The RBI is not only India's monetary authority. It is also the licensing authority, rule-maker and supervisor for almost every institution that takes deposits or lends on a large scale: commercial banks, small finance and payments banks, regional rural and co-operative banks, and thousands of non-banking financial companies (NBFCs). This part explains where that power comes from in law, how the RBI sorts banks and NBFCs into categories with different rules, how much capital and liquidity they must hold, how supervisors watch them, and what happens when they break the rules. It ends with the live questions of 2026: the move to expected credit loss provisioning, the new upper-layer NBFC list, and the sale of IDBI Bank.
This part assumes you have read the functions and responsibilities of the RBI, which introduces the RBI's regulatory role. The systemic side of the story (the Financial Stability Report, D-SIBs, stress tests and the banking PCA framework in detail) is in Part 15, the RBI and financial stability. The reserve requirements that banks must meet, CRR and SLR, are in Part 5, CRR and SLR.
In the news
- 23 October 2026: operational risk capital rules finalised. The RBI issued amendment directions setting the implementation date for the new Basel III Standardised Approach to operational risk, part of the revised Basel III capital framework that applies to commercial banks (other than SFBs, payments banks and RRBs) from 1 April 2027. Why it matters for the exam: 1 April 2027 is the start date for both the new capital rules and ECL provisioning.
- 14 October 2026: IDBI Bank sale cleared by the Cabinet. The Cabinet Committee on Economic Affairs approved the sale of a 60.72% stake (30.48% from the government, 30.24% from LIC) to an entity of Canada's Fairfax Financial Holdings at ₹81 a share, about ₹52,878 crore. The deal still needs the RBI's "fit and proper" clearance. Why it matters for the exam: bank ownership changes need RBI approval under Section 12B of the Banking Regulation Act.
- 6 August 2026: 17 NBFCs in the upper layer. The RBI's list for 2026-27, based on March 2026 accounts, added four government-owned NBFCs (REC, PFC, IRFC and HUDCO) for the first time. Why it matters for the exam: expect questions on who is in the list and why government NBFCs are new to it.
- 24 June 2026: new test for the upper layer. Amendment directions replaced the old scoring method with a simple asset-size test: an NBFC with total assets of ₹1 lakh crore or more is in the upper layer. Government-owned NBFCs became eligible, and the threshold is to be reviewed every three years. Why it matters for the exam: the "top ten by size plus scoring" rule of 2021 no longer applies.
- 29 May 2026: penalties fall to ₹26.33 crore. The RBI Annual Report showed 241 penalties totalling ₹26.33 crore in 2025-26, down from 353 penalties and ₹54.78 crore in 2024-25. Co-operative banks accounted for 172 of them. Why it matters for the exam: the numbers and the split by type of entity are classic static-plus-current questions.
- 27 April 2026: ECL and new credit risk rules. The RBI issued final directions moving commercial banks from incurred-loss to expected credit loss (ECL) provisioning, and final directions on the Basel III standardised approach for credit risk. Both take effect on 1 April 2027. Why it matters for the exam: ECL is the biggest change in loan-loss accounting for Indian banks since the 90-day NPA rule.
- 1 April 2026: tighter liquidity coverage rules. Amendments to the LCR, issued on 21 April 2025, took effect. Banks must assume an extra 2.5% run-off on retail deposits that can be withdrawn through internet and mobile banking. Why it matters for the exam: it is a direct response to the fast digital bank runs seen abroad in 2023.
- 28 November 2025: 244 consolidated Master Directions. The RBI replaced over 9,000 separate instructions with 244 Master Directions for 11 types of regulated entities, and repealed or withdrew 9,445 circulars. Why it matters for the exam: the numbers 244, 11 and 9,445 are all quotable.
Where the RBI's power comes from
The Banking Regulation Act, 1949
The Banking Regulation Act (BR Act) is the main law for banks. Its key sections:
| Section | What it lets the RBI do |
|---|---|
| 5(b) | Defines "banking": accepting deposits from the public, repayable on demand or otherwise, for lending or investment |
| 12B | Requires prior RBI approval for anyone acquiring 5% or more of a bank's shares or voting rights |
| 22 | No company may carry on banking business without a licence from the RBI; the RBI can cancel it |
| 24 | Banks must hold liquid assets (the SLR) |
| 35 | The RBI may inspect any bank |
| 35A | The RBI may give directions in the public interest, in depositors' interest or to secure proper management |
| 36AA | The RBI may remove a chairman, director or chief executive |
| 36ACA | The RBI may supersede the board of a bank, for up to 12 months, after consulting the government |
| 45 | The RBI may seek a moratorium and prepare a scheme of reconstruction or amalgamation |
| 46 and 47A | Penalties; 47A lets the RBI itself impose monetary penalties |
| 56 | Applies the Act, with changes, to co-operative banks |
The working tools are Sections 35A and 47A. When the RBI caps withdrawals at a weak co-operative bank, the press release says "Directions under Section 35A read with Section 56". When it fines a bank, it cites "Section 47A(1)(c) read with Section 46(4)(i)", as in the ₹61.95 lakh penalty on Kotak Mahindra Bank in December 2025.
The RBI Act, 1934: Chapter III-B for NBFCs
NBFCs are not banks, so the BR Act does not apply to them. The RBI regulates them under Chapter III-B of the RBI Act (Sections 45H to 45QB), added in 1963 and greatly strengthened in 1997:
- Section 45-I defines a "non-banking financial company" and a "financial institution".
- Section 45-IA says no NBFC may carry on business without a certificate of registration from the RBI and a minimum net owned fund (NOF). The RBI can cancel the certificate; it cancelled the registrations of four NBFCs in a single release on 11 December 2025.
- Section 45-IC requires every NBFC to transfer at least 20% of its net profit to a reserve fund every year.
- Section 45-IE, added in 2019, lets the RBI supersede an NBFC's board.
- Section 45JA lets the RBI set prudential norms (capital, provisioning, exposure limits) and give directions.
- Section 45L lets it call for information and give directions to financial institutions.
Housing finance companies (HFCs) were moved from the National Housing Bank to RBI regulation in 2019, though NHB still supervises them.
Directions, Master Directions and the 2025 clean-up
Regulation reaches banks as directions issued under these sections, which piled up over the years in thousands of circulars. On 28 November 2025 the RBI consolidated them "as is" into 244 Master Directions (237 plus seven new ones on digital banking channels), organised around 30 functional areas. The RBI says more than 11,000 instructions were screened and 9,445 circulars repealed. NBFCs have the most (35), followed by commercial banks (32) and small finance banks (30); each of the 11 entity types also got a new direction on digital banking channels.
A Regulatory Review Cell and an external Advisory Group on Regulation, working since 1 October 2025, now review the directions on a set cycle under the RBI's Framework for Formulation of Regulations of 7 May 2025.
Types of banks
The best count of banks is the DICGC's list of insured banks, because every bank the RBI licenses must insure its deposits. On 31 March 2026 there were 1,950 insured banks: 124 commercial banks, including 11 small finance banks, 6 payments banks, 28 RRBs and 2 local area banks, and 1,826 co-operative banks (1,440 urban co-operative banks, 34 state co-operative banks and 352 district central co-operative banks).
Universal (commercial) banks
Public sector, private and foreign banks can do the full range of banking. A scheduled bank is one listed in the Second Schedule of the RBI Act (Section 42), which gives it access to RBI refinance and obliges it to keep CRR. Since 1 August 2016 the RBI has licensed universal banks "on tap": an eligible applicant can apply at any time instead of waiting for a licensing window. The 2016 guidelines set a minimum paid-up voting equity of ₹500 crore. Foreign banks may operate as branches or as wholly owned subsidiaries; on 14 January 2026 the RBI gave in-principle approval to Sumitomo Mitsui Banking Corporation to convert its four Indian branches into one.
Small finance banks (SFBs)
SFBs were created by guidelines of 27 November 2014 to lend to small businesses, farmers and the unorganised sector. They take deposits and lend like any bank, but at least half their loans must be of up to ₹25 lakh, and they have a higher priority-sector target than universal banks. Most of the first ten were former microfinance NBFCs. On-tap SFB licensing began on 5 December 2019.
An SFB can become a universal bank. Under the RBI's circular of 26 April 2024, it must be listed, have a net worth of at least ₹1,000 crore, a five-year record as a scheduled bank, and gross and net NPAs within 3% and 1% in the previous two years. Results so far:
- AU Small Finance Bank received in-principle approval on 7 August 2025, the first universal bank approval in about a decade. In March 2026 the RBI dropped its requirement for a non-operative holding company, and AU applied for the final licence.
- Jana SFB's application was returned in October 2025 for not meeting the criteria.
- Ujjivan SFB's application was returned in April 2026. The RBI wants a more diversified loan book first, since group microfinance loans were about 45% of it.
Payments banks
Payments banks, also licensed under 2014 guidelines, can take deposits of up to ₹2 lakh per customer, issue debit cards and run remittances, but cannot lend. They must invest most of their demand deposits in government securities. There are six. On 5 December 2025 Fino Payments Bank became the first payments bank to get in-principle approval to convert into an SFB, which the on-tap SFB rules allow after five years of operation for resident-controlled payments banks.
Regional rural banks
RRBs were set up under the Regional Rural Banks Act, 1976. Each is owned by the central government (50%), a sponsor bank (35%) and the state government (15%). The RBI regulates them, but NABARD supervises them. Under the "One State, One RRB" plan, 26 RRBs were merged into 11 with effect from 1 May 2025, cutting the number from 43 to 28.
Local area banks
Local area banks were licensed in the late 1990s to serve a few districts. Only two are left.
Co-operative banks
Co-operative banks are member-owned societies of two kinds: urban co-operative banks (UCBs), and rural co-operative banks (state and district central co-operative banks), which NABARD supervises.
Since 1966 these banks have been under dual control: the RBI regulated their banking business, while the state Registrar of Co-operative Societies (or the Central Registrar for multi-state banks) controlled management and elections. After the Punjab and Maharashtra Co-operative (PMC) Bank collapse of September 2019, the Banking Regulation (Amendment) Act, 2020 gave the RBI much more power. It applied to UCBs from 26 June 2020, first by ordinance, and to rural co-operative banks from 1 April 2021. Among other things, the RBI can now supersede a co-operative bank's board, approve the appointment of its chief executive, and reconstruct or merge a bank without first imposing a moratorium.
The Banking Laws (Amendment) Act, 2025 (assent 15 April 2025) went further. It raised the maximum tenure of co-operative bank directors (other than the chairperson and whole-time directors) from 8 to 10 years, allowed up to four nominees for a deposit account, simultaneous or successive, and redefined the "fortnight" for CRR reporting as the 15th and last day of each month instead of every second Friday.
The four-tier framework for UCBs
On the advice of an Expert Committee chaired by N. S. Vishwanathan, the RBI adopted a four-tier framework for UCBs in July 2022, categorised by deposits under a circular of 1 December 2022:
| Tier | Which UCBs | Minimum CRAR | Minimum net worth |
|---|---|---|---|
| Tier 1 | Unit and salary earners' UCBs, and others with deposits up to ₹100 crore | 9% | ₹2 crore if in a single district, else ₹5 crore |
| Tier 2 | Deposits above ₹100 crore, up to ₹1,000 crore | 12% | ₹5 crore |
| Tier 3 | Deposits above ₹1,000 crore, up to ₹10,000 crore | 12% | ₹5 crore |
| Tier 4 | Deposits above ₹10,000 crore | 12% | ₹5 crore |
The tiers drive much else: housing-loan limits, the PCA framework (which covers Tiers 2 to 4), and the new macro stress tests the RBI is exploring for Tiers 3 and 4.
Example. A UCB operating in three districts has deposits of ₹1,500 crore and risk-weighted assets of ₹900 crore. Its deposits put it in Tier 3, so it needs a CRAR of 12%: regulatory capital of at least 12% × ₹900 crore = ₹108 crore, and a net worth of at least ₹5 crore.
Capital and liquidity: Basel III in India
The capital stack
Capital absorbs losses before depositors do. It is measured against risk-weighted assets (RWAs), in which each loan is weighted by its riskiness. India's Basel III rules, fully phased in by October 2021, are stricter than the Basel minimum:
| Component | India | Basel minimum |
|---|---|---|
| Common Equity Tier 1 (CET1) | 5.5% | 4.5% |
| Additional Tier 1 (AT1) | up to 1.5% | up to 1.5% |
| Tier 1 total | 7.0% | 6.0% |
| Tier 2 | up to 2.0% | up to 2.0% |
| Minimum total capital (CRAR) | 9.0% | 8.0% |
| Capital conservation buffer (CCB), in CET1 | 2.5% | 2.5% |
| CRAR plus CCB | 11.5% | 10.5% |
CET1 is mainly paid-up equity and retained earnings. AT1 bonds are perpetual and can be written down when CET1 falls too low (Yes Bank's AT1 bonds were written off in 2020). Tier 2 includes subordinated debt and some provisions. A bank that dips into its CCB may keep operating, but faces limits on dividends and bonuses. The three D-SIBs (SBI, HDFC Bank and ICICI Bank) need extra CET1 on top, covered in Part 15. There is also a countercyclical capital buffer, which the RBI has kept at zero. Scheduled commercial banks had an average CRAR of 17.2% at end-September 2025.
The RBI also sets a leverage ratio (Tier 1 capital as a share of total exposure, unweighted): 4% for D-SIBs and 3.5% for other banks.
Liquidity: LCR and NSFR
- Liquidity Coverage Ratio (LCR): a bank must hold high-quality liquid assets (HQLA), mainly government securities, at least equal to its expected net cash outflows over 30 days of stress. The minimum is 100%.
- Net Stable Funding Ratio (NSFR): available stable funding must be at least 100% of required stable funding over one year. It applies from 1 October 2021.
From 1 April 2026, banks must assume an extra 2.5% run-off on retail deposits (and deposits of small business customers) that come with internet and mobile banking, and apply haircuts to the government securities counted as HQLA, matching the margins the RBI applies in its own repo and MSF windows.
Example. A bank has HQLA of ₹30,000 crore and expected net outflows over 30 days of ₹25,000 crore. Its LCR is 30,000 ÷ 25,000 = 120%. Suppose ₹2,00,000 crore of its retail deposits are digitally enabled. The extra 2.5% run-off adds 0.025 × ₹2,00,000 crore = ₹5,000 crore to outflows, which become ₹30,000 crore. The LCR falls to 30,000 ÷ 30,000 = 100%, exactly the minimum. One rule change has used up the bank's whole buffer.
What changes on 1 April 2027
Two sets of final directions issued on 27 April 2026 take effect on 1 April 2027 for commercial banks (other than small finance, payments and local area banks):
- Expected credit loss (ECL) provisioning. Today banks provide for loans mostly after they go bad (the incurred-loss model). Under ECL, every loan is placed in one of three stages: Stage 1 (performing), Stage 2 (a significant increase in credit risk) and Stage 3 (credit-impaired). Provisions are made in advance: 12 months of expected losses in Stage 1, lifetime expected losses in Stages 2 and 3, subject to prudential floors set by the RBI. The 90-day rule for NPAs stays, and interest income will be recognised using the effective interest rate (EIR) method. Banks can spread the hit to capital over the years up to 31 March 2031. CRISIL estimates the one-time net impact at up to 120 bp of CET1.
- Revised standardised approach for credit risk. Risk weights become more granular, with lower weights for unrated MSMEs and revised credit conversion factors for off-balance-sheet items. The new standardised approach for operational risk follows the same timetable.
NBFCs: scale-based regulation
Four layers
NBFCs used to be regulated by whether they took deposits and whether they were "systemically important". After the IL&FS default of 2018 showed that a large NBFC can shake the whole system, the RBI issued the Scale-Based Regulation (SBR) framework on 22 October 2021, effective 1 October 2022. It sorts NBFCs into four layers, with rules growing stricter as you go up:
| Layer | Who is in it | Main extra rules |
|---|---|---|
| Base (NBFC-BL) | Non-deposit-taking NBFCs with assets below ₹1,000 crore; always P2P platforms, account aggregators, NOFHCs and NBFCs without public funds or customer interface | Minimum NOF, 90-day NPA norm, basic governance |
| Middle (NBFC-ML) | All deposit-taking NBFCs, non-deposit-taking NBFCs with assets of ₹1,000 crore or more, and all standalone primary dealers, IDF-NBFCs, core investment companies, HFCs and infrastructure finance companies | Bank-like governance (chief compliance officer, compensation policy), concentration limits, core banking for 10+ branches |
| Upper (NBFC-UL) | NBFCs with total assets of ₹1 lakh crore or more (since June 2026) | CET1 of at least 9%, large exposure framework, listing within 3 years, at least 5 years in the layer |
| Top (NBFC-TL) | Empty; for an upper-layer NBFC whose systemic risk rises sharply | Higher capital, intensive supervision |
SBR also raised the minimum net owned fund for investment and credit companies, microfinance NBFCs and factors to ₹10 crore, in steps: ₹5 crore (₹7 crore for MFIs and factors) by 31 March 2025 and ₹10 crore by 31 March 2027. It moved all NBFCs to the 90-day NPA rule.
The upper layer in 2026-27
From 2022 to 2025 the RBI picked the upper layer by a two-part test: the ten largest NBFCs were always in, and others were scored on size, interconnectedness, complexity and so on. The first list, on 30 September 2022, had 16 names. Government-owned NBFCs were kept out. No list was issued for 2025-26 while the RBI reviewed the method.
The 24 June 2026 amendment replaced all that with one test, total assets of ₹1 lakh crore or more, and let government-owned NBFCs in. The list of 6 August 2026 has 17 NBFCs:
| Type | NBFCs |
|---|---|
| Government infrastructure finance companies (new) | REC, Power Finance Corporation, Indian Railway Finance Corporation, HUDCO |
| Deposit-taking | Bajaj Finance, Shriram Finance, Mahindra & Mahindra Financial Services, LIC Housing Finance |
| Non-deposit-taking | Cholamandalam Investment and Finance, Tata Capital, Muthoot Finance, Aditya Birla Capital, L&T Finance, Bajaj Housing Finance, HDB Financial Services, Piramal Finance |
| Core investment company | Tata Sons (its inclusion is "without prejudice" to its pending application to give up NBFC registration) |
PNB Housing Finance and Sammaan Capital no longer meet the test but stay under upper-layer rules, because a NBFC stays at least five years once identified.
The listing requirement
An upper-layer NBFC must list within three years of being identified, and must make listed-company disclosures even before that. This is why Bajaj Housing Finance, HDB Financial Services and Tata Capital went public between September 2024 and October 2025. Under the 2026 amendments, an upper-layer NBFC that is wholly owned and controlled by the government does not have to list. Tata Sons is the best-known holdout: it has asked the RBI to cancel its registration as a core investment company, which would take it out of the list altogether.
Supervision
Who supervises
The Board for Financial Supervision (BFS), set up in 1994 and chaired by the Governor, oversees supervision. Since 2019 a single Department of Supervision supervises commercial banks, SFBs, payments banks, local area banks, UCBs, NBFCs (other than HFCs), asset reconstruction companies, credit information companies and all-India financial institutions, so that similar risks get similar treatment. RRBs and rural co-operative banks are supervised by NABARD, and HFCs by NHB.
Banks face risk-based supervision: an annual inspection (now called the Inspection for Supervisory Evaluation), continuous off-site monitoring and a supervisory rating. A separate rating model for SFBs starts in the 2026-27 cycle, and a structured framework for base-layer NBFCs is also being rolled out.
SupTech: DAKSH and data quality
The RBI's supervisory work runs increasingly on technology ("SupTech"):
- DAKSH, the Reserve Bank's advanced supervisory monitoring system, was launched on 6 October 2022. It is a web-based workflow tool for compliance monitoring, inspection planning and cyber-incident reporting.
- A supervisory data quality index (sDQI) has been published quarterly since June 2025.
- Bank liquidity stress tests now estimate a "survival horizon": how many days a bank could last in a run.
The RBI's wider use of AI, including MuleHunter.AI, is covered in Part 20, central banking and AI.
CAFRAL
The Centre for Advanced Financial Research and Learning (CAFRAL), set up by the RBI in Mumbai in 2011, trains supervisors and bankers and does policy research. The RBI funded it with ₹18.6 crore in 2025-26.
Prompt Corrective Action
The PCA framework forces early action when an entity's capital or asset quality weakens. Part 15 covers the bank framework in depth; this section compares it with the NBFC and UCB versions.
| Banks | NBFCs | |
|---|---|---|
| Circular | 2 November 2021 | 14 December 2021 |
| Effective | 1 January 2022 | 1 October 2022 |
| Covers | Commercial banks, including foreign banks' Indian branches (not SFBs, payments banks or RRBs) | Deposit-taking NBFCs and non-deposit-taking NBFCs in the middle, upper and top layers (not HFCs or primary dealers) |
| Capital threshold 1 | CRAR up to 250 bp below 11.5% (CET1 up to 162.5 bp below 8%) | CRAR up to 300 bp below 15% (below 15%, at least 12%) |
| Capital threshold 2 | 250 to 400 bp below | 300 to 600 bp below (below 12%, at least 9%) |
| Capital threshold 3 | More than 400 bp below (CRAR below 7.5%) | More than 600 bp below (below 9%) |
| Net NPA thresholds | 6%, 9%, 12% | Above 6%, 9%, 12% |
| Other indicator | Tier 1 leverage ratio | Tier 1 capital ratio (10%, 8%, 6%) |
Mandatory actions are the same in spirit for both: at threshold 1, no dividends and owners must bring in capital; at threshold 2, also no branch expansion; at threshold 3, also limits on capital spending (and, for NBFCs, on operating costs). The RBI can add discretionary actions, and a bank in PCA can ultimately be merged or reconstructed under Section 45.
For UCBs a PCA framework replaced the old Supervisory Action Framework from 1 April 2025. It covers Tier 2 to Tier 4 UCBs and watches CRAR, net NPAs and profitability (two years of losses in a row is a trigger).
Example. A bank has RWAs of ₹2,00,000 crore, CET1 of ₹14,000 crore, AT1 of ₹2,000 crore and Tier 2 of ₹4,000 crore.
- CET1 ratio = 14,000 ÷ 2,00,000 = 7.0%, which is 100 bp below the 8% indicator (5.5% + 2.5% CCB). That is within 162.5 bp, so threshold 1.
- CRAR = (14,000 + 2,000 + 4,000) ÷ 2,00,000 = 10.0%, which is 150 bp below 11.5%. That is within 250 bp, so threshold 1.
- To get CET1 back to 8% it needs 0.08 × 2,00,000 = ₹16,000 crore of CET1, so ₹2,000 crore of fresh equity, if RWAs stay the same.
Until it does, it cannot pay a dividend.
Enforcement: penalties and other actions
The RBI has a separate Enforcement Department so that the people who find a breach are not the people who punish it. Monetary penalties on banks come under Section 47A of the BR Act, on NBFCs under Section 58G of the RBI Act, and on payment companies under the Payment and Settlement Systems Act, 2007.
| Year | Penalties | Amount (₹ crore) | Of which co-operative banks |
|---|---|---|---|
| 2021-22 | 189 | 65.32 | 145 |
| 2022-23 | 211 | 40.39 | 176 |
| 2023-24 | 281 | 86.11 | 215 |
| 2024-25 | 353 | 54.78 | 264 |
| 2025-26 | 241 | 26.33 | 172 |
In 2025-26, the 241 penalties split as: public sector banks 13 (₹9.05 crore), private banks 14 (₹7.93 crore), foreign banks 3, payments banks 2, SFBs 1, RRBs 2, co-operative banks 172 (₹4.12 crore), NBFCs 25 (₹1.76 crore), HFCs 6 and payment system operators 3. The RBI issued 342 show-cause notices with 698 charges, of which 382 led to penalties.
Working with the numbers. Penalties fell from 353 to 241, a drop of 112 or 31.7%, and the amount fell from ₹54.78 crore to ₹26.33 crore, a drop of 51.9%. The average penalty in 2025-26 was ₹26.33 crore ÷ 241 = about ₹10.9 lakh. Co-operative banks received 172 ÷ 241 = 71% of the penalties but only 4.12 ÷ 26.33 = 16% of the money, because their fines are small.
Typical recent cases:
- ₹99.30 lakh on Jammu and Kashmir Bank (order of 1 December 2025) for failures in grievance redress, transfers to the Depositor Education and Awareness Fund, and video-KYC.
- ₹61.95 lakh on Kotak Mahindra Bank (order of 11 December 2025) for opening second basic savings accounts, letting business correspondents do work outside their permitted scope, and sending wrong data to credit bureaus.
- ₹59.20 lakh on IndusInd Bank (August 2026) for paying interest on some current accounts and breaching securitisation rules.
Penalties are only one tool. Others are business restrictions under Section 35A (often caps on withdrawals at weak co-operative banks), supersession of boards, cancellation of NBFC registrations and, at the extreme, cancellation of a banking licence, after which DICGC pays depositors up to ₹5 lakh each. In 2025-26 DICGC settled claims of ₹1,988 crore, all for 72 failed UCBs.
Ownership and control
Who may own a bank
The RBI's ownership rules, last overhauled after an Internal Working Group (IWG) report of November 2020, aim to keep banks well capitalised while stopping any one owner from treating a bank as its own treasury:
- Promoter cap: in the long run (15 years), a promoter's stake may be at most 26% of paid-up voting equity, up from 15% before the RBI accepted the IWG's advice on 26 November 2021. Promoters who had already come down below 26% can raise their stake back.
- Prior approval: anyone who would hold 5% or more of a bank needs RBI approval under Section 12B, and must meet "fit and proper" tests.
- Large corporate and industrial houses still cannot promote banks. The RBI said this would need changes to the BR Act first.
- One promoter, one bank: a promoter group cannot control two banks.
The IDBI Bank sale
IDBI Bank shows these rules at work. LIC took control in 2019 and the bank was reclassified as a private sector bank. In the sale cleared on 14 October 2026, a Fairfax entity is to buy 60.72%, leaving the government with 15% and LIC with 19%. Three regulatory hurdles remain:
- Fit and proper. Only bidders already cleared by the RBI and the Home Ministry could bid. Before the share purchase agreement is signed, the buyer must again present its credentials and a compliance roadmap to the RBI.
- The 26% cap. Since the cap applies in the long run, a promoter holding 60.72% would have to sell down by 34.72 percentage points over time to reach 26%.
- Two banks. Fairfax already controls CSB Bank, holding about 40% of it, and so must merge CSB with IDBI or exit it. Reports differ on which, so check before your exam.
The government expects to complete the sale by the end of 2026-27.
Common exam traps
NBFCs are not banks. An NBFC cannot accept demand deposits, cannot issue cheques drawn on itself, and its depositors are not covered by DICGC insurance. Only deposit-taking NBFCs with RBI permission may take term deposits.
SBR was issued in 2021, not 2022. The circular is dated 22 October 2021; it took effect on 1 October 2022.
"Top layer" is empty. Questions that ask how many NBFCs are in the top layer want zero. The upper layer has 17 in 2026-27.
CRAR 9% vs 11.5%. 9% is the minimum CRAR in India. 11.5% includes the 2.5% CCB. The Basel minimum is 8%.
Who supervises RRBs? NABARD, not the RBI's Department of Supervision, though the RBI regulates them.
ECL does not abolish the 90-day NPA rule. Stage 3 assets will include NPAs, but the NPA definition stays the same.
Key facts at a glance
| Bank licence | Section 22, Banking Regulation Act, 1949 |
| RBI directions to banks | Section 35A, BR Act |
| Removal of bank managers | Section 36AA, BR Act |
| Moratorium and amalgamation | Section 45, BR Act |
| Monetary penalties on banks | Section 47A, BR Act |
| NBFC registration | Section 45-IA, RBI Act (Chapter III-B) |
| Insured banks, 31 March 2026 | 1,950: 124 commercial (11 SFBs, 6 payments banks, 28 RRBs, 2 LABs) and 1,826 co-operative (1,440 UCBs) |
| Minimum CRAR / with CCB | 9% / 11.5% (CET1 5.5%, CCB 2.5%) |
| Leverage ratio | 4% for D-SIBs, 3.5% for others |
| LCR and NSFR | 100% each |
| ECL provisioning | Final directions 27 April 2026; effective 1 April 2027 |
| NBFC Scale-Based Regulation | Circular 22 October 2021; effective 1 October 2022 |
| Upper-layer test | Total assets of ₹1 lakh crore or more (since June 2026) |
| NBFC-UL list 2026-27 | 17 NBFCs (6 August 2026), including REC, PFC, IRFC and HUDCO |
| NBFC-UL listing | Within 3 years of identification |
| UCB tiers | 4, by deposits: ₹100 crore, ₹1,000 crore, ₹10,000 crore |
| Consolidated Master Directions | 244 for 11 types of entity (28 November 2025); 9,445 circulars repealed |
| Penalties 2025-26 | 241, totalling ₹26.33 crore |
| Promoter cap in private banks | 26% in the long run (15 years) |
| DAKSH | SupTech monitoring system, launched 6 October 2022 |
Exam corner: what to remember
- The BR Act governs banks (licence s. 22, directions s. 35A, removal s. 36AA, amalgamation s. 45, penalties s. 47A). The RBI Act's Chapter III-B governs NBFCs (registration s. 45-IA).
- Co-operative banks came fully under the RBI after the BR (Amendment) Act, 2020 (UCBs from 26 June 2020). The Banking Laws (Amendment) Act, 2025 raised co-op directors' tenure to 10 years and allowed up to four nominees.
- UCBs have four tiers by deposit size; Tier 1 needs CRAR of 9%, Tiers 2–4 need 12%.
- Basel III in India: CET1 5.5% + AT1 1.5% + Tier 2 2% = 9%, plus CCB 2.5% = 11.5%.
- ECL and the new standardised approaches for credit and operational risk start on 1 April 2027.
- SBR has four layers: base (below ₹1,000 crore), middle, upper (₹1 lakh crore and above, 17 NBFCs) and top (empty). Upper-layer NBFCs must list within 3 years.
- PCA triggers: banks at CRAR below 11.5% or net NPAs of 6%; NBFCs at CRAR below 15%, Tier 1 below 10% or net NPAs above 6%.
- Penalties: 241 for ₹26.33 crore in 2025-26, down from 353 for ₹54.78 crore in 2024-25.
- IDBI Bank: 60.72% to Fairfax approved by the CCEA on 14 October 2026; RBI fit-and-proper clearance pending.
- First universal bank in-principle approval for an SFB: AU SFB (7 August 2025). First payments bank to get an SFB nod: Fino (5 December 2025).
For exam-specific syllabus and pattern details, see our pages for RBI Grade B, SBI PO and IBPS PO.
Test yourself
Under which section of the Banking Regulation Act, 1949 must a company obtain a licence from the RBI to carry on banking business in India?
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Answer: (b) Section 22 requires a licence; Section 12B covers acquisitions of 5% or more, 35A directions and 45 amalgamation.
NBFCs must register with the RBI under:
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Answer: (a) Section 45-IA, in Chapter III-B of the RBI Act, requires a certificate of registration and a minimum net owned fund.
Under the RBI's Scale-Based Regulation as amended in June 2026, an NBFC is placed in the upper layer if its total assets are at least:
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Answer: (d) The June 2026 amendment replaced the scoring method with a single test of ₹1 lakh crore in total assets.
Which of these was NOT in the RBI's list of upper-layer NBFCs for 2026-27, released on 6 August 2026?
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Answer: (d) IDBI Bank is a bank, not an NBFC. REC (one of four government NBFCs added for the first time), Tata Capital and Muthoot Finance are all on the list of 17.
A bank has risk-weighted assets of ₹50,000 crore and total regulatory capital of ₹5,250 crore. Which PCA risk threshold, if any, has it breached on capital?
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Answer: (b) CRAR = 5,250 ÷ 50,000 = 10.5%, which is 100 bp below the 11.5% indicator (9% + 2.5% CCB), within the 250 bp band of threshold 1.
An NBFC in the middle layer has a CRAR of 11% and a Tier 1 ratio of 9%. Under the NBFC PCA framework it is in:
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Answer: (c) CRAR of 11% is between 9% and 12%, which is threshold 2; the Tier 1 ratio of 9% is only threshold 1, and the worse of the two applies.
In 2025-26, according to the RBI Annual Report, the RBI imposed how many monetary penalties on regulated entities?
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Answer: (b) 241 penalties totalling ₹26.33 crore; 353 was the figure for 2024-25 and 281 for 2023-24.
Under the four-tier framework for urban co-operative banks, a UCB with deposits of ₹5,000 crore falls in:
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Answer: (c) Tier 3 covers deposits above ₹1,000 crore and up to ₹10,000 crore.
The RBI's expected credit loss (ECL) framework for commercial banks comes into effect from:
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Answer: (c) The final directions of 27 April 2026 apply from 1 April 2027; 31 March 2031 is the end of the period over which banks can spread the capital impact.
Under the RBI's ownership rules for private sector banks, the long-run (15-year) cap on a promoter's shareholding is:
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Answer: (c) The cap was raised from 15% to 26% when the RBI accepted the Internal Working Group's recommendations in November 2021.
Further reading
- RBI Annual Report 2025-26, Chapter VI: Regulation, Supervision and Financial Stability: the RBI's own account of every regulatory and supervisory change in 2025-26, with the penalty and fraud tables.
- Scale Based Regulation: A Revised Regulatory Framework for NBFCs (RBI circular, 22 October 2021): the original four-layer framework, still the best explanation of why each layer exists.
- Prompt Corrective Action Framework for Scheduled Commercial Banks (RBI circular, 2 November 2021): thresholds, mandatory and discretionary actions, and exit rules.
- Prompt Corrective Action Framework for NBFCs (RBI circular, 14 December 2021): the NBFC version, useful for comparing thresholds.
- Report of the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks (November 2020): the source of the 26% promoter cap and the debate over corporate-owned banks.
- RBI press release on the consolidated Master Directions, 28 November 2025: how 9,000-plus instructions became 244 directions.
- Report on Trend and Progress of Banking in India 2024-25: the annual statutory report on banks, co-operative banks and NBFCs, with capital and asset-quality data.
Sources
- RBI Annual Report 2025-26, Chapter VI: 241 penalties for ₹26.33 crore and their split by entity type; 342 show-cause notices; ECL directions of 27 April 2026; credit risk standardised approach final and effective 1 April 2027; LCR amendment of 21 April 2025 effective 1 April 2026; 244 MDs and the table by entity; Regulatory Review Cell; DoS coverage; SFB rating model; base-layer NBFC framework; sDQI; survival-horizon stress test; DAKSH and FSB alignment; MuleHunter.AI in 26 banks; insured banks on 31 March 2026; DICGC claims of ₹1,988 crore for 72 UCBs (accessed 24 October 2026)
- RBI Annual Report 2024-25, Chapter VI: 353 penalties for ₹54.78 crore in 2024-25, 264 on co-operative banks (accessed 24 October 2026)
- RBI Annual Report 2023-24, Chapter VI: 281 penalties for ₹86.11 crore in 2023-24, 215 on co-operative banks (accessed 24 October 2026)
- RBI Annual Report 2022-23, Chapter VI: 211 penalties for ₹40.39 crore in 2022-23; four-tier UCB framework, net worth and CRAR (circulars of 1 December 2022); DAKSH launched 6 October 2022; first NBFC-UL list of 16 on 30 September 2022; CET1 of 9% for NBFC-UL (accessed 24 October 2026)
- RBI Annual Report 2021-22, Chapter VI: 189 penalties for ₹65.32 crore in 2021-22, 145 on co-operative banks (accessed 24 October 2026)
- RBI Annual Report 2025-26, Chapter X: Banking Laws (Amendment) Act, 2025, assent 15 April 2025, co-operative director tenure, nominations, change in the definition of fortnight (accessed 24 October 2026)
- RBI Annual Report 2025-26, Chapter XI: RBI support of ₹18.6 crore to CAFRAL (accessed 24 October 2026)
- RBI press release, 28 November 2025: 244 Master Directions for 11 types of regulated entities; 9,445 circulars repealed or withdrawn (accessed 24 October 2026)
- RBI press release, 23 October 2026: operational risk amendment directions; revised Basel III framework from 1 April 2027 for commercial banks other than SFBs, payments banks and RRBs (accessed 24 October 2026)
- RBI press release, 6 August 2026: list of 17 NBFC-UL for 2026-27, PNB Housing Finance and Sammaan Capital continuing, Tata Sons footnote (accessed 24 October 2026)
- King Stubb & Kasiva, RBI Upper Layer NBFC Rules 2026: Second Amendment Directions of 24 June 2026, ₹1 lakh crore threshold, three-yearly review, government NBFCs, listing exemption for wholly government-owned NBFCs (accessed 24 October 2026)
- Adda247 Current Affairs, August 2026: no NBFC-UL list for 2025-26 while the method was reviewed (accessed 24 October 2026)
- RBI circular on Scale Based Regulation, 22 October 2021: four layers and their membership, NOF glide path, 90-day NPA norm, listing within 3 years, five-year rule, government NBFCs (accessed 24 October 2026)
- RBI circular on PCA for scheduled commercial banks, 2 November 2021: scope, effective date, thresholds and mandatory actions (accessed 24 October 2026)
- RBI circular on PCA for NBFCs, 14 December 2021: scope, effective date, thresholds and mandatory actions (accessed 24 October 2026)
- RBI press release on PCA for UCBs: framework for Tier 2 to 4 UCBs effective 1 April 2025, replacing the Supervisory Action Framework (accessed 24 October 2026)
- RBI press release, 7 October 2025: draft ECL and credit risk directions; staging, prudential floors, EIR, existing NPA norms retained (accessed 24 October 2026)
- KPMG India, Expected credit loss, May 2026: final ECL directions of 27 April 2026, effective 1 April 2027; scope excludes SFBs, payments banks and local area banks (accessed 24 October 2026)
- CRISIL Ratings, April 2026: one-time net CET1 impact of up to 120 bp, spread over four fiscals (accessed 24 October 2026)
- RBI press release, 7 August 2025: in-principle approval to AU SFB to become a universal bank; 26 April 2024 eligibility circular (accessed 24 October 2026)
- RBI press release, 5 December 2025: in-principle approval to Fino Payments Bank to convert into an SFB under the on-tap guidelines (accessed 24 October 2026)
- Business Standard, June 2025 and Business Standard, October 2025: Jana SFB's application and its return; eligibility criteria (accessed 24 October 2026)
- Ujjivan SFB media coverage, April 2026: Ujjivan's application returned; need for loan-book diversification (accessed 24 October 2026)
- Outlook Business, 2026: group loans about 45% of Ujjivan's loan book (accessed 24 October 2026)
- Angel One, March 2026: RBI letter of 6 March 2026 relaxing the NOFHC requirement for AU SFB (accessed 24 October 2026)
- RBI press release, 29 December 2025: Trend and Progress 2024-25; SCB CRAR of 17.2% at end-September 2025 (accessed 24 October 2026)
- RBI press release, 19 December 2025: ₹61.95 lakh penalty on Kotak Mahindra Bank under Section 47A(1)(c) read with 46(4)(i) (accessed 24 October 2026)
- RBI press release, 5 December 2025: ₹99.30 lakh penalty on Jammu and Kashmir Bank (accessed 24 October 2026)
- RBI press release, 14 August 2026: ₹59.20 lakh penalty on IndusInd Bank (accessed 24 October 2026)
- RBI press release, 26 November 2021: RBI accepts 21 of the IWG's 33 recommendations on ownership (accessed 24 October 2026)
- Business Today, 26 November 2021: promoter cap raised from 15% to 26%; no corporate ownership of banks without BR Act amendments (accessed 24 October 2026)
- Corporate Law Updates, 15 October 2026: IDBI sale terms, residual stakes, RBI fit-and-proper step (accessed 24 October 2026)
- Free Press Journal, 16 October 2026: completion targeted by end of FY27, subject to RBI approval; open offer after the share purchase agreement (accessed 24 October 2026)
- Business Today, 14 October 2026: Fairfax's roughly 40% stake in CSB Bank and the one-promoter, one-bank rule (accessed 24 October 2026)
- Outlook Money, 2025: RRBs reduced from 43 to 28 from 1 May 2025 under One State, One RRB (accessed 24 October 2026)
- RBI Annual Report 2025-26, annex page: chronology of 2025-26 policy announcements (accessed 24 October 2026)