Context:
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RBI announced Retail Direct Scheme which allows general public to invest in G-Secs.
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RBI is working on digital rupee (Digital Currency).
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Such steps are in direct competition with the role of banks thus reducing relevance of banks altogether.
RBI’s Initiatives:
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Retail Direct Scheme:
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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.
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Central Bank Digital Currency (CBDC):
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RBI is working on its digital currency to tackle the challenge of Cryptocurrencies.
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It could enable RBI to take over the bank depository function.
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What are the concerns/issues with RBI’s latest move?
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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).
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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.
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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.
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Digital advancements in banking allow the new online services to operate cheaply compared to legacy banks. As a result, it makes legacy banks uncompetitive.
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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?
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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.
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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.
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It allows the central bank to execute fiscal transfers such as a universal basic income or an agenda of state-directed credit.