Current Affairs - Banking & Finance
Recently, the Reserve Bank of India (RBI) and the Bank of England (BoE) inked a Memorandum of Understanding (MoU) on Friday to enhance cooperation and information exchange pertaining to the Clearing Corporation of India Limited (CCIL).
- Framework for Regulatory Reliance: The MoU establishes a framework allowing the Bank of England to rely on the regulatory and supervisory activities of RBI, ensuring the safeguarding of the UK's financial stability.
- Cross-Border Cooperation: The RBI emphasized the significance of cross-border cooperation for facilitating international clearing activities.
- The MoU reflects the commitment of the Bank of England to respect the regulatory regimes of other authorities.
- Assessment for Recognition: The agreement enables the Bank of England to assess CCIL's application for recognition as a third-country Central Counterparty (CCP). This recognition is crucial for UK-based banks to conduct transactions through CCIL.
- Confirmation of Mutual Interests: The MoU reaffirms the shared interests of both authorities in enhancing cooperation in alignment with their respective laws and regulations.
Recently, the Finance Ministry has urged state-owned banks to conduct a thorough review of their digital operations, prompted by the recent UCO Bank incident.
- In response, banks have been advised to assess their cybersecurity measures and implement enhancements to fortify their systems.
- Cybersecurity Assessment: State-owned banks are instructed to scrutinize their systems and processes related to digital operations to ensure robust cybersecurity measures are in place.
- Vigilance and Preparedness: Banks are advised to maintain a vigilant stance and prepare for potential future cyber threats, emphasizing the importance of proactive measures.
- Sensitization by Authorities: The Finance Ministry and RBI have consistently sensitized banks about cybersecurity in light of the increasing digitization within the financial sector.
- UCO Bank Incident: UCO Bank, based in Kolkata, reported an erroneous credit of Rs 820 crore to account holders via the Immediate Payment Service (IMPS). Technical issues during November 10-13 resulted in certain transactions crediting UCO Bank accounts without actual funds from other banks.
- Recovery Efforts: The bank promptly blocked the recipients' accounts and has successfully recovered Rs 649 crore, equivalent to 79% of the erroneously credited amount.
Recently, a Financial Action Task Force (FATF) team arrived in India to evaluate the implementation of the required legal framework against money-laundering and terrorist financing.
- The Financial Action Task Force (FATF) is an intergovernmental organization which leads global action to tackle money laundering, terrorist and proliferation financing.
- FATF was established in 1989 by the G7 to examine and develop measures to combat money laundering. It originally included the G7 countries, the European Commission and eight other countries. In 2001, the FATF expanded its mandate to also combat terrorist financing.
- FATF has 40 members including India. Indonesia has become a recent member of FATF.
- It has the authority to issue warnings and sanctions against countries that fail to comply with its standards, such as suspension of membership and blacklisting.
- FATF Black List: Countries known as Non-Cooperative Countries or Territories (NCCTs) are put on the Blacklist. These countries support terror funding and money laundering activities. The FATF revises the blacklist regularly, adding or deleting entries.
- As of October 2023 North Korea,Iran and Myanmar are in the Blacklist.
- FATF Grey List: Countries that are considered a safe haven for supporting terror funding and money laundering are put in the FATF Grey list. This inclusion serves as a warning to the country that it may enter the blacklist.
- As of October 2023 there are 23 countries in the list including Türkiye, United Arab Emirates and South Africa.
Recently, State-owned National Highways Authority of India (NHAI) accepted first insurance surety bond for the monetization program of the upcoming bid of Toll Operate Transfer (TOT) Bundle 14 to boost liquidity and capacity of bidders.
- It is the first time this innovative instrument (Insurance Surety Bond) is being utilized as a Bank Guarantee (BG) in the road infrastructure sector for monetization of bids.
- NHAI has been working closely with Highway Operators Association of India (HOAI), SBI General Insurance and AON India Insurance to implement this initiative.
- These bonds can be defined in their simplest form as a written agreement to guarantee compliance, payment, or performance of an act.
- These are instruments where insurance companies act as ‘Surety’and provide the financial guarantee that the contractor will fulfil its obligation as per the agreed terms.
- Surety is a unique type of insurance because it involves a three-party agreement.
- The three parties in a surety agreement are:
- Principal: The party that purchases the bond and undertakes an obligation to perform an act as promised.
- Surety: The insurance company or surety company that guarantees the obligation will be performed. If the principal fails to perform the act as promised, the surety is contractually liable for losses sustained.
- Obligee: The party who requires and often receives the benefit of the surety For most surety bonds, the obligee is a local, state or federal government organisation.
Recently, the Insurance Regulatory and Development Authority of India (IRDAI) has established a taskforce aimed at reviewing the current bancassurance framework and enhancing its efficiency in response to complaints of policy mis-selling and forced selling.
- Underutilization of Bancassurance: IRDAI noted that despite the extensive branch networks of banks across India, their role as corporate agents contributed to only 5.93% of non-life premium and 17.44% of new business premium for life insurance in the 2022-23 fiscal year.
- Additionally, banks have the option to establish a separate legal entity to distribute insurance products as insurance brokers but have not utilized this opportunity.
- Enhancing Insurance Penetration: IRDAI seeks to leverage the extensive bank branch network to make insurance products accessible throughout the country.
- This initiative aligns with the regulator's goal of ensuring insurance coverage for all by 2047.
- Regulatory Stipulations and Market Conduct: The taskforce's primary focus is to recommend regulatory stipulations related to the market conduct requirements of bancassurance partners, particularly in response to the increasing complaints of policy mis-selling and forced selling by customers.
- Efficiency and International Best Practices: In addition to addressing mis-selling, the committee will evaluate the effectiveness of existing bancassurance models and propose measures to enhance their efficiency.
- It will also examine international best practices and suggest suitable modifications that can be incorporated into domestic regulations.
- Recommendations Deadline: The taskforce is expected to submit its recommendations within two months of the directive.
It means selling insurance product through banks. Banks and insurance company come up in a partnership wherein the bank sells the tied insurance company's insurance products to its clients.
Recently, the Reserve Bank of India (RBI) has reported advancements in its Central Bank Digital Currency (CBDC) pilot, with a focus on wholesale and retail CBDC usage.
- Additionally, the public tech platform for credit, launched by the RBI, has seen significant lender response.
- Wholesale and Retail CBDC Pilot Progress: The RBI's wholesale CBDC pilot commenced in November 2022, primarily for settlements in the secondary government securities market.
- Retail CBDC pilot, designed for peer-to-peer (P2P) and peer-to-merchant (P2M) transactions, began in December 2022.
- The RBI is working on enhancing the infrastructure to reach the target of 10 lakh (1 million) transactions per day by December 2023.
- The central bank is focused on interoperability and other crucial aspects to boost transaction volumes, with expectations of significant growth from the current rate of 18,000-20,000 daily transactions.
- Objective of CBDC Pilot: The primary goal of the pilot is to study user behavioral patterns, influencing design choices, policy decisions, and incentives.
- This aligns with the objective of facilitating financial transactions while maintaining system integrity.
- Public Tech Platform for Credit: The RBI launched a public tech platform for frictionless credit on August 17, 2023.
- The platform has garnered positive responses from lenders and is expected to enhance cost optimization and speed up loan sanction and disbursement processes.
- Fintech Regulations and Self-Regulatory Organizations (SROs): While fintech regulations are expected to take time to develop, SRO norms are anticipated to be introduced within the year.
On 9th October, 2023, the Insurance Regulatory and Development Authority of India (IRDAI) released guidelines for 'Bima Vahaks,' a dedicated distribution channel focused on women, with the aim of improving insurance inclusion, especially in rural areas.
- Insurance for All Goal: Bima Vahaks are part of IRDAI's strategy to achieve the 'Insurance for All' goal.
- They are expected to play a vital role in promoting 'Bima Vistaar,' affordable and comprehensive insurance coverage.
- Effective Date: The guidelines will come into effect when 'Bima Vistaar,' a comprehensive insurance product, is launched in the future.
- Role of Bima Vahaks: Both individual and corporate Bima Vahaks will be equipped with handheld electronic communication devices integrated into insurers' electronic platforms.
- They will sell and service 'Bima Vistaar' and other specified insurance products.
- Bima Vahaks are not allowed to collect fees or charges from policyholders, except for insurance premiums.
- Operational Standards: The Life Insurance Council and General Insurance Council will jointly establish operational and conduct standards for Bima Vahaks.
- These standards will cover educational requirements, commission structures, training, appointment terms, database maintenance, data confidentiality, and compliance.
- Coverage Expansion: Insurers will need to align with the standards set by the councils and have a Board-approved policy on Bima Vahaks.
- They must engage individual and corporate Bima Vahaks with a focus on gradually covering every Gram Panchayat (village administrative unit).
- Bima Vahaks should be deployed in each Gram Panchayat by December 31, 2024.
- Outreach and Responsibilities: Bima Vahaks will contribute to raising insurance awareness in villages.
- Their responsibilities may include assisting with proposal forms, facilitating KYC processes, issuing insurance policies, providing support for policy and claims-related services, and aiding in claims settlements.
Women & Financial Inclusion Linkage
Building Financial Resilience
- Women often serve as primary decision-makers for spending and savings in low-income households.
- Their commitment and discipline in saving are typically higher than that of men.
- Research indicates that women, when given the opportunity, save and thereby build financial resilience.
- Targeting women economically benefits banks and contributes to social welfare.
Increasing Social Capital
- Women's engagement with financial institutions and their access to work and credit can enhance their social capital.
- Empowering 230 million women Jan Dhan customers financially has the potential to uplift 920 million lives within average-sized families.
Women’s Empowerment and Poverty Reduction
- Providing low-income women with effective and affordable financial tools for saving, borrowing, payments, and risk management is crucial for women's empowerment and poverty reduction.
Gender Gap in Financial Inclusion
- According to the 2017 Global Findex database, 83% of males above 15 years of age in India held accounts at financial institutions in 2017, compared to 77% of females.
- Socio-economic factors, such as greater availability of mobile handsets and internet data among men, contribute to this gap.
Gender-Based Barriers to Financial Inclusion
- Demand Side Barriers:
- Lack of bargaining power within the household.
- Reduced mobility due to time constraints or social norms.
- Account opening requirements disadvantaging women.
- Concentration in lower-paying economic activities.
- Absence of gender-specific policies and practices in product design and marketing.
- Competing demands on women's time related to unpaid domestic work.
- Supply Side Barriers:
- Inappropriate distribution channels.
- Legal barriers to owning and inheriting property and other collateral.
- Lack of assets for collateral.
- Lower rates of digital inclusion.
- Absence of gender-inclusive credit reporting systems.
- Legal & Regulatory Barriers:
- Legal and regulatory obstacles related to property ownership and inheritance.
- Lack of gender-inclusive policies and practices.
- Challenges in obtaining formal identification.
Schemes for Financial Inclusion of Women in India
- Pradhan Mantri Jan Dhan Yojana (PMJDY): Launched in 2014, this is one of the largest financial inclusion programs globally. It aims to provide universal access to banking facilities with a special focus on women. Under this scheme, women can open zero-balance savings accounts and get access to various financial services.
- Stand-Up India: This scheme, launched in 2016, promotes entrepreneurship among women and marginalized communities by providing loans for starting greenfield enterprises in manufacturing, trading, or the services sector.
- MUDRA Yojana: Under the Micro Units Development and Refinance Agency (MUDRA) Yojana, women can avail loans up to a certain limit for starting or expanding small businesses. MUDRA offers three categories of loans: Shishu (up to Rs. 50,000), Kishore (Rs. 50,000 to Rs. 5 lakh), and Tarun (Rs. 5 lakh to Rs. 10 lakh).
- Beti Bachao, Beti Padhao (BBBP): While not directly a financial inclusion scheme, BBBP promotes the importance of educating and empowering girls, which indirectly contributes to their financial inclusion and economic empowerment.
- Sukanya Samriddhi Yojana: This savings scheme, launched under the "Beti Bachao, Beti Padhao" campaign, allows parents to save money for the future education and marriage expenses of their girl child. It offers tax benefits and an attractive interest rate.
- Mahila e-Haat: It is an online marketing platform for women entrepreneurs, where they can showcase their products and reach a wider audience. This initiative encourages women's economic empowerment and financial inclusion.
- National Rural Livelihoods Mission (NRLM): NRLM, also known as Aajeevika, aims to mobilize women into self-help groups (SHGs) and provides them with access to micro-credit and livelihood opportunities.
- Stree Shakti Package: Offered by various banks, this package includes benefits such as lower interest rates on loans, special credit facilities, and fee concessions for women entrepreneurs.
- Rashtriya Mahila Kosh (RMK): RMK provides micro-credit to poor women for income-generating activities. It focuses on promoting self-employment and entrepreneurship among women.
- STEP (Support to Training and Employment Program for Women): This program by the Ministry of Women and Child Development aims to provide skills training and employment opportunities to women, thus enhancing their financial independence.
Recently, Reserve Bank of India (RBI) Governor has put forth a proposal to introduce card-on-file tokenisation (CoFT) at the issuer-bank level, emphasizing the growing acceptance and advantages of card data tokenisation.
- Introduction of CoFT Facility: Governor announced the proposal for the introduction of card-on-file tokenisation (CoFT) at the issuer-bank level.
- RBI's CoFT Channels: RBI had previously introduced new channels for card-on-file tokenisation in September 2021, with implementation beginning on October 1, 2022.
- These channels allow credit/debit card users to generate card tokens on their bank's website or app, eliminating the need to do so on e-commerce platforms during online shopping.
- Data Security Benefits: The proposal aims to address data security concerns related to token generation on e-commerce or merchant portals.
- It offers consumers greater control over managing their card tokens.
- RBI's Card Tokenisation Impact: Since the introduction of Card-on-File Tokenisation (CoFT), over 56 crore tokens have reportedly been created, facilitating transactions worth over Rs 5 lakh crore.
- Streamlined Token Creation: Previously, cardholders had to generate different tokens through each merchant's application or website, which required time and effort.
- With the new approach, tokens will be created at the issuer bank level and linked to users' existing accounts with various e-commerce applications.
- This eliminates the need for duplication of the tokenisation process at each app or website, enhancing transaction security and reducing card-data-related fraud.
- Understanding Tokenisation: Tokenisation replaces a debit or credit card's 16-digit number with a unique token specific to the user's card and a particular merchant for a single transaction.
- This token conceals the card's actual details, safeguarding it in case of data leaks from merchant websites. Tokens contain no personal information and change with each use.
- Customers can choose whether to opt for card tokenisation, applicable to both debit and credit cards, for future online purchases.
On 7th October, 2023, the Reserve Bank of India (RBI) took the bond market by surprise with its recent announcement on considering an Open Market Operation (OMO) sale of government securities to manage liquidity.
- Market Surprise: Although no specific schedule was provided, the market now anticipates that OMOs can be announced at any time.
- This uncertainty is due to the understanding that liquidity conditions might tighten over the October-December quarter, making it crucial to address the risk of additional supply near-term.
- Background and Inflation: The retail inflation rate stood at 6.83% in August, and the market was not expecting such a measure from the RBI to withdraw excess liquidity, signaling a somewhat hawkish approach to monetary policy.
- The forthcoming festival season is expected to lead to cash withdrawals from the banking system, further contributing to liquidity tightening.
- Open Market Operation (OMO): OMOs are used by the RBI to adjust rupee liquidity conditions on a durable basis. When there is excess liquidity, the RBI sells government securities to absorb rupee liquidity.
- Conversely, when liquidity is tight, the central bank purchases securities, injecting liquidity into the market.
- OMOs are employed to manage inflation and money supply. However, when liquidity is absorbed, it can lead to higher bond yields.
- RBI's Liquidity Management: The RBI has indicated intent for "active liquidity management" in the future.
- This reflects the central bank's focus on both inflation risks and financial stability.
- The RBI aims to anchor inflation at 4%, emphasizing a proactive approach to achieve this target.
Recently, the central banks of Singapore, France and Switzerland, in partnership with the Bank for International Settlements (BIS), have achieved a significant milestone by conducting successful trials of cross-border trading and settlement involving wholesale central bank digital currencies (wCBDCs).
- Decentralized Finance Technology Utilized: Innovative decentralized finance (DeFi) technology concepts were employed in the process, leveraging a public blockchain.
- Proof of Concept for Cross-Border Trading: The project's proof of concept effectively examined cross-border trading and settlement involving hypothetical euro, Singapore dollar, and Swiss franc wholesale CBDCs, engaging simulated financial institutions.
- The protocols developed through this project are expected to facilitate cross-border trading and settlement among financial institutions in the future.
- Experimental Nature of Project Mariana: Project Mariana is purely experimental and should not be interpreted as an indication that the partner central banks intend to issue wCBDCs or endorse specific technological solutions or DeFi.
- CBDC Launch in India: In a separate development, the Reserve Bank of India initiated the launch of the digital rupee, known as Central Bank Digital Currency (CBDC), on a pilot basis on December 1, 2022, offering an electronic form of the sovereign currency.