Economy One Year Current Affairs (Set-1)

Topics to discuss

Digital Payments
Monetary Policy Transmission
Regulation of NBFCs
National strategy on Financial inclusion
Small finance banks and payment banks
Development banks
Cooperative banks
Utkarsh 2022
e-Bkray
operation twist

With reference to real time gross settlement often seen in news, consider the following statements
1) It is a settlement mechanism used only by non banking financial company.
2) There is no minimum or maximum limit in the transfer of funds in the beneficiary’s account.
Which of the above statements is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2

Why In News

RBI Moves to boost Digital payment Transaction

Digital Payments

RBI has removed charges for payments via NEFT and RTGS and asked banks to pass on the benefits to customers.
The merchant discount rate charges applicable on payment via RuPay and UPI have been removed
Also, all business companies with an annual turnover of ₹50 crore or more have been mandated to offer RuPay & UPI modes of payment to customers
RuPay is the first domestic Debit and Credit Card payment network of India
UPI is an immediate real-time payment system to instantly transfer funds between multiple bank accounts through a mobile platform.
RuPay and UPI are products of National Payments Corporation of India (NPCI)

Merchant Discount rate

MDR is the cost paid by a merchant to a bank for accepting payment from their customers via digital means, which is usually recovered from the customer.

Which of the following Statements is correct regarding monetary policy committee?

It is non-statutory body
It is headed by financial secretary
It is multi member body with equal member from reserve bank of India and government of India
It’s objective is to decide the amount of surplus to be transferred to government.

Monetary Policy Committee

The 6 member Monetary Policy Committee (MPC) constituted by the Central Government as per the Section 45ZB of the amended RBI Act, 1934
It contains equal members from RBI and the Government
The committee is headed by RBI governor
Basic terminology related to monetary policy
Repo Rate: It is the Fixed interest rate charged by RBI while extending short term loan on the security of government bonds. Banks undertake to repurchase them same at a later date. (RBI lends to banks)
It is used as Policy rate, which signals to the financial system to adjust their lending and borrowing operations.
Reverse Repo : RBI borrows from the market on the basis of securities and repurchases them later. Rate charged by bank is called Reverse repo rate.(banks lend to RBI). It absorbs excess liquidty.

Monetary Policy Transmission

Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through financial system to influence the businesses and households

How banks in India lends

Earlier banks lend on base rate
Base Rate: It is the interest rate below which Scheduled Commercial Banks (SCBs) will lend no loans to its customers.
Later Base rate is replaced with MCLR (Marginal Cost of funds-based Lending Rate)
It is also the interest rate below which Schedule commercial banks will not lend.
But there are some difference between the MCLR and Base Rate
Base rate is replaced by MCLR because MCLR includes Marginal Cost of funds that depends on the repo rate on the other hands Base rate depends on the average cost of funds

Actual scenario in India

In India, policy rate changes by RBI are not reflected in the rates of banks regularly.
While rate hikes are passed on immediately, but same is not witnessed in rate cuts by the RBI.

This shows there is a lag in monetary transmission
Reasons for lag in monetary policy in India
Overdependence on banks- The Indian financial system remains bankdominated, and the share of non-bank finance companies (NBFCs) and markets(corporate bonds, commercial paper, equity, etc.) is less. Hence, most public savings are in Bank deposits, reducing the banks’ dependency on repo rate.
Increasing Non-Performing Assets- in bank balance sheets, which impedes the bank’s ability to offer lower interest rates.
Sub-optimal performance of MCLR system– as suggested by the Janak Raj Committee.
So SBI is saying it will link the saving bank account deposits and short-term loans to the RBI’s repo rate which may ensure faster monetary expansion

Affects Inflation as Well

RBI has a monetary policy committee that uses Monetary policy tools such as repo rate, reverse repo rate , CRR, SLR to control inflation Banks has to follow the footprints of RBI and work accordingly but it was not happening
So there is lag in monetary policy and controlling inflation

NBFCs

It is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/ construction of immovable property
Government took measures to control this issue, consequently, the flow of resources from the banking sector to NBFCs improved for some time.
However, the flow of resources from the banking side has contracted since November 2018 which has impacted the lending capability of the sector in recent quarters
So RBI, took some steps towards the regulation of NBFCs

Steps by RBI

RBI has said that NBFCs have to now maintain a liquidity buffer of high-quality liquid assets to meet short-term obligations.
RBI has introduced liquidity management framework for NBFCs. It is applicable to all non-deposit-taking NBFCs with an asset size of ₹100 crore and above, systemically important Core Investment Companies and all deposit- taking NBFCs irrespective of their asset size.
RBI notified that the aggregate exposure of a lender to all borrowers at any point of time, across all non-banking financial company Peer to Peer (P2P) platforms, will be capped at Rs 50 lakh, against Rs 10 lakh at present

P2P lending

P2P lending is a form of crowd-funding which enables individuals to borrow and lend money without any financial institution as an intermediary. The borrower can either be an individual or a legal person.
Some of the P2P lending platforms are Faircent, Lendenclub, Finzy, Rupeecircle, Lendbox, etc.
All P2P platforms are considered non-banking financial companies and are regulated by the RBI.

National Strategy For Financial Inclusion

For the period of 2019-2024 to set forth the vision in expanding and sustaining the financial inclusion process at the national level through a broad convergence of action
Key recommendations of NSFI
Provide banking access to every village within a 5 km radius / hamlet of 500 households in hilly areas by March 2020.
Strengthen eco-system for various modes of digital financial services in all the Tier II to Tier VI centres to create the necessary infrastructure by March 2022.
Enroll every willing and eligible adult enrolled under PM Jan Dhan Yojana under an insurance scheme (PMJJBY, PMSBY, etc.), Pension scheme (NPS, APY, etc.) by March 2020.
Make Public Credit Registry (database of credit information of borrowers) fully operational by March 2022.

Financial inclusion

Financial inclusion may be defined as the delivery of banking services at an affordable cost, especially to the vast sections of disadvantaged and low-income group
Some of the steps taken by the government for financial inclusion are Appointment of business correspondents/ bank mitras in the village
Imparting Financial literacy
Pradhan Mantri Jan Dhan Yojana
Differentiated Banking

Differentiated banking

The banks which could be differentiated on the account of capital requirement, scope of activities and serve the needs of a certain demographic segment of the population are called as Differentiated Banks or Niche Banks
The idea of Differentiated Bank was mooted by Nachiket More Committee 2014, for Financial Inclusion.
It can be classified as Payment Banks, Small Finance Banks, Regional Rural Banks, Local Area Banks Wholesale and Long-Term Finance (WLTF) banks etc.

Development Banking

Finance minister suggested the setting up of a development bank Development banks are financial institutions that provide long-term credit for capital intensive investments spread over a long period
These banks also extended useful services such as in-house technical expertise, underwriting new capital issuance and creating confidence in other lenders.
Due to these social benefits, they are often supported by governments or international institutions in the form of tax incentives.
Industrial Finance Corporation of India (IFCI) was the first development bank in India. It started in 1948 to provide finance to medium and large-scale industries in India.
After 1991, following the Narasimham Committee reports on financial sector reforms, development finance institutions were disbanded and got converted to commercial banks.

Cooperative banks

Co-operative banks, which are distinct from commercial banks, were born out of the concept of co-operative credit societies where members from a community band together to extend loans to each other, at favourable terms.
Broadly, co-operative banks in India are divided into two categories – urban and rural.
Rural cooperative credit institutions could either be short-term or long-term in nature.
Urban Co-operative Banks (UCBs) are either scheduled or non-scheduled.
The UCBs in India are under dual regulation, by the Reserve Bank of India (RBI) and the Registrar of Cooperative Societies (RCS) under the government

Utkarsh 2022

RBI launched Utkarsh 2022, the Reserve Bank of India’s Medium term Strategy Framework to achieve excellence in the performance of RBI’s mandates and strengthening the trust of citizens and other institutions
It is a three-year road map for medium term objective which is in line with the global central banks’ plan to strengthen the regulatory and supervisory mechanism
Objective: It aims to promote the economic and financial well-being of the people of India in terms of price and financial stability; fair and universal access to financial services; and a robust, dynamic and responsive financial intermediation infrastructure

e-Bkray

It is an e-auction platform which provides single-window access to information on properties up for e-auction as well as facility for comparison of similar properties on all PSB e-auction sites.
It was recently launched by Ministry of Finance

Operation Twist

It was US Federal Reserve Bank’s monetary policy which involved buying and selling of government bonds to provide monetary easing for the economy.
On similar lines, RBI also announced a simultaneous sale and purchase of government bonds under the Open Market Operations mechanism.

Open Market operations

These include both, outright purchase and sale of government securities, for injection and absorption of liquidity.

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