Category: Banking & Finance

RBI keeps rates unchanged, stance accommodative, BFSI News, ET BFSI

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The Reserve Bank of India‘s Monetary Policy Committee has kept the repo rate at 4% and other rates unchanged. The RBI‘s Monetary Policy Committee also voted with a 5:1 majority to continue with an ‘accommodative’ stance as long as necessary to support growth.

Reverse repo rate remains at 3.35%, Marginal Standing Facility Rate and Bank Rate at 4.25% while the projection for India’s real Gross Domestic Product (GDP) is maintained at 9.5 per cent for FY22, RBI Governor Shaktikanta Das said while announcing the monetary policy review.

Inflation target raised

RBI has raised the CPI inflation estimate for FY22 to 5.7% from 5.1%.

“CPI inflation surprised on the upside in May; price momentum however moderated. Outlook for aggregate demand is improving but underlying conditions are still weak. More needs to be done to restore supply-demand balance in no. of sectors.

He said the recent inflationary pressures are evoking concerns but the current assessment is that these are transitory.

“We are in n a much better position as compared to June 2021. Need to remain vigilant on the possibility of a third wave,” he said.

Shaktikanta Das, Governor, Reserve Bank of India



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South Korea’s Kakao Bank shares soar in market debut, BFSI News, ET BFSI

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SEOUL, – South Korea‘s Kakao Bank Corp jumped 38% above its initial public offering (IPO) price on its market debut, amid growth expectations for the digital bank’s planned mobile mortgage business and other offerings.

The listing is the country’s biggest since game company Netmarble’s IPO raised 2.7 trillion won in 2017, continuing a bumper year for South Korean stock market floats, despite some valuations being slashed in recent offerings.

The digital bank began trading on Friday at 53,700 won per share compared to its IPO price of 39,000 won, then soared shortly after to as much as 74% above the IPO price. This compared with a 0.1% rise of the KOSPI benchmark index.

Its largest shareholder is Kakao Corp, operator of South Korea’s dominant chat app, with a 27.3% stake.

Kakao Bank, South Korea’s first digital bank to go public, became profitable in 2019 after less than two years in operation and has 13.35 million monthly active users (MAUs), it said last month.

The opening price valued Kakao Bank at 25.5 trillion won, which made it the 16th largest stock on the KOSPI, based on Thursday’s closing valuations. In morning trading on Friday, it climbed to the 11th largest stock on the KOSPI, excluding preferred shares.

Analysts said its high valuation, which overtook market capitalisations of established banking groups such as KB Financial Group and Shinhan Financial Group as of Friday, could not be explained by traditional bank valuation measures.

“Kakao Bank’s stock price-to-earnings ratio based on the IPO price is a multiple of 56, while that of existing banking shares is around a multiple of five. It’s got the valuation of a different industry,” said Kim Eun-gab, analyst at IBK Investment & Securities. (Reporting by Joyce Lee, Jihoon Lee and Heekyong Yang; Editing by Christopher Cushing and Sonali Paul)



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Will RBI take away the punch bowl from IPO financing party?, BFSI News, ET BFSI

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Ever thought why the initial public offerings of many companies receive bids that are over 100 times the offer. Apart from the investor appetite and retail frenzy the biggest factor in work is margin financing of IPOs by banks and NBFCs.

July saw several records being broken in the IPO market as a whopping Rs 8.86 lakh crore were bid for IPOs of Rs 18,400 crore on offer. About 98% of the money came from margin financing. Zomato, with an IPO size of Rs 9,375 crore, got bids for Rs 3.58-lakh crore, a subscription of nearly 39 times.

How does it work?

Unlike for retail investors, there is no limit on HNIs and institutions bids in an IPO. HNIs have to put only Rs 1 crore of their own for a bid worth Rs 100 crore while the NBFC funds the remaining 99 per cent. With the lenders charging 10-15%, the cost is just Rs 20 lakh towards interest for Rs 100 crore bid for 3-5 days. With all IPOs listing above the issue price, the leveraged investor can exit on the opening day. With a spectacular listing like the Zomato that gave 63% returns, more players are attracted to the market. The risk of the IPO collapsing in the initial days is virtually absent due to the heavy bidding and grey market premium.

With 15 per cent of an IPO reserved for HNIs and 50 per cent for institutions, their allotment is often enough to cover their interest cost as their bids are extremely high. Self-funding and other sources of borrowing would further increase the size of the IPO financing market.

The fund raise

Bajaj Finance had raised Rs 27,200 crore since June 10, while Infna Finance, Aditya Birla Finance and Tata Capital have collected Rs 13,225 crore, Rs 11,380

crore and Rs 9,625 crore, respectively. Two JM Financial firms have together raised Rs 16,300 crore, while IIFL Facilities Services and IIFL Finance have garnered about Rs 11,600 crore, according to reports. Most non-bank lenders raised funds by issuing commercial papers in the primary market. These papers have tenures of seven to 10 days and yield to maturity between 3.7% and 5.8%.

The risk

Financiers insist the risk is limited since there is a margin for the lender in terms of shares. Normally, higher the funding cost, lower the chances of making money on the IPO after all costs are factored in. Investors need to pay interest on the entire amount borrowed and not on the amount actually allotted. That is why higher oversubscription works against borrowers as they have to have more interest on idle funds.

RBI proposal

The euphoria due to excess funding is leading to artificial demand and distorting IPO prices in the short term. While the funded investors exit on listing, serious investors get low allotments.

In January this year, the Reserve Bank of India had proposed to cap IPO financing by NBFCs to up to Rs 1 crore per person, a move which may lead to a sharp drop in bidding by high net worth individuals (HNIs) and a drastic reduction in subscriptions of offers.

Banks have a Rs 10-lakh limit on IPO financing and there is no such cap for NBFCs. “IPO financing by NBFCs has come under close scrutiny, more for their abuse of the system,” the RBI said in a discussion paper. “Taking into account the unique business model of NBFCs, it is proposed to fix a ceiling of Rs 1 crore per individual for any NBFC,” the RBI said. Market players said that RBI’s proposed rule would surely bring a break to highly subscribed IPOs.



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RBI denies Rupee Bank, MSC Bank merger nod, BFSI News, ET BFSI

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Pune: The Reserve Bank of India (RBI) has denied the stressed Rupee Cooperative Bank permission to merge with the Maharashtra State Cooperative Bank (MSCB) in a culmination of a process that has taken nearly two years.

The order also disallowed the MSCB to take over the Mumbai-based City Cooperative Bank, stated a communication to both the banks and the MSCB from the Commissioner for Cooperation and Registrar, Cooperative Societies (CC&RCS). The communication has been accessed by the TOI.

Though neither the RBI and nor the CC&RCS communicated reasons for the denial of permission to the banks to merge, sources familiar with the matter said National Bank for Agriculture and Rural Development (Nabard) expressed reservations about the deal. A source said Nabard expressed concerns about agro-finance being used for retail banking, with the MSCB being primarily an agricultural bank. The source said RBI was concerned about the merger setting a precedent for cooperative banks across the country, which would bring about policy difficulties.

MSCB chairman Vidyadhar Anaskar said, “We had prepared and submitted the proposal nearly two years ago after RBI asked for a joint proposal with the Rupee Bank and getting approved at the annual general meeting. But during this time, we were asked no questionsabout the financial positions or feasibility. Nabard should not have had a say in this proposal, as they are a supervisory authority, with RBI being the sole licensing authority,”

Rupee Bank administrator Sudhir Pandit said, “The RBI’s decision is not totally unexpected. It is necessary to mention here that there are no shortcomings or lacunae in the merger proposal. Rupee Bank has good business potential. We will continue our efforts for its merger with other strong banks, or its conversion into a small finance bank or its revival.”



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As loan growth slows, other income comes to banks’ rescue, BFSI News, ET BFSI

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Other income has come to the rescue for banks even as they grapple with weak loan growth, in the first quarter of the fiscal year, bank results show.

All banks have seen a year on year growth in other income led by fees and recovery in large written off accounts like the defunct Kingfisher Airlines as a result of which the contribution of other income to total income has increased.

The trend is the same for both large and small banks. For example, State Bank of India (SBI) reported a 24% rise other income to Rs 11,803 crore led by a 21% rise in fees and a Rs 1,692 crore recovery from the written off Kingfisher Airlines’ account which has increased the proportion of other income to 15% of total income from 11% last year.

The story is similar in the large private sector bank’s as well which traditional have a larger proportion of fee income. HDFC Bank‘s other income grew 54% led by fees and commission and income from foreign exchange and derivative transactions, increasing the share of other income to total revenues to 17% from 12% a year earlier. HDFC’s peer ICICI Bank also reported a 53% rise in other income led by fees despite a fall in treasury income.

Analysts say higher proportion of other income though legitimate is driven mostly by lumpy income streams which are not sustainable. However, they expect banking core incomes to rise as loan growth picks up later this year.

“Other income has increased through two main heads namely income from treasury and income from written off accounts. Both of these are very volatile and depend on market conditions and can be called one offs. Banks are sitting on excess SLR and have booked profits this quarter which is reflected in treasury gains. Having said that they are both legitimate income streams and there need not be a concern though for the quality of earnings to be sustainable revival of credit growth is important,” said Asutosh Mishra, head of research at Ashika Stock Broking.

Other income has risen for even smaller lenders as banks dug deep for new income streams faced with twin challenges of depressed loans demand and slow recovery of loans in light of the second wave of the pandemic.

RBL Bank’s other income doubled to Rs 695 crore led by a 137% growth in retail fee income even as total advances fell marginally to Rs 56,527 crore from Rs 56,683 crore a year earlier. Even public sector Bank of India reported a 39% rise in other income due to recovery from a written off aviation account and foreign exchange income even as loan book fell 0.18%.

“This quarter there also has been a increase in forex trading income as forward premiums came down during the quarter, allowing banks to book profits.
Along with the repricing the bond investments this has helped other income,” said Anil Gupta, vice president financial ratings at ICRA.

Gupta expects credit growth to revive later this fiscal as corporate working capital requirements will increase due to higher commodity prices. “We expect credit growth of 8% next fiscal which will bring higher core income and also fees so there is no reason to worry on the outlook,” he said.



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Banks head towards recovery after challenging environment due to the second wave of covid-19, BFSI News, ET BFSI

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The second Covid-19 wave has impacted the recovery and lending activities of commercial banks. From tackling scattered lockdowns to managing recovery and collections, banks are expecting a recovery phase in the coming quarters.

Private lender Federal Bank recorded the highest ever operating profit of Rs.1135 Cr with 22% Y-o-Y growth in Q1FY22. The total business of the bank reached Rs. 299158.36 Cr registering Y-o-Y growth of 8.30% as of 30th June 2021.

Shyam Srinivasan, Managing Director, and CEO, Federal Bank said in a statement, “The external environment continues to be challenging however we have managed to keep our operating momentum intact by delivering our highest ever operating profit, for the quarter. Our CASA ratio is at an all-time high and we continue to build a granular liability franchise with more than 90% of our deposits being retail in nature. Our relationship with the NR diaspora continues to blossom with our share in personal inward remittances increasing to 18.20%. We have also managed to keep asset quality in check with only a marginal uptick in GNPA and NNPA.”

Shyam Srinivasan (File Pic)

On similar lines, IDFC FIRST Bank in its Q1FY22 financial results announced the highest ever core pre-provisioning operating profit at Rs. 601 Crore. Total Income grew by 36% YoY basis to reach Rs. 3,034 crore in Q1FY22.

V Vaidyanathan, Managing Director, and CEO, IDFC FIRST Bank, said in a statement, “Our CASA ratio is high at 50.86% despite reducing savings account interest rates by 200 bps recently. Because of our low-cost CASA, we can now participate in prime home loans business, which is a large business opportunity.”

“Regarding the loss during the quarter, we have made prudent provisions for COVID second wave, and expect provisions to reduce for the rest of the three quarters in FY 22. We guide for achieving pre- COVID level Gross and Net NPA, with targeted credit loss of only 2% on our retail book by Q4 FY 22 and onwards, assuming no further lockdowns.” Vaidyanathan added.
Banks head towards recovery after challenging environment due to the second wave of covid-19
South-based lender CSB Bank in its First Quarter results announced a profit after tax at Rs 61 Cr in Q1FY22 as against Rs 53.56 Cr in Q1FY21 and Rs 42.89 Cr for the sequential quarter. Net profit increased by 14% YoY. The operating profit of the bank is Rs 179.78 Cr with a Y-o-Y -growth of 39%.

CVR Rajendran, Managing Director & CEO at CSB Bank said in a statement, “COVID second wave coupled with the LTV management of gold loans did pose some challenges in the first quarter of FY 22. Lockdowns, alternate holidays, slowing down of economic activity, controlled movements due to strict social distancing norms, lack of transport, etc restricted the customer access to branches which in turn impacted both the fresh pledges and releases. Thankfully, the worst seems to be over now and recoveries are happening in full swing. The portfolio LTV that was at 83% has been brought down to 75%. The aggressive vaccination push and controlled localised lockdowns have helped in managing the second wave to a great extent and we are optimistic to catch up the business opportunities on a larger scale from this quarter.
Banks head towards recovery after challenging environment due to the second wave of covid-19
Bandhan Bank also announced its Q1FY22 results with pre-provision Operating Profit (PPOP) at 9.3%; up from 8.6% in the Q4FY21.

Chandra Shekhar Ghosh, Managing Director, and CEO of Bandhan Bank said in a statement, “Despite the challenging environment due to covid second wave, we have delivered the best-ever quarter in terms of operational performances. Collections continue to improve with covid restrictions getting relaxed. Typically, the second half of the financial year is always better for the bank in terms of growth and collections. With the easing of the covid second wave and upcoming festive season, we are confident of achieving better performance going forward.”
Banks head towards recovery after challenging environment due to the second wave of covid-19
While Axis Bank reported a 94 percent year-on-year rise in standalone net profit at Rs 2,160 crore as against Rs 1,112 crore reported in the same quarter of last year (Q1FY21).

Amitabh Chaudhry, MD & CEO, Axis Bank said, “Despite second wave headwinds, we made tremendous progress this quarter on our strategy of building a high-quality granular franchise, increasing our relevance in the lives of the customers and the communities we serve, and building the best digital bank in the country,”

“The journey we started two years back is gathering momentum with a strong balance sheet, conservative provisions, and a steady operating performance supporting our aspirations. We have also set a bold mandate for our long-term ESG goals. We continue to monitor the macroeconomic environment closely and we remain confident about our strategy and the road ahead,” Chaudhry said.

Amitabh Chaudhry (File Pic)
Amitabh Chaudhry (File Pic)

The country’s largest lender, The State Bank of India recorded its highest-ever quarterly profit at Rs 6,504 cr. in Q1FY21. This implied a 55-per cent year-on-year (YoY) rise in net profit compared to Rs 4,189.34 crore in the year-ago period.
Dinesh Khara, chairman of SBI said, “Around 50% of our home loan book is to non-salaried customers which belong to the SME segment,”
Banks head towards recovery after challenging environment due to the second wave of covid-19
“The slippages are largely because of the disruption in the SME segment.” He also said, “SBI is expecting a credit growth of 9% during this financial year. The under-utilization of credit lines by borrowers in our corporate clients group has dropped to 25%,” Khara said. “That’s a positive,” he added.

SBI says that the bank is gearing up on several fronts to mitigate all the challenges posed by the spread of the COVID-19 pandemic.



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Covid impact: Banks see slippages rise in cash collection-driven segments

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State Bank of India (SBI), CSB Bank and Federal Bank were among the lenders who reported an increase in non-performing assets (NPAs) in the gold loan segment.

Lenders reported a deterioration in asset quality during the April-June quarter in loan categories where cash collections play an important role. Gold loans, commercial vehicle (CV) loans and microfinance — all saw fresh bad loans inch up in Q1FY22 as the second wave of Covid-19 hampered collection activities. The absence of a moratorium on repayments, unlike last year, made the stress more evident on lenders’ books.

State Bank of India (SBI), CSB Bank and Federal Bank were among the lenders who reported an increase in non-performing assets (NPAs) in the gold loan segment. SBI’s NPA ratio in gold loans stood at 2.24% in the June quarter. Chairman Dinesh Khara attributed the high NPA ratio in gold loans to the inability of collection staff to reach borrowers amid mobility restrictions.

CSB Bank MD & CEO CVR Rajendran said last month that a fall in the prices of gold led to margin calls and demands for additional money from borrowers. This phenomenon also played a part in the rise in bad loans. Both SBI and CSB Bank said that as lockdowns are lifted, people should be able to travel to bank branches and make good the margin shortfall.

Commercial vehicle loans have also come under pressure in Q1 as lockdowns and mobility restrictions prevented the movement of trucks carrying goods and even three-wheelers used for commutes in smaller towns. Bajaj Finance said in July that the three-wheeler business, which accounts for 30% of the company’s Rs 11,347-crore auto loan portfolio, was particularly hit in the second wave.

Rajeev Jain, managing director, Bajaj Finance, said the reason slippages were under control in Q1FY21 was the loan moratorium. “We do realise and we’ve said that many times, that’s the only business where we fundamentally deal with mass customers. We were far more impacted or they’re far more impacted,” he said.

The impact of movement restrictions was yet more pronounced in rural markets. Ramesh Iyer, vice-chairman & MD, Mahindra & Mahindra Financial Services, told analysts that rural prosperity hinges on the movement of goods and that took a hit during the second wave. “The other sentiment that we saw in the rural market that impacted us is this, many of the customers did have money, but were not able to come to pay or we were not able to go and collect,” Iyer said.

Since the repayment stress in Q1 was due in large parts to lockdowns, the lifting of restrictions across most states in June had a beneficial impact on most lenders. SBI said that in the last one-and-a-half months, it has been able to pull back Rs 4,700 crore of slippages. Most other lenders, too, have reported a recovery in collection efficiencies during June and July. However, the outlook for retail asset quality remains uncertain. Most banks and non-bank lenders expect its trajectory to depend on the likelihood of a third wave of the pandemic breaking out.

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Indiabulls Housing Finance Q1 net up marginally

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Indiabulls Housing Finance registered a 3.2 per cent increase in its consolidated net profit at ₹281.69 crore for the quarter ended June 30, 2021. Its net profit was ₹272.84crore in the same period last fiscal.

Its net interest income was up 4.65 per cent to ₹765 crore in the first quarter of the fiscal from ₹731 crore a year ago.

Total revenue from operations, however, fell 9.9 per cent on a year on year basis to Rs ₹ 2,320.69 crore as on June 30, 2021.

Loan book degrew by 10.5 per cent to ₹65,438 crore in the first quarter of the fiscal as against ₹73,129 crore a year ago.

It shored up provisions on the balancesheet to ₹3,600 crore or 5.5 per cent of the loan book.

“The high provision cushion places the company’s portfolio in a strong position to negotiate any macroeconomic uncertainties stemming from second wave and expected third wave of the Covid-19 pandemic,” Indiabulls Housing Finance said in a statement on Thursday.

Net non performing assets declined to ₹1,227 crore in the first quarter of the fiscal as against ₹1,517 crore in the corresponding quarter in the previous fiscal.

“Real estate sector is in strong upward trajectory thereby providing high impetus to company’s borrowers in their business. Had the company not chosen to de-grow its book in the past one year, the above gross NPAs of 2.86 per cent would have been at 2.45 per cent,” it further said.

Subsequent to the second wave of Covid-19, collection efficiency has normalised in June and July and is now at about 98 per cent.

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Sundaram Finance Holdings invests ₹480 cr in buying out stakes in portfolio companies

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Sundaram Finance Holdings Ltd (SF Holdings) said it invested about ₹480 crore in consolidating holdings in a few portfolio companies in the past one year or so.

SF Holdings primarily operates as a holding company owning a portfolio of businesses engaged in various aspects of automotive manufacturing. Significant investments include Sundaram Clayton, Wheels India, IMPAL (all listed) and Brakes India and Turbo Energy (both unlisted).

While the performance of portfolio companies is improving, it is still below their results in FY20 due to the downturn in the automotive industry driven by cyclical factors as well as the impact of the pandemic, according to a statement.

“We remain optimistic on the recovery and growth of the automotive sector in the medium term and consequently we expect a recovery in the future results of the company,” said Harsha Viji, Director, SF Holdings.

Consolidating holdings

In the past one year, the holding company utilised the opportunity to further consolidate its long-term holdings in its portfolio. “We have bought out foreign partners in Wheels India and Brakes India with an investment of ₹450 crore,” said TT Srinivasaraghavan, Chairman, Sundaram Finance Holdings Ltd.

The company increased its stake in Wheels India from 13.58 per cent to 23.28 per cent, through an acquisition of an additional 9.70 er cent stake from the foreign partner (Titan Europe) for a total consideration of ₹100 crore. The combined holding of the Indian promoters in Wheels India now stands at 57.53 per cent.

In Q1 this year, SF Holdings completed the acquisition of an additional 7.71 per cent stake in Brakes India Pvt Ltd for a total consideration of ₹350 crore from the foreign partner ZF International, taking its stake from 6.67 per cent to 14.38 per cent. The Indian promoters now own 100 per cent of the company.

The company also consolidated its shareholding in its foundry portfolio by acquiring a 6.84 per cent stake in Flometallic India Pvt Ltd and consequently the stake in Flometallic has increased from 40 per cent to 46.84 per cent.

Carbon fiber biz

SF Holdings made an investment of ₹23.71 crore in the carbon fiber business of Mind S.r.l., Italy for a 40.6 per cent stake.

“The carbon fibre market, though nascent in India now, has solid potential to grow in the long term, and the technology and expertise from Mind S.r.l will help position SF Holdings well in the market. In the long term, the carbon fiber operations could get partially shifted to India, which is expected to decrease manpower cost and expand margins,” said Srivats Ram, Director, SF Holdings.

SF Holdings reported net profit of ₹5.13 crore for the quarter ended June 30, compared to ₹2.85 crore in the year-ago quarter. Revenue stood at ₹10.50 crore (₹9.30 crore). Consolidated profit, including share of associate’s profit, was ₹31.58 crore against a loss of ₹9.89 crore a year ago.

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How RBI’s CBDC will change the payments ecosystem

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The Central Bank Digital Currency (CBDC), currently being explored by the Reserve Bank of India (RBI) for retail and international trade payments, could have a much larger impact on the financial ecosystem, according to industry experts. It will be instrumental in promoting grassroots level financial inclusivity and modernising the banking sector apart from creating a cashless economy.

While many see CBDCs as a legalised replacement of private digital currencies or cryptocurrencies, in reality, CBDCs are just going to be a digital replica of the physical cash in circulation in the country. “RBI is creating a digital version of the fiat currency in circulation. Currently, the only alternative to physical currency is debit cards or credit cards, which are not accessible to all citizens,” Naveen Surya, Chairman, Fintech Conversion Council and Emeritus Chairman, Payments Council of India, told BusinessLine.

Also read: Why CBDC will not end bitcoin’s reign

“CBDC could be used directly through mobile phone. It can use blockchain technology but doesn’t necessarily need to be linked to a bank account to hold it. This will convert your mobile device into a wallet. In short, it will fast-track financial inclusivity while building a cashless economy,” Surya added.

India is in fact late to join the trend. Countries like Russia, Japan and China had started working on the same much earlier. According to a 2021 BIS survey, quoted in the RBI report, 86% of the central banks surveyed are actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects. “It took 4-5 years of multiple pilots before China could look into introducing digital currency,” Surya said.

Need for CBDC

“Today though we are doing e-payments and money transfers thinking they happen in real-time, but at some point, this money still has to be physically moved between the banks, known as ‘inter-bank’ settlement. With CBDCs, there won’t be the need for inter-bank settlement, your digital payments will be the final transactions,” Sharan Nair, chief business officer, CoinSwitch told BusinessLine.

Cryptocurrency exchanges lauded the move, saying that a possible widespread usage of digital currency will only boost their business and familiarise the masses with the technology and its varied forms. Though cryptocurrency isn’t necessarily looking to become a currency used for making payments. “Private cryptocurrencies are primarily seen as tradable assets. Though some countries have allowed Bitcoins to be used a mode of payment, NFTs and other cryptocurrencies are mostly assets. They don’t have the characteristics of currency and neither do they want to be,” Surya said.

Financial Transparency

A major use case for CBDCs will likely be in the insurance and lending space and also for managing non-performing assets (NPA). Using digital currencies will enable more transparency and traceability across levels for the financial services sector. The RBI at present is pondering upon the underlying technology on whether it should use distributed ledger or a centralized ledger, and a possibility of using blockchain. “In the case of lending, say if a farmer wants to take a loan to buy fertilizers and farming-related activities, at present, it is difficult of the government to verify how it is used. But with digital currency the government will be able to programme it in a manner that it can be used only for the fertilizers and not a car,” Nair explained.

“In international trade too, for instance, if an importer wants to settle a payment in the US, due to the time zone difference that will delay the transaction and due to change in dollar to rupee value, prices would have changed. CBDC can settle this in real-time without needing further intervention,” he added.

“Challenges of different vendors working with different merchants will subside once CBDC come into play. Merchants would want to use this, as this would eliminate third party payment gateway involvement, bringing down the cost of transaction fees,” Sathvik Vishwanath, Co-founder and CEO, Unocoin told BusinessLine.

Complex process ahead

Converting a part of paper money into digital currencies will surely come with its complexities and confusion. “To implement this the government authorities and the RBI would have to work on digitising the entire currency circulation model. Further, several other fundamental issues and monetary policies will have to accordingly be taken into account, as with CBDC there will be more traceability and transparency of the currency on digital network,” Surya said.

Additionally, blockchain technology in its current state might not be the most efficient way forward.

Vishwanathan said, “It doesn’t look like the RBI is looking to involve any cryptocurrency-related technology like blockchain. It will be more of a centralised wallet service like Paytm. Blockchain is not capable of handling millions of transactions per hour. Currently, bitcoin blockchain supports up to seven transactions per second and then there are some others that let a few thousand transactions per second. For a country like India, blockchain technology won’t be able to manage such an enormous volume of data.”

“Given that it is only the Indian government sponsoring this technology for its citizens which makes it a single-party creator, using blockchain will be as good as creating a regular database,” he added.

Also, increased traceability might introduce new challenges around privacy. “With blockchain, they (government) can get a partial biography of every person using the digital currency and what all he uses it to pay. That will be quite intrusive,” Vishwanathan said.

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