An RBI public interface that can recast banking

News: RBI has opened a retail window for bonds. Along with this, the launch of its digital rupee next could enable RBI to take over the bank depository function.

Recently, RBI launched the 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.

But this is not a welcome move, because the RBI’s outreach could set the stage for other financial relationships with the public resulting in disintermediation (removal of intermediaries from a supply chain. In this case, the banks).

What are the concerns/issues with RBI’s latest move?

Firstly, it might result in taking away the depository role played by banks. For instance, consider the following situation. If RBI launches the central bank digital currency (CBDC), its public interface will expand to cover the country.

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.

Secondly, 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.

Source: This post is based on the article “An RBI public interface that can recast banking” published in Livemint on 15th Nov 2021.

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