Impact of RBI initiatives on Banks – UPSC GS3

  • RBI announced Retail Direct Scheme which allows general public to invest in G-Secs.
  • RBI is working on digital rupee (Digital Currency).
  • Such steps are in direct competition with the role of banks thus reducing relevance of banks altogether.
RBI’s Initiatives:
  • Retail Direct Scheme:
    • Under this scheme, people can invest directly in government bonds. As these are virtually risk-free, people would be attracted to use this window for access to market for gilts.
  • Central Bank Digital Currency (CBDC):
    • RBI is working on its digital currency to tackle the challenge of Cryptocurrencies.
    • It could enable RBI to take over the bank depository function.
What are the concerns/issues with RBI’s latest move?
  • RBI’s outreach could set the stage for other financial relationships with the public resulting in disintermediation of banks (removal of intermediaries i.e. banks  from a supply chain).
  • It might result in taking away the depository role played by banks. Since money kept with the RBI would be fully safe, such a facility will reduce the relative appeal of classic bank deposits. This raises the question of the need for banks to keep depositor funds when a central bank could do the same.
  • Legacy banks are already under threat due to the disruptive potential of technology. For example, From cryptocurrencies to decentralized finance (‘DeFi’), blockchain innovations have advanced at a great speed.
  • Digital advancements in banking allow the new online services to operate cheaply compared to legacy banks. As a result, it makes legacy banks uncompetitive.
  • Such a move could result in changing the core structure of the banking industry of the brick-and-mortar age.
What are the potential advantages of RBI taking over the depository role of banks?
  • The shift could act as a restraint on reckless Credit lending. Because It allows Banks to focus on assessing credit risk and price it profitably.
  • RBI will have more control over its monetary policy. A central bank with wide access to the cost-of-funds will make interest-rate settings easier to transmit.
  • It allows the central bank to execute fiscal transfers such as a universal basic income or an agenda of state-directed credit.
Scroll to Top