Reserve Bank of India
Also written RBI · Reserve Bank of India (RBI)
India's central bank, set up on April 1, 1935 under the RBI Act. It runs monetary policy, regulates and supervises banks and NBFCs, is banker to the Government and lender of last resort.
In plain language
The Reserve Bank of India is the bank for banks and for the Government.
It does not open savings accounts for the public. Instead it decides the rules every bank has to follow, keeps watch on how they follow them, manages the country's currency and credit, and tries to keep prices stable.
For an ordinary investor, the useful line is simple: if your problem is with a bank or a non-banking finance company, RBI is the regulator; if it is with a broker, a listed company or a mutual fund, SEBI is.
How it works
What the booklet (Chapter 4) says about RBI:
- Established on April 1, 1935, under the Reserve Bank of India Act.
- Uses monetary policy to create financial stability, and is charged with regulating the country's currency and credit systems.
- Its main purpose is consolidated supervision of the financial sector: commercial banks, financial institutions and non-banking finance companies.
- It formulates, implements and monitors monetary policy, aiming to maintain price stability and keep credit flowing to productive sectors.
- It is regulator and supervisor of the banking system, banker to the Government of India, and lender of last resort for all commercial banks.
- Commercial banks are regulated by RBI and audited by RBI every year.
Where else RBI appears in the booklet:
- Customer liability: no liability for a customer when an unauthorised transaction is due to the bank's fraud, negligence or deficiency; the same when the fault is elsewhere in the system, if the customer tells the bank within three days of receiving an alert. A customer whose own negligence causes the fraud bears the loss until it is reported.
- Credit bureaus are licensed by RBI, and RBI requires each to give one free full credit report every year to every consumer.
- Chapter 13 table: mobilisation of deposits by NBFCs and by a Nidhi or mutual benefit society go to RBI; gold saving schemes by jewellers go to MCA / RBI.
- The SEBI helpline refers complaints outside SEBI's purview to RBI, IRDAI, PFRDA and MCA.
A worked example
Amounts are illustrative.
At 11:40 p.m. Sunita, a pharmacist in Mysuru, receives an SMS alert: Rs 23,000 debited from her account for an online purchase she never made. She had not shared her card details or OTP.
Because the fault is not hers, and she tells the bank the next morning, well within three days of the alert, the RBI framework in the booklet says she carries no liability, and the bank must credit the amount back within a specified time.
The same month, her uncle asks where to complain about a non-banking finance company that took Rs 2,00,000 in deposits and stopped paying interest. He had tried SEBI's SCORES. The Chapter 13 table points elsewhere: mobilisation of deposits by NBFCs belongs to RBI. A complaint about a broker would have gone to SEBI; this one does not.
Why NISM asks about it
Chapter 4 (Savings Related Products) has the RBI profile and the customer-liability rules; Chapter 8 (Borrowing-Related Products) links RBI to credit bureaus; Chapter 13 (Grievance Redressal Agencies) is the which-regulator-for-what table. Expect: the founding date (April 1, 1935), lender of last resort, banker to the Government, and matching an activity (NBFC deposits, Nidhi companies) to RBI.
Common exam traps
- RBI was set up in 1935; SEBI's statutory establishment was 1992. Do not swap the dates.
- Chit funds, co-operative society schemes and multi-level marketing go to State Governments, not RBI, in the Chapter 13 table.
- Company deposits under Section 73 of the Companies Act go to MCA, not RBI. NBFC deposits go to RBI.
- Gold saving schemes by jewellers: MCA / RBI, both named.
- Housing finance institutions: National Housing Bank, not RBI, in that table.
- Three days runs from the alert, and only protects a customer who was not negligent.
Check yourself
1.Under the Central Government deposit insurance scheme, deposits are insured up to:
- a)₹1 lakh per account
- b)₹5 lakh per customer in that particular bank
- c)₹5 lakh per deposit
- d)₹10 lakh per customer across all banks
Show the answer
Answer: (b) ₹5 lakh per customer in that particular bank
"Central Government deposit insurance scheme ensures that all deposits are insured by the Government UP TO A LIMIT OF ₹5 LAKHS PER CUSTOMER IN THAT PARTICULAR BANK. So, even in case of a failure of a bank, depositors are assured that the Government will step in and return up to ₹5 lakhs of their savings in that bank." Three words carry the rule: per customer, per bank. It is not per account and not per deposit, so a person holding a savings account, two fixed deposits and a recurring deposit at the same bank has one ₹5 lakh cover across all four. Split the same money across three banks and each brings its own limit. The chapter adds that "for complete details on the scheme, one can refer the website of Reserve Bank of India, from time to time."
2.A customer shares an OTP with a fraudulent caller and money is withdrawn. What is the customer's liability, and why should she still report immediately?
- a)She has no liability at all, since a fraud occurred
- b)Because the loss arose from her own negligence she bears it — but only until the date of reporting, so reporting at once caps the loss
- c)She bears the entire loss permanently, so reporting makes no difference
- d)The bank bears the loss only if she reports within 24 hours
Show the answer
Answer: (b) Because the loss arose from her own negligence she bears it — but only until the date of reporting, so reporting at once caps the loss
RBI specifies three situations. Where the fault is the bank's — "fraud, contributory negligence or deficiency on part of the bank" — there is no liability. Where "neither the customer nor the bank is at fault, but the problem lies elsewhere in the system", again no liability, provided the customer "notifies the bank... within THREE DAYS of receiving an alert." And "in cases where such fraud takes place on account of the NEGLIGENCE OF THE CUSTOMER, the ENTIRE LOSS, UNTIL THE DATE OF REPORTING the unlawful transaction, will be borne by the customer." Sharing an OTP is customer negligence, so the third applies — but read the clause the other way round, because that is where the useful news lies: everything after the date of reporting is not hers. Silence out of embarrassment converts a bounded loss into an open one, and a compromised credential rarely stops at one transaction. The chapter's instruction is to "report it to your bank immediately or at least within three working days, so that your complaint or grievance is addressed in your favour."
3.According to the chapter, when does one resort to borrowing?
- a)Whenever a purchase is desired
- b)In meeting financial goals, when savings are inadequate
- c)Only for purchasing a house
- d)When investment returns are expected to exceed the interest rate
Show the answer
Answer: (b) In meeting financial goals, when savings are inadequate
"Borrowing is an act of taking money and paying it back over a period. In meeting financial goals, IN CASE THE SAVINGS ARE INADEQUATE, one resorts to borrowing. Borrowing provides the flexibility of REPAYING IN SMALL INSTALMENTS over a period of time. EQUATED MONTHLY INSTALMENTS (EMI) is a very popular mode of repayment of loan." Borrowing bridges a gap between a real goal and real savings — the same framing Chapter 2 used when it defined debt as "money borrowed to meet SHORTFALL of money when expenses are more than the funds available in hand." Option (a) is what the debt-trap tips warn against: "Do not buy more than what you can afford. Do not get lured into 'WANT' items." Option (d) is forbidden outright by Chapter 5's don'ts — "Don't borrow money for investment."
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Monetary policyThe central bank's management of money supply and interest rates to promote growth and hold prices stable — expansionary when it wants to push the economy up, contractionary when it wants to cool it.
- Credit scoreThe number a credit information company builds from your loan and credit-card repayment history, and the first thing a lender looks at when your application arrives.
- Customer liability for unauthorised transactionsRBI's rule that a bank customer bears no loss from an unauthorised transaction caused by fraud, bank negligence or a system failure elsewhere — provided it is reported within three days of the alert.
- Lender of last resortThe workbook's description of RBI's role as the lender commercial banks can turn to when no one else will lend them money.
- Non-Banking Finance CompanyA financial institution — grouped by the booklet with commercial banks under RBI supervision — whose deposit-mobilisation activity, when it goes wrong, is a Reserve Bank of India grievance, not a SEBI one.
- Securities and Exchange Board of IndiaThe statutory regulator of India's securities market, set up under the SEBI Act, 1992, to protect investors and to develop and regulate the market. It registers brokers, DPs and mutual funds.
- Payment BankA new category of bank that offers savings and current accounts, debit cards and remittances, but cannot give loans, issue credit cards, or accept fixed or recurring deposits.
- Ponzi schemeA fraud that pays earlier investors out of their own money or new investors' money, not real profits. It promises high or unusually steady returns and collapses when new money slows.
- Small Finance BankA category of bank introduced by the RBI that takes small deposits and gives small loans, mainly to people and small businesses the banking system does not reach well.
- Business CorrespondentA representative of a bank, also called a Bank Mitra, who goes to customers in remote places and villages to open accounts, take deposits, transfer funds and give small loans.
- IRDAIThe Insurance Regulatory and Development Authority of India, the regulator of India's insurance sector. It protects policyholders' interests and handles grievances on insurance contracts and ULIPs.
- Commercial bankA regulated deposit-taking institution supervised by the Reserve Bank of India, inspected and audited at intervals, offering savings, current, fixed and recurring deposit accounts.
- Deposit insuranceThe Central Government scheme that insures every bank deposit up to Rs 5 lakh per customer in a bank, so depositors get that much back even if the bank itself fails.
- Housing Finance CompanyA company whose primary business is lending for the purchase of property or real estate, regulated by the Reserve Bank of India after that role moved from the National Housing Bank.
- Primary DealerAn entity licensed by the RBI to underwrite government securities, bid in RBI auctions and resell the securities in the secondary market — the one issue intermediary not registered with SEBI.