1. Introduction to the Indian Financial System (IFS)

The Indian Financial System is a network of institutions that helps money move from:

people who have extra funds (savers) →
people or businesses who need funds (borrowers)

It plays a major role in:

Economic growth
Capital formation (creating wealth)
Financial stability

The Indian Financial System has two major sectors:

A. Organized Sector (Fully Regulated)

Monitored by regulators like RBI, SEBI, IRDAI, PFRDA.

Includes:

Commercial Banks
Regional Rural Banks (RRBs)
Co-operative Banks
NBFCs
Development Financial Institutions (DFIs)
Insurance companies
Mutual Funds
Pension Funds

B. Unorganized Sector (Not Fully Regulated)

Includes:

Individual moneylenders
Indigenous bankers
Chit funds
Private or informal lenders

2. Major Components of the Indian Financial System

IFS consists of four main components:

Component	What It Means
Financial Institutions	Banks, NBFCs, insurance companies, DFIs
Financial Markets	Places where money is traded (e.g., NSE, BSE)
Financial Instruments	Shares, bonds, deposits, loans, derivatives
Financial Services	Insurance, mutual funds, payment services, etc.

3. Financial Institutions – The Backbone of IFS

These institutions act as intermediaries between savers and borrowers.

A. Banking Institutions

1. Reserve Bank of India (RBI)

The central bank of India (explained in detail in Section 4).

2. Commercial Banks

These are banks that provide banking services to the public.

A. Scheduled Commercial Banks (SCBs)

Listed under Second Schedule of RBI Act, 1934.

Types of Scheduled Banks

Type	Ownership	Examples
Public Sector Banks	Majority owned by Govt.	SBI, PNB
Private Sector Banks	Privately owned	HDFC Bank, ICICI Bank
Foreign Banks	HQ outside India	HSBC, Citibank
Regional Rural Banks (RRBs)	Special banks for rural/agri sector	All RRBs

RRB Ownership Structure

Entity	Share
Central Govt	50%
State Govt	15%
Sponsor Bank	35%

B. Non-Scheduled Banks

Not listed in the Second Schedule of RBI Act.

3. Co-operative Banks

These work on a three-tier system:

Level	Category	Area
1	State Co-operative Banks	State level
2	District/Central Co-operative Banks	District level
3	Primary Agricultural Credit Societies (PACS)	Village level

4. Differentiated Banks

Banks created to serve specific purposes.

A. Small Finance Banks (SFBs)

Serve small farmers, micro-businesses, and low-income groups.
Examples: AU SFB, Equitas SFB

B. Payments Banks

Can accept deposits up to ₹2 lakh but cannot lend.
Examples: Airtel Payments Bank, India Post Payments Bank

B. NBFCs (Non-Banking Financial Companies)

Provide financial services similar to banks
Cannot accept demand deposits (like savings/current accounts)
Regulated by RBI

Examples: Bajaj Finance, Muthoot Finance, Manappuram

C. Development Financial Institutions (DFIs) / AIFIs

These specialized institutions support agriculture, MSME, housing, exports, etc.

1. NABARD – National Bank for Agriculture and Rural Development

Feature	Details
Set up	1982 (Sivaraman Committee / CRAFICARD)
Owned by	Govt of India
HQ	Mumbai

Key Roles:

Refinancing to banks & cooperatives
Supervising RRBs & co-operative banks
Managing RIDF (Rural Infrastructure Development Fund)
Promoting SHG-Bank Linkage, KCC, rural credit

2. SIDBI – Small Industries Development Bank of India

Feature	Details
Set up	1990
HQ	Lucknow

Roles:

Apex institution for MSME lending
Refinancing to banks/NBFCs
Direct loans to MSMEs
Nodal agency for: Startup India, Stand-Up India

3. NHB – National Housing Bank

Feature	Details
Set up	1988
Owned by	100% GoI (now RBI supervises HFCs)
HQ	New Delhi

Roles: Promote housing finance institutions, refinance HFCs & banks.

4. EXIM Bank – Export Import Bank of India

Supports India’s international trade.

Feature	Details
Set up	1982
HQ	Mumbai

Key Functions:

Export/import finance
Lines of credit to foreign countries
Guarantees for international projects
Advisory services to exporters

4. Financial Regulators – Ensuring Stability

A. RBI – Reserve Bank of India

Feature	Details
Established	1935
Role	Central Bank of India

Main Functions:

Monetary Authority (controls inflation, interest rates)
Issuer of Currency
Banker’s Bank
Regulates Banks & NBFCs
Manages Forex (FEMA, 1999)
Oversees payment systems (NEFT, RTGS, UPI)
Developmental role in financial inclusion

B. SEBI – Securities and Exchange Board of India

Feature	Details
Formed	1988
Statutory Status	1992
HQ	Mumbai
Regulates	Capital Markets

Functions:

Protective: Prevents insider trading, fraud
Regulatory: Monitoring market intermediaries
Developmental: Promoting new products & technology

Powers:
SEBI is Quasi-Legislative, Quasi-Executive, and Quasi-Judicial

C. IRDAI – Insurance Regulatory and Development Authority of India

Feature	Details
Formed	1999
HQ	Hyderabad
Regulates	Insurance Sector

Roles:

Registers insurers
Ensures solvency
Protects policyholders
Regulates agents, TPAs, brokers

D. PFRDA – Pension Fund Regulatory and Development Authority

Feature	Details
Statutory Since	2013
HQ	New Delhi

Administers:

NPS (National Pension System)
APY (Atal Pension Yojana)
Protects pension subscribers

5. Financial Markets

Financial markets help in the allocation of funds.

A. Money Market

Deals with short-term funds (maturity ≤ 1 year).

Important Instruments:

Instrument	Meaning
Call/Notice Money	Very short-term bank borrowings
Treasury Bills	Govt securities (91/182/364 days)
Commercial Paper (CP)	Short-term corporate debt
Certificates of Deposit (CD)	Short-term deposit by banks

B. Capital Market

Deals with long-term funds (maturity > 1 year).

1. Primary Market – new securities issued

IPO
FPO
Rights Issue

2. Secondary Market – existing securities traded

Examples: NSE, BSE

6. Important Concepts & Reforms in Banking

A. Priority Sector Lending (PSL)

Banks must lend 40% of ANBC to priority sectors:

Agriculture
MSME
Education
Housing
Export Credit
Renewable Energy
Social Infrastructure

B. Basel Norms

International rules to ensure bank stability.

Basel III (current framework)

Indian requirement:

CRAR: 9%
Capital Conservation Buffer: 2.5%
Total: 11.5%

Focus on:

Higher capital
Better liquidity
Leverage ratio

C. Insolvency and Bankruptcy Code (IBC), 2016

A legal framework for fast insolvency resolution.

Applies to:

Companies
Individuals (with modifications)

Introduced CIRP:

Corporate Insolvency Resolution Process
Aim: Maximize value & improve recovery rate

D. Payment & Settlement Systems

System	Key Features
NEFT	24×7, half-hourly batch settlement
RTGS	Real-time, high-value (min ₹2 lakh)
IMPS	Instant 24×7 transfer
UPI	Instant mobile payments (NPCI)

⭐ MCQs on Indian Financial Sector (IFS)

1. Introduction to Indian Financial System

The Indian Financial System mainly connects:
A. Government to RBI
B. Savers to borrowers
C. Banks to SEBI
D. RBI to IMF
Answer: B
Which of the following is NOT a part of the Indian Financial System?
A. Financial Institutions
B. Financial Markets
C. Financial Instruments
D. Voting Systems
Answer: D
The IFS is divided into how many sectors?
A. 1
B. 2
C. 3
D. 4
Answer: B
The Organized Sector is regulated by:
A. Banks only
B. RBI, SEBI, IRDAI, PFRDA
C. Finance Ministry only
D. IMF
Answer: B
The Unorganized Sector includes:
A. Mutual Funds
B. Indigenous bankers
C. Foreign Banks
D. NBFCs
Answer: B

2. Financial Institutions

Financial institutions act as:
A. Borrowers only
B. Intermediaries
C. Government representatives
D. Foreign exchanges
Answer: B
Which is the central bank of India?
A. SEBI
B. SBI
C. RBI
D. IRDAI
Answer: C
Which of the following is a Development Financial Institution (DFI)?
A. PNB
B. NABARD
C. Airtel Payments Bank
D. NPS Trust
Answer: B

3. Commercial Banks

Scheduled Commercial Banks are listed in:
A. RBI Act, 1949
B. SEBI Act, 1992
C. Second Schedule of RBI Act, 1934
D. Banking Regulation Act
Answer: C
Public Sector Banks are owned majorly by:
A. RBI
B. Central Government
C. SEBI
D. NABARD
Answer: B
Foreign Banks are:
A. Fully Indian owned
B. Registered abroad with branches in India
C. Only rural banks
D. Co-operative banks
Answer: B
RRBs are mainly set up to serve:
A. Foreign exchange markets
B. Agriculture & rural credit
C. Insurance sector
D. Capital markets
Answer: B
RRB ownership structure:
Central Govt: 50%, State Govt: 15%, Sponsor Bank: ?
A. 10%
B. 35%
C. 50%
D. 25%
Answer: B

4. Co-operative Banks

PACS operate at which level?
A. National
B. State
C. Village
D. District
Answer: C
State Co-operative Banks operate at:
A. Village level
B. District level
C. State level
D. National level
Answer: C

5. Differentiated Banks

Payments Banks can accept deposits up to:
A. ₹50,000
B. ₹1 lakh
C. ₹2 lakh
D. Unlimited
Answer: C
Payments Banks cannot:
A. Accept deposits
B. Lend loans
C. Offer debit cards
D. Operate branches
Answer: B
Small Finance Banks primarily serve:
A. High-income customers
B. Corporates only
C. Small businesses & unorganized sectors
D. Foreign investors
Answer: C

6. NBFCs

NBFCs cannot accept:
A. Fixed deposits
B. Demand deposits
C. Gold loans
D. Term loans
Answer: B
NBFCs are regulated by:
A. SEBI
B. IRDAI
C. RBI
D. Ministry of Finance
Answer: C

7. Development Financial Institutions

NABARD

NABARD was set up in:
A. 1947
B. 1982
C. 1990
D. 2000
Answer: B
NABARD manages which fund?
A. IDF
B. RIDF
C. SIDF
D. SLRF
Answer: B
NABARD headquarters is located in:
A. Delhi
B. Lucknow
C. Mumbai
D. Hyderabad
Answer: C

SIDBI

SIDBI is the apex body for:
A. Agriculture
B. Housing
C. MSME
D. Pension
Answer: C
SIDBI was established in:
A. 1982
B. 1990
C. 1999
D. 2002
Answer: B
HQ of SIDBI is in:
A. Mumbai
B. Pune
C. Lucknow
D. Chennai
Answer: C

NHB

NHB was set up in:
A. 1985
B. 1988
C. 1992
D. 2013
Answer: B
NHB is an apex body for:
A. Rural credit
B. MSME
C. Housing finance
D. Export credit
Answer: C

EXIM Bank

EXIM Bank was established in:
A. 1980
B. 1982
C. 1988
D. 1999
Answer: B
Main function of EXIM Bank:
A. Issue currency
B. Domestic small loans
C. Export-import finance
D. Insurance products
Answer: C

8. Regulators

RBI

RBI was established in:
A. 1930
B. 1935
C. 1947
D. 1950
Answer: B
RBI regulates:
A. Banks & NBFCs
B. Mutual Funds only
C. Insurance companies
D. Stock markets
Answer: A
RBI manages forex under:
A. FEMA, 1999
B. FERA, 1974
C. SEBI Act
D. Companies Act
Answer: A

SEBI

SEBI became a statutory body in:
A. 1988
B. 1992
C. 1999
D. 2005
Answer: B
SEBI is the regulator of:
A. Insurance markets
B. Capital markets
C. Banks
D. Pension sector
Answer: B
SEBI’s powers include:
A. Quasi-judicial
B. Quasi-legislative
C. Quasi-executive
D. All of the above
Answer: D

IRDAI

IRDAI regulates:
A. Banking
B. NBFCs
C. Insurance sector
D. Pension funds
Answer: C
IRDAI was formed in:
A. 1999
B. 1992
C. 2000
D. 1994
Answer: A

PFRDA

PFRDA became statutory in:
A. 1999
B. 2005
C. 2013
D. 2018
Answer: C
PFRDA regulates which scheme?
A. PMJJBY
B. NPS
C. PMJDY
D. PMAY
Answer: B

9. Financial Markets

Money Market

Money market deals with instruments having maturity:
A. More than 1 year
B. Less than or equal to 1 year
C. 5 years
D. 10 years
Answer: B
Treasury Bills are issued by:
A. RBI for banks
B. SEBI
C. Government of India
D. IRDAI
Answer: C
Which is a money market instrument?
A. Equity share
B. Corporate bond
C. Commercial Paper
D. Debenture
Answer: C

Capital Market

Capital Market deals with maturity:
A. Less than 1 year
B. Only overnight
C. More than 1 year
D. Only government securities
Answer: C
A company issuing shares to the public for the first time is called:
A. FPO
B. IPO
C. Rights Issue
D. Buyback
Answer: B
NSE and BSE are part of:
A. Money market
B. Capital market (secondary market)
C. Pension market
D. Insurance market
Answer: B

10. Priority Sector Lending (PSL)

PSL target for banks is:
A. 10% of ANBC
B. 20% of ANBC
C. 30% of ANBC
D. 40% of ANBC
Answer: D
PSL includes:
A. Real estate
B. Agriculture
C. Private equity
D. Crypto
Answer: B

11. Basel Norms

Basel III focuses on:
A. Bank lending only
B. Higher capital & liquidity
C. Stock market reforms
D. Currency regulation
Answer: B
Minimum CRAR in India (Basel III) is:
A. 6%
B. 8%
C. 9%
D. 12%
Answer: C
Capital Conservation Buffer (CCB) in India is:
A. 1%
B. 2.5%
C. 5%
D. 3%
Answer: B

12. Insolvency & Bankruptcy Code (IBC)

IBC was enacted in:
A. 2012
B. 2014
C. 2016
D. 2018
Answer: C
CIRP under IBC stands for:
A. Corporate Investment Regulation Process
B. Corporate Insolvency Resolution Process
C. Credit Impact Review Process
D. Central Insolvency Recovery Plan
Answer: B

13. Payment & Settlement Systems

NEFT operates:
A. Only on weekdays
B. 24×7 in half-hourly batches
C. Only during business hours
D. Only for large value
Answer: B
Minimum amount in RTGS:
A. No limit
B. ₹1 lakh
C. ₹2 lakh
D. ₹5 lakh
Answer: C
IMPS is available:
A. 9 AM to 5 PM
B. 24×7 real-time
C. Weekdays only
D. With a 3-hour delay
Answer: B
UPI was developed by:
A. RBI
B. SEBI
C. NPCI
D. NABARD
Answer: C

14. Additional High-Level Questions

Which is NOT part of organized financial sector?
A. Commercial Banks
B. NBFCs
C. PACS
D. Moneylenders
Answer: D
Indigenous bankers are part of:
A. Organized sector
B. Unorganized sector
C. Mutual fund industry
D. Insurance sector
Answer: B
Financial instruments represent:
A. Physical assets
B. Paper money only
C. Claims or obligations (shares, bonds)
D. Currency notes
Answer: C

Beyond Banks: A Simple Guide to India Financial Sector