Category: Banking & Finance

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Former Reserve Bank of India (RBI) Governor Maidavolu Narasimham passed away in Hyderabad on Tuesday. He was 94.

The recommendations of the two committees he headed – Committee on the Financial System, 1991 and the Committee of Banking Sector Reforms, 1998 – formed the bedrock of reforms in the Indian financial and banking sectors.

When the Emergency ended in 1977 and the new Janata Government was installed, it appointed Narasimham as Governor from May 2, 1977, to November 30, 1977.

Narasimham was the first and so far the only Governor to be appointed from the Reserve Bank cadre, having joined the central bank as a Research Officer in the Economic Department.

He later joined the government, and prior to his appointment as Governor, served as Additional Secretary, Department of Economic Affairs.

After his stint at the RBI as Governor, he joined the International Monetary Fund as Executive Director (ED) and later at the World Bank as ED. He was Finance Secretary between 1982 and 83.

When banks brought to the notice of the Reserve Bank the adverse impact on their profitability on account of opening additional offices in backward areas, Narasimham, then Additional Secretary, Department of Economic Affairs (early 1970s), cautioned that excessive concern for profitability would defeat the social objectives that banks were required to subserve, and contended thatexpenditures could be cut down and the minimum lending rate could be increased beyond the then prevailing level (of 10 per cent), as per RBI history.

According to the history, when the Bank of England (BoE) executive (Deputy Governor) went so far as to indicate that the option of ordering the closure of the Central Bank of India’s branch was not ruled out. Narasimham then explained that the major banks in India, including Central Bank of India, had only recently been nationalised, and any such action by the Bank of England could have political repercussions at home and give a handle to those who were critics of bank nationalisation.

He requested the BoE to bear this in mind, emphasising that the Central Bank branch was a victim of a fraud. However, these arguments did not make much headway, as Narasimham noted.

“At that point, I (Narasimham) told him that we in the Reserve Bank had reasons to believe that a couple of British banks were also transgressing our exchange control regulations. But we had held our hand in view of the cordial relationship between the British and Indian banks and between the Bank of England and the Reserve Bank, and that we were expecting the Bank of England to bear the same sentiments,” as per RBI history.

The BoE Deputy Governor tried to get Narasimham to name the banks, which he refused to do on the ground of confidentiality of relationships.

Narasimham, as quoted by RBI history from his book, ‘From Reserve Bank to Finance Ministry and Beyond: Some Reminiscences’, disclosed that while this approach worked, the head of the Discount Department at the Bank of England did not conceal the feeling that what Narasimham said seemed to be close to a veiled threat.

Life Insurance Corporation of India said it has collected the highest-ever premium of ₹1.84-lakh crore in 2020-21, and has paid out ₹1.34-lakh crore as claims to policyholders in the period.

According to Life Insurance Council data, LIC’s first-year premium for March 2021 shot up by 64.7 per cent to ₹28,105.92 crore compared to ₹17,066.57 crore in March 2020. Its premium for the full year 2020-21 increased by 3.5 per cent to ₹1,84,174.57 crore.

“LIC has also procured an impressive 2.1 crore policies, out of which, 46.72 lakh were procured in March alone, with a growth of 298.82 per cent over last year for the corresponding month,” said the state-run life insurer in a statement.

Market share

Its market share stands at 81.04 per cent in terms of number of policies for the month of March and 74.58 per cent for 2020-21.

In the context of first-year premium, LIC’s market share is 64.74 per cent for March and 66.18 per cent for the whole year.

“On the claims front, in spite of severe constraints due to Covid pandemic, LIC settled 2.19 crore maturity claims, money back claims and annuities, amounting to ₹1,16,265.15 crore,” it further said.

During the fiscal year 2020-21, it settled 9.59 lakh death claims amounting to ₹18,137.34 crore.

It said it has achieved its highest-ever first year premium income of ₹56,406 crore under individual assurance business with a 10.11 per cent growth over last year.

LIC said its pension and group schemes vertical also created a new record by clocking its highest-ever new business premium income of ₹1,27,768 crore over a huge base of ₹1,26,749 crore in the previous year.

With the addition of 3,45,469 agents, LIC has a sales force of 13,53,808 agents.

Market participants, especially banks, in the Government Securities (G-Sec) market, seem to be turning averse to the conversion of short-tenor securitiesinto long-tenor securities, due to fears that a rise in interest rates could adversely impact prices of the latter.

They are avoiding duration risk (the longer the maturity of a bond, the more sensitive it is to changes in interest rates), going by the results of the switch/ conversion auction of 10 G-Secs (for a notified amount of ₹2,000 crore each) conducted by the Reserve Bank of India on Monday.

G-Sec prices on the rise

The aforementioned development comes amid uncertainty triggered by the second wave of thepandemic and its possible deleterious impact on growth and inflation.

The central bank got tepid response in terms of the number of bids received and amount offered at the conversion auction of two G-Secs maturing in 2022 and two in 2023 into a single destination security of long maturity (G-Sec maturing in 2061).

However, the RBI got better response to the conversion of three G-Secs maturing in 2022, two G-Secs maturing in 2023, and one in 2024 into a single destination security of medium maturity (G-Sec maturing in 2035).

Offers placed by participants exceeded the notified amount in the case of conversion of three G-Secs maturing in 2022, one each in 2023 and 2024 into the destination security maturing in 2035.

In the case of the remaining G-Secs, the offers were less than the notified amount.

The RBI has been conducting auction for conversion of G-Secs on third Monday of every month since April 22, 2019.

Bidding in the auction implies that the market participants agree to sell the source security/ies to the Government of India (GoI) and simultaneously agree to buy the destination security from the GoI at their respective quoted prices.

G-Sec yields under pressure

G-Sec yields have been under pressure in the backdrop of the huge government borrowing programme, retail inflation surging to a four-month high of 5.52 per cent in March 2021 (from 5.03 per cent in February 2021) and index of industrial production (factory output) contracting 3.6 per cent in February 2021 (1.6 per cent contraction in January 2021).

How good is G-Sec as an investment option

Referring to the yield on the 10-year benchmark G-Sec rising about 11 basis points to close at 6.1256 per cent on April 15 despite the RBI purchasing this security at an yield of 6.0317 per cent under the G-Sec Acquisition Programme (G-SAP), CARE Ratings, in a note, said: “The market is still not convinced and is demanding higher yields.

“Pressures of government borrowing and high inflation – today’s (April 15) WPI inflation at 7.4 per cent was a major shock. This market will need to be watched as the view of the market is divergent in terms of direction of yields.”

Currently, the benchmark 10-year G-Sec is trading at an yield of about 6.09 per cent.

Market experts say the RBI’s bid to evolve the yield curve in an orderly manner via G-SAP has yet not yielded results as the current yield differential between the 2030 benchmark G-Sec and the 2035 G-Sec is wide at 63 basis points. The yield differential between the benchmark and the 2025 G-Sec is 55 basis points now.

From e-commerce firms and payment processors to governments, everyone with half a server and an algorithm wants our data. So it’s a pleasant surprise to see at least one central bank expressly rejecting the idea of sweeping up personal information in designing its electronic cash.

The European Central Bank “has no interest in monetizing or even collecting users’ payment data,” executive board member Fabio Panetta told the European Parliament last week. A digital euro would let people “make payments without sharing their data with third parties, other than what is required by regulation.”

This restraint is refreshing in what’s developing into another area of superpower contention. Digital currencies are in the news less for what they’ll mean to users and more for how they would help issuers. Whether China could use a fully online version of taxpayer-backed cash to challenge the dollar’s hegemony gets the most attention. The electronic yuan, e-CNY, will be available for international visitors during next year’s Beijing Winter Olympics, People’s Bank of China Deputy Governor Li Bo said at the Boao Forum on Sunday. We may know more about preparations for a FedCoin as early as July, when the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology, which have been developing prototypes for a digital dollar, unveil their research.

The eurozone is still some years away from deciding whether to offer an electronic version of physical cash. If it does go ahead, the overriding goal may be less about joining the U.S.-China race and more about taking back some of the data-mining power of private payment apps — and handing it back to citizens. That’s what people also want: 43 per cent of the record 8,000-plus replies the ECB received in its recently concluded public consultation on the digital euro identified privacy as the most important feature.

In societies where the state has already appointed itself Big Brother in exchange for supplying trust in economic transactions (and in human interactions, after Covid-19), individuals can do very little to reclaim ownership of their data. Beijing may not want to surrender the surveillance capabilities of the digital yuan, whatever its unease with the dominance of private payment services in the domestic economy, such as Ant Group Co.’s Alipay and Tencent Holdings Ltd.’s WeChat Pay.

But Europe, which cares more than most of the world’s major economic powers about personal data protection, will be different.

Beyond checking money-laundering and terror financing, the ECB doesn’t want digital currencies to turn everyday lives into an open book for private payment giants to read and profit from. It’s investigating three different approaches to the privacy challenge.

In theory, it’s possible that electronic cash will be made available as blockchain tokens. In that case, there’s no privacy concern. The user will need to produce the correct cryptographic key to spend the balance in her smartphone wallet. That will make digital currencies similar to physical cash or Bitcoin: Individuals will be responsible for the safety of their money.

But in all likelihood, digital currencies will follow a different path. Starting their life as IOUs in the central bank’s ledger, they’ll resemble deposits more closely than cash. Except that a monetary authority won’t have the bandwidth to verify if all of us are who we say we are, or if we’re double-pending our resources. That job will be outsourced to banks, which will be able to see who’s paying whom — even though we’ll no longer be using their money. Instead, customers will settle claims with the sovereign’s liabilities.

This is where people risk losing the anonymity of cash forever.

One way to counter this could be to separate identities from transactions. Let the operator of the infrastructure see only cryptographic public keys while recording payments, and not the identity of customers. The banking intermediaries used by the payer and the payee will know the link between identities and public keys, but they won’t see the rest.

Another mechanism could be an off-ledger system where the payment details won’t be known to any third party, not even the central bank. This can presumably be done for small-value transactions. Finally, electronic cash could come very close to the real thing if purchasing power could be made to reside on a piece of hardware that their users have to safeguard.

Cash pays zero interest, and that’s the minimum a digital currency will also have to offer to gain popular acceptance. Whether it’s a hit or a flop will depend on third-party value-added services. International payments, for instance, could get a lot cheaper once money moves across borders without requiring elaborate networks of correspondent banks. It’s important to refocus the discussion on users. All financial and commodity assets are underpinned by a formal system of state-enforced property rights. But not consumer data, which the tech industry has simply captured as if they were “res nullius,” or wild animals, says Columbia Law School Professor Katharina Pistor. One way to force data harvesters to share their supersize profits from analysing traces of our financial lives could be to give users a bargaining chip — an alternative means of payment that provides instantaneity without commercial exploitation.

The ECB’s privacy-first approach to digital cash may offer a global template for authorities to negotiate with Big Tech on our behalf.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.