Markets, Investments and New Credit in Banking Law: Complete Notes

These notes leave the branch and follow the bank everywhere else it does business. Overnight it lends its surplus in the call and repo markets that Chapter IIID of the Reserve Bank of India Act governs. A quarter of its balance sheet sits in government securities, classified and valued under the Investment Portfolio Directions of 2023. At its counters it sells insurance, funds and pensions under the fence of section 6. Through apps it lends under the Digital Lending Directions of 2025. And at the system's edge, the Banning of Unregulated Deposit Schemes Act, 2019 closes the ground beneath every financier who answers to no regulator at all.

Figure 1: The five frontiers of these notes

1. The money market and Chapter IIID

• Chapter IIID, inserted in 2006, gives the Reserve Bank express command of money market instruments: section 45U defines repo as the sale of securities with an agreement to repurchase at a price including interest, and reverse repo as its mirror; section 45V validates derivative transactions where at least one party is the Reserve Bank, a scheduled bank or another regulated agency; section 45W empowers the Bank to direct agencies dealing in these instruments and to call for information.
• Call money is unsecured lending among banks and primary dealers: overnight in the call market, 2 to 14 days at notice, and 15 days up to a year at term. Its weighted average rate is the operating target of monetary policy, which is why this small market matters beyond its size.
• Repo is the secured counterpart, in government securities, margined by haircut, and the form the Bank's own liquidity operations take under the liquidity adjustment facility and the marginal standing facility.
• Certificates of deposit, under the Master Direction of 4 June 2021: issued by banks in multiples of ₹5 lakh, for 7 days to 1 year, at a discount or on a floating rate; banks may not lend against certificates without the Reserve Bank's permission, and buyback is permitted only after 7 days, offered to all holders at the market price. Commercial paper is the corporate parallel, rated at least A3, for the same tenors.

2. Government securities and the investment portfolio

• The Government Securities Act, 2006 is the property law of the gilt: securities exist as entries in subsidiary general ledger accounts or constituent accounts, in stock certificates, promissory notes or bearer bonds; the holder of a ledger account is deemed the holder of the securities in it, and the Act gives nomination, survivorship, duplicates and summary recognition of title without a succession certificate within monetary limits.
• Banks hold them for reasons the law itself supplies: the statutory liquidity ratio of section 24, the liquidity coverage buffer, and the zero risk weight of sovereign credit.
• The Investment Portfolio Directions of 12 September 2023, effective 1 April 2024, rebuilt classification: on day one each security goes, by the bank's objective and the instrument's cash flow character, into held to maturity at cost with no ceiling, available for sale with quarterly revaluation to a reserve in equity, or fair value through profit and loss, within which a held for trading book marks daily to earnings.
• Sales out of held to maturity need board policy and are disclosed; subsidiaries and joint ventures are carried at cost; the investment fluctuation reserve continues as the buffer against rate cycles.

Figure 2: The five mirrored pairs these notes turn on

3. Para banking: section 6 and the counter

• Section 6(1) of the Banking Regulation Act lists what a banking company may do besides banking, agency, guarantees, underwriting and the rest, and section 6(2) forbids every other form of business; section 8 bars trading in goods, and section 19 confines subsidiaries, with the ceiling of 30 per cent on holding another company's shares under section 19(2).
• On that fence the Reserve Bank builds the para banking rules: pure distribution of insurance, mutual funds and pension products, on fee and without risk participation, needs no prior approval; risk participation and ventures need approval and entry thresholds.
• A bank may act as corporate agent of up to nine insurers in each line since 2022; mutual fund sales must promise no assured return; and the conduct rules answer mis-selling: no tying of a product to a loan (the term deposit for a locker, within limits, being the narrow exception), suitability in the sale, and the customer's remedy running against the product regulator for the product and the banking machinery for the sale.

4. Digital lending under the Directions of 2025

• The Directions of 8 May 2025 consolidate the framework of 2022 and the guarantee rules of 2023. They bind the regulated entities, who reach their lending service providers and digital lending apps through outsourcing law: the credit decision cannot be outsourced, and the entity answers for its agent's conduct.
• The borrower's protections: the lender named before the contract; a key fact statement carrying the all inclusive annual percentage rate, outside which no charge may be levied; direct flow of funds both ways, with no pass through account of the platform; a cooling off period of at least one day, and three for loans of seven days or more, exit at principal plus the proportionate rate; digitally signed documents; consent bound data with no scraping of contacts or media; every loan reported to the credit bureaus; and a nodal grievance officer, with the Ombudsman after 30 days.
• The default loss guarantee is capped at 5 per cent of the covered portfolio, backed by cash, lien marked deposit or bank guarantee, and earns the lender no classification, provisioning or capital relief.
• The public app directory runs from 1 July 2025, and from 1 November 2025 a multi lender platform must show the borrower all matching offers, with lender, amount, tenor and rate, unbiased by commission.

Figure 3: The recent texts and their dates

5. The Banning of Unregulated Deposit Schemes Act, 2019

• The Act bans in advance every unregulated deposit scheme: one not listed in the First Schedule under one of nine regulators. A deposit is money received with a promise of return, excluding loans from relatives, business advances and partners' capital; a deposit taker is anyone from an individual to a society, excluding banks and statutory corporations.
• Section 3 bans promoting, advertising, soliciting and accepting under such a scheme; section 4 punishes fraudulent default even on a regulated scheme; the offences rise from 1 to 5 years for soliciting, through 2 to 7 for accepting, to 3 to 10 with a fine up to twice the collection for fraudulent default, and 5 to 10 for the repeat offender.
• The machinery is attachment first: a Competent Authority of Secretary rank provisionally attaches, the Designated Court confirms and distributes within an aim of 180 days, and section 12 ranks the depositors ahead of most claims, subject to the secured creditor statutes.
• Behind it stands section 45S of the Reserve Bank of India Act, which has since 1984 barred individuals and unincorporated bodies from taking public deposits for a financial business at all.

Figure 4: Four levels of one architecture

6. Quick Revision

1. The overnight market is the hinge of monetary policy, and Chapter IIID is its legal spine.
2. Classification by objective on day one decides a security's accounting life.
3. Para banking is permitted business, fenced by section 6 and policed through the sale.
4. In digital lending the technology may be anyone's; the loan and the responsibility are always the lender's.
5. A deposit scheme outside the nine regulators is criminal when solicited, not merely when it fails.

7. Frequently Asked Questions

Why does the Reserve Bank care so much about the call money rate?

Because it is the first domino of transmission. The monetary policy committee fixes the policy repo rate, but what it actually steers, day by day, is the weighted average call rate, the price at which banks borrow unsecured overnight. Liquidity operations under the adjustment facility add or drain funds until that rate sits where the committee wants it, and from there the impulse travels outward into treasury bills, certificates of deposit, commercial paper and at last the loan priced off a bank's cost of funds. A market measured in hours therefore carries the economy's interest rate structure, which is why Chapter IIID puts it under express statutory direction.

What problem did the 2023 Investment Directions solve?

Honesty in the carrying value. The old framework capped held to maturity as a percentage and let regulatory relaxations of that ceiling double as interest rate policy, while available for sale was depreciated but not appreciated, an asymmetry that hid gains and understated volatility. The 2023 Directions trade the ceiling for discipline: entry to held to maturity is earned by the objective and the instrument's cash flow character, not granted by quota; available for sale revalues symmetrically into an equity reserve; the trading book marks to market daily; and a sale out of held to maturity, the old escape hatch, now costs board process and public disclosure. The portfolio's accounting finally resembles what the bank is actually doing with it.

If a bank mis-sells an insurance policy, who answers, the bank or the insurer?

Split the grievance in two. The product, its terms, the claim, the repudiation, belongs to the insurer and its regulator, with the insurance ombudsman as the forum. The sale, the misrepresentation at the counter, the policy bundled with the locker or the loan, the premium debited without mandate, is the bank's conduct as corporate agent, answerable through its grievance machinery, the Integrated Ombudsman and the conduct rules against tying and unsuitability. The customer often must pursue both, and the examiner's point is the doctrinal one: distribution without risk participation keeps the insurance risk on the insurer, but it never transfers the seller's responsibility for the selling.

How do the Digital Lending Directions and the 2019 Act fit together?

They are the two walls of the same corridor. The Directions discipline the licensed side: a regulated entity may lend through any app it likes, provided the lender is named, the money flows directly, the price is in one statement and the guarantee stays within 5 per cent. The 2019 Act closes the unlicensed side: an app that collects money from the public with promised returns, answering to no regulator, is running a banned deposit scheme, and soliciting for it is already an offence. The public app directory is the seam between the walls, the one-minute test of which side of the corridor a given app stands on.

8. Related Topics and Provisions

• The Reserve Bank of India: constitution, management and functions
• Monetary policy and the monetary policy committee
• Statutory liquidity and cash reserve requirements
• Principles of lending and credit facilities
• The Reserve Bank's regulation of non-banking financial companies
• The Payment and Settlement Systems Act and payment law