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Top 200 Finance Terms for RBI Grade B, Bank PO and UPSC

Master the Top 200 Finance Terms from the Indian Financial System, carefully curated for RBI Grade B, SEBI Grade A, NABARD Grade A, IRDAI Assistant Manager, and other Banking and Regulatory Body examinations. This comprehensive resource covers all the important areas, including Functions of the RBI, Financial Sector Regulators, Financial Markets, Money and Capital Markets, Derivatives and other key finance topics.

Designed according to the latest exam trends and previous year questions, this compilation helps aspirants strengthen conceptual understanding, improve retention of financial terminology, and build a strong foundation for both objective and descriptive examinations.

Created By Brajesh Mohan · Banking and finance faculty

Repo rate

5.25%

SDF (floor)

5.00%

MSF and Bank Rate

5.50%

CRR

3.00%

SLR

18.00%

CRAR plus buffer

11.50%

LCR and NSFR

100%

Deposit cover

Rs 5 lakh

How to use this page. Work through one chapter at a time and tick the box on the left rail of each card as you learn it. The mastery meter in the sticky bar tracks your progress and it survives a page reload. Use the chapter and level chips to narrow the list, then run the flashcard drill, which draws only from the entries currently visible. Every card opens to a fuller explanation, and the linked term chips at the bottom of each card jump you to the two entries you should read next.

Why this list and why these entries

Finance sections in RBI Grade B, NABARD Grade A, Bank PO and the UPSC economy paper are not testing vocabulary for its own sake. They test whether you can tell two adjacent ideas apart under time pressure: the repo rate against the Bank Rate, systematic risk against systemic risk, deflation against disinflation, a forward against a future. Almost every wrong answer in this area comes from a blurred boundary rather than a missing fact, so the entries here are ordered by dependency and the confusable pairs sit next to each other.

The fifteen chapters follow the syllabus as it is actually set: the financial system and the RBI first, then the institutions, then the prudential rules that govern them, then the markets, then risk, derivatives, project finance and inflation. A term that another term depends on always comes first. Reserve money before the money multiplier, capital adequacy before the buffers that sit on top of it, options before option payoffs.

Table of contents

1. 001 to 012Foundations of the Indian financial system12 entries
2. 013 to 027The Reserve Bank of India and its functions15 entries
3. 028 to 044The banking system in India17 entries
4. 045 to 056Non-banking finance companies and urban co-operative banks12 entries
5. 057 to 071Prudential norms and capital regulation15 entries
6. 072 to 085The other regulators and development institutions14 entries
7. 086 to 098The money market13 entries
8. 099 to 111The primary market and the secondary market13 entries
9. 112 to 125The stock market and mutual funds14 entries
10. 126 to 140Bonds, government securities and debentures15 entries
11. 141 to 153Risk management in the banking sector13 entries
12. 154 to 166Derivatives: types and functions13 entries
13. 167 to 176Public private partnerships10 entries
14. 177 to 188Alternative sources of finance12 entries
15. 189 to 200Inflation concepts12 entries

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Chapter 01 · entries 001 to 012

Foundations of the Indian financial system

1. 001

   Financial system

   The network of institutions, markets, instruments and regulators that moves savings from savers to borrowers.Basic

   A financial system has four pillars: institutions (banks, non-banking finance companies, insurers), markets (money, capital, forex), instruments (deposits, shares, bonds) and regulators (RBI, SEBI, IRDAI, PFRDA). Its core job is intermediation, which means converting household savings into productive investment. India is a bank dominated system: banks still supply the largest share of formal credit, unlike the United States where markets dominate. When any pillar weakens, such as when the IL and FS default froze non-banking finance company funding in 2018, credit to the real economy contracts quickly.

   Linked terms
2. 002

   Financial intermediation

   The process by which an institution accepts funds from savers and lends them onward to borrowers in a different form.Intermediate

   An intermediary transforms three things: size (many small deposits become one large loan), maturity (short term deposits fund long term loans) and risk (the depositor holds a safe claim while the bank holds a risky one). This transformation is exactly what makes banks fragile, because the liabilities can be withdrawn faster than the assets can be sold. That is why banks are subject to reserve ratios and liquidity coverage requirements while an ordinary company is not. Maturity transformation is the single idea that explains most of banking regulation.

   Linked terms
3. 003

   Direct finance and indirect finance

   Direct finance is borrowing straight from savers through markets; indirect finance routes the money through an intermediary.Basic

   When a company issues bonds or shares to the public, that is direct finance: the saver holds a claim on the company itself. When the same company borrows from a bank funded by deposits, that is indirect finance: the saver holds a claim on the bank, not on the company. India has historically leaned on indirect finance, though corporate bond issuance has grown steadily. Examiners test this as a contrast, so anchor it on who bears the credit risk of the ultimate borrower.

   Linked terms
4. 004

   Asset transformation

   A bank's conversion of risky, illiquid, long dated assets into safe, liquid, short dated claims for depositors.Intermediate

   A home loan runs twenty years, cannot be sold quickly and may default. A savings deposit is repayable on demand, is insured up to five lakh rupees and carries almost no credit risk. The bank stands between the two and absorbs the difference using capital and liquidity buffers. This is why a bank's capital adequacy ratio and its liquidity coverage ratio are regulated together: one covers solvency, the other covers the timing mismatch.

   Linked terms
5. 005

   Financial market

   A market where financial claims are issued and traded, split by maturity into money market and capital market.Basic

   The money market handles instruments maturing within one year, such as treasury bills and commercial paper, and is regulated by the RBI. The capital market handles longer dated claims, shares and bonds, and is regulated by SEBI. The dividing line is exactly one year, which is a common one mark question. Both are further split into a primary segment where new securities are issued and a secondary segment where existing ones change hands.

   Linked terms
6. 006

   Capital market

   The market for financial instruments with an original maturity of more than one year, covering equity and long term debt.Intermediate

   It has a primary segment where companies and governments raise fresh capital, and a secondary segment where investors trade among themselves without any money reaching the issuer. SEBI regulates the capital market under the SEBI Act, 1992 and the Securities Contracts (Regulation) Act, 1956. Government securities occupy an awkward middle position: they are long dated capital market instruments but the RBI regulates them, a jurisdictional split created by the Government Securities Act, 2006 and the RBI Act. Knowing which regulator owns which instrument settles a large share of regulator based questions.

   Linked terms
7. 007

   Financial inclusion

   Delivery of affordable financial services, especially banking, credit, insurance and pensions, to low income and excluded groups.Basic

   The main instruments in India are the Pradhan Mantri Jan Dhan Yojana basic savings accounts, business correspondents, small finance banks and payments banks, and the Aadhaar enabled payments infrastructure. The RBI publishes a Financial Inclusion Index that combines access, usage and quality into a single score between zero and one hundred. Inclusion is measured on usage, not just accounts opened, because a dormant account adds nothing. Recent policy has shifted from account opening towards credit deepening and insurance and pension coverage.

   Linked terms
8. 008

   Financial deepening

   A rise in the size of the financial sector relative to the economy, usually measured as credit or assets to gross domestic product.Intermediate

   Common ratios are bank credit to gross domestic product, market capitalisation to gross domestic product and insurance premium to gross domestic product. India's bank credit to gross domestic product remains well below that of China or advanced economies, which is the standard argument for further deepening. Deepening is not automatically good: credit growing far faster than nominal output for several years is a classic financial stability warning, captured by the credit to gross domestic product gap. Distinguish deepening (size) from inclusion (breadth of access) and from financial literacy (capability of the user).

   Linked terms
9. 009

   Financial stability

   A state in which the financial system absorbs shocks without disrupting the flow of credit and payments to the real economy.Intermediate

   In India, financial stability is monitored by the Financial Stability and Development Council chaired by the Union Finance Minister, and by the RBI through its half yearly Financial Stability Report. The report publishes stress test results and the macro stress tested gross non performing asset ratio for scheduled commercial banks. Stability is a system level idea, so it uses macroprudential tools such as risk weights and countercyclical buffers rather than firm level supervision alone. It is deliberately separate from price stability, which is the job of the Monetary Policy Committee.

   Linked terms
10. 010

    Financial Stability and Development Council

    The apex non statutory body that coordinates India's financial regulators on stability, inter regulatory issues and inclusion.Intermediate

    It was set up in December 2010 on the recommendation of the Raghuram Rajan Committee and is chaired by the Union Finance Minister, with the heads of the RBI, SEBI, IRDAI, PFRDA and IFSCA as members. Its sub committee is chaired by the RBI Governor and does most of the operational work. It has no statutory backing, which is a standing criticism, and it cannot override any member regulator. Remember it as the coordination forum, not a super regulator.

    Linked terms
11. 011

    Development financial institution

    An institution created to provide long term finance to sectors that commercial banks will not fund at required tenors.Intermediate

    India's earlier generation included IDBI, ICICI and IFCI, most of which converted into banks or were merged after the reforms of the 1990s. The current all India financial institutions regulated by the RBI are NABARD, SIDBI, EXIM Bank, the National Housing Bank and NaBFID. The National Bank for Financing Infrastructure and Development, or NaBFID, was set up under a 2021 Act to fill the infrastructure funding gap. The problem these bodies solve is maturity: infrastructure needs twenty year money and deposit funded banks cannot safely supply it.

    Linked terms
12. 012

    Shadow banking

    Credit intermediation carried out by entities outside the regulated banking system and outside deposit insurance.Advanced

    The Financial Stability Board tracks this globally as non bank financial intermediation. In India the label loosely covers non-banking finance companies, housing finance companies and some mutual fund debt schemes that perform maturity transformation without access to a central bank liquidity backstop. The IL and FS collapse in 2018 and the DHFL default in 2019 showed the systemic reach of the sector, which triggered scale based regulation for non-banking finance companies. Use the term carefully in an answer: the RBI itself prefers the neutral phrase non-bank financial intermediation.

    Linked terms

Chapter 02 · entries 013 to 027

The Reserve Bank of India and its functions

1. 013

   Reserve Bank of India

   India's central bank, constituted under the Reserve Bank of India Act, 1934, which began operations on 1 April 1935.Basic

   It was set up on the recommendation of the Hilton Young Commission, started as a private shareholders' bank with a paid up capital of five crore rupees, and was nationalised in 1949. Its preamble now includes a modern monetary policy framework with price stability as the primary objective while keeping growth in mind. It is governed by a Central Board headed by the Governor, with four Deputy Governors and directors nominated by the central government. Its powers flow not just from the RBI Act but also from the Banking Regulation Act, 1949, FEMA, 1999 and the Payment and Settlement Systems Act, 2007.

   Linked terms
2. 014

   Monetary policy

   Central bank action on interest rates, money supply and credit availability to achieve price stability and support growth.Basic

   Since the RBI Act amendment of May 2016, India follows flexible inflation targeting with a statutory Monetary Policy Committee. The primary objective is price stability while keeping in mind the objective of growth. The operating target is the weighted average call rate, and the main instrument is the policy repo rate, currently 5.25 percent. Policy works through the interest rate, credit, asset price and exchange rate channels, with transmission in India strongest in the money market and weakest in deposit rates.

   Linked terms
3. 015

   Monetary Policy Committee

   The six member statutory committee that sets the policy repo rate by majority vote.Intermediate

   It has three RBI members, the Governor as chairperson, a Deputy Governor in charge of monetary policy and one RBI officer, plus three external members appointed by the central government for four years without reappointment. Decisions are by majority and the Governor holds a casting vote in a tie. The quorum is four, it must meet at least four times a year and in practice meets six times, and minutes are published on the fourteenth day after the meeting. Failure to meet the inflation target for three consecutive quarters obliges the RBI to write a report to the central government explaining the failure and remedial action.

   Linked terms
4. 016

   Inflation targeting

   A framework in which the central bank publicly commits to a numerical inflation target as its primary objective.Intermediate

   India's target is four percent headline consumer price index inflation with a tolerance band of plus or minus two percentage points, notified by the central government every five years. The current cycle runs to March 2031. Note that the target is on headline consumer price index inflation, not core and not wholesale prices, which is a frequently tested detail. Failure is formally defined as average inflation outside the band for three consecutive quarters.

   Linked terms
5. 017

   Repo rate

   The rate at which the RBI lends overnight to banks against government securities under the liquidity adjustment facility.Basic

   It is the single policy rate under the current framework and stands at 5.25 percent following the cut announced in December 2025. A repo is technically a sale of securities with an agreement to repurchase, so it is a collateralised loan rather than an outright transaction. Changes in the repo rate feed into external benchmark linked lending rates almost immediately, which is why home loan equated monthly instalments reset within one to three months of a policy change. All other corridor rates are now defined relative to it.

   Linked terms
6. 018

   Standing deposit facility

   The uncollateralised facility through which banks park surplus funds with the RBI, forming the floor of the policy corridor.Intermediate

   It was operationalised in April 2022 and is set twenty five basis points below the repo rate, currently 5.00 percent. Its key advantage over the reverse repo is that the RBI does not have to give collateral, so it can absorb unlimited liquidity. The fixed rate reverse repo still exists on paper at 3.35 percent but is no longer the operative floor. Since 2022, the corridor is standing deposit facility at the bottom, repo in the middle and marginal standing facility at the top.

   Linked terms
7. 019

   Marginal standing facility

   The overnight window at which banks borrow from the RBI against securities including a permitted dip into the statutory liquidity ratio.Intermediate

   It is set twenty five basis points above the repo rate, currently 5.50 percent, and forms the ceiling of the liquidity adjustment facility corridor. Banks may borrow up to a specified percentage of net demand and time liabilities by dipping into their statutory liquidity ratio holdings. It exists as a safety valve so that overnight rates do not spike above the corridor when liquidity is tight. The Bank Rate is aligned to it and moves together with it.

   Linked terms
8. 020

   Bank Rate

   The rate at which the RBI stands ready to buy or rediscount eligible bills, now aligned with the marginal standing facility rate.Intermediate

   It currently sits at 5.50 percent and is no longer an active instrument of monetary policy. Its real significance today is penal: shortfalls in cash reserve ratio and statutory liquidity ratio maintenance attract penalties linked to the Bank Rate plus three or five percentage points. Do not confuse it with the repo rate, which is the operational policy rate. The contrast most examiners want is that repo lending is collateralised and short term, while Bank Rate lending is longer term and traditionally uncollateralised.

   Linked terms
9. 021

   Cash reserve ratio

   The share of net demand and time liabilities that a bank must keep as cash balances with the RBI.Basic

   It stands at 3.00 percent after a phased hundred basis point reduction announced in June 2025 and completed in November 2025. No interest is paid on cash reserve ratio balances, so it acts as a tax on banking and directly affects the money multiplier. It is maintained as an average over a fortnight, with a daily minimum floor, which gives banks some flexibility. A cut releases lendable resources immediately, which is why the June 2025 cut was framed as a liquidity measure rather than a rate signal.

   Linked terms
10. 022

    Statutory liquidity ratio

    The minimum share of net demand and time liabilities that a bank must hold in cash, gold or approved securities.Basic

    It is currently 18.00 percent, and the Banking Regulation Act permits a maximum of forty percent. Unlike the cash reserve ratio, statutory liquidity ratio assets earn a return because they are largely government securities, so it doubles as a captive market for government borrowing. Holdings above the requirement can be used to borrow under the liquidity adjustment facility and the marginal standing facility. It is a prudential and a fiscal instrument at the same time, which is the point examiners test.

    Linked terms
11. 023

    Liquidity adjustment facility

    The RBI's set of daily operations, repo and reverse repo, used to manage system liquidity within a rate corridor.Intermediate

    Since the revised framework it operates mainly through variable rate repo and variable rate reverse repo auctions rather than fixed rate windows. The corridor runs from the standing deposit facility at the floor to the marginal standing facility at the ceiling, a width of fifty basis points. The aim is to keep the weighted average call rate close to the repo rate, so deviation of the call rate from the repo rate is the standard scorecard for operating efficiency. Main operations are typically fourteen day variable rate auctions, supported by fine tuning operations of shorter tenor.

    Linked terms
12. 024

    Open market operations

    Outright purchase or sale of government securities by the RBI to inject or absorb durable liquidity.Intermediate

    A purchase injects rupees permanently and raises reserve money, while a sale withdraws them. Unlike liquidity adjustment facility repos, which self reverse the next day, open market operations change the durable liquidity position. In December 2025 the RBI announced government bond purchases of one lakh crore rupees to add durable liquidity alongside its rate decision. Operation Twist, buying long dated bonds while selling short dated ones, is a variant used to flatten the yield curve without changing net liquidity.

    Linked terms
13. 025

    Market Stabilisation Scheme

    An arrangement under which the RBI issues special securities to sterilise the rupee liquidity created by foreign exchange purchases.Advanced

    It was introduced in 2004 through a memorandum of understanding with the government. When the RBI buys dollars to check rupee appreciation, it releases rupees into the system, and Market Stabilisation Scheme bills or bonds mop that liquidity back up. The interest cost is borne by the government but the proceeds are held in a separate account and cannot be spent, so it does not finance the deficit. It was used heavily after demonetisation in 2016 when the ceiling was temporarily raised.

    Linked terms
14. 026

    Sterilisation

    Offsetting the domestic money supply effect of foreign exchange intervention so that the monetary base is unchanged.Advanced

    If the RBI buys ten thousand crore rupees worth of dollars, rupee liquidity rises by the same amount, which is inflationary if left alone. The RBI sterilises by selling government securities, issuing Market Stabilisation Scheme instruments or raising the cash reserve ratio. Sterilisation is never costless, since the RBI usually earns less on foreign reserves than it pays on domestic instruments, a gap called the quasi fiscal cost. This is the mechanical link between exchange rate management and monetary policy that the impossible trinity describes.

    Linked terms
15. 027

    Lender of last resort

    The central bank's role of supplying emergency liquidity to solvent but illiquid banks to stop a panic spreading.Advanced

    The doctrine comes from Walter Bagehot's 1873 book Lombard Street, which said the central bank should lend freely, against good collateral, at a penal rate. The penal rate matters because it makes the facility a last resort rather than a cheap funding source. In India the marginal standing facility and special liquidity windows perform this function, alongside the RBI's powers under Section 18 of the RBI Act. The distinction between illiquidity and insolvency is the examinable point: a central bank should rescue the first, not the second.

    Linked terms

Chapter 03 · entries 028 to 044

The banking system in India

1. 028

   Scheduled bank and non-scheduled bank

   A scheduled bank is listed in the Second Schedule of the RBI Act, 1934; a non-scheduled bank is not.Intermediate

   To be scheduled, a bank must have paid up capital and reserves of at least five lakh rupees and must satisfy the RBI that its affairs are not conducted in a manner detrimental to depositors. Scheduled status brings access to the liquidity adjustment facility, membership of the clearing house and eligibility for RBI refinance. Non-scheduled banks still fall under the Banking Regulation Act but lack these privileges. Almost all commercial banks in India are scheduled, so the category matters most for small co-operative and local area banks.

   Linked terms
2. 029

   Banking Regulation Act, 1949

   The principal statute defining banking business and giving the RBI powers to license, regulate and supervise banks.Basic

   Section 5(b) defines banking as accepting deposits from the public, repayable on demand or otherwise, and withdrawable by cheque, draft or order, for the purpose of lending or investment. That definition is why non-banking finance companies cannot accept demand deposits or issue cheques on themselves. Section 22 governs licensing and Section 35A gives the RBI power to issue binding directions. The Banking Regulation (Amendment) Act, 2020 extended most of these powers to co-operative banks, and the Banking Laws (Amendment) Act, 2025 modernised nomination, audit and governance provisions.

   Linked terms
3. 030

   Banking Laws (Amendment) Act, 2025

   An Act amending five banking statutes to strengthen nomination, governance, audit and depositor protection.Intermediate

   It received assent on 15 April 2025, with governance provisions effective 1 August 2025 and nomination provisions from 1 November 2025. Depositors may now name up to four nominees, either simultaneously with fixed percentage shares totalling one hundred percent, or successively; lockers permit successive nomination only. The threshold for substantial interest was raised from five lakh rupees to two crore rupees, the first revision since 1968, and co-operative bank director tenure rose from eight to ten years. Public sector banks may now transfer unclaimed shares and bond proceeds to the Investor Education and Protection Fund.

   Linked terms
4. 031

   Commercial bank

   A bank that accepts demand deposits and lends commercially, covering public sector, private sector, foreign, regional rural and small finance banks.Basic

   Public sector banks are those where the government holds a majority stake and are governed additionally by the Bank Nationalisation Acts of 1970 and 1980 and the State Bank of India Act, 1955. The RBI's powers over public sector banks are narrower: it cannot remove their directors, supersede their boards or force a merger, a dual regulation gap flagged repeatedly by the RBI. Private and foreign banks are fully under RBI powers. This asymmetry is a favourite descriptive question in RBI Grade B.

   Linked terms
5. 032

   Differentiated bank

   A bank licensed for a narrow set of activities rather than the full range of universal banking.Intermediate

   India licensed two categories following the Nachiket Mor Committee: payments banks and small finance banks, both from 2015 onward. The rationale is that a narrower licence needs less capital and can serve niches that universal banks find unprofitable. Local area banks, licensed from 1996, were an earlier experiment in the same direction. Contrast with a universal bank, which may do everything from deposits to project finance to distribution of insurance.

   Linked terms
6. 033

   Payments bank

   A differentiated bank that may accept deposits and offer payments but cannot lend.Intermediate

   It requires a minimum paid up equity capital of one hundred crore rupees and may hold a maximum balance of two lakh rupees per individual customer, raised from one lakh rupees in 2021. It cannot issue credit cards or lend, and must invest at least seventy five percent of its demand deposits in government securities of up to one year maturity. Examples include India Post Payments Bank, Airtel Payments Bank and Fino Payments Bank. The model tests distribution reach rather than credit skill, which is why several early licensees surrendered their licences.

   Linked terms
7. 034

   Small finance bank

   A differentiated bank licensed to provide savings and credit to small borrowers, micro enterprises and the unorganised sector.Intermediate

   It needs a minimum paid up equity capital of two hundred crore rupees, and the promoter must hold at least forty percent initially, reducing to twenty six percent within twelve years. From FY 2025-26 the priority sector lending target was cut from seventy five percent to sixty percent of adjusted net bank credit, with forty percent to prescribed sub sectors and twenty percent flexible. At least fifty percent of the loan portfolio must consist of loans up to twenty five lakh rupees. AU Small Finance Bank, Ujjivan and Equitas are the well known names, several of which converted from microfinance institutions.

   Linked terms
8. 035

   Regional rural bank

   A rural focused bank set up under the Regional Rural Banks Act, 1976 and jointly owned by the Centre, a sponsor bank and a state government.Intermediate

   The shareholding is fifty percent central government, thirty five percent sponsor bank and fifteen percent state government. They were created on the recommendation of the Narasimham Working Group of 1975 to combine the local feel of a co-operative with the discipline of a commercial bank. Successive amalgamation rounds have cut their number sharply under the One State One Regional Rural Bank policy. NABARD supervises them while the RBI regulates them, a split that is frequently tested.

   Linked terms
9. 036

   Co-operative bank

   A bank registered as a co-operative society and owned by its members, operating on the principle of one member one vote.Intermediate

   The structure has an urban arm, the urban co-operative banks, and a rural arm with a three tier design of state co-operative banks, district central co-operative banks and primary agricultural credit societies. Co-operative banks are under dual control: banking functions are regulated by the RBI under the Banking Regulation Act while incorporation and management fall to the Registrar of Co-operative Societies. The Banking Regulation (Amendment) Act, 2020 substantially widened RBI powers over them, including over management and capital raising. Primary agricultural credit societies remain outside RBI regulation.

   Linked terms
10. 037

    Non-performing asset

    A loan on which interest or principal has remained overdue for more than ninety days.Basic

    Assets are classified as standard, sub standard (non-performing up to twelve months), doubtful (non-performing beyond twelve months) and loss. For agricultural loans the trigger is two crop seasons for short duration crops and one crop season for long duration crops, not ninety days. Gross non-performing asset ratio is the stock of bad loans to gross advances, while net non-performing asset ratio deducts provisions already made. Under the expected credit loss framework effective 1 April 2027, provisioning becomes forward looking but the ninety day classification rule itself stays unchanged.

    Linked terms
11. 038

    Special mention account

    A loan showing early signs of stress but not yet classified as a non-performing asset.Intermediate

    Accounts are tagged SMA-0 when principal or interest is overdue up to thirty days, SMA-1 for thirty one to sixty days and SMA-2 for sixty one to ninety days. The categories exist so that stress is recognised and reported before the ninety day cliff is reached. Banks must report special mention accounts of five crore rupees and above to the Central Repository of Information on Large Credits. In practice, SMA-2 numbers are the best leading indicator of next quarter's slippages.

    Linked terms
12. 039

    Prompt corrective action

    A supervisory framework that imposes escalating restrictions on a bank breaching thresholds on capital, asset quality or leverage.Intermediate

    The revised framework effective from 1 January 2023 uses three parameters: capital adequacy, net non-performing asset ratio and leverage ratio; return on assets was dropped as a trigger. There are three risk thresholds, with mandatory actions such as restrictions on dividend, branch expansion, management compensation and eventually on lending itself. It has been extended to non-banking finance companies in the middle and upper layers and to urban co-operative banks with deposits above one hundred crore rupees. The purpose is early intervention, so exit from prompt corrective action requires sustained improvement, not a single good quarter.

    Linked terms
13. 040

    Priority sector lending

    Mandated lending to sectors the government considers nationally important but which are under served by commercial credit.Intermediate

    Under the Priority Sector Lending Directions, 2025 effective 1 April 2025, domestic scheduled commercial banks and foreign banks with twenty or more branches must lend forty percent of adjusted net bank credit or the credit equivalent of off balance sheet exposure, whichever is higher. Categories include agriculture, micro small and medium enterprises, export credit, education, housing, social infrastructure, renewable energy and weaker sections. Urban co-operative banks now face a sixty percent target and small finance banks sixty percent from FY 2025-26. Shortfalls must be parked in the Rural Infrastructure Development Fund with NABARD or similar funds at below market returns.

    Linked terms
14. 041

    Adjusted net bank credit

    The denominator used to compute priority sector targets, being bank credit adjusted for bills rediscounted and certain investments.Advanced

    It equals net bank credit plus bills rediscounted with the RBI and other approved institutions, plus permitted non statutory liquidity ratio investments in the held to maturity category, with prescribed deductions. Targets apply to adjusted net bank credit or the credit equivalent of off balance sheet exposure, whichever is higher, so a bank cannot shrink its obligation by moving exposure off balance sheet. Getting the definition right matters because numerical questions on priority sector shortfall depend on it. It is computed on the corresponding date of the preceding year.

    Linked terms
15. 042

    Priority sector lending certificate

    A tradable certificate that lets a bank with a priority sector surplus sell the credit to a bank with a shortfall.Advanced

    Introduced in April 2016, these are traded on the RBI's e-Kuber platform in four categories: agriculture, small and marginal farmers, micro enterprises and general. Only the priority sector obligation is transferred; the underlying loan and its credit risk stay with the originating bank. Trading is in multiples of twenty five lakh rupees and all certificates expire on 31 March regardless of when issued. They are popular with small finance banks and regional rural banks, which typically run large surpluses.

    Linked terms
16. 043

    Marginal cost of funds based lending rate and external benchmark lending rate

    Two internal and external benchmarks for pricing bank loans, the first based on a bank's own cost of funds and the second on a market rate.Advanced

    The marginal cost of funds based lending rate, introduced in April 2016, has four components: marginal cost of funds, negative carry on the cash reserve ratio, operating costs and tenor premium. Because it responded slowly to policy rate cuts, the RBI mandated external benchmark linked lending from 1 October 2019 for all new floating rate retail loans and loans to micro and small enterprises. The permitted external benchmarks are the repo rate, the three or six month treasury bill yield and other benchmarks published by Financial Benchmarks India Private Limited, with a mandatory reset at least once every three months. Older corporate loans still reference the internal benchmark, so both systems coexist, and the external benchmark is the single biggest improvement in monetary transmission on the lending side.

    Linked terms
17. 044

    Unclaimed deposits and DEA Fund

    Deposits inoperative for ten years or more, transferred by banks to the RBI's Depositor Education and Awareness Fund.Intermediate

    The fund was created under Section 26A of the Banking Regulation Act and is used for depositor education and awareness. A depositor retains the right to claim the money with interest at any time, so transfer does not extinguish the claim. The RBI launched the UDGAM portal in 2023 to let the public search for unclaimed deposits across banks in one place. The Banking Laws (Amendment) Act, 2025 created a parallel route for public sector banks to move unclaimed shares and bond redemption proceeds to the Investor Education and Protection Fund.

    Linked terms

Chapter 04 · entries 045 to 056

Non-banking finance companies and urban co-operative banks

1. 045

   Non-banking financial company

   A company registered under the Companies Act whose principal business is lending, investment or acquisition of securities, but which is not a bank.Basic

   Registration with the RBI under Section 45-IA of the RBI Act is compulsory, and the principal business test requires that financial assets exceed fifty percent of total assets and financial income exceed fifty percent of gross income. A non-banking finance company cannot accept demand deposits, cannot issue cheques drawn on itself and its deposits are not covered by deposit insurance. It fills gaps that banks miss: used vehicle finance, gold loans, microfinance and small ticket consumer credit. The minimum net owned fund for an investment and credit company has been raised to ten crore rupees, with a glide path ending 31 March 2027.

   Linked terms
2. 046

   Scale based regulation

   The RBI's four layer framework that calibrates regulation of non-banking finance companies to their size and systemic importance.Intermediate

   Effective from 1 October 2022, the layers are Base, Middle, Upper and Top. The Base Layer covers non deposit taking companies below one thousand crore rupees in assets, the Middle Layer covers all deposit taking companies plus non deposit taking ones above that threshold, and the Top Layer is meant to stay empty unless the RBI sees substantial systemic risk. In revised norms issued on 24 June 2026, the RBI replaced the earlier parametric scoring method: any non-banking finance company with assets of one lakh crore rupees or more is now automatically classified in the Upper Layer. This is a recent change and older coaching material still describes the scoring model.

   Linked terms
3. 047

   Net owned fund

   Owned funds of a non-banking finance company reduced by investments in and loans to group companies beyond a threshold.Intermediate

   Owned funds mean paid up equity, preference shares compulsorily convertible into equity, free reserves and share premium, less accumulated losses and intangible assets. From this, investments in shares of subsidiaries and group companies and book value of debentures and loans to them exceeding ten percent of owned funds are deducted. The threshold for an investment and credit company, microfinance institution or factor is ten crore rupees, reached through a glide path of five crore rupees by March 2025 and ten crore rupees by March 2027. Peer to peer platforms and account aggregators remain at two crore rupees.

   Linked terms
4. 048

   Systemically important non-banking finance company

   A non-deposit taking company with asset size of five hundred crore rupees or more, subject to tighter prudential norms.Intermediate

   The label predates scale based regulation and continues in use for reporting and prudential purposes. These entities face capital to risk weighted assets ratio requirements, exposure norms and corporate governance standards closer to those of banks. Under scale based regulation, most of them fall in the Middle Layer. The idea is that failure of a large non-banking finance company transmits stress to banks, which supply more than half its funding, as the IL and FS episode demonstrated.

   Linked terms
5. 049

   NBFC-Microfinance institution

   A non-deposit taking company with at least seventy five percent of assets as qualifying collateral free microfinance loans.Intermediate

   Under the RBI's harmonised microfinance directions of March 2022, a microfinance loan is a collateral free loan to a household with annual income up to three lakh rupees. The key constraint is that total repayment obligations of a household cannot exceed fifty percent of monthly household income. Interest rate caps were removed in 2022 and replaced with a board approved policy plus mandatory disclosure of an all inclusive rate. The minimum net owned fund is ten crore rupees, five crore rupees for those in the north eastern region.

   Linked terms
6. 050

   NBFC-Factor and factoring

   Purchase of a firm's receivables by a factor at a discount, giving the seller immediate cash.Intermediate

   It is governed by the Factoring Regulation Act, 2011, amended in 2021 on the recommendations of the U K Sinha Committee to widen participation. The 2021 amendment allowed all non-banking finance companies to undertake factoring, not only those with factoring as their principal business, which greatly expanded supply to micro small and medium enterprises. With recourse factoring leaves credit risk with the seller, while without recourse factoring transfers it to the factor. TReDS is the electronic platform where this happens at scale for enterprise receivables.

   Linked terms
7. 051

   Core investment company

   A non-banking finance company holding at least ninety percent of its assets as investments in group companies.Advanced

   Of that ninety percent, at least sixty percent must be in equity shares of group companies, including instruments compulsorily convertible into equity. It cannot trade in these investments except for block sale or disinvestment, and cannot carry on any other financial activity. Those with assets of one hundred crore rupees or more and access to public funds must register with the RBI as a systemically important core investment company. It is essentially a holding company vehicle, and the Master Direction of 2020 tightened norms after IL and FS.

   Linked terms
8. 052

   Account aggregator

   A data blind non-banking finance company that moves a customer's financial data between institutions with explicit consent.Intermediate

   It operates under the RBI's Master Direction of 2016 and holds a licence with a net owned fund requirement of two crore rupees. It cannot read, store or use the data itself; it only transports encrypted data from financial information providers to financial information users after consent. The consent artefact specifies purpose, duration and data type, and can be revoked at any time. The framework underpins cash flow based lending to small businesses that lack collateral or long credit histories.

   Linked terms
9. 053

   Peer to peer lending platform

   An online intermediary that matches individual lenders with individual borrowers without taking the credit risk itself.Advanced

   It must register with the RBI as an NBFC-P2P with a minimum net owned fund of two crore rupees and cannot lend on its own balance sheet or provide any credit guarantee. Aggregate exposure of a single lender across all platforms is capped at fifty lakh rupees, exposure to one borrower is capped at fifty thousand rupees, and a borrower cannot take more than ten lakh rupees across platforms. Funds must move through an escrow mechanism operated by a bank promoted trustee. The RBI tightened these rules significantly in August 2024 after platforms began marketing products that resembled deposits.

   Linked terms
10. 054

    Urban co-operative bank

    A primary co-operative bank operating in urban and semi urban areas, regulated by the RBI for its banking functions.Intermediate

    They serve small borrowers, traders and salaried customers within a limited area of operation. Dual control means the RBI covers banking while the Registrar of Co-operative Societies covers registration, management and audit. The Banking Regulation (Amendment) Act, 2020 gave the RBI powers over their boards, capital raising and reconstruction, following the Punjab and Maharashtra Co-operative Bank failure. Under the Licensing, Scheduling and Regulatory Classification Guidelines, 2025, no fresh licences for new urban co-operative banks are being considered.

    Linked terms
11. 055

    Four tiered framework for urban co-operative banks

    A deposit size based classification of urban co-operative banks into four tiers with differentiated prudential norms.Advanced

    Tier 1 covers all unit and salary earners' banks regardless of deposit size plus others with deposits up to one hundred crore rupees. Tier 2 covers deposits above one hundred crore rupees up to one thousand crore rupees, Tier 3 above one thousand crore rupees up to ten thousand crore rupees, and Tier 4 above ten thousand crore rupees. Minimum capital to risk weighted assets ratio is nine percent for Tier 1 and twelve percent for Tiers 2, 3 and 4. Minimum net worth is two crore rupees for Tier 1 banks in a single district and five crore rupees for all others, and the framework follows the N S Vishwanathan Committee.

    Linked terms
12. 056

    Umbrella organisation for urban co-operative banks

    A national level body that provides liquidity, technology and capital support to small urban co-operative banks.Advanced

    The National Urban Co-operative Finance and Development Corporation was granted approval to function as the umbrella organisation, with a mandate to act as a self regulatory and support body. The rationale is scale: individual urban co-operative banks are too small to invest in core banking, cyber security or treasury capability. It is expected to run a liquidity support facility for member banks, reducing the chance that a small bank fails purely for want of temporary funds. The Vishwanathan Committee had recommended membership of an umbrella organisation as a condition for regulatory relaxations.

    Linked terms

Chapter 05 · entries 057 to 071

Prudential norms and capital regulation

1. 057

   Capital adequacy ratio

   The ratio of a bank's regulatory capital to its risk weighted assets, expressed as a percentage.Basic

   It is also called the capital to risk weighted assets ratio. Basel III sets a global minimum of eight percent, but the RBI prescribes nine percent for Indian scheduled commercial banks, plus a capital conservation buffer of 2.5 percent, taking the effective requirement to 11.5 percent. Risk weighting means a government security attracts zero percent while an unsecured personal loan can attract one hundred percent or more, so the denominator reflects risk, not size. Revised Basel III norms and a new standardised approach for credit risk take effect for commercial banks from 1 April 2027.

   Linked terms
2. 058

   Basel norms

   International banking standards issued by the Basel Committee on Banking Supervision, covering capital, liquidity and supervision.Intermediate

   Basel I of 1988 covered credit risk with crude risk weights. Basel II of 2004 introduced the three pillars: minimum capital, supervisory review and market discipline. Basel III, agreed after the 2008 crisis, added quality of capital, buffers, a leverage ratio and two liquidity standards. The Basel Committee is hosted by the Bank for International Settlements at Basel, its standards are not legally binding, and each national regulator implements them, which is why India's minimum is nine percent rather than eight.

   Linked terms
3. 059

   Tier 1 and Tier 2 capital

   Tier 1 is going concern capital that absorbs losses while the bank operates; Tier 2 is gone concern capital that absorbs losses in liquidation.Intermediate

   Tier 1 splits into common equity Tier 1, being paid up equity, statutory reserves and retained earnings, and additional Tier 1, mainly perpetual debt instruments with loss absorption features. Tier 2 includes subordinated debt with an original maturity of at least five years, revaluation reserves at a discount and general provisions up to a ceiling. Under India's Basel III norms the minimum common equity Tier 1 is 5.5 percent, Tier 1 is seven percent and total capital is nine percent of risk weighted assets. The Yes Bank additional Tier 1 write down of 2020 is the standard Indian illustration of loss absorption.

   Linked terms
4. 060

   Risk weighted assets

   A bank's assets weighted by the credit risk each carries, forming the denominator of the capital adequacy ratio.Advanced

   Under the standardised approach, weights depend on the counterparty and external rating: sovereign exposures carry zero percent, and unrated corporate exposures typically one hundred percent. The RBI has repeatedly used risk weights as a macroprudential lever, most notably raising them on unsecured consumer credit and lending to non-banking finance companies in November 2023 to slow growth in those segments, before partially rolling that back in February 2025. Because risk weights sit in the denominator, raising them lowers reported capital adequacy without changing the actual capital. The revised standardised approach effective 1 April 2027 is expected to reduce weights on micro small and medium enterprise and residential real estate exposures.

   Linked terms
5. 061

   Capital conservation buffer

   An additional capital cushion of common equity Tier 1 held above the minimum, to be drawn down in stress.Intermediate

   It is set at 2.5 percent of risk weighted assets in India, taking the effective total requirement to 11.5 percent. Breaching it does not close the bank but triggers automatic restrictions on discretionary distributions such as dividends, share buybacks and bonus payments. The escalation is graded, so the deeper the breach the higher the share of earnings that must be retained. The design intent is that banks rebuild capital from profits rather than by shrinking their loan books during a downturn.

   Linked terms
6. 062

   Countercyclical capital buffer

   A buffer of up to 2.5 percent of risk weighted assets that a regulator switches on when credit growth is excessive.Advanced

   The RBI put the framework in place in February 2015 but has kept the requirement at zero to date. The main indicator is the credit to gross domestic product gap, that is, the deviation of the credit to output ratio from its long run trend, supplemented by other indicators. Its logic is countercyclical: build capital in booms so it can be released in downturns, smoothing the credit cycle. Note the contrast with the capital conservation buffer, which is always on.

   Linked terms
7. 063

   Leverage ratio

   Tier 1 capital divided by total exposure, an unweighted backstop to the risk based capital ratio.Intermediate

   It deliberately ignores risk weights, so a bank cannot inflate its capital ratios by loading up on assets that regulators treat as low risk. The RBI requires 3.5 percent for most banks and four percent for domestic systemically important banks, above the Basel minimum of three percent. The exposure measure includes on balance sheet items, derivative exposures and off balance sheet commitments after conversion factors. It became a formal prompt corrective action trigger in the revised framework.

   Linked terms
8. 064

   Liquidity coverage ratio

   The ratio of high quality liquid assets to net cash outflows expected over a thirty day stress period, with a minimum of one hundred percent.Intermediate

   It is a Basel III standard designed to ensure a bank can survive a month of acute stress without central bank support. High quality liquid assets are mostly cash, central bank reserves and government securities, split into Level 1 and Level 2 with haircuts. The RBI's revised guidelines effective 1 April 2026 raised the run off assumption on retail deposits accessible through internet and mobile banking, recognising how fast digital deposits can leave. That change was a direct response to the 2023 Silicon Valley Bank episode.

   Linked terms
9. 065

   Net stable funding ratio

   The ratio of available stable funding to required stable funding over a one year horizon, with a minimum of one hundred percent.Advanced

   Where the liquidity coverage ratio covers a thirty day shock, the net stable funding ratio addresses structural funding mismatch over a year. Retail deposits and long term wholesale funding count as stable; short term interbank borrowing largely does not. It penalises a bank that funds twenty year infrastructure loans with three month certificates of deposit. Both ratios apply in India, and remembering the horizons, thirty days versus one year, is the fastest way to separate them in an exam.

   Linked terms
10. 066

    High quality liquid assets

    Unencumbered assets that can be converted to cash quickly with little or no loss of value in a stress period.Advanced

    Level 1 assets include cash, excess cash reserve ratio balances, government securities within the statutory liquidity ratio to the extent permitted, and are counted at full value with no cap. Level 2A and 2B assets, such as certain corporate bonds and equities, attract haircuts and a combined cap of forty percent of the total stock. The facility to avail liquidity for liquidity coverage ratio purposes allows banks to reckon a portion of statutory liquidity ratio holdings as high quality liquid assets. The concept explains why banks hold government securities well above the statutory minimum.

    Linked terms
11. 067

    Expected credit loss framework

    A forward looking provisioning approach requiring banks to provide for losses expected in future, not only losses already incurred.Advanced

    The RBI issued final directions on 27 April 2026, effective 1 April 2027, for commercial banks excluding small finance banks, payments banks and regional rural banks, with a glide path to 31 March 2031 to absorb the one time impact. Assets are staged: Stage 1 needs twelve month expected credit loss, Stage 2 needs lifetime expected credit loss where credit risk has increased significantly, and Stage 3 covers credit impaired assets. Prudential floors apply so that expected credit loss provisioning cannot fall below existing regulatory minimums. The ninety day non-performing asset classification rule remains unchanged, which is the detail most often misread.

    Linked terms
12. 068

    Provisioning coverage ratio

    The share of gross non-performing assets covered by provisions already set aside.Intermediate

    A higher ratio means a smaller unprovided hole in the balance sheet, so a bank with ninety percent coverage has already absorbed most of the pain from its bad loans. Standard assets also attract provisioning, at 0.40 percent generally and higher for stressed sectors such as commercial real estate. The RBI has at times prescribed a floor of seventy percent, and banks often report both the ratio including and excluding technical write offs. Provisions hit the profit and loss account while capital absorbs the residual, which is why provisioning and capital adequacy always move together.

    Linked terms
13. 069

    Domestic systemically important bank

    A bank whose failure would cause significant disruption, designated by the RBI and required to hold extra capital.Advanced

    The RBI publishes the list annually and places banks in buckets with additional common equity Tier 1 requirements. State Bank of India, HDFC Bank and ICICI Bank are the designated banks, with State Bank of India in the highest applicable bucket. The framework follows the Basel Committee's approach based on size, interconnectedness, substitutability and complexity. The surcharge is the regulator's answer to too big to fail: make bigness expensive rather than prohibited.

    Linked terms
14. 070

    Deposit insurance

    Insurance of bank deposits by the Deposit Insurance and Credit Guarantee Corporation up to a limit per depositor per bank.Basic

    The limit is five lakh rupees, covering principal and interest together, raised from one lakh rupees with effect from 4 February 2020. It covers savings, current, fixed and recurring deposits in commercial banks, regional rural banks, local area banks and co-operative banks, but excludes inter bank deposits and government deposits. The premium is paid by the bank, not the depositor, currently twelve paise per hundred rupees of assessable deposits; the RBI has proposed moving to a risk based premium model with the present flat rate as the ceiling. Section 18A of the DICGC Act, inserted in 2021, allows interim payment to depositors within ninety days when a bank is placed under all inclusive directions.

    Linked terms
15. 071

    DICGC

    The Deposit Insurance and Credit Guarantee Corporation, a wholly owned RBI subsidiary that insures bank deposits.Intermediate

    It was formed in 1978 by merging the Deposit Insurance Corporation of 1962 with the Credit Guarantee Corporation of India of 1971, and operates under the DICGC Act, 1961. Registration is compulsory for all eligible banks and the corporation can deregister a bank that fails to pay premium. Its credit guarantee function on small loans has effectively lapsed, so today it is a deposit insurer in practice. Proposals to raise the five lakh rupee cover have been under active government consideration since 2025 but no revised limit has been notified.

    Linked terms

Chapter 06 · entries 072 to 085

The other regulators and development institutions

1. 072

   Other regulators and their statutes

   India uses sectoral regulation, with a different statutory regulator for securities, insurance, pensions, international financial services and rural credit.Basic

   SEBI regulates securities under the SEBI Act, 1992; IRDAI regulates insurance under the IRDA Act, 1999; PFRDA regulates pensions under the PFRDA Act, 2013; and IFSCA regulates all financial services in an International Financial Services Centre under the IFSCA Act, 2019. NABARD and SIDBI are development institutions rather than regulators, though NABARD supervises regional rural banks and co-operative banks. The RBI covers banking, non-banking finance companies, payment systems, government securities, money market and foreign exchange. Mapping instrument to regulator is the fastest way to answer jurisdiction questions.

   Linked terms
2. 073

   Securities and Exchange Board of India

   The statutory regulator of India's securities market, protecting investors and regulating intermediaries and issuers.Basic

   It was set up as a non statutory body in 1988 and given statutory status by the SEBI Act, 1992 after the Harshad Mehta scam. It is headquartered in Mumbai and headed by a chairperson with whole time and part time members appointed by the central government. It has quasi legislative, quasi executive and quasi judicial powers, and can search, seize, impose penalties and bar entities from the market. Appeals against SEBI orders go to the Securities Appellate Tribunal, and from there to the Supreme Court on a question of law.

   Linked terms
3. 074

   Securities Contracts (Regulation) Act, 1956

   The statute that governs stock exchanges, recognition of exchanges and the definition of securities.Intermediate

   It defines securities to include shares, scrips, stocks, bonds, debentures, derivatives and units of collective investment schemes, and the definition matters because it fixes SEBI's jurisdiction. It requires exchanges to be recognised by the central government, a power now largely delegated to SEBI. It also provides for listing conditions and the framework for minimum public shareholding. Together with the SEBI Act and the Depositories Act, 1996, it forms the backbone of Indian securities law.

   Linked terms
4. 075

   Securities Appellate Tribunal

   The statutory appellate body that hears appeals against orders of SEBI, IRDAI, PFRDA and the pension regulator.Intermediate

   It was established under the SEBI Act and sits in Mumbai, headed by a presiding officer who is or has been a judge of the Supreme Court or a Chief Justice of a High Court. Appeals must generally be filed within forty five days of receiving the order. Its jurisdiction was extended to insurance and pensions, which is why it is not simply a securities tribunal. Further appeal lies to the Supreme Court only on a question of law.

   Linked terms
5. 076

   Insurance Regulatory and Development Authority of India

   The statutory regulator of the Indian insurance sector, established under the IRDA Act, 1999.Intermediate

   It is headquartered in Hyderabad and regulates insurers, reinsurers and intermediaries, and prescribes solvency, product and policyholder protection norms. The minimum solvency ratio for an Indian insurer is 1.5 times, that is, available solvency margin to required solvency margin. Foreign direct investment in Indian insurance companies and intermediaries was raised to one hundred percent under the automatic route with effect from 5 February 2026, following the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025. The earlier caps were twenty six percent until 2015, forty nine percent to 2021 and seventy four percent thereafter.

   Linked terms
6. 077

   Solvency ratio

   The ratio of an insurer's available solvency margin to its required solvency margin, a measure of its ability to meet claims.Advanced

   IRDAI requires a minimum of 1.5 times, which means an insurer must hold assets fifty percent above the level actuarially required to meet liabilities. It is the insurance analogue of a bank's capital adequacy ratio: both are cushions between expected losses and the point of failure. Minimum paid up capital for a life or general insurer is one hundred crore rupees and for a reinsurer two hundred crore rupees. The Insurance Amendment Act of 2025 also enables a risk based capital approach over time, moving away from a formula driven margin.

   Linked terms
7. 078

   Pension Fund Regulatory and Development Authority

   The statutory regulator of the National Pension System and the Atal Pension Yojana, set up under the PFRDA Act, 2013.Intermediate

   It regulates pension funds, the central recordkeeping agency, points of presence and trustee banks, and its head office is in New Delhi. The National Pension System is a defined contribution scheme, so the pension depends on contributions and market returns rather than a promised formula. At exit at age sixty, at least forty percent of the corpus must be used to buy an annuity, and the balance may be withdrawn tax free. The Unified Pension Scheme, operational from 1 April 2025 for eligible central government employees, is offered as an option within the National Pension System architecture.

   Linked terms
8. 079

   National Pension System

   A defined contribution, market linked retirement savings scheme regulated by PFRDA and open to all Indian citizens.Intermediate

   It offers Tier I, a restricted retirement account, and Tier II, a voluntary withdrawable account without tax benefit for most subscribers. Investment choices are Active, where the subscriber sets the equity, corporate debt, government securities and alternative asset mix, and Auto, where a lifecycle fund reduces equity with age. Equity exposure under Active choice is capped at seventy five percent. The Atal Pension Yojana, aimed at the unorganised sector, guarantees a pension between one thousand and five thousand rupees a month and is also administered by PFRDA.

   Linked terms
9. 080

   IFSCA

   The unified regulator for all financial services in an International Financial Services Centre, established under the IFSCA Act, 2019.Intermediate

   It began operations in 2020 and is headquartered at GIFT City, Gandhinagar, the first and so far only International Financial Services Centre in India. It combines the powers that RBI, SEBI, IRDAI and PFRDA would otherwise exercise within the centre, creating a single window regulator. Its board has nine members, including one nominee each from the RBI, SEBI, IRDAI and PFRDA and two from the Ministry of Finance, with three year terms. Transactions in an International Financial Services Centre are treated as offshore for foreign exchange purposes even though the centre is on Indian soil.

   Linked terms
10. 081

    GIFT City

    Gujarat International Finance Tec-City, which hosts India's only operational International Financial Services Centre.Intermediate

    It offers a distinct tax and regulatory regime designed to bring offshore rupee and dollar business back onshore, including a ten year tax holiday for units and exemption from securities transaction tax and stamp duty on specified transactions. Activities established there include aircraft and ship leasing, global in-house centres, offshore banking units, bullion exchange and international stock exchanges such as NSE IX and India INX. Transactions there are denominated in foreign currency, mainly the United States dollar. The policy objective is to compete with Dubai and Singapore for India linked financial business.

    Linked terms
11. 082

    NABARD

    The National Bank for Agriculture and Rural Development, the apex development bank for rural credit and rural infrastructure.Basic

    It was established on 12 July 1982 on the recommendation of the CRAFICARD Committee headed by B Sivaraman, and is fully owned by the Government of India. It refinances co-operative banks, regional rural banks and non-banking finance companies for agriculture, supervises regional rural banks and co-operative banks on behalf of the RBI, and manages the Rural Infrastructure Development Fund. The Rural Infrastructure Development Fund is funded largely by banks' priority sector shortfalls, which links it directly to priority sector lending. It also runs the self help group bank linkage programme, one of the largest microfinance channels in the world.

    Linked terms
12. 083

    SIDBI

    The Small Industries Development Bank of India, the apex institution for financing and developing micro, small and medium enterprises.Intermediate

    It was set up under an Act of Parliament in 1990 with headquarters at Lucknow, initially as a subsidiary of IDBI. It provides indirect finance through refinance to banks and non-banking finance companies and direct finance for specific segments, and runs the Fund of Funds for Startups. It operates the Udyami Mitra portal and is a key promoter of the Credit Guarantee Fund Trust for Micro and Small Enterprises. It also promoted TReDS platforms and the microfinance ratings ecosystem.

    Linked terms
13. 084

    NaBFID

    The National Bank for Financing Infrastructure and Development, a development finance institution for long term infrastructure funding.Advanced

    It was created by the NaBFID Act, 2021 with an initial authorised share capital of one lakh crore rupees, and is regulated by the RBI as an all India financial institution. Its mandate has two limbs: a financial objective of lending to infrastructure, and a developmental objective of deepening the bonds and derivatives markets that infrastructure needs. It exists because banks cannot safely fund twenty five year assets with three year deposits, the maturity mismatch that sank the earlier development finance institutions. Government guarantees on its foreign borrowings are offered at a concessional fee to lower its cost of funds.

    Linked terms
14. 085

    Credit information company

    A company that collects credit data on borrowers and issues credit reports and scores, licensed under the CICRA, 2005.Intermediate

    India has four: TransUnion CIBIL, Equifax, Experian and CRIF High Mark, all regulated by the RBI under the Credit Information Companies (Regulation) Act, 2005. Banks and non-banking finance companies must be members and must submit data, now on a fortnightly basis following an RBI direction effective January 2025. Individuals are entitled to one free full credit report a year from each company. Complaints about credit information now fall within the RBI Integrated Ombudsman Scheme, with compensation of one hundred rupees per day for delayed correction.

    Linked terms

Chapter 07 · entries 086 to 098

The money market

1. 086

   Money market

   The market for short term funds and instruments with an original maturity of one year or less.Basic

   It is regulated by the RBI and includes call money, treasury bills, commercial paper, certificates of deposit, repo and TREPS. Its economic function is liquidity management, not capital raising: institutions with surplus cash lend to those with a temporary shortfall. Instruments are typically discounted, meaning they are issued below face value and redeemed at par, so the return comes from the discount rather than a coupon. It is also where monetary policy first bites, which is why the weighted average call rate is the operating target.

   Linked terms
2. 087

   Call money, notice money and term money

   Uncollateralised interbank borrowing for one day, for two to fourteen days, and for fifteen days to one year respectively.Intermediate

   Call money is overnight, notice money runs from two to fourteen days and term money from fifteen days to one year. Participants are restricted to banks and primary dealers, which is why it is called the interbank market; corporates and mutual funds cannot participate. Because it is uncollateralised, rates here are the purest signal of liquidity stress in the system. The term money segment remains thin in India, a long standing structural weakness the RBI has tried to address.

   Linked terms
3. 088

   Weighted average call rate

   The volume weighted average of interest rates in the overnight uncollateralised call money market, and the operating target of monetary policy.Intermediate

   The RBI aims to keep it close to the repo rate, so persistent deviation signals that liquidity management is off target. It sits inside the corridor bounded by the standing deposit facility at the floor and the marginal standing facility at the ceiling. When it drifts towards the floor, the system has surplus liquidity; when it presses the ceiling, there is a deficit. Examiners often ask what the operating target is, and the answer is the weighted average call rate, not the repo rate itself.

   Linked terms
4. 089

   Treasury bill

   A short term discounted debt instrument issued by the central government with a maturity of up to one year.Basic

   India issues 91 day, 182 day and 364 day treasury bills, all through auctions conducted by the RBI on the E-Kuber platform. They carry no coupon: an investor buys at a discount to the face value of one hundred rupees and receives face value at maturity, so the return is the discount. They carry zero credit risk, which makes their yields the benchmark risk free rates for short tenors. The 14 day treasury bill exists only for state governments and select bodies as an intermediate treasury bill.

   Linked terms
5. 090

   Cash management bill

   An ultra short term instrument issued by the central government to bridge temporary cash flow mismatches.Intermediate

   Introduced in 2010, it has a maturity of less than ninety one days and is issued at a discount like a treasury bill. Its purpose is purely cash management, not deficit financing, so its issuance is irregular and driven by the government's daily balances. It qualifies as a statutory liquidity ratio eligible security and is issued through the same auction machinery as treasury bills. Distinguish it from ways and means advances, which are a direct overdraft from the RBI rather than a market instrument.

   Linked terms
6. 091

   Ways and means advances

   Temporary overdraft from the RBI to the central or a state government to bridge mismatches in receipts and payments.Advanced

   It is provided under Section 17(5) of the RBI Act and must be repaid within ninety days, so it is not a substitute for market borrowing. Limits are fixed by mutual agreement between the RBI and the government and reviewed periodically, and drawing beyond the limit becomes an overdraft attracting a higher rate. Interest is charged at the repo rate, with overdrafts at repo plus two percent. States also have a special drawing facility backed by their consolidated sinking fund and guarantee redemption fund holdings.

   Linked terms
7. 092

   Commercial paper

   An unsecured, negotiable promissory note issued at a discount by companies and financial institutions for short term funds.Basic

   Introduced in 1990, it can be issued by corporates, primary dealers and all India financial institutions with a minimum credit rating of A3 from a SEBI registered agency. The tenor is seven days to one year, the minimum investment is five lakh rupees and it is issued in dematerialised form. Because it is unsecured, only the strongest credits can issue it cheaply, which is why the commercial paper market froze for non-banking finance companies after the IL and FS default. It gives well rated borrowers funding below the bank lending rate.

   Linked terms
8. 093

   Certificate of deposit

   A negotiable, unsecured money market instrument issued by a bank or financial institution against funds deposited with it.Intermediate

   Banks may issue for seven days to one year, while all India financial institutions may issue for one to three years. The minimum amount is five lakh rupees and multiples thereof, and it is issued at a discount to face value in dematerialised form. Unlike an ordinary fixed deposit, it is transferable in the secondary market, which is the whole point of the instrument. Banks cannot grant loans against their own certificates of deposit and cannot buy them back before maturity except under limited conditions.

   Linked terms
9. 094

   Repo and reverse repo

   A repo is a sale of securities with an agreement to repurchase them later; the same transaction seen from the lender's side is a reverse repo.Basic

   Economically it is a collateralised loan, with the securities acting as collateral and the price difference acting as interest. Market repo between banks, primary dealers and other eligible entities is distinct from the RBI's liquidity adjustment facility repo. A haircut is applied to the collateral so that the lender is protected against a fall in its price. Repo transactions are settled through the Clearing Corporation of India and reported on the negotiated dealing system.

   Linked terms
10. 095

    TREPS

    Triparty Repo Dealing and Settlement, a repo arrangement where a third party handles collateral selection and settlement.Advanced

    It replaced Collateralised Borrowing and Lending Obligation in November 2018 and is operated by Clearing Corporation of India Limited, which acts as the central counterparty. Because the clearing corporation guarantees settlement, participants take no counterparty risk, which is why mutual funds and insurers use it heavily. It is now the largest segment of the overnight money market by volume, far exceeding uncollateralised call money. Mutual funds are required to park a portion of liquid scheme assets in such instruments, which reinforces its dominance.

    Linked terms
11. 096

    Bill discounting

    A bank buying a trade bill from a seller before its due date at a discount, giving the seller immediate cash.Intermediate

    A bill of exchange arises from a genuine trade transaction, so bill finance is self liquidating: repayment comes from the underlying sale proceeds. Discounting is done by the seller's bank, while rediscounting occurs when that bank sells the bill onward. Bills accepted by a bank become bank accepted bills and carry lower risk, which is why they discount at finer rates. The instrument is central to working capital finance and is the analogue mechanism behind TReDS.

    Linked terms
12. 097

    TReDS

    The Trade Receivables Discounting System, an RBI authorised electronic platform for financing invoices of micro, small and medium enterprises.Intermediate

    It brings sellers, corporate buyers and financiers onto one platform where invoices are auctioned and the best discount rate wins. It operates under the Payment and Settlement Systems Act, 2007 and RVAT, M1xchange and Invoicemart are the licensed operators. Companies above a turnover threshold and all central public sector enterprises must onboard, a requirement progressively tightened to widen coverage. The mechanism solves the delayed payment problem that chokes working capital for small suppliers.

    Linked terms
13. 098

    Financial Benchmarks India Private Limited

    The independent benchmark administrator that computes and publishes key Indian interest rate, foreign exchange and valuation benchmarks.Advanced

    It was set up in December 2014 by the Fixed Income Money Market and Derivatives Association, the Foreign Exchange Dealers' Association and the Indian Banks' Association, and is recognised by the RBI as an administrator of financial benchmarks. It publishes the Mumbai Interbank Offered Rate, the overnight Mumbai Interbank Outright Rate, treasury bill benchmark rates, the rupee reference rate and government security valuation curves. Independent administration was a global reform after the London Interbank Offered Rate manipulation scandal. Its benchmarks are permitted references for external benchmark linked lending rates.

    Linked terms

Chapter 08 · entries 099 to 111

The primary market and the secondary market

1. 099

   Primary market

   The market where securities are issued for the first time and the proceeds go to the issuer.Basic

   Routes include a public issue, a rights issue to existing shareholders, a preferential allotment to identified investors, a qualified institutions placement and a private placement. It is the only segment where fresh capital actually reaches the company; the secondary market simply transfers ownership. SEBI's Issue of Capital and Disclosure Requirements Regulations, 2018 govern public issues, and the offer document is the primary disclosure vehicle. Merchant bankers, registrars and underwriters are the intermediaries that make an issue happen.

   Linked terms
2. 100

   Secondary market

   The market where already issued securities are traded among investors, with no money flowing to the issuer.Basic

   Its value is liquidity and price discovery: without a resale market, few investors would subscribe in the primary market at all. In India it operates through the National Stock Exchange and BSE, with trades cleared by clearing corporations and settled through depositories. Settlement moved to T plus 1 for equities from January 2023, and an optional T plus 0 same day settlement was introduced in 2024. The secondary market price also becomes the reference for future primary issues, which links the two segments.

   Linked terms
3. 101

   Initial public offering

   The first sale of shares by a company to the public, converting it from unlisted to listed.Basic

   It may be a fresh issue, which raises new capital for the company, or an offer for sale, in which existing shareholders sell and the company receives nothing. The draft red herring prospectus is filed with SEBI, which issues observations rather than approval, since SEBI does not vet the merits of an issue. Minimum public shareholding rules generally require at least twenty five percent public holding, with time to comply for large issuers. Understanding the fresh issue versus offer for sale split is the key to reading any prospectus correctly.

   Linked terms
4. 102

   Follow on public offer

   A further issue of shares to the public by a company that is already listed.Intermediate

   Unlike an initial public offering, a market price already exists, so pricing is anchored to the prevailing quotation. It can be dilutive, where new shares are created and existing holdings shrink in percentage terms, or non dilutive, where existing shareholders sell. Disclosure requirements are lighter than for an initial public offering because the company is already under continuous disclosure obligations. Do not confuse it with an offer for sale, which is a secondary market mechanism run through the exchange.

   Linked terms
5. 103

   Book building

   A price discovery mechanism in which bids are collected within a price band and the final price is set from the demand curve.Intermediate

   The issuer sets a floor price and a cap, with the cap not exceeding one hundred and twenty percent of the floor, and investors bid at or above the floor. The cut off price is the price at which the issue is fully subscribed, and retail investors may bid at cut off to accept whatever price emerges. It contrasts with the fixed price method, where the price is stated upfront in the prospectus and demand is known only after the issue closes. In a book built issue, the reservation is generally fifty percent for qualified institutional buyers, fifteen percent for non institutional investors and thirty five percent for retail.

   Linked terms
6. 104

   Anchor investor

   A qualified institutional buyer allotted shares one day before the public issue opens, to signal confidence and anchor demand.Intermediate

   Up to sixty percent of the qualified institutional buyer portion may be allotted to anchor investors, and the minimum application is ten crore rupees. Anchor allocations face a lock in: fifty percent of the shares are locked for thirty days and the balance for ninety days from allotment, a rule tightened in 2022 to prevent quick exits. At least one third of the anchor portion is reserved for domestic mutual funds. Their presence is treated by the market as a quality signal, which is why an issue without credible anchors often struggles.

   Linked terms
7. 105

   Green shoe option

   An over allotment mechanism that lets the issuer allot additional shares to stabilise the price after listing.Advanced

   It is named after the Green Shoe Manufacturing Company, which first used it, and is governed in India by SEBI's Issue of Capital and Disclosure Requirements Regulations. The size is capped at fifteen percent of the issue, and a stabilising agent borrows shares from a promoter to allot the extra quantity. If the price falls below the issue price after listing, the agent buys from the market and returns the shares; if it rises, the company issues fresh shares instead. The mechanism transfers post listing price risk to a professional intermediary for a defined window of thirty days.

   Linked terms
8. 106

   Offer for sale

   A mechanism through which promoters or large shareholders sell existing shares on the exchange platform.Advanced

   It is a secondary market transaction, so the money goes to the selling shareholder and not to the company. SEBI introduced it in 2012 as a fast route for promoters to reduce holdings and comply with minimum public shareholding norms. The government has used it repeatedly to divest stakes in public sector undertakings. At least ten percent of the offer size must be reserved for retail investors, who are also generally offered a discount.

   Linked terms
9. 107

   Qualified institutions placement

   A private placement of securities by a listed company to qualified institutional buyers without a full public offer document.Advanced

   SEBI introduced it in 2006 so that Indian companies could raise domestic capital quickly rather than resorting to depository receipts abroad. Pricing must be at or above the average of the weekly high and low of closing prices over the preceding two weeks, with a discount of up to five percent permitted. No more than fifty percent of the issue may go to a single allottee and there must be at least two allottees. It is fast because it avoids the draft red herring prospectus route, which is the reason it dominates large secondary fundraising.

   Linked terms
10. 108

    ASBA

    Applications Supported by Blocked Amount, a mechanism where the application money stays blocked in the applicant's own bank account until allotment.Basic

    It is mandatory for all public issues in India and means an applicant continues to earn interest on the blocked funds until shares are allotted. If the applicant receives no allotment, the block is simply released, so there is no refund cycle to fail. Unified Payments Interface based blocking has since become the standard route for retail applications up to five lakh rupees. It replaced the older system in which money left the applicant's account and was refunded weeks later.

    Linked terms
11. 109

    Depository

    An institution that holds securities in electronic form and enables their transfer by book entry.Basic

    India has two, the National Securities Depository Limited and the Central Depository Services Limited, both regulated under the Depositories Act, 1996. An investor does not deal with them directly but through a depository participant, usually a broker or bank. Dematerialisation converts physical certificates into electronic form, and transfer of listed securities in physical form is no longer permitted. The depository eliminates bad delivery, forgery and transfer delays that plagued the physical certificate era.

    Linked terms
12. 110

    Dematerialisation

    Conversion of physical share certificates into electronic holdings in a demat account.Intermediate

    The process starts with a dematerialisation request form submitted through a depository participant along with the certificates, which are then destroyed after verification. The reverse process is rematerialisation, which is rare and largely of academic interest. Since April 2019 transfer of listed securities has required dematerialised form, effectively ending physical trading. It removed the physical settlement problems of the pre 1996 market and is a precondition for T plus 1 settlement.

    Linked terms
13. 111

    Clearing Corporation of India

    The central counterparty that clears and settles trades in government securities, money market instruments and foreign exchange.Advanced

    It was set up in 2001 and acts as the buyer to every seller and the seller to every buyer, which removes bilateral counterparty risk. It operates the Negotiated Dealing System Order Matching platform for government securities and the TREPS segment for triparty repo. It also runs a settlement guarantee fund supported by member margins to absorb a default. As a qualified central counterparty, its risk management standards follow the Principles for Financial Market Infrastructures.

    Linked terms

Chapter 09 · entries 112 to 125

The stock market and mutual funds

1. 112

   Stock exchange

   A recognised platform where securities are bought and sold under rules laid down by SEBI and the exchange itself.Basic

   India's principal exchanges are the National Stock Exchange, founded in 1992 and the first to introduce screen based nationwide trading, and BSE, established in 1875 as Asia's oldest. Exchanges have been demutualised, meaning ownership, management and trading rights are separated so that brokers no longer control the exchange. They perform listing, trading, surveillance and enforcement of the listing agreement. The Metropolitan Stock Exchange and international exchanges at GIFT City complete the picture.

   Linked terms
2. 113

   Stock market index

   A statistical measure of the price movement of a chosen basket of stocks, used as a market benchmark.Basic

   The BSE Sensex has thirty stocks and the Nifty 50 has fifty, both computed by the free float market capitalisation method. Free float means only shares available for public trading are counted, so promoter and government holdings are excluded. The base for the Sensex is 1978-79 with a value of one hundred, and for the Nifty 50 it is 3 November 1995 with a value of one thousand. Indices matter operationally because index funds, exchange traded funds and derivative contracts are built on them.

   Linked terms
3. 114

   Market capitalisation

   The total market value of a company's outstanding shares, being share price multiplied by number of shares.Intermediate

   SEBI classifies companies by rank: the top one hundred by market capitalisation are large cap, the next one hundred and fifty are mid cap, and the rest are small cap. This classification is not a rupee threshold, it is a rank, and the list is revised every six months by the Association of Mutual Funds in India. Mutual fund category definitions depend on it, so a large cap fund must hold at least eighty percent in the top one hundred companies. Market capitalisation to gross domestic product is separately used as a valuation indicator for the whole market.

   Linked terms
4. 115

   Circuit breaker

   An automatic halt in trading triggered when an index or a stock moves beyond a preset percentage.Intermediate

   At index level, movements of ten, fifteen and twenty percent in either the Sensex or the Nifty 50, whichever is breached first, trigger a market wide halt, with the duration depending on the level and the time of day. Individual stocks have price bands of two, five, ten or twenty percent, though stocks in the derivatives segment have wider dynamic bands. The purpose is to give participants time to absorb information and prevent panic driven cascades. The mechanism was used in March 2020 when the market hit the lower circuit at the start of the pandemic.

   Linked terms
5. 116

   Mutual fund

   A vehicle that pools money from many investors and invests it in securities according to a stated objective.Basic

   In India it is structured as a three tier trust: sponsor, trustees and an asset management company, governed by the SEBI Mutual Funds Regulations, 1996. The sponsor must contribute at least forty percent of the net worth of the asset management company, and at least two thirds of trustees must be independent. Returns are not guaranteed and the risk sits with the investor, which is why every advertisement carries the standard risk warning. Schemes are categorised by SEBI into five broad groups so that similar schemes are genuinely comparable.

   Linked terms
6. 117

   Net asset value

   The per unit market value of a mutual fund scheme, being assets minus liabilities divided by units outstanding.Basic

   It is declared at the end of each business day for open ended schemes and is the price at which units are bought and sold. A common misconception is that a low net asset value scheme is cheap: it is not, since returns depend on percentage change, not on the absolute level. Applicability is governed by cut off timings and, since February 2021, by the actual realisation of funds rather than the time of application. Expense ratio and exit load are deducted before the investor's realised return.

   Linked terms
7. 118

   Total expense ratio

   The annual cost of running a mutual fund scheme expressed as a percentage of its average net assets.Advanced

   SEBI caps it on a sliding scale that falls as scheme size rises, with equity schemes allowed up to 2.25 percent at the lowest asset levels and much less for large schemes. Index funds and exchange traded funds have far lower limits, generally up to one percent. Direct plans exclude distributor commission and therefore carry a lower expense ratio than regular plans, which is why their net asset value grows faster for identical portfolios. The ratio is charged daily against the net asset value, so the investor never sees a separate bill.

   Linked terms
8. 119

   Systematic investment plan

   A method of investing a fixed sum in a mutual fund scheme at regular intervals rather than as a lump sum.Basic

   Because a fixed amount buys more units when prices are low and fewer when high, the average cost per unit falls, an effect called rupee cost averaging. It also removes the need to time the market, which is the most common reason retail investors lose money. Monthly systematic investment plan flows have become a stabilising force in the Indian equity market, offsetting foreign portfolio investor selling in several episodes. The counterparts are the systematic withdrawal plan and the systematic transfer plan.

   Linked terms
9. 120

   Exchange traded fund

   A fund whose units trade on a stock exchange like a share and which usually tracks an index or a commodity.Intermediate

   It combines the diversification of a mutual fund with the intraday tradability of a share, and typically carries a very low expense ratio because it is passively managed. Large institutional participants transact directly with the fund in creation units, which keeps the market price close to the net asset value through arbitrage. The Employees' Provident Fund Organisation invests part of its corpus in equity through exchange traded funds, and the government used the CPSE and Bharat 22 exchange traded funds for disinvestment. Gold exchange traded funds hold physical gold and are the standard exam example of a commodity variant.

   Linked terms
10. 121

    Alternative investment fund

    A privately pooled investment vehicle registered with SEBI that collects funds from sophisticated investors for a defined strategy.Advanced

    It is governed by the SEBI Alternative Investment Funds Regulations, 2012 and comes in three categories. Category I covers socially or economically desirable funds such as venture capital, small and medium enterprise, social venture and infrastructure funds. Category II covers private equity and debt funds that use no leverage other than for operations. Category III covers hedge funds and others using complex strategies and leverage, and the minimum investment is one crore rupees for investors other than employees of the fund.

    Linked terms
11. 122

    Foreign portfolio investor

    A non resident investor registered with SEBI to invest in Indian securities without seeking management control.Advanced

    The regime merged the older foreign institutional investor, sub account and qualified foreign investor categories in 2014 and now runs under the SEBI Foreign Portfolio Investors Regulations, 2019. A single foreign portfolio investor and its group may hold below ten percent of a company's paid up capital; at or above that, the holding is reclassified as foreign direct investment. Their flows are volatile because they respond to global interest rates and risk appetite, so they are called hot money. Contrast with foreign direct investment, which is long term and carries management interest.

    Linked terms
12. 123

    Insider trading

    Dealing in a listed security while in possession of unpublished price sensitive information.Intermediate

    It is prohibited by the SEBI Prohibition of Insider Trading Regulations, 2015, which define an insider broadly to include anyone in possession of or having access to such information, not only employees. Companies must maintain a structured digital database of persons with whom such information is shared and enforce trading windows and code of conduct. Penalties under Section 15G of the SEBI Act can reach twenty five crore rupees or three times the profit made, whichever is higher. The offence is about informational advantage, so intention to profit is not a defence.

    Linked terms
13. 124

    Front running

    Trading ahead of a known large order to profit from the price movement that order will cause.Advanced

    A dealer who learns that a fund is about to buy a large quantity and buys for himself first is front running, and it is a fraudulent and unfair trade practice under SEBI regulations. It differs from insider trading in the nature of the information: front running uses knowledge of impending orders, while insider trading uses unpublished corporate information. SEBI has acted against dealers at large fund houses using call data and trade timing analysis. Both offences ultimately punish the same thing, an unfair informational edge over other market participants.

    Linked terms
14. 125

    Real estate investment trust and infrastructure investment trust

    Trusts that pool investor money to own income generating real estate or infrastructure assets and distribute most of the income.Advanced

    Both are regulated by SEBI under 2014 regulations and must distribute at least ninety percent of net distributable cash flows to unit holders, generally at least twice a year for a real estate investment trust. At least eighty percent of assets must be in completed, revenue generating properties or projects, which limits development risk. Minimum lot sizes have been progressively reduced to widen retail participation. They convert illiquid physical assets into tradable units, which is why they are treated as a monetisation tool alongside the National Monetisation Pipeline.

    Linked terms

Chapter 10 · entries 126 to 140

Bonds, government securities and debentures

1. 126

   Bond

   A debt instrument under which the issuer borrows a sum and promises periodic interest and repayment of principal at maturity.Basic

   The three defining features are face value, coupon and maturity, and the market price adjusts so that the yield matches prevailing rates. A bondholder is a creditor with a fixed claim, unlike a shareholder who is an owner with a residual claim, which is why bondholders rank ahead in liquidation. Bonds may be secured against specific assets or unsecured, and may be redeemable or perpetual. In India the term bond is used loosely for government paper while debenture is used for corporate paper, though the legal distinction is thinner than it appears.

   Linked terms
2. 127

   Coupon rate

   The annual interest a bond pays, expressed as a percentage of its face value.Basic

   A bond with a face value of one hundred rupees and a coupon of seven percent pays seven rupees a year regardless of what the bond trades for in the market. The coupon is fixed at issue for a plain bond, so all subsequent adjustment happens through the price and therefore the yield. Floating rate bonds instead reset the coupon periodically against a benchmark. Confusing coupon with yield is the single most common error in fixed income questions.

   Linked terms
3. 128

   Yield to maturity

   The total annualised return an investor earns if a bond is held to maturity and all cash flows are reinvested at the same rate.Advanced

   It is the discount rate that equates the present value of all future coupons and principal to the current market price. Because price and yield are inversely related, a bond bought below face value has a yield above its coupon and a bond bought above face value has a yield below it. The reinvestment assumption is its main weakness, since actual reinvestment happens at whatever rates prevail. Yield to maturity, not the coupon, is the correct comparison across bonds.

   Linked terms
4. 129

   Bond price and interest rate relationship

   Bond prices move inversely to market interest rates.Basic

   If market rates rise to eight percent, an existing bond paying seven percent becomes less attractive, so its price falls until its yield matches eight percent. The reverse holds when rates fall, which is why bond funds post gains during a rate cutting cycle. The size of the price change depends on maturity and coupon, captured formally by duration. This single relationship explains why banks book treasury losses when the RBI raises rates.

   Linked terms
5. 130

   Duration

   A measure of a bond's price sensitivity to interest rate changes, expressed in years.Advanced

   Macaulay duration is the weighted average time to receive the bond's cash flows, while modified duration converts that into an approximate percentage price change for a one percent change in yield. A bond with modified duration of five will fall roughly five percent in price if yields rise by one percentage point. Longer maturity and lower coupon both raise duration, so a zero coupon bond has duration equal to its maturity. Banks and insurers use duration matching to immunise their balance sheets against rate moves.

   Linked terms
6. 131

   Government security

   A tradable debt instrument issued by the central or a state government, carrying sovereign credit risk.Basic

   Central government issues treasury bills for up to one year and dated securities beyond, while states issue State Development Loans. They are issued through RBI auctions, are eligible for statutory liquidity ratio maintenance and are held in the Subsidiary General Ledger. They carry no credit risk in domestic currency but full interest rate risk, which is why a bank can lose money on a government bond. The RBI Retail Direct scheme, launched in 2021, lets individuals open accounts and buy them directly.

   Linked terms
7. 132

   State Development Loan

   A dated security issued by a state government to finance its fiscal deficit, auctioned by the RBI.Intermediate

   They typically yield more than central government securities of the same maturity, a gap called the spread, which reflects lower liquidity rather than any legal difference in credit standing. They are eligible for statutory liquidity ratio maintenance and are issued through auctions conducted on the E-Kuber platform. State borrowing limits are set under the Fiscal Responsibility and Budget Management framework and approved by the central government under Article 293(3) of the Constitution. Aggregate state borrowing has become large enough that its calendar affects overall bond market yields.

   Linked terms
8. 133

   Primary dealer

   An entity authorised by the RBI to underwrite and make markets in government securities.Advanced

   It must bid a minimum amount in every primary auction and must quote two way prices in the secondary market, providing liquidity. The system was introduced in 1995 to develop the government securities market and reduce direct RBI subscription to primary issues. Standalone primary dealers are non-banking finance companies regulated by the RBI, while bank primary dealers run the activity as a department. Since the Fiscal Responsibility and Budget Management Act barred RBI participation in primary auctions from April 2006, primary dealers became the underwriters of last resort.

   Linked terms
9. 134

   Debenture

   A debt instrument issued by a company acknowledging a loan, which may or may not be secured against assets.Basic

   A secured debenture carries a charge on specified assets while an unsecured or naked debenture does not, so recovery depends on the general estate. Convertible debentures can be converted into equity, fully or partly, at a stated ratio and time, while non convertible debentures stay debt throughout. Companies issuing debentures must appoint a debenture trustee registered with SEBI and create a debenture redemption reserve where required. The trustee's role is to act for dispersed holders who could never enforce individually.

   Linked terms
10. 135

    Credit rating

    An independent opinion on the creditworthiness of an issuer or an instrument, expressed on a letter scale.Intermediate

    Indian agencies registered with SEBI include CRISIL, ICRA, CARE, India Ratings and Brickwork. Long term scales run from AAA, the highest safety, down through BBB, the lowest investment grade, to D for default, while short term scales run A1 to A4. Ratings are opinions on relative default risk, not recommendations to buy, and they are reviewed periodically. Rating linked investment mandates matter practically: a downgrade below investment grade can force insurers and pension funds to sell regardless of their own view.

    Linked terms
11. 136

    Sovereign Gold Bond

    A government security denominated in grams of gold, giving gold price exposure plus a fixed interest coupon.Intermediate

    Issued by the RBI on behalf of the Government of India from November 2015, it pays 2.5 percent per annum on the initial investment and has an eight year tenor with an exit option from the fifth year. Capital gains on redemption at maturity are exempt from tax for individuals, which is the feature that made it attractive relative to physical gold. It reduced imports by giving savers a paper alternative to metal. Fresh issuance has been discontinued, but the outstanding bonds continue to trade and to be redeemed on schedule.

    Linked terms
12. 137

    Masala bond

    A rupee denominated bond issued outside India, where the currency risk sits with the foreign investor.Advanced

    The International Finance Corporation issued the first in 2014 and named it after Indian spices, following the pattern of dim sum bonds in Hong Kong and samurai bonds in Japan. Because the borrowing is in rupees, an Indian issuer faces no exchange rate risk on repayment, which is the entire attraction. They fall within the external commercial borrowing framework of the RBI, with minimum maturity and end use restrictions. Contrast with a foreign currency bond, where depreciation of the rupee raises the issuer's repayment burden.

    Linked terms
13. 138

    Green bond

    A bond whose proceeds are earmarked for projects with environmental benefits such as renewable energy or clean transport.Intermediate

    India issued its first Sovereign Green Bonds in January 2023 under a framework approved by the government, with proceeds ring fenced for eligible green projects. SEBI has issued disclosure requirements for green debt securities, including third party review and reporting on use of proceeds. Investors often accept a marginally lower yield, a gap known as the greenium, though it is small and inconsistent in practice. The main risk the framework guards against is greenwashing, where the label does not match the underlying use.

    Linked terms
14. 139

    Inflation indexed bond

    A bond whose principal or coupon is adjusted for inflation, protecting the investor's real return.Advanced

    India issued inflation indexed bonds linked to the wholesale price index in 2013 and inflation indexed national saving securities linked to the consumer price index in 2013-14, neither of which found sustained demand. In the standard design, the principal is scaled up by the index and the fixed coupon rate is applied to the adjusted principal, so both interest and redemption rise with inflation. The gap between the nominal yield and the indexed yield gives a market based measure of expected inflation, called the break even inflation rate. They matter conceptually because they separate real interest rates from inflation expectations.

    Linked terms
15. 140

    External commercial borrowing

    Borrowing by an eligible Indian entity from a recognised non resident lender, in foreign currency or in rupees.Advanced

    The framework is administered by the RBI under FEMA and prescribes eligible borrowers, recognised lenders, minimum average maturity, all in cost ceilings and permitted end uses. End use restrictions typically bar real estate, capital market investment and on lending, other than by eligible financial intermediaries. Foreign currency borrowing is cheaper in nominal terms but exposes the borrower to depreciation, which is why the RBI encourages hedging. The automatic route covers most cases, with the approval route for the rest.

    Linked terms

Chapter 11 · entries 141 to 153

Risk management in the banking sector

1. 141

   Risk

   The possibility that actual outcomes differ from expected outcomes, including the chance of loss.Basic

   Banking risks are conventionally grouped into credit risk, market risk, operational risk and liquidity risk, with Basel capital charges for the first three. Risk is not the same as uncertainty: risk can be assigned probabilities while uncertainty cannot, a distinction due to Frank Knight. Banks manage risk through the three lines of defence: the business unit, an independent risk and compliance function and internal audit. Expected losses are covered by provisions and pricing, while unexpected losses are covered by capital, a division that underlies all prudential regulation.

   Linked terms
2. 142

   Credit risk

   The risk that a borrower or counterparty fails to meet its obligations as they fall due.Basic

   It is the dominant risk in Indian banking and is decomposed into probability of default, loss given default and exposure at default, whose product gives expected loss. Mitigation tools include collateral, guarantees, covenants, exposure limits and credit derivatives. Concentration risk is a specific form: excessive exposure to one borrower, group or sector, which the large exposures framework controls. Under the expected credit loss framework effective April 2027, these parameters move from supervisory templates into banks' own models.

   Linked terms
3. 143

   Market risk

   The risk of loss from movements in market prices such as interest rates, exchange rates, equity prices and commodity prices.Advanced

   For Indian banks the largest component is interest rate risk on the government securities portfolio, because a rise in yields lowers the value of held for trading and available for sale holdings. It is measured using value at risk, sensitivity measures such as duration and stress testing. Banks classify investments into held to maturity, available for sale and held for trading, and the classification determines whether losses hit the profit and loss account. The revised investment classification norms effective 1 April 2024 aligned these categories more closely with global standards.

   Linked terms
4. 144

   Operational risk

   The risk of loss from inadequate or failed internal processes, people and systems, or from external events.Intermediate

   The Basel definition includes legal risk but excludes strategic and reputational risk, a boundary that examiners test. Examples include fraud, technology failure, mis selling, cyber attack and natural disaster. Basel II offered the basic indicator, standardised and advanced measurement approaches; Basel III replaces these with a single standardised measurement approach built on a business indicator and an internal loss multiplier. Most Indian banks currently use the basic indicator approach, which charges fifteen percent of average gross income over three years.

   Linked terms
5. 145

   Liquidity risk

   The risk that a bank cannot meet its obligations as they fall due without incurring unacceptable losses.Intermediate

   It has two forms: funding liquidity risk, the inability to raise cash, and market liquidity risk, the inability to sell an asset without moving its price. It is measured through structural liquidity statements bucketing assets and liabilities by maturity, and through the liquidity coverage ratio and net stable funding ratio. A bank can be perfectly solvent and still fail on liquidity, which is the lesson of the Silicon Valley Bank collapse in March 2023. Digital banking has compressed the speed at which deposits can leave, which is why run off assumptions were tightened from April 2026.

   Linked terms
6. 146

   Maturity mismatch

   The gap between the maturity profile of a bank's assets and that of its liabilities.Intermediate

   Banks fund long dated loans with short dated deposits, so the mismatch is intrinsic to the business rather than a mistake. It is measured through a structural liquidity statement that buckets cash flows into time bands, with regulatory tolerance limits on negative gaps in the shorter buckets. The same gap creates interest rate risk in the banking book, because assets and liabilities reprice at different times. Asset liability management committees exist specifically to monitor and manage this exposure.

   Linked terms
7. 147

   Asset liability management

   The coordinated management of a bank's assets and liabilities to control liquidity and interest rate risk.Advanced

   It is run by an Asset Liability Committee, chaired by the chief executive, which sets the balance sheet strategy, pricing and gap limits. The two main tools are the structural liquidity statement for liquidity and the interest rate sensitivity statement for repricing gaps. A positive gap in a time bucket means more assets than liabilities reprice, so income rises when rates rise. In India the framework follows RBI guidelines first issued in 1999 and refined since.

   Linked terms
8. 148

   Interest rate risk

   The risk that changes in interest rates reduce a bank's earnings or the economic value of its equity.Advanced

   Interest rate risk in the trading book is a market risk with a capital charge, while interest rate risk in the banking book is handled under Pillar 2 of Basel. The two standard measurement lenses are earnings at risk, a short term view of net interest income, and economic value of equity, a long term view of the present value of all cash flows. Repricing gaps, basis risk, yield curve risk and optionality are the four sources. Duration is the technical measure that links yield changes to value changes.

   Linked terms
9. 149

   Value at risk

   The maximum loss a portfolio is expected to suffer over a given period at a given confidence level.Advanced

   A one day ninety nine percent value at risk of ten crore rupees means that on ninety nine days out of a hundred the loss should not exceed ten crore rupees. It can be computed by the historical simulation, variance covariance or Monte Carlo methods. Its known weakness is that it says nothing about the size of the loss in the remaining one percent of cases, which is why expected shortfall, the average loss beyond the value at risk threshold, is now preferred under the Fundamental Review of the Trading Book. Back testing checks whether actual exceptions match the model's predictions.

   Linked terms
10. 150

    Stress testing

    Assessing the impact of severe but plausible adverse scenarios on a bank's capital, earnings and liquidity.Advanced

    Sensitivity analysis moves one variable at a time while scenario analysis moves a coherent set together, such as a growth slowdown with rising yields and a depreciating rupee. The RBI publishes macro stress test results in its half yearly Financial Stability Report, projecting the gross non-performing asset ratio under baseline and adverse scenarios. Reverse stress testing starts from failure and works backwards to find what would cause it. Results feed into the internal capital adequacy assessment process under Pillar 2.

    Linked terms
11. 151

    Systematic risk and systemic risk

    Systematic risk is undiversifiable market wide risk; systemic risk is the risk that failure of one institution brings down the system.Intermediate

    Systematic risk is a portfolio theory term, measured by beta, and cannot be removed by diversification because it affects all assets. Systemic risk is a financial stability term, arising from interconnectedness, common exposures and contagion, and is addressed by macroprudential tools and systemically important institution surcharges. The words look alike and are constantly confused, which is exactly why they are examined together. The 2008 crisis is the standard illustration of systemic risk and the 2020 market crash of systematic risk.

    Linked terms
12. 152

    Beta

    A measure of a security's sensitivity to movements in the overall market.Advanced

    A beta of one means the security moves in line with the market, above one means it amplifies market moves and below one means it dampens them. It is estimated by regressing the security's returns on market returns, and it captures only systematic risk since unsystematic risk is diversified away. In the capital asset pricing model, expected return equals the risk free rate plus beta times the equity risk premium. A negative beta, rare in practice, indicates an asset that moves against the market, which is why gold is sometimes described this way.

    Linked terms
13. 153

    Cyber risk

    The risk of loss from cyber attacks, data breaches or failure of information technology systems.Intermediate

    The RBI treats it as a component of operational risk and has issued a cyber security framework for banks, urban co-operative banks and non-banking finance companies with a baseline set of controls. Banks must report cyber incidents to the RBI within a prescribed time and maintain a security operations centre. The Digital Personal Data Protection Act, 2023 adds data breach obligations on top of prudential requirements. It is now discussed as a systemic issue because a successful attack on a shared payment infrastructure would affect all participants at once.

    Linked terms

Chapter 12 · entries 154 to 166

Derivatives: types and functions

1. 154

   Derivative

   A contract whose value is derived from an underlying asset, rate, index or credit event.Basic

   Section 45U of the RBI Act defines it as an instrument settled at a future date whose value derives from interest rates, exchange rates, credit rating or index, or securities prices. The four building blocks are forwards, futures, options and swaps, and every complex product is a combination of these. Derivatives serve three functions: hedging an existing exposure, speculating on a price view and arbitraging price differences. Jurisdiction is split, with the RBI regulating interest rate and currency derivatives on the over the counter market and SEBI regulating exchange traded equity and commodity derivatives.

   Linked terms
2. 155

   Forward contract

   A customised bilateral agreement to buy or sell an asset at a fixed price on a future date.Basic

   It is traded over the counter, so the quantity, quality, price and date are negotiated between the two parties. That flexibility comes with counterparty risk, since there is no clearing house standing behind the trade, and with illiquidity, since a customised contract is hard to unwind. An exporter expecting one million dollars in ninety days can lock in a rupee rate today through a forward, removing exchange rate uncertainty. Contrast this with a futures contract, which is standardised and exchange traded.

   Linked terms
3. 156

   Futures contract

   A standardised exchange traded contract to buy or sell an asset at a fixed price on a specified future date.Intermediate

   Standardisation of lot size, quality and expiry allows the contract to trade freely, and a clearing corporation becomes the counterparty to both sides, eliminating default risk. Positions are marked to market daily, with gains and losses settled in cash each day rather than accumulating to expiry. In India, equity, index, currency and commodity futures trade on recognised exchanges, with commodity derivatives regulated by SEBI since the merger of the Forward Markets Commission in 2015. The daily settlement mechanism is the operational difference from a forward that examiners most often test.

   Linked terms
4. 157

   Option

   A contract giving the buyer the right, but not the obligation, to buy or sell an underlying at a set price.Basic

   A call option gives the right to buy and a put option the right to sell, at a strike price, and the buyer pays a premium for this right. The buyer's loss is limited to the premium while the writer's loss can be unlimited, an asymmetry that is the defining feature. European options can be exercised only at expiry while American options can be exercised at any time; Indian index and stock options are European style. Options are described as in the money, at the money or out of the money depending on the relationship between spot and strike.

   Linked terms
5. 158

   Option premium and payoff

   The premium is the price paid for an option; the payoff is its value at expiry, split into intrinsic and time value.Advanced

   Intrinsic value is the immediate exercise value, which for a call is the spot price minus the strike price when positive and zero otherwise. Time value is the balance of the premium, reflecting the chance that the option moves further into the money before expiry, and it decays to zero at expiry. Premium is driven by spot price, strike, time to expiry, volatility and interest rates, the five inputs of the Black Scholes model. The Greeks, delta, gamma, theta, vega and rho, measure sensitivity to each of these.

   Linked terms
6. 159

   Swap

   An agreement between two parties to exchange a series of cash flows over time on an agreed basis.Intermediate

   The commonest form is an interest rate swap exchanging fixed for floating payments on a notional principal, which is never itself exchanged. Currency swaps do exchange principal, at the start and again at maturity, because the two legs are in different currencies. Swaps are over the counter instruments, so they are customised and were historically bilateral, though central clearing is now common. In December 2025 the RBI announced a three year dollar rupee swap of five billion dollars as a liquidity measure, which shows the instrument in a monetary policy role.

   Linked terms
7. 160

   Interest rate swap

   A swap in which one party pays a fixed interest rate and receives a floating rate on a notional principal.Advanced

   The notional principal is only a reference for calculating payments and is never exchanged, so credit exposure is limited to the net difference. In India the dominant variant is the overnight indexed swap, where the floating leg references the overnight Mumbai Interbank Outright Rate compounded daily. Overnight indexed swap rates are watched closely because they reveal what the market expects the policy rate to be over the coming months. A borrower with floating rate debt who fears a rate rise can swap into fixed and lock its cost.

   Linked terms
8. 161

   Forward rate agreement

   An over the counter contract fixing an interest rate for a notional deposit or loan starting on a future date.Advanced

   Only the difference between the agreed rate and the actual reference rate on the settlement date is exchanged, discounted back to that date. It is effectively a single period interest rate swap, so an interest rate swap can be viewed as a series of forward rate agreements. A treasurer expecting to borrow in three months for six months can lock the rate today using a three against nine forward rate agreement. The RBI permits scheduled commercial banks, primary dealers and select institutions to deal in them under its derivatives directions.

   Linked terms
9. 162

   Credit default swap

   A contract in which the protection buyer pays a periodic premium and the seller compensates it if a specified credit event occurs.Advanced

   It functions like insurance on a bond, with the credit event typically being default, bankruptcy or restructuring of the reference entity. The RBI issued revised Credit Default Swaps Directions in 2022, permitting a wider set of users and market makers to deepen the corporate bond market. The instrument amplified the 2008 crisis because sellers such as AIG wrote protection far beyond their capacity to pay. In India volumes remain very thin, which is itself an examinable point about corporate bond market development.

   Linked terms
10. 163

    Currency derivatives and foreign exchange risk

    Foreign exchange risk is loss from adverse currency movement; currency derivatives are the contracts used to hedge it.Intermediate

    Exposure has three forms: transaction exposure on committed cash flows, translation exposure on consolidating foreign subsidiary accounts and economic exposure on long run competitiveness. Hedging tools include currency forwards, currency futures and options on recognised exchanges, and currency swaps in the over the counter market. Exchange traded currency derivatives in India cover the dollar, euro, pound and yen against the rupee, with position limits set by the RBI and SEBI. An unhedged foreign currency exposure attracts a higher capital charge for the lending bank, which is how the regulator pushes borrowers to hedge.

    Linked terms
11. 164

    Margin and mark to market

    Margin is the collateral placed with the clearing corporation; mark to market is the daily settlement of gains and losses.Advanced

    Initial margin is collected upfront to cover a one day adverse move at a high confidence level, and exposure margin is added on top as a buffer. At the end of each day, positions are revalued at the settlement price and the difference is debited or credited, so losses cannot accumulate unnoticed. If the balance falls below the maintenance level, a margin call requires a top up, failing which the position is squared off. This machinery is why exchange traded derivatives carry almost no counterparty risk while over the counter contracts do.

    Linked terms
12. 165

    Hedging, speculation and arbitrage

    Hedging reduces an existing risk, speculation takes on risk for profit, and arbitrage exploits price differences for riskless gain.Basic

    A jeweller who buys gold futures against a fixed price order is hedging; a trader who buys the same futures purely on a price view is speculating. An arbitrageur who buys in the cash market and simultaneously sells in the futures market to capture a mispricing is doing neither, since the position is offsetting. All three are necessary: hedgers need speculators to take the other side, and arbitrageurs keep cash and derivative prices aligned. Cost of carry links the spot and futures price, and arbitrage is what enforces it.

    Linked terms
13. 166

    Volatility

    A measure of the dispersion of returns, usually expressed as the annualised standard deviation of price changes.Advanced

    Historical volatility is computed from past prices while implied volatility is backed out of current option premiums and reflects what the market expects. India VIX is the National Stock Exchange's volatility index, derived from Nifty option prices, and is often called the fear gauge because it rises when markets fall sharply. Higher volatility raises option premiums for both calls and puts, since either can end up further in the money. It is the only input to option pricing that cannot be directly observed, which is why it is traded in its own right.

    Linked terms

Chapter 13 · entries 167 to 176

Public private partnerships

1. 167

   Public private partnership

   A long term contract between a government authority and a private party to provide a public asset or service, with defined risk sharing.Basic

   The essential features are a long concession period, private financing and construction, performance linked payment and transfer of the asset back to the public sector at the end. Its purpose is not merely to raise money but to transfer risks such as construction, operation and demand to the party best able to manage them. India uses it heavily in highways, ports, airports and urban infrastructure, guided by model concession agreements. Public private partnership projects above a threshold are appraised by the Public Private Partnership Appraisal Committee chaired by the Secretary of Economic Affairs.

   Linked terms
2. 168

   Build operate transfer

   A model in which a private party builds and operates a facility for a concession period and then transfers it to the government.Intermediate

   In the toll variant, the concessionaire recovers its investment from user charges and therefore carries the traffic or demand risk. In the annuity variant, the government pays fixed semi annual amounts irrespective of traffic, so demand risk stays with the government while construction and operation risk stays private. Related variants include build own operate transfer, design build finance operate transfer and build lease transfer. The choice of variant is essentially a choice about who bears revenue risk, and that is the point examiners test.

   Linked terms
3. 169

   Hybrid annuity model

   A highway contracting model in which the government funds forty percent of project cost during construction and the balance is paid as annuities.Advanced

   It was adopted by the National Highways Authority of India in 2016 after pure build operate transfer toll projects stalled for want of private finance. The government pays forty percent in five instalments linked to construction milestones, and the remaining sixty percent is paid over the operation period as annuities with interest linked to the bank rate plus a spread. Toll collection rights stay with the authority, so the concessionaire faces no traffic risk. It revived private participation in highways precisely because it split risk more evenly than either extreme.

   Linked terms
4. 170

   Viability gap funding

   A capital grant from the government to make an economically desirable but financially unviable project bankable.Intermediate

   Under the scheme administered by the Department of Economic Affairs, support is normally up to twenty percent of total project cost from the central government, with the sponsoring authority able to add up to another twenty percent. It is disbursed only after the private developer has brought in its equity, so it is not a subsidy at the front end. The revamped scheme extended support to social sectors such as health, education, waste water and solid waste management. The core idea is that a project can be socially valuable yet fail a commercial internal rate of return test, and the grant closes that gap.

   Linked terms
5. 171

   Swiss challenge method

   A bidding process in which an unsolicited proposal is published and third parties are invited to submit better offers.Advanced

   The original proposer usually retains a right of first refusal, allowing it to match the best counter offer and win the project. It rewards private innovation in identifying projects while still preserving some competitive tension. Critics argue it favours the original proposer and reduces genuine competition, and the Supreme Court has upheld its use while stressing transparency. Indian states have used it for redevelopment and infrastructure projects, and the Vijay Kelkar Committee cautioned against overuse.

   Linked terms
6. 172

   Toll, annuity and toll operate transfer

   Three revenue models for highway assets, differing in who collects the revenue and who bears traffic risk.Advanced

   In the toll model the concessionaire collects user charges and bears traffic risk; in the annuity model the government pays fixed instalments and bears it. Toll operate transfer is different in kind: it monetises an already built and operating public asset by auctioning the right to collect tolls for a fixed period, typically thirty years, against an upfront payment. The National Highways Authority of India has raised substantial sums through toll operate transfer bundles, which is why it sits at the centre of the asset monetisation programme. No construction risk arises in toll operate transfer, since the road already exists.

   Linked terms
7. 173

   Special purpose vehicle

   A separate legal entity created to execute a single project, ring fencing its assets and liabilities from the sponsor.Intermediate

   Lenders finance the special purpose vehicle rather than the sponsor, relying on the project's own cash flows, which is the essence of non recourse or limited recourse project finance. Ring fencing protects the sponsor if the project fails and protects the project if the sponsor fails. Almost every public private partnership concession in India is executed through one, with the concession agreement signed by the special purpose vehicle. It is also the standard structure used in securitisation.

   Linked terms
8. 174

   Concession agreement

   The contract that defines the rights, obligations, risk allocation and payment terms between the authority and the concessionaire.Intermediate

   It specifies the concession period, performance standards, tariff or annuity mechanism, force majeure, termination payments and dispute resolution. India uses model concession agreements for sectors such as highways and ports so that terms are standardised and bankable. Termination payment clauses matter most to lenders, since they determine recovery if the project is cut short. Disputes over these agreements have been a major cause of stalled projects, which is why the Kelkar Committee recommended an independent regulator and better dispute resolution.

   Linked terms
9. 175

   Infrastructure financing

   Long tenor funding for physical infrastructure, characterised by high upfront cost, long gestation and back loaded cash flows.Advanced

   Banks are structurally unsuited to it because deposits are short and infrastructure loans run fifteen to twenty five years, the mismatch that produced India's asset quality crisis after 2010. The alternatives are development finance institutions such as NaBFID, infrastructure debt funds, infrastructure investment trusts and the corporate bond market. Take out financing, where a long term lender replaces the bank after construction, was designed to address the same problem. Credit enhancement by NaBFID or a guarantee fund can lift a project bond to a rating that insurers and pension funds are permitted to buy.

   Linked terms
10. 176

    Asset monetisation

    Unlocking value from existing public assets by transferring operating rights to private parties for a defined period.Intermediate

    Ownership is not sold: the government transfers the right to operate and earn revenue and takes the asset back at the end, which distinguishes it from disinvestment. The National Monetisation Pipeline announced in August 2021 covered roads, railways, power transmission, gas pipelines, warehousing and telecom towers. Common structures are toll operate transfer, infrastructure investment trusts and long term leases. The proceeds are meant to fund fresh capital expenditure rather than revenue spending, which is the fiscal argument for it.

    Linked terms

Chapter 14 · entries 177 to 188

Alternative sources of finance

1. 177

   Venture capital

   Equity finance provided to early stage, high risk companies with high growth potential.Basic

   Funds invest in stages: seed, early stage and later stage, taking minority equity and a board seat, and expect most investments to fail while a few return the whole fund. In India these funds register with SEBI as Category I alternative investment funds. Exit routes are an initial public offering, a strategic sale or a secondary sale to another fund, and the absence of exits is the classic constraint. SIDBI's Fund of Funds for Startups, with a corpus of ten thousand crore rupees, invests in such funds rather than directly in startups.

   Linked terms
2. 178

   Angel investor

   A wealthy individual who invests personal funds in a very early stage venture, usually before institutional capital arrives.Basic

   Cheque sizes are small, typically between twenty five lakh and a few crore rupees, and the investor often contributes mentoring and networks alongside money. Angel funds are a sub category of Category I alternative investment funds under SEBI regulations, with a lower corpus requirement than venture capital funds. Angels invest earlier and with less diligence than venture capital funds, so their loss rate is higher. The abolition of the angel tax under Section 56(2)(viib) removed a long standing irritant for this segment.

   Linked terms
3. 179

   Private equity

   Investment in mature unlisted companies, or in taking listed companies private, usually with a controlling stake.Advanced

   It differs from venture capital in stage, ticket size and control: private equity backs established businesses and often uses leverage, while venture capital backs unproven ones with equity only. A leveraged buyout funds the acquisition largely with debt secured against the target's own assets and cash flows. Funds register with SEBI as Category II alternative investment funds and typically hold for four to seven years before exiting. Their value creation claim rests on operational improvement and governance, not just financial engineering.

   Linked terms
4. 180

   Crowdfunding

   Raising small amounts from a large number of people, usually through an online platform.Intermediate

   It has four forms: donation based, reward based, peer to peer lending and equity crowdfunding. Peer to peer lending is regulated in India as NBFC-P2P, but equity crowdfunding through unregistered platforms is not permitted, and SEBI has warned that such platforms may amount to an unauthorised public offer. Section 42 of the Companies Act limits a private placement to two hundred persons in a financial year, which is the legal constraint that blocks equity crowdfunding. Reward and donation platforms operate freely because no security is issued.

   Linked terms
5. 181

   Securitisation

   Pooling illiquid loans and issuing tradable securities backed by their cash flows.Advanced

   The originator sells a pool of loans to a special purpose vehicle, which issues pass through certificates to investors, moving the assets off the originator's balance sheet. The RBI's 2021 directions require a minimum holding period before a loan can be securitised and minimum retention of risk by the originator, so that the originator keeps skin in the game. Where the underlying is a mortgage the product is a mortgage backed security; otherwise it is an asset backed security. Weak underwriting in securitised United States subprime mortgages was the trigger of the 2008 crisis, which is why retention rules exist.

   Linked terms
6. 182

   Asset reconstruction company

   A company registered with the RBI that buys non-performing assets from banks and works to recover value from them.Advanced

   It operates under the SARFAESI Act, 2002, needs a minimum net owned fund of three hundred crore rupees and issues security receipts to qualified buyers against the acquired pool. Banks may sell bad loans for cash or against security receipts, and the RBI requires the asset reconstruction company to retain a minimum stake so that incentives are aligned. The National Asset Reconstruction Company Limited, set up in 2021 with a government guarantee on security receipts, is the public sector version. The purpose is to let banks clean their books and specialists focus on recovery.

   Linked terms
7. 183

   Insolvency and Bankruptcy Code

   The 2016 law providing a time bound, creditor driven process for resolving insolvency of companies and individuals.Advanced

   The corporate insolvency resolution process must be completed within one hundred and eighty days, extendable by ninety days, with an outer limit of three hundred and thirty days including litigation. On admission a moratorium takes effect, the board is suspended and an insolvency professional runs the company under a committee of creditors that approves a resolution plan by sixty six percent vote. The adjudicating authority is the National Company Law Tribunal for companies, with appeals to the National Company Law Appellate Tribunal, and the Insolvency and Bankruptcy Board of India is the regulator. Failure to approve a plan leads to liquidation under the waterfall in Section 53.

   Linked terms
8. 184

   Leasing and hire purchase

   Leasing gives use of an asset for rent without ownership; hire purchase transfers ownership after the final instalment.Intermediate

   A finance lease transfers substantially all risks and rewards of ownership and appears on the lessee's balance sheet, while an operating lease is closer to a rental. In hire purchase the hirer takes possession immediately but title passes only on payment of the last instalment, which is why it suits vehicle and equipment finance. Leasing conserves cash, avoids obsolescence risk and can offer tax advantages through depreciation claimed by the lessor. Aircraft leasing from GIFT City is the current policy example, aimed at moving offshore leasing business onshore.

   Linked terms
9. 185

   Foreign direct investment

   Investment by a non resident in an Indian entity with a lasting interest and, usually, some management participation.Basic

   It is governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and the consolidated FDI policy, with an automatic route and a government approval route. Sectoral caps apply, and insurance moved to one hundred percent under the automatic route from 5 February 2026. A holding of ten percent or more by a foreign portfolio investor is reclassified as foreign direct investment, which is the standard threshold distinguishing the two. Press Note 3 of 2020 requires government approval for investment from countries sharing a land border with India.

   Linked terms
10. 186

    Startup and Fund of Funds

    A startup is a young entity recognised by the government for benefits; the Fund of Funds invests in venture funds that back them.Intermediate

    Under the Department for Promotion of Industry and Internal Trade definition, an entity qualifies for up to ten years from incorporation with turnover below one hundred crore rupees in any year, and must be working on innovation or scalable business models. Benefits include a three year income tax exemption under Section 80-IAC, self certification under labour and environment laws and relaxed public procurement norms. The Fund of Funds for Startups, with a corpus of ten thousand crore rupees, is operated by SIDBI and invests in SEBI registered alternative investment funds rather than directly in companies. The Union Budget for 2026-27 added a ten thousand crore rupee SME Growth Fund alongside this architecture.

    Linked terms
11. 187

    Credit guarantee scheme

    A scheme in which a trust or fund guarantees part of a lender's loss on a loan, encouraging collateral free lending.Intermediate

    The Credit Guarantee Fund Trust for Micro and Small Enterprises, set up by the government and SIDBI in 2000, guarantees collateral free credit to micro and small enterprises, with the ceiling raised to ten crore rupees. Guarantees address the core problem of small business lending: the borrower has cash flows but no assets to pledge. The Emergency Credit Line Guarantee Scheme launched in 2020 used a one hundred percent guarantee to sustain small business credit through the pandemic. The cost is a guarantee fee and the risk is moral hazard, since a guaranteed lender may screen borrowers less carefully.

    Linked terms
12. 188

    Microfinance and self help group bank linkage

    Provision of small collateral free loans to low income households, often through groups that borrow collectively.Intermediate

    A self help group is a small savings group, usually of ten to twenty women, which is later linked to a bank for credit under the NABARD programme launched in 1992. Joint liability and peer monitoring substitute for collateral, which is what makes repayment rates high. Under the RBI's harmonised directions of 2022, a microfinance loan is a collateral free loan to a household with annual income up to three lakh rupees, with total repayment obligations capped at fifty percent of monthly household income. The Andhra Pradesh crisis of 2010 led to the Malegam Committee and the creation of the NBFC-Microfinance institution category.

    Linked terms

Chapter 15 · entries 189 to 200

Inflation concepts

1. 189

   Inflation

   A sustained rise in the general price level of goods and services, which reduces the purchasing power of money.Basic

   It is measured as the year on year percentage change in a price index, usually the consumer price index in India. A one off rise in one price is not inflation; the increase must be general and sustained. Moderate inflation is treated as benign because it eases relative price adjustment and reduces the real burden of debt, while high inflation acts as a regressive tax on those holding cash. India's statutory target is four percent consumer price index inflation with a band of plus or minus two percentage points.

   Linked terms
2. 190

   Consumer price index

   An index measuring the change in retail prices of a fixed basket of goods and services consumed by households.Basic

   The Ministry of Statistics and Programme Implementation released a new series with base year 2024 equal to one hundred on 12 February 2026, replacing the 2012 base. Weights come from the Household Consumption Expenditure Survey of 2023-24, the basket expanded from 299 to 358 items, and the structure moved from six groups to twelve divisions under the COICOP 2018 classification. The weight of food and beverages fell sharply from 45.86 percent to 36.75 percent in the combined index, which materially reduces the influence of vegetable price spikes on headline inflation. Separate rural, urban and combined indices are published, and the consumer price index combined is the RBI's target variable.

   Linked terms
3. 191

   Wholesale price index

   An index measuring the change in prices of goods traded in bulk at the wholesale level, before they reach the retail stage.Intermediate

   It is compiled by the Office of the Economic Adviser in the Department for Promotion of Industry and Internal Trade with base year 2011-12, and covers primary articles, fuel and power, and manufactured products. It excludes services entirely, which is its main weakness in a services dominated economy, and it has not been the monetary policy anchor since 2014. Manufactured products carry the largest weight, at just under sixty five percent, which is why it tracks producer costs and global commodity prices closely. Wholesale price index and consumer price index inflation can diverge sharply and even move in opposite directions, a favourite question.

   Linked terms
4. 192

   GDP deflator

   The ratio of nominal gross domestic product to real gross domestic product, multiplied by one hundred.Advanced

   It is the broadest measure of inflation because it covers every good and service produced domestically, not a fixed basket. Its basket changes automatically with the composition of output, so it is a Paasche type index, unlike the consumer price index, which is a fixed basket Laspeyres type index. It excludes imports, which the consumer price index includes, so it can diverge sharply when oil prices move. It is available only quarterly with a lag, which is why it is not used for policy in real time.

   Linked terms
5. 193

   Headline and core inflation

   Headline inflation covers the full basket; core inflation excludes food and fuel, which are the volatile components.Basic

   Core inflation is the better guide to underlying demand pressure because food and fuel prices are driven by monsoons, harvests and global crude rather than domestic demand. India targets headline inflation, not core, which is a deliberate choice given the large weight of food in household budgets and its effect on inflation expectations. When headline sits far above core for several months, the RBI usually treats it as a supply shock and looks through it, unless it starts feeding into wages. With the food weight now at 36.75 percent, the gap between headline and core should narrow structurally.

   Linked terms
6. 194

   Demand pull and cost push inflation

   Demand pull inflation comes from excess demand chasing limited output; cost push inflation comes from rising input costs.Intermediate

   Demand pull arises when aggregate demand exceeds potential output, for example after a large fiscal stimulus, and monetary tightening is the appropriate response. Cost push arises from higher oil prices, wages or supply disruption, and tightening in that case suppresses output without addressing the cause. The 2022 spike after the Russia Ukraine conflict was largely cost push, which is why the RBI first tolerated it before responding to second round effects. Identifying which type is present is the central diagnostic question in any inflation answer.

   Linked terms
7. 195

   Deflation, disinflation and reflation

   Deflation is a falling price level, disinflation is a falling rate of inflation, and reflation is policy driven revival of demand after a slump.Intermediate

   Disinflation means prices are still rising, only more slowly, so inflation falling from six percent to three percent is disinflation, not deflation. Deflation is far more dangerous because it raises the real value of debt and encourages consumers to postpone purchases, deepening the slump, as Japan's experience showed. Reflation refers to deliberate fiscal or monetary expansion to restore output and prices to trend after a contraction. The three terms are constantly confused and are best learnt as a set.

   Linked terms
8. 196

   Stagflation

   The simultaneous occurrence of high inflation, stagnant output and high unemployment.Intermediate

   It became prominent during the oil shocks of the 1970s and broke the accepted policy trade off, since fighting inflation worsened unemployment and vice versa. It is typically caused by a large adverse supply shock that raises costs and reduces output at the same time. It is a policy trap because monetary tightening deepens the slowdown while easing entrenches inflation. Its existence is the standard empirical objection to a stable Phillips curve.

   Linked terms
9. 197

   Phillips curve

   A relationship showing an inverse trade off between inflation and unemployment in the short run.Advanced

   A W Phillips documented it for the United Kingdom in 1958, and it implied that a government could buy lower unemployment by accepting higher inflation. Friedman and Phelps argued that the trade off holds only while inflation is unexpected, so in the long run the curve is vertical at the natural rate of unemployment. The expectations augmented version explains the 1970s stagflation that the original curve could not. Its policy implication is central to inflation targeting: anchoring expectations lowers the output cost of keeping inflation down.

   Linked terms
10. 198

    Real interest rate

    The nominal interest rate adjusted for inflation, showing the true increase in purchasing power.Intermediate

    The Fisher equation approximates it as the nominal rate minus the inflation rate, so an eight percent deposit rate with six percent inflation gives a real return of about two percent. The ex ante real rate uses expected inflation while the ex post rate uses actual inflation, and only the first drives saving and investment decisions. Real rates can turn negative when inflation exceeds nominal rates, which penalises savers and encourages borrowing, as happened in India during 2011 to 2013. The RBI has at times cited a real policy rate of around one to 1.5 percent as an appropriate medium term level.

    Linked terms
11. 199

    Money supply measures and the money multiplier

    The RBI's monetary aggregates M0 to M4, and the ratio of broad money to reserve money that links them.Advanced

    M0 is reserve money, being currency in circulation plus bankers' deposits with the RBI plus other deposits with the RBI. M1 is narrow money, being currency with the public, demand deposits and other deposits with the RBI, while M3 is broad money, being M1 plus time deposits with the banking system; M2 and M4 add post office savings and post office deposits to M1 and M3 respectively. The money multiplier is M3 divided by M0, and it exists because banks lend out most of what they receive and the resulting deposit is redeposited. It is limited by the cash reserve ratio and by the public's preference for currency over deposits, so the reduction of the cash reserve ratio to three percent completed in November 2025 mechanically raised it.

    Linked terms
12. 200

    Base effect

    The influence of the previous year's price level on the current year on year inflation rate.Intermediate

    If prices spiked twelve months ago, the high base makes this year's inflation look low even if prices are still rising at a normal pace, and the reverse holds after an unusually low base. It is a statistical artefact, not an economic change, so it must be stripped out before drawing any conclusion about price pressure. Analysts therefore also look at month on month and sequential momentum figures. A large share of month to month commentary on Indian inflation data is really commentary on base effects.

    Linked terms

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Ten question self test

Each question is marked the moment you answer, with the correct option and a one line reason. Every figure below was verified in July 2026.

1. Question 01

   What is the policy repo rate as of July 2026?

   The Monetary Policy Committee cut the repo rate to 5.25 percent in December 2025 and has held it there since.

2. Question 02

   What is the current cash reserve ratio?

   The cash reserve ratio was cut by 100 basis points in four tranches announced in June 2025, reaching 3.00 percent by November 2025.

3. Question 03

   Including the capital conservation buffer, what minimum capital must an Indian scheduled commercial bank hold?

   India prescribes 9 percent capital to risk weighted assets plus a capital conservation buffer of 2.5 percent.

4. Question 04

   What is the base year of the consumer price index series released in February 2026?

   The new series with base 2024 equal to 100 was released on 12 February 2026 using the Household Consumption Expenditure Survey of 2023-24.

5. Question 05

   What is the weight of food and beverages in the new combined consumer price index?

   The food and beverages weight fell from 45.86 percent in the 2012 series to 36.75 percent in the 2024 series.

6. Question 06

   Under the revised norms of June 2026, what asset size automatically places a non-banking finance company in the Upper Layer?

   The RBI replaced the parametric scoring method with an absolute threshold of Rs 1 lakh crore in total assets.

7. Question 07

   Which deposit size places an urban co-operative bank in Tier 4?

   Tier 4 covers urban co-operative banks with deposits above Rs 10,000 crore, and Tiers 2 to 4 must hold a minimum capital ratio of 12 percent.

8. Question 08

   From which date does the expected credit loss provisioning framework take effect for commercial banks?

   Final directions were issued on 27 April 2026 with effect from 1 April 2027 and a glide path running to 31 March 2031.

9. Question 09

   What is the overall priority sector lending target for small finance banks from FY 2025-26?

   The flexible component was cut from 35 percent to 20 percent, taking the overall target from 75 percent down to 60 percent.

10. Question 10

    What is the foreign direct investment cap in Indian insurance companies from 5 February 2026?

    The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 raised the cap to 100 percent under the automatic route.

Answer all ten questions to see your score.

How to revise this list

Do not read all two hundred entries in one sitting. Take one chapter, read the definitions only, then read the explanations, then close the page and write the ten hardest terms from memory in a single line each. The one line definition on every card is deliberately under thirty words because that is roughly what you can hold and reproduce accurately under exam conditions.

Revisit on a spacing schedule rather than a calendar one. Tick entries as you learn them, and on your next pass switch on the not yet learnt filter so that you only see what is still weak. Three passes spaced a day, a week and a month apart will hold better than ten consecutive readings, and the mastery meter is there to make the gap visible.

Frequently asked questions

What are the current RBI policy rates for 2026?

As of July 2026 the repo rate is 5.25 percent, the standing deposit facility rate is 5.00 percent, and the marginal standing facility rate and the Bank Rate are both 5.50 percent. The cash reserve ratio is 3.00 percent and the statutory liquidity ratio is 18.00 percent. These are the five numbers most likely to appear in a one mark question, so confirm them on the RBI website in the week before your exam.

Does the RBI target consumer price index or wholesale price index inflation?

The RBI targets headline consumer price index combined inflation at 4 percent with a tolerance band of plus or minus 2 percentage points. It does not target core inflation and it has not used the wholesale price index as an anchor since the framework changed in 2014. Failure is defined as average inflation outside the band for three consecutive quarters.

Which finance terms have changed most rcecently?

Five areas have moved substantially. The consumer price index moved to base year 2024 with the food weight cut to 36.75 percent, the expected credit loss (ECL) framework by RBI was finalised and will be implemented from April 2027, Non-banking finance company (NBFC) Upper Layer classification switched to an absolute Rs 1 lakh crore threshold, Insurance foreign direct investment went to 100 percent, and the Banking Laws (Amendment) Act, 2025 allowed up to four nominees per account.

What is the difference between systematic risk and systemic risk?

Systematic risk is undiversifiable market wide risk measured by beta, and it belongs to portfolio theory. Systemic risk is the danger that failure of one institution spreads through the system, and it belongs to financial stability policy. The words look almost identical, which is exactly why examiners pair them, so learn them as a contrast rather than separately.

How should I use the flashcards and the self test on this page?

Read a chapter first, tick each entry as you learn it, then run the flashcard drill on that chapter only by selecting its filter chip. The drill shows the one line definition and asks you to name the term, which is the direction an objective question actually tests. Take the ten question self test after two or three chapters rather than at the end.

About the author

Brajesh Mohan

Brajesh Mohan teaches Current, banking and finance for RBI Grade B, NABARD Grade A, Bank PO and the UPSC Economy paper, with 6 years of classroom and test series experience. He writes the banking and finance series on AffairsTap.

This glossary is revised periodially after Monetary Policy Committee meeting, after the Union Budget and the Economic Survey, and whenever a base year or a prudential threshold is revised. Figures were last verified on 24 July 2026. Report a missing term or an outdated figure through the contact page and it will be added in the next pass.

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