50 Important Topics – Economy (Part – 1)

Strategy
1. What UPSC Demands : Application > Theory
• UPSC wants you to understand broader issue and its implication in real world.
• For Ex: Instead of asking What is CRR?", UPSC will ask what happens to inflation or
liquidity if CRR is increased.
• Make aspirants think for the impact of economic terms in real-world scenarios.
Example
• Concept: Cash Reserve Ratio (CRR)
• Typical student prep: "CRR is the percentage of a bank's total deposits that must be
maintained with the RBI.“
• UPSC-style Question (2020):
• With reference to the Indian economy, consider the following statements:
o If the RBI increases the CRR, it increases the credit creation capacity of commercial
banks.
o A decrease in CRR helps in increasing the liquidity in the economy.
o Answer: Statement 1 is wrong, Statement 2 is correct.
o Insight: This checks if you understand impact, not just the definition.
2. Current Affairs - It’s relevance.
• Most questions come from government schemes, reports, and economic policies released in the
last 12–18 months.
• Focus areas:
o Budget and Economic Survey - Very Important for Exam.
o RBI circulars, monetary policy announcements
o Flagship government schemes (PM Gati Shakti, PLI, Jal Jeevan Mission, etc.)
o Reports: SDG Index, WEF reports, SECC, NFHS, etc.
• Can refer Sleepy Classes Economics Current Affairs and Schemes compilations.
• Budget 2024 announced an increased capital expenditure for Railways and Defence.
• UPSC 2023 asked:
• "Capital expenditure has a multiplier effect on the economy. Which of the following
qualifies as capital expenditure?“
• Options: Loans to states, Investment in PSUs, Repayment of debt, etc.
• Answer: Only investment and loans to states qualify.

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 • Insight: Students who ignored Budget highlights missed this.
3. NCERT + 2 Sources Are Enough
• Class 11-12 NCERTs build the foundation.
• One standard book (Ramesh Singh or Sanjeev Verma), and one current affairs source (like
Indian Express/Sleepy/PIB/PT365).
• Emphasize revision over new resources. Every question will make more sense when
concepts are interlinked.
• Class 12 NCERT (Macroeconomics) explains inflation, fiscal deficit, and monetary policy in
simple terms.
• Sanjeev Verma or Ramesh Singh adds Indian examples and schemes.
• UPSC 2019:
• "With reference to inflation in India, which of the following statements is correct?
Controlling the inflation in India is the responsibility of only the RBI.“
• Answer: Incorrect — it's a shared responsibility of RBI + Government (via fiscal policy).
• Insight: Clear in NCERT + Economic Survey analysis.
4. Master the Keywords in the Question
• UPSC can trick you using words like correct/incorrect, significantly, direct impact, likely,
not likely
• Need to learn eliminating options using logic and the interlinkages of topics. ( Getting
Difficult )
• Example (2022):
• "Which of the following steps is most likely to help in reducing the current account deficit of India?“
• Options: Increasing exports, reducing gold imports, increasing FDI, etc.
• Keyword: "most likely“
• Elimination: FDI doesn’t directly reduce CAD — it's capital account.
• Correct answer: Reducing gold imports and increasing exports.
• Insight: One word changes the entire logic.
5. Economy is Interconnected
• Inflation connects to interest rates, which connect to bond yield, which affects capital
markets, which links to FDI/FII.
• Can make mind maps or flowcharts to explain these links. If you can visualize the economy,
you’ll never forget it.
• Inflation → Repo rate ↑ → Borrowing costly → Demand ↓ → Investment ↓ → GDP ↓
• Also: Repo ↑ → Bond prices ↓ → FPI outflow ↑ → Rupee weakens

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 • UPSC 2021:
• "If the interest rate is increased by the RBI, what will be the immediate effect?“
• Options:
o Inflation rises
o Consumer borrowing increases
o Demand contracts
o Bond prices rise
• Answer: Demand contracts
• Insight: Flowcharts help in tackling chain-effect questions.
6. Avoid the ‘Static vs Dynamic’ Trap
• UPSC increasingly frames dynamic-looking questions from static concepts (and vice versa).
• Example: “What will be the effect on the economy if RBI increases the repo rate?” — the
concept is static, but the question looks current.
• Tip: Learn current affairs conceptually, not just as news bytes.
• Static concept: Balance of Payments
• Dynamic news: India’s trade deficit with China increased.
• UPSC-style Question: "If India’s current account deficit widens, which of the following
may happen?"
• Options may include depreciation of currency, foreign exchange reserves fall, inflation due
to costlier imports.
• Insight: Appears current but conceptually static.
7. PYQs are Essential
• At least 3–4 questions each year resemble or evolve from previous years’ questions.
• Tip: Try to solve and analyze 10 years of PYQs, not just for answers but for patterns.
• UPSC 2015: "What happens when repo rate is reduced?“
• UPSC 2021: "Which of the following is likely if RBI cuts repo?“
• Similar logic, different wording.
8. Reverse Learning Works
• Instead of starting from books, pick a question and study backward to the concept.
• Builds analytical and exam-facing skills.
• UPSC 2022:
• "Which of the following is not included in the capital account of India’s BoP?"
Options: FDI, FII, External commercial borrowing, Remittances

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 • Correct: Remittances (they're current account)
• Now learn:
• What are the components of BoP?
• Why are remittances current account?
• Difference between FDI & FII
• Insight: Starting with the question pulls you deeper into relevant concepts.

National Income Accounting

GDP Base year revision
Context
• The Government of India has decided to update the base year for the computation of Gross
Domestic Product (GDP) from 2011-12 to 2022-23.
• This move aims to improve the accuracy and relevance of economic data by incorporating
updated sources and methods for compiling national accounts.

Key Points
• Objective of Base Year Revision:
o The update aims to reflect structural changes in the economy and capture the latest
trends in economic activity.
o Revising the base year will help improve the accuracy of GDP estimates and make
them more aligned with current economic realities
• Advisory Committee on National Accounts Statistics (ACNAS): An Advisory Committee
on National Accounts Statistics (ACNAS) has been constituted.
• The committee includes representatives from:
o Central and State Governments
o Reserve Bank of India (RBI)
o Academia and researchers
• ACNAS will advise on:
o Identifying new data sources
o Improving the methodology for compiling National Accounts Statistics
• Measures to Improve Statistical System:
o Standardization of data structure to promote consistent and harmonized reporting
across the National Statistical System.
o Greater use of administrative data to enhance the quality and coverage of economic
indicators.

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 o Strengthening the statistical system to improve the accuracy and credibility of
national data.

GDP
• The final result of production of goods and services is Product.
• A product may be a tangible good or intangible service. For example, a dentist does not sell
anything but his treatment/diagnosis is his service
o When we combine the monetary value of all the final goods and services produced
in the domestic territory of a country for a specified time such as a year, this will be
called “Gross Domestic Product”
• Note - Economic territory is not equal to Political territory

Economic Territory Covers

• Political boundaries including territorial waters and air space.
• Embassies, consulates, military bases, etc located abroad (but excluding those of other
countries located within the political boundaries of India)
• Ships, aircrafts etc., operated by the residents (need not be citizens) of India between two or
more countries.
• Fishing vessels, oil and natural gas rigs, etc operated by the residents (need not be citizens)
in the international waters or other areas over which the country enjoys the exclusive rights
or jurisdiction such as territorial waters and exclusive economic zone.
Inflation
Household Consumption Expenditure Survey (HCES) 2023-24
About HCES
• Conducted by NSO under MoSPI to collect household consumption and expenditure data.
• Digital data collection via Computer Assisted Personal Interview (CAPI) for accuracy and
real-time validation.
• First post-pandemic survey conducted in 2022-23, followed by 2023-24 to assess trends.
• Provides Monthly Per Capita Consumption Expenditure (MPCE) estimates.
• Used for updating the Consumer Price Index (CPI) basket, measuring poverty and
inequality, and formulating economic policies

Broad Consumption Categories

• Food items: Cereals, pulses, dairy, vegetables, fruits, eggs, meat, edible oil, beverages.
• Non-food items: Fuel, medical expenses, education, rent, clothing, consumer services,
entertainment

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Survey Coverage
• Total Households Surveyed: 2,61,953 (1,54,357 rural & 1,07,596 urban).
• MPCE estimates generated in two ways:
o Without considering imputed values of items received free through social welfare
schemes.
o With imputed values included.

Key Findings of HCES 2023-24

• Monthly Per Capita Consumption Expenditure (MPCE):
o Rural MPCE: ₹4,122 (₹4,247 with imputed values).
o Urban MPCE: ₹6,996 (₹7,078 with imputed values).
o Growth in MPCE (Nominal Prices) from 2022-23:
▪ Rural: ↑9%
▪ Urban: ↑8%
o Urban-Rural MPCE Gap:
▪ 2011-12: 84%
▪ 2022-23: 71%
▪ 2023-24: 70% (indicating rising rural consumption).
o Highest increase in MPCE observed in the bottom 5-10% of the population (both rural & urban).
• Consumption Pattern:
o Non-Food Items Dominance:
▪ Rural Areas: 53% of total MPCE.

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 ▪ Urban Areas: 60% of total MPCE.
• Major Food Expenditure Categories:
o Beverages, refreshments, and processed food have the highest share.
• Major Non-Food Expenditure Categories:
o Conveyance, clothing & footwear, entertainment, durable goods
o House Rent (7% share) major in urban areas.

• 3. Consumption Inequality (Gini Coefficient):

o Declined in both rural and urban areas from 2022-23:
▪ Rural: 0.237 (↓ from 0.266 in 2022-23).
▪ Urban: 0.284 (↓ from 0.314 in 2022-23).
o Indicates lower economic disparity and improved equitable consumption growth.

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 • Highest MPCE:
o Rural: Sikkim (₹9,474)
o Urban: Sikkim (₹13,965)
• Lowest MPCE:
o Rural: Chhattisgarh (₹2,927)
o Urban: Chhattisgarh (₹5,114)

Way Forward
• Strengthen rural income sources to sustain demand.
• Improve social welfare targeting based on consumption patterns.
• Expand financial inclusion and digital payment adoption in rural areas.
• Focus on inflation control policies to maintain real consumption growth.

Banking
Bank Clinic
Bank Clinic
• The All India Bank Employees' Association (AIBEA) has launched the "Bank Clinic"
initiative to assist bank customers with grievance redressal.

About Bank clinic

• It is an initiative by the All India Bank Employees' Association (AIBEA), aims to assist
bank customers with grievance redressal amid the rapid expansion of technology and
Reserve Bank of India (RBI) guidelines on retail banking.
• It is a non-resolving advisory platform guiding customers on the remedies available per
RBI guidelines.
• It serves as an additional channel alongside the normal Banking Ombudsman process.

How does it work?

• Under this initiative, customers can register their complaints on the Bank Clinic website
and within five working days, they will receive a reply detailing the available remedies and
relevant RBI guidelines for their specific issue
• The goal is to ensure timely and effective redressal of customer issues.
• It guides customers on available remedies but does not directly resolve queries.
• What is AIBEA?
o The All India Bank Employees Association (AIBEA) is a national trade union
representing bank employees across India.
o Founded in 1946 on April 20th in Kolkata. It’s headquarter is in Chennai.

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 o AIBEA plays a crucial role in advocating for the rights, welfare and interests of
bank workers.
Basel End Game
Basel Norms
• Basel is a city in Switzerland.
• It is the headquarters of Bureau of International Settlement (BIS), which fosters cooperation
among central banks with a common goal of financial stability and common standards of
banking regulations.
• Basel guidelines refer to broad supervisory standards formulated by this group of central
banks - called the Basel Committee on Banking Supervision (BCBS). The set of agreement
by the BCBS, which mainly focuses on risks to banks and the financial system are called
Basel accord.
• The purpose of the accord is to ensure that financial institutions have enough capital on
account to meet obligations and absorb unexpected losses. India has accepted Basel accords
for the banking system.

Basel Norms 1
• In 1988, BCBS introduced capital measurement system called Basel capital accord, also
called as Basel 1. It focused almost entirely on credit risk. It defined capital and structure of
risk weights for banks. The minimum capital requirement was fixed at 8% of risk weighted
assets (RWA).
• India Basel 1 guidelines in 1999. RBI issued guidelines to maintain CRAR of 9 percent for
every SCB.

Basel Norms 2
• In June ’04, Basel II guidelines were published by BCBS, which were considered to be the
refined and reformed versions of Basel I accord.
• The guidelines were based on three parameters, which the committee calls it as pillars.
• Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy
requirement of 8% of risk assets.
• Supervisory Review: According to this, banks were needed to develop and use better risk
management techniques in monitoring and managing all the three types of risks that a bank
faces, viz. credit, market and operational risks
• Market Discipline: This calls for stricter disclosure regulations. Banks are required to
regularly submit reports to the central bank about their CAR, risk exposure, and other data.
• As per RBI, all SCBs were bound to comply with Basel 2 norms

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Basel Norms 3
• In 2010, Basel III guidelines were released. These guidelines were introduced in response to
the financial crisis of 2008.
• Tier 1 Capital: 4.5%
• Capital Conservation Buffer: 2.5%
• Basel-III created LCR.
• The Liquidity Coverage Ratio (LCR) will require banks to hold a buffer of high-quality
liquid assets sufficient to deal with the cash outflows encountered in an acute short term
stress scenario as specified by supervisors.

Key Features of Basel I, II, And III Compared

Pillars Key Components Basel I Basel II Basel III

of Pillars

Pillar I Minimum Ratio of At least 8% (CAR) 8% 8%+ 2.5% of capital

Capital to RWAs conservation
(Capital
Buffers
Requirement)

Tier 1 Capital of At least 4 % 4% 6%

RWAs

Pillar II No provisions for Risk Based Enhanced

Supervisory Supervisory Supervisory
(Supervisory Review
Review introduced Process
Process)

Pillar III No provisions Quantitative and Enhanced

related to Market Qualitative Supervisory
(Disclosure &
Discipline disclosure Process
market Discipline)
prescribed at
Quarterly. Half
Yearly and Yearly
Intervals

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Related Terms
• Tier I capital (Core Capital): It include paid up share capital, stocks and disclosed reserve.
These are more permanent in nature and as a result, have high capacity to absorb losses.
• Tier II capital (Supplementary Capital): It includes all other capital e.g. Undisclosed reserve,
revaluation reserves, general provisions and loss reserves. It is considered less reliable than
Tier 1 capital because it is more difficult to accurately calculate and more difficult to
liquidate
• Risk weighed Assets (RWA): RWA is linked to minimum amount of capital that banks must
have relative to bank's risk from its lending activities. The more the risk, the more the capital
needed to protect depositors.
• Capital Adequacy Ratio (CAR) or Capital to Risk (Weighted) Assets Ratio: CAR is a
percentage that measures a bank's financial health by comparing its capital to its risk-
weighted assets.
• Liquidity Coverage Ratio (LCR): LCR is a requirement that requires banks to maintain a
minimum amount of liquid assets to withstand cash outflows over a 30-day period.
• Leverage ratio: The leverage ratio i.e. ratio of Tier I capital to the bank's average total
consolidated assets (sum of the exposures of all assets and non-balance sheet items).
• The minimum LCR requirement will be to reach 100% on 1 January 2019. This is to prevent
situations like “Bank Run”. The goal is to ensure that banks have enough liquidity for a 30-
days stress scenario if it were to happen

Basel End Game

US Basel III Endgame (August 2023)
• The US Basel III Endgame refers to a set of significant reforms introduced by the Federal
Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), and Federal Deposit
Insurance Corporation (FDIC) on July 27, 2023.
• These reforms aim to improve the strength, transparency, and consistency of the US banking
system's capital framework. The changes will apply to all large banking organizations with
assets above $100 billion.

Key Changes and Impacts

• Higher Capital Requirements:
o Estimated to increase Common Equity Tier 1 (CET1) capital levels by 16%.
o Increase risk-weighted assets (RWA) by 20% for large banks.
• Overhaul of Market and Operational Risk Frameworks:
o New standardized and internal model-based approach for market risk.
o Higher capital requirements for operational risks based on historical losses. o New
approach for credit valuation adjustment (CVA) risk calculation.

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 • Application to All Large Banks:
o Replaces advanced internal models for credit and operational risk.
o Extends capital requirements previously applicable to the largest banks (Category I
& II) to Category III & IV banks.
• Residential and Retail Risk Weights:
o Residential real estate mortgage risk weights increased by 20% above international
standards.
o Non-real estate retail risk weights increased by 10%.
• Unrealized Gains and Losses (AOCI):
o Removal of the AOCI opt-out for Category III and IV banks.
o Unrealized gains and losses must be reflected in regulatory capita
• G-SIB Surcharge and Risk-Based Scoring:
o G-SIB scores to be calculated using averages rather than point-in-time values.
o Inclusion of derivatives in cross-jurisdictional activity increases the likelihood of
higher capital requirements for foreign banking organizations.
• Operational Challenges:
o Banks will need to maintain parallel calculation and reporting systems.
o Higher costs and operational complexity for globally active banks.

Implementation Timeline
• Transition Period: Three years starting from July 1, 2025.
• Fully Implemented: By July 1, 2028.

Strategic Considerations for Banks

• Review Business Model Implications – Impact on profitability and competitive
positioning.
• Data Collection and Reporting – Increased burden on regulatory reporting.
• Operational Impact – Increased compliance and infrastructure costs.
• Impact on Lending and Trading – Higher capital requirements may reduce lending and
trading capacity for US banks.

Conclusion
• The US Basel III Endgame will create significant capital and operational burdens for large
US banks, especially those with complex business models and international exposure. The
proposed changes will align US standards more closely with international regulations but
impose higher capital requirements, creating competitive challenges for US-based global
banks.

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 Syndicate Loan
Syndicate Loan
• Recently, a private Non-Banking Financial Company (NBFC) announced that it has raised
USD 425 million and EURO 40 million through a syndicated loan.
• It is a three-year external commercial borrowing facility structured as a social loan that
would be used to empower small entrepreneurs and vulnerable groups across India.
• A syndicated loan is financing offered by a syndicate made up of a group of lenders that
work together to provide funds for a borrower.
• The borrower can be a corporation, a large project, or a sovereign government.
• Syndicated loans involve large amounts of money, spreading the risk among several
financial institutions to reduce the impact if the borrower fails to repay.
• External Commercial Borrowings (ECBs) denote Indian companies borrowing funds from
foreign sources, such as loans, bonds, or financial instruments, to finance business
expansion, asset acquisition, or existing debt repayment.

Central Bank Digital Currency

What is a CBDC?
• CBDCs are a digital form of a paper currency and unlike cryptocurrencies that operate in a
regulatory vacuum, these are legal tenders issued and backed by a central bank.
• It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
• A fiat currency is a national currency that is not pegged to the price of a commodity such as
gold or silver.
• The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
• Though the concept of CBDCs was directly inspired by Bitcoin, it is different from
decentralised virtual currencies and crypto assets, which are not issued by the state and lack
the ‘legal tender’ status.

CBDC Types
• CBDCs can be divided into two primary categories: wholesale and retail, each serving
different functions in the financial system.
• Wholesale CBDCs are primarily used by financial institutions, while retail CBDCs are
designed for use by consumers and businesses in everyday transactions.
• Wholesale CBDCs: These are designed for use by financial institutions and market
participants for large-scale transactions, such as interbank transfers and securities
settlement.
• Financial institutions can hold accounts with central banks to deposit funds or settle

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 interbank transactions.
• Central banks can use tools like reserve requirements or interest rates on reserves to
influence lending and manage monetary policy.
• Retail CBDCs: These are government-backed digital currencies designed for public use,
enabling consumers and businesses to make transactions. They are of two types:
• Token-based retail CBDCs: These currencies can be accessed using private and public keys,
allowing for anonymous transactions.
• Account-based retail CBDCs: These require digital identification for users to access and use
their accounts.

Objectives
• The main objective is to mitigate the risks and trim costs in handling physical currency, costs
of phasing out soiled notes, transportation, insurance and logistics.
• It will also wean people away from cryptocurrencies as a means for money transfer.

Global Trends
• Bahamas has been the first economy to launch its nationwide CBDC — Sand Dollar.
• Nigeria is another country to have rolled out eNaira in 2020.
• China became the world's first major economy to pilot a digital currency e-CNY in April
2020.
• Korea, Sweden, Jamaica, and Ukraine are some of the countries to have begun testing its
digital currency and many more may soon follow.
• India has introduced the e-Rupee, a form of digital currency, through the Reserve Bank of
India (RBI).
• The e-Rupee aims to modernize the financial infrastructure, ensure financial inclusion, and
reduce transaction costs.
• The digital currency was initially rolled out in phases, with pilot projects for wholesale and
retail use in 2022 and 2023.
• The e-Rupee seeks to integrate with India’s existing digital payment systems, providing a
reliable, government-backed alternative to cash for everyday transactions.

Why are CBDCs Gaining Popularity?

• CBDCs address several key challenges in the current financial landscape.
• They promote financial inclusion by providing banking access to unbanked populations,
especially in remote areas.
• Transactions become faster and cheaper, enhancing both domestic and cross-border
payments.
• By offering a government-backed alternative to private cryptocurrencies and stablecoins,

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 CBDCs strengthen monetary control and reduce risks associated with unregulated digital
currencies.

Key Developments in CBDCs by 2025

Several countries are leading the charge in CBDC development.
• China’s digital yuan is already in use, demonstrating the potential for large-scale adoption.
• The Eurozone is advancing the digital euro initiative, while the United States continues to
explore the feasibility of a digital dollar.
• International organizations like the IMF and the Bank for International Settlements (BIS) are
actively supporting cross-border CBDC collaborations, paving the way for seamless global
trade and finance.
Benefits of CBDCs for the Global Economy
• CBDCs offer numerous advantages that make them a transformative force in global
finance:
• Financial Stability: They mitigate risks posed by private cryptocurrencies and promote
trust in the financial system.
• Enhanced Monetary Policy Implementation: Central banks can track money flows in real
time, improving the effectiveness of policy measures.
• Reduced Transaction Costs: CBDCs streamline payments, making them faster and more
affordable.
• Improved AML Measures: The transparency of CBDC transactions helps combat money
laundering and illicit activities.

Conclusion
• CBDCs represent a pivotal shift in the financial landscape. By addressing key inefficiencies
and promoting inclusion, they have the potential to create a more equitable and efficient
global economy.
• As countries continue to develop and refine CBDCs, their impact on the future of money
will only grow, making them an essential component of the financial systems of tomorrow.

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 Variable Repo Rate
Variable Repo Rate
• The Reserve Bank of India’s (RBI) variable rate repo (VRR) auction attracted significant
interest from banks, with bids totalling ₹1,13,915 crore, surpassing the RBI’s offer of ₹50,000
crore.
• This underscores the growing demand for liquidity in the banking sector amid an estimated
deficit of around ₹1.54-lakh crore.

What is the Repo Rate?

• Repo Rate is simple terms the rate at which the Banks borrows money from RBI for one day,
also termed as overnight borrowing.

What Is The Variable Repo Rate?

• It is a mechanism where the RBI permits banks to borrow funds at rates determined by the
market, differing from the fixed Repo Rate at which banks borrow directly from the RBI.
• Typically lasting up to 14 days, VRR serves as a means to inject short-term liquidity into the
banking system. Conversely, Variable Rate Reverse Repo (VRRR) is employed to absorb
surplus liquidity from the system

Variable Repo Rate (VRR) Auction

• Current situation: The RBI has been conducting VRRs or Variable repo rate to inject
liquidity on a temporary basis into the banking system since December 2023.
• In mid-January, the tenor of the VRR was increased to 14 days to match the CRR cycle for
steady State injection. Further to this, it has been conducting short-dated VRRs (1-7 day)
periodically to ‘fine tune’ market liquidity.
• VRR Auctions: They are conducted by the RBI, when the weighted average call money rate
trends above the repo rate in the interbank money market, serving as a signal to the RBI of
System Liquidity Deficit.
• Tenure: It is a short-term liquidity injection against collaterals with a tenor of Overnight to
13 days usually.
• But, for injection of durable liquidity, the RBI conducts VRR auctions for a tenor beyond 14
days very rarely.
• Rate of Interest: It generally is borrowed at a rate decided by market generally lower than
Repo Rate (though not less than Reverse Repo Rate).

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 Payment system – UPI, ULI
Payment System UPI
• Why in News
o The Reserve Bank of India (RBI) is exploring the possibility of expanding its
payment system abroad, following the requests from several countries

Key Points
• Requests for Payment System: The RBI has received requests from abroad for
implementing its payment systems like Cheque Truncation System (CTS), National
Electronic Fund Transfer (NEFT), Unified Payments Interface (UPI) and messaging
solutions.
• Reason: The availability of low cost innovative digital payment products in India has led to
many countries expressing their interest in Indian payment system.
• Availability of Payment System Outside India:
o Currently, there are no RBI authorised payment system operators providing
payment services outside India.
o However, there is cross-country cooperation with Bhutan with respect to CTS,
National Automated Clearing House (NACH) and NEFT. NEFT is also available for
one-way transfers from India to Nepal.
• Scope of Payment System Outside India:
o According to RBI there is scope for enhancing global outreach of its payment
systems, including remittances, through active participation and co-operation in
international and regional fora by collaborating and contributing to standard setting.
o Efforts have been made to increase and widen the scope, coverage and usage of
RuPay card scheme and UPI to enhance their brand value internationally.

Unified Payments Interface

• It is an advanced version of Immediate Payment Service (IMPS)- round–the-clock funds
transfer service to make cashless payments faster, easier and smoother.
• UPI is a system that powers multiple bank accounts into a single mobile application (of any
participating bank), merging several banking features, seamless fund routing & merchant
payments into one hood.
• Performance of UPI:
o The UPI transaction value for the month of October (2022) touched a new high at Rs
12.11 lakh crore, with the transaction count touching 7.3 billion.
o According to the RBI’s Payment Vision 2025, UPI is expected to register an average
annualised growth of 50%.
• National Payments Corporation of India (NPCI) launched UPI with 21 member banks in

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 2016.
• NPCI
o It is an umbrella organisation incorporated in 2008 as a “Not for Profit” Company
under the Companies Act 1956 (now Section 8 of the Companies Act 2013).
• National Payments Corporation of India (NPCI)
o It is an initiative of RBI and IBA under the provisions of the Payment and Settlement
Systems Act, 2007, for creating infrastructure for the entire Banking system in India
for physical as well as electronic payment and settlement systems.

Payment System ULI

• Why in News
o The Reserve Bank of India (RBI) plans to launch the Unified Lending Interface (ULI)
at national level to transform India’s lending sector. The ULI was launched as a pilot
project by the RBI in 2023.
• What is Unified Lending Interface (ULI)?
o About: ULI is a digital platform that is expected to make the lending process easy.
o It would enable friction-less credit while delivering banking services to farmers and
MSME borrowers.
• Key Features of ULI:
o Consent-Based Digital Access: ULI will provide lenders with digital access to both
financial and non-financial data of customers, including land records, through a
consent-based system.
o Common and Standardised APIs: ULI will feature standardised Application
Programming Interface (APIs) that allow for a ‘plug and play’ approach,
simplifying data access and reducing technical integration complexity.
o The 'plug and play' concept refers to ready-made facilities with essential
infrastructure like power, network etc allowing industries to start operations
immediately.
• Potential Benefits:
o Frictionless Credit: ULI aims to facilitate a smoother lending experience by
minimising paperwork, particularly for smaller and rural borrowers.
o Reduced Appraisal Time: By consolidating data from various sources, ULI will
minimise the time required for credit evaluation.
o Centralised Data Access: The platform will consolidate financial and non-financial
data from multiple sources, making it easily accessible to lenders.
o Focus on Agriculture and MSMEs: ULI is expected to address the large unmet
demand for credit in sectors such as agriculture and Micro, Small, and Medium

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 Enterprises (MSMEs).

Third Party Application Providers (TPAPs)

Third Party Application Providers (TPAPs)
• The Reserve Bank of India has asked the National Payment Council of India to examine the
request of One97 Communications, which owns Paytm, to become a Third-Party
Application Provider for continued Unified Payments Interface operation of the Paytm
application

About Third-Party Application Provider (TPAP)

• It is an entity that provides the UPI compliant app(s) to the end-user customers to facilitate
UPI-based payment transactions.
• These applications could be mobile wallets, merchant apps, or any other platform that
utilises UPI for payments.
• NPCI, the umbrella organisation for operating retail payments and settlement systems in
India, owns and operates the UPI platform.

Roles & Responsibilities of TPAP

• TPAP is a service provider and participates in UPI through PSP Bank
• TPAP is responsible to comply with all the requirements prescribed by PSP Bank and NPCI
in relation to TPAP’s participation in UPI
• TPAP is responsible to ensure that its systems are adequately secure to function on the UPI
platform
• TPAP is responsible to comply with all applicable laws, rules, regulations and guidelines
etc. prescribed by any statutory or regulatory authority in relation to UPI and TPAP’s
participation on the UPI platform including all circulars and guidelines issued by NPCI in
this regard.
• TPAP has to store all the payments data including UPI Transaction Data collected by TPAP
for the purpose of facilitating UPI transactions, only in India
• TPAP is responsible to facilitate RBI, NPCI and other agencies nominated by RBI/ NPCI, to
access the data, information, systems of TPAP related to UPI and carry out audits of TPAP,
as and when required by RBI and NPCI
• TPAP shall facilitate the end-user customer with an option to raise grievance through the
TPAP’s grievance redressal facility made available through TPAP’s UPI app or website and
such other channels as may be deemed appropriate by the TPAP like email, messaging
platform, IVR etc.
• Currently, there are 22 NPCI-approved 3rd party Unified Payments Interface (UPI) apps
that can be used to send and receive money from other UPI users by using UPI IDs.

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 • They include Amazon Pay, Google Pay, Groww, Jupiter Money, Mobikwik, Phonepe,
Samsung Pay, TataNeu and Whatsapp.

Payment Banks in India

Payment Banks in India
• The Reserve Bank of India (RBI) introduced Payment Banks (PBs) to further financial
inclusion by providing small savings accounts, payment and remittance services to
underserved and unbanked segments of the population.
• Payment Banks were conceptualized to provide basic banking services without engaging in
complex financial operations like lending.

Key Features of Payment Banks

• Licensing and Regulation:
o Governed under the Banking Regulation Act, 1949 and RBI’s operational guidelines.
o Minimum paid-up capital requirement of ₹100 crore.
o Promoters must hold at least 40% of the paid-up equity capital for the first five years
• Capital Adequacy Framework:
o Minimum Capital Requirement: 15% of Risk-Weighted Assets.
o Common Equity Tier 1 (CET1): Minimum 6%.
o Tier 2 Capital: Limited to a maximum of 7.5% of risk-weighted assets.
• Operational Limitations:
o Cannot offer loans or credit cards.
o Can only accept demand deposits (savings and current) up to ₹2 lakh per individual
customer.
o Must invest at least 75% of demand deposit balances in SLR (Statutory Liquidity
Ratio) securities like government bonds and treasury bills.
o Up to 25% of deposits can be held with scheduled commercial banks
• Business Model and Activities:
o Facilitating domestic remittances and cross-border payments (limited to inward
remittances).
o Can issue debit cards, but not credit cards.
o Allowed to distribute insurance and mutual fund products.
• Technology and Digital Focus:
o Expected to leverage technology for low-cost operations and widespread access.
o Interoperability of payment systems to allow seamless transactions across banks.

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 • Risk and Compliance:
o PBs must follow Basel II framework for credit risk.
o Restrictions on investing in corporate bonds and equities.
o Cannot undertake para-banking activities beyond the scope of licensing guidelines.
• Customer Protection and Grievance Redressal:
o PBs are included under the Banking Ombudsman Scheme.
o Must ensure data privacy and protection for customer transactions.
• Foreign Exchange and KYC Norms:
o Permitted to operate in the foreign exchange market under AD Category II licenses.
o KYC guidelines aligned with the RBI’s regulations for commercial banks.

Current Status and Challenges

• PBs like Airtel Payments Bank, Paytm Payments Bank, and India Post Payments Bank are
operational.
• Challenges include
o Low profitability due to narrow margins.
o Dependence on volume-based transactions.
o Limited scope for revenue diversification since lending is not allowed.

Conclusion
• Payment Banks have enhanced financial inclusion by offering accessible banking services
to rural and underserved populations. However, operational challenges related to
profitability, competition, and regulatory limitations remain key areas for improvement.

Fifty Years of Indian Microfinance – The Long Journey to Profitability

Fifty Years of Indian Microfinance – The Long Journey to Profitability
• The Indian microfinance sector has completed 50 years since its establishment, beginning
with the Self-Employed Women’s Association (SEWA) Bank in Gujarat in 1974.
• Nobel Laureate Muhammad Yunus laid the foundation of modern MFIs with establishment
of Grameen Bank in Bangladesh in 1976.
• RBI is regulatory body for MFIs operating in country.
• Malegam Committee (2010) constituted by RBI recommended for holistic framework to
regulate NBFC –MFI.

What is Microfinance?
• It offers financial services like small value loans to marginalized and poor individuals who
lack access to formal banking services.

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 • It includes multiple services like saving accounts, fund transfer, micro insurance, etc.
• Services include:
o Savings and checking accounts
o Microcredit
o Micro insurance
o Fund transfers
• Microfinance institutions (MFIs) must earn interest on credit and implement repayment
schemes with regular installments.

Key Risks in Microfinance

• Credit Risk – Risk of loan defaults.
• Operational Risk – Inefficiencies, fraud, and processing errors.
• Liquidity Risk – Cash flow mismanagement.
• Market Risk – Interest rate and economic fluctuation risks.
• Foreign Exchange Risk – Currency value fluctuations for international MFIs.
• Reputation Risk – Loss of trust due to negative publicity.
• Regulatory Risk – Changes in government policies and regulations

Challenges in the History of Microfinance

• Early Programs (1980s): Differential Rate of Interest (DRI) and Integrated Rural
Development Programme (IRDP) – ineffective due to high costs and inefficiencies.
• Growth in the 1990s and 2000s:
o Expansion of Self-Help Groups (SHGs) and MFIs.
o High transaction costs and lack of collateral made lending difficult.
o Dependence on moneylenders remained due to flexible terms
• 2010 Andhra Pradesh Crisis: Allegations of coercive recovery methods and high interest
rates led to stringent state regulations, reducing microfinance activity.
• 2016 Demonetisation: Cash shortage affected repayment capacity, causing high defaults.
• COVID-19 Pandemic: Lockdowns disrupted repayment, causing liquidity stress. Forced
MFIs to switch to digital transactions and restructure loans.

Regulatory Reforms
• 2010 Malegam Committee:
o Framework for NBFC-MFIs.
o Introduced interest rate caps and fair practice guidelines.
• 2014:

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 o RBI recognised Microfinance Institutions Network (MFIN) and Sa-Dhan as Self-
Regulatory Organizations (SROs).
• 2022 Harmonised Regulations:
o Uniform framework for all regulated entities (REs).
o Addressed over-indebtedness and ensured transparent pricing.

Growth and Financial Performance

• The sector's Gross Loan Portfolio grew 16.5 times from INR 17,000 crore in 2012 to INR 2.85
lakh crore in 2022.
• NBFC-MFIs have outperformed banks, holding a 39.1% market share vs 33.5% for banks (as
of FY23).
• Portfolio delinquencies have returned to pre-pandemic levels.
• Profitability has increased due to:
o Higher lending yields
o Lower credit costs

Initiatives taken by Government for Microfinance in India

• SHG-Bank Linkage Program: To increase the loan volume of the SHGs, and modify their
money lending pattern from non-income generating activities to productionbased activities.
• Pradhan Mantri Mudra Yojana (PMMY): Pradhan Mantri Mudra Yojana (PMMY):
Providing loans up to 10 lakh to non-corporate, non-farm small/micro enterprises through
commercial banks, NBFCs, etc.
o Loans under MUDRA are categorized as: Shishu, Kishore and Tarun.
o 2024 Union Budget enhanced limit to ₹20 lakh from current ₹10 lakh for those who
have availed and successfully repaid loans previously taken under Tarun category.

Persisting Challenges
• High Interest Rates – Burden on poor borrowers.
• Over-Indebtedness – Borrowing from multiple sources.
• High Operational Costs – Small loan portfolios increase expenses.
• Low Financial Literacy – Misuse of funds and repayment issues.
• Limited Access to Funding – Difficult to secure low-cost capital

Conclusion
• The Indian microfinance sector has made significant progress over the last 50 years, driven
by regulatory support, technological innovations, and government initiatives.
• Despite challenges like high operational costs, low financial literacy, and over-indebtedness,
the sector’s profitability and resilience have improved.

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 • With strategic reforms and enhanced financial literacy, microfinance holds the potential to
drive deeper financial inclusion and rural empowerment in India.

Project Nexus
Project Nexus
• Why in NEWS?
o The Reserve Bank of India (RBI) has joined Project Nexus, a multilateral initiative
launched by the Bank for International Settlements (BIS) to enable instant cross-
border retail payments by interlinking domestic Fast Payment Systems (FPSs).
India’s Unified Payments Interface (UPI) will be linked with FPSs of Malaysia, the
Philippines, Singapore, and Thailand under this initiative.
• The Reserve Bank of India (RBI) has joined Project Nexus, a multilateral initiative launched
by the Bank for International Settlements (BIS) to enable instant cross-borProject Nexus
is an initiative of the BIS Innovation Hub aimed at enhancing cross-border payments by
connecting multiple domestic Instant Payment Systems (IPS) globally.
• It is the first BIS Innovation Hub project in the payments area to advance towards live
implementation.
• RBI has already been working bilaterally with several countries to link UPI with their FPSs.
However, Nexus will provide a multilateral platform to expand the international reach of
Indian payment systems.
• der retail payments by interlinking domestic Fast Payment Systems (FPSs). India’s Unified
Payments Interface (UPI) will be linked with FPSs of Malaysia, the Philippines, Singapore,
and Thailand under this initiative.

Key Objectives and Features

• Standardised Connectivity: Nexus aims to create a single, standardised connection
between domestic payment systems instead of building separate connections with each
country. This will reduce costs and improve the efficiency of cross-border payments.
• Faster Cross-Border Payments: Nexus will allow cross-border payments from sender to
recipient within 60 seconds at near-zero cost in most cases.
• Multilateral Approach:
o Instead of individual bilateral agreements, Nexus will enable broader and faster
integration of Indian payment systems into the global network.
o India’s UPI will become more globally accessible.
Participating Countries
• The initial founding countries under Project Nexus are:
o India (Unified Payments Interface – UPI),

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 o Malaysia (Bank Negara Malaysia),
o Philippines (Bangko Sentral ng Pilipinas),
o Singapore (Monetary Authority of Singapore),
o Thailand (Bank of Thailand),
o Indonesia is expected to join the platform in the future.
• The agreement was signed on June 30, 2024, in Basel, Switzerland.

Conclusion
• RBI’s participation in Project Nexus marks a significant step towards positioning India’s
UPI as a global payment system. By facilitating fast, low-cost, and secure cross-border
transactions, Project Nexus will deepen India's financial integration with Southeast Asia
and beyond, enhancing trade and financial flows.

Priority Sector Lending Norms

Priority Sector Lending Norms
• The RBI recently revised its priority sector guidelines to encourage banks to provide small
loans in economically disadvantaged districts with low average loan sizes.

About Priority Sector Lending (PSL)

• PSL is a lending requirement administered by the RBI, requiring banks to give a minimum
proportion of their loans to sectors of development importance or the sectors that have
difficulty of getting loans.
• The RBI is periodically updating the sectors that are eligible to get priority sector lending
and the limits of loans.
• Similarly, the regulations identify institutions that are obliged to provide these loans.

The categories of priority sectors are as follows:

• Agriculture
• Micro, Small, and Medium Enterprises
• Export Credit
• Education
• Housing
• Social Infrastructure
• Renewable Energy
• Others

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The Targets Under PSL
• Domestic SCBs and foreign banks with 20 branches and above: 40 percent of Adjusted Net
Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE),
whichever is higher.
• Foreign banks with less than 20 branches: 40 percent of ANBC or CEOBE, whichever is
higher; out of which up to 32% can be in the form of lending to exports and not less than 8%
can be to any other priority sector.
• Regional Rural Banks and Small Finance Banks: 75 percent of ANBC or CEOBE, whichever
is higher.
• Primary (Urban) Co-operative Banks (UCBs): 40 percent of ANBC or CEOBE, whichever is
higher, which shall be increased to 75 percent of ANBC or CEOBE, whichever is higher,
with effect from FY2025-26.

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The Targets Under PSL
• Banks can meet their PSL obligations by extending loans, providing credit facilities, and
offering financial products and services to individuals, entities, and enterprises in the
priority sectors.
o They can also fulfil their targets through investments in eligible instruments, such as
bonds issued by entities engaged in priority sector activities.
• In case, banks fail to meet their PSL targets, they have to deposit the allocated amount to
the Rural Infrastructure Development Fund (RIDF) established with NABARD and to other
funds with NABARD, SIDBI, Mudra, National Housing Bank, etc., as decided by the RBI
from time to time.

Revised RBI Guidelines

• The new norms discourage lending in districts with high average loan sizes.
• Starting from FY25, more weight(125%) will be given to fresh priority sector loans in
districts where the loan availability is low (less than Rs 9,000 per person).
• In districts with high loan availability (more than Rs 42,000 per person), the loans will have
a weight of 90%.
• With the exception of outlier districts with low credit availability and those with high loan
sizes, all other districts will continue to have the current importance level of 100%.

Foreign Currency Non-Resident Bank (FCNR (B)) Accounts

Foreign Currency Non-Resident Bank (FCNR (B)) Accounts
• The Foreign Contribution Regulation Act (FCRA) was enacted to prevent foreign influence
on India’s internal affairs through financial contributions. Consequently, amended in 2010
and 2020, the FCRA plays a key role in regulating the acceptance and use of foreign funds
to safeguard national interests.
• While promoting transparency and compliance, the FCRA has posed challenges for NGOs,
with over 20,701 licenses revoked since its inception for alleged violations. The FCRA Rules
further tighten oversight, impacting NGO operations and development initiatives.
• The Foreign Contribution (Regulation) Act (FCRA), introduced in 1976 during the
Emergency, was established to prevent foreign influence on India’s internal affairs through
financial contributions. It is aimed at regulating and overseeing the flow of foreign funds
into the country.
• It establishes a structured framework outlining how individuals and organisations can
receive and use foreign contributions, ensuring their utilisation aligns with the nation’s
interests and objectives.

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Foreign Contribution (Regulation) Amendment Act, 2020
• The Foreign Contribution (Regulation) Amendment Act, 2020 introduced key changes as
outlined below:
o Prohibition on Transfers: Foreign contributions cannot be transferred to an
individual, an association, or a registered company.
o Mandatory Aadhaar: Office bearers must provide an Aadhaar or passport/OCI card
for registration.
o FCRA Account: Contributions must be received in a designated SBI branch in New
Delhi.
• Reduced Administrative Use: Administrative expense limits were reduced from 50% to
20%.
• Renewal of licence: The government can inquire before renewing certificates, checking for
fictitious entities or misuse of funds.
• Suspension Extension: Initially, registration suspension can be enforced for a period of 180
days. This suspension can be further extended by an additional 180 days.
• Surrender of Certificate: Entities can surrender their certificate post-government approval.
• Utilisation Restrictions: The government can restrict unutilized funds based on inquiries.

Foreign Contribution Regulation (Amendment) Rules 2022

• In 2022, the government amended the Foreign Contribution (Regulation) Rules, 2011, to
strengthen safeguards against foreign contributions that could harm national interests, with
key updates introduced under the FCRA Rules 2022:
• These rules are designed to prevent the acceptance and use of foreign contributions or
hospitality for activities that may harm national interests.
• Under the FCRA Rules 2022, Indians can now receive up to ₹10 lakh annually from relatives
abroad without notifying the authorities, compared to the previous limit of ₹1 lakh.

Key Features
• Currency and Tenure: Maintained in freely convertible foreign currencies such as US Dollar
(USD), British Pound (GBP), Euro (EUR), Canadian Dollar (CAD), Australian Dollar (AUD),
and Japanese Yen (JPY).
• Tenure ranges from 1 year to 5 years.
• Tax and Repatriation Benefits: Interest earned is tax-free in India.
• Principal and interest are fully repatriable without any limit.

Source of Funds
• Funds can be transferred from an NRE account or directly remitted from an overseas
account.

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 • Funds are converted into the desired currency at the prevailing exchange rate.

FEMA Compliance
• Governed by the Foreign Exchange Management Act (FEMA).
• No limit on the amount that can be deposited.
• Protection Against Currency Fluctuations: Since the deposit is maintained in foreign
currency, it protects the funds from exchange rate fluctuations.

Conclusion
• FCNR (B) accounts are ideal for NRIs looking to earn stable, tax-free returns on their foreign
earnings while securing their capital from currency risks.
• The flexibility in fund transfer and repatriation makes it a popular option for overseas
Indians seeking to diversify their investments in India.

Windfall Tax
Windfall Tax?
• Why in NEWS?
o The Indian government removed the windfall gains tax on domestic crude oil
production and the export of diesel, petrol, and aviation turbine fuel (ATF) on
December 2, 2024.
o The tax was introduced on July 1, 2022, after the surge in global crude oil and fuel
prices following Russia's invasion of Ukraine.
o As global oil prices and fuel supply have stabilized, the windfall gains tax had
become insignificant in terms of revenue generation.
• A Special Additional Excise Duty (SAED) and Additional Excise Duty (AED) imposed on
oil producers and fuel exporters to tax super-normal profits.
• Introduced to:
o Capture windfall profits of domestic oil producers and exporters.
o Ensure adequate domestic fuel supply by discouraging excessive exports.
o Offset the impact of domestic fuel duty cuts.
• The “windfall tax” was introduced to tax the extraordinary profits earned by oil companies
during unusual global market conditions.
• It is a higher tax on profits that result from a sudden windfall gain to a company. The term
“windfall” refers to a dramatic and unanticipated increase in business profits.
• The main objective is to redistribute excess profits from the sudden windfalls to benefit the
wider community. Hence it is levied mostly for a temporary period and removed once
conditions normalise.

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 • In India, the windfall tax applied to fuel exports and domestic crude oil production under
central excise laws.
• Initial Levy:
o ₹23,250 per tonne (~$40 per barrel) on domestic crude oil.
o ₹13 per litre on diesel exports.
o ₹6 per litre on petrol and ATF exports.

Reasons for Removal

• Stabilization of Global Oil and Fuel Prices:
o Crude oil prices have dropped from over $100 per barrel (July 2022) to below $75 per
barrel (December 2024).
o Global oil and fuel supply chains have stabilized after the initial shock from the
Ukraine war.
• Decline in Revenue Generation:
o Revenue from the tax declined sharply:
o ₹25,000 crore in FY23
o ₹13,000 crore in FY24
o ₹6,000 crore in FY25 (so far)
o The tax on petrol exports had been zero since July 2022; on diesel since March 2024;
and on ATF since January 2024.
• Industry Opposition:
o Oil companies argued that the tax reduced profitability and discouraged production.
o The unpredictable nature of the levy made long-term planning difficult for oil
companies.
• Global Trend:
o Other countries had imposed similar taxes post-Ukraine war but began removing
them as market conditions stabilized.

Conclusion
• The removal of the windfall gains tax marks a shift from crisis-era measures to stable
economic policy. It signals the government's confidence in the stability of global oil markets
and is expected to enhance profitability and investment in the domestic oil sector while
maintaining predictable taxation.

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