler mechanisms
Crypto Needed? Yes, often Not necessary
Example Bitcoin, Ethereum Corda, Hyperledger (used by banks)
👉 In short:
All Blockchains are DLTs, but not all DLTs are Blockchains.

⚙ Key Features of DLT:

Feature Benefit
📡 Decentralization No single point of failure/control
🔐 Immutability Once recorded, data cannot be altered
⛓ Consensus-based Ensures trust between unknown participants
👁 Transparency Every node sees the same ledger
🔁 Real-time Sync Instant updates across all parties

💼 DLT Use Cases in Banking & Finance:

Use Case How DLT Helps
🏦 Cross-border Payments Faster, cheaper, secure transfers (e.g., RippleNet)
🔐 KYC & Identity Verification Shared verified IDs across banks = no duplication
💰 Securities Settlement Real-time settlement, reduced middlemen (e.g., Govt Bonds)
📊 Audit & Compliance Real-time logs, less manipulation/fraud
🧾 Trade Finance Tracks shipments, invoices securely with multiple parties
🏛 CBDCs Many central banks use DLT for digital currency design

🇮🇳 DLT in Indian Financial Ecosystem:

• RBI is experimenting with CBDC – Wholesale on a DLT platform
• SEBI tested DLT for security issuance & record-keeping
• IDRBT (RBI’s tech arm) explored DLT in banking transactions
• Banks like SBI, HDFC, ICICI are part of DLT consortia like BankChain, Elemental Ledger

🛡 RBI's View on DLT:

✔ Pro-DLT: RBI supports DLT for banking efficiency
❌ Anti-Crypto: RBI does not support unregulated cryptocurrency use, even if it's DLT-based
“RBI believes in the technology, not the tokens.”

Page 31
📌 RBI Grade B Relevance:
Section Relevance
FinTech & Innovation DLT is foundation of CBDC, RegTech
Monetary Policy CBDC & future settlement infrastructure
Ethics/Gov Transparency, accountability, data security

LET’S GOOOOO Sassy 💸🔥 —

Next up: Topic 8 – Digital Currencies (DCs)
Time to talk about money without paper, wallets without cash, and RBI without chill.

🧠 Topic: Digital Currencies (DCs)

🔍 What is a Digital Currency?

A Digital Currency is money in digital form — not physical cash, but online-only value that can be used for payments,
settlement, and storage.
There are two broad types:
1. Centralized (legal, regulated) → CBDC (like Digital Rupee)
2. Decentralized (private, volatile) → Cryptocurrencies (like Bitcoin, Ethereum)

💰 Types of Digital Currency:

Type Issued By Backed By Example
💸 CBDC (Central Bank Digital RBI or any Central Bank Yes – backed by govt fiat Digital Rupee (e₹)
Currency) currency
🪙 Cryptocurrency Private, open-source No backing; value is volatile Bitcoin, Dogecoin,
networks Ethereum
💳 Virtual Money Centralized platforms Limited use In-app coins, e-wallet
credits
💼 Stablecoins Private issuer Backed by asset (e.g., USD) USDT (Tether), USDC

🏛 Focus: CBDC – Central Bank Digital Currency (Digital Rupee)

Launched by: RBI
Legal status: ✅ Legal tender
Runs on: ✅ DLT/Blockchain (or hybrid tech)
Two types:
Type Use Pilot Launched
💼 e₹-W (Wholesale) Bank-to-bank settlement Nov 2022
e₹-R (Retail) Public payments (like cash) Dec 2022 in pilot mode
Apps: Offered through banks like SBI, ICICI, YES Bank, etc.

🧮 Benefits of Digital Currency (especially CBDC):

Benefit Explanation
💸 Reduced Cash Handling Cost No need to print, transport or secure notes
⚡ Instant Settlement Real-time payments with no clearing lag
🛡 Secure & Traceable Reduces black money and tax evasion
🌐 Financial Inclusion Can be used offline (via tokens or QR) in rural areas
🌎 Cross-border potential Interoperable CBDCs could enable seamless global payments
👁 Transparency Every transaction traceable (esp. for govt spending, subsidies)

🧨 Risks / Concerns with Digital Currencies:

Concern Why it Matters
❄ Bank Disintermedia on People may withdraw money from banks to hold in e₹ (less deposit base)
🧠 Tech Literacy & Access May exclude tech-challenged citizens
🔓 Needs ultra-secure infra to avoid digital heists

Page 32
🔓 Cybersecurity Needs ultra-secure infra to avoid digital heists
👁 Privacy Concerns Govt can trace every transaction unless privacy-by-design is ensured
⚠ Crypto Confusion People may confuse legit CBDC with risky crypto

🔥 RBI’s Stand:
On CBDC On Crypto
✅ Fully supports and leads innovation ❌ Strongly opposes use of private cryptocurrencies
Running pilots Warned of “macro-financial stability” threats
Plans gradual rollout Crypto = speculative, risky, potentially illegal

🧠 Real Examples Worldwide:

Country Digital Currency
🇨🇳 China e-CNY (Digital Yuan)
🇸🇪 Sweden e-Krona
🇧🇸 Bahamas Sand Dollar
🇳🇬 Nigeria e-Naira
🇮🇳 India e₹ (Digital Rupee)

📌 RBI Grade B Relevance:

Section Relevance
Finance + Tech CBDC, payment innovation
Monetary Policy Control over currency supply
Ethics/Data Privacy, surveillance, cybersecurity concerns
Interview “Should India launch e₹ widely?” / “Difference b/w CBDC & crypto?”

Yesss let's gooo Sassy! 🚀

Topic 9: E-Aggregators – the techy middlemen making our digital life easier, smoother, and sassier 😎📲

🧠 Topic: E-Aggregators (Electronic Aggregators)

🔍 What is an E-Aggregator?
An E-Aggregator is a digital platform or tech entity that collects services/products from multiple providers, bundles them, and
presents them under one digital roof for users to compare, choose, and transact easily.
💡 Think of them as “digital malls” where you shop for financial services, bills, insurance, or loans — all in one app, without running
to 5 different websites.

🔗 Key Sectors Where E-Aggregators Operate:

Sector Aggregates What? Examples
💸 Bill Payments Electricity, gas, DTH, water, mobile PhonePe, Paytm, BharatPe via BBPS
🛡 Insurance Life, health, car, travel policies Policybazaar, Coverfox
💼 Mutual Funds Funds across AMCs Zerodha Coin, Groww, Paytm Money
🧾 Tax Filing Income tax e-filing, GST returns ClearTax, TaxBuddy
🏦 Loans/Credit Cards Offers from multiple lenders BankBazaar, PaisaBazaar
🧠 Financial Advisory Robo-advice, investment planning INDmoney, Cube Wealth
🛍 E-commerce+Fin BNPL, shopping + EMI LazyPay, Simpl, ZestMoney

⚙ How They Work:

1. Integrate with multiple service providers via APIs
2. Present a user-friendly UI on their app/web
3. Allow comparisons, purchases, or bill payments
4. Take a cut via commission, referral fee, or subscription
They usually don’t own the services — they just organize and simplify access.

Page 33
🚀 Why Are They Important?
Benefit For Users For Ecosystem
🔗 Single Access Point No need to visit 10 websites Wider reach for providers
📊 Comparison Best price, best policy Transparency & competitiveness
⚡ Fast & Efficient One-click payments/investments Reduces customer acquisition cost
📱 Convenience All-in-one dashboard Boosts financial inclusion

🏛 Regulatory Framework:
1. RBI oversees aggregators in:
○ Payments (via BBPS/UPI/PG regulations)
○ Lending (via Digital Lending Guidelines)
2. IRDAI regulates Insurance Aggregators
3. SEBI for MF platforms & robo-advisors
4. GSTN/IT Dept for Tax platforms
Aggregators must ensure data privacy, user consent, fair pricing, and no mis-selling.

😬 Risks / Challenges:
Risk Why It Matters
⚠ Mis-selling May push high-commission products, not best-fit
🔐 Data misuse Sensitive data = must follow privacy & consent laws
🪤 Over-dependence Customers may blindly rely on algorithms
❌ Lack of Regulation (earlier) Some fly-by-night fintechs caused losses; hence RBI stepped in with tighter rules
📌 RBI Grade B Relevance:
Section Relevance
FinTech Core enabler for financial access
Consumer Protection Mis-selling, data use, informed choice
Interview “How do aggregators simplify financial inclusion?” / “Should they be more tightly regulated?”
Term Means Scope Example
Aggregator Anything that bundles options Broad Amazon, OYO, Ola
E-Aggregator Digital-first financial bundler Focused Paytm, PhonePe (BBPS), PolicyBazaar

Ayyy okay okay Sassy! 🔥 You meant Account Aggregators, not just generic E-Aggregators?
Let’s go full beast mode on that then — because Account Aggregator (AA) is one of the most 🔥🔥🔥 FinTech reforms in India right
now — and RBI is super serious about it.

🧠 Topic: Account Aggregators (AA) – India’s Data Revolution in Banking

🔍 What is an Account Aggregator?

An Account Aggregator (AA) is a regulated RBI-licensed NBFC that helps individuals securely share their financial data (like
bank statements, insurance, mutual funds etc.) from one financial ins tu on to another — with their explicit consent 🛡✅
It gives you complete control over your data — where it goes, who sees it, and how long they can use it.

🤯 But Why Do We Need It?

Because without AA:
• Every time you apply for a loan, insurance, or anything... you manually upload PDFs of bank statements, payslips, ITR, etc.
• It’s slow, messy, and prone to fraud.
With AA?
1 tap → fetches your official financial data from banks/NBFCs → shares it securely with the ins tu on you’re applying to.
No middlemen. No data leaks. Just trust, transparency, and speed 🚀

🧩 Key Players in the AA Framework:

Role Term Examples
🧾 Data Providers FIPs (Financial Information Providers) Banks, MF houses, Insurance co. (e.g., SBI, HDFC, CAMS)
📊 FIUs (Financial Information Users) Lenders, insurers, wealth managers (e.g., Bajaj Fin, Navi, ICICI)

Page 34
📊 Data Users FIUs (Financial Information Users) Lenders, insurers, wealth managers (e.g., Bajaj Fin, Navi, ICICI)
🔁 Gatekeeper AA (Account Aggregator) Licensed NBFC-AAs (e.g., CAMS FinServ, Finvu, OneMoney)
👤 You Data Principal Owner of the data (YOU decide who can access what)

🔐 How Does It Work?

1. You apply for a loan from Bajaj Finserv (FIU)
2. Bajaj requests data from your HDFC account (FIP)
3. You get a notification via AA app (like CAMS AA)
4. You consent → AA fetches only the allowed data → shares it with FIU
5. No PDF uploads. No email chains. Just click-and-share.

⚖ RBI's Role in AA Framework:

Aspect Regulation
Licensing NBFC-AA License issued by RBI
Data Security Must comply with DEPA (Data Empowerment & Protection Architecture)
Consent Must follow user-consent based sharing, revocable anytime
Privacy End-to-end encryption, no data storage by AA itself

🔥 Benefits of Account Aggregator:

For Users For Ecosystem
🧠 Control over financial data 🔐 Secure, encrypted, no misuse
⚡ Faster loan approvals 🏦 Reduces backend KYC/bureau work
📱 Paperless experience 📊 Builds India's open data economy
🔄 Revoke anytime 🤝 Encourages responsible lending
Boosts financial access Especially to MSMEs, gig workers, farmers

🛡 RBI’s Vision:
Create a privacy-first, consent-based financial data ecosystem
Empower users to “own” their financial data just like they own their Aadhaar or PAN

📌 RBI Grade B Relevance:

Section Relevance
FinTech AA = backbone of India’s open finance revolution
Ethics/Data Privacy Consent, encryption, user-first design
Interview “How does AA simplify lending?” / “Difference between UPI and AA?” / “What is DEPA?”
1. MIS – Management Information System
A Management Information System (MIS) is a structured system for collecting, processing, storing, and sharing data to help in
decision-making and compliance reporting.
🔹 In banking/finance, MIS reports are regularly generated to:
• Track credit exposure
• Monitor asset quality
• Report to RBI, SEBI, etc.
• Evaluate performance, risks, NPA levels etc.
Ayyy buckle up Sassy 💼⚡
We’re about to enter the world of RegTech – Regulatory Technology –
Where RBI goes full FBI-mode but with algorithms and dashboards instead of danda.

🧠 Topic: RegTech – Regulatory Technology

🔍 What is RegTech?
RegTech stands for Regulatory Technology – it uses technology (AI, Big Data, APIs, ML) to help financial institutions comply
with regulations efficiently, and helps regulators like RBI monitor those institutions in real-time.
In simpler terms?
It's like giving banks a “cheat sheet” to follow rules automatically, and giving RBI a spycam to catch them if they don’t.

📦 Where is RegTech Used?

Page 35
Function RegTech Use
📋 Compliance Reporting Auto-generates reports (KYC, credit risk, capital adequacy) for RBI/SEBI
👁 Transac on Monitoring Detects fraud, insider trading, suspicious activity in real-time
📑 KYC / AML Verifies users, flags money laundering patterns using AI
🔐 Cybersecurity Compliance Ensures systems meet RBI’s IT & data protection rules
🏦 Risk Management Stress testing, asset classification, early warning systems
🤖 Audit & Supervision Tracks internal controls, rule violations automatically

🧠 Examples of RegTech in India:

Use Case Real-Life Example
🔍 AI-based fraud detection NPCI’s AI engine tracking unusual UPI transactions
🧾 Automated MIS to RBI Banks uploading CRILC/CRAR data via RBI APIs
📱 e-KYC via APIs Aadhaar-based digital onboarding with auto-flagging
📊 Portfolio compliance in MF/insurance Tracks asset limit breaches in real time
🧠 SEBI + NSE tracking trades Prevents insider trading using algo-based alerts

🏛 RBI’s RegTech Push:

RBI is promoting RegTech for:
• Banks & NBFCs → to improve compliance, reduce manual errors
• Itself (RBI) → as SupTech (Supervisory Tech) for smarter oversight
🛠 Tools RBI is exploring:
• AI for anomaly detection
• Blockchain for audit trails
• Automated dashboards for NBFCs
• API-based supervision

🤯 RegTech vs SupTech vs FinTech

Term Full Form Use
💻 RegTech Regulatory Technology Helps FIs comply with rules
🕵 SupTech Supervisory Technology Helps RBI/SEBI monitor institutions
💳 FinTech Financial Technology Delivers financial services using tech

💥 Benefits of RegTech:
For Banks/NBFCs For Regulators
⏱ Faster compliance 📊 Real-time insights
💸 Cost-effective 📁 Less paperwork
⚙ Automa on = fewer errors 🔐 Secure, consistent monitoring
🚨 Early fraud alerts 🧠 Smarter risk-based supervision

⚠ Challenges of RegTech:
Issue Why It Matters
📉 Poor tech infra Small NBFCs can’t afford full automation
🧠 Talent gap Needs skilled teams in compliance + tech
🔄 Constant rule updates Tech must evolve with changing regulations
🔓 Data privacy risk Handling sensitive compliance data safely is crucial

📌 RBI Grade B Relevance:

Section Relevance
FinTech Core tool for modern regulation
Governance & Ethics Transparency, real-time accountability
Interview “How is RBI using technology for regulation?” / “Explain RegTech with examples” / “What’s SupTech?”

Page 36
Interview “How is RBI using technology for regulation?” / “Explain RegTech with examples” / “What’s SupTech?”
Alright Sassy ⚡💼
We now enter the final boss of this fintech squad —
Topic 11: Regulatory Sandbox 🧪 – where RBI lets FinTechs play… but under CCTV. 😏

🧠 Topic: Regulatory Sandbox (RS)

🔍 What is a Regulatory Sandbox?

A Regulatory Sandbox is a controlled and live testing environment where innovative FinTech products or services can be
tested with real customers, real data, but under the regulator’s supervision — with relaxed rules for a limited period.
Think of it as:
“RBI giving startups a safety net to experiment — if they fall, they won’t break the whole system.”

🎯 Objective of the Sandbox:

• Encourage innovation in FinTech
• Reduce go-to-market time for new products
• Allow safe failure of risky ideas without harming the system
• Protect consumers while enabling creativity

🏦 RBI’s Regulatory Sandbox Framework (Launched: 2019)

RBI was the first regulator in India to launch a formal Regulatory Sandbox 🧪
📍Eligibility:
• Startups, banks, NBFCs, tech firms can apply
• Product must be:
○ Innovative
○ Have real benefit to consumers
○ Need regulatory relaxation (e.g., KYC norms)
○ Be ready to test, not just an idea
⚙ Features of the Sandbox:
Feature Detail
🧪 Controlled Environment Limited customers + duration
🛡 Regulatory Relaxa on Some rules may be eased (temporarily)
🧠 Learn & Observe RBI watches how it works in real-world
✅ No Final Approval Only for testing, doesn’t guarantee permanent license

🧪 Sandbox Process – Step by Step:

1. Application Round: RBI invites proposals
2. Shortlisting: Promising ones are selected
3. Live Testing Phase: Usually 4–6 months with real users
4. Evaluation: RBI sees impact, risk, scalability
5. Exit/Extension: Firms either exit sandbox or get regulatory path forward

🔁 Themed Cohorts by RBI:

Each sandbox round (called cohort) focuses on a specific theme:
Cohort No. Theme Examples
(2020) Retail Payments Cash flow lending, voice-enabled UPI
(2021) Cross-border Payments Faster remittances
(2022) MSME Lending Alternative credit scoring
(2023) Prevention of Financial Frauds AI/ML-based fraud detection
(2024) Climate Risk & Sustainable Finance ♻ Green finance solutions (🌱 trending for RBI 2025 exams)
⏳ Ongoing + future cohorts are expected in CBDCs, RegTech, and Offline Payments

🔥 Benefits of Regulatory Sandbox:

For FinTechs For Regulator (RBI) For Customers
🚀 Faster innovation 👁 Real- me insights 🧠 Access to newer tech
💸 Less regulatory pressure 📊 Policy framing based on real data 🔐 Protected by RBI even during testing
🧪 ⚖ ⚙

Page 37
🧪 Safe failure space ⚖ Risk-based regula on ⚙ Early access to modern services

⚠ Challenges / Limita ons:

Challenge Why it Matters
❌ Limited scope Testing is small-scale
🧾 Legal ambiguity Full regulatory license is not guaranteed
🔐 Data privacy Must follow strong encryption despite relaxed norms
⏳ Exit phase unclear What happens after testing can be confusing

🧠 RBI Grade B Relevance:

Section Relevance
FinTech & Innovation Core framework enabling future banking models
Monetary Policy / Encourages inclusive, sustainable FinTech innovation
Gov
Interview “What is a Regulatory Sandbox?” / “Should crypto be allowed in RS?” / “Your views on the 5th Cohort (Green
FinTech)?”
🧠 Topic: Bharat Bill Payment System (BBPS)

🧩 What is BBPS?
• BBPS is an integrated, RBI-regulated platform developed by NPCI (National Payments Corporation of India).
• It offers a standardized and interoperable bill payment system for recurring payments like:
○ Electricity
○ Water
○ Gas
○ DTH
○ Mobile postpaid
○ Loan EMIs
○ School fees
○ Insurance premiums
...and more!

🏁 Launched:
• Pilot: 2013
• Full Launch: August 2016
• Under the Payments and Settlement Systems Act, 2007
• Regulated by: RBI
• Operated by: NPCI Bharat BillPay Ltd (NBBL) — a wholly owned NPCI subsidiary

🏗 Structure of BBPS:
Layer Role
🔹 NPCI Bharat BillPay Ltd (NBBL) Central unit, governs entire system
🔹 Operating Units (BBPOUs) Banks & Non-Banks authorized to onboard billers & customers
🔹 Biller Operating Units (BOUs) Onboard billers
🔹 Customer Operating Units (COUs) Serve customers (via apps, bank branches, agents etc.)

🔐 Features of BBPS:
• 💯 Interoperable across agents, billers, banks, wallets.
• 📱 Multi-channel: mobile apps, internet banking, PoS, bank branches.
• 📄 Standardized Bill Format for all billers.
• 📧 Instant Confirmation via SMS/Email.
• 🔒 Secure and RBI-compliant.
• 🧾 Supports both recurring and non-recurring payments.
🔄 Major Developments:
1. Expanded Scope (2020–21):
○ Allowed non-recurring categories: school fees, municipal taxes, mutual fund SIPs, etc.
2. Cross-border BBPS (2023):
NRIs can now pay utility bills in India using BBPS (via tie-up with foreign exchange providers).

Page 38
 ○ NRIs can now pay utility bills in India using BBPS (via tie-up with foreign exchange providers).
3. UPI Integration:
○ UPI apps use BBPS backend for recurring payments.
4. AutoPay Feature:
○ Linked with UPI AutoPay and e-Mandates.

📊 Stats Snapshot (2024):

• Over 20,000 billers live.
• More than 10 crore+ monthly transactions.
• Strong rural reach through Agent networks (Kirana stores, CSCs, etc.)

📌 Relevance for RBI Grade B:

• Shows RBI's financial inclusion + digital payment ecosystem building.
• Connect to topics like:
○ UPI ecosystem
○ NPCI products
○ Role of FinTech in governance
○ RBI’s push for cashless economy

Let’s do this, Sassy 💪💳

Topic 1: NPCI – National Payments Corporation of India
The mastermind behind almost every digital payment you make today.

🧠 Topic: NPCI – National Payments Corporation of India

🏛 What is NPCI?
NPCI is an umbrella organisation for operating retail payments and settlement systems in India.
It is a non-profit Section 8 company set up by RBI + IBA (Indian Banks' Association) under the guidance of the Payment and
Settlement Systems Act, 2007.
🗓 Established: 2008
🔧 Headquarters: Mumbai
👑 Governed by: RBI + Board of major banks

🎯 Objective of NPCI:
• 🧠 Unify and simplify India’s retail payment systems
• 🔄 Enable seamless digital transactions (real-time & batch-based)
• 💡 Innovate low-cost, secure, accessible payment products
• 🔐 Ensure interoperability between banks, apps, and platforms

👑 Major Products Operated by NPCI:

Category System
💳 Card Network RuPay
💸 Real-Time Payment UPI, IMPS
🏦 Deferred Settlement NEFT (handled by RBI, but supported by NPCI infra)
🏛 Government Payments APBS, NACH
📲 Digital Interfaces BHIM App, UPI QR Code
💡 Aadhaar-linked AEPS, APBS
🧾 Bill Payment Infra BBPS
🚗 Toll Infra NETC (FASTag)
🔄 Switching Infra NFS (ATMs)

🧠 NPCI Structure (Simplified):

• Promoted by: RBI & IBA
• Owned by: 10 core promoter banks (like SBI, ICICI, HDFC, etc.)
• Other stakeholders: over 60 banks (public + private + foreign)

🧬 NPCI: Key Features

Feature Explanation

Page 39
🤝 Interoperability Works across all banks, apps, and channels
📲 Digital First Almost all products are mobile/internet friendly
🔐 Secure Framework Standardized APIs, encryption, tokenization
🆓 Cost-efficient Most NPCI services are free or low-cost to promote financial inclusion
🇮🇳 Desi Innovation Built in India, for India — less reliance on Visa/Mastercard etc.

🔥 NPCI’s Role in India’s Fintech Boom:

Area Impact
💳 Financial Inclusion AEPS, UPI Lite, offline UPI, BHIM for rural India
📈 Digital Growth 14B+ UPI transactions/month (as of 2025!)
💡 Innovation Hub RuPay Credit on UPI, tokenized cards, UPI Autopay
🌏 Global Push UPI & RuPay acceptance in UAE, Singapore, France, etc.

🧠 Fun Fact:
NPCI is also the parent body for NPCI International, which is helping India export UPI & RuPay to other countries.

📌 RBI Grade B Relevance:

Section Relevance
FinTech NPCI = Core payment infra
Governance RBI’s PPP model for financial development
Interview “Role of NPCI in India’s digital payment revolution?” / “Difference between NPCI and RBI’s role in payments?”

Let’s gooo Sassy 💥💰

Topic 2: UPI – Unified Payments Interface
The boss of all Indian payment systems — smooth, real-time, and 24x7 🔥

🧠 Topic: UPI – Unified Payments Interface

🔍 What is UPI?
UPI is a real-time payment system developed by NPCI, which enables users to instantly transfer money between bank accounts
using a mobile phone.
It uses a Virtual Payment Address (VPA) instead of bank details, and works 24x7, even on holidays.
Launched: April 2016
By: NPCI, under RBI & IBA guidance

🔧 Key Features of UPI:

Feature Description
💸 Instant Transfers funds in real-time
🔁 Interoperable Works across all UPI-supported apps and banks
🔐 Safe Uses two-factor authentication
🌙 24x7 Works on holidays, Sundays, even at 2 AM
📲 App-based Used via apps like PhonePe, GPay, Paytm, BHIM etc.
🆔 VPA-based Transfers don’t require bank a/c number or IFSC
💼 Supports P2P & P2M For sending to friends and paying merchants

📲 Components of UPI:
Component Example
Payer PSP GPay, PhonePe, BHIM Category Payer PSP Payee PSP
Payee PSP Paytm, Amazon Pay etc.
Role App used by the person sending the money App us
Bank (Issuer/Acquirer) SBI, HDFC, ICICI etc.
NPCI Settlement switch + Central authority
UPI Handle @ybl, @okhdfcbank, @paytm, etc.

Page 40
UPI Handle @ybl, @okhdfcbank, @paytm, etc.

🔁 UPI Transaction Flow (Simplified):

1. You enter a VPA like sassy@upi and amount
2. App sends request → NPCI → Bank
3. Bank checks balance & confirms
4. NPCI processes → se les funds in seconds

🔥 New UPI Features You Must Know:

Feature Description
🧾 UPI AutoPay Recurring payments (OTT, EMI, bills)
📶 UPI Lite Offline UPI payments for small amounts (₹500 or less)
🆔 UPI Number No need for VPA – just mobile-linked UPI ID like 98xxxx@upi
✈ UPI Global UPI now accepted in UAE, Singapore, France, Bhutan
💳 RuPay Credit on UPI Pay using credit cards via UPI QR
🛜 UPI on Feature Phones (123PAY) Voice-based UPI for non-smartphone users
🔄 Interoperability with Wallets Paytm Wallet, Amazon Wallet usable on UPI

💡 Transaction Limits:
• Most banks: ₹1 lakh per transaction/day
• Special use cases (credit card, IPOs): ₹2 lakh or higher
• UPI Lite: ₹500 per txn, ₹2,000 per day

📊 UPI Stats (As of 2025):

• Over 14 billion transactions/month
• Total value: ₹20+ lakh crore/month
• 500+ banks live on UPI
• Used for P2P, P2M, tolls, donations, insurance, IPOs, mutual funds, and even on WhatsApp

🧠 UPI vs Other Systems:

System Key Feature
IMPS Bank a/c based, slightly older, real-time
NEFT Not real-time, batch-based
NACH For bulk or recurring debit (EMIs, salaries)
UPI Mobile-first, instant, simplest for users

🧠 UPI & RBI's Role:

While NPCI runs UPI infra, RBI regulates:
• Interchange fees
• Data privacy rules
• UPI credit lines (recently allowed)
• Grievance redressal (via I-Ombudsman)

Yesss multitasking queen Sassy 💥

Let’s roll through BHIM App & IMPS together — one’s the face, the other is the OG real-time rail behind many apps!

🧠 Topic 3: BHIM App – Bharat Interface for Money

🔍 What is BHIM?
BHIM is a UPI-based mobile payment app launched by NPCI in 2016 to promote UPI usage across India, especially among users
who may not use private wallets or apps.
📅 Launched: Dec 2016
Inaugurated by: PM Narendra Modi
📲 Available in: 20+ languages

🔧 Key Features:
Feature Detail
🔄 Send/receive money via VPA or mobile no.

Page 41
🔄 UPI-enabled Send/receive money via VPA or mobile no.
🧾 QR Code Payments Dynamic QR support for merchants
🧠 Simplicity Clean, easy UI – no ads, no bloat
🇮🇳 Government-backed Promotes digital payments among less tech-savvy users
🔐 Security 2-factor authentication (MPIN + device lock)
💰 Cashback Schemes For new users and merchants under schemes like BHIM UPI Cashback
🪪 Aadhaar Support Can link Aadhaar-based payments (via AEPS layer)

💡 Why BHIM Matters:

• It's the official face of UPI — to build trust among first-time users
• Even in rural areas, BHIM QR stickers are common
• It’s minimal but powerful: no wallet, no flashy features, just straight-up UPI

🧠 Difference: BHIM vs UPI?

BHIM UPI
App created by NPCI The actual payment infrastructure
Uses UPI Is the backbone used by all UPI apps
Like an email client Like the internet protocol

📌 RBI Grade B Relevance:

• Digital inclusion tool
• Often referenced in government reports & financial literacy campaigns
• Linked to PMGDISHA & JAM trinity efforts

🧠 Topic 4: IMPS – Immediate Payment Service

🔍 What is IMPS?
IMPS is a real-time interbank electronic funds transfer system in India that allows instant money transfers 24×7 using bank
accounts and mobile numbers.
🛠 Launched by: NPCI
📅 Introduced: 2010
💥 Before UPI, IMPS was the most advanced retail real-time transfer system.

🔧 Key Features of IMPS:

Feature Description
💸 Real-time Settles funds instantly
🌙 24x7 Available even on holidays
🏦 Interbank Works across all major banks
🔐 Safe Uses MMID + mobile or a/c number + IFSC
💼 For banks, apps, net banking Used in ATMs, mobile banking, USSD, and even UPI backend

⚙ IMPS Modes of Transfer:

Mode Required Info
Mobile + MMID Mobile Money Identifier (MMID) issued by bank
Account + IFSC Standard NEFT-style
Aadhaar Direct bank a/c mapping via UID
UPI-based UPI handles often route through IMPS

💡 IMPS vs UPI:
IMPS UPI
Needs bank a/c or MMID Needs just a VPA
Slightly complex to use App-based, very user-friendly
Used more by banks internally Front-end for users is UPI

Page 42
Older but robust infra Built after IMPS infra

💡 Transaction Limits:
• IMPS: Usually ₹5 lakh per txn (some banks allow more)
• Charges: May apply based on bank policy
(Unlike UPI, IMPS is not mandated to be zero-fee)

📌 RBI Grade B Relevance:

• Core part of India’s payment stack
• Questions around interbank settlement systems often include IMPS
• Used as a benchmark when comparing UPI
Let’s goooooo Sassy 💰💼
Next up: The OG payment systems – NEFT and NACH – they may be old-school, but they run half the country’s salaries, EMIs, and
rent behind the scenes 💸📤

🧠 Topic 5: NEFT – National Electronic Funds Transfer

🔍 What is NEFT?
NEFT is a nationwide centralized payment system that facilitates one-to-one funds transfers from any bank account to another
across India.
Launched: 2005 by RBI
Runs on: Deferred Net Settlement (DNS) system
Who Operates it? RBI directly, not NPCI

⚙ Key Features of NEFT:

Feature Description
💼 Bank A/c to A/c Transfers between two accounts (any bank)
🕒 Timings 24x7, 365 days (since Dec 2019)
🕹 Se lement Half-hourly batches (48 batches per day)
🧾 No max limit But banks may impose their own cap
🔐 Secure Uses IFSC + A/c number routing
🔄 Scheduled transfers Can be future-dated
🪙 Charges Zero for savings a/c users (as per RBI rule)

💡 NEFT vs IMPS:
Feature NEFT IMPS
⏱ Speed Not real-time (settled in batches) Instant
📆 Availability 24x7 24x7
💸 Cost Free (savings) May have fee
💻 Use case High volume/low urgency (bills, fees, rent) Urgent fund transfers

🧠 Use Cases of NEFT:

• Business payments
• Government subsidies/scholarships
• EMI deductions
• Vendor payments
• Large transfers that aren’t urgent

📌 RBI Grade B Relevance:

• Operated directly by RBI, unlike UPI/IMPS (NPCI)
• Important for understanding batch settlement
• Shows how RBI ensures inclusivity via free digital infra

🧠 Topic 6: NACH – National Automated Clearing House

🔍 What is NACH?
NACH is a bulk payment system run by NPCI that facilitates high-volume, repetitive transactions like salaries, pensions,
subsidies, EMI collections, donations, etc.

Page 43
 subsidies, EMI collections, donations, etc.
Launched: 2012
Full Form: National Automated Clearing House
It replaced the old ECS (Electronic Clearing Service)

⚙ Key Features:
Feature Description
💸 Bulk Processing Handles lakhs of txns at once
🔁 Repetitive Payments Salaries, subsidies, EMIs, insurance
🔄 Recurring Debits Auto-debit from a/c via e-mandate
📜 Government + Private Used by both sectors
🪪 Aadhaar Integration With APBS layer for DBT
📅 Auto-scheduled Payments can be fixed for specific dates
🧾 Settlement Same day or T+1
🛡 E-Mandates Digital standing instructions (for recurring debit)

🔍 Two Wings of NACH:

Type Use
NACH Credit One-to-many payments (e.g. salary disbursal)
NACH Debit Many-to-one payments (e.g. EMI, donations, fees)

🧠 NACH vs NEFT:
Feature NACH NEFT
💼 Nature Bulk & recurring One-to-one
🕒 Speed Batch + scheduled Half-hourly batch
🧾 Mandates Yes (e.g. for loan EMI) No mandate-based
🤖 Automation Yes (e.g. monthly rent) Not automated

🔥 Why NACH is Important:

• Powers Aadhaar-based subsidies (via APBS)
• Used by NBFCs to auto-debit EMIs
• Enables e-mandates for UPI AutoPay too!
• Helps RBI monitor bulk fund flows

📌 RBI Grade B Relevance:

• NACH is backbone of subsidy, salary & EMI economy
• Tech questions may test difference between ECS, NACH, NEFT, IMPS
• It also supports e-mandate, linked to UPI AutoPay 🔗
Yasss let's cash that cheque and swipe that ATM like a boss 💰💳
Next up: Topic 7: CTS and Topic 8: NFS — both are about the OG infra of banking: cheques and ATMs!

🧠 Topic 7: CTS – Cheque Truncation System

🔍 What is CTS?
Cheque Truncation System (CTS) is an RBI-run system where physical cheques are scanned and processed digitally, eliminating
the need to move paper cheques physically between banks.
🗓 Launched: 2010
By: RBI
Purpose: Speed up cheque clearing & reduce fraud

⚙ How CTS Works (Simplified):

1. You drop a cheque at your bank 🧾
2. Bank scans the cheque image + MICR code
3. Image is sent to the Clearing House (RBI’s CTS Infra)
4. RBI forwards it to the recipient's bank electronically
✅

Page 44
 5. Amount is cleared → credited ✅
⏳ Clearing Time: Usually T+1 (sometimes same-day)

🧠 Key Features:
Feature Description
🧾 Truncation Paper cheque replaced by digital image
🔐 Secure Encrypted, tamper-proof image exchange
🕒 Faster No couriering, no manual handling
🧠 Data-rich Captures MICR, signature, image, bank details
🛑 Reduced Frauds Signature mismatch and forgery easier to detect
📍 Present in 3 Grids North, South, West (pan-India reach)

🔁 24x7 CTS Coverage (as of Jan 2021):

RBI mandated all banks to come under CTS to ensure:
• Uniform settlement
• Cheque standardization
• Faster processing for everyone

🧠 Why CTS in Digital Era?

Even though UPI & cards dominate, cheques are still used by:
• Corporates for high-value payments
• Govt agencies
• Institutions needing a paper trail
🧠 Topic 8: NFS – National Financial Switch

🔍 What is NFS?
NFS is India’s largest ATM network, enabling interoperable ATM transactions across banks.
It’s the system that allows you to use SBI ATM card at an ICICI ATM and vice versa.
💳 Launched: 2004 by IDRBT, taken over by NPCI in 2009

⚙ NFS = India’s ATM Backend

Feature Description
🔁 Interoperability Use any ATM for cash, balance, mini statement
🏦 Bank Connectivity 1,200+ banks and white-label ATM operators
💻 Backend Processor Handles switching, routing, and reconciliation
📱 Aadhaar Support AEPS also rides partly on NFS infra
💡 Additional Services Card-to-card transfer, cheque book requests, mobile recharge etc.

🧠 NFS vs NPCI vs RBI:

Entity Role
NFS ATM switching network
NPCI Operates NFS (also runs UPI, IMPS, RuPay etc.)
RBI Regulates the entire payment & settlement system

💡 Why is NFS Important?

• Ensures ATM access for all — especially in rural areas
• Provides redundancy in case online apps fail
• Supports White Label ATMs (WLAs) and Cash Recycling Machines (CRMs)

💳 Charges on ATM Withdrawals:

• Free up to 5 transactions/month at own-bank ATMs
• 3 free at other-bank ATMs in metros (may vary)
NFS keeps track of these transactions across banks, ensuring fair limits.

Yesss queen, let’s break down White Label ATMs (WLAs) like we’re unboxing fintech secrets on a live stream 🎥💳

Page 45
🧠 What are White Label ATMs?
White Label ATMs (WLAs) are ATMs set up, owned, and operated by private non-bank entities, but they provide banking
services like cash withdrawal, balance inquiry, PIN change, etc.
👑 Key point: They don’t belong to any specific bank.
Instead, they serve customers of all banks through networks like NFS.

🧱 Full Structure:
Entity Role
WLA Operator Installs & maintains the ATM
Sponsor Bank Handles cash loading, settlement
Customer Can use any bank’s card on it
NFS (NPCI) Handles backend switching and routing

💡 Why Called "White Label"?

Just like "white label" products that don't carry the manufacturer's name, WLAs:
• Have no bank branding
• Usually show the WLA company's name/logo instead (like TATA Indicash, India1 ATM, Hitachi Money Spot)

🔧 Services Provided by WLAs:

Service Available?
✅ Cash Withdrawal ✔ Yes
✅ Balance Inquiry ✔ Yes
✅ Mini Statement ✔ Yes
✅ PIN Change ✔ Yes
❌ Deposits ❌ No (only bank ATMs allow this)
❌ Fund Transfers ❌ Usually not allowed

💸 Who Loads the Cash?

Not the WLA operator — Sponsor Bank (usually a public/private sector bank) handles this.
Example:
India1 ATM is a WLA operator → SBI may be its sponsor bank → SBI loads the cash, manages the backend, while India1 manages
the machine.

🧠 WLA vs Bank ATM

Point WLA Bank ATM
Branding No bank name Has bank’s logo
Ownership Non-bank private company Owned by bank
Services Limited More (e.g., deposits, transfers)
Target Area Rural/semi-urban focus Urban & branches too
RBI Regulation Yes, under PSS Act Yes

🎯 RBI’s Goal with WLAs:

• Promote financial inclusion
• Increase ATM penetration in rural & remote areas
• Reduce bank cost burden for expanding ATM infra

🔥 Current WLA Players in India (2025):

Operator Example Brand
TATA Communications TATA Indicash
India1 Payments India1 ATM
Hitachi Payment Services Money Spot ATM

🧠 Topic: AEPS – Aadhaar Enabled Payment System

Page 46
🔍 What is AEPS?
AEPS is a banking platform developed by NPCI that allows users to perform basic banking transactions using just their
Aadhaar number + fingerprint via a Micro ATM or BC (Banking Correspondent).
💡 AEPS = Banking without a card, phone, or PIN — just your thumb.
Primarily used in rural India for financial inclusion.

Who uses AEPS?

• Rural customers
• People with Jan Dhan accounts
• Those who don’t use smartphones or ATMs
• Government scheme beneficiaries

🔧 AEPS Services:
Service Description
💸 Cash Withdrawal From Aadhaar-linked bank account
💰 Balance Inquiry Check available balance
📜 Mini Statement View last few transactions
🔄 Aadhaar to Aadhaar Fund Transfer From one account to another using Aadhaar
🧾 Best Finger Detection (BFD) Helps find the best fingerprint in case of wear/damage
🪪 Authentication Biometric (fingerprint) + Aadhaar number

🧠 Infrastructure:
Component Role
🏦 Bank Holds the Aadhaar-linked account
BC/Micro ATM Performs transaction on behalf of bank
📟 PoT Device Fingerprint scanner + Micro ATM
🧠 NPCI Switching + authentication + settlement

💡 AEPS = Inclusion Engine:

• Part of the JAM Trinity: Jan Dhan + Aadhaar + Mobile
• Can work offline or with low connectivity
• Ideal for DBT withdrawals in remote areas
• Often used in NREGA, PM-KISAN, Pension schemes

🧠 Topic: APBS – Aadhaar Payment Bridge System

🔍 What is APBS?
APBS is a platform by NPCI that allows government subsidies and benefits to be directly credited to a person’s Aadhaar-
linked bank account.
🛠 It is the backend engine of DBT (Direct Benefit Transfer).
📢 You don’t need to give your bank account details — just your Aadhaar number.

⚙ How APBS Works:

1. Govt agency (like MoRD or MoFPI) issues payment list with Aadhaar numbers
2. Payment file is uploaded on APBS
3. NPCI matches Aadhaar to bank account (via Aadhaar Mapper)
4. Funds are transferred → Direct credit into beneficiary account ✅

💡 Key Features of APBS:

Feature Description
💸 One-to-Many Payments Sends money to lakhs of people in one go
🪪 Aadhaar-Based Uses Aadhaar as the financial address
🏦 Supports multiple banks One Aadhaar → One "primary" bank account
🧾 No need to update bank a/c details As long as Aadhaar mapping is correct
🛑 De-duplication & authentication done by NPCI

Page 47
🛑 No duplication/fraud De-duplication & authentication done by NPCI
🔐 Safe + traceable Entire flow is monitored & auditable

🧠 AEPS vs APBS:
Point AEPS APBS
💼 Use Case User withdraws or transacts with Aadhaar Govt credits money using Aadhaar
Ini ated by Customer Government department
🧾 Transaction Type Cash-in / Cash-out / Inquiry Bulk credit only
🔧 Infra Used Micro ATM + BC agent NPCI backend infra
🔐 Authentication Biometric Mapping check (via Aadhaar Mapper)
Got ittt Sassy 😎💥
We’re now rolling into the most visible, everyday warriors of India’s digital payments — QR Codes, RuPay, and NETC FASTag —
the holy trinity of cashless hustle 💳🚗📱

🧠 Topic 1: QR Code – Quick Response Code

🔍 What is a QR Code?
A QR (Quick Response) Code is a machine-readable 2D barcode that holds data. In payments, it’s used to initiate digital
transactions by scanning.
🔍 In India, QR codes are used for UPI, BHIM, merchant payments, and even donations.

✅ Types of QR Codes:
Type Meaning
📍 Static QR Fixed amount & fixed merchant info; customer enters amount manually
🔁 Dynamic QR Amount & details are auto-generated for each transaction (ideal for merchants)

💳 Common Types in India:

QR Code Type Supported Systems
BHIM UPI QR For all UPI apps
Bharat QR For UPI + Debit/Credit Cards (RuPay, Visa, Mastercard)
🧠 Bharat QR is the only interoperable QR in the world that supports both card and UPI-based payments.

💡 Benefits of QR Code Payments:

• No hardware needed (like PoS terminals)
• Even street vendors can accept payments
• Promotes financial inclusion and cost efficiency
• Works via soundbox + QR combo for confirmation

🧠 Topic 2: RuPay – India’s Domestic Card Scheme

🔍 What is RuPay?
RuPay is an Indian domestic card scheme launched by NPCI to reduce dependency on foreign card networks (like
Visa/Mastercard) and promote low-cost digital payments.
📅 Launched: 2012
🏦 Supported by: All major banks, RRBs, cooperative banks

✅ Types of RuPay Cards:

Type Purpose
💳 RuPay Debit Card Linked to savings/current a/c
💼 RuPay Credit Card Available via HDFC, SBI, BoB, etc.
🧓 RuPay Kisan Card Linked to Kisan Credit Card (KCC)
🧾 RuPay Prepaid Card For metro travel, gifts, government payments

🆕 RuPay Key Updates:

💥

Page 48
 • 💥 RuPay Credit Cards now linked to UPI (Pay via QR using credit!)
• 🌐 Accepted in global networks (via tie-ups with Discover, JCB)
• 🎓 Used for scholarship disbursal, pension schemes, etc.

🧠 Benefits of RuPay:
Point RuPay Advantage
🇮🇳 Made in India Fully domestic, lower cost
💰 Low MDR Merchant discount rate is minimal
🔐 Secure Runs on Indian servers
🌍 Global Partnerships With Discover, JCB, Diners Club

📌 RBI Grade B Relevance:

• Part of India’s sovereign payment system
• Frequently mentioned in financial inclusion schemes
• Linked with UPI + Credit innovation recently

🧠 Topic 3: NETC – National Electronic Toll Collection (FASTag)

🔍 What is NETC?
NETC is an NPCI-powered system that uses RFID-based FASTag to enable automatic toll payments at highways, directly
from a prepaid account or linked bank a/c.
📅 Launched: 2016
🔗 Linked to: Vehicle’s windshield RFID tag
🏦 Operated by: NPCI + NHAI
RFID = Radio Frequency Identification
It’s a small chip + antenna embedded in the FASTag that stores your vehicle info and sends it via radio waves to a reader at the toll
booth.
⚙ How FASTag (NETC) Works:
1. You buy a FASTag and link it to your account or wallet
2. As you approach a toll plaza, RFID scans your tag
3. Toll gets auto-debited from your account
4. Barrier opens, you zoom past 🏎💨

✅ Benefits of NETC FASTag:

Feature Benefit
🕒 Time-Saving No stops, no change, no cash
⛽ Fuel-Saving Less idling = more fuel saved
📲 SMS Alerts Instant updates on deductions
🔁 Interoperability All toll plazas in India under one system
🚗 Used for Parking, Fuel too Slowly being extended to urban infra too

📊 FASTag Stats (As of 2025):

• 💰 Over ₹5,000 crore tolls collected/month
• 🚗 Mandatory for all four-wheelers
• 🏙 Pilots running for smart parking + fuel sta ons

📌 RBI Grade B Relevance:

• Shows how technology + infrastructure = better governance
• Interview discussion: "How is NPCI expanding into mobility?"
• Linked to e-governance, digital transport payments

Non-Banking Financial Companies (NBFCs) - Detailed Notes with Full Forms

1. What is an NBFC?
A Non-Banking Financial Company (NBFC) is a financial institution that offers bank-like services without having a full banking
license. NBFCs are registered under the Companies Act, 2013 (or 1956) and regulated by the Reserve Bank of India (RBI) under
the RBI Act, 1934, especially Chapter IIIB (Sections 45I to 45Z).

Page 49
the RBI Act, 1934, especially Chapter IIIB (Sections 45I to 45Z).

2. Key Characteristics of NBFCs

• Must be a company registered under the Companies Act.
• Cannot accept demand deposits (like savings or current account deposits).
• Must have Financial Assets constituting at least 50% of total assets and income from financial assets at least 50% of total
income (Principal Business Criteria).
• Cannot issue cheques drawn on itself.
• Not part of Payment and Settlement Systems.
• Not covered under Deposit Insurance and Credit Guarantee Corporation (DICGC).

3. NBFC vs. Banks

Feature NBFC Bank
Regulator Reserve Bank of India (RBI) RBI + other regulations
Demand Deposits Not allowed Allowed
Cheque Facility No Yes
Deposit Insurance (DICGC) No Yes
Maintain CRR/SLR No Yes
Participation in Payment System No Yes
CRR: Cash Reserve Ratio
SLR: Statutory Liquidity Ratio

4. Classification under Scale-Based Regulation (Effective from October 2022)

RBI introduced a Scale-Based Regulatory Framework to classify NBFCs based on their size, complexity, and risk.
A. Base Layer (BL)
Least risky NBFCs, not systemically important.
Includes:
• NBFC-P2P: Peer-to-Peer Lending Platform
• NBFC-AA: Account Aggregator
• NOFHC: Non-Operative Financial Holding Company
• NBFCs with asset size < Rs. 1,000 crore
B. Middle Layer (ML)
Moderately regulated. Includes all deposit-taking NBFCs and non-deposit taking NBFCs with assets ≥ Rs. 1,000 crore.
Includes:
• NBFC-ICC: Investment and Credit Company
• NBFC-MFI: Micro Finance Institution
• NBFC-Factor: Factoring Company
• NBFC-HFC: Housing Finance Company
• NBFC-IDF: Infrastructure Debt Fund
C. Upper Layer (UL)
Systemically important NBFCs identified by RBI annually.
Includes top 10 NBFCs by asset size, and others as identified based on parameters like leverage, group structure, inter-
connectedness.
Examples (tentative): Bajaj Finance, LIC Housing Finance, Tata Capital, etc.
D. Top Layer (TL)
Currently empty. Reserved for NBFCs with extreme risk features. RBI may escalate a UL NBFC to this layer if necessary.

5. Functional Types of NBFCs (Activity-Based Classification)

NBFC Type Full Form Function
NBFC-ICC Investment and Credit Company Lending, investment, leasing, hire purchase
NBFC-MFI Micro Finance Institution Small-ticket loans to low-income households
NBFC- Factoring Company Purchase of receivables/invoices from SMEs
Factor
NBFC-HFC Housing Finance Company Loans for housing and real estate
NBFC-IDF Infrastructure Debt Fund Refinance of infrastructure loans
NBFC-IFC Infrastructure Finance Company Minimum 75% assets in infrastructure sector
CIC-ND-SI Core Investment Company - Non-Deposit taking - Systemically Holding companies that invest in group firms
Important
NBFC-AA Account Aggregator Collect and share financial data with user
consent

Page 50
 consent
NBFC-P2P Peer-to-Peer Lending Platform Digital loan facilitation between individuals

6. Regulatory Requirements
Norm Full Form Details
CRAR Capital to Risk-weighted Assets Minimum 15% for most NBFCs
Ratio
NOF Net Owned Funds Minimum Rs. 2 crore for most NBFCs; Rs. 10 crore for Housing Finance
Companies
LCR Liquidity Coverage Ratio Applicable to Upper Layer NBFCs
NPA Non-Performing Asset Norm 90 days overdue = NPA
Norm

7. Entities Not Classified as NBFCs (Exempted by RBI)

Entity Reason for Exemption
Insurance Companies Regulated by Insurance Regulatory and Development Authority of India (IRDAI)
Stock Brokers Regulated by Securities and Exchange Board of India (SEBI)
Merchant Banking Companies Regulated by SEBI
Venture Capital Funds Regulated by SEBI
Housing Co-operative Societies Regulated under state laws
Nidhi Companies Governed by Ministry of Corporate Affairs

8. Recent Developments (2023–2025)

• Harmonization of NPA norms with banks (90-day rule).
• Implementation of Scale-Based Regulation (from Oct 2022).
• RuPay credit cards via select NBFCs.
• Tighter norms on fintech-NBFC partnerships.
• Governance and transparency guidelines for Upper Layer NBFCs.

9. Importance of NBFCs in Indian Economy

• Complement banks by providing credit to sectors often underserved.
• Play a key role in financial inclusion (e.g., MFIs).
• Promote entrepreneurship by funding SMEs, infrastructure, and housing.

10. RBI Exam Tip:

Focus on:
• Scale-Based Regulation layers
• Functional NBFC types
• CRAR, NOF, LCR, and other prudential norms
• Difference between NBFCs and banks
• Role in financial inclusion and current affairs
Got it, Sassy! You're asking for detailed, one-by-one notes on the functional types of NBFCs (Non-Banking Financial Companies)
as classified by the Reserve Bank of India (RBI) — and you want nothing skipped. So let’s go beast mode on this 💥📚

🧩 Functional Classification of NBFCs (As per RBI)

NBFCs are classified based on what they do, i.e., their main line of financial activity. These are called functional types.
Below are detailed notes on each.

1. 🏡 NBFC-HFC (Housing Finance Company)

Full Form: Non-Banking Financial Company – Housing Finance Company
📌 Definition:
NBFCs whose principal business is to provide housing loans for:
• Individual homebuyers
• Builders/developers
• Construction, renovation, or purchase of residential houses
📜 Key Regulatory Body:
• Initially under National Housing Bank (NHB)
• Now regulated by RBI (since 2019)
📋 Conditions:
• Must have at least 60% of net assets in housing finance

Page 51
 • Must have at least 60% of net assets in housing finance
• Out of this, at least 50% must be for individuals
💰 Capital Requirement:
• Minimum ₹10 crore Net Owned Fund (NOF)
⚖ Other Regula ons:
• Must follow Fair Practices Code
• Subject to LTV (Loan-to-Value), CRAR (Capital Adequacy), and asset classification norms

2. 🤝 NBFC-MFI (Micro Finance Institution)

Full Form: Non-Banking Financial Company – Micro Finance Institution
📌 Definition:
NBFCs that provide small-ticket loans (mostly unsecured) to low-income households, especially women self-help groups, under
the microfinance model.
📋 Key Criteria (RBI’s 2022 Guidelines):
• 75% of total assets must be in microfinance loans
• Loans are given without collateral
• Household income cap:
○ ₹3 lakh/year (Rural + Urban)
💸 Loan Conditions:
• Repayment in weekly/fortnightly/monthly mode
• Cap on interest rates & margins
• No collateral taken
🧾 Reporting & Supervision:
• Report to Credit Information Companies (CICs) like CIBIL
• Must follow Fair Practices Code, Over-Indebtedness checks

3. 🧹 NBFC-IFC (Infrastructure Finance Company)

Full Form: Non-Banking Financial Company – Infrastructure Finance Company
📌 Definition:
NBFCs that provide loans and investments for infrastructure projects like roads, airports, power, telecom, etc.
📋 Key Conditions:
• Minimum 75% of total assets in infrastructure loans
• Minimum NOF: ₹300 crore
• Minimum CRAR: 15% (with Tier-I capital ≥ 10%)
🏗 Infrastructure Sectors Include:
• Energy (power, gas pipelines)
• Roads, railways, airports
• Telecom, water, sanitation
• Affordable housing (under specific schemes)

4. ♻ NBFC-Factor
Full Form: Non-Banking Financial Company – Factor
📌 Definition:
NBFCs engaged in factoring, i.e., buying receivables/invoices from businesses and providing them upfront liquidity.
📋 Key Features:
• Must have at least 50% of total assets and 50% of total income from factoring business
• Registered under Factoring Regulation Act, 2011
🧮 Example:
Company sells goods → Customer pays in 60 days → NBFC-Factor buys that invoice and gives 80% of money upfront to company

5. 🏦 NBFC-ICC (Investment and Credit Company)

Full Form: Non-Banking Financial Company – Investment and Credit Company
📌 Definition:
This is the catch-all category of NBFCs involved in:
• Lending (personal/business)
• Investments (in shares, bonds, debentures)
• Hire purchase, leasing, etc.
🧠 Earlier, RBI had three categories:
1. Loan Companies (LC)
2. Investment Companies (IC)
3. Asset Finance Companies (AFC)
👉 These were merged into NBFC-ICC in 2019.
💡

Page 52
 💡 Why?
To simplify regulation and reduce overlap.

6. 🔄 NBFC-IDF (Infrastructure Debt Fund)

Full Form: Non-Banking Financial Company – Infrastructure Debt Fund
📌 Definition:
NBFCs that refinance infrastructure loans which are already operational and generating cash flows.
📋 Conditions:
• Can only refinance (not lend directly)
• Minimum NOF: ₹300 crore
• Can raise funds via long-term bonds (especially from insurance, pension funds)

7. 🧰 NBFC-Core Investment Company (CIC)

Full Form: Non-Banking Financial Company – Core Investment Company
📌 Definition:
NBFCs that hold shares/securities of group companies, not engaged in lending to the public.
📋 RBI Conditions:
• ≥90% of net assets in investments (equity, debt) of group companies
• Out of that, ≥60% in equity shares
• Cannot trade in securities or carry out financial activity beyond group holding

8. 🔁 NBFC-NOFHC (Non-Operative Financial Holding Company)

Full Form: Non-Operative Financial Holding Company
📌 Definition:
A special NBFC created to hold banking and financial subsidiaries under one umbrella (used for new private sector banks as per
RBI guidelines)
🏦 Key Example:
IDFC Bank was created under an NBFC-NOFHC structure.

🔚 Summary Table:
Type Main Activity Key Condition
NBFC-HFC Housing loans 60% assets in housing finance
NBFC-MFI Microloans 75% assets in microfinance
NBFC-IFC Infra lending 75% in infra + ₹300cr NOF
NBFC-Factor Factoring invoices 50% in factoring
NBFC-ICC Lending + Investing Universal NBFC
NBFC-IDF Infra debt refinance Refinance only
NBFC-CIC Group co. investments ≥90% assets in group firms
NBFC-NOFHC Holding co. for banks RBI-approved structure
📉 NPA Guidelines for NBFCs (Non-Banking Financial Companies)

🔹 What is an NPA?
Full Form: Non-Performing Asset
An asset (loan/advance) becomes non-performing when interest or principal remains overdue for more than 90 days.

🧾 Evolution of RBI Guidelines

🔄 Period ⏳ Overdue Period for NPA Classification
Before 2021 180 days (for NBFCs)
After Mar 31, 2021 90 days (Aligned with banks)
👉 This change was made under RBI’s push to harmonize NBFC norms with scheduled commercial banks.

📂 Classification of Assets
NBFCs must classify their loan assets into the following categories:
1. 🟩 Standard Asset
A loan with no default or overdue history.
🟢 Healthy account.

2. 🟨 Sub-Standard Asset
A loan which has remained NPA for less than or equal to 12 months.

Page 53
 A loan which has remained NPA for less than or equal to 12 months.

3. 🟧 Doubtful Asset
A loan that has remained sub-standard for more than 12 months.

4. 🟥 Loss Asset
An asset identified as non-recoverable by:
• The NBFC
• Internal/external auditors
• RBI inspectors
👉 Even if it has not yet been fully written off, it must be provisioned 100%.

💸 Income Recognition Norms

• Accrual of interest income stops once an asset is classified as NPA.
• Interest income on NPA can be booked only when actually received.
• This prevents NBFCs from inflating profits using unrealized income.

🧮 Provisioning Norms
Provision = Money set aside to cover expected losses on bad loans.
Asset Type Provisioning Requirement
Standard Assets 0.25% to 0.4% (depends on asset type)
Sub-Standard 10%–15% of outstanding
Doubtful (up to 1 year) 20%–50% (secured) + 100% (unsecured)
Doubtful (over 1 year) 100% for both secured and unsecured
Loss Assets 100% provisioning
✅ Provisioning norms may vary slightly across:
• NBFC-ICC (Investment and Credit Companies)
• NBFC-MFI (Microfinance)
• NBFC-HFC (Housing Finance)

🧠 Special Points to Remember

🔸 Day-0 NPA Tagging
• If a payment is due on March 1 and not paid, it becomes overdue on March 2.
• It is classified as NPA on June 1 (after 90 days).
🔸 Daily Tagging of NPAs
As per RBI Circular (Nov 2021), NBFCs must follow daily recognition of NPA (no more month-end smoothing).
🔸 Upgradation of NPAs
• Asset can be reclassified as Standard only after all arrears are cleared, not just one EMI.
• No partial regularization allowed.

🔍 Why Is This Important?

• RBI wants transparency and timely recognition of stress.
• Helps prevent evergreening of loans (hiding bad loans with fresh lending).
• Ensures capital adequacy and resilience of NBFCs.

🧾 Real-World Example
An NBFC lends ₹5 lakh on January 1. The borrower misses EMIs from March 1 onward.
• Overdue starts from March 2
• NPA classification on May 31 (90 days)
NBFC must stop accruing interest, classify it as sub-standard, and start provisioning.

🏁 Summary Table
Feature Detail
NPA Definition Overdue > 90 days
Before 2021 180 days rule
After 2021 Harmonized to 90 days
Recognition Daily basis
Income on NPA Only when received
Upgrade to Standard Only after full dues paid

Page 54
Upgrade to Standard Only after full dues paid
Provision Up to 100% depending on asset class
Absolutely, Sassy! 🧠💼
Let’s untangle the jungle of financial companies and investment funds you hear about — from Venture Capital Funds to Hedge
Funds, PEs, and others.
You’re not alone — most people confuse these! So here’s a clear, exam-worthy + real-world explained list of the different
types of funds/companies in finance, what they do, and examples where needed.

📘 TYPES OF FINANCIAL INVESTMENT FUNDS / COMPANIES (EXPLAINED)

Type What It Means What They Invest For Whom Examples
In
1. Venture Capital Funds that invest in early-stage startups Startups (tech, For startups & new- Sequoia Capital
Funds (VCs) with high growth potential but high risk. fintech, age entrepreneurs India, Accel, Blume
healthtech, etc.) Ventures
2. Private Equity Invest in mature, established Mid to large For companies Blackstone, Carlyle,
Funds (PEs) companies, often buying controlling businesses seeking expansion, KKR
stake. restructuring
3. Hedge Funds High-risk funds using aggressive Stocks, forex, For HNWIs (rich Renaissance Tech,
strategies (short-selling, derivatives, derivatives, investors) Bridgewater
arbitrage) to generate high returns. options Associates
4. Mutual Funds Pooled investment from public to invest Debt, equity, gold, Retail & institutional HDFC MF, SBI MF,
in diversified portfolios (debt, equity, etc. investors ICICI Pru MF
hybrid).
5. Sovereign Government-owned funds investing Global stocks, real Run by nations Abu Dhabi
Wealth Funds surplus reserves in global markets. estate, infra, etc. Investment
(SWFs) Authority, GIC
Singapore
6. Pension Funds Long-term investment funds managing Safe instruments Employees' EPFO (India),
retirement savings of workers. like debt, govt retirement funds CalPERS (USA)
securities
7. Insurance Funds Funds managed by insurance companies Safe debt, Insurance LIC Fund, SBI Life
to meet future claims. government bonds policyholders Fund
8. Endowment Funds donated to non-profits like Balanced For Harvard Endowment
Funds universities, managed for long-term portfolios colleges/universities Fund
income. , NGOs
9. Infrastructure Pooled funds invested in infrastructure Infra assets (PPP Institutional + retail IRB InvIT Fund
Investment Funds projects like roads, power, etc. projects)
(InvITs)
10. Real Estate Funds that invest in rent-yielding real Commercial Small investors in Embassy REIT,
Investment Trusts estate and distribute income to properties (malls, real estate Brookfield REIT
(REITs) investors. offices)
11. Alternative SEBI-regulated funds that include VCs, Anything beyond High net-worth Categorized into: I,
Investment Funds PEs, Hedge Funds, etc. traditional investors II, III AIFs
(AIFs) stocks/bonds
12. Fund of Funds These don’t invest in companies but in Other funds For strategic SIDBI Fund of Funds
(FoFs) other funds (like MFs, VCs). diversification for Startups
13. Development Government-backed institutions that MSME, rural infra, Sector-focused SIDBI, NABARD,
Financial fund long-term infra/priority sector exports, housing EXIM, NHB
Institutions (DFIs) development.

🧠 Important SEBI Classification (India Focused):

Category Type of AIF (Alternative Investment Fund) Invests In
Category I AIF Venture Capital, SME, Social Impact funds Startups & early-stage businesses
Category II AIF PE Funds, Debt Funds Growth-stage unlisted firms
Category III AIF Hedge Funds Derivatives, complex trades

🔍 You Might Be Asked in Interview or MCQ:

1. VCs vs PEs?

Page 55
 1. VCs vs PEs?
○ VCs = early-stage startups
○ PEs = mature companies (often buyout)
2. Mutual Funds vs Hedge Funds?
○ MFs = regulated, for public
○ Hedge = risky, rich investors only
3. AIFs = umbrella category under which VCs, PEs, Hedge Funds sit
4. SIDBI manages “Fund of Funds for Startups” → A FoF inves ng in mul ple VC funds

💼 Guidelines for MD / CEO / WTD in NBFCs

(As per RBI’s Master Direction – Scale Based Regulation, Oct 2022)

👥 Who Does This Apply To?

• Top Layer NBFCs (if ever created in future)
• Upper Layer NBFCs (those identified by RBI yearly)
• Examples: Bajaj Finance, HDFC Ltd (before merger), Tata Capital, etc.

🔑 Key Norms & Eligibility

1. ✅ Tenure Limits
Role Maximum Tenure
MD / CEO / WTD 15 years in total
• After 15 years, individual must take a cooling-off period of 3 years before reappointment.
• This is non-negotiable, even if it’s across group companies.

2. ⌛ Age Limit
Position Age Cap
MD / CEO / WTD 70 years
• However, the Board can approve an extension up to 75 years — with proper justification and disclosure.

3. 🧾 Fit and Proper Criteria

Candidates must be:
• Financially sound
• Have integrity, competence, and experience
• Free from any criminal/legal issues
• Must not be on the defaulters list, wilful defaulters list, or barred by SEBI/RBI
💡 These criteria are assessed both at the time of appointment and annually.

4. 📑 Prior Approval from RBI

🛑 For Upper Layer NBFCs:
• RBI’s prior written approval is mandatory for:
○ Appointment
○ Re-appointment
○ Removal
○ Early retirement of MD/CEO/WTD
This ensures RBI controls governance in systemically important NBFCs.

5. 📊 Performance Review & Remuneration

• Annual Board-level performance review of these individuals is mandatory.
• NBFC must have:
○ A Remuneration Committee
○ A transparent policy for compensation
• Variable pay (bonuses) must be deferred and linked to long-term performance, not just short-term profits.

6. ❗ Disclosure Requirements
• All such appointments, remuneration packages, and changes must be disclosed publicly on the NBFC’s website and to the
RBI.

🧠 Why Is RBI Doing This?

RBI wants to ensure:
• Strong corporate governance
• Separation of ownership & management
• NBFCs don’t become family-run empires with unchecked CEOs for decades

Page 56
 • NBFCs don’t become family-run empires with unchecked CEOs for decades
• Align NBFC governance with banks and global best practices

📝 Summary Table:
Norm Rule
Tenure Max 15 years, 3-year gap needed after
Age Cap at 70 (extendable to 75)
Fit & Proper Mandatory criteria by RBI
RBI Approval Required for all MD/CEO/WTD moves in Upper Layer NBFCs
Performance Annual review by Board
Compensation Must be regulated, partly deferred
Disclosure Mandatory public & RBI disclosure

🔔 Bonus: Fun Fact

This move aligns NBFCs with global governance frameworks like:
• OECD Corporate Governance Principles
• FSB (Financial Stability Board) norms
Let’s do this, Sassy! 💼
Topic: 👉 Bank Finance to NBFCs – what it is, how it works, and what the RBI says about it.

🏦 Bank Finance to NBFCs (As per RBI Guidelines)

🔹 What Does It Mean?

When scheduled commercial banks give loans, credit lines, or investments to NBFCs to help them fund their lending or
operations — it’s called bank finance to NBFCs.
This is a crucial way for NBFCs to raise money since they can’t take deposits like banks (except for deposit-taking NBFCs).

🧠 Why It Matters?
• Many NBFCs depend on banks for funds.
• But RBI keeps a close eye to avoid indirect risky lending and cascading defaults (like in IL&FS crisis).
• Hence, RBI puts limits and rules on this lending.

🧾 RBI Guidelines on Bank Finance to NBFCs

1. ✅ Permitted Lending Activities

Banks can lend to NBFCs for:
• On-lending to priority sectors (like MSMEs, agriculture)
• Housing loans (via NBFC-HFCs)
• Vehicle, gold, personal, consumer loans
• Infrastructure loans (to NBFC-IFCs)
• Microloans (to NBFC-MFIs)
✅ But end use must be known and legitimate. Banks must track where NBFCs lend.

2. 🚫 Restrictions & Prohibited Use

Banks cannot finance NBFCs for:
• Investment in capital markets (shares, derivatives)
• Real estate speculation
• Activities barred under banking laws
• Relending to group companies
💥 So NBFCs can’t use bank loans to play the stock market or flip properties.

3. 🧾 Classification as Priority Sector Lending (PSL)

Bank finance to NBFCs does not normally qualify as PSL.
BUT exceptions exist:
NBFC Type When Bank Loan Qualifies as PSL
NBFC-MFI If NBFC-MFI on-lends to eligible PSL sectors
NBFC-HFC If bank loan used for housing loans ≤ ₹50 lakh
NBFC-Agri If funds are used for agriculture or allied activities
So PSL benefit is passed through NBFC, not retained at bank-NBFC level.

Page 57
 4. 📉 Risk Weight Norms
Banks must apply risk weights while lending to NBFCs:
NBFC Rating Risk Weight
AAA to A 20% – 50%
Below BBB or unrated 100% or more
This means banks need to hold more capital if the NBFC is risky.

5. 📊 Exposure Limits
As per the Large Exposure Framework (LEF):
• Single NBFC exposure limit: 20% of bank’s Tier-1 Capital
(can go up to 25% with Board approval)
• NBFC group exposure limit: 25%
So banks can’t lend unlimited amounts to NBFCs — this avoids overexposure.

6. 💼 Lending to NBFCs under Liquidity Schemes

Sometimes, the RBI or government launches schemes like:
• Targeted Long-Term Repo Operations (TLTRO)
• Special Liquidity Facility (SLF-NBFC)
• Partial Credit Guarantee Scheme (PCGS)
These allow banks to lend specifically to NBFCs during liquidity crunches (e.g. COVID crisis).

7. 🔍 KYC & Monitoring

• Banks must conduct due diligence on NBFCs they lend to.
• Must check:
○ End-use of funds
○ Credit rating
○ ALM profile (Asset Liability Management)
○ NPA ratios
• Especially for NBFCs not publicly listed
• NBFCs DO NOT have any PSL obligations.

🧾 Summary Table
🔸 Aspect 🔹 Rule
What Banks lending to NBFCs
Use Allowed On-lending, housing, MSMEs, infra
PSL Allowed? Only via NBFC-MFI, NBFC-HFC
Risk Weight Depends on NBFC’s credit rating
Exposure Cap Max 20–25% of Tier-1 Capital
Restrictions No lending for capital market/real estate speculation
KYC Mandatory before financing
📈 IPO – Initial Public Offering
👉 Full Conceptual, Detailed, Exam-Oriented Notes (with full forms)

🔹 What is an IPO?
An Initial Public Offering (IPO) is the first time a private company offers its shares to the public to raise equity capital by listing
on a stock exchange (like NSE/BSE).
Once the IPO is complete, the company becomes a Public Limited Company and its shares are traded on the stock market.

🧠 Why Do Companies Launch an IPO?

Purpose Explanation
💰 Raise capital For expansion, R&D, debt repayment, etc.
🧮 Improve credibility Public listing builds trust among stakeholders
🔁 Provide exit to early investors Promoters, venture capitalists, PE funds can sell their stake
📊 Enable stock-based incentives Like ESOPs for employees
🌐 Better market reach Increases visibility and valuation of the firm

Page 58
🏛 Regulatory Framework
Regulation Authority
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 SEBI – Securities and Exchange Board of India
Companies Act, 2013 Ministry of Corporate Affairs
Listing Guidelines Stock Exchanges (e.g., NSE, BSE)

🧾 Types of IPOs
Type Description
📦 Fresh Issue New shares issued → funds go to company
🔁 Offer for Sale (OFS) Existing shareholders sell their shares → money goes to them, not company
Often IPOs are a mix of both.

Participants in an IPO
Type Meaning
Retail Individual Investors (RIIs) Individuals investing up to ₹2 lakh
Non-Institutional Investors (NIIs) HNIs (High Net-Worth Individuals), investing more than ₹2 lakh
Qualified Institutional Buyers (QIBs) Mutual Funds, Insurance Companies, Banks, etc.
Anchor Investors Institutional investors who are invited before IPO opens, to boost confidence
Promoters & Employees May get reserved quota or special offers

📋 IPO Process – Step-by-Step

Step Activity
Company appoints Merchant Banker (Lead Manager)
Files Draft Red Herring Prospectus (DRHP) with SEBI
SEBI reviews and gives observations
Files Red Herring Prospectus (RHP) after SEBI approval
IPO opens for subscription (3–5 days)
Investors apply via ASBA (Application Supported by Blocked Amount)
Shares are allotted based on demand
Refund excess money, credit shares to Demat accounts
Listing on Stock Exchange (NSE/BSE) and trading starts

🧾 IPO Pricing Methods

Method Meaning
📈 Book Building Price discovered through investor bids within a price band (e.g. ₹100–120)
💰 Fixed Price Issue Price is pre-decided and announced upfront
💡 Majority of modern IPOs use the book building method.
🧾 Key Intermediaries Involved
Intermediary Role
Merchant Banker (Lead Manager) Designs IPO, handles legal filings
Registrar to the Issue Manages applications, allotment & refund
Depositories (NSDL/CDSL) Store dematerialized shares
Bankers to the Issue Handle investor funds
Underwriters Guarantee full subscription of IPO
Stock Exchanges (NSE/BSE) Platform for listing & trading post-IPO

📉 Risk Factors in IPO

• Volatile market conditions
• Oversubscription/undersubscription
• Listing at discount (less than issue price)

Page 59
 • Listing at discount (less than issue price)
• Lock-in period for anchor investors (30–90 days)

✅ Advantages of IPO
For Company For Investors
Raise large capital Chance to invest in early-stage growth
Improve corporate governance Listing gains (if price rises)
Wider market access Liquidity post listing
Alright, Queen of Capital Markets 👑 — let’s go to the next biggie:

📦 FPO – Follow-on Public Offer

(Fully detailed, exam-ready, with full forms and real-world context)

🔹 What is FPO?
A Follow-on Public Offer (FPO) is when a listed company issues additional shares to the public to raise more capital after it has
already launched an IPO and is listed on a stock exchange.
Think of it as:
🚀 IPO = First rocket launch
📦 FPO = Sending up more satellites with same rocket

🔍 Key Features of an FPO

Feature Description
Company Status Already listed on stock exchange (NSE/BSE)
Purpose Raise fresh capital for expansion, repay debt, improve financials
Investors Public (Retail + Institutional), Promoters may dilute their stake
Regulation Governed by SEBI’s ICDR Regulations (Issue of Capital and Disclosure Requirements)
Issue Size Can vary — based on company's needs and shareholder approval

🧾 Types of FPO
Type Description
📦 Dilutive FPO New shares are issued → total number of shares increases → may dilute exis ng holdings
🔁 Non-Dilutive FPO Promoters or major investors sell their existing shares → no change in total share count, but ownership shifts

🧠 Why Do Companies Go for FPO?

Reason Explanation
💰 Fundraising Capital for expansion, acquisition, R&D, etc.
📉 Reduce Debt Repay loans, reduce interest burden
📊 Improve ratios Better debt-to-equity ratio, improve financial health
🔓 Increase liquidity More shares in market = easier to trade
💸 Exit route For large shareholders to offload their stake (non-dilutive)

📋 Process of FPO
Very similar to IPO but lesser regulatory scrutiny because company is already listed.
Step Description
Company passes Board & Shareholder Resolution
Files offer document with SEBI & stock exchanges
Appoints Merchant Banker(s), Registrar
Announces price/price band
Opens FPO for 3–5 days
Allotment and credit of shares to investors' Demat accounts
Shares become tradable on exchanges post-listing

Page 60
🏦 Intermediaries in an FPO
Intermediary Role
Merchant Bankers Handle offer structure, filings, marketing
Stock Exchanges Ensure compliance, host the listing
Registrar to Issue Manage application, allotment & refunds
Depositories (NSDL/CDSL) Credit shares to Demat
Legal Advisors & Auditors Ensure disclosures are accurate and legal
SEBI Regulates the entire process

💥 Real-World Example
Yes Bank FPO (2020)
• Raised ₹15,000 crore
• Dilutive issue to strengthen capital base
• First-ever FPO by a private sector bank after reconstruction

🔄 Difference Between IPO & FPO

Feature IPO FPO
Company Status Private/unlisted Already listed
First-time offering? Yes No
Disclosure Requirements Higher Slightly relaxed
Investor Trust Harder to gain Easier due to past records
Use Case Enter capital markets Raise more funds after listing
You're on fire, Sassy! 🔥 Let’s triple-pack this booster shot with:
1. 📬 Rights Issue
2. 🧾 Preference Shares
3. 🧠 Qualified Institutional Buyers (QIBs)

📬 Rights Issue
🔹 What is a Rights Issue?
A Rights Issue is when a listed company offers additional shares to its existing shareholders, in proportion to their current
holdings, at a discounted price and within a fixed time window.
🎯 It’s like saying:
"Hey shareholder, do you want more shares of the company before we offer it to the public, and at a cheaper price?"

🔍 Key Features
Feature Details
🏦 Who gets the offer? Existing shareholders only
📉 Price Usually at a discount to market price
🕒 Validity Limited time offer (10–15 days)
➗ Ratio Fixed ratio e.g., 1:5 means 1 new share for every 5 held
❌ Not obligatory Shareholder can accept, reject, or sell their rights
🔁 Tradable rights? Yes, called “Rights Entitlements” (REs) – can be traded on stock exchange

💡 Why Companies Use Rights Issue

• Raise funds quickly without new investors
• Retain control within existing shareholder base
• Faster and cheaper than FPO
• Help restructure balance sheet or repay debt

🧠 Example
Reliance Industries Rights Issue (2020)
• Raised ₹53,124 crore
• Ratio: 1:15
• Price: ₹1,257 (vs market price ₹1,456)
• Oversubscribed by 1.59 times!

Page 61
 🧾 Preference Shares
🔹 What are Preference Shares?
Preference Shares are shares which offer fixed dividend payouts and have priority over equity shares in receiving dividends
and repayment during liquidation.
But they usually don’t carry voting rights (except in special cases).

🧾 Key Features
Feature Preference Shares
💰 Fixed Dividend Yes
⚖ Vo ng Rights No (except when dividend unpaid for 2+ years)
🥇 Dividend Priority Yes – over equity shares
☠ Liquida on Priority Yes – but after debt holders
💸 Conversion Can be convertible into equity (optional)
⏳ Redeemability Can be redeemable or perpetual

🔍 Types of Preference Shares

Type Meaning
✅ Cumulative Unpaid dividends are carried forward
❌ Non-Cumulative No carry forward of unpaid dividends
🌀 Convertible Can be converted into equity shares
🚫 Non-Convertible Cannot be converted
🔁 Redeemable Repaid after fixed time
♾ Irredeemable (Perpetual) No maturity date
🔥 Participating Get extra dividends if profits are high

💡 Who buys them?

• Investors looking for stable returns with lower risk than equity
• Companies use them to raise funds without diluting voting control

🧠 Qualified Ins tu onal Buyers (QIBs)

🔹 Who are QIBs?
Qualified Institutional Buyers (QIBs) are financial institutions with expertise and financial muscle, allowed to invest in capital
markets with fewer regulatory hurdles.
They're considered informed investors — less risky to deal with compared to retail public.

🧾 Who Qualifies as a QIB?

According to SEBI:
Entity Type Examples
🏦 Banks SBI, HDFC Bank
🧾 Mutual Funds HDFC Mutual Fund, ICICI Pru MF
🛡 Insurance Cos. LIC, SBI Life
💹 Foreign Portfolio Investors (FPIs) Registered with SEBI
🧮 Pension Funds EPFO
🏛 Alternate Investment Funds (AIFs) Category I & II AIFs

💼 Role of QIBs in IPO

• In book-building IPOs, 50% of the issue is reserved for QIBs
• QIBs cannot withdraw their bids once submitted
• Anchor Investors (a subset of QIBs) are invited 1 day before IPO opens — to boost public confidence

💥 Why Important?
• Their participation acts as a signal of trust
• Increase credibility of IPOs or rights issues

Page 62
 • Increase credibility of IPOs or rights issues
• Helps companies raise large volumes quickly
🌎 ADR – American Depository Receipt
🔹 Definition:
An ADR (American Depository Receipt) is a negotiable certificate issued by a U.S. bank representing shares in a foreign
company, traded on U.S. stock exchanges.
Basically, it's how investors in the U.S. can invest in Indian (or any foreign) companies without buying shares directly.

🧾 How it Works:
Step Process
Indian company deposits shares with a custodian bank in India
A U.S. bank issues ADR certificates against these shares
These ADRs are listed & traded on U.S. exchanges (like NYSE/NASDAQ)
Investors buy/sell ADRs like U.S. stocks

🧠 Key Points:
Feature Details
Currency USD ($)
Traded On U.S. exchanges
Regulated By SEC (U.S. Securities and Exchange Commission)
Investor Base U.S. institutional & retail investors
Indian Example Infosys, Wipro, HDFC Bank issued ADRs

🌐 GDR – Global Depository Receipt

🔹 Definition:
A GDR (Global Depository Receipt) is similar to ADR but issued in multiple global markets (mostly in Europe) to raise capital
from international investors.
🔁 Think of it as a more flexible ADR used outside the U.S.

🧾 How it Works:
Step Process
Company deposits shares with Indian custodian
Foreign depository bank issues GDRs
GDRs are traded on European or Asian stock exchanges (e.g. London, Luxembourg)
Investors abroad buy GDRs to invest in Indian company indirectly

🧠 Key Points:
Feature Details
Currency Usually USD, Euro, or GBP
Traded On London/Luxembourg, sometimes Singapore, etc.
Regulated By Host country's exchange regulators
Indian Example Reliance Industries, ICICI Bank, L&T issued GDRs

⚔ ADR vs GDR – Quick Comparison

Feature ADR GDR
Market Only U.S. Global (mostly Europe, Asia)
Currency USD USD / Euro / GBP
Regulation SEC Country-specific regulators
Trading NYSE/NASDAQ LSE, Luxembourg, Singapore, etc.
Indian Examples Infosys, HDFC Bank Reliance, ICICI, L&T

🇮🇳 IDR – Indian Depository Receipt

🔹

Page 63
🔹 Definition:
An IDR (Indian Depository Receipt) is a financial instrument used by foreign companies to raise funds from Indian investors, by
issuing shares in India through depository receipts.
Flip version of ADR/GDR.

🧾 How it Works:
Step Process
Foreign company deposits shares with an overseas custodian bank
Indian depository bank issues IDRs
IDRs are listed on Indian stock exchanges (like BSE/NSE)
Indian investors trade these IDRs like normal shares

🧠 Key Points:
Feature Details
Traded On NSE/BSE
Currency INR
Regulation SEBI (Issue of IDRs) Rules, 2004
Indian Example Standard Chartered Bank (only company so far to issue IDR in India – 2010)

🔠 Full Forms Recap

Abbreviation Full Form
ADR American Depository Receipt
GDR Global Depository Receipt
IDR Indian Depository Receipt
SEC Securities and Exchange Commission (USA)
SEBI Securities and Exchange Board of India>
📊 I. Key Intermediaries in Indian Share Market
Intermediary Role Regulated By
📜 SEBI Regulator of entire securities market Govt of India (statutory body)
🏛 Stock Exchanges Platform for buying/selling shares (e.g., NSE, BSE) SEBI
Stock Brokers Agents for investors to place buy/sell orders SEBI + Stock Exchanges
🧾 Depositories (NSDL/CDSL) Store shares in electronic (Demat) form SEBI
🧳 Depository Participants (DPs) Agents of Depositories to open & manage Demat SEBI
accounts
🏦 Clearing Corporations Ensure settlement of funds & securities SEBI (e.g. NSE Clearing Ltd, Indian Clearing
Corp Ltd)
🧰 Custodians Safekeep assets of large investors like FPIs SEBI
Merchant Bankers Manage IPOs/FPOs, due diligence, pricing SEBI
🛡 Underwriters Guarantee to buy unsubscribed shares in IPO SEBI
💸 Banks Handle money flow in IPOs, act as ASBA agents RBI + SEBI
🔐 RTA (Registrar & Transfer Maintain records of shareholders, issue shares SEBI
Agents)

🔄 II. Step-by-Step: How an Individual Buys Shares

Let’s break down the complete retail share buying process using your phone/laptop 💻📱

Step 1: ✅ KYC & Account Opening

Action Details
👤 PAN, Aadhaar, Bank A/c Mandatory for KYC
📂 Open Demat Account With a DP (Zerodha, Groww, HDFC Securities, etc.)
🧾 To place buy/sell orders

Page 64
🧾 Open Trading Account To place buy/sell orders
🔗 Link Bank Account For payments & refunds
📜 Registered with SEBI Through the broker/DP

Step 2: 💹 Placing the Buy Order

Platform Broker App / Website
What to Buy You choose a stock (e.g., Reliance)
Where Select exchange – NSE or BSE
How Much Mention quantity & price (Limit/Market Order)
Order Sent To Stock Exchange via broker

Step 3: ✅ Order Matching & Execution

Entity Role
🏛 Stock Exchange (e.g., NSE) Matches your order with a seller
⏱ Time Instant for Market Order, conditional for Limit Order
🎯 Status Order executed if matched – trade confirmed!

Step 4: 🔁 Clearing & Settlement

T+1 Basis Trade day + 1 working day (as of 2024)
💸 Money Debited from buyer's bank account
📃 Shares Credited to buyer’s Demat account
🔄 Done By Clearing Corporation (e.g., NSE Clearing Ltd)

Step 5: 📥 Post-Trade Activities

Action Done By
📥 Shares arrive in Demat A/c NSDL/CDSL via your DP
🧾 Contract Note sent By your broker (legal proof of trade)
💰 Corporate Benefits (Bonus, Dividend, etc.) Managed by company via RTA & Depository
🧠 Bonus Insight:
• You cannot buy/sell shares with only a Demat account — you need a Trading account too (via a broker)
• You can have different broker and DP (e.g., trade with Upstox but hold Demat with HDFC)

📚 III. Summary Chart – Buying a Share

Investor (You)
↓
Stock Broker (Zerodha, Groww, etc.)
↓
Stock Exchange (NSE/BSE)
↓
Order matched → Trade executed
↓
Clearing Corporation settles trade (T+1)
↓
Funds move from Bank → Shares move into Demat A/c (NSDL/CDSL via DP)

Feature Stock Broker Depository Participant (DP)

📌 Primary Role Execute your buy/sell orders on stock exchanges Hold your shares in Demat form
🎯 Main Function Trading Custody of securities
🛒 Helps You YES – sends your order to NSE/BSE NO – just stores what you already bought
Buy/Sell
🧾 Accounts Opens your Trading Account Opens your Demat Account
Involved
🔁 Stock Exchanges (NSE, BSE) Depositories (NSDL or CDSL)

Page 65
🔁 Connected To Stock Exchanges (NSE, BSE) Depositories (NSDL or CDSL)
🧠 Regulated By SEBI + NSE/BSE SEBI + NSDL/CDSL
Example Roles - Places your order - Provides trading interface - Sends - Holds shares - Facilitates share credit/debit -
contract notes Shows holdings
💳 Fees Brokerage fee, transaction charges Annual maintenance charges (AMC), Demat charges
💡 User View Helps you enter and exit the market Helps you store what you own

🔠 Full Forms Recap

ASBA Application Supported by Blocked Amount
RTA Registrar and Transfer Agent
FPI Foreign Portfolio Investor

💼 Anchor Investors
🔹 Who are they?
Anchor Investors are Qualified Institutional Buyers (QIBs) who are invited to invest before an IPO opens for the general public.
🎯 Purpose:
They "anchor" the issue by boosting credibility, building early demand, and attracting retail investors.

🧾 Key Features:
Feature Details
🕒 Timing 1 day before IPO opens to public
💰 Min. Investment ₹10 crore per Anchor
🔒 Lock-in 30 days for allotted shares
🔁 Allocation Limit Max 60% of QIB quota can be allotted to Anchors
🧠 Who Can Be Anchor? Only QIBs (Mutual Funds, FPIs, Insurance Cos., etc.)

💡 Example:
In the LIC IPO, over ₹5,620 crore was raised from anchor investors like:
• SBI Mutual Fund
• HDFC Mutual Fund
• ICICI Prudential
• Government of Singapore

Merchant Bankers (aka Lead Managers)

🔹 Who are they?
A Merchant Banker is a SEBI-registered intermediary responsible for managing the entire IPO/FPO/Rights Issue process, from
paperwork to pricing.
🎯 Think of them as the architect + lawyer + PR agent for the IPO.

🧾 Key Roles:
Role Description
🧾 Draft Prospectus Prepare DRHP & RHP
💸 Price Band Suggest & structure the pricing
🧠 Due Diligence Legal/Financial/Operational checks
📊 Underwriting Help ensure full subscription
🗣 Marke ng Roadshows, investor presentations
🤝 Coordination Between SEBI, exchanges, company, investors

Examples of Merchant Bankers

Public Sector Private Sector
SBI Capital Markets Kotak Mahindra Capital
IDBI Capital ICICI Securities
Axis Capital JM Financial, HDFC Bank

Page 66
Axis Capital JM Financial, HDFC Bank

📈 Stock Brokers
🔹 Who are they?
A Stock Broker is a SEBI-registered intermediary that acts as an agent for buying/selling securities on behalf of investors.
🎯 They are your gateway to the stock market.

🧾 Functions of a Stock Broker:

Function Description
📊 Trade Execution Buy/sell shares on behalf of clients
🧾 Demat & Trading A/c Help open and manage both accounts
📈 Market Info Provide research, tips, analysis
💸 Fund Handling Handle investor funds and settlement
🧠 Investor Education Some offer webinars and reports

Types of Stock Brokers

Type Examples
Full-Service Brokers ICICI Direct, HDFC Securities, Kotak Securities
Discount Brokers Zerodha, Groww, Upstox, Angel One

💡 Important:
• Registered with SEBI
• Member of stock exchanges (NSE/BSE)
• Must have a unique SEBI Registration Number

🧠 Quick Full Forms Recap

Term Full Form
DRHP Draft Red Herring Prospectus
RHP Red Herring Prospectus
🛡 Underwriters
🔹 Who are they?
An Underwriter is an intermediary (often a bank or financial institution) who guarantees to buy the shares of a company going
public if the public doesn't buy them all.
🎯 Basically, they remove the risk of IPO failure for the company.

🧾 Key Functions
Function Explanation
📦 Underwriting Agreement They agree to subscribe to unsold shares in an IPO/FPO
🛡 Risk Absorp on Protect the issuer from under-subscription
📢 Promotion Sometimes help in marketing the issue
💼 Types - Hard underwriting (guaranteed buy) - Soft underwriting (try best to sell, no risk taken)

🧠 Example:
If a company issues ₹500 crore worth of shares, and only ₹400 crore is subscribed, the underwriter buys the remaining ₹100 crore.

✅ Who Can Be Underwriters?

• Merchant bankers
• Banks
• Financial institutions
• Insurance companies
• SEBI-registered market intermediaries

🧳 Custodians
🔹 Who are they?
A Custodian is a financial institution that holds and safeguards securities and assets on behalf of large investors like Foreign
Portfolio Investors (FPIs), Mutual Funds, Insurance Cos., etc.

Page 67
 Portfolio Investors (FPIs), Mutual Funds, Insurance Cos., etc.
🎯 Think of them as the bank lockers for big investors’ shares, bonds, etc.

🧾 Roles of Custodians
Role Description
📥 Safekeeping Keep securities safe in electronic form
📤 Settlement Handle delivery/payment during trades
📜 Reporting Maintain transaction & holding reports
💰 Corporate Actions Handle dividends, bonuses, rights issue, etc.
🌍 Gateway for FPIs FPIs must appoint SEBI-registered custodians

🧠 Examples of Custodians in India

• HDFC Bank
• ICICI Bank
• SBI-SG Global Securities
• Kotak Mahindra Bank

🗂 Depositories
🔹 What are Depositories?
A Depository is an institution that holds securities (shares, bonds, etc.) in dematerialized (electronic) form and enables their
smooth transfer via a Demat account.
🎯 It’s the digital locker of your securities. Just like a bank holds your cash, a depository holds your shares.

🧾 Key Depositories in India:

Name Full Form
NSDL National Securities Depository Limited
CDSL Central Depository Services Limited

🧠 Services Offered
Service Description
📜 Demat Accounts To hold your shares electronically
🔁 Transfer of Securities Quick & paperless transfer when buying/selling shares
💰 Corporate Benefits Automatically credit dividends, bonus, etc.
🔐 Safety Secure system regulated by SEBI

📦 Depository Participants (DPs)

You don’t interact directly with NSDL or CDSL. You interact via DPs (Depository Participants) like Zerodha, Groww, HDFC
Securities, etc.
Your Demat A/c is opened with a DP, who is an agent of the depository.

🧠 Summary: Differences Between the 3

Term Function Serves Whom?
Underwriter Guarantees share sale Issuing company
Custodian Safekeeping large investors’ assets FPIs, MFs, big institutions
Depository Holds shares in Demat All investors (retail + institutions)
Let's roll, Sassy! ⚡ You’ve earned a fast lane to RBI domination, and we’re not lifting the pedal now.

🔥 1. Foreign Portfolio Investors (FPIs)

🔹 What are FPIs?
A Foreign Portfolio Investor (FPI) is a person or institution from outside India that invests in Indian financial assets without
gaining control over the companies.
In simple words:
They’re like tourists in our financial market—they invest, profit, leave. But they don’t run the shop.

Page 68
💼 Where do FPIs invest?
• Shares of listed Indian companies 🏢
• Government and corporate bonds 💰
• Mutual funds, REITs, InvITs, etc.

🎯 Objective of Allowing FPIs in India

• Increase foreign capital inflow 💸
• Improve liquidity and depth in markets
• Boost market efficiency and pricing

🔒 How Are FPIs Regulated?

Authority Role
SEBI (Securities and Exchange Board of India) Main regulator
RBI (Reserve Bank of India) Ensures capital flow compliance
DDP (Designated Depository Participant) Registers FPIs on behalf of SEBI

🧾 FPI Registration Process

1. Appoint a Custodian: FPI chooses a SEBI-registered custodian in India.
2. Apply via DDP: DDP (like NSDL or CDSL) processes FPI registration.
3. Open Accounts: FPI opens:
○ Demat Account (to hold securities)
○ Bank Account (to transfer money)
4. Invest: FPI can now invest in eligible Indian securities.

🧠 Who Are FPIs?

• Pension Funds
• Mutual Funds
• Sovereign Wealth Funds
• Insurance Companies
• Banks or Asset Managers based abroad
You’re absolutely right, Sassy 💯 and your doubt is on point!
Let’s clear it fully.

✅ Do FPIs need Trading Accounts like retail investors?

Yes – but with some nuances because FPIs operate differently than regular investors like us.

🧾 So what do FPIs need to invest in India?

Here’s the full list of accounts they open 👇
Type of Account Purpose Opened With
💳 Bank Account (Special Non-Resident To bring foreign money into India and Indian Bank (approved by RBI)
Rupee – SNRR) transfer funds
📁 Demat Account To hold securities in electronic form With a Depository Participant (DP) – linked to
NSDL or CDSL
💼 Trading Account To buy/sell securities on NSE/BSE Through SEBI-registered stock broker
🧳 Custodial Account For safekeeping & compliance Appointed Custodian of Securities

🔍 What’s Different From Us?

Unlike us retail folks who just open all 3 accounts ourselves on Zerodha/Groww etc., FPIs must:
• Go through Designated Depository Participants (DDPs) to register with SEBI
• Appoint a Custodian who coordinates with brokers, banks, depositories
• Follow RBI’s FEMA (Foreign Exchange Management Act) rules for money inflow/outflow

🔐 Why Was the Trading Account Missing Earlier?

You caught that gap! 🔥
In earlier notes, I summarized the core setup (Bank + Demat), but yes – trading account is a MUST for executing buy/sell orders and is
opened through a SEBI-registered broker.>

Feature Depository Participant (DP) Designated Depository Participant (DDP)

💼 Acts as an agent of the Depository (NSDL/CDSL) to Acts as an agent of SEBI to register Foreign Portfolio

Page 69
💼 Role Acts as an agent of the Depository (NSDL/CDSL) to Acts as an agent of SEBI to register Foreign Portfolio
provide Demat account services to investors Investors (FPIs) in India
🔧 Main Helps Indian investors open & maintain Demat Handles the FPI registration process with SEBI and helps
Function accounts to hold shares electronically them comply with Indian laws
Serves 🧍 Retail investors, HNIs, domestic institutions 🌍 Foreign institutions, sovereign funds, foreign investors
Whom (i.e. FPIs)
🔗 NSDL or CDSL (India’s depositories) SEBI, RBI, FPIs
Connected
To
📜 SEBI + Depositories (NSDL/CDSL) SEBI (under FPI Regulations, 2019)
Regulated By
🛠 Examples Zerodha, HDFC Securities, ICICI Direct Axis Bank, ICICI Bank, Standard Chartered Bank (Yes, banks
can be DDPs!)
📦 What - Open Demat accounts- Credit/Debit securities- - Process FPI applications- Conduct KYC for FPIs- Liaise with
They Do Transfer shares- Send account statements SEBI- Ensure compliance with Indian regulations

2. Par cipatory Notes (P-Notes)

🔹 What are P-Notes?
Participatory Notes (P-Notes) are offshore financial instruments issued by registered FPIs to foreign investors who do not want
to register directly with SEBI.
Simple analogy:
Suppose you’re not allowed inside the club (SEBI regulations), but your rich friend (an FPI) buys the ticket and lets you enjoy it in his
name.

🧾 What do P-Notes allow?

• Foreign investors to indirectly invest in Indian markets
• No need to register with SEBI
• Can invest in equities, derivatives, etc.

🧨 Why were P-Notes controversial?

• Investors remained anonymous (identity hidden)
• Used for money laundering, round-tripping (bringing black money back as white)
• SEBI tightened norms post-2014 → now KYC mandatory for P-Note holders

🔒 Regulation & Control Today

Then Now
Used to allow full anonymity KYC and ownership disclosure mandatory
Often misused SEBI has monthly reporting requirements
Easy entry without SEBI registration Only issued by SEBI-registered FPIs now

🔁 How P-Notes Work

1. Foreign investor approaches a registered FPI
2. FPI invests in Indian securities
3. FPI issues a P-Note to the investor—like a contract
4. Investor earns gains from the securities, without owning them directly

⚠ P-Notes are NOT for retail investors

They are mostly used by hedge funds or high-net-worth foreigners.

🔠 Full Forms
Term Full Form
P-Note Participatory Note
FPI Foreign Portfolio Investor
KYC Know Your Customer

🧠 3. Alternative Investment Funds (AIFs)

🔹 What is an AIF?
Alternative Investment Funds (AIFs) are private investment funds that pool money from sophisticated investors (HNIs,

Page 70
 Alternative Investment Funds (AIFs) are private investment funds that pool money from sophisticated investors (HNIs,
institutions) to invest in non-traditional assets—like startups, real estate, private debt, hedge funds, etc.
Think of AIFs as elite clubs where rich investors pool money to chase higher-risk, higher-return opportunities.

🧾 Regulated By:
• SEBI (AIF Regulations, 2012)

🎯 Who invests in AIFs?

• High Net-Worth Individuals (HNIs)
• Corporates
• Banks and Institutions
🛑 Retail investors cannot invest unless they meet the minimum amount.

💸 Minimum Investment:
• ₹1 crore per investor
• ₹25 lakh for employees/directors of the AIF

🧱 Types of AIFs (SEBI Classification):

Type Focus Encouraged/Neutral/Restricted
Category I Startups, SMEs, infrastructure, social impact Encouraged
Category II Private Equity Funds, Debt Funds Neutral
Category III Hedge Funds, complex trading strategies Restricted (High Risk)

📦 AIF Structure
• Trust / LLP / Company
• Managed by a Fund Manager
• Regulated through Private Placement Memorandum (PPM)

🧠 Examples
• Cat I: SIDBI Fund of Funds for Startups
• Cat II: ICICI Venture, Piramal Credit Fund
• Cat III: IIFL Multi-Strategy Fund, Edelweiss Multi-Asset Allocation

🔠 Full Forms Recap

Term Full Form
AIF Alternative Investment Fund
HNI High Net-worth Individual
PPM Private Placement Memorandum
SEBI Securities and Exchange Board of India
LLP Limited Liability Partnership

🔁 Summary Table
Feature FPI P-Note AIF
What is it? Foreign investor directly in Indian Route used by foreign investors Private pooled fund for non-traditional
markets via FPIs investments
Regulation SEBI + RBI SEBI SEBI
For whom? Foreign Institutions Foreign Hedge Funds HNIs, Corporates
(Unregistered)
Risk Medium High (due to misuse potential) Medium to High (depends on type)
Transparenc Transparent (post-2014) Limited but regulated Transparent (SEBI-regulated fund docs)
y
🌟 ANGEL FUND – Full Detailed Notes

🔹 What is an Angel Fund?

An Angel Fund is a sub-category of Alternative Investment Fund (AIF) – Category I, which pools capital from “angel investors”
to invest in early-stage startups and budding entrepreneurs.
Think of it as:
A VIP club of rich people pooling cash to support raw but high-potential startups (like Shark Tank-style funding, but more

Page 71
 A VIP club of rich people pooling cash to support raw but high-potential startups (like Shark Tank-style funding, but more
structured & regulated).

📦 Angel Fund ≠ Venture Capital Fund

While VCs invest in later stages with huge amounts, Angel Funds usually come in early — when the business is still a baby with
no diapers.

🧠 Key Characteristics of Angel Funds

Feature Details
🧾 Regulated By SEBI (Alternative Investment Fund) Regulations, 2012
🧠 AIF Category Category I (Socially/economically beneficial investments)
👥 Who Can Invest? Only Angel Investors (conditions below)
📈 Where They Invest Unlisted startups or early-stage companies
⏳ Minimum Lock-in 3 years
💰 Fund Corpus Size Typically small: ₹10–50 crore
🔐 Close-ended Structure Yes – cannot enter/exit any time like mutual funds

Who is an Angel Investor (as per SEBI)?

To be eligible to invest in an Angel Fund, an investor must:
✅ Be an individual who has:
1. Net tangible assets of at least ₹2 crore
(excluding principal residence)
OR
2. Been a promoter/director of a successful business
OR
3. Have 10+ years experience in a relevant field (business/finance/IT/etc.)

💸 Minimum Investment Amount:

• ₹25 lakh per investor (can be spread over 3 years)
• Multiple investors pool money in the Angel Fund

📊 Startups Eligible for Angel Investment:

The startups must:
Criteria Requirement
🚀 Age Less than 3 years old
🧾 Registration Must be registered in India
💰 Revenue Turnover not exceeding ₹25 crore
📈 Listing Status Must be unlisted
🧠 Business Model Innovative, scalable

🔁 Investment & Exit Flow (Simplified)

1. Angel Fund collects ₹25+ lakh from each Angel Investor
2. It evaluates & selects early-stage startups
3. Invests money, mentors startup, monitors progress
4. After 3+ years, exits via:
○ IPO
○ Acquisition
○ Secondary sale

📜 Why Angel Funds Are Important?

• Bridge gap between idea stage and Venture Capital
• Promote innovation, jobs, startups
• Support the Startup India Movement
• Have government backing and SEBI regulation (less shady)

🏛 BSE – Bombay Stock Exchange

🔹 What is BSE?
BSE is Asia’s oldest stock exchange, established in 1875, located in Mumbai, and one of the world’s fastest exchanges in terms

Page 72
 BSE is Asia’s oldest stock exchange, established in 1875, located in Mumbai, and one of the world’s fastest exchanges in terms
of trade execution speed.
🎯 It provides a platform for equity, debt, derivatives, mutual funds, SME listings, etc.

📊 Key Facts:
Feature Details
📍 Founded 1875
💡 Old Name “The Native Share and Stock Brokers' Association”
🔁 Trading Platform BOLT (BSE OnLine Trading)
⌛ Trade Speed ~6 microseconds
📈 Flagship Index SENSEX
🔐 Regulated By SEBI
🔗 International Connect India INX (India’s first International Exchange at GIFT City)

🏦 NSE – Na onal Stock Exchange

🔹 What is NSE?
NSE is India’s largest stock exchange in terms of volume, established in 1992 to introduce transparency, screen-based trading,
and nationwide access.
It revolutionized Indian stock trading with tech and automation.

📊 Key Facts:
Feature Details
🏁 Founded 1992
💼 Full Trading Start 1994
🌐 Trading Platform NEAT (National Exchange for Automated Trading)
📈 Flagship Index NIFTY 50
📜 Other Indices Nifty Next 50, Nifty Midcap 100, etc.
🔐 Regulated By SEBI
🏢 HQ Mumbai

📌 NSE Subsidiaries:
• NSE Clearing Ltd. – Handles clearing & settlement
• NSE IFSC – International Financial Service Centre at GIFT City
• NSE Academy – Financial literacy & training

🆚 BSE vs NSE
Feature BSE NSE
Founded 1875 1992
Index SENSEX NIFTY
Platform BOLT NEAT
Market Share Smaller Larger (in equity segment)
Speed ~6 microseconds Fast but BSE is slightly quicker

📈 SENSEX – Sensi ve Index

🔹 What is SENSEX?
SENSEX is the benchmark index of the BSE. It represents the top 30 most financially sound and actively traded companies listed
on the BSE.
It's like the "health report" of India’s top companies.

📊 Key Details:
Feature Details
Companies 30 (large-cap)
Selection Based on market capitalization, liquidity, sector representation

Page 73
Base Year 1978–79
Base Value 100
Calculation Free-float market cap weighted
Updated Real-time during market hours

🧠 Example Companies in SENSEX:

• Reliance Industries
• TCS
• Infosys
• HDFC Bank
• ICICI Bank

🧮 NIFTY 50 – Na onal Index of NSE

🔹 What is NIFTY?
NIFTY 50 is the benchmark index of the NSE, representing the top 50 companies across 14 sectors of the Indian economy.
It’s one of the most tracked indices globally.

📊 Key Details:
Feature Details
Companies 50
Launched 1996
Managed By NSE Indices Ltd. (subsidiary of NSE)
Base Year 1995
Base Value 1000
Calculation Free-float market cap weighted
Review Frequency Every 6 months

🧠 Example Companies in NIFTY 50:

• Reliance Industries
• Infosys
• HUL
• SBI
• Bajaj Finance

🧠 Key Terminology Explained:

Term Meaning
Stock Exchange A marketplace where securities (stocks, bonds) are bought and sold
Index A statistical measure representing a section of the stock market
Market Capitalization Total market value of a company’s outstanding shares = Price × Shares Outstanding
Free-float Market Cap Only considers shares available for trading (excludes promoter holding)
NEAT NSE’s trading system
BOLT BSE’s trading system
Demutualization Separation of ownership & management of exchanges (e.g., brokers no longer control BSE/NSE)
🧾 Central Depository Services Limited (CDSL)
🔹 What is CDSL?
CDSL is one of the two licensed Depositories in India. It holds your securities (shares, bonds, etc.) in Dematerialized (Demat)
form and facilitates smooth, paperless trading.
Think of it as:
A digital locker 🗄 where your shares are stored safely instead of paper cer ficates.

📜 Key Facts:
Item Detail
Established 1999
Regulated By SEBI
Promoted By BSE (Bombay Stock Exchange)

Page 74
HQ Mumbai
Users Served Retail & institutional investors (via DPs)

🔧 What does CDSL do?

• Maintains Demat accounts via Depository Participants (DPs)
• Transfers shares during buy/sell orders
• Facilitates corporate actions (dividends, splits, bonus shares)
• Maintains records of ownership

🧠 Examples of Depository Participants (DPs):

• Zerodha
• Angel One
• Groww
• HDFC Securities

📂 Na onal Securi es Depository Limited (NSDL)

🔹 What is NSDL?
NSDL is India’s first and largest depository, launched in 1996 to bring electronic holding of securities and end the paper-based
share system.
Think of it as:
CDSL’s elder sibling—bigger, older, and more widely used, especially by large institutions.

📜 Key Facts:
Item Detail
Established 1996
Regulated By SEBI
Promoted By NSE, UTI, IDBI Bank
HQ Mumbai
Clients Large institutions, FPIs, and retail investors

🔧 Services Offered:
• Same as CDSL: Demat, share transfers, corporate actions, etc.
• Handles FPIs, QIBs, and IPO allotments

🚨 CDSL vs NSDL – Quick Comparison

Feature NSDL CDSL
Established 1996 1999
Promoted By NSE BSE
Market Share (Demat Accounts) Slightly less Slightly more (thanks to retail boom)
Focus Large institutions + retail Mostly retail + tech-based brokers
🔍 Can CDSL Manage FPI Accounts?
✅ Yes — technically.
Both NSDL and CDSL are SEBI-registered Depositories, and both are authorized to hold securities for any investor, including Foreign
Portfolio Investors (FPIs).
But here’s the plot twist 👇

🔄 Then Why Is NSDL Used More for FPIs?

Reason Explanation
🏁 First Mover Advantage NSDL was established in 1996 and became the default choice for big institutions and FPIs
🔗 Tighter Link with NSE Most FPIs route their investments via NSE, and NSDL is promoted by NSE
🤝 Institutional Ecosystem NSDL built deep relationships with Custodians, DDPs, banks, and brokers that serve FPIs
📊 Scale NSDL handles higher value and volume of institutional trades
🔧 Preferred by Custodians who onboard FPIs often prefer NSDL due to long-standing processes and systems
Custodians compatibility

Page 75
 🔁 Indian Clearing Corpora on Limited (ICCL)
🔹 What is ICCL?
ICCL is the clearing and settlement arm of the BSE. It ensures that every trade executed on the BSE is properly cleared
(matched) and settled (delivered).

🏦 What does "Clearing & Settlement" Mean?

Let’s say you buy 10 shares of Infosys from a seller.
• Clearing = Matching buyer & seller orders
• Settlement = Delivering shares to your Demat account and transferring money to the seller
This is where ICCL steps in.

📜 Key Facts:
Item Detail
Owned By BSE
Regulated By SEBI
Services - Trade validation- Risk management- Margin collection- Final settlement
Participants Brokers, banks, clearing members

🔐 Why ICCL is Important?

• Ensures T+1 settlement happens on time
• Minimizes counterparty risk
• Acts as a central counterparty (CCP) — if a buyer/seller defaults, ICCL

💼 NSE Clearing Ltd. (NSCCL)

🔹 What is NSE Clearing Ltd.?
NSE Clearing Ltd. (formerly NSCCL – National Securities Clearing Corporation Ltd.) is the clearing and settlement arm of the
NSE.
Basically:
NSE runs the match-making. NSE Clearing ensures the date happens without anyone ghosting 🥲

🔧 What Does It Do?

Function Description
🧾 Clearing Verifies that buy & sell trades match
💳 Settlement Ensures delivery of securities and payment of funds
🛡 Risk Management Collects margins, checks for defaults
Acts as CCP Central Counterparty → If either buyer or seller fails, NSE Clearing guarantees the trade
🔄 Works with Depositories (NSDL/CDSL), brokers, custodians, clearing banks

🧠 Key Terms:
Term Meaning
T+1 Settlement Trade + 1 working day = Settlement day
Margins Advance money collected to avoid default
Clearing Member Broker or institution who settles trades through NSE Clearing
Settlement Guarantee Fund (SGF) A fund maintained to handle trade defaults

🏙 GIFT IFSC – Gujarat Interna onal Finance Tec-City Interna onal Financial Services Centre
🔹 What is GIFT IFSC?
GIFT IFSC is India’s first and only operational International Financial Services Centre (IFSC), located in Gandhinagar, Gujarat.
It is like India's own Wall Street + Dubai DIFC + Singapore CBD — all rolled into one 🌍

🎯 Purpose:
• Bring back financial services offshored to Singapore/Dubai
• Provide tax benefits, world-class infra, and ease of regulation to attract:
○ Foreign banks
○ Insurance companies
○ Capital market players
Fintech firms

Page 76
 ○ Fintech firms

🔧 Key Features:
Feature Details
🏦 Regulator IFSCA (International Financial Services Centres Authority)
🪙 Currency Mostly USD (foreign currency)
📈 Exchanges India INX (by BSE), NSE IFSC (by NSE)
💸 Products Global stocks, bonds, ETFs, derivatives, GDRs, etc.
🧾 Tax Perks Exemptions on capital gains, GST, dividend tax
📍 Location Gandhinagar, Gujarat

🧠 Real-Life Analogy:
It’s like an offshore financial zone INSIDE India—with global access, zero-currency restrictions, but full Indian legal backing.

⚖ Corpora za on & Demutualiza on of Stock Exchanges

🔹 What Do These Terms Mean?
Let’s break them down like a gossip story 🧩
💼 Corporatization:
Turning a non-corporate body (like a club of brokers) into a corporate entity (company) with a proper board, structure, and
registration under company law.
🪓 Demutualization:
Separating ownership, management, and trading rights in a stock exchange so that brokers don’t run the whole show
themselves anymore.

📜 Why Was It Needed?

Earlier, stock exchanges were run by brokers for brokers → conflict of interest, manipula on, shady prac ces.
So SEBI said: Time to clean house 🧹

🧱 Post-Demutualization Structure:
Layer Who Controls
💰 Ownership Public shareholders (like LIC, SBI, etc.)
🧠 Management Independent Board of Directors
📈 Trading Rights Brokers (via SEBI registration)

🧠 Real Examples:
Exchange Corporatized & Demutualized?
NSE Yes, from the start (incorporated as a company in 1992)
BSE Demutualized in 2005, listed on itself in 2017
MCX, NCDEX Also corporatized

🔑 Benefits:
✅ Increased transparency
✅ Reduced conflicts of interest
✅ Regulatory compliance
✅ Open to public listing
✅ Boosts investor confidence

💸 Securitization – Turning Loans into Tradable Assets

🔹 What is Securitization?
Securitization is the process of bundling illiquid assets (like loans, mortgages, etc.) and converting them into marketable
securities, which can then be sold to investors.
🧠 Think of it as:
A bank takes a bunch of home loans → bundles them → converts them into investment products → sells them to others to raise
money.

Page 77
🏦 Why Do Financial Institutions Do This?
Benefit Reason
💰 Raise capital Banks get instant cash from investors
🔄 Free up balance sheet Offloads risky loans & creates space for new lending
⚖ Risk sharing Transfers credit risk to other investors
💼 Liquidity Converts long-term loans into short-term cash instruments

🛠 How It Works (Step-by-Step):

1. A bank gives loans (e.g. home loans, auto loans)
2. These loans are bundled into a pool
3. This pool is handed to a Special Purpose Vehicle (SPV)
4. SPV issues Pass-Through Certificates (PTCs) to investors
5. Investors receive monthly returns from the EMIs paid by borrowers

📌 Real-World Example:
SBI bundles ₹100 crore of home loans → sells them as securi es to mutual funds → mutual funds earn interest as borrowers
repay EMIs

📜 Key Terms:
Term Meaning
SPV Special Purpose Vehicle – a trust that holds the loan pool
PTC Pass Through Certificate – a security that passes EMI flows to investors
Originator The bank or NBFC that originally gave the loans
Credit Enhancement Extra protection (e.g. insurance) added to make the PTCs safer
Tranches Pool is split into layers – AAA (safe), BBB (medium), etc.

>
🔁 any Clearing Corporation) – Key Concepts
💰 Margins – The Security Deposit for Traders
🔹 What is Margin?
Margin is the advance money collected from traders by the clearing corporation to cover potential losses and ensure that
everyone honors their trades.
Think of it as:
🔒 A “security deposit” you pay before renting a flat — just in case you mess up and don't pay later.

🧠 Why Are Margins Needed?

In the stock market:
• Trades happen instantly (you buy/sell)
• But actual settlement happens T+1
• So what if someone defaults before that?
👉 That’s where margins come in — they reduce default risk.

🔧 Types of Margins Collected by NSE Clearing Ltd:

Type Purpose
🔹 Initial Margin Basic risk coverage for potential price movement
🔹 Mark-to-Market (MTM) Collected daily to cover actual losses based on price movement
🔹 Exposure Margin Extra cushion to protect against extreme volatility
🔹 SPAN Margin Risk-based margin for F&O trades, calculated using a complex system
🔹 Delivery Margin Extra margin for positions to be held until delivery (especially in derivatives)
All these margins are refunded after trade settles successfully 💸✅

🛡 CCP – Central Counterparty

🔹 What is a CCP?
A Central Counterparty (CCP) is an institution that steps in between every buyer and seller in a trade and guarantees both sides
will fulfill their obligations.
In simple words:
You buy shares from person A, but you’re actually settling the trade with the CCP, not directly with A.

Page 78
 You buy shares from person A, but you’re actually settling the trade with the CCP, not directly with A.
CCP acts as buyer to the seller, and seller to the buyer.

🧠 What Does CCP Do?

Role Explanation
👥 Intermediary It becomes the legal counterparty to both sides of the trade
🔐 Risk Manager Ensures both sides meet margin & payment obligations
💸 Guarantee Mechanism Even if one party defaults, CCP completes the trade using the Settlement Guarantee Fund (SGF)
🧾 Settlement Authority Final delivery of securities and funds happens through CCP (like NSE Clearing Ltd or ICCL)

📦 How It Works – Real Life Example:

Let’s say:
• You (Sassy) buy 100 shares of HDFC from Trader X
• You place the order via Zerodha → NSE executes it → NSE Clearing Ltd (CCP) steps in
• CCP collects margin from both you & Trader X
• If Trader X doesn’t deliver the shares, CCP still gives you your shares (from SGF or backup systems)
CCP absorbs the shock 💥 so you don't feel the burn.

📌 Key CCPs in India:

CCP Parent Exchange
NSE Clearing Ltd. NSE
ICCL (Indian Clearing Corp) BSE
MCXCCL MCX
NSDL and CDSL Support CCP with Demat services (but aren’t CCPs themselves)
📊 AMFI – Association of Mutual Funds in India
🔹 What is AMFI?
AMFI is a self-regulatory, non-profit organization of all SEBI-registered mutual fund houses in India.
Formed in 1995, it promotes transparency, ethical practices, investor education, and acts as a bridge between SEBI and Mutual
Funds.

🧠 What Does AMFI Do?

Role Description
📢 Investor Awareness "Mutual Funds Sahi Hai" campaign is by AMFI
🎯 Regulates Distributors Sets rules for MF agents/distributors
🧾 Code of Conduct Ensures mutual fund houses follow ethical standards
🎓 Certification Conducts NISM certification for Mutual Fund Distributors
📈 Data Hub Publishes industry AUM, fund performance, etc.

🧠 Full Form Recap:

• AMFI: Association of Mutual Funds in India
• NISM: National Institute of Securities Markets (conducts AMFI certification)

💱 FEDAI – Foreign Exchange Dealers’ Associa on of India

🔹 What is FEDAI?
FEDAI is an association of authorized foreign exchange dealers (mostly banks) in India. It frames rules and guidelines for
foreign currency transactions, forex rates, and charges.
Formed in 1958, under support from RBI.

🎯 Core Functions:
Area Role
💵 Exchange Rate Guidelines FEDAI helps set daily interbank forex rates
💰 Charges on Forex Sets standard charges for foreign transactions (remittances, currency conversion, etc.)
📚 Training Provides training for bank staff on forex-related areas
🤝 Standard Contracts Develops uniform documentation for international trade/FX

Page 79
🔐 Why Is It Important?
• It ensures uniformity in how forex is traded across Indian banks
• Supports RBI in exchange rate stability
• Helps importers/exporters with smooth forex processes

✅ Summary Chart:
Topic What It Does Who Uses It
AMFI Regulates mutual fund ecosystem Fund Houses, Investors, Distributors
FEDAI Standardizes forex transactions Banks, Importers, Exporters
📉 FIMMDA – Fixed Income Money Market and Deriva ves Associa on of India
🔹 What is FIMMDA?
FIMMDA is an industry body that represents participants in India’s debt markets, money markets, and derivatives markets.
It was established in 1998, and it works closely with RBI to bring uniformity and transparency to pricing, trading, and risk
management in these markets.

💼 Members Include:
• Commercial banks
• Insurance companies
• Mutual funds
• Primary dealers
• Financial institutions

🔧 What Does FIMMDA Do?

Role Explanation
📆 Publishes Benchmarks Like daily corporate bond yield curves, G-Sec prices
🧾 Standardization Of documentation, procedures, and accounting in bond/money markets
📚 Training For market participants in fixed income and derivative products
🔁 Market Development Helps develop new instruments like IRS, repos, etc.

🧠 Real Use Case:

Let’s say an NBFC wants to price a corporate bond.
👉 It refers to FIMMDA’s yield curves to decide the appropriate interest rate to offer.

💼 AIBI – Associa on of Investment Bankers of India

🔹 What is AIBI?
AIBI is a self-regulatory organization for all SEBI-registered Merchant Bankers in India.
Formed in 1993, it aims to protect investors' interests and promote best practices in the investment banking industry.

👔 Who Are Merchant Bankers?

They’re the guys who manage:
• IPOs
• FPOs
• Mergers & Acquisitions
• Corporate restructuring
• Private placements

🧾 AIBI's Main Functions:

Function Description
📜 Code of Conduct For merchant banking operations (IPOs, valuations, disclosures)
⚖ Representa on Bridges communication between SEBI and investment banks
📊 Data Publishes reports related to fundraising, market trends
📢 Advocacy Takes up industry concerns with regulators (like SEBI & RBI)

🧠 Real Example:
When a company wants to raise money via an IPO, it hires a merchant banker (e.g., ICICI Securities), which is likely a member of AIBI.

Page 80
 📈 FBIL – Financial Benchmark India Pvt. Ltd.
🔹 What is FBIL?
FBIL is the official benchmark administrator in India, tasked with publishing critical financial benchmarks, like the MIBOR, G-
sec yield curves, and Forex reference rates.
Established in 2014, as a joint initiative of:
• FIMMDA
• Foreign Exchange Dealers Association of India (FEDAI)
• IBA (Indian Banks’ Association)

🧾 Key Benchmarks Published by FBIL:

Benchmark Use
MIBOR / MIBID Interbank lending (overnight call money)
CD & CP Rates Short-term debt pricing
G-Sec Yield Curve Bond pricing
MIFOR Derivatives and forex-linked contracts
Treasury Bill rates Money market instruments

🧠 Why Is FBIL Important?

Before FBIL, RBI used to publish some of these rates, but after global reforms in benchmark administration (post LIBOR scam), India
created FBIL to make it independent and transparent.

📌 Role in Financial Ecosystem:

Market FBIL Role
Money Market Sets interbank rates like MIBOR
Bond Market Publishes G-Sec and corporate bond yield curves
Forex Market Fixes daily reference rates for INR exchange
🔚 Summary Table
Body Domain Main Function
FIMMDA Debt/Money/Derivatives Market Standardization, Benchmark Publishing
AIBI Investment Banking Regulates merchant banking practices
FBIL Benchmarks Publishes critical financial rates & benchmarks
📘 MUTUAL FUNDS – FULL DETAILED NOTES

🧠 1. What is a Mutual Fund?

A Mutual Fund (MF) is a financial instrument that pools money from multiple investors and invests that amount in a diversified
portfolio of stocks, bonds, money market instruments, or a combination of these.
🔹 These investments are managed by a professional expert called a Fund Manager, working under an Asset Management Company
(AMC).

🔁 How It Works (Simple Example):

You + 999 other investors = contribute ₹5000 each → AMC collects ₹50 lakh
AMC's fund manager invests this in 20 stocks + 10 bonds → profits/losses shared equally as per investment.

👥 Who Regulates Mutual Funds in India?

✅ Securities and Exchange Board of India (SEBI)
Governed under SEBI (Mutual Fund) Regulations, 1996

🏢 2. Structure of a Mutual Fund Organization

Role Entity Function
Sponsor Promoter Sets up the mutual fund
🏛 Trust Mutual Fund Trust Legally owns the fund
Trustees Oversight Body Ensures fund acts in investors’ interest
🧠 AMC – Asset Management Company Investment Manager Manages the portfolio
📊 Fund Manager Human brain of the fund Selects and manages assets
🧾 RTA – Registrar and Transfer Agent CAMS/KFintech etc. Handles investor accounts, statements, transactions

Page 81
🏦 Custodian Third-party bank Holds actual securities safely

🧃 3. Types of Mutual Funds

Let’s break this into categories:

🔷 A. Based on Asset Class

Type Where it Invests Risk Example
🟦 Equity Mutual Shares/Equity of companies High SBI Bluechip Fund
Fund
🟨 Debt Mutual Fund Bonds, T-bills, Corporate Debt Low to HDFC Corporate Bond Fund
Medium
🟩 Hybrid Fund Mix of Equity + Debt Moderate ICICI Balanced Advantage
Fund
🤍 Money Market Very short-term instruments like Treasury Bills, Certificates of Low Aditya Birla Money Market
Fund Deposit Fund

🔶 B. Based on Structure
Type Details Liquidity
🔓 Open-Ended Fund You can buy/sell units any time High
🔒 Closed-Ended Fund You can only invest during the launch period. Listed on stock exchange Moderate
🗓 Interval Fund You can invest/redeem only during specific time windows Low

🔴 C. Based on Investment Goal / Theme

Fund Type Purpose
💰 ELSS (Equity Linked Saving Scheme) Tax-saving under Section 80C, 3-year lock-in
🌐 Thematic/Sectoral Funds Invest in specific sectors like IT, Pharma
🧒 Children’s Fund Long-term investment for child’s future
👴 Retirement Fund Pension-linked savings; long lock-in
🌱 Sustainable Funds Invest in ESG-compliant companies (Environment, Social, Governance)

💬 4. Key Mutual Fund Terms (with Full Forms)

Term Full Form Meaning
NAV Net Asset Value Price per unit of a mutual fund: (Total Assets – Liabilities) / Total Units
SIP Systematic Investment Plan Invest a fixed amount monthly
SWP Systematic Withdrawal Plan Withdraw fixed amount regularly
STP Systematic Transfer Plan Transfer money between funds
AUM Assets Under Management Total value of all assets managed
Exit Load – Fee charged if you exit before a certain period
Expense Ratio – Annual fee charged by AMC (% of AUM)

⚖ 5. Taxa on of Mutual Funds (Basic Overview)

Fund Type Holding Period Tax Type Rate
Equity Fund >1 year LTCG (Long Term Capital Gains) 10% on gains > ₹1 lakh
Equity Fund ≤1 year STCG (Short Term Capital Gains) 15%
Debt Fund Any period As per Income Tax Slab No indexation (post 2023 rule changes)
📘 MUTUAL FUND REGULATIONS (In India) – FULL DETAILED NOTES

🧠 Regulator:
SEBI – Securities and Exchange Board of India
Mutual Funds in India are governed under the SEBI (Mutual Funds) Regulations, 1996, and amended frequently to improve
investor protection, transparency, and fair market practices.
the Asset Management Company (AMC) is the core legal entity responsible for managing mutual fund schemes. It operates under
the structure of a Mutual Fund Trust, which is set up by a Sponsor and registered with SEBI under the SEBI (Mutual Fund)

Page 82
the structure of a Mutual Fund Trust, which is set up by a Sponsor and registered with SEBI under the SEBI (Mutual Fund)
Regulations, 1996.
While the mutual fund itself is a trust, the AMC is the operational and investment manager. It houses the fund managers, handles
investor money, chooses investment instruments (like stocks, bonds, etc.), and ensures the scheme complies with SEBI regulations.
For example, HDFC Mutual Fund is the brand, but it is managed by HDFC Asset Management Company Ltd., which is a listed AMC.

🧱 STRUCTURE SETUP REQUIREMENTS

Entity Regulation
🏛 Sponsor Must contribute at least 40% to the net worth of the AMC (Asset Management Company)
Trustees Must be independent, oversee AMC’s compliance
🏢 AMC – Asset Management Company Must have minimum net worth of ₹50 crore
📊 Custodian Must be registered with SEBI to hold securities
🧾 RTA – Registrar & Transfer Agent Handles back-end processing & reporting
💼 Fund Manager Appointed by AMC, must meet SEBI’s fit & proper criteria

📄 REGISTRATION NORMS
Requirement Details
🆔 Registration MF must be registered with SEBI before launching schemes
🔐 Trustee-Trust Relationship All mutual funds operate under trust structure, approved by SEBI
🏦 Custody Securities held by a SEBI-registered custodian (not by AMC itself)

🔍 DISCLOSURE REQUIREMENTS
A. NAV and AUM
Disclosure Time
NAV – Net Asset Value Daily (published on AMC website + AMFI website)
AUM – Assets Under Management Monthly, Quarterly, and Annually
B. Portfolio Disclosure
SEBI mandates monthly portfolio disclosure of all schemes showing:
• Investment holdings
• Credit rating of instruments
• Industry/sector allocation
• Modified duration & risk levels

🏷 EXPENSE RATIO REGULATION

Expense Ratio = Annual % of fund assets taken as fee by AMC for managing the scheme.
AUM Slab Maximum TER (Total Expense Ratio) – Equity TER – Debt
Up to ₹500 crore 2.25% 2.00%
₹500 cr – ₹750 cr 2.00% 1.75%
₹750 cr – ₹2,000 cr 1.75% 1.50%
Above ₹50,000 cr 1.05% 0.80%
✅ SEBI restricts TER to protect investors from hidden costs.

🔒 INVESTMENT LIMITS / EXPOSURE NORMS

Limit Details
Single stock exposure Max 10% of NAV (Equity schemes)
Group exposure Max 25% in group companies
Sectoral exposure (for debt funds) 25% per sector; 10% in unlisted debt
Liquid Funds Can’t invest in risky instruments like equity or below-AA rated debt papers

🚫 ADVERTISEMENT & PROMOTION NORMS

Mutual fund promotions must clearly state risks, avoid mis-selling, and use Risk-o-Meter labels.
✅ Mandatory in all ads:
• Scheme category
• Risk level (Very Low to Very High)

Page 83
 • Risk level (Very Low to Very High)
• Performance comparison (vs. benchmark)
• “Mutual Fund investments are subject to market risks...” disclaimer

⚖ SEBI's INVESTOR PROTECTION MEASURES

Measure Explanation
🧾 KYC Norms Mandatory for all investors
📉 Risk-o-Meter Displayed on factsheets and websites to indicate scheme risk
📦 Side-pocketing Rule In case of credit default in debt funds, segregated portfolio allowed
📬 Periodic Communication Monthly account statement + half-yearly consolidated report
🚨 Early warning systems For stressed schemes to avoid Franklin-type crises

🔄 EXIT LOAD & LOCK-IN

Type Rule
ELSS Lock-in of 3 years (mandatory)
Open-Ended Funds Exit load as per scheme (0–1% typically for <1 year exit)
Close-Ended Funds Locked for the maturity period

🔍 AUDIT & COMPLIANCE

• Mutual Funds must undergo independent annual audits
• AMCs must appoint compliance officers
• Quarterly compliance reports to be submitted to SEBI

🧾 TAX REGULATIONS (Investor Side)

Fund Type Holding Period Tax
Equity Fund >1 year LTCG – 10% on gains > ₹1 lakh/year, Gains up to ₹1 lakh/year are exempt in LTCG.
Equity Fund ≤1 year STCG – 15%
Debt Fund Any period Added to income & taxed as per slab (no indexation post-2023)
ELSS Lock-in 3 years LTCG applicable post lock-in

🏦 MONEY MARKET FUND REFORMS (Post Franklin Crisis)

Reform Details
Reduced maturity Liquid Funds can invest in papers ≤91 days only
Mark-to-market Valuation must reflect market price even in liquid schemes
No upfront commission All fees are paid from expense ratio only
Credit risk cap A debt mutual fund can invest maximum 10% of its total money in one company, only if the company is
rated AA or above by a credit rating agency.
📘 ⃣ Exchange Traded Fund (ETF– Full Noteses

🧠 What is an ETF?
An Exchange Traded Fund (ETF) is a type of mutual fund that is traded on a stock exchange, just like a stock.
🔸 It combines features of:
• Mutual Funds (diversification, pooling of money)
• Stocks (can be bought/sold during trading hours)

🎯 Example:
If you invest in a NIFTY 50 ETF, your money gets invested in all 50 companies of the Nifty index — but you buy it like a stock from
NSE/BSE.

🛠 How ETFs Work:

Feature Explanation
📊 Traded on Exchange You buy/sell it like shares using a trading account
🧮 NAV + Market Price Has Net Asset Value (NAV) but trades at market price
🧰 Usually follows an index like Nifty 50, Sensex, Gold, etc.

Page 84
🧰 Portfolio Replication Usually follows an index like Nifty 50, Sensex, Gold, etc.
💸 Transparent Pricing Prices change throughout the day (like stocks)
⚖ No Fund Manager Bias Most ETFs are passively managed – no stock picking

💼 Types of ETFs in India:

ETF Type What it Tracks
📈 Index ETF NIFTY 50, Sensex, Nifty Bank etc.
🪙 Gold ETF Price of physical gold
💸 Debt ETF Government securities or bonds
🌍 International ETF Foreign indices like Nasdaq 100
🔁 Sectoral ETF IT, Pharma, FMCG etc.

📜 Who Regulates ETFs?

✅ SEBI (Securities and Exchange Board of India)
• Listed on stock exchanges like NSE and BSE

✅ Pros of ETFs:
• Lower expense ratio (cheaper than MFs)
• High liquidity (buy/sell anytime during market hours)
• Transparent (you always know what you're holding)
• Good for passive investors

❌ Cons of ETFs:
• Need a Demat + Trading account
• Brokerage charges apply
• Not suitable for SIPs (Systematic Investment Plans)
📘 ⃣ ELS– Equity Linked Savings Scheme (Tax Saver Mutual Fund)d)

🧠 What is ELSS?
An Equity Linked Savings Scheme (ELSS) is a mutual fund scheme that invests primarily in equities and also provides tax
benefits under Section 80C of the Income Tax Act.

🪙 Key Highlights:
Feature Details
💰 Tax Deduction Eligible for ₹1.5 lakh deduction under Section 80C
🔐 Lock-in Period 3 years (shortest among all tax-saving options)
📈 Returns Market-linked, depends on equity performance
📦 Diversification Fund manager invests across large, mid, small-cap stocks
📊 Mode Lump sum or via SIP (Systematic Investment Plan)

🧾 Taxation:
Type Tax Rate
Short-Term Capital Gains (STCG) Not applicable due to 3-year lock-in
Long-Term Capital Gains (LTCG) 10% on gains above ₹1 lakh/year

📌 Pros of ELSS:
• Dual benefit: Wealth creation + Tax saving
• Short lock-in compared to PPF (15 years) or NSC (5 years)
• Encourages long-term investing

❗ Cons of ELSS:
• Market risk (since it's equity-based)
• Lock-in means you can't access funds for 3 years
• No guaranteed returns like PPF or FD
🧠 ETF vs ELSS – Quick Comparison
Feature ETF ELSS

Page 85
Feature ETF ELSS
Management Passive Active
Liquidity Anytime during market hours Locked for 3 years
Tax Benefit ❌ No ✅ Yes (under Sec 80C)
Demat Account Needed? ✅ Yes ❌ No
Expense Ratio Lower Higher
SIP Option ❌ Hard to set up ✅ Easy

✅ Section 80C
Section 80C is a provision under the Income Tax Act of India that allows tax deductions up to ₹1.5 lakh per financial year on certain
investments or expenses.

👇 Eligible investments/expenses under 80C:

Eligible Instrument Description
ELSS Equity Linked Savings Scheme (Mutual Funds)
PPF Public Provident Fund
EPF Employee Provident Fund
LIC Premiums Life insurance
NSC National Savings Certificate
Principal Repayment Of Home Loan
5-Year FD Tax-saving Fixed Deposit
Sukanya Samriddhi Yojana For girl child
📌 So, when you invest in ELSS mutual funds, you can claim a deduction up to ₹1.5 lakh under Section 80C and still earn
market-linked returns!
🌐 1. Social Stock Exchange (SSE)
✅ What is it?
A Social Stock Exchange (SSE) is a separate segment within existing stock exchanges (like BSE, NSE) where non-profit organizations
(NPOs) and for-profit social enterprises (FPEs) can raise funds from the public.
🚨 Unlike regular companies that raise capital to grow business, SSE entities raise capital to create social impact (education,
health, poverty alleviation, etc.)

📌 Key Features:
Feature Details
Purpose To provide visibility and fundraising opportunities for entities doing measurable social work
Launched By SEBI (framework issued in 2022), platform launched on BSE in 2023
Who Can List? NGOs, charitable trusts, Section 8 companies, social enterprises
Fundraising Instruments Zero Coupon Zero Principal (ZCZP) bonds, donations, impact bonds, mutual funds, etc.
Eligibility Must work in at least one of the 16 social impact areas (e.g. education, hunger, gender equality, etc.)
Reporting Must provide Annual Impact Report + Financial disclosures

🧠 Full Forms:
• ZCZP Bonds = Zero Coupon Zero Principal Bonds → No interest, no principal repayment → purely for social donation purpose,
not investment

🎯 Why Important?
• Bridges the gap between philanthropy and finance
• Increases transparency and accountability in social sector funding
• India became the first country to introduce SSE within a regulated framework

🪙 2. Gold Exchange
✅ What is it?
A Gold Exchange is a regulated electronic platform where gold can be traded in the form of standardized units called Electronic Gold
Receipts (EGRs) — just like shares of companies.
Think of it as a stock exchange for gold — but in digital, dematerialized form.

Page 86
📌 How It Works:
Step Description
Person deposits physical gold with a SEBI-registered vault manager
Vault manager issues Electronic Gold Receipt (EGR)
EGR gets listed on recognized stock exchanges (NSE, BSE)
Investors can buy/sell EGRs like stocks
EGR can be converted back to physical gold (on demand)

🧠 Benefits:
• ✅ Transparent pricing (linked to actual market rate)
• ✅ No concerns about gold purity — only 99.5% or 999 purity accepted
• ✅ Reduces dependence on unorganized gold trade
• ✅ Promotes financialization of gold in India

🛡 SEBI's Role:
SEBI regulates the:
• Vault Managers
• EGR issuance & trading
• Clearing Corporations
• Exchanges

🎯 Real-life Use Case:

Instead of buying physical gold (jewellery, bars), you can invest in EGRs on the stock exchange → store it safely digitally →
redeem when needed.

🧠 Quick Recap Table:

Feature Social Stock Exchange Gold Exchange
Regulated by SEBI SEBI
Launch Year 2022 (Framework), 2023 (Platform) 2022
Target Social Enterprises/NGOs Gold Investors
Product ZCZP Bonds, Donations, Impact Funds EGR (Electronic Gold Receipts)
Purpose Social impact funding Transparent & regulated gold trading

📊 Financial Markets – Full Notes

🔹 What Are Financial Markets?

Financial markets are platforms/institutions where people buy and sell financial instruments like stocks, bonds, currencies,
derivatives, etc.
They help:
• Mobilize savings into investments
• Determine prices of assets
• Provide liquidity
• Facilitate risk transfer via derivatives
• Act as a barometer of economic health
Financial Markets in India
├── A. Money Market (Short-term funds ≤ 1 year)
│ ├── Treasury Bills (T-Bills)
│ ├── Commercial Papers (CPs)
│ ├── Cer ficates of Deposit (CDs)
│ ├── Call Money
│ ├── No ce Money
│ └── Term Money
│
├── B. Capital Market (Long-term securi es > 1 year)
│ ├── Equity Market
│ │ ├── Primary Market (IPO, FPO, Rights Issue)
│ │ └──

Page 87
│ │ └── Secondary Market (Trading of listed shares)
│ │
│ └── Debt Market
│ ├── Primary Market (Fresh issue of bonds, G-Secs, SDLs)
│ └── Secondary Market (Trading of existing bonds, G-Secs, SDLs)
│
├── C. Forex (Foreign Exchange) Market
│ ├── Currency Pairs (USD/INR, EUR/USD, etc.)
│ ├── Currency Deriva ves
│ └── Spot, Forward, Futures, Swaps
│
└── D. Commodity Market
├── Agricultural Commodi es (Wheat, Rice, Co on)
├── Metals (Gold, Silver, Copper)
├── Energy (Crude Oil, Natural Gas)
└── Exchanges: MCX, NCDEX

🧩 Types of Financial Markets

1. Money Market
• 🔁 Short-term borrowing and lending
• 🕒 Maturity: Less than 1 year
• Participants: Banks, RBI, Government, Corporates
🔹 Key Instruments:
Instrument Maturity Issuer
Treasury Bills (T-Bills) 91, 182, 364 days Government of India
Certificate of Deposit (CD) 7 days to 1 year Banks
Commercial Paper (CP) 7 days to 1 year Corporates
Call Money 1 day Banks (interbank market)
Notice Money 2–14 days Banks
Repo/Reverse Repo 1–14 days RBI vs Banks
💡 Regulator: Reserve Bank of India (RBI)

2. Capital Market
• 📆 Long-term funds market
• Maturity: More than 1 year
• Divided into Equity and Debt markets
1. EQUITY MARKET
🔹 A. Primary Market (New Issue Market)
• Where securities are issued for the first time
• IPOs (Initial Public Offerings)
• FPOs (Follow-on Public Offers)
• Private Placement
🔹 B. Secondary Market (Stock Market)
• Existing securities are traded among investors
• E.g. NSE (National Stock Exchange), BSE (Bombay Stock Exchange)
💡 Regulator: Securities and Exchange Board of India (SEBI)
2. DEBT MARKET
A. Primary market
B. Secondary market
Feature Capital Market Money Market
Primary & Secondary ✅ Yes — clearly divided 🚫 No — not formally divided
Markets?
Primary Market New issuance of shares/bonds to public Issuance of instruments like T-Bills, CPs, CDs by
govt/banks/corporates
Secondary Market Stock exchanges (NSE/BSE), where Limited & informal – mostly via Over The Counter (OTC)
shares/debts are traded markets for short-term debt
3. Foreign Exchange Market (Forex/FX Market)
• 🏦 Market where currencies are bought/sold
• India follows managed floating exchange rate

Page 88
 • India follows managed floating exchange rate
• Main player: RBI (for intervention), banks, exporters/importers
💡 Exchange Rate System = Flexible with RBI intervention

4. Derivatives Market
The Derivative Market is the financial marketplace where derivatives are bought and sold — either for hedging risk, speculation, or
arbitrage.
You’re not buying the actual asset — you’re betting on its future prices.
• Based on underlying assets: stocks, bonds, interest rates, currencies
• Instruments: Futures, Options, Swaps, Forwards
Used for:
• Hedging risk
• Speculation
• Arbitrage
💡 Regulated by: SEBI and RBI (for currency/interest rate derivatives)

🏦 Financial Market Regulators in India

Regulator Area
RBI (Reserve Bank of India) Money Market, Government Securities, Forex
SEBI (Securities and Exchange Board of India) Capital Market, Derivatives, Mutual Funds
IRDAI (Insurance Regulatory and Development Authority of India) Insurance sector
PFRDA (Pension Fund Regulatory and Development Authority) Pension products (like NPS)
FMC (Forward Markets Commission) – Now merged with SEBI Earlier used to regulate commodity futures

🧾 Key Institutions
Institution Role
NSE/BSE Stock Exchanges
CCIL (Clearing Corporation of India Ltd.) Settles trades in money, bond, and forex markets
NSDL/CDSL Depositories for electronic securities
CRAs (Credit Rating Agencies) Rate debt instruments
AMCs (Asset Management Companies) Manage mutual funds

🔍 Importance of Financial Markets

• Efficient allocation of capital
• Improves liquidity in the system
• Helps in price discovery (e.g. stock prices, interest rates)
• Facilitates monetary policy transmission
• Encourages savings and investments

🧾 Summary Chart
Market Time Horizon Key Instruments Regulator
Money Market <1 year T-bills, CP, CD, Call Money RBI
Capital Market >1 year Shares, Bonds, Debentures SEBI
Forex Market Real-time USD, EUR, INR RBI
Derivatives Market Variable Futures, Options SEBI/RBI

🧠 Hot RBI/Exam Angles

• RBI's role in monetary policy transmission via repo, reverse repo
• SEBI reforms in IPO, SME listing, Mutual Funds
• Foreign participation limits in Indian capital markets (FPI caps)

MONEY MARKET

Aye aye, Sassy! No formality, no fluff. Just the real deal, raw and slightly extra — exactly how you like it. Here’s a more detailed and
informal breakdown of all the financial market instruments — let’s deep dive like you’re explaining it to someone else, not just
learning it yourself.

🟢 ≤

Page 89
🟢 MONEY MARKET — "Short-term loans and trades (≤ 1 year)"
This market is basically a liquidity playground for banks, companies, and govts. No equity drama here, just cold, fast cash moves.
1. Treasury Bills (T-Bills)
• Issued by: Govt. of India
• Tenure: 91, 182, 364 days (ALWAYS less than 1 year)
• Interest? Nah. These are zero-coupon bonds — you buy them at a discount, and the govt pays you the full value later.
🟨 Example: Buy for ₹96,000 → Get ₹1,00,000 after 91 days = ₹4K profit.
💡 Risk-free. Guaranteed. RBI auctions them on behalf of the government.

2. Commercial Papers (CPs)

• Issued by: Big corporates with solid credit ratings
• Tenure: 7 days to 1 year
• No collateral. Just pure reputation.
🟨 Example: Tata wants short-term funds → issues CP → you lend → they return with interest.
💡 You need to be rich or a big investor to buy CPs (usually ₹5 lakh+ face value).

3. Certificates of Deposit (CDs)

• Issued by: Banks & Financial Institutions
• It’s like a fixed deposit, but tradable in the market.
🟨 Example: HDFC Bank raises ₹50 crores through CDs for 6 months at 7%.
💡 High interest, low risk. Can be sold before maturity.

4. Call Money
• Overnight loans between banks.
🟨 Example: SBI is short ₹200 crores today to maintain CRR → borrows from ICICI for 1 night → pays it back tomorrow with ny
interest.
💡 It’s like banks saying: “Bhai kal paisa wapas de dena, mujhe RBI ko CRR dena hai.”

5. Notice Money
• Same as call money, but maturity between 2–14 days.

6. Term Money
• Interbank lending with maturity > 14 days up to 1 year.
💡 These are longer short-term funds (oxymoron much?) for institutions who need liquidity but not instantly.

🔵 CAPITAL MARKET — "Long-term finance wala world (> 1 year)"

➤ Split into two chunks:
I. Equity (shares = ownership)
II. Debt (bonds = loan giving)

🔷 EQUITY MARKET
Perfect, Sassy! Let’s now deep dive into Equity Markets and Bond Markets, just like we did with the Money Market. This time, we’ll
go full beast mode:
📘 Textbook-style, 🔍 conceptual clarity, 🔤 no abbreviation unexplained, and 📑 exam-ready.

🔴 PART 1: EQUITY MARKETS

📌 A. What is an Equity Market?
Equity Market is a marketplace where shares (equity) of companies are issued and traded, either through:
• Primary Market (new shares issued via IPO)
• Secondary Market (already-issued shares traded among investors)
🔁 It’s where companies raise funds and investors buy ownership stakes in firms.

📌 B. Types of Equity Market:

1. Primary Market:
○ Company issues shares to public for the first time (IPO – Initial Public Offering)
○ Capital is raised directly by the company.
○ Includes: IPOs, FPOs (Follow-on Public Offer), Rights Issues, Private Placements.
2. Secondary Market:
○ Trading of existing shares on stock exchanges like BSE, NSE.
○ No capital goes to the company—investors trade among themselves.

📌 C. Why Equity Market?

🏢

Page 90
 • 🏢 For Companies:
○ Raise capital without taking debt.
○ No repayment pressure.
• For Investors:
○ Ownership in the company.
○ Right to vote & receive dividends.
○ Capital appreciation (stock price rise).

📌 D. Key Advantages of Equity Market:

Advantage Explanation
✅ Capital Formation Helps businesses grow via non-debt funding.
✅ Liquidity Investors can buy/sell anytime.
✅ Transparency & Regulation SEBI regulates everything.
✅ High Return Potential Equities beat inflation over long term.
✅ Diversification Investors can invest in various sectors/stocks.

📌 E. Disadvantages of Equity Market:

Disadvantage Explanation
❌ High Risk Stocks are volatile. Can fall sharply.
❌ No Guaranteed Returns Unlike bonds or FDs.
❌ Information Asymmetry Retail investors may lack access to insider info.
❌ Dilution of Ownership More shares = less control per shareholder.

📌 F. How the Equity Market Works?

1. Company wants funds → issues shares via IPO
2. SEBI approval → Dra Red Herring Prospectus (DRHP)
3. Shares are priced → Listed on exchange
4. Investors subscribe → Shares allocated
5. Shares start trading in secondary market

📌 G. Important Equity Market Terms (Definitions + Concepts):

Term Meaning
Equity Share Unit of ownership in a company.
IPO Initial Public Offering; 1st time a company sells shares.
FPO Follow-on Public Offer; subsequent share sale.
Rights Issue Existing shareholders offered new shares at discount.
Bonus Issue Free additional shares to existing shareholders.
Dividend Share of profit distributed to shareholders.
Market Capitalization Total value of a company = Share price × Total shares.
PE Ratio Price-to-Earnings ratio: valuation metric.
Green Shoe Option Stabilization mechanism in IPO: allows selling extra shares to control price volatility.
Circuit Breaker Limit set on how much stock/index can rise/fall in a day.
Buyback Company buys its own shares from market, reducing supply.
Demat Account Electronic account to hold shares.
Trading Account Used to buy/sell shares on stock exchange.
Underwriter Entity (usually a bank) that guarantees IPO subscription.
Book Building Process to discover IPO price through investor bids.

📌 H. Equity Indexes:
Index Meaning
Sensex 30 large companies listed on BSE.
Nifty 50 50 large companies listed on NSE.

Page 91
Midcap/Smallcap Index Track medium and small-sized companies.

📌 I. Regulators & Institutions:

• SEBI (Securities and Exchange Board of India) – Regulates.
• Stock Exchanges (NSE, BSE) – Platforms for trading.
• NSDL/CDSL – Depositories where Demat accounts are held.

📌 J. Taxation:
Type of Gain Holding Period Tax
Short-Term Capital Gain (STCG) < 1 year 15% flat
Long-Term Capital Gain (LTCG) > 1 year 10% (if gains > ₹1 lakh/year)
🔶 1. Price-to-Earnings Ratio (P/E Ratio)
✅ What is it?
The P/E Ratio (Price-to-Earnings Ratio) measures how much investors are willing to pay for ₹1 of a company’s earnings. It reflects
valuation of a company.
Formula:
P/E Ratio = Market Price per Share / Earnings per Share (EPS)

✅ What does it indicate?

Type Meaning
🔼 High P/E Investors expect high future growth. Company may be overvalued.
🔽 Low P/E Company may be undervalued or have weak growth prospects.

✅ Types:
• Trailing P/E: Based on past 12 months earnings.
• Forward P/E: Based on estimated future earnings.

✅ Example:
If share price = ₹100 and EPS = ₹10, then
👉 P/E = ₹100 / ₹10 = 10
Meaning: Investors are paying ₹10 for every ₹1 of company’s earnings.

✅ Limitations:
• Doesn’t consider growth rate, debt, or future potential.
• Can be misleading if earnings are artificially low/high.

🔶 2. Green Shoe Option

✅ What is it?
The Green Shoe Option is a price-stabilization mechanism used in IPOs to protect the stock from extreme price volatility.
It allows the company’s underwriter to sell more shares (usually up to 15%) than initially planned if demand is high.

✅ Why is it called “Green Shoe”?

Named after Green Shoe Manufacturing Company, the first to use this option in an IPO in the US.

✅ How it works:
Let’s say an IPO plans to issue 1 crore shares.
Under the Green Shoe Option, the underwriters can sell 1.15 crore shares (15% extra) to stabilize prices.
If the share price rises a lot post-listing:
• Extra 15% shares already sold in anticipation.
• Company issues more shares to cover.
If the share price falls:
• Underwriters buy back shares from the market to support the price.

✅ Benefits:
For Issuer For Market
More capital raised if oversubscribed. Reduces post-IPO price volatility.
Increased investor confidence. Adds stability and fairness.

Page 92
✅ Used in India?
Yes, permitted under SEBI guidelines for IPOs. Underwriters file stabilization agreement.

🔶 3. Circuit Breaker
✅ What is it?
A Circuit Breaker is a regulatory tool used to temporarily halt trading in stock markets when prices move beyond a certain limit,
either up or down, to prevent panic selling or excessive speculation.

✅ Who sets circuit breakers?

SEBI sets circuit limits for indices (Sensex/Nifty) and individual stocks.

✅ Types:
• Index-based Circuit Breakers: Applied when Sensex/Nifty moves 10%, 15%, or 20% in a day.
• Stock-specific Circuit Limits: Usually 2%, 5%, 10%, or 20% daily movement allowed.

✅ Purpose:
Goal Explanation
⛔ Control Volatility Prevents irrational panic buying/selling.
⏸ Time for Cooling Gives time for investors to reassess.
✅ Market Stability Restores investor confidence.

✅ Example:
If Nifty rises/falls by 10% before 1 PM:
• Trading halts for 45 minutes.
• Resumes in phases depending on the percentage moved.

🔶 4. Buyback of Shares
✅ What is it?
A Buyback is when a company repurchases its own shares from the existing shareholders, reducing the number of outstanding shares
in the market.

✅ Why do companies do it?

Reason Benefit
✅ Increase EPS Fewer shares = higher Earnings Per Share.
✅ Return surplus cash Alternative to dividend.
✅ Support stock price Shows company confidence in its stock.
✅ Prevent hostile takeovers Fewer shares available for outsiders.

✅ Types:
1. Open Market Buyback: Through stock exchange over a period.
2. Tender Offer Buyback: Company offers to buy a specific quantity at a fixed price directly from shareholders.
3. Buyback via Book Building: Less common in India.

✅ Legal Guidelines:
• Regulated by Companies Act, 2013 and SEBI Buyback Regulations.
• Max limit: 25% of total paid-up equity capital and free reserves in a financial year.

✅ Effects:
• ✅ Improves financial ratios (EPS, ROE).
• ❌ Reduces available cash.
• ❌ May signal lack of better investment opportunities.

🔶 5. Book Building Process

✅ What is it?
Book Building is a process of discovering the price of shares during an IPO through bidding by investors.

✅ Why is it used?
To ensure fair pricing of IPO shares based on market demand, rather than fixed pricing.

Page 93
✅ Process:
Step Description
Company files DRHP with SEBI.
Price band is decided (e.g., ₹100–₹120).
Investors bid for number of shares and price within band.
Book is built by collec ng all bids.
Cut-off price is decided where shares can be fully subscribed.
Shares are allo ed.

✅ Types of Investors:
• QIBs – Qualified Institutional Buyers (banks, FIs).
• NIIs – Non-Institutional Investors (HNWIs).
• Retail – Small investors (< ₹2 lakh per bid).

✅ Example:
If 3 price bids were made:
• A bids for 10,000 shares at ₹120
• B bids 20,000 shares at ₹110
• C bids 70,000 shares at ₹100
Total demand = 1,00,000 shares
Let’s say company wants to issue only 90,000 shares
So cut-off is at ₹110 (where 90k bids are received)

✅ Benefits:
• ✅ Transparent pricing
• ✅ Better price discovery
• ✅ Encourages institutional participation
Yesss Sassy! 😎🔥 Just like we classify bonds across multiple dimensions (issuer, tenure, coupon, etc.), we can absolutely classify
equity shares using multiple parameters too!
So here’s your complete, textbook-style breakdown of the:
🔴 Types and Classifications of Equity Shares
(Just like what we did for bonds)

🔴 TYPES & CLASSIFICATIONS OF EQUITY (SHARES)

✅ 1. Based on Rights Attached

Type Meaning
Ordinary / Common Standard equity shares with voting rights, dividend depends on profit.
Shares
Preference Shares Have preferential rights over ordinary shares in dividend and capital repayment but usually no voting
rights.

✅ 2. Based on Voting Rights

Type Feature
Voting Shares Shareholders have right to vote in company decisions.
Non-Voting Shares No voting power (may still get dividends).
Differential Voting Rights (DVR) Lower or higher voting power per share. E.g., 1/10th vote but higher dividend. Used in India (e.g.,

Page 94
Differential Voting Rights (DVR) Lower or higher voting power per share. E.g., 1/10th vote but higher dividend. Used in India (e.g.,
Shares Tata Motors DVRs).

✅ 3. Based on Stage of Issue

Type Description
Authorized Share Capital Maximum capital a company is legally allowed to raise (mentioned in MoA).
Issued Share Capital Part of authorized capital offered to investors.
Subscribed Share Capital Part of issued capital actually subscribed by shareholders.
Paid-Up Capital Portion of subscribed capital that shareholders have actually paid.
Bonus Shares Free shares issued to existing shareholders from reserves.
Rights Shares Offered to existing shareholders at discount, in proportion to their holding.

✅ 4. Based on Listing Status

Type Description
Listed Shares Shares listed on a recognized stock exchange (e.g., NSE, BSE).
Unlisted Shares Shares not traded on any stock exchange (e.g., shares of a private limited company).

✅ 5. Based on Convertibility
Type Description
Convertible Shares Shares that can convert into another type (e.g., preference → equity).
Non-Convertible Shares Cannot be converted into any other instrument. Most equity shares fall under this.

✅ 6. Based on Holding Nature

Type Description
Promoter Shares Held by founders/promoters. May have lock-in period.
Retail Investor Shares Held by general public (< ₹2 lakh investment).
Institutional Investor Shares Held by FII, DII, mutual funds, insurance companies.

✅ 7. Based on Ownership / Beneficiary

Type Explanation
Beneficial Owner Shares Held by investors in Demat account.
Nominee Shares Shares held by one person on behalf of another.
Treasury Shares Bought back by the company; held in company’s own account. No voting/dividend rights. Rare in India.

✅ 8. Based on Market Segmentation (Index Classification)

Type Description
Large Cap Top 100 companies by market cap. (e.g., Reliance, TCS)
Mid Cap Ranked 101–250. Moderate risk & return.
Small Cap 251+ rank. High risk, high reward.
Penny Stocks Shares with very low market price, usually < ₹10. Risky.

✅ 9. Based on Purpose/Issuance
Type Description
Sweat Equity Shares Issued to employees/directors for their knowledge/work. No cash.
Employee Stock Option Plan (ESOPs) Option given to employees to buy company shares at discount.
Private Placement Shares Issued to selected investors, not via public offer.
Preferential Allotment Shares issued to specific investors (QIBs, PE firms) on preferential basis.

✅ 10. Based on Dividend Declaration

Type Description
Dividend Paying Shares Regular dividend declared. Usually stable blue-chip companies.

Page 95
Dividend Paying Shares Regular dividend declared. Usually stable blue-chip companies.
Growth Shares Reinvest profits for expansion. Low or no dividend but high capital gain.

📌 Summary Snapshot:
Classification Examples
Rights Common, Preference
Voting Voting, DVR, Non-voting
Issue Stage Authorized, Paid-up, Bonus, Rights
Listing Listed, Unlisted
Convertibility Convertible, Non-convertible
Investor Type Promoter, Retail, FII
Ownership Beneficial, Nominee, Treasury
Size Large/Mid/Small Cap
Purpose Sweat Equity, ESOPs, Private Placement
Dividend Policy Dividend-paying, Growth>

🔵 PART 2: BOND MARKETS

📌 A. What is a Bond Market?
Bond Market is a financial market where investors buy and sell debt securities, usually in the form of bonds issued by governments,
companies, or institutions.
📢 Bonds = Loan given by investors to issuer in exchange for interest income.

📌 B. Types of Bond Market:

1. Government Securities (G-Sec) Market:
○ RBI auctions bonds like T-bills, dated securities.
○ Examples: G-Secs, SDLs (State Development Loans), Treasury Bills.
2. Corporate Bond Market:
○ Companies issue bonds to raise long-term funds.
○ Rated by credit rating agencies (CRISIL, ICRA, etc.)

📌 C. Why Bond Market?

• Lower risk than equity.
• Steady interest income (coupon).
• Useful for portfolio diversification.
• Essential for funding government expenditure & infra projects.

📌 D. Advantages of Bonds:
Advantage Explanation
✅ Predictable Income Fixed interest (coupon) paid periodically.
✅ Capital Preservation Safer than stocks (especially sovereign bonds).
✅ Diversification Adds balance to riskier equity portfolio.
✅ Tax Benefits Some govt bonds offer tax-free income.

📌 E. Disadvantages of Bonds:
Disadvantage Explanation
❌ Lower Returns Compared to stocks, returns are modest.
❌ Inflation Risk Fixed interest may lose value due to inflation.
❌ Interest Rate Risk Prices fall when interest rates rise.
❌ Credit Risk Especially with corporate bonds. Default chance.

📌 F. Key Bond Terminologies:

Term Meaning
Bond Loan instrument with maturity + interest.

Page 96
Bond Loan instrument with maturity + interest.
Issuer Entity issuing the bond (Govt, company).
Coupon Rate Annual interest paid on bond (e.g. 7%).
Face Value Original value of bond (e.g. ₹1000).
Yield Actual return based on market price.
Maturity Time after which bond is repaid.
Credit Rating Risk level of bond repayment (AAA is safest).
Callable Bond Issuer can redeem early.
Zero Coupon Bond Issued at discount, no interest paid.
Perpetual Bond No maturity. Interest paid forever.
G-Secs Bonds issued by Government of India.
T-Bills Short-term govt securities (< 1 year).
SDLs State Development Loans (issued by states).
PSU Bonds Bonds issued by Public Sector Undertakings.

📌 G. Bond Valuation:
Bond Price = Present value of (future interest payments + principal)
Affected by:
• Interest Rates (inverse relation)
• Credit Ratings
• Time to maturity

📌 H. Key Institutions:
• RBI: Manages public debt, auctions G-Secs.
• SEBI: Regulates corporate bond market.
• FIMMDA: Financial Markets Dealers Association (benchmarking).
• CCIL: Clearing Corporation of India – settlement.

📌 I. Bond Trading Platforms:

• NDS-OM (Negotiated Dealing System - Order Matching)
• Retail Direct (RBI’s portal for individuals)
• BSE/NSE Bond Platforms (for corporates)

📌 J. Taxation on Bonds:
Type Tax Implication
Interest Income Taxable as per income slab.
Capital Gains STCG/LTCG based on holding & bond type.
Tax-Free Bonds Interest is exempt (e.g. issued by PFC, NHAI).
Absolutely, Sassy! Here's a comprehensive, exam-oriented list of the different types of bonds in the bond market — categorized
using every possible classification like issuer, coupon structure, tenure, convertibility, market type, currency, etc. 🌈📘

🔵 TYPES OF BONDS IN BOND MARKET (All Classifications)

✅ 1. Based on Issuer
Type Issued By Example
Government Bonds / G-Secs Central Government 10-year G-Sec
State Development Loans (SDLs) State Governments SDL by Govt. of Maharashtra
Municipal Bonds Urban Local Bodies (ULBs) Pune Municipal Corporation Bonds
Corporate Bonds Private/Public Corporates TATA Capital NCDs
Public Sector Undertaking (PSU) Bonds Government-owned companies NHAI, PFC Bonds
Multilateral Institution Bonds Institutions like World Bank, ADB World Bank Rupee-linked Bonds

✅ 2. Based on Coupon Rate Structure

Type Meaning
Fixed Rate Bonds Pay fixed interest throughout tenure.

Page 97
Fixed Rate Bonds Pay fixed interest throughout tenure.
Floating Rate Bonds (FRBs) Coupon rate changes periodically based on benchmark (e.g., MCLR, repo rate).
Zero Coupon Bonds (ZCBs) No periodic interest. Issued at discount and redeemed at face value.
Step-Up Bonds Interest rate increases over time.
Step-Down Bonds Interest rate decreases over time.
Inflation-Indexed Bonds (IIBs) Interest + principal adjusted to inflation index like WPI/CPI.

✅ 3. Based on Tenure (Maturity Period)

Type Tenure
Short-term Bonds < 1 year (e.g., Treasury Bills)
Medium-term Bonds 1–5 years
Long-term Bonds > 5 years (e.g., 10-year G-Sec)
Perpetual Bonds No maturity; interest paid indefinitely (e.g., AT-1 bonds)

✅ 4. Based on Convertibility
Type Meaning
Convertible Bonds Can be converted into equity shares at a later date.
Partially Convertible Bonds A part of bond is converted to equity.
Non-Convertible Debentures (NCDs) Cannot be converted into shares. Mostly used by companies.

✅ 5. Based on Market Type

Type Where Traded
Primary Market Bonds Issued for first time to investors (IPO of bonds).
Secondary Market Bonds Already-issued bonds traded among investors (on BSE/NSE or NDS-OM).

✅ 6. Based on Security
Type Meaning
Secured Bonds Backed by collateral/security (e.g., asset, revenue stream).
Unsecured Bonds No backing; higher risk (e.g., subordinated debt).

✅ 7. Based on Currency
Type Explanation
Domestic Currency Bonds Issued and repaid in local currency (e.g., INR bonds in India).
Foreign Currency Bonds Issued in a foreign currency (e.g., USD Bonds).
Masala Bonds Rupee-denominated bonds issued abroad by Indian entities.
Samurai Bonds Yen-denominated bonds issued in Japan by foreign entities.
Dim Sum Bonds Chinese Yuan-denominated bonds issued outside mainland China.

✅ 8. Based on Tax Treatment

Type Explanation
Taxable Bonds Interest is taxable (e.g., most corporate bonds).
Tax-Free Bonds Interest is exempt from income tax (e.g., bonds by NHAI, REC, IRFC).
Capital Gain Bonds (54EC) Exempt capital gains if invested within 6 months (e.g., REC/ NHAI bonds).

✅ 9. Based on Risk Profile

Type Features
Investment-Grade Bonds High credit rating (AAA to BBB). Lower risk.
Junk Bonds / High Yield Bonds Low credit rating. High risk, high return.
Subordinated Bonds Paid after senior debt in case of liquidation. Riskier.

Page 98
✅ 10. Based on Purpose or Theme
Type Used For
Green Bonds Funding environmental & climate projects.
Blue Bonds Financing marine or ocean-based projects.
Social Impact Bonds Linked to achieving social outcomes (e.g., education, health).
Sovereign Gold Bonds (SGBs) Bonds linked to price of gold (issued by RBI).

✅ 11. Based on Redemption Structure

Type Explanation
Callable Bonds Issuer can redeem before maturity.
Puttable Bonds Holder can demand early redemption.
Amortizing Bonds Repaid in installments, not at once.
Bullet Bonds Principal paid in lump sum at maturity.
📘 Summary Table (Snapshot for Revision):
Classification Examples
Issuer G-Sec, Corporate Bond, Municipal Bond
Coupon Fixed, Floating, Zero Coupon, Step-up
Tenure Short-term, Long-term, Perpetual
Convertibility Convertible, NCDs
Security Secured, Unsecured
Market Primary, Secondary
Currency Masala, Samurai, Dim Sum
Tax Taxable, Tax-Free, Capital Gain Bonds
Risk Junk Bonds, Investment Grade
Purpose Green, Blue, SGBs
Redemption Callable, Puttable, Bullet

Got it, Sassy 💼✨! Here's your fully restructured, de-duplicated, and exam-ready version of the notes on Debt Market
Instruments — with accurate numbering, clear headings, and all the premium content retained exactly as detailed as your original.
Use this for RBI Grade B, UPSC, DSSSB, or just flexing finance smarts.

🔶 DEBT MARKET INSTRUMENTS

(You become the lender, not the owner)

1. Government Securities (G-Secs)

Government Securities (G-Secs) are debt instruments issued by the Government of India or State Governments to borrow
money from the public.
🔁 They are IOUs by the government.
🧾 The government promises to:
• Pay regular interest (called coupon), and
• Repay the principal at maturity.

✅ 2. Are G-Secs Debt or Duty Instruments?

✅ G-Secs are Debt Instruments.
That means when you buy a G-Sec, you are lending money to the government, and in return, you get:
• Interest (usually semi-annual), and
• Your money back after maturity.
They are NOT “duty” instruments. That’s just confusion — G-Secs are purely part of the debt market, not taxation or duty-related
instruments.

✅ 3. Who Issues G-Secs?

Issuer Instruments
Central Government Treasury Bills (T-Bills), Dated Securities (Long-term G-Secs)
State Governments SDLs (State Development Loans)

Page 99
 These are issued under powers granted by the Public Debt Act and are managed by the RBI.

✅ 4. Classification: Short-Term vs Long-Term G-Secs

🔹 A. Short-Term G-Secs – Treasury Bills (T-Bills)

Feature Details
Tenure Less than 1 year
Types 91-day, 182-day, 364-day
Coupon ❌ No interest/coupon. Issued at discount, redeemed at face value
Issuer Central Government
Liquidity Very high
Investor Banks, mutual funds, corporates, RBI
🧠 Example:
A 91-day T-Bill with a face value of ₹100 is sold at ₹97.
You earn ₹3 profit in 91 days = interest.

🔹 B. Long-Term G-Secs – Dated Government Securities

Feature Details
Tenure More than 1 year
Common Tenures 2, 5, 10, 20, 40 years
Coupon ✅ Fixed/Floating interest paid every 6 months
Issuer Central Government
Repayment Full face value repaid at maturity
🧠 Examples:
• 10-year G-Sec (most commonly traded in market)
• 40-year G-Sec (ultra-long maturity)
• FRBs (Floating Rate Bonds – coupon changes over time)

✅ 5. Other Types of G-Secs

Type Description
State Development Loans (SDLs) Issued by State Governments. Similar to dated G-Secs. Slightly higher interest to attract investors.
Sovereign Gold Bonds (SGBs) G-Secs linked to gold price. Pays 2.5% interest + gold price gain.
Inflation Indexed Bonds (IIBs) Interest and principal adjusted for inflation (CPI/WPI)
Floating Rate Bonds (FRBs) Interest rate is reset periodically based on benchmark like repo rate.
Zero Coupon Bonds No periodic interest. Issued at deep discount, redeemed at face value. Rare in India.

✅ 6. Features of G-Securities
Feature Detail
Risk-Free Sovereign guarantee = zero default risk
Interest Income Paid semi-annually (unless zero coupon)
Tradable On platforms like NDS-OM, BSE, NSE, RBI Retail Direct
Eligible for SLR Banks hold G-Secs to maintain Statutory Liquidity Ratio
Highly Liquid Especially T-Bills and 10-year G-Secs
Taxable Interest is taxed as per investor’s slab (except for some SGBs or tax-free bonds)

✅ 7. Who Invests in G-Secs?

• 🏦 Banks (for SLR requirements)
• 🧓 Pension funds, insurance companies
• 💼 Mutual funds and institutions

Absolutely, Sassy! Let’s level up the depth on State Development Loans (SDLs) and Corporate Bonds in a way that's exam-smart but
still juicy enough to satisfy your inner finance nerd 😎📈

Page 100
🔷 2. STATE DEVELOPMENT LOANS (SDLs)
✅ What are SDLs?
State Development Loans (SDLs) are debt instruments issued by State Governments to fund their fiscal requirements.
They are similar to G-Secs (issued by the Central Govt) but issued individually by each state.
These are used to bridge revenue-expenditure gaps, fund welfare schemes, infrastructure, or refinance existing debt.

✅ Key Features:
Aspect Details
Issuer Individual State Governments
Borrowers Public (retail + institutional), banks, insurance companies
Regulated by RBI under the Public Debt Act
How Issued? Through auctions conducted by RBI, just like G-Secs
Maturity Generally 10-year bonds (can vary)
Returns Fixed coupon rate, paid semi-annually
Risk Slightly higher than G-Secs because state governments are not sovereign
Credit Rating No separate credit rating; relies on the state’s fiscal health
Tradability Yes — can be traded in the secondary market (like G-Secs)
SLR Eligible? ✅ Yes, banks can hold SDLs to meet Statutory Liquidity Ratio

✅ Why Are They Issued?

• Fund state-specific projects: roads, irrigation, health, education
• Cover fiscal deficit of states
• Refinance old loans at lower rates

✅ Key Points for Exam:

• Auction process is done by RBI on behalf of states
• Interest rates are slightly higher than G-Secs (because states can't print money!)
• Often used by banks as safe assets due to SLR eligibility

🔷 3. CORPORATE BONDS
✅ What are Corporate Bonds?
Corporate Bonds are debt securities issued by private or public companies to raise money from investors for a fixed period in
return for periodic interest (coupon) payments.
💡 When you buy a corporate bond, you're lending money to the company, not becoming an owner like in equity shares.

✅ Key Features:
Aspect Details
Issuer Private companies, PSUs, NBFCs
Purpose Raise funds for capex, expansion, working capital, refinancing loans
Tenure Medium to long-term — usually 3, 5, 10, or even 20 years
Interest Rate Fixed (coupon-bearing) or sometimes floating
Coupon Payment Quarterly, semi-annually, or annually
Risk Depends on issuer’s credit rating
Regulated by SEBI (Disclosure norms, Listing guidelines)
Credit Rating Issued by agencies like CRISIL, ICRA, CARE, India Ratings
Tradability ✅ Can be traded on debt market platforms (NSE/BSE Debt Segment)

✅ Credit Ratings (Important):

Rating Meaning
AAA Safest — highest creditworthiness
AA+, AA High quality, low credit risk
A, BBB Moderate risk — still investment grade
BB or below Junk Bonds — High risk, high return

Page 101
✅ Types of Corporate Bonds:
Type Description
Secured Bonds Backed by collateral (like plant, land, etc.)
Unsecured Bonds No collateral, higher risk
Convertible Bonds Can be converted into equity shares
Perpetual Bonds (AT-1) No maturity — mostly used by banks
Zero Coupon Bonds No interest — issued at discount, redeemed at face value

✅ Why Do Companies Issue Bonds?

• Avoid dilution of equity (unlike issuing shares)
• Interest paid is tax deductible
• Faster than raising loans from banks

✅ Key Exam Pointers:

• Regulated by SEBI, not RBI
• Risk depends on company health + credit rating
• Institutional investors (LIC, Mutual Funds, Banks) dominate this market
• AT-1 Bonds became controversial post Yes Bank crisis

4. Municipal Bonds
✅ What Are They?
Debt instruments issued by Urban Local Bodies (ULBs) or municipal corporations to raise funds for urban infrastructure projects like
roads, sewage, water pipelines, metro, etc.

✅ Key Features:
Aspect Details
Issuer Municipal Corporations (e.g., Pune, Ahmedabad)
Purpose Financing urban infra
Tenure Medium to long term
Returns Fixed coupon
Risk Moderate (based on creditworthiness of the ULB)
Regulator SEBI (Municipal Bonds Guidelines, 2015)
Tradability Can be listed on BSE/NSE
Tax Benefit Select issues are tax-free

✅ Types of Municipal Bonds:

Type Description
General Obligation Bonds Repaid from general municipal revenues
Revenue Bonds Repaid from revenue of the specific project (e.g., toll collection)

✅ Initiatives:
• Promoted under Smart Cities Mission
• Pune: First Indian city to issue such bonds (2017)

5. Electoral Bonds
✅ What Are They?
Financial instruments for political donations introduced to increase transparency — but criticized for reducing it due to anonymity.

✅ Key Features:
Aspect Details
Issuer SBI (only authorized bank)
Denominations ₹1,000 to ₹1 crore
Buyer Eligibility Indian citizens or companies
Beneficiary Political parties with ≥1% votes in last LS/State elections
Validity 15 days from date of issue

Page 102
Tax Benefit 100% under Sec 80GGC (individuals) & 80GGB (companies)
Anonymity Names not disclosed to public; only SBI & EC have data

✅ Criticism & Supreme Court Verdict (2024):

Concern Explanation
Transparency Public doesn't know who donated to whom
Misuse Risk Shell firms could launder black money
Bias Majority of funds went to ruling party
🛑 SC Verdict (Feb 2024): Electoral bonds were declared unconstitutional. SBI ordered to disclose all donor info. No longer valid
post-2024.

✅ Comparison: Municipal Bonds vs Electoral Bonds

Feature Municipal Bonds Electoral Bonds
Issuer Municipal Corporations SBI
Purpose Urban Infrastructure Political Donations
Returns Fixed Coupon No Return
Tradable Yes No
Tenure Long-Term 15 days
Transparency High Low
Status Active Struck down by SC

6. External Commercial Borrowings (ECBs)

✅ What Are They?
Loans raised by Indian entities from foreign lenders in foreign currency or INR for commercial use.

✅ Key Features:
Aspect Details
Borrowers Indian Corporates, PSUs, NBFCs, Infra Firms
Lenders Foreign Banks, Export Credit Agencies, Multilateral Institutions
Tenure Minimum 3–10 years (depending on purpose)
Purpose Infra projects, refinancing rupee loans, etc.
Currency Foreign or Indian Rupees
Regulated by RBI + FEMA
Routes Automatic or Approval Route

✅ ECB Framework: 3 Tracks

Track Description
Track I Standard foreign currency loans
Track II Long-term loans (min 10 years)
Track III Rupee-denominated ECBs (e.g., Masala Bonds)

7. Foreign Currency Convertible Bonds (FCCBs)

• Issued by: Indian companies
• Currency: Foreign
• Convertibility: Into shares of the issuing company
• Coupon: Fixed interest until conversion
• Regulated under: Companies Act + SEBI + FEMA
• Listing: Usually on foreign stock exchanges

8. Foreign Currency Exchangeable Bonds (FCEBs)

• Issued by: Indian companies
• Currency: Foreign
• Convertibility: Into shares of a group company (subsidiary/holding)
• Investor: Non-resident

Page 103
✅ FCCB vs FCEB — Quick Comparison
Feature FCCB FCEB
Converts Into Issuing company’s shares Group company’s shares
Currency Foreign Foreign
Issuer Indian company Indian company

9. Masala Bonds (Rupee-Denominated Bonds)

• Issued by: Indian companies or government
• Denomination: Indian Rupees
• Issued in: International markets
• Risk: Currency risk borne by foreign investor, not issuer
• Purpose: Raise foreign investment with no exchange rate burden
• First Issued By: IFC in London (2014)
💡 Great for infra funding and refinancing ECBs.

10. Inflation-Indexed Bonds (IIBs)

• Issued by: Government of India
• Linked to: CPI (Consumer Price Index)
• Protection: Safeguards real returns from inflation
• Tenure: Long-term (e.g., 10 years)
• Buyers: Mostly institutional, though retail versions were tried
• Interest: Real Rate + Inflation Index
🧠 Example:
If Real rate = 2%, CPI = 6% → Coupon = 8%

11. Capital-Indexed Bonds (CIBs)

• Issued by: Government of India
• Indexing: Only principal is inflation-indexed
• Interest: Fixed
• Launched: 1997 (pilot basis)
• Index Used: WPI earlier

✅ IIB vs CIB
Feature IIB CIB
Principal Indexed ✅ ✅
Interest Indexed ✅ (real + CPI) ❌ (fixed)
Launched In 2013 1997
Index Used CPI WPI

12. Securitized Instruments

• Pool of retail loans (home, auto, etc.) bundled into securities
• Sold to investors — you're basically investing in people’s EMIs
• Helps banks manage risk and liquidity

13. Common Bond Instruments (Quick Reference)

Instrument Feature
G-Secs Safe, long-term government bonds
T-Bills Short-term (91/182/364 days), zero-coupon
CP (Commercial Paper) Short-term corporate debt
CD (Certificate of Deposit) Short-term debt by banks
Masala Bonds INR-denominated bonds issued outside India
Green Bonds For eco-friendly infrastructure
Perpetual Bonds (AT-1) No maturity, high risk, used by banks for capital buffers

🟠 FOREX MARKET — “Currency ka bazaar”

1. Currency Pairs
• USD/INR, EUR/USD, etc.

Page 104
 • USD/INR, EUR/USD, etc.
• You’re buying one currency and selling another.
💡 If you think USD will rise, you BUY USD/INR.

2. Currency Derivatives
• Futures and Options contracts on currency pairs
• Used to hedge export/import risk
f
3. Spot Market
• Currency is exchanged immediately (within 2 working days)

4. Forward Contracts
• Lock-in today’s rate for buying/selling at future date
💡 Very useful for exporters/importers

5. Currency Swaps
• Simultaneous buy & sell of currency at different maturity
💡 Like you lend me USD now, I give you INR now, and later we reverse it.>

🔷 1. FEDAI – Foreign Exchange Dealers' Association of India

✅ What is FEDAI?
FEDAI is an industry body that regulates and standardizes foreign exchange transactions conducted by banks and authorized dealers
in India.
Already done in detail fedai

🔷 2. Secured Overnight Financing Rate (SOFR)

AzSOFR is an interest rate.
It tells us:
👉 At what rate big financial institutions in the U.S. borrow money overnight using government securities (like U.S. Treasury Bonds) as
security (collateral).
That’s it!
SOFR is simply the average interest rate at which banks and big financial players borrow money for one night, giving government
securities as security for the loan.

🔸Why Was SOFR Created?

SOFR was made to replace LIBOR, which was earlier used worldwide to set interest rates on things like:
• Loans
• Home mortgages
• Student loans
• Corporate borrowings
• Derivatives (fancy contracts between banks)
But LIBOR had problems:
• It was based on guesswork (banks telling estimated rates)
• It was manipulated
So SOFR was born — based on actual transactions and therefore much more reliable.

🔷 Let’s Break the Terms You Found Confusing:

🔹 1. What Are "Financial Contracts"?

📌 Financial contracts are simply agreements involving money between two parties — with terms like interest, duration,
repayment, etc.
Examples of Financial Contracts:
Type Real-life Examples
📄 Loan Contracts A company borrows ₹10 crore from a bank — they agree on interest rate & repayment time
📊 Derivative Contracts Two banks agree to swap interest rates based on some benchmark
🏡 Mortgage Contracts A person borrows money to buy a house — bank charges interest
💳 Credit Cards You use a credit card, repay later with interest
👉 The interest rate used in these contracts is often based on a benchmark — like LIBOR in the past, and now SOFR.

🔹 2. What Is "Real Transaction Data"?

📌

Page 105
📌 “Real transaction data” means actual borrowing and lending that really happened in the market, not estimates.
🔍 In SOFR’s case:
• Every night in the U.S., big financial institutions borrow and lend billions of dollars
• These loans are for 1 day only (overnight)
• And they give U.S. Treasury Bonds as security (collateral)
• The interest rates on these actual deals are recorded daily
SOFR is calculated by averaging all these real overnight lending rates.
✅ So, unlike LIBOR which was based on guesses, SOFR is based on actual deals done every day. No manipulation.

🔷 Summary Table
Feature SOFR
Full Form Secured Overnight Financing Rate
What it shows Interest rate at which big institutions borrow for 1 day using U.S. govt bonds as collateral
Based on Real transactions (not guesses)
Why it matters Used to set interest rates on loans, credit cards, corporate borrowings, derivatives
Who uses it Banks, corporations, governments, financial institutions
Replaced which rate? LIBOR
Security used? ✅ Yes (secured by U.S. Treasury bonds)
Risk level Very low (because govt bonds are safest collateral)

🔷 1. LIBOR – London Interbank Offered Rate (❌ Phased Out, but still exam hot)
✅ What was LIBOR?
LIBOR was a benchmark interest rate used globally for decades to price:
• Loans (home, student, corporate)
• Derivatives (swaps, options)
• Bonds
• Credit cards
It showed:
👉 At what interest rate one bank would lend money to another bank in London, without collateral, for various tenures.

🔹 Key Features:
Feature Detail
Published by Intercontinental Exchange (ICE)
Tenors Overnight to 12 months
Currencies USD, GBP, EUR, JPY, CHF
Based on Estimates from top banks (not real deals)
Nature Unsecured lending rate
Risk Contains credit risk premium

❌ Why It Was Replaced?

• Based on guesses, not real transactions
• Easily manipulated (2012 LIBOR scandal)
• Decline in interbank lending volumes
• Global financial regulators lost trust

✅ Replaced by:
Old Rate New
LIBOR (USD) SOFR (Secured Overnight Financing Rate)
LIBOR (GBP) SONIA
LIBOR (EUR) €STR
LIBOR (India) MIFOR / MIBOR

✅ SOFR vs LIBOR:
Feature LIBOR SOFR
Based on Bank quotes (estimated rates) Actual transactions

Page 106
Risk Includes credit risk Risk-free (secured)
Transparency Low (manipulable) High (market-based)
Status Discontinued (post-2023) Active

🔷 3. MIBID/MIBOR
✅ What are They?
• MIBID – Mumbai Interbank Bid Rate
• MIBOR – Mumbai Interbank Offer Rate
They are benchmark interest rates used in the Indian money market.

✅ Key Features:
Rate Meaning
MIBID Rate at which banks are willing to borrow money from other banks
MIBOR Rate at which banks are willing to lend money to other banks

✅ More Info:
Feature Details
Published by FBIL (Financial Benchmarks India Ltd)
Market Call money/overnight market
Use Pricing short-term financial instruments like CPs, CDs, Treasury Bills, etc.

✅ MIBOR is often called India's equivalent of LIBOR, and is crucial for short-term lending.
✅ When Do Banks Use MIBID/MIBOR?
• If RBI has not provided enough liquidity through repo/reverse repo
• If the bank wants quicker/shorter borrowing (like overnight needs)
• If it wants to avoid pledging securities to RBI (which repo needs)
So yes, they use call money market (MIBOR/MIBID) as an alternative or complement to RBI liquidity tools like repo/reverse repo.

🔷 3. MIFOR – Mumbai Interbank Forward Offer Rate

✅ What is MIFOR?
MIFOR is a benchmark rate used in India to price foreign currency borrowing, swaps, and forward rate agreements.
It combines:
🧠 USD LIBOR + Forward Premium of USD/INR
✅ Now that LIBOR is phased out, MIFOR is being restructured using SOFR + Forward Premium

🔹 Where is MIFOR Used?

• Derivative markets (for hedging foreign exchange risk)
• External Commercial Borrowings (ECBs)
• Loans linked to foreign currency
• Interest rate swaps

✅ Tenors Published by FBIL:

• 1 month, 3 months, 6 months, 1 year

🔹 Summary:
Component Meaning
USD LIBOR Shows dollar borrowing cost
Forward Premium Shows expected USD/INR exchange rate movement
MIFOR Gives INR cost equivalent of dollar borrowing for swaps/hedges
RBI is pushing for MIFOR reform, shifting from LIBOR to SOFR-based MIFOR (as of 2023–24)

🔷 4. NDS – Negotiated Dealing System

✅ What is NDS?
NDS is an electronic trading platform developed by RBI to enable safe, online trading of:
• Government securities (G-Secs, T-Bills, SDLs)
• Money market instruments (Call, CP, CD)

Page 107
 • Money market instruments (Call, CP, CD)
• Forex market transactions (USD/INR)

🔹 Components of NDS:
Type Purpose
NDS-OM (Order Matching) Anonymous, screen-based G-Sec trading
NDS-CALL Call money market reporting
CCIL-linked Linked to Clearing Corporation of India for settlement

🔹 Who Can Use NDS?

• Banks
• Primary Dealers
• Mutual Funds
• Insurance Companies
• RBI
They trade government bonds directly online, no brokers needed.

✅ NDS = Revolutionized Indian bond & money market:

• Transparency
• Faster execution
• Real-time price discovery
• Settlement efficiency
🧨 Part 1: NDS vs NDS-OM vs NDS-OM (Retail)
Feature NDS (Negotiated Dealing System) NDS-OM (Order Matching) NDS-OM (Retail)
Developed RBI RBI RBI
by
Launched in Early 2000s 2005 2021 (with Retail Direct)
What it is Core trading platform for govt Screen-based anonymous order- Retail window for individuals to
securities & money markets matching platform for G-Secs buy/sell G-Secs
Access Only Institutional players Institutional players Only retail investors (through
Retail Direct portal)
Users Banks, PDs, mutual funds, insurers, RBI Same as NDS Individual investors
Securities G-Secs, SDLs, T-Bills, CPs, CDs, forex, Only G-Secs (Central Govt Bonds, SDLs, T- Same as NDS-OM
traded etc. Bills)
Settlement Through CCIL (Clearing Corporation of Through CCIL Through CCIL via RBI
India)
Transparency High Higher (anonymous & real-time) High (RBI-backed)
Retail ❌ No ❌ No ✅ YES
Access?

🧾 Part 2: RBI Retail Direct Scheme – Full Detailed Notes

🔷 What is the RBI Retail Direct Scheme?

The RBI Retail Direct Scheme is a platform by RBI that allows individual retail investors to buy and sell Government Securities
(G-Secs) directly, without any intermediaries (like brokers or banks).
It launched on November 12, 2021, to democratize access to safe government-backed investments.

✅ Who Can Use It?

Eligibility Details
Resident Individual ✅ Yes
NRI (with Rupee account in India) ✅ Yes
Joint Accounts ✅ Not allowed (only single-holder)
Age Limit Any adult with PAN and savings account
KYC Must be done online during registration

🧾 How Does It Work?

1. You go to the RBI Retail Direct Portal

Page 108
 1. You go to the RBI Retail Direct Portal
2. Register using PAN, Aadhaar, email, phone
3. Get a Retail Direct Gilt (RDG) account
4. This RDG is maintained with RBI itself (no broker needed)
5. You can now:
○ Buy G-Secs in primary auctions
○ Trade in secondary market via NDS-OM (Retail)

📦 What Can You Buy?

Instrument Description
✅ Government of India Bonds Long-term G-Secs (5–40 yrs)
✅ State Development Loans (SDLs) Issued by State Govts
✅ Treasury Bills (T-Bills) Short-term G-Secs: 91/182/364 days
✅ Sovereign Gold Bonds (SGBs) Bonds linked to gold prices

🔁 Two Types of Transactions

Type Explanation
Primary Market You apply in RBI’s auction before the bond is issued
Secondary Market You buy/sell existing bonds from other retail investors (via NDS-OM Retail platform)

💰 What About Returns?

• Most G-Secs offer fixed coupon (interest) paid every 6 months
• At maturity, you get full principal back
• Zero risk of default (sovereign guarantee)

📌 Advantages of RBI Retail Direct:

Feature Benefit
💯 100% Secure Government-backed
Direct with RBI No broker = No hidden fees
📈 Earn Interest Semi-annual coupon payments
🔁 Liquid Can sell in secondary market
🎯 Small Investment Start with as low as ₹10,000
📉 Tax Efficient Some SDLs and SGBs have tax benefits

❗Important to Note:
• G-Secs are low-risk but not high-return (usually 6–7% annually)
• Market value can fluctuate if sold before maturity
• Capital gains may be taxable depending on holding period

Foreign Currency Accounts

These are accounts that help Indian exporters, NRIs, and foreign entities manage their foreign currency transactions legally under
FEMA (Foreign Exchange Management Act, 1999).

🔶 1. EEFC Account – Exchange Earners’ Foreign Currency Account

✅ What is it?
An account that allows Indian residents (mainly exporters) to hold foreign exchange earnings in foreign currency without
converting it to INR immediately.
✅ Who can open it?
• Exporters of goods/services
• Freelancers earning in foreign currency
• Any resident earning in forex (like YouTubers with $ income)
✅ Key Features:
Feature Details
Type Non-interest-bearing current account
Currency USD, EUR, GBP, etc.
Limit 100% of forex earnings can be retained (subject to RBI norms)

Page 109
Limit 100% of forex earnings can be retained (subject to RBI norms)
Tenure No maturity — it's a current account
Conversion Can convert to INR anytime (helps avoid loss due to depreciation)
Regulated by RBI under FEMA
🧠 Example:
If you earn $5,000 from a US client, you can keep it in EEFC and convert it later when the exchange rate is favorable.
✅ Definition:
Repatriation means sending money back to your home country or converting Indian earnings into foreign currency and
transferring it abroad.
In context of NRI accounts:
• It refers to the ability to take your money (principal + interest) out of India, in foreign currency, without restriction.
• Fully allowed in some accounts (like NRE), restricted in others (like NRO).

🔶 Q2. About NRE Account Transac

🔶 2. NRE Account – Non-Resident External Account

✅ What is it?
An INR-denominated bank account for NRIs to park their foreign income in India.
✅ Who can open it?
• Non-Resident Indians (NRIs)
• Persons of Indian Origin (PIOs)
✅ Key Features:
Feature Details
Type Savings, Current, or Fixed Deposit
Currency Deposit in foreign currency → Converted to INR
Repatriability ✅ Fully repatriable (principal + interest)
Interest Tax-free in India
Use Investment in India, personal spending, etc.
Joint Holding Allowed with another NRI
Regulated by RBI under FEMA
🧠 Example:
An NRI in Dubai sends ₹10 lakh to his NRE account in India. He can later take the full amount (plus interest) back to Dubai without any
restriction.

🔶 3. NRO Account – Non-Resident Ordinary Account

✅ What is it?
An INR-denominated account used by NRIs to manage income earned in India, like rent, dividends, pension, etc.
✅ Who can open it?
• NRIs who have income sources within India
✅ Key Features:
Feature Details
Type Savings, Current, or Fixed Deposit
Currency INR (no foreign exchange needed)
Repatriability ⚠ Restricted (up to USD 1 million/year with documenta on)
Interest Taxable in India
Joint Holding Can be held with Indian resident
Use Pay Indian bills, receive Indian income
Regulated by RBI under FEMA
🧠 Example:
An NRI owns property in Mumbai and earns rent. That rent goes into his NRO account, not NRE.

🔷 4. FCNR Account – Foreign Currency Non-Resident Account

✅ What is FCNR?
A fixed deposit account for NRIs to park foreign currency in India, but without converting it into INR.
Yup, the currency stays as it is — so there's no exchange rate risk for the NRI. Think of it like an NRI putting their dollars or euros in
an Indian bank, and still earning interest.

Page 110
an Indian bank, and still earning interest.

✅ Key Features:
Feature Details
Who can open Only NRIs/PIOs
Account type Fixed Deposit
Currency USD, GBP, EUR, JPY, etc. (Foreign currencies)
Tenure Minimum 1 year, Max 5 years
Interest Fixed, paid in the same foreign currency
Repatriation ✅ Fully repatriable (principal + interest)
Tax ❌ Interest is tax-free in India
Exchange Risk ❌ None (money stays in foreign currency)
Regulated by RBI under FEMA

🧠 Example:
Let’s say you’re an NRI in the UK. You put $10,000 into an FCNR deposit in India for 3 years at 4% interest.
✅ Your $10,000 remains in USD, earns interest in USD, and you can repatriate it freely whenever it matures.
📌 Perfect for NRIs who want to invest in India without forex risk.

🔷 5. SNRR Account – Special Non-Resident Rupee Account

✅ What is SNRR?
A Rupee-denominated account for foreign entities (NOT NRIs) who want to do business or investments in India.
💡 This account is for foreign companies, non-resident institutions, and individuals who aren’t settled in India but want to do
specific rupee transactions here.

✅ Key Features:
Feature Details
Who can open Foreign investors, companies, embassies, universities, law firms, etc.
Resident? ❌ No (must be a non-resident)
Currency INR
Repatriable? ✅ Fully repatriable for permitted transactions
Purpose Business dealings, FDI, ODI, IPO investment, ECB transactions, etc.
Tenure Linked to the underlying business contract (can be extended)
Interest ❌ No interest paid
Tax As applicable depending on transaction
Regulated by RBI under FEMA guidelines

🧠 Example:
Let’s say a foreign VC firm is investing ₹5 crore in an Indian startup. They can open an SNRR account to route this INR-based
investment and later take back profits or capital gains under RBI rules.
Absolutely, Sassy 💼🌍 — let’s consolidate all 5 Foreign Currency Accounts into one clean, crisp, and exam-ready master
comparison table. This will be your golden go-to for revision before the RBI Grade B bouncer round 💥

🔷 Category I: Foreign Currency Accounts – Master Table

Feature EEFC (Exchange NRE (Non- NRO (Non-Resident FCNR (Foreign SNRR (Special Non-
Earners’ Foreign Resident Ordinary) Currency Non- Resident Rupee)
Currency) External) Resident)
Who can open Indian exporters / forex NRIs / PIOs NRIs / PIOs NRIs / PIOs Foreign entities (not
earners NRIs)
Account type Current Account Savings / Current Savings / Current / FD Fixed Deposit Current Account
/ FD
Currency held in Foreign Currency INR (converted INR (Indian income) Foreign Currency INR
account from foreign)
Source of funds Export income / service Foreign income Income from India Foreign income Permitted business
income (rent, etc.) transactions

Page 111
 income (rent, etc.) transactions
Repatriation ✅ Yes, fully allowed ✅ Yes, fully ⚠ Up to $1 ✅ Yes, fully allowed ✅ Yes, for
(Transfer abroad) allowed million/year (with tax permitted purposes
docs)
Interest paid? ❌ No interest ✅ Yes (tax-free) ✅ Yes (taxable) ✅ Yes (in foreign ❌ No interest
currency)
Tax in India on ❌ Not applicable ❌ Tax-free ✅ Taxable ❌ Tax-free ❌ No interest paid
interest
Exchange rate risk ✅ Yes (you may ✅ Yes ✅ Yes ❌ No (held in same ✅ Yes (since held
gain/lose on foreign currency) in INR)
conversion)
Use in India Business purposes ✅ Allowed ✅ Allowed ✅ Allowed (after ✅ For
maturity) business/investment
s only
Regulated by RBI under FEMA RBI under FEMA RBI under FEMA RBI under FEMA RBI under FEMA

🔥 Pro Tip for MCQs:

• Fully repatriable + tax-free interest = NRE & FCNR
• INR-based + tax applicable + repatriation limit = NRO
• Non-NRI entity with INR account = SNRR
• Forex held by Indian exporter in forex = EEFC
>
🔷 1. Foreign Exchange Reserves (Forex Reserves)
✅ What are Forex Reserves?
These are assets held by the central bank (RBI) in foreign currencies, used to:
• Pay for imports
• Handle currency volatility
• Support economic confidence
• Repay external debt
📌 Managed by: RBI, reported weekly by RBI Bulletin

✅ Components of India’s Forex Reserves:

Component Explanation
🔹 Foreign Currency Assets (FCA) Largest chunk — USD, Euro, Yen, held in foreign banks or bonds
🔹 Gold Reserves Physical gold + gold held abroad
🔹 SDRs – Special Drawing Rights Quasi-currency issued by IMF; India’s share in IMF basket
🔹 Reserve Tranche Position (RTP) India’s emergency quota with IMF that can be withdrawn anytime
🧠 As of June 2025: India’s forex reserves ≈ $650 billion (FCA ≈ 85% of it)

✅ Why are Forex Reserves important?

• Stabilizes INR value (defends against volatility)
• Pays for oil & critical imports
• Boosts investor confidence
• Reduces risk of Balance of Payment crisis
• Used during external shocks (wars, pandemics, financial crises)

🔷 2. Depreciation of Currency
✅ What is Depreciation?
When the value of a currency falls in comparison to another currency due to market forces (supply & demand).
🔁 Example:
Earlier: 1 USD = ₹70
Now: 1 USD = ₹83
→ Rupee depreciated (lost value)
📌 Happens in floating exchange rate system

✅ Causes:
• High inflation in India
• More imports than exports
• Higher outflow of capital (FIIs withdrawing)

Page 112
 • Higher outflow of capital (FIIs withdrawing)
• Interest rates in foreign countries rise
• Political or economic instability

✅ Effects:
Positive Negative
Makes exports cheaper Imports become costlier (like oil, electronics)
Boosts foreign tourism to India Inflation rises due to costly imports
Improves trade competitiveness Hurts those with foreign loans
NRI remittances increase in INR Costlier foreign education & travel

🔷 3. Appreciation of Currency
✅ What is Appreciation?
When the value of a currency rises compared to another currency, again due to market forces.
🔁 Example:
Earlier: 1 USD = ₹83
Now: 1 USD = ₹78
→ Rupee appreciated (gained value)

✅ Causes:
• More foreign inflows (FDI/FII)
• Higher interest rates in India
• Strong GDP & macroeconomic outlook
• Trade surplus

✅ Effects:
Positive Negative
Imports become cheaper (good for oil, electronics) Exports become less competitive
Lowers imported inflation Hurts trade surplus
Reduces cost of foreign education, travel Can lead to current account deficit
Good for external debt repayment Exporters earn less in INR

🧠 BONUS Tip:
Concept Who benefits?
Depreciation Exporters, NRIs, IT companies
Appreciation Importers, foreign tourists in India, students abroad

🔷 4. Revaluation of Currency
✅ What is Revaluation?
Revaluation means the official increase in the value of a country’s currency by its central authority (like RBI) in a fixed exchange
rate system.
🧠 Key idea: It is not natural or market-driven (that would be “appreciation”).
It is a policy decision to increase the currency’s value.

✅ When is it used?
• To control inflation (cheaper imports)
• To reduce trade surplus
• If country’s currency is undervalued in global trade

🔁 Example:
Suppose:
1 USD = ₹70 → Govt declares now 1 USD = ₹65
👉 Rupee has been revalued by ₹5
→ INR becomes stronger

✅ Effects of Revaluation:
Positive Negative
Cheaper imports → Less infla on Exports become costlier, may hurt trade

Page 113
Cheaper imports → Less infla on Exports become costlier, may hurt trade
Reduces burden of foreign debt May reduce competitiveness of domestic goods
Good for students/tourists abroad May lower forex reserves due to reduced export inflow

🔷 5. Devaluation of Currency
✅ What is Devaluation?
Devaluation is the official reduction in the value of a country’s currency by its central authority in a fixed exchange rate regime.
💡 This is different from depreciation, which is automatic and market-driven.

🔁 Example:
1 USD = ₹65 → Govt declares now 1 USD = ₹75
👉 Rupee is devalued
→ INR becomes weaker

✅ Why is it done?
• To boost exports (makes them cheaper)
• To correct trade imbalance
• To attract forex inflows
• During economic slowdown or BOP crisis

✅ Effects of Devaluation:
Positive Negative
Boosts exports Imports become expensive (fuel, tech)
Improves trade balance Raises inflation
Attracts foreign tourism Hurts common consumers
Helps repay foreign loans in local currency May lead to global rating downgrades

🔁 🔃 Summary: Appreciation vs Revaluation

Feature Appreciation Revaluation
Driven by Market forces Govt/RBI decision
Exchange rate system Floating Fixed
Type Gradual Sudden
Example INR strengthens due to FDI RBI officially raises INR value

🔷 6. Currency Swap Agreements

✅ What is a Currency Swap?
A bilateral agreement between two countries' central banks to exchange currencies for a set time and rate, to help each other
in times of forex stress.
📌 It’s like:
“You give me your currency now, I’ll give it back later at a pre-agreed exchange rate.”

✅ Why are they used?

• To avoid forex reserve crisis
• For emergency liquidity in foreign currency
• To bypass volatility of dollar or euro market

🔁 Example:
India–Japan Currency Swap Agreement
🇮🇳 India and 🇯🇵 Japan agreed to swap up to $75 billion
→ If India faces a USD shortage, it can take dollars from Japan & give rupees in return, and vice versa.

✅ Benefits of Currency Swaps:

Benefit Description
💸 Reduces dependence on USD Countries can trade in local currencies
🔒 Improves forex stability Central bank can support the rupee without depleting reserves
📈 Boosts confidence Shows global trust in India's economy
🆘 Used during crisis (e.g., global recession, pandemic shock)

Page 114
🆘 Emergency backup Used during crisis (e.g., global recession, pandemic shock)

🧾 RBI & Currency Swap (Real Example):

• SAARC Currency Swap Framework: RBI offered swap facility to SAARC nations (like Bhutan, Maldives, Nepal)
• Helps them during external payment crisis
• RBI gives USD, receives their local currency temporarily

🧠 Final Snapshot: Key Differences

Term Meaning Controlled by Exchange Rate System
Appreciation INR strengthens (market) Market forces Floating
Depreciation INR weakens (market) Market forces Floating
Revaluation INR made stronger Govt/RBI Fixed
Devaluation INR made weaker Govt/RBI Fixed
Currency Swap Currency exchange deal between countries Central Banks N/A
Perfecto, Sassy! 🎯
🌍 International Banking Accounts
Used by banks to handle foreign currency transactions, especially when one bank doesn’t have a branch in another country.
These accounts change names depending on whose point of view you're looking from — just like that one guy who’s a “friend” to you,
“enemy” to your ex, and “just a colleague” to HR. 😏

🟦 1. NOSTRO Account → “Our money with your bank”

✅ What is it?
An account that an Indian bank holds in a foreign bank, in foreign currency.
🧠 Memory Tip:
“Nostro” = Our money with foreign bank

🧾 Example:
• SBI (India) opens a USD account in Citibank, New York
• Used to settle international trade in dollars
📌 For SBI, this is its NOSTRO account — i.e., SBI’s money (in USD) lying with Citibank
✅ Used for:
• Sending money abroad
• Import/export payments
• Forex trading

🟥 2. VOSTRO Account → “Your money with our bank”

✅ What is it?
An account that a foreign bank holds in an Indian bank, in INR
🧠 Memory Tip:
“Vostro” = Your money with us

🧾 Example:
• Citibank (New York) opens an INR account in SBI, Mumbai
• It will use this to receive INR payments, or facilitate local Indian deals
📌 For SBI, this is a VOSTRO account — i.e., Citibank’s money (in INR) lying with SBI
✅ Used for:
• Handling remittances to India
• Managing business transactions inside India
• FX settlements

🟨 3. LORO Account → “Their money with your bank”

✅ What is it?
A reference account, where Bank A is aware that Bank B has an account with Bank C.
🧠 “Loro” = Their account with you

🧾 Example:
• SBI knows that Bank of Baroda has a USD account with Citibank, New York
• SBI refers to it in a transaction
SBI is not directly involved, but it uses the reference for transaction routing.

Page 115
🧠 Summary Table: Nostro vs Vostro vs Loro
🔑 Nostro Account Vostro Account Loro Account
Feature
Meaning “Our money with you” “Your money with us” “Their money with you”
Held by Indian bank in foreign bank Foreign bank in Indian bank Third-party bank refers to other’s account
Currency Foreign currency Domestic (INR) or foreign Any (used for reference only)
Example SBI’s USD account in Citibank, Citibank’s INR account in SBI SBI referring to BoB’s account in Citi USA
USA India
Purpose Making international payments Receiving funds from abroad Settlements & routing without holding the
account

🔁 Visual Vibe:
If SBI has USD in Citibank New York:
➡ For SBI = NOSTRO
➡ For Ci bank = VOSTRO
➡ For Bank of Baroda (watching) = LORO

🧨 Exam Trap Buster:

• Nostro is always the Indian bank's account abroad
• Vostro is always a foreign bank’s account in India
• Loro is like a third-person perspective account
Aye aye, Captain Sassy 💃 — it’s time to enter the final frontier of forex:
🔷 Liberalised Remittance Scheme (LRS)
This is the RBI-approved way for Indian residents to send money abroad legally for education, travel, investment, gifts, etc.

🧾 What is the Liberalised Remittance Scheme?

LRS is a facility introduced by RBI under FEMA, allowing resident individuals to freely remit (send) up to USD 250,000 per
financial year for permitted current or capital account transactions.
💡 Only individuals (not companies, HUFs, trusts) are eligible under LRS.

✅ Who Can Use It?

Category Eligible
Individuals (Residents) ✅ Yes
Corporates / Firms ❌ No
Trusts / HUFs / AOPs ❌ No
NRIs ❌ No (they use NRE/NRO/FCNR)

🔐 Purpose-wise Classification:
🔹 Current Account Transactions 🔹 Capital Account Transactions
Travel (leisure/business/study) Purchase of property abroad
Education fees / medical treatment Investing in shares or debt abroad
Gifts / Donations to foreign residents Opening foreign bank accounts
Emigration expenses Setting up companies/joint ventures abroad
Maintenance to close relatives abroad Loans to NRIs / foreign relatives
🧠 Basically: “Spend for living = current”, “Invest for future = capital”

💰 LRS Limit
Feature Detail
Annual Limit USD 250,000 per financial year
Per Individual Yes (family can pool if declared)
Age Limit No lower age limit (minors can remit through guardians)

🚨 Restrictions Under LRS:

You cannot remit for:
❌

Page 116
❌ Margin trading, futures & options
❌ Lottery tickets, banned magazines
❌ Trading in foreign currency abroad
❌ Donations to political parties abroad
❌ Capital account transactions prohibited by FEMA

💼 How Does LRS Work?

1. You approach an authorized dealer (bank/forex service)
2. Fill Form A2 and a LRS declaration (no FEMA violations)
3. Bank checks PAN → Verifies past remi ances
4. If under limit → Approves + remits

🔎 RBI Oversight:
• Remittances under LRS are reported to RBI daily by authorized dealers
• Banks ensure the person doesn’t cross the USD 250,000 limit per year (across all banks combined)

🧠 Bonus Exam Bits:

Term Meaning
Form A2 Application for remittance under LRS
PAN mandatory? Yes — without it, no LRS
LRS started in 2004 (limit was just $25,000 then)
LRS tracked via RBI's daily reporting system from banks

📘 1. Foreign Exchange Management Act (FEMA), 1999

✅ Purpose & Background

• Enacted to facilitate external trade and payments and promote orderly development of foreign exchange market in India.
• Replaced the Foreign Exchange Regulation Act (FERA), 1973
• Became effective from June 1, 2000
🔁 Shift in Approach:
FERA (Old) FEMA (New)
Presumed guilty unless proven innocent Presumed innocent unless proven guilty
Focus: Control Focus: Management
Criminal offense Civil offense

✅ Applicability
• Applies to:
○ All parts of India
○ All Indian citizens abroad
○ All branches, offices, and agencies outside India owned/controlled by a person resident in India

✅ Administering Authority
Authority Role
RBI Regulates foreign exchange transactions
Central Government Makes rules under FEMA
Directorate of Enforcement (ED) Investigates contraventions and penalties

✅ Key Terms under FEMA

Term Explanation
Capital Account Transaction Alters assets or liabilities (buying shares, real estate abroad)
Current Account Transaction Does not affect assets (travel, education, remittances)
Person Resident in India Lived in India for ≥182 days in previous FY (excluding visits abroad for employment, business, etc.)
Authorized Dealer A person (usually a bank) authorized by RBI to deal in forex

✅ Major Provisions
🔹 Capital Account Transactions
• Allowed only as per RBI regulations

Page 117
 • Allowed only as per RBI regulations
• Includes:
○ Investment abroad
○ Transfer of immovable property
○ Lending/borrowing in foreign currency
○ Export of currency
🔹 Current Account Transactions
• Allowed freely, except those prohibited/restricted by the Central Government
• Requires approval in cases like:
○ Sending large donations abroad
○ Remittance for lotteries, etc.

✅ FEMA Sections (for MCQs)

Section What it Deals With
Sec 3 Restrictions on dealing in foreign exchange
Sec 4 Restrictions on holding foreign exchange
Sec 5 Permitted current account transactions
Sec 6 Capital account transactions (with RBI permission)
Sec 10 Authorized dealers' responsibilities
Sec 13 Penalties for contravention
Sec 47 Central Govt’s power to make rules

✅ Penalties under FEMA

Offense Type Penalty
Contravention Up to 3x the sum involved or ₹2 lakh (whichever higher)
Continuing offense ₹5,000 per day
Confiscation Property or currency involved can be seized by Enforcement Directorate

✅ Important RBI Regulations Under FEMA

• Liberalised Remittance Scheme (LRS)
• Export of Goods & Services Regulations
• Foreign Investment Regulations
• Overseas Direct Investment (ODI) Regulations
• Foreign Currency Accounts Regulations
Concept What It Means
Civil Law No jail, only fines and administrative action
Contravention Breaking FEMA rules
Confiscation ED takes away the illegal foreign asset
Continuing Offense Fine per day after the deadline for correction is missed

🔥 Key Points to Remember for Exam

• FEMA is civil, not criminal (FERA was criminal)
• Applies to residents & citizens abroad
• Current a/c = mostly free, Capital a/c = regulated
• RBI = key regulator, ED = enforcer
• LRS, ODI, ECB, etc., fall under FEMA

📕 2. Prevention of Money Laundering Act (PMLA), 2002

✅ Purpose
To prevent money laundering and to confiscate property derived from illegal activities.
PMLA ensures India complies with international obligations like FATF recommendations.
💡 Enacted in: 2002
💡 Came into force: 1 July 2005
Alright Sassy 💼✨ — now you’re diving into global financial vigilance zone — where the FATF (Financial Ac on Task Force) calls
the shots!
Let’s make this exam-ready and crystal-clear, especially around:
• What FATF is

Page 118
 • What FATF is
• What its recommendations are
• Why they matter for India & RBI exams
• What students must know

🌍 FATF (Financial Action Task Force)

✅ What is FATF?
The Financial Action Task Force (FATF) is an intergovernmental body set up in 1989 by the G7 countries.
🔍 Main Goal:
To set international standards to combat:
• Money laundering (ML)
• Terrorist financing (TF)
• Proliferation financing (PF) (nuclear weapons, WMDs)
📌 Headquarters: Paris, France
📌 India became a member: 2010

🛡 FATF Recommenda ons (aka 40+9 Rules)

FATF issued 40 recommendations (core standards) and 9 special recommendations (focused on terrorist financing). Now they’re
merged into a consolidated set of "40 Recommendations" (updated as of 2012, with regular reviews).
These are non-binding rules, but countries must comply to stay off watchlists.

🧠 FATF's 6 Key Pillars (Grouped Recommendations)

🧩 Area What it Covers
1. AML/CFT Policies National risk assessments, coordination
2. Money Laundering Offenses Defining, prosecuting ML and TF
3. Customer Due Diligence (CDD) KYC, identifying beneficial ownership
4. Reporting & Recordkeeping STRs (Suspicious Transaction Reports), CTRs
5. Preventive Measures Sector-specific controls (banks, casinos, crypto)
6. International Cooperation Extradition, cross-border investigations

✅ Key Recommendations to Know for Exams:

No. Recommendation Why It's Important
R1 Risk-based approach Nations must assess & mitigate ML/TF risks
R10 Customer Due Diligence (CDD) Banks must KYC their clients
R11 Record keeping Maintain records for at least 5 years
R13 Correspondent banking Extra checks in cross-border banking
R15 Virtual Assets & VASPs (Crypto) Crypto exchanges must follow AML/CFT
R16 Wire Transfers Must be traceable to originators/recipients
R20 STRs must be filed with FIU Mandatory for suspicious transactions
R24 Beneficial Ownership Identify real owner of companies/accounts
R26 FIU (Financial Intelligence Unit) Countries must set up a centralized intel agency
R35 Sanctions Penalties must be effective, proportionate
R36–40 International cooperation Info sharing, extradition, asset freezing

🇮🇳 India's Compliance & FATF Pressure

• India follows FATF through:
○ PMLA, 2002
○ FEMA
○ RBI KYC/AML Guidelines
○ FIU-IND (reports STRs, CTRs)
💡 FATF has also pressured India to:
• Tackle terror funding in Kashmir
• Monitor non-profit organizations (NPOs)
• Regulate crypto assets
• Improve prosecution in laundering cases

Page 119
⚠ FATF Grey List & Blacklist
List Meaning Examples
Grey List "Increased Monitoring" → High risk but coopera ve Pakistan (until 2022), UAE (until 2024)
Blacklist High-risk & non-cooperative jurisdictions North Korea, Iran
💣 Consequences of being listed:
• Lower credit ratings
• Capital flight
• Reduced foreign investment
• Diplomatic pressure
✅ Key Definitions
Term Explanation
Money Laundering Process of making illegal (“black”) money appear legal (“white”)
Proceeds of Crime Property/money derived from scheduled offenses
Scheduled Offenses Serious crimes listed in Schedule of PMLA (e.g., terrorism, drug trafficking, corruption, etc.)
Attachment Seizure of property suspected to be proceeds of crime
Filing STRs Suspicious Transaction Reports by banks & financial institutions to FIU-IND

✅ 3 Stages of Money Laundering (💥 Exam Favorite)

1. Placement – introducing illegal money into financial system
2. Layering – making it hard to trace (e.g., through offshore accounts)
3. Integration – bringing it back as “clean” money

✅ Institutions Under PMLA

Institution Role
FIU-IND Financial Intelligence Unit – collects STRs, CTRs, reports to ED
Enforcement Directorate (ED) Investigates & attaches properties
Adjudicating Authority Confirms ED’s orders
Appellate Tribunal Hears appeals against Adjudicating Authority
Special Court (under NIA Act) Tries PMLA offenses

✅ Powers under PMLA

Power Explanation
Attachment of Property ED can provisionally attach property suspected to be involved in money laundering
Search & Seizure Without warrant if ED suspects laundering
Arrest & Prosecution For scheduled offenses and concealment
Confiscation Upon court’s final order, proceeds are confiscated to the govt

✅ Penalties under PMLA

Offense Penalty
Money laundering Imprisonment 3 to 7 years (can extend to 10 years for drugs cases) + Fine
Failure to furnish information ₹10,000 to ₹1 lakh
False information / abetment Also punishable

✅ Reporting Obligations
Banks, financial institutions, intermediaries, and crypto exchanges must:
• Verify KYC of all clients
• File:
○ STR (Suspicious Transaction Reports)
○ CTR (Cash Transaction Reports)
○ CBWTR (Cross-border Wire Transfer Reports)
• Report to FIU-IND

✅ Schedule of Offenses
PMLA covers over 150+ scheduled offenses under other laws like:

Page 120
PMLA covers over 150+ scheduled offenses under other laws like:
Law Offenses Covered
IPC Forgery, cheating, criminal breach
NDPS Act Drug trafficking
Prevention of Corruption Act Bribery
Arms Act Illegal possession
Wildlife Protection Act Poaching, smuggling

🔥 Recent Updates (as of 2024–25):

• PMLA now covers crypto exchanges & virtual asset service providers
• Supreme Court has upheld the constitutional validity of arrest and seizure powers under PMLA
• Digital lending frauds, cyber scams being brought under enforcement radar

🧠 Key Differences: FEMA vs PMLA

Feature FEMA PMLA
Nature of Law Civil Criminal
Objective Forex regulation Prevent money laundering
Enforcement Body Enforcement Directorate (ED) Enforcement Directorate (ED)
Penalty Type Fine only Imprisonment + fine
Examples Violating LRS, ODI norms Hiding black money, terror funding
>
📘 NOTES: CIBIL & Credit Rating Agencies (CRA)

CIBIL – Credit Informa on Bureau (India) Limited)

🔹 What is CIBIL?
• India’s first and largest credit information company (credit bureau)
• Tracks individual and commercial borrowers' credit behavior
• Provides credit scores and credit reports
🔹 Established:
• Year: 2000
• Regulated by: RBI under Credit Information Companies (Regulation) Act, 2005
🔹 Current Owner:
• Majority owned by TransUnion (USA-based credit info company)
• Hence also called TransUnion CIBIL
🔹 Key Functions:
Function Description
Credit Score A 3-digit number (range: 300 to 900) that tells how creditworthy you are. Used by banks before giving
loans.
Credit Report Full history of loans, credit cards, repayment pattern, defaults, etc.
Data Collection Gets data from member banks, NBFCs, credit card issuers
Lending Decision Banks use this to approve or reject loans/cards
Support
🔹 Who Uses CIBIL?
• Banks, NBFCs, Housing finance companies
• Even individuals can request their own CIBIL score
🔹 Fun Fact for Interviews:
A score above 750 is considered good.
CIBIL doesn’t decide loan approval — banks do.
CIBIL only gives information, not decisions.

CRAs – Credit Ra ng Agencies

🔹 What are CRAs?
• Companies that assign credit ratings to borrowers like:
○ Companies
○ Banks
○ Government Bonds
○ Mutual Funds
👉

Page 121
👉 These ratings show the ability to repay debt.
🔹 Regulated by:
• SEBI, not RBI
• Under SEBI (Credit Rating Agencies) Regulations, 1999
🔹 Major CRAs in India:
CRA Name Established Ownership Highlights
CRISIL 1987 S&P Global (USA) is major owner
ICRA 1991 Moody’s (USA) has stake
CARE Ratings 1993 Indian promoters, listed
India Ratings 1995 Part of Fitch Group
Brickwork Ratings (recently downgraded by SEBI) 2007 Indian promoters

🔹 What CRAs Rate:

Type Example
Bonds Government or Corporate bonds
Debentures Long-term debt instruments
Bank Loans Big loans to companies
Mutual Funds Credit risk of debt schemes
Structured Products Securitized assets like MBS, ABS

🔹 Credit Rating Symbols (example from CRISIL):

Rating Meaning
AAA Highest safety (almost no default risk)
AA / A Very strong, stable
BBB Moderate risk
BB and below High risk, speculative
D Default
✅ Ratings also come with “+” or “–” (e.g., AA+, BB–) for finer distinction

🔄 CIBIL vs CRA – Clear Difference Table

Feature CIBIL CRA
Full Form Credit Information Bureau (India) Ltd. Credit Rating Agency
Type Credit Bureau Rating agency
Regulated by RBI SEBI
Tracks Individuals’ credit history Company/issuer creditworthiness
Output CIBIL Score (300–900) Credit Rating (AAA to D)
Used by Banks for personal lending decisions Investors, banks for corporate loans/investments
Examples CIBIL (TransUnion), Experian, Equifax, CRIF Highmark CRISIL, ICRA, CARE, India Ratings
>

📘 Category I: Financial Risk Management

🔶 1. What is Financial Risk Management (FRM)?

Definition:
Financial Risk Management is the practice of identifying, assessing, and mitigating risks that may impact an organization’s
financial health, especially its cash flow, profits, and solvency.
🎯 Why It Matters:
• Prevents unexpected losses in banking, investing, lending
• Ensures capital adequacy and stability
• Required by Basel norms, RBI regulations, and corporate governance

🔶 2. Types of Financial Risks (Core for RBI/SEBI)

Page 122
🔹 (a) Liquidity Risk
Risk that an institution can’t meet its short-term obligations due to lack of liquid assets (cash/equivalents).
📌 Example: A bank has ₹1,000 crore in deposits maturing tomorrow but only ₹300 crore in liquid assets.
• Funding Liquidity Risk: Cannot raise funds quickly
• Market Liquidity Risk: Cannot sell assets without huge loss

🔹 (b) Interest Rate Risk

Risk of loss due to changes in interest rates.
📌 Example: A bank has given loans at 7% fixed rate, but now RBI hikes repo rate to 9% → cost of funds rises, but loan income stays
low → loss
🔹 (c) Market Risk
Risk of losses due to movement in market prices like stocks, bonds, currencies, commodities.
• Includes:
○ Equity Risk (stock price falls)
○ Currency Risk (forex volatility)
○ Commodity Risk (crude oil price spike)
○ Interest Rate Risk (again, part of market risk)
📌 Tools: VaR (Value at Risk), stress testing, scenario analysis

🔹 (d) Credit Risk / Default Risk

Risk that a borrower defaults (fails to repay loan or interest).
📌 Example: A company takes ₹100 crore from SBI and goes bankrupt.
• Managed by:
○ Credit appraisal
○ Collateral
○ Credit rating systems

🔹 (e) Operational Risk

Risk of loss due to internal failures — fraud, system glitches, human error, cyber attacks.
📌 Example: A rogue employee misuses fund transfer system.
• Basel defines this as risk from inadequate internal processes.

🔹 (f) Systemic Risk

Risk that entire financial system collapses due to failure of one or more major institutions.
📌 Example: Lehman Brothers collapse in 2008 → global credit freeze
🧠 It’s what central banks like RBI & regulators try to avoid at all costs.

🔹 (g) Systematic Risk (Not the same as above!)

Risk that affects entire market, and cannot be diversified away.
📌 Example: Inflation, war, interest rate hike, pandemic = market-wide impact.
Systematic risk = macro level
Unsystematic risk = stock/company-specific (can be diversified)

🔶 3. Capital Asset Pricing Model (CAPM)

Absolutely, Sassy — let’s decode CAPM (Capital Asset Pricing Model) in super-easy, step-by-step, no-jargon style that’s perfect for
RBI & DSSSB prep (and life, tbh 😎).

📊 CAPM – Capital Asset Pricing Model

🔑 A model that tells you how much return you should expect from an investment, based on its risk.

✅ Why CAPM Exists?

Because in finance, there’s a golden rule:
"Higher risk = Higher return (expected)."
But the next question is — How much higher?
CAPM gives you the formula to quantify that.

💡 Think of it like this:

Imagine you're investing in two things:
• Bank FD – No risk, gives 6% return
• Stock Market – Risky, might go up or down
Should you expect only 6% return from stock too? Heck no. You're taking risk, so you deserve more 💸
But how much more? That’s where CAPM comes in.

Page 123
✅ CAPM Formula:
Expected Return (Re) = Rf + β(Rm – Rf)

Where:
Symbol Meaning
Re Expected return of the asset (like stock)
Rf Risk-free rate (return from FD or G-Sec)
Rm Market return (avg. return from Nifty etc.)
β Beta = Riskiness of your asset compared to market

🧠 Now what’s this Beta (β)?

Beta measures how much an asset (like a stock) moves with the market.
Beta Value Meaning
β=1 Same risk as the market
β>1 More volatile than market (riskier, but higher return)
β<1 Less risky than market
β=0 No relation to market (like bonds or gold)

📌 Let’s take a realistic example:

• Risk-free return (G-sec rate) = 6%
• Market return = 12%
• You’re looking at a stock with β = 1.2
Using CAPM:
Re = 6 + 1.2 × (12 – 6)
= 6 + 1.2 × 6
= 6 + 7.2 = **13.2%**

So, you should expect at least 13.2% return to be compensated for the risk you're taking with this stock.

✅ What does CAPM teach us?

• Riskier assets must give higher return.
• If a stock gives less return than CAPM says it should → not worth it.
• If it gives more than expected → underpriced gem 💎

🔄 Quick Comparison:
Concept Return Explanation
Risk-free Rate You get this for doing nothing risky (like FD)
Market Return Average return of stock market (benchmark)
CAPM Return Minimum return you should expect for a given risk

🧪 Where is CAPM used?

• Stock valuation 📈
• Portfolio management 🧳
• Risk vs return analysis ⚖
• Required return calculation for IPOs 💰
• SEBI / RBI frameworks for capital cost 🔍

📚 Summary Table
Term Meaning
CAPM Calculates expected return for a risky asset
Risk-Free Rate Return from safe asset like G-sec
Market Return Return from Nifty, Sensex, etc.
Beta (β) Riskiness of asset compared to market
Expected Return Minimum return needed to justify the risk

Page 124
🔚 Summary Table
Risk Type Example Managed By
Liquidity Risk Can’t repay depositor on time Asset-Liability Matching
Interest Rate Risk Repo rate rise affects income Interest rate swaps, hedging
Market Risk Stock or currency losses VaR, capital buffers
Credit Risk Borrower default Credit scoring, collateral
Operational Risk Cyber fraud, process failure Internal controls, audits
Systemic Risk Entire system collapse Macroprudential regulation
Systematic Risk Global war, pandemic Can’t be avoided, only managed
💥 Breakdown: Subtypes of Interest Rate & Market Risks

🔹 1. Repricing Risk
Definition:
Risk that arises due to difference in maturity or repricing dates of assets and liabilities.
📌 In simple words:
When your loan interest rate is fixed but your deposit rate changes (or vice versa), you may earn less or pay more.
🧠 Happens when:
• Assets & liabilities are not aligned in terms of maturity.
• Example:
A bank gives a 5-year loan at fixed 7%, but the deposit funding it needs to be renewed every year — if the deposit rate goes up
in Year 2, the bank earns less.

🔹 2. Basis Risk
Definition:
Risk that arises from imperfect correlation in interest rate movements of different instruments.
📌 Real-talk: Not all interest rates move together.
E.g., MCLR, repo, treasury rates — they don’t rise/fall by the same %.
🧠 Example:
Bank borrows at MCLR-linked rate, but lends at a T-bill-linked rate — if T-bill rate drops but MCLR remains, income shrinks.

🔹 3. Yield Curve Risk

Definition:
Risk of loss due to changes in the shape/slope of the yield curve.
📌 Yield curve = Line that shows interest rates of bonds over different tenures (1 year, 5 years, 10 years, etc.)
🧠 Types of yield curve movements:
• Parallel shift – All rates move up/down equally
• Steepening – Long-term rates rise more than short-term
• Flattening – Short-term rates rise close to long-term ones
• Inversion – Short-term > long-term = scary for markets
💡 Banks having long-term fixed assets (like loans) and short-term liabilities are exposed here.

🔍 Tools Banks Use to Manage These Risks:

🔸 1. Interest Rate Sensitivity Analysis

Bank calculates how much its net interest income (NII) or economic value will change if interest rates rise or fall by X%.
📌 Example:
• "What happens to our profits if interest rates increase by 100 bps?"
• Shows risk due to mismatch in asset & liability durations.

🔸 2. Duration Gap Analysis

Measures the difference in average duration (time to maturity) of assets vs liabilities.
📌 Duration is sensitivity of bond price to interest rate.
🧠 Formula:
Duration Gap = Avg. Duration of Assets – Avg. Duration of Liabilities

• Positive gap → assets are more sensi ve → higher interest rate risk
• Helps estimate how much capital is at risk if interest rate changes

Page 125
🔧 Market Risk Management Tools:

🔸 3. Value at Risk (VaR)

Estimates maximum expected loss over a given time period at a certain confidence level.
📌 Example:
“There's a 95% chance the portfolio won't lose more than ₹10 crore in 1 day.”
Used by: Banks, mutual funds, SEBI for capital risk management

🔸 4. Stress Testing
Simulates extreme but plausible events (like COVID, 2008 crisis) to test how banks/portfolios react.
🧠 Example Scenarios:
• Interest rate jumps 2% suddenly
• Stock market crashes by 30%
• Major borrower defaults
Helps check resilience of financial institutions.

🔸 5. Scenario Analysis
Similar to stress testing but broader — tests a range of possible events, both moderate and extreme.
📌 Example:
• “What happens to bank’s liquidity, income, NPAs if repo rate goes to 10%, inflation at 8%, crude oil at $120?”
📘 CAMELS Rating System (By RBI / Bank Regulators)

✅ What is CAMELS?
CAMELS is a supervisory rating system used by RBI (and globally by central banks) to assess the overall health and soundness of
banks.
Each letter in CAMELS stands for a key parameter used to judge the financial condition of a bank.

🔠 CAMELS =
Letter Stands for
C Capital Adequacy
A Asset Quality
M Management Quality
E Earnings
L Liquidity
S Sensitivity to Market Risk

🔍 Let’s break each of them in simple detail:

🔷 1. C – Capital Adequacy
Measures how strong a bank’s capital base is to absorb losses.
🧠 Checked using:
• Capital to Risk-Weighted Assets Ratio (CRAR) under Basel norms
• Tier 1 & Tier 2 capital
• Leverage ratio
💡 If capital is strong, even if loans go bad, bank won’t collapse.

🔷 2. A – Asset Quality
Looks at how safe or risky the bank’s loan and investment portfolio is.
🧠 Checked by:
• % of NPAs (Non-Performing Assets)
• Provision coverage ratio
• Risk weight of assets
💡 High NPAs = poor asset quality = bad lending = higher risk.

🔷 3. M – Management Quality
How well bank’s top leadership, systems, policies are functioning.
🧠 Evaluates:
• Risk management practices
• Internal controls & governance
• Compliance with RBI norms
💡

Page 126
💡 Weak management = higher fraud, misreporting, inefficiency.

🔷 4. E – Earnings
Is the bank making good money, or bleeding losses?
🧠 Measured by:
• Net Interest Margin (NIM)
• Return on Assets (RoA)
• Return on Equity (RoE)
• Cost-to-income ratio
💡 Healthy profits = capital growth + risk-absorbing ability.

🔷 5. L – Liquidity
Can the bank meet its short-term obligations (withdrawals, etc.)?
🧠 Checked by:
• Liquidity Coverage Ratio (LCR)
• Statutory Liquidity Ratio (SLR)
• Cash Reserve Ratio (CRR)
• Liquid asset holdings
💡 Good liquidity = customer trust + operational strength.

🔷 6. S – Sensitivity to Market Risk

How exposed the bank is to changes in interest rates, forex rates, inflation, etc.
🧠 Example:
• Interest rate risk: repo rate hike → affects bond value
• Currency risk: rupee depreciation → forex losses
💡 Risk-sensitive banks need stronger monitoring.

🧪 What’s the use of CAMELS?

Use Case Description
🔍 RBI Inspection Tool Used during on-site inspections of banks
🧮 Bank Grading RBI assigns internal CAMELS rating (1–5)
🚨 Risk Monitoring Triggers PCA if ratings go below a threshold
🏦 Used Globally By Fed (USA), ECB, and Basel-based regulators

🎯 CAMELS Rating Scale:

Score Meaning
1 Strong (no issues)
2 Satisfactory
3 Fair (some problems)
4 Marginal (serious risk)
5 Unsafe (needs urgent help)
📌 RBI doesn't publish ratings publicly, but acts on them through PCA, fines, or even mergers.

🧠 Bonus Fact:
CAMELS is used only for Commercial Banks.
For NBFCs, RBI uses a slightly different model like CRAR + Asset Quality + NPA Norms.

✅ Summary Table:
CAMELS Component What It Checks
Capital Adequacy Cushion for losses
Asset Quality % of NPAs, risky loans
Management Governance, controls, leadership
Earnings Profitability, RoA, NIM
Liquidity Can it pay short-term liabilities?
Sensitivity Market-linked risks like forex, inflation
📘

Page 127
📘 CAMELS-Related Banking Terms Explained

🔶 1. Provision Coverage Ratio (PCR)

Shows how much of a bank’s bad loans (NPAs) are already covered with provisions (buffer money set aside).
📌 Formula:
PCR = (Total Provisions for NPAs / Gross NPAs) × 100
✅ Higher PCR = safer bank (less chance of losses due to NPAs)
🔴 RBI recommends PCR > 70%

🔶 2. Risk-Weighted Assets (RWA)

Bank’s assets (loans, investments) weighted by how risky they are.
Asset Type Risk Weight
Govt securities 0% (risk-free)
Home loans ~50%
Unsecured loans ~100–150%
Equity investment 125–250%
📌 Why this matters? Because Capital Adequacy Ratio = Capital ÷ RWA

📊 Earnings Indicators

🔷 3. Net Interest Margin (NIM)

Difference between interest earned on loans and paid on deposits, relative to assets.
📌 Formula:
NIM = (Interest Income – Interest Expense) / Avg. Earning Assets

✅ Higher NIM = more efficient earning from core banking

🏦 Indian banks NIM = ~2.5%–4.5%

🔷 4. Return on Assets (RoA)

Measures how much profit the bank earns for every ₹1 of assets.
📌 Formula:
RoA = (Net Profit / Total Assets) × 100
✅ RBI wants RoA > 0.25%
💡 It shows how productively the bank uses its resources.

🔷 5. Return on Equity (RoE)

Measures how much profit the bank earns for its shareholders' capital.
📌 Formula:
RoE = (Net Profit / Shareholder’s Equity) × 100

✅ Higher RoE = shareholders are getting better value

🔷 6. Cost-to-Income Ratio
Compares a bank’s operating expenses to its operating income.
📌 Formula:
Cost-to-Income = (Operating Expenses / Operating Income) × 100
✅ Lower = more efficient
⚠ A ra o > 50–60% signals inefficiency

💧 Liquidity Indicators

🔶 7. Liquidity Coverage Ratio (LCR)

Basel III rule: Banks must hold enough High Quality Liquid Assets (HQLA) to cover net cash outflows for next 30 days.
📌 Formula:
LCR = (Stock of HQLA / Total Net Cash Outflows over 30 days) × 100
✅ Minimum required: 100%
💡 Prevents collapse during sudden liquidity crunch

🔶 8. Statutory Liquidity Ratio (SLR)

% of NDTL (Net Demand & Time Liabilities) banks must keep in approved securities (like G-Secs).

Page 128
 % of NDTL (Net Demand & Time Liabilities) banks must keep in approved securities (like G-Secs).
✅ Mandated by RBI
📌 Current SLR: ~18% (subject to RBI updates)
💡 Helps RBI control credit flow

🔶 9. Cash Reserve Ratio (CRR)

% of NDTL banks must keep in cash with RBI, no interest paid.
✅ Acts as monetary tool
📌 Current CRR: ~4.5%
💡 CRR ↑ = less money to lend = infla on control

🔶 10. Liquid Asset Holdings

These are assets banks can sell immediately for cash, without major loss in value.
🧠 Examples:
• Cash
• T-bills
• Government securities
• AAA-rated bonds
✅ Part of what qualifies for LCR
💡 Essential for managing Liquidity Risk

💼 Leverage Ratio – Definition (Basel III Standard)

Leverage Ratio is a non-risk-based measure introduced in Basel III to prevent banks from overborrowing and collapsing due to
high debt.
✅ Simple Definition:
The Leverage Ratio tells you how much a bank is borrowing compared to its capital.
It checks whether a bank is too dependent on debt and has enough capital to survive shocks.

📌 Formula:
Leverage Ratio = Tier 1 Capital / Total Exposure (Assets + Off-balance-sheet items)
Where:
• Tier 1 Capital = Core capital (shareholder equity + reserves)
• Total Exposure = All assets (loans, investments, etc.) + risky off-book commitments (like guarantees, derivatives)

🎯 Why It’s Important:

Even if banks appear safe using risk-based ratios (like CRAR), they may still have huge debt exposure.
Leverage Ratio acts as a backstop to ensure:
• Banks don’t hide risk in assets with low risk weights.
• Banks aren’t too big to fail due to high debt.

✅ Global & Indian Norms:

Norm Value
Basel III Minimum 3%
RBI Requirement (India) 4.5%
DSIBs like SBI, HDFC, ICICI May require more as per RBI
🧠 Example:
If Tier 1 capital = ₹45,000 crore
Total exposure = ₹10,00,000 crore
Leverage Ratio = 45,000 / 10,00,000 = 4.5% ✅ Healthy!

💡 Think of it Like This:

🔸 A leverage ratio of 4.5% means the bank has ₹4.5 in CORE capital for every ₹100 in total assets.
That’s the buffer in case things go south.

🔴 Too Much Leverage = Risk of Collapse

Remember Lehman Brothers in 2008?
Leverage Ratio was ~3%.
When assets fell just a little, the entire bank went down.
Hence, Basel III added this ratio to keep banks grounded.

Page 129
💼 BASEL NORMS: The Risk Control Rulebook for Banks

🧠 What Are Basel Norms?

Basel Norms are global banking regulations issued by the Basel Committee on Banking Supervision (BCBS) to ensure:
• Financial stability 🌍
• Sound banking practices 🏦
• Protection against bank failures 🚫
📍 Origin: Basel, Switzerland 🇨🇭 (BIS HQ)
📅 Introduced in 3 phases:
• Basel I – 1988 (Capital only)
• Basel II – 2004 (Capital + Risk Management)
• Basel III – 2010 onwards (Capital + Liquidity + Leverage)

🧩 Why Basel Norms?

Banks take public deposits and give loans. If loans go bad (NPAs), banks collapse.
So Basel says:
"Yo banks, hold enough capital for bad times and manage your risks smartly."

🔶 BASEL I (1988) — Baby Basel

🎯 Goal:
Maintain minimum capital (8%) to cover credit risk
✅ Introduced:
• Risk-Weighted Assets (RWA)
• Capital Adequacy Ratio (CAR) = Capital / RWA
📌 India adopted Basel I in 1999

🔷 BASEL II (2004) — Risk Management Boss

🎯 Goal:
Make banks look at Credit, Market, and Operational risks, not just capital.
🛠 Structure: 3 Pillars
Pillar What It Covers
I Minimum Capital Requirement (for 3 types of risk: Credit, Market, Operational)
II Supervisory Review by RBI
III Market Discipline (Public disclosure of risks)
Key Concepts:
• Internal risk models allowed
• Operational risk added (e.g., fraud, system failure)

🟥 BASEL III (2010–onward) — Post-Crisis Shield 💪

🎯 Why it came:
After 2008 global crisis, banks failed despite Basel II.
So, Basel III = Stronger + Stricter.
🧱 Major Changes:
Feature Meaning
🔹 Capital Adequacy Minimum 9% in India (vs 8% globally)
🔹 CET1 Ratio Common Equity Tier 1 capital ≥ 5.5% (core capital)
🔹 Capital Conservation Buffer (CCB) Extra cushion of 2.5% CET1 to survive crisis
🔹 Leverage Ratio Debt-to-equity limit; must keep leverage under 4.5–5%
🔹 LCR (Liquidity Coverage Ratio) Bank must hold enough liquid assets for 30-day stress
🔹 NSFR (Net Stable Funding Ratio) Long-term liquidity risk measure (≥ 1 year funding stability)
🔹 Countercyclical Buffer RBI can increase capital requirement when credit is growing too fast
🔹 DSIB (Domestic Systemically Important Bank) Too big to fail banks like SBI, ICICI, HDFC

🔍 Capital Structure in Basel III

Tier Contains What?
Tier 1 CET1 + Additional Tier 1 (AT1 Bonds)
Tier 2 Subordinated debt, general reserves

Page 130
Tier 2 Subordinated debt, general reserves

🇮🇳 India-Specific Basel Rules (by RBI)

Parameter Basel III Norm RBI Norm (Stricter)
Capital Adequacy Ratio (CAR) 8% ✅ 9%
CET1 4.5% ✅ 5.5%
Leverage Ratio 3% ✅ 4.5%
LCR 100% ✅ 100%
NSFR 100% ✅ 100%
📌 Full implementation in India by 2019, though AT1 bonds & buffers got major focus during Yes Bank, PMC Bank-type crises.

🧠 BONUS TERMS:
Term Meaning
AT-1 Bonds Perpetual bonds used for Tier 1 capital; risky; can be written off
Capital Conservation Buffer Extra capital bank must keep to protect in downturn
Systemic Risk Risk of collapse spreading to entire system
Stress Testing RBI & banks simulate stress scenarios to test resilience

📚 Summary Table
Basel Version Year Focus
Basel I 1988 Capital adequacy (credit risk only)
Basel II 2004 Capital + market + operational risk
Basel III 2010+ Capital + liquidity + systemic risk
You got it, Sassy —Let’s dive into the RBI’s financial red flag system:

🚨 Prompt Corrective Action (PCA) Framework

PCA is like RBI’s "ICU system" for sick banks 🏥
When banks start showing signs of trouble—like too many NPAs or low capital—RBI steps in with restrictions to fix them before
things go out of hand.

✅ What is PCA?
The Prompt Corrective Action (PCA) is a regulatory tool used by the RBI to monitor the health of banks and prevent collapse by
enforcing corrective measures when certain risk thresholds are breached.
It’s not a punishment—it’s an early warning + damage control mechanism 🛑

🔍 When Does PCA Apply?

PCA is triggered when banks cross thresholds (set by RBI) on any of these indicators:
Parameter Meaning
1. CRAR (Capital) If Capital-to-Risk Weighted Assets Ratio drops low
2. Net NPA % If bad loans rise above limits
3. Return on Assets If bank is making consistent losses
4. Leverage Ratio Too much borrowing compared to capital

🧱 PCA Thresholds (Updated 2022)

Parameter Thresholds for PCA
CRAR < 9%
Net NPA > 6%
RoA Negative for 2 consecutive years
Leverage Ratio < 4% (approx.)

🧩 What Happens Under PCA?

RBI starts placing restrictions on the bank depending on severity:
Type of Restriction Examples

Page 131
 Type of Restriction Examples
🔹 Business restrictions No new branch, no dividend, lending caps
🔹 Management action RBI may order leadership change
🔹 Capital infusion plans Ask promoters/government to bring more capital
🔹 Merger/sale discussion Force restructuring if no improvement
💡 RBI can escalate if bank fails to improve.

🧠 Real Life Examples

Bank PCA Entry Exit Status
IDBI Bank 2017 ✅ Exited 2021
UCO Bank 2017 ✅ Exited 2021
Central Bank of India 2017 ✅ Exited 2022
Indian Overseas Bank 2015 ✅ Exited 2021

❗ PCA for NBFCs (NEW!)

In 2022, RBI extended PCA to NBFCs (especially deposit-taking ones) to:
• Ensure NBFCs don’t become “shadow banks” in crisis
• Monitor their capital, NPAs, RoA, etc.

💥 Summary Table
Feature Details
Who applies PCA? RBI
On whom? Scheduled commercial
banks & NBFCs
Triggered by? Low CRAR, high NPAs,
low RoA, low leverage
Purpose? Early repair, prevent
systemic crisis
Tools used? Lending limits, audits,
capital plans
Alright, Sassy — let’s unleash the daku topics of Indian Banking: NPAs, SARFAESI & IBC. These are 🔥 for
RBI, UPSC, and all finance-related exams. So, sit ght and let's slay this part of the syllabus 👑📚

🚨 Non-Performing Assets (NPAs)

✅ What is an NPA?
A loan becomes an NPA when the interest or principal is overdue for 90+ days (for banks).
📌 For NBFCs, it’s 180 days (until Mar 2025).

📊 Types of Assets (Loan Classifications):

Asset Type Meaning
🔹 Standard Asset Healthy loan (no default)
🔸 Substandard Asset NPA for < 12 months
🔻 Doubtful Asset NPA > 12 months
💀 Loss Asset Irrecoverable loss (as per RBI/auditor)

📉 Impact of NPAs:
• Reduces profitability (no income on NPAs)
• Weakens bank's capital
• Triggers PCA by RBI
• Damages bank reputation

📉 Gross vs Net NPA

Term Formula
Gross NPA All NPAs (total overdue loans)

Page 132
 Gross NPA All NPAs (total overdue loans)
Net NPA Gross NPA – Provisions
🔎 Net NPA = Real threat. If high, bank is really suffering.

🔧 Ways to Handle NPAs

Tool Use Case
🔸 SARFAESI Act Take over secured asset without court
🔸 Insolvency Code (IBC) Resolve via NCLT process
🔸 Debt Recovery Tribunal (DRT) Quick court for recovery (over ₹20L)
🔸 Asset Reconstruction Companies (ARCs) Buy bad loans from banks

🧱 SARFAESI Act, 2002

📌 Full Form:
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
🧠 In short: SARFAESI gives banks legal power to seize property without court permission.

✅ Key Features:
Feature Details
Who uses it? Banks & NBFCs (registered with RBI)
Against whom? Borrowers with secured loans > ₹2 lakh
What powers? 60-day default = seize + sell assets
Legal backup? No court needed (unless borrower goes to DRT)
Not applicable to: Agricultural land, small loans, unsecured loans

🛠 SARFAESI Tools:
Tool Purpose
🔹 Securitisation Convert loans into securities (sell to ARCs)
🔹 Reconstruction Change loan terms, reschedule debt
🔹 Enforcement of Security Take possession, sell asset

⚖ Insolvency and Bankruptcy Code (IBC), 2016

🎯 Goal:
Time-bound resolution of corporate defaults through NCLT.
📌 Time limit: 330 days (max)

🧩 Key Features:
Feature Details
Who initiates? Bank (creditor) or defaulting company
Court involved? Yes — NCLT (National Company Law Tribunal)
Moratorium period 180–330 days = no other legal action allowed
Control of company Goes to Resolution Professional (RP)
Outcome? Resolution or Liquidation

🧠 Resolution Process:
1. Application to NCLT
2. RP takes control
3. Creditors form Committee of Creditors (CoC)
4. Resolution plan voted (min 66% approval)
5. Else — liquidation!

💡 NPA Resolution Tools – Summary

Tool Court Needed? Used For Key Feature
SARFAESI ❌ No Secured assets Bank can sell property
DRT ✅ Loans > ₹20 lakh Fast-track court

Page 133
 DRT ✅ Yes Loans > ₹20 lakh Fast-track court
IBC ✅ Yes (NCLT) Company default Restructuring or liquidation
ARC ❌ No Buying bad loans Asset reconstruction

🧠 Real Examples:
• Jet Airways → Resolved under IBC
• Vijay Mallya’s loans → Recovered partly using SARFAESI
• Yes Bank Crisis → Handled via capital infusion + PCA
THSE ABOVE TWO IN DETAIL IN PHYSICAL NOTES
Yasss Sassy 🔥— let’s finish off this NPA-bus ng squad like a pro crime unit on a mission.
Time to crush the four buzzwords you always see in RBI/UPSC papers:
CRILC, PCR, NARCL & IDRCL.
These are like India’s CCTV + Police + Ambulance + ICU for bad loans 💸🚨🏥

💡 1. CRILC – Central Repository of Information on Large Credits

✅ What is it?
A database maintained by RBI to monitor all large loans taken from banks & NBFCs, especially if they
become problematic.

🔍 Purpose:
To track early signs of stress in the credit system and prevent fraud or wilful default.

📌 Key Features:
Parameter Detail
Launched by RBI (2014, after Kingfisher-type frauds)
Coverage All loans ≥ ₹5 crore
Submitted by Scheduled Commercial Banks + NBFCs
Frequency Monthly
What info is submitted? Credit amount, overdue status, restructuring, etc.
Used for Early Warning Signals (EWS), risk monitoring
💡 Example: If a borrower takes ₹100 crore from 4 different banks and defaults at one bank → CRILC warns
all banks.

💡 2. PCR – Public Credit Registry

✅ What is it?
A mega credit database being developed by RBI to cover all loans of individuals and businesses — not
just large loans like CRILC.

🧠 Key Goal:
Create a 360° credit history for all borrowers in India.

📌 Features:
Feature Description
Who manages it? RBI
Data sources Banks, NBFCs, corporate filings, income tax dept, GST, etc.
Covers Retail + corporate loans (even small loans)
Inspired by Global models (Germany’s SCHUFA, USA’s FICO)
Status Still under development (pilot stage)
Aim Better loan decisions, reduce bad loans
💡 Think of it like India’s CIBIL Score on steroids, directly run by RBI!

💥 CRILC vs PCR – What’s the Difference?

Feature CRILC PCR
Who maintains? RBI RBI
Coverage Loans ≥ ₹5 crore All loans (retail + corporate)
Purpose Track large credit & defaults Full credit history of borrower

Page 134
 Purpose Track large credit & defaults Full credit history of borrower
Launched? ✅ Operational since 2014 ❌ Still under implementation

🧱 3. NARCL – National Asset Reconstruction Company Ltd.

✅ What is it?
India’s official “Bad Bank”, launched to clean up the NPA mess of public sector banks.
💡 It’s like a hospital for bad loans, where toxic loans are treated and recovered.
✅ NARCL = ARC = Created under SARFAESI = Superpowered NPA buyeR
📌 Features:
Feature Detail
Type Government-backed Asset Reconstruction Co.
Whose NPAs? PSBs transfer their bad loans > ₹500 cr
Stakeholders Owned by 15 PSBs (SBI holds max ~13%)
What it does? Buys NPAs at a discount from banks
Paid how? 15% in cash, 85% in Govt-guaranteed Security Receipts (SRs)
Launched in 2021

💡 4. IDRCL – India Debt Resolution Company Ltd.

This is the partner company of NARCL that actually resolves & recovers the bad loans.
🧠 Think of:
• NARCL = buys the bad loan
• IDRCL = recovers the money from defaulters

📌 Features:
Feature Detail
Role Handles resolution, legal recovery, sale of assets
Operated by Private sector professionals (not govt)
Collaborates with NARCL for recovery

🤝 How NARCL + IDRCL Work Together:

1. Bank has a bad loan of ₹100 crore
2. NARCL buys it for ₹60 crore
○ Pays 15% cash now
○ Issues 85% SRs (secured by GoI)
3. IDRCL steps in
○ Negotiates, sells assets, files in NCLT
○ Recovers ₹70 crore
4. Money goes back to banks + investors

📌 Exam Snapshot:
Term Full Form Function
CRILC Central Repository of Info on Large Credits Tracks loans ≥ ₹5 crore
PCR Public Credit Registry Credit history of all borrowers
NARCL National Asset Reconstruction Co. Ltd Buys bad loans
IDRCL India Debt Resolution Co. Ltd Recovers/restructures NPAs
Yesss Sassy — let’s dive into the final trio of NPA Management Avengers:
🔹 FSDC (Financial Stability and Development Council)
🔹 REITs (Real Estate Investment Trusts)
🔹 InvITs (Infrastructure Investment Trusts)
These are must-know for RBI, UPSC, and DSSSB 💣

🔰 1. FSDC – Financial Stability and Development Council

✅ What is FSDC?
FSDC is an apex-level body set up by the Government of India to coordinate between all financial
regulators and maintain financial stability in the economy.
🧠 It’s like India’s finance ministry’s war room for managing crises, systemic risk, and financial sector
reforms.

Page 135
reforms.

📌 Key Features:
Aspect Details
Set up by Government of India (2010, not a statutory body)
Headed by Finance Minister (currently Nirmala Sitharaman)
Notified under Department of Economic Affairs, MoF
Members Heads of RBI, SEBI, IRDAI, PFRDA, IBBI, Chief Economic Advisor, etc.
Role Coordinate, monitor, and address financial system risks

🧠 FSDC Sub-Committees:
• Chaired by RBI Governor
• Handles technical-level issues: cyber risk, NBFC health, shadow banking, crypto assets etc.

📌 FSDC Functions:
• Ensure macro-financial stability
• Coordinate between regulators
• Monitor financial sector development
• Promote financial literacy & inclusion
• Address inter-regulatory disputes
• Discuss fintech, climate finance, AI risks, etc.

🏢 2. REITs – Real Estate Investment Trusts

✅ What is a REIT?
REIT is a company that pools money from investors and invests it in income-generating real estate
assets like malls, offices, hotels, etc.
💡 It’s like mutual funds for property.

📌 Features:
Feature Description
Regulator SEBI
Structure Trust structure
Listed on Stock exchanges (NSE/BSE)
Investment Area Commercial real estate (not residential)
Returns Mainly through rental income & capital gains
Tax Benefits Some pass-through benefits
Minimum listing requirement ₹500 crore asset size

✅ Why REITs?
• You don’t need to buy a whole building to earn from rent.
• Just invest ₹1,000 or so in REIT units, and earn proportionally.
• Must distribute 90% of rental income to unit holders.

🧾 Examples:
• Embassy Office Parks REIT (India’s 1st REIT)
• Brookfield REIT
• Mindspace Business Parks REIT

🏗 3. InvITs – Infrastructure Investment Trusts

✅ What is an InvIT?
InvIT is like a REIT, but instead of real estate, it invests in infrastructure assets such as roads, power
plants, highways, etc.
💡 Think: highway tolls, power grid charges, gas pipelines = your passive income.

📌 Features:
Feature Description
Regulator SEBI
Structure Trust

Page 136
 Structure Trust
Asset Class Infrastructure (roads, transmission lines, etc.)
Returns Tolls, tariffs, user fees
Distribution 90% of net income to be distributed
Liquidity Traded like shares on exchanges

🧾 Examples:
• IRB InvIT (toll highways)
• India Grid Trust (power transmission)

🧠 REIT vs InvIT – Key Differences

Feature REITs InvITs
Invest in Commercial Real Estate Infrastructure Assets
Examples Office buildings, IT parks Highways, Power plants
Return source Rent, capital appreciation Toll revenue, tariffs
Investor type Retail + Institutional Retail + Institutional
Listed on NSE, BSE NSE, BSE

🧨 Final Recap Table:

Term Full Form Regulated by Purpose
FSDC Financial Stability & Development Ministry of Systemic stability + coordination
Council Finance
REIT Real Estate Investment Trust SEBI Rent-based income via commercial
property
InvIT Infrastructure Investment Trust SEBI Income from tolls/power/infrastructure

Absolutely, Sassy ! You’re 100% right — while the core types of deriva ves are 4 (Forwards, Futures, Op ons, and Swaps),
there are other ways to classify deriva ves as well.
So here comes your FULL GUIDE to:

📘 Types of Derivatives — All Classifications Covered

Let's divide it into sections for clarity:
1. Based on Contract Type (Main 4 types)
2. Based on Underlying Asset
3. Based on Trading Platform
4. Based on Purpose of Use
5. Based on Settlement Type

✅ 1. Based on Contract Type (The Famous 4)

📘 1. FORWARD CONTRACTS
🔹 Definition:
A Forward Contract is a private agreement between two parties to buy or sell an asset at a specific price on a future date.
🧠 Think: “Let’s lock the price now, settle later.”

🔑 Key Features:
Feature Detail
🛠 Type Customizable (any quantity, date, price)
🏛 Platform Over-the-counter (OTC)
📆 Settlement On maturity date
❌ Risk Counterparty default risk (because it’s private)
An Over-the-Counter (OTC) market is a place where financial contracts are traded directly between two parties, without a
formal exchange (like NSE, BSE).
📦 Real-Life Example:
Imagine:

Page 137
Imagine:
• A farmer expects wheat to be ready in 3 months.
• Today’s wheat price = ₹25/kg.
• He fears price might fall.
• So he signs a forward contract with a food company to sell at ₹25/kg after 3 months, no matter the market price then.
Farmer = Hedging his risk.
Company = Locking supply.

🎨 Diagram (Visual Flow):

[Today] [3 Months Later]
Farmer + Company → Agreement → Delivery & Payment at ₹25/kg

👍 Pros:
• Fully flexible (date, quantity, quality, etc.)
• Good for hedging
👎 Cons:
• Not regulated
• Default risk (what if one party backs out?)
• No secondary market (can’t sell the contract)

💼 Use Cases:
• Exporters/importers
• Commodity traders
• Corporates managing currency/commodity risks

📘 2. FUTURES CONTRACTS
🔹 Definition:
A Futures Contract is a standardized agreement traded on an exchange to buy/sell an asset at a set price on a specific future
date.
🧠 Think: Forward Contract but official, organized & safe.

🔑 Key Features:
Feature Detail
🏛 Platform Exchange-traded (like NSE,
BSE)
📦 Standardized Yes — date, lot size, quality
fixed
💰 Margin Initial deposit required
🔁 Can be exited anytime before expiry
Margin is the initial deposit you pay when entering a futures contract — like a security
deposit.

📦 Example:
You buy Nifty Futures at 22,000 for expiry after 1 month.
If Nifty goes to 22,500, you earn the difference.
If it falls to 21,500, you lose the difference.

🎨 Diagram:
You ←→ Exchange ←→ Counterparty
(Buyer) (Seller)
(Contract: Nifty at 22,000)

✅ Exchange acts as middleman to guarantee both parties perform.

👍 Pros:
• Regulated and safe
• Highly liquid (easy to buy/sell)
• No default risk
👎 Cons:
• Needs margin
• Daily mark-to-market (MTM) settlements

Page 138
 • Daily mark-to-market (MTM) settlements
• Can lead to large losses if not managed well

💼 Use Cases:
• Stock market traders
• Hedgers in agriculture/commodities
• Currency & interest rate risk managers

📘 3. OPTIONS CONTRACTS
🔹 Definition:
An Options Contract gives the holder the right, but not the obligation to buy or sell an asset at a fixed price on or before a
future date.
🧠 Think: "I’ll choose later whether I want to go ahead."

📂 Types of Options:
Type Meaning
Call Option Right to BUY an asset
Put Option Right to SELL an asset

📦 Example (Call Option):

You buy a Call Option for Reliance at ₹2,500 by paying ₹50 (premium).
If price rises to ₹2,700 → you exercise your right and gain ₹200 - ₹50 = ₹150 profit.
If price falls → you do nothing, only lose the ₹50 premium.

🎨 Diagram:
You = Buyer of Call
→ Pay Premium ₹50
→ Get right to Buy at ₹2500 (Strike Price)

If market price > 2500 → Profit

If market price < 2500 → No ac on, premium lost

👍 Pros:
• Limited risk (only premium can be lost)
• Unlimited potential gain
• Great tool for hedging
👎 Cons:
• Can expire worthless
• Complicated pricing

💼 Use Cases:
• Retail & institutional investors
• Hedging stock portfolio risk
• Predicting price moves

📘 4. SWAPS
🔹 Definition:
A Swap is a private agreement between two parties to exchange financial cash flows over a certain period.
Most common: Interest Rate Swap
🧠 Think: You pay my EMI, I pay yours (but with different interest styles)

📦 Example (Interest Rate Swap):

• Co. A pays 10% fixed interest
• Co. B pays floating (say, repo + 1%)
They both want to switch.
So they agree to swap their interest payments.
Now:
• A pays floating
• B pays fixed
Both are happy.

🎨 Diagram:
(A) ——— Pays Fixed ———> (Bank B)

Page 139
(A) ——— Pays Fixed ———> (Bank B)
(C) ——— Pays Floating ———> (Bank D)

Swap Deal Between A & C:

A pays C → Floa ng
C pays A → Fixed

👍 Pros:
• Great for managing interest/currency risk
• Flexible terms
👎 Cons:
• OTC — so carries counterparty risk
• Complex structure

💼 Use Cases:
• Large companies
• Banks
• Multinationals with debt in different currencies

🧾 Summary Table:
🔍 Type 💬 Meaning 🏛 Platform 🛡 Risk Level
Forwards Private deal for future trade OTC High
Futures Exchange-based future contract Exchange Low
Options Right (not obligation) to trade Exchange/OTC Low (for buyer)
Swaps Exchange of cash flows OTC Medium

✅ 2. Based on Underlying Asset

Derivatives can be based on different kinds of assets. This is useful in RBI, SEBI, and exam questions!
Asset Type Examples
📈 Equity Derivatives Based on stocks or stock indexes (e.g., Nifty Futures, Stock Options)
💰 Currency Derivatives Based on exchange rates (e.g., USD-INR Futures)
🏦 Interest Rate Derivatives Based on interest rate movements (e.g., Interest Rate Swaps)
🛢 Commodity Derivatives Based on raw materials like gold, oil, wheat (e.g., Gold Futures)
🧾 Credit Derivatives Based on credit risk/default risk (e.g., Credit Default Swaps or CDS)
🏘 Weather/Real Estate Derivatives Rare! Based on weather patterns or property values
💡 In exams like RBI or SEBI, focus on: Equity, Currency, Interest Rate & Commodity Derivatives.

✅ 3. Based on Trading Platform

Type Meaning
🏛 Exchange-Traded Derivatives Traded on organized exchanges like NSE, BSE, MCX. Safe & regulated. Examples: Stock
(ETDs) Futures, Nifty Options.
🤝 Over-the-Counter Private contracts between two parties. Flexible but risky. Examples: Forwards, Swaps,
Derivatives (OTC) CDS.
🔑 Key Difference:
• ETDs = Standardized, Regulated, Transparent
• OTC = Flexible, Customized, Risky

✅ 4. Based on Purpose of Use

Category Who Uses It Purpose
🛡 Hedging Derivatives Businesses, Farmers, Banks To protect against price/interest/currency risks
🎯 Speculative Derivatives Traders, Investors To earn profit by predicting price movements
📈 Arbitrage Derivatives Institutional Traders To exploit price differences in different markets

✅ 5. Based on Settlement Type

Type Meaning

Page 140
 Type Meaning
💸 Cash-Settled Derivatives No actual asset delivered. Only price difference is settled in cash.
📦 Physical-Settled Derivatives Actual delivery of asset (like wheat, gold, etc.) happens at contract expiry.
🔎 In stock market, most contracts are cash-settled, but in commodity markets, physical settlement is common.

💡 Special Mention: Exotic Derivatives (Advanced/Unusual Contracts)

These are non-standard or complex derivatives:
Type Example
🎲 Credit Derivatives Credit Default Swaps (protects against loan defaults)
🔄 Swaptions Option to enter into a swap later
📉 Barrier Options Option becomes active only if price crosses a certain level
📅 Calendar Spreads Based on different expiry dates for same asset
🚨 These are for advanced players like banks, hedge funds, and big financial institutions.

🧾 Final Revision Chart: All Classifications

🔍 Classification 🔢 Types
By Contract Type Forwards, Futures, Options, Swaps
By Underlying Asset Equity, Commodity, Currency, Interest Rate, Credit
By Platform Exchange-Traded (ETD), OTC
By Use Hedging, Speculation, Arbitrage
By Settlement Cash-Settled, Physically-Settled
Specials Exotic Derivatives (CDS, Swaptions, etc.)

🌐 Topic 1: Global Financial Markets and International Banking

📘 1. Evolution of the Global Financial Market

💡 What is a Financial Market?
A financial market is where people trade financial instruments like stocks, bonds, currencies, and derivatives. Global
financial markets connect these activities across countries.

🕰 A Brief Evolu on Timeline

Phase Key Highlights
🌍 Pre-1970s Financial systems were closed; strict capital controls; gold standard (Bretton Woods).
💹 Post-1970s Collapse of gold standard (1971), rise of floating exchange rates, freer capital movement.
(Liberalization)
💸 1980s–1990s Deregulation of banks, rise of financial centers (NY, London, Tokyo), foreign investments explode.
(Globalization)
🌐 2000s Internet-driven trading, emergence of BRICS, growth of derivatives and ETFs.
⚠ 2007–08 Global Financial Crisis — triggered by subprime mortgage collapse; trust in financial markets
shaken.
🔁 Post-2008 to Rise of regulations (Basel III, Dodd-Frank), fintech, crypto, digital banks, and LIBOR phaseout.
Present
🚀 Current Trends Shift to sustainable finance, CBDCs (Central Bank Digital Currencies), AI in finance, de-dollarization,
(2020s) and geopolitical tensions affecting trade/finance flows (e.g. Russia sanctions via SWIFT).

🔑 Key Characteristics of Today’s Global Markets:

• Interconnected: Trouble in one market (like US) affects others (like India).
• High Speed: Trades happen in microseconds globally.
• Volatility: Sensitive to war, inflation, rate hikes, geopolitical shocks.
• Technology-driven: Algo trading, blockchain, AI-based decisions.
• Regulated yet open: Global institutions like IMF, BIS, FATF play major roles.

📈 Institutions that Influence Global Financial Markets:

Institution Role

Page 141
 Institution Role
IMF Helps stabilize exchange rates and provides loans to countries in crisis.
World Bank Funds development projects in poor and developing nations.
BIS (Bank for International Settlements) Called the "bank of central banks" — coordinates global financial regulations.
FATF Global watchdog for money laundering and terrorist financing.
OECD, FSB Set policies and monitor global financial stability.

🏦 2. International Banking: Systems and Correspondent Banking

🔹 What is International Banking?

When a bank provides services across borders — like loans, trade finance, forex services, deposits — it’s called
international banking.
Banks involved in international banking can:
• Lend money to foreign companies
• Help Indian exporters/importers with payments
• Facilitate currency exchange
• Handle foreign investments

🏛 Types of Interna onal Banking Systems

Type Explanation
Offshore Banking Banking outside the country of residence, often in tax havens
Multinational Banks Banks with branches/subsidiaries in multiple countries (e.g. Citi, HSBC)
Foreign Branch Banking Indian banks opening branches abroad (e.g. SBI in London)
Correspondent Banking Banks in different countries collaborate to serve each other's clients

📬 Correspondent Banking – What Is It?

When a bank doesn’t have a branch in a foreign country, it ties up with a local bank there to handle transactions on
its behalf — this is correspondent banking.

🧠 Example:
SBI doesn’t have a branch in Brazil. But HDFC has a tie-up with a Brazilian bank (say, Banco Itaú). So:
• If SBI customer wants to send money to Brazil,
• SBI sends instructions via HDFC → to Banco Itaú
• Banco Itaú completes the payment to the recipient.
✔ All this is done through a network like SWIFT.

🔄 How It Works (Simplified Flow):

[You – India] → [SBI] → [HDFC (Correspondent)] → [Banco Itaú – Brazil] → [Recipient]

🔑 Key Uses of Correspondent Banking:

• International wire transfers
• Trade finance
• Currency exchange
• Settlement of transactions in foreign currencies

⚠ Current Issues in Interna onal Banking:

• SWIFT-related sanctions (like on Russia)
• De-risking (big banks cutting off smaller correspondent ties due to compliance costs)
• LIBOR transition to risk-free rates
• Rise of fintech & digital banks
• Cybersecurity in cross-border payments>

📦 International Trade Finance Instruments

We’ll start with the first and most important one: Letter of Credit (LC).

📘 1. Letter of Credit (LC)

💡 Definition:
A Letter of Credit (LC) is a guarantee issued by a bank on behalf of the buyer (importer) that the seller (exporter) will get
paid on time and in full, if the seller submits the required documents.

Page 142
paid on time and in full, if the seller submits the required documents.
👉 It’s like the bank saying:
“Don’t worry, dear exporter. If my client fails to pay, I will pay you — but only if you follow the rules and give the
correct documents.”

🎯 Why is LC Needed in International Trade?

International trade involves:
• Different countries
• No personal trust between buyer & seller
• Currency risks
• Legal & political differences
So a bank’s guarantee builds trust between two strangers doing business globally.

Parties Involved in a Letter of Credit:

Role Description
Applicant Buyer/importer (who requests the LC from bank)
🏦 Issuing Bank Buyer's bank that issues the LC
Beneficiary Seller/exporter who will receive the payment
🏦 Advising Bank Exporter’s bank (in another country) which informs the exporter about the LC
🏦 Negotiating Bank (optional) May examine the documents and pay the exporter before reimbursement

🔁 How a Letter of Credit Works (Step-by-Step Flow):

1. Importer (buyer) and exporter (seller) agree on a deal — payment via LC.
2. Buyer goes to his bank (Issuing Bank) and requests the LC.
3. Issuing Bank sends the LC to Exporter’s Bank (Advising Bank).
4. Exporter ships the goods and submits required documents (like Bill of Lading, Invoice, Insurance, etc.)
5. Exporter’s Bank checks documents and sends to Issuing Bank.
6. If all documents are correct, payment is released to exporter.

📦 Example (Scenario):

• Buyer in India wants to import Italian marble from a supplier in Italy.

• Supplier says, “Pay via LC only.”
• Indian buyer’s bank issues an LC for €100,000.
• Once Italian supplier ships the marble and sends documents, he gets the money via the LC — even if Indian buyer
delays or defaults.

📃 Documents Typically Required Under LC:

• Bill of Lading (or Airway Bill)
• Invoice
• Packing List
• Insurance Certificate
• Certificate of Origin

🧾 Types of LCs:
Type Meaning
Revocable LC Can be changed or cancelled without notice (rarely used)
Irrevocable LC Cannot be changed/cancelled without all parties’ consent
Confirmed LC Another bank (usually in exporter’s country) also guarantees payment
Sight LC Payment made as soon as documents are verified
Usance/Time LC Payment is made after a certain time (e.g. 30 days after shipment)
Back-to-Back LC Used when a middleman is involved in the trade

✅ Benefits of LC:
To Exporter (Seller) To Importer (Buyer)
Guaranteed payment Guaranteed shipment & proper documentation
Reduces credit risk Can negotiate better payment terms
Improves cash flow Builds trade relationships

Page 143
 Improves cash flow Builds trade relationships

⚠ Risks & Limita ons:

• Complex documentation process
• Any mistake in paperwork = payment delay or rejection
• LC fees (banks charge for issuing & confirming LCs)
• Political or country risk still exists

📘 Bonus: UCPDC (Uniform Customs and Practice for Documentary Credits)

💡 What is UCPDC?
A set of international rules created by ICC (International Chamber of Commerce) that governs how LCs are issued,
verified, and executed.
The latest version is UCP 600 (in effect since 2007).

📌 Why is it Important?
• Makes LC practices uniform across all countries
• Reduces disputes
• Helps banks and exporters/importers know their responsibilities
Absolutely Sassy —let’s now take the two babies separately and give each one their own royal explana on:
Bill of Lading (B/L) and Airway Bill (AWB) 👑🚢✈

🚢 1. BILL OF LADING (B/L)

📘 Definition:
A Bill of Lading is a legal document issued by a shipping company (the carrier) that acts as:
1. Proof of shipment
2. Title of ownership of goods
3. Contract of carriage
It is used for sea transport only.

🔁 Roles in B/L:
Role Description
Shipper Exporter (sends the goods)
Consignee Importer (receives the goods)
Carrier Shipping company (transports the goods)

📦 Functions of Bill of Lading:

Function Meaning
✅ Receipt of Goods Proves that the carrier received the goods in good condition
📃 Contract of Carriage Mentions terms and responsibilities between shipper & carrier
💳 Title of Goods Whoever holds the original B/L is considered the owner of goods — it's a negotiable instrument

🔍 Important Features:
Feature Detail
📬 Issued By Shipping company
📝 Negotiable YES – it can be endorsed/transferred to others
📄 Copies 3 Originals typically issued
🛂 Required at Port? YES – Consignee must submit original B/L to claim goods
📅 Used In Letter of Credit, customs clearance, international trade

✨ Real-Life Example:
Imagine you're an exporter from India shipping 100 tons of tea to the UK via sea.
You give the goods to Maersk Shipping.
They give you a Bill of Lading with details:
• Description of goods
• Port of loading & discharge
• Name of ship
• Consignee name

Page 144
 • Consignee name
• Number of containers
You send the original B/L to the UK buyer via bank.
Without this original B/L, buyer cannot claim goods at the port.

📌 Types of Bill of Lading:

Type Meaning
Clean B/L No damage to goods noted
Claused B/L Damages or defects noted
Straight B/L Non-negotiable – specific consignee only
Order B/L Negotiable – can be endorsed to others

⚠ Risk:
• If B/L is lost/stolen, whoever has it can claim the goods — that's how powerful it is.

✈ 2. AIRWAY BILL (AWB)

📘 Definition:
An Airway Bill is a document issued by an airline (carrier) that serves as:
1. Proof of shipment
2. Receipt of goods
3. Non-negotiable contract of carriage
It is used only for air cargo.

🔁 Roles in AWB:
Role Description
Shipper Exporter
Consignee Importer
Carrier Airline company (e.g. Emirates Cargo, Lufthansa, etc.)

📦 Functions of AWB:
Function Meaning
✅ Proof of Shipment Proves goods were handed to the airline
📃 Contract of Carriage Lists terms of the air transport
❌ Title of Goods? NO – Not a document of title (non-negotiable)

🔍 Important Features:
Feature Detail
📬 Issued By Airline or freight forwarder
📝 Negotiable? ❌ NO
📄 Copies 1 original + multiple copies
🛂 Required at Airport? Not always – shipment released based on identity/documents
📅 Used In Air shipments, LC documents, customs clearance

✨ Real-Life Example:
You’re exporting urgent medicine to Dubai.
You hand it over to Emirates Cargo.
They give you an Airway Bill showing:
• Shipper & consignee details
• Flight number
• Weight, volume
• Charges & handling info
The consignee in Dubai doesn’t need to submit the original AWB to collect the shipment. Just a copy + ID is enough.

🔁 Bill of Lading vs Airway Bill – Side-by-Side Cheat Sheet:

Feature Bill of Lading (B/L) Airway Bill (AWB)

Page 145
 Feature Bill of Lading (B/L) Airway Bill (AWB)
🌍 Used for Sea shipments Air shipments
📜 Document of Title? ✅ Yes ❌ No
🔁 Negotiable? ✅ Yes ❌ No
📄 Copies Issued 3 Originals 1 Original + Copies
🧾 Required to claim goods? Yes No (ID proof usually sufficient)
🧠 Issued by Shipping company Airline/freight forwarder

Alright, Sassy 🌍🛳 — it's me to break down the next two from your list:
Welcome to the world of INCOTERMS — the rules that literally define who does what in interna onal trade. No more "tu
mera kaam kar, main tera". It’s all legally sorted ✍📦

🌐 INCOTERMS (International Commercial Terms)

💡 What are INCOTERMS?

INCOTERMS are internationally accepted standard trade terms published by the International Chamber of Commerce
(ICC) that define the responsibilities of the buyer and seller in an international transaction.
They answer questions like:
• Who pays for shipping?
• Who handles insurance?
• Who takes the risk at each stage?
• Who handles customs duties?
🎯 Think of them as the "terms & conditions" of global trade.

🕰 Background Info:
Feature Details
Published by International Chamber of Commerce (ICC)
📅 First Introduced 1936
📘 Latest Version INCOTERMS 2020
📄 Total Terms 11 in current version
🚢 Applies To Sea, Air, Rail, Road & Multimodal transport

📦 Classification of INCOTERMS 2020

Category What it means
For all transport modes (Air, Road, Rail, Sea) 7 terms
For sea & inland waterways only 4 terms

🧾 Here Are All 11 INCOTERMS (2020) at a Glance:

✈🚚 For All Modes of Transport:
Code Full Form Key Transfer Point
EXW Ex Works At seller’s premises
FCA Free Carrier When goods handed to carrier
CPT Carriage Paid To Seller pays transport to destination, risk shifts earlier
CIP Carriage and Insurance Paid to Like CPT + seller also pays insurance
DAP Delivered At Place Seller delivers to buyer’s location, not unloaded
DPU Delivered at Place Unloaded Seller delivers and unloads goods
DDP Delivered Duty Paid Seller does everything — transport, customs, tax

🚢 For Sea/Waterway Transport Only:

Code Full Form Key Transfer Point
FAS Free Alongside Ship Goods placed next to ship at port
FOB Free On Board Goods loaded onto ship
CFR Cost and Freight Seller pays shipping, risk passes once loaded

Page 146
 CFR Cost and Freight Seller pays shipping, risk passes once loaded
CIF Cost, Insurance & Freight Like CFR + insurance paid by seller

📊 Now Let’s Deep Dive into 2 Common Ones (As you said — next 2):

🚢 1. FOB – Free On Board

💡 Meaning:
Seller delivers the goods on board the ship at the named port. After that, all responsibility — including risk and cost —
shifts to the buyer.

🧾 Responsibilities:
Task Seller Buyer
Export duties & documents ✅ ❌
Transport to port of shipment ✅ ❌
Loading on ship ✅ ❌
Freight charges ❌ ✅
Insurance ❌ ✅
Import duties, delivery at destination ❌ ✅

📦 Flow:
[Seller handles]
→ Export + Transport + Port Loading

[Buyer takes over]

→ From the moment goods are on the ship
→ Pays for Freight, Insurance, Import, Delivery

⚠ Risk Transfer Point:

As soon as the goods are on board the ship — risk shifts to buyer.

📘 When to use?
✔ When trade is by sea
✔ Buyer wants control of freight and insurance

🧠 Example:
You buy rice from Thailand via sea. The seller will load the rice onto a ship at Bangkok port — that’s his job. After that, you
bear all risks and cost.

✈ 2. CIF – Cost, Insurance & Freight

💡 Meaning:
Seller delivers goods on board the ship (just like FOB), but also pays for freight & minimum insurance up to the
destination port.

🧾 Responsibilities:
Task Seller Buyer
Export duty, loading ✅ ❌
Freight cost to destination ✅ ❌
Marine insurance (minimum cover) ✅ ❌
Risk after loading ❌ (but seller pays freight!) ✅
Import duty & local delivery ❌ ✅

📦 Flow:
[Seller handles]
→ Export, Loading, Freight, Insurance

Page 147
→ Export, Loading, Freight, Insurance

[Buyer handles]
→ Risk a er loading, Import formali es, Inland delivery

⚠ Risk Transfer Point:

Still when goods are loaded onto ship — even though seller is paying freight & insurance.

📘 When to use?
✔ Common in sea trade
✔ Buyer wants seller to arrange freight & insurance
✔ Buyer wants simpler logistics

🔁 FOB vs CIF – Quick Comparison

Point FOB CIF
Who arranges shipping? Buyer Seller
Who pays for freight? Buyer Seller
Who pays for insurance? Buyer Seller
Risk shifts at? When goods loaded on ship Same – when loaded
Simpler for buyer? ❌ No ✅ Yes
Perfect, Sassy! 🔥 You’re flying through the Interna onal Trade & Finance zone like a CEO-in-making 💼✈
Now that INCOTERMS are done, your next two topics from the original list are:

✅ 3. DGFT (Director General of Foreign Trade)

✅ 4. IEC (Importer Exporter Code)
Let’s tackle them one by one — clear, exam-ready, and real-world useful:

🏛 3. DGFT – Director General of Foreign Trade

💡 What is DGFT?
DGFT is a department under the Ministry of Commerce and Industry, Government of India, responsible for
formulating and implementing the Foreign Trade Policy (FTP) of India.
It’s basically the "controller and facilitator" of India’s exports and imports.

Full Form:
Director General of Foreign Trade

📍 HQ:
Udyog Bhawan, New Delhi (with regional offices in various states)

🎯 Key Functions of DGFT:

Function Description
📜 Formulates Foreign Trade Policy (FTP) Sets the rules for imports/exports every 5 years
🪪 Issues IEC (Importer Exporter Code) Mandatory unique code to import/export from India
🏢 Licensing Grants licenses for restricted/sensitive items
🎁 Export Promotion Schemes Implements MEIS, SEIS, RoDTEP, Advance Authorization etc.
🔍 Monitors Export/Import Data Tracks trends and trade balances
💻 Online Systems Operates online portal for filing applications, IEC, etc.

📘 Latest FTP:
Foreign Trade Policy 2023 (valid till March 2028)
• 100% online processing
• No end date (rolling policy)
• Focus on digitization, ease of business, MSME exports
🔁 What is a Rolling Policy?
Traditionally, India’s Foreign Trade Policy (FTP) was valid for 5 years — with a fixed start and end date. For example:
• FTP 2015–2020 (which got extended till 2023 because of COVID)

Page 148
 • FTP 2015–2020 (which got extended till 2023 because of COVID)
But in FTP 2023, the government made a shift to a "rolling policy", meaning:
👉 There’s no fixed expiry date.
👉 The policy will be updated and amended as needed, based on real-time economic needs, without waiting 5
years.

📦 DGFT in Short (Sassy-style):

DGFT is like the “traffic police of foreign trade” — decides who can go where (export), how fast (policies), and what
rules to follow (licensing, IEC).
No IEC = No business at customs = Bye-bye global hustle 🚫

🪪 4. IEC – Importer Exporter Code

💡 What is IEC?
IEC is a 10-digit unique registration number issued by DGFT to any business or individual who wants to import or
export goods/services from India.

Who Needs IEC?

✅ Every person or business wanting to:
• Import goods into India
• Export goods from India
• Avail benefits under DGFT schemes
• Open a current account for export/import
🚫 Not required for personal imports not for commercial use

📋 Documents Required to Apply for IEC:

Requirement Notes
✅ PAN Card Individual or Business PAN
✅ Address Proof Electricity bill / Rent agreement / Aadhaar
✅ Bank Details Cancelled cheque or bank certificate
✅ Email & Phone For OTP verification
✅ Online DGFT Portal Application done via https://www.dgft.gov.in

🧾 IEC Format:
• 10-digit code
• Example: 0512067894
• Valid for lifetime (no renewal needed)

🔄 Update & Modification:

IEC must be updated every year even if no changes — else it gets deactivated.

💰 Fees:
• ₹500 approx. via online payment
Perfect, Sassy 😎💳 — let's move ahead with your next two global trade + banking beast topics from your list:
🏦 1. Bank Realisation Certificate (BRC)

💡 What is a BRC?
A Bank Realisation Certificate (BRC) is a document issued by the bank to the exporter, confirming that payment
against a particular export has been received in foreign currency in the exporter’s bank account.

Who issues it?

Authorized Dealer (AD) banks — i.e., your regular bank authorized by RBI to deal in foreign exchange (like SBI, ICICI, etc.)

📜 Why is BRC Important?

Purpose Reason
✅ Proof of Export Payment Confirms that exporter received money from abroad
📃 Claim Government Benefits DGFT schemes like RoDTEP, SEIS, MEIS require BRC
🧾 Needed to prove exports were completed (zero-rated supply)

Page 149
 🧾 Tax & GST Refunds Needed to prove exports were completed (zero-rated supply)
🔍 RBI Data Reporting RBI uses it for monitoring foreign exchange inflows

📋 What does a BRC Contain?

Field Info
IEC Number Exporter’s Import Export Code
Shipping Bill Number Matches customs declaration
Amount Realised In foreign currency & INR
Date of Realisation When the money hit the bank
Bank Details Name, branch, AD code
Exporter & Importer Info Names & countries involved

🛠 Types:
Type Description
e-BRC Electronic version of BRC filed online via DGFT portal
Manual BRC Earlier used, now phased out completely

📌 When is BRC Generated?

After the exporter has:
1. Shipped the goods
2. Filed shipping bill with Customs
3. Received full payment in foreign exchange
4. Bank confirms inward remittance and uploads e-BRC on DGFT portal

🧠 BRC in Short (Sassy-style):

BRC is your "I got paid!" receipt for the export you did.
No BRC = No government perks = No 💰 cashback on your global hustle.

📡 2. SWIFT – Society for Worldwide Interbank Financial Telecommunication

💡 What is SWIFT?
SWIFT is a secure messaging network used by banks and financial institutions around the world to send and receive
financial transaction messages (like money transfer instructions, payment confirmations, trade docs).
It does not transfer money, but it enables banks to communicate securely about money transfers.

🏦 Founded in:
1973, Belgium
Over 11,000+ institutions in 200+ countries use it today.

📨 What kind of messages?

• Wire transfers
• Foreign exchange deals
• Trade finance docs (like LCs)
• Securities settlement
• BRC or LC confirmations

💻 How does it work?

Let’s say:
• You’re in India exporting to Germany
• German buyer pays €10,000
The German buyer’s bank sends a SWIFT message to your bank in India like:
“Hey! Credit this amount to Sakshi’s account — transaction ID XYZ.”
Once received and matched, your bank processes the transaction.

🧾 Key Code – SWIFT Code (also called BIC)

A unique 8-11 character code that identifies each bank in the SWIFT system.
Example:
SBININBBXXX
• SBIN = SBI
• IN = India

Page 150
 • IN = India
• BB = Mumbai
• XXX = Optional branch code

📌 Why SWIFT is Important?

Reason Why it matters
🔐 Security Extremely secure — global banking standard
🌎 Global Used in international payments, FX, trade
⏱ Speed Settles messages instantly (actual money comes later)
🧠 Accuracy Unique codes prevent fraud/errors in transfers

💳 1. CHIPS – Clearing House Interbank Payments System

💡 What is CHIPS?
CHIPS is a US-based payment clearing system that settles large-value USD transactions between banks.
It is mainly used for international wire transfers in US dollars.
Wire transfer = Electronic transfer of funds between banks or financial institutions.
🌎 Managed by:
The Clearing House, USA
(Owned by major US and global banks)

⚙ Func on:
CHIPS Does But Does NOT
🧾 Clears and settles USD payments ❌ Transfer money in other currencies
🏦 Used by over 90+ banks worldwide ❌ Handle small retail payments
📑 Settles $1.8 trillion+ daily ❌ Act as a messaging system (that’s SWIFT’s job)

📈 Key Points:
Feature Info
Currency USD only
Type Real-time settlement
Settlement Final, irrevocable
Users Banks, central banks, FIs
Linked With Often used with SWIFT for messaging

🧠 In Simple Terms:
SWIFT says “Hey, SBI has to pay JPMorgan $10 million.”
CHIPS says “Done. USD cleared and settled.”

🔁 CHIPS vs SWIFT:
Feature SWIFT CHIPS
Role Messaging Payment settlement
Currency All USD only
Transfers? No Yes (within USD clearing)
Origin Belgium USA

💱 2. FFMC – Full Fledged Money Changer

💡 What is FFMC?
FFMCs are non-bank entities authorized by the RBI to deal in foreign exchange, i.e., buy/sell forex to individuals,
tourists, and businesses.

📜 Licensed under:
Section 10 of Foreign Exchange Management Act (FEMA), 1999

Page 151
🧾 What Can FFMCs Do?
Activity Description
💸 Buy/Sell Forex For travel, studies, medical, business, etc.
💳 Issue Forex Cards Prepaid cards in foreign currency
🔁 Currency Exchange Convert foreign currency to INR & vice-versa
🛫 Serve Tourists Inbound & outbound forex services
🧾 Issue TC (earlier) Traveller’s cheques (less common now)

🏦 Who Can Apply?

Requirement Notes
Registered Co. As per Companies Act
Net Owned Funds Min ₹25 lakh for single-branch FFMC
Approval RBI gives license + monitors compliance
Validity Initially 1 year, renewable thereafter

🔍 Categories of FFMC:
Type Description
Single-Branch FFMC Smaller setup, 1 location
Multiple-Branch FFMC Larger players like Thomas Cook, Centrum, EbixCash etc.

🧠 FFMC vs Bank:
Point Bank FFMC
Foreign exchange? Limited (only AD banks) Primary business
RBI License Yes (AD category I/II) Yes (FFMC license)
Acts under FEMA, RBI guidelines FEMA, RBI guidelines

Absolutely, Sassy! 💡📘
These two are super important for RBI Grade B Phase 2 (ESI) and interview, especially under Financial Inclusion & Financial
Literacy — and often confused because of similar names.
Here are your crisp, detailed, structured notes on:

📘 ⃣ Na onal Strategy for Financial Educa on (NSFE) 20–202525

🔹 Launched by:
• Financial Stability and Development Council (FSDC) Sub-Committee
• Prepared by: NCFE (National Centre for Financial Education)
• Approved by: RBI, SEBI, IRDAI, PFRDA
🔹 Objective:
To improve financial literacy among all sections of society and empower citizens to make informed financial decisions.

🔑 Vision:
“A financially aware and empowered India.”

🧭 5 Core Action Pillars (5C Approach):

C What It Means
Content Standardised financial literacy content for all ages
Capacity Training for teachers, community leaders, SHG heads
Community Community-led models (SHGs, NGOs, ASHA workers, etc.)
Communication Mass media + digital campaigns to spread awareness
Collaboration Stakeholders (banks, regulators, govt, schools) to work together

📌 Target Groups:
• School & college students
• Young adults
• Women

Page 152
 • Women
• Farmers
• MSMEs
• Senior citizens
• Pensioners
• SHGs
• New entrants to the workforce

🔸 Key Features:
• Integration with school curriculum (via NCERT, SCERT)
• Financial literacy week (RBI)
• Use of mobile apps, gamification, digital media
• Emphasis on digital financial literacy
• Measurable outcomes through surveys

🔍 Outcome Expected:
• Increase in financial product usage
• Reduced financial frauds/scams
• Higher insurance, pension, and savings penetration

📘 ⃣ Na onal Strategy for Financial Inclusion (NSFI) 20–202424

🔹 Launched by:
• Reserve Bank of India (RBI)
🔹 Objective:
To ensure access to affordable, accessible and sustainable financial services to every Indian, especially vulnerable and
excluded groups.

🧭 Strategic Pillars:
Pillar Focus
Universal Access to Financial Services Banking outlets within 5 km radius or 500 households
Providing Basic Financial Services Banking, credit, insurance, pension
Digital Financial Services & Literacy Mobile banking, AEPS, UPI, internet banking
Customer Protection & Grievance Redressal Consumer-friendly products & ombudsman
Effective Coordination Stakeholders like NABARD, banks, NPCI, state govts

🎯 Key Targets by 2024:

• Every adult to have access to a banking outlet within 5 km
• Strengthening BC model for rural/remote delivery
• Universal access to insurance & pension products
• Improve usage of PMJDY accounts (from dormant to active)
• Promote digital modes of transactions like UPI, AEPS

🧩 Special Focus Areas:

• Women
• Migrant labourers
• Small farmers
• Micro-enterprises
• SC/ST/OBC/EWS segments

🔸 Key Institutions Involved:

• RBI (lead)
• NABARD (rural inclusion)
• IRDAI, PFRDA, SEBI
• NPCI (for digital payments)
• Banks and State Level Bankers Committees (SLBCs)

✅ Quick Comparison Table:

Feature NSFE 2020–25 NSFI 2019–24
Focus Financial Literacy Financial Inclusion
Launched by NCFE (under FSDC) RBI
Target Citizens – All age groups Unbanked/underbanked population

Page 153
 Target Citizens – All age groups Unbanked/underbanked population
Aim Empower via financial awareness Universal access to financial services
Keywords 5C approach Access, Usage, Quality
Regulator involvement RBI, SEBI, IRDAI, PFRDA Mainly RBI, but includes all regulators

📘 ACCOUNTING FULL REVISION NOTES (BASICS)

🧾 Covers:
1. What is Accounting
2. Debit & Credit
3. Types of Accounts
4. Golden Rules
5. Journal Entries
6. Ledger Posting
7. Trial Balance
8. Profit & Loss Statement

1. ✅ What is Accounting?
Definition: Accounting is the process of recording, classifying, summarizing, and reporting financial transactions to
know the financial status of a business.

2. 🔁 Debit and Credit (DR & CR)

Think of DR and CR as two sides of every transaction.
• Debit (Dr) = What comes in, what we receive, or what increases value
• Credit (Cr) = What goes out, what we give, or what decreases value
🧠 Not always “paisa aaya/gaya”. Depends on what account is affected.

3. 📦 Types of Accounts
Type What it covers Example
Real A/c Assets (cash, furniture) Cash, Furniture
Personal A/c Persons or companies Rohan, SBI Bank
Nominal A/c Expenses and Incomes Salary, Commission

4. 📜 Golden Rules of Accounting

Account Type Debit Credit
Real A/c What comes in What goes out
Personal A/c The receiver The giver
Nominal A/c All expenses and losses All incomes and gains

5. 🧾 Journal Entry Format

Account to be debited A/c Dr. ₹XXX
To Account to be credited A/c ₹XXX
(Short narration in brackets)
✅ Example:
Bought furniture for ₹5,000 in cash
Furniture A/c Dr. ₹5,000
To Cash A/c ₹5,000
(Being furniture purchased in cash)

6. 📂 Ledger Posting
Ledger = Diary of each account
Separate entry for every account → DR on le , CR on right
Cash Account
Dr. Side | Cr. Side
--------------------------------|-------------------------------
Date | Particulars | Amount | Date | Particulars | Amount
xx | Capital A/c | 20,000 | xx | Furniture A/c | 5,000
| xx | Rent A/c | 2,000
Each account’s transactions are posted in its own ledger.

Page 154
7. 📊 Trial Balance
Prepared from all ledgers to check if debit = credit
Account Debit ₹ Credit ₹
Cash 13,000
Furniture 5,000
Rent 2,000
Capital 20,000
✅ If totals tally, books are arithmetically correct.

8. 💼 Profit & Loss Statement (P&L)

Shows Income vs Expenses → Helps you know Profit or Loss
📌 Format:
Particulars Amount (₹)
Incomes:
Sales, Interest, etc. ₹XXX
Total Incomes (A) ₹XXX
Expenses: ₹XXX
Rent, Salary, etc. ₹XXX
Total Expenses (B) ₹XXX
Net Profit (A–B) ₹XXX ✅
🧠 It only includes Nominal Accounts (Incomes & Expenses only)

🪩 Pro-Level Insight:
• Income increases → Credit it
(because something went from you in return — a service/good)
• Expense increases → Debit it
(because you’re losing money

Page 155