RBI went beyond just housekeeping with some bold moves in 2022

It's a landmark achievement, so far as the functioning of the economy is concerned: RBI Governor on CBDC

Innovation to the fore

The class act of calendar 2022 was the Reserve Bank of India’s (RBI’s) move to introduce the Central Bank Digital Currency (CBDC). In the trial phase for both the wholesale and retail segments, CBDC is legal tender issued by a central bank in digital form. “It’s a landmark achievement so far as the functioning of the economy is concerned,” said Governor Shaktikanta Das.

As Deputy Governor T Rabi Sankar pointed out in July this year, “it is conceivable for an Indian importer to pay its American exporter on a real-time basis in digital dollars, without the need of an intermediary. This transaction would be final, as if cash dollars are handed over, and would not even require that the US Federal Reserve system is open for settlement. Time-zone differences would no longer matter in currency settlement.”

The RBI’s move on CBDC has to be seen through a different lens as well. While interest in CBDCs is near-universal now, very few countries have reached even the pilot stage of launching their own CBDCs. A survey of central banks by the Bank for International Settlements in 2021 found that 86 per cent were actively researching the potential for CBDCs, 60 per cent were experimenting with the technology and only 14 per cent were deploying pilot projects.

The big homecoming

On April 4, HDFC Ltd said it would merge with HDFC Bank in a $40-billion deal, to create a financial services behemoth with an asset base of nearly Rs 18 trillion. “After 45 years of housing finance and nine million homes provided to Indians, we had to find a home for ourselves. We have found it within our own family and in our own bank,” said Deepak Parekh, chairman of HDFC Ltd, while announcing its long-speculated merger with its offspring, the 28-year-old HDFC Bank.

The “we” that Parekh referred to is a many-million-strong family, and includes the housing finance company’s employees, shareholders, and customers. The merger may have been trigge­red by factors unique to “group HDFC”, but it has also raised questions on the viability of monoline financial firms in the long run.

Governance first

The RBI turned its gaze on financial technology firms to ensure that regulatory arbitrage as a business model was consigned to history. Pre-paid instruments (PPIs) can no longer be funded from credit lines of shadow banks, and be treated as credit cards. From here on, the plot will unfold at three levels — entities regulated by the RBI; other regulated and authorised entities; and unregulated entities (including third-party service providers) in the digital financial realm.
 

The RBI took off from November 2021’s Working Group’s Report on Digital Lending through Online Platforms and Mobile Apps. It was a blow to self-styled fintech evangelists who believed that legacy players will be history because they are not nimble enough to rework their business models in the wake of changes foisted by technology.

Get moving on bad loans

Banks will have to get moving on the bad-asset resolution front. On April 30, Deputy Governor Rajeshwar Rao made a pointed reference to the fact that a comprehensive law like the Insolvency and Bankruptcy Code (enacted in 2016) is often viewed as a last resort by the lenders — an avenue that needs to be explored after exhausting all alternatives. “However, this view stems from the lack of a comprehensive vision for the future of a beleaguered borrower,” noted Rao.

The RBI’s bi-annual Financial Stability Report (June 2022) had observed that “the economic value in most of the corporate debtors that ended in liquidation had almost completely eroded even before they were admitted into the Corporate Insolvency Resolution Process. These debtors had assets, on average, valued at less than 8 per cent of the outstanding debt amount.” Rao’s stance and that of the FSR must be read along with Finance Minister Nirmala Sitharaman’s statement last week that bad loans worth just over Rs 10.09 trillion have been written off by banks during the last five financial years.

Setting the debate

Should the Unified Payments Interface (UPI) continue to be free for all time to come? Mint Road’s Discussion Paper on Charges in Payment Systems released in August took up the issue head on. “In any economic activity, including payment systems, there does not seem to be any justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation. But who should bear the cost of setting up and operating such an infrastructure, is a moot point,” the paper argued.

This went counter to a tweet by the ministry of finance days after the paper was released, which held that it is a digital public good with immense convenience for the public and productivity gains for the economy. And, therefore, “there is no consideration in the government to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means,” it said.

What’s lost in the din is that banks pay a switching fee to the National Payments Corporation of India — a not-for-profit entity — running into hundreds of crores every year for UPI, but have to offer the service for free, whether for peer-to-peer or peer-to-merchant transactions. 

NBFCs are back in action

For most non-banking financial companies (NBFCs), it was a return to a more familiar turf — of running banks close in niche areas. The RBI’s move to extend the prompt corrective action framework effective from October 1, 2022 has also not proved to be a mood dampener, as it was announced well in advance — in December 2021.

The RBI’s Report on Trend and Progress of Banking in India (T&P 20-21) had observed that “a fallout of the pandemic and the slowdown in economic activity is that credit growth of (commercial) banks remained subdued in FY21, but NBFCs have stepped up to fill this space.” NBFCs had stepped in to fill the vacuum resulting from risk aversion among banks through the greater part of FY22. But this may change, going ahead.

In the headlines

That communication is a key component of policy formulation was acknowledged by the RBI explicitly for the first time. Deputy Governor Michael Debabrata Patra quoted Ben Bernanke: “Monetary policy is 98 per cent talk and only two per cent action”. This was not an off-the-cuff remark but a speech on ‘The Lighter Side of Making Monetary Policy’ on November 24. Patra went so far as to say that communication has morphed “from a facilitator of monetary policy to a new policy instrument in its own right”.

The interesting thing is that the RBI is now conducting studies on its monetary policy communication by text-processing the minutes of the Monetary Policy Committee meetings at multiple levels using mining techniques. The preliminary findings are that the minutes were longer in 2019 (presumably reflecting deliberations on rate cuts), in periods following different waves of Covid-19, and after the war in Ukraine began.