Is India’s Cryptocurrency Ban Aimed At Announcing New Digital Currency Of RBI?

Is India’s Cryptocurrency Ban Aimed At Announcing New Digital Currency backed by RBI?

The twisted tale of the Cryptocurrency is back in the news. With the government planning to launch the proposal for banning these digital assets, let us look upon the events as they unfolded for the same and how it may be a precursor to the launch of Central Bank Digital Currency (a cryptocurrency) backed by the RBI.

Crux of the Matter

The Proposed Bill
The cryptocurrency and Regulation of Official Digital Currency Bill, 2021.

  • Establish a framework for creating Official Digital Currency issued by the RBI.
  • Seeks to ban all private cryptocurrencies.
  • Exempted for the usage of crypto technology.

The Dilly Dallying Timeline Of Crypto Ban

  • 2018: The RBI banned cryptocurrency transactions and mandated all the banks to stop dealing with cryptocurrencies.
  • 2019: The GOI panel too banned all the cryptocurrencies. A prison term of 10 years was established for individuals dealing in digital currencies.
  • 2020: The Supreme Court overturned the Central bank’s order terming it to be disproportionate.
  • 2021: The GOI proposed the bill in the lower house for banning the cryptocurrency. 

How Would RBI Develop Its On Crypto?

  • Step 1: A Central Bank Digital Currency (CBDC) would be backing RBI and in turn, the government.
  • Step 2: The Indian Rupee bills would be then converted into digital format.
  • Step 3: These digital bills would be issued and backed by the RBI.
  • Step 4: Further making it as an alternate currency for transactions.

Central’s Rationale For Ban

  • Price fluctuations.
  • The risk to consumers.
  • Criminal activities cannot be traced
  • An enormous amount of power consumption required for a single transaction.

Counter Arguments

There’s no such thing as a private cryptocurrency. Crypto by their very nature are decentralized and public.

Niscal Shetty, Founder Of WazirX

Crypto assets are more like alternate govt. Issued legal tender. Govt’s digital currency and cryptocurrency can coexist.

Rahul Pagidipati, CEO, Zebpay

Read more about cryptocurrency here.

  • China has started its own digital currency called e-RMB. When made publicly available, it will be the world’s first state-backed digital currency.
  • RBI was conceptualised as per the guidelines, working style and outlook presented by Dr B. R. Ambedkar in his book titled “The Problem of Rupee – Its origin and its solutions” and presented to the Hilton Young Commission. Eventually, the Central Legislative Assembly passed these guidelines as the RBI Act 1934.
  • The central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Private Limited—on 3 February 1995 to produce banknotes. The company operates in Indian and global markets, catering to security document needs of Central banks and monetary authorities of the world by designing, printing and supplying banknotes

As Shady Practices In Digital Lending Rise, RBI Forms Committee For Regulation

As Shady Practices In Digital Lending Rise, RBI Forms Committee For Regulation

With pandemic hitting in 2020, and subsequently the economic crisis hitting individuals, the scheme of micro-lending was assumed to be a resort. Well as seamless as it seems, the consequences end up to be frightening. Let us understand the nuisance around the unregulated area of digital lending, and how RBI’s working committee can take the step of regulating this sector.

Crux of the Matter

RBI Committee
On 13th January 2021, RBI announced the forming of a working committee chaired by Jayant Kumar Dash, Executive Director of RBI,  to regulate digital lending through loan applications. 

Amidst the public outcry and growing concern for unethical and illegal loan practices executed by loan app users, RBI is forming the group to study the digital lending activities of both regulated and unregulated players of  financial sector.

What Is Digital Lending?
Prominent as PayDay Loans or Fringe Banking, Digital Banking is the practice of lending money through digital channels, web platforms, or phone applications & employing technology for authentication & credit information. It is only a 4-year old industry in India.

Digital Landing Overview In India

  • ₹800-1200 crores of loans disbursed every month.
  • Loan Book of around ₹5500 crores.
  • 60%+ loans are offered to citizens residing in Tier I cities.
  • The age group of borrowers: 20-35 years.
  • Loan tenure lies between 3-6 months.
  • Majority of borrowers fall in the income bracket of ₹1 – 5 lakhs.

Illegitimate Lending

Type 1: Shadow Operations

  • Lendersregister under the Companies Act, develop a mobile application, and start commercial lending.
  • Peddle 7-30 days loans. Interest rates are 200-500% (annualised) or 0.5-1.5% per day.
  • Reportedly, these apps have Chinese servers with Indian names.

Type 2: Through NBFCs

  • Tie up with inactive NBFCs, that lend their name in return for a commission of 1-3% of the disbursed loan.
  • The sponsors of such loans are nationals from China, Hong Kong, Singapore, and Malaysia.

The Lending Flow

  • Step 1: Users download the app from Google Store.
  • Step 2: On loan application, users need to upload a scanned copy of Aadhar card and/or PAN card.
  • Step 3: Unlike the formal processes, no e-signature or OTP authentication is required.
  • Step 4: Users submit a selfie to authenticate themselves. Some ask for signing on a white paper and uploading the same.
  • Step 5: Loan is approved instantly and money is disbursed.

Dubious Doings

  • Loans not backed by one’s own NBFC.
  • Seeks access to borrower’s phone, gallery, contacts, and emails.
  • No official documentation of repayment schedule.
  • Up to ₹100 is the processing fee for a loan of ₹1000.
  • 15-30% of recoverable dues go to a collection agent.

Instances Of Social Shaming
Collection Agents harass through:

  • Endless calls to borrowers & their relatives – contacts accessed from the phone book of the borrower.
  • Threat texts on Whatsapp followed by abusive phone calls.
  • Sexual harassment and verbal abuse to women borrowers.
  • A debt spiral refers to a situation where a country (or firm or individual) sees ever-increasing levels of debt. These increasing levels of debt and debt interest become unsustainable, eventually leading to debt default.
  • Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions.
  • Bad debt occasionally called ‘Uncollectible accounts expense’ is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor not having the money to pay, for example, due to a company going into liquidation or insolvency. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the institution provisioning.

Why Did US Add India To Currency Manipulator Monitoring List?

Why Did The US Add India To Currency Manipulator Monitoring List

While the US has branded Switzerland and Vietnam as currency manipulators, it kept India under the currency manipulator ‘monitoring list’ for intentionally devaluing Indian Rupee. But why would RBI devalue the Indian Rupee? How are the currencies valued? Let’s throw some light on this matter.

Crux of the Matter

RBI Under Watchlist
US has put RBI under the watchlist of currency manipulators for intentionally devaluing the Indian rupee to gain benefits. You might wonder how devaluing the Rupee helps India? In simple terms, devaluing the Rupee helps in boosting exports to foreign countries, which results in boosting the economy. However, RBI can devalue the Rupee up to a certain extent only, otherwise, it may have ill effects on the Indian and the global economy.

In recent, RBI has been buying dollars and selling rupees in the global market. This can also be seen from the growing foreign exchange reserves of India, which stood at $578 billion in December.

For instance, if $1 = ₹75 today, then,
1. if the the value of the rupee becomes $1 = ₹80, then rupee is said to have depreciated,
2. if the value of the rupee becomes $1 = ₹70. then rupee is said to have appreciated.

How Did US Come To Know About It?
To identify currency manipulation, the US has set three benchmarks.

First Benchmark
The first one is that the Bilateral trade surplus limit with the US should not cross $20 billion. In simple terms, the export value from India should not exceed the import value by more than $20 billion at any particular time. If India doesn’t import from the US and keeps exporting it will negatively impact the local market of the US. India has crossed this limit.

Second Benchmark
The second benchmark is that the current account surplus should be of at least 3% of GDP. Current Account has three components i.e. good and services, income, and current transfers. The goods and services measure the exports and imports of goods and services, income accounts for the government’s income and spending on financial investments, and current transfers include one-way gifts and remittances made in the country.

If the sum of these three components is less than zero, then the current account is in deficit, and if it is greater than zero, the current account is in surplus. Currently, India does not have a current account surplus of more than 3% of GDP.

Read More: India Achieves Current Account Surplus: What Does It Mean?

Third Benchmark
The last benchmark is that the net purchase of foreign currency should not be more than 2% of the GDP of the last 1 year. According to the US, RBI has been excessively buying foreign currency, thereby intentionally devaluing the value of the Rupee.

  • According to the Bretton Woods system, each country had to adopt a monetary policy that maintained its external exchange rates within 1% by tying its currency to gold. It was established in the cold war era and dissolved in 1968-1973.
  • Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
  • The most valuable foreign currency is the Kuwaiti Dinar. One dinar is worth approximately $3.28 or ₹241.13.

Will Reliance, Tata, Birla Finally Be Able To Launch Banks?

Will Reliance, Tata, Birla Finally Be Able To Launch Banks?

RBI’s internal committee has proposed a makeover of the banking system of India. In the last few years, India’s banking sector has faced a lot of challenges and now requires a solid fix to preserve the public interest. Under RBI’s latest proposal, corporate giants like Reliance, Tata, Bajaj Finance, etc may get full-fledged commercial banking license. Let’s take a look at the key aspects of the proposal for the potential banks.

Crux of the Matter

Crippled Banking Sector In India
Indian public sector banks are debt-ridden due to bad loans. Experts say that a complete recovery seems impossible even with the help of the government. At such a juncture, private banks are in very small numbers as against the demand for the nation’s banking and financial services. Moreover, RBI has stopped issuing banking licenses since 2014.

Looking at these all problems, the internal working committee has proposed some recommendations to foster growth and competition in the banking sector.

Key Aspects Of The Proposal

Banking License To Corporates
The committee suggested giving full commercial banking licenses to corporate houses under specific conditions. Conditions to be met by them are:
– business group’s assets need to be more than ₹5000 crores
– non-finance business activities contribute at least 40% in net assets
– and the entity must need 10 years of operational experience.

Banking License To Large NBFCs
It also recommended that Non-Banking Financial Companies (NBFCs) with assets more than ₹50,000 crores and 10 years of operational experience should be given a full-fledged banking license.

Small Finance Banking License To Payment Banks
Payment banks like Airtel, Paytm, etc. should be allowed to convert to Small Finance Banks (SFBs). They have to follow some rules and regulations such as they need at least 25% outlet presence in unbanked areas and 50% of all loans must be under ₹25 lakhs, etc.

Increasing Promoters’ Stake
Another suggestion made by the working committee is increasing the promoter’s stake from 15% to 26% of paid up-equity in the long run of 15 years. However, under current norms, private bank promoters were notified to reduce their share to 40% within three years and to 15% in 15 years. Kotak Bank promoter Uday Kotak was recently asked by the RBI to reduce his stake in the company to 26%.

Over the course we have seen, that promoter-driven banks like Yes Bank, and even diversified banks like ICICI have faced roubles, making it difficult to assess which of the ways is better.

Experts’ Views
Experts say that giving banking licenses to corporate houses and NBFCs will result in bringing a lot of liquidity along with their work experience and brand value in the banking sector. They also believe that increasing competition in the banking sector will reduce the cost of financial services and enable greater access to financial services.

However, some have also warned that corporate houses may use banking license for achieving personal goals and motives, which may not be in the public interest.

  • Raghuram Rajan, the 23rd Governor of RBI, was named by Time in its list of the ‘100 Most Influential People in the World’ in 2016. Currently, he is a professor at the University of Chicago.
  • Repo rate is the rate of interest at which the RBI lends money to commercial banks. Currently, the repo rate is 4.00%.
  • RBI demonetized notes in the denominations of five thousand rupees (₹5,000) and ten thousand rupees (₹10,000) in 1938. They were reintroduced in 1954 and again demonetized in 1978. RBI can print these notes according to the RBI act of 1934.

What Is Operation Twist?

What Is Operation Twist?

RBI announced Operation Twist as a part of its monetary policy measures to support the Covid-19 hit economy. Did you know that the concept of Operation Twist was introduced in the US in 1961? Let’s demystify what it is and what are its aims.

Crux of the Matter

What Is Operation Twist?
It is one of the US Federal Reserve’s monetary policy operations. It is implemented with an aim to bring down long-term interest rates by a simultaneous purchase and sale of government securities. The RBI has so far carried out three rounds of simultaneous buying and selling of bonds via open market operations (OMOs).

What Did RBI Do?
RBI launched the first phase of Operation Twist on 19th December 2019. In September 2020, RBI announced that it would conduct another phase of Operation Twist. In the first phase (December 2019), RBI bought long-term securities (6.45% 2029 GS) for ₹10,000 crores and sold short-term securities (6.65% GS 2020, 7.80% GS 2020, 8.27% GS 2020, and 8.12% GS 2020) worth the same amount.

In the term 6.45%GS2029, 6.45% refers to the annual coupon rate (interest rate) on bond, GS stands for Government Security, and 2029 refers to the year in which the bong will mature.

Alternate Use
Moreover, Operation Twist can also be used to bring down long-term bond yields. In simple terms bold yield is the total return (including appreciation in bond price and interest) on a bond. In simple terms, the demand for short-term bonds increases and for long term bonds decreases, resulting in a decrease in yields of longer-term bonds.

Link with US
In 1961, the US government introduce Operation Twist to revive the weak economy. Then US govt lowered longer-term interest rates and kept short-term interest rates unchanged. In late 2011 and 2012, the Federal government had also implemented it to revive the economy hit by the global financial crisis.

  • The twist is a dance that was inspired by rock and roll music. From 1959 to the early sixties it became a worldwide dance craze, enjoying immense popularity. When Operation Twist began in 1961, the dance style was at its peak and hence the operation was named after it.
  • The Mexican peso crisis was a currency crisis sparked by the Mexican government’s sudden devaluation of the peso against the U.S. dollar in December 1994, which became one of the first international financial crises ignited by capital flight.
  • Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity. An unconventional form of monetary policy, it is usually used when inflation is very low or negative, and standard expansionary monetary policy has become ineffective.