Current Affairs - Banking & Finance

Recently, the International Financial Services Centres Authority (IFSCA) and Climate Policy Initiative - India (CPI) have signed a Memorandum of Understanding (MoU) to cooperate and increase the mobilization of global sustainable capital flows into India.

The key points are:

• Mobilization of Sustainable Capital Flows: The primary objective of the agreement is to increase the mobilization of global sustainable capital flows into India.
• Both IFSCA and CPI recognize the importance of sustainable finance in achieving the transition to green and resilient economies.
• Conducive Regulatory Environment: IFSCA has taken significant steps to create a regulatory environment that is conducive to sustainable finance.
• The organization has implemented international best practices in its regulatory framework to support the needs of India and other developing countries.
• Research Collaboration: The MoU includes provisions for research collaboration between IFSCA and CPI.
• The organizations will work together to conduct research in the field of sustainable finance, aiming to generate valuable insights and contribute to the development of sustainable finance practices in India.
• Support for Climate Investments: The collaboration between IFSCA and CPI recognizes the need for greater international capital flows to support climate investments in India.
• IFSCA, as the regulatory authority for IFSCs, can play a critical role in enabling climate investments from international sources through the capital markets route.
• Achievement of Sustainable Development Goals: The partnership aligns with the objectives of the Sustainable Development Goals (SDGs) by promoting sustainable finance and facilitating the mobilization of global capital towards sustainable projects.
• It supports India's efforts to achieve its SDG targets and contribute to global sustainable development.

On 5^th July, 2023, a working group appointed by the Reserve Bank of India (RBI) put forward several recommendations to expedite the internationalization of the Indian rupee. The recommendations aim to increase the use of the Indian currency in cross-border transactions.

The key recommendations are:

• Adoption of a Standardized Approach: Implementing a standardized approach for examining proposals on bilateral and multilateral trade arrangements for invoicing, settlement, and payment in the rupee and local currencies will streamline cross-border transactions and promote the use of the rupee in international trade.
• Opening of Rupee Accounts for Non-Residents: Encouraging the opening of rupee accounts for non-residents, both within India and outside the country, will facilitate easier access and usage of the rupee by foreign entities, promoting its internationalization.
• Integration of Payment Systems: Integrating Indian payment systems with those of other countries will enable seamless cross-border transactions, enhancing the efficiency and convenience of using the rupee for international payments.
• Development of a Global Rupee Market: Fostering the development of a global rupee market will ensure liquidity and accessibility of the currency across different time zones, facilitating round-the-clock trading and investment in rupee-denominated instruments.
• Recalibration of the Foreign Portfolio Investor (FPI) Regime: Reviewing and recalibrating the FPI regime will attract greater foreign investment in Indian markets and instruments denominated in rupees, deepening the rupee market and increasing its attractiveness to global investors.
• Review of Taxes on Masala Bonds: Evaluating and potentially revising taxes on masala bonds, which are rupee-denominated bonds issued outside India by Indian entities, will encourage their issuance and utilization, contributing to the internationalization of the rupee.
• Real-Time Gross Settlement (RTGS) for Cross-Border Trade: Exploring the international use of Real-Time Gross Settlement for cross-border trade transactions will ensure faster and more secure settlement of international payments in rupees.
• Inclusion of Indian Government Bonds in Global Indices: Working towards the inclusion of Indian Government Bonds in global bond indices will increase their visibility and attractiveness to international investors, enhancing the internationalization of the rupee.
• Efforts for Rupee Inclusion in IMF's SDR: Making efforts to include the rupee in the International Monetary Fund's Special Drawing Rights (SDR) basket will enhance the global recognition and acceptance of the rupee as an international reserve currency.

Recently, the Union government released the 3rd Installment of Tax Devolution to state governments amounting to Rs 1,18,280 crore in June 2023, as against the normal monthly devolution of Rs 59,140 crore.

• Uttar Pradesh received the highest (Rs 21,218 crore) followed by Bihar (Rs 11,897 crore), Madhya Pradesh, West Bengal and Rajasthan.

About Tax Devolution

• It refers to the distribution of tax revenues between the central government and the state governments. It is a constitutional mechanism established to allocate the proceeds of certain taxes among the Union and the states in a fair and equitable manner.
• Article 280(3) (a) of the Constitution of India mandates that the Finance Commission (FC) has the responsibility to make recommendations regarding the division of the net proceeds of taxes between the Union and the states.

Recommendations of 15th Finance Commission on Tax Devolution

Share of States in Central Taxes (Vertical Devolution)

• The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.
• This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 period.
• The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.

Horizontal Devolution (Allocation between the States)

• For horizontal devolution, it has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology and 2.5% to tax and fiscal efforts.PM inaugurates first-ever National Training Conclave

On 2^nd June, 2023, the Reserve Bank of India (RBI) released draft cybersecurity directions for payment system operators (PSOs) and digital payments under the title- Draft Master Directions on Cyber Resilience and Digital Payment Security Controls for Payment System Operators.

• These directions are being issued under the Payment and Settlement Systems Act, 2007.

Aim

• To improve safety and security of the payment systems operated by PSOs by providing a framework for overall information security preparedness with an emphasis on cyber resilience.

About the Directions

Applicability

• The Directions apply to all RBI-authorized non-bank payment system operators (PSOs).

Timelines for Implementation

Large non-bank PSOs: April 1, 2024

• Payment Aggregators (PAs), card payment networks, large pepaid payment instrument (PPI) issuers, non-bank ATM networks, White Label ATM Operators, Clearing Corporation of India Limited (CCIL), National Payments Corporation of India (NPCI), NPCI Bharat Bill Pay Limited, TReDS, and Bharat Bill Payment Operating Units fall under this category.

Medium non-bank PSOs: April 1, 2026

• Cross-border (in-bound) money transfer operators under Money Transfer Service Scheme (MTSS) and Medium PPI Issuers fall under this category.

Small non-bank PSOs: April 1, 2028

• Small PPI Issuers and Instant Money Transfer Operators fall under this category.

Board of Directors (Board) of the PSO

• The Board of Directors (Board) of the PSO shall be responsible for ensuring adequate oversight over information security risks, including cyber risk and cyber resilience.

Cyber Crisis Management Plan (CCMP)

• PSOs will be required to develop an approved Cyber Crisis Management Plan (CCMP) to detect, contain, respond to, and recover from cyber threats and attacks.

The Indian Finance Ministry has made amendments to the Prevention of Money Laundering Act (PMLA) rules on March 10, 2023.

• More Disclosures for NGOs: The amendments require reporting entities such as banks, financial institutions, and intermediaries to provide more disclosures related to transactions involving NGOs.
• This increased scrutiny is aimed at preventing money laundering and terrorist financing through NGOs.
• Greater Clarity on Politically Exposed Persons (PEPs): The amendments define PEPs under the PMLA in line with the recommendations of the Financial Action Task Force (FATF).
• This will help reporting entities to better identify and monitor PEPs, who are considered higher risk individuals due to their potential involvement in corrupt activities.
• Enhanced Due Diligence: Reporting entities will be required to undertake enhanced due diligence measures for customers who are PEPs, or for transactions involving high-risk countries or activities.
• This will help to identify and mitigate the risks of money laundering and terrorist financing.
• Increased Compliance Costs: The amendments may result in increased compliance costs for reporting entities, as they will need to invest in new systems and processes to comply with the enhanced requirements.
• This may also impact NGOs, who may face additional reporting requirements and scrutiny from reporting entities.

On February 22, the Securities and Exchange Board of India (SEBI) has given the National Stock Exchange of India (NSE) the green light to establish a Social Stock Exchange (SSE).

• It is a new segment within the existing stock exchange that helps social enterprises raise funds from the public through its mechanism.
• The SSE provides a medium for social enterprises to seek finance for their social initiatives and acquire visibility.
• The SSE offers increased transparency about fund mobilisation and utilisation, providing retail investors with an opportunity to invest in securities offered by for-profit social enterprises under the Main Board.
• Institutional investors and non-institutional investors can invest in securities issued by SEs in all other cases.

Eligibility to be listed on the SSE:

• Establish the primacy of social intent
• Fall under either non-profit organizations (NPO) or for-profit social enterprises (FPSEs)
• Establish the primacy of social intent
• Fall under either non-profit organizations (NPO) or for-profit social enterprises (FPSEs)
• Work towards eradicating hunger, poverty, malnutrition, and inequality; promoting education, employability, equality, empowerment of women and LGBTQIA+ communities; environmental sustainability; protection of national heritage and art; or bridging the digital divide
• Direct at least 67% of its activities towards achieving the stated objective, as evidenced by either revenue, expenditure, or the target population.

The Reserve Bank of India (RBI) has signed a Currency Swap Agreement with the Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework.

• This is to provide swap support as a backstop line of funding for short term foreign exchange liquidity requirements.
• This agreement will enable the MMA to make drawals in multiple tranches up to a maximum of USD 200 million from the RBI.

Highlights of the SAARC Currency Swap Agreement

• The SAARC currency swap facility came into operation on 15^th November, 2012.
• The RBI can offer a swap arrangement within the overall corpus of USD 2 billion.
  • The swap drawals can be made in US dollar, euro or Indian rupee.
  • The framework provides certain concessions for swap drawals in Indian rupee.
• The facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.
• In 2020, the RBI signed a currency swap agreement for extending up to a USD 400 million to Sri Lanka.

What is Currency Swap?

• Swap is short for exchange. A contract or agreement to exchange currencies between two nations under predetermined terms and conditions is known as a currency swap.
• In the present context, the facility's role in the current situation is to offer swap support as a substitute source of funding for short-term foreign exchange liquidity needs.
• Central banks (or Governments) engage in currency swaps with foreign counterparts to meet short-term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid the Balance of Payments (BOP) crisis till longer arrangements can be made.
  • These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
• At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.
• At the end of the swap, the principal amounts are swapped back at either the prevailing spot rate, or at a pre-agreed rate such as the rate of the original exchange of principals. Using the original rate would remove transaction risk on the swap.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2022 was awarded to Ben S. Bernanke, Douglas W. Diamond, Philip H. Dybvig (all from the USA) “for research on banks and financial crises”.

• Together, the work for which Bernanke, Dybvig and Diamond have been recognised has also laid the foundation for modern bank regulations. Their work has been “crucial to subsequent research that has enhanced our understanding of banks, bank regulation, banking crises and how financial crises should be managed”.
• They have demonstrated the importance of preventing widespread bank collapses that also gives an insight to avoid both serious crises and expensive bailouts.

(Image Source: WSJ)

Diamond and Dybvig’s Analysis

Since the Global Financial Crisis of 2008, banks have lost their sheen in the public eye. They are often seen as money-grabbing institutions that exist to profit off borrowers as well as depositors.

But in a world without banks, it would be impossible to make any long-term investment. That’s because, as Diamond and Dybvig’s 1983 paper showed, there are “fundamental conflicts between the needs of savers and investors”.

Savers-Investors Conflict

• Savers always want access to at least some part of their savings for unexpected use; this is also called the need for liquidity. They want the ability to pull out money when they need it.
• Borrowers, especially those taking out a loan for building a home or building a road, need the money for a much longer time. Borrowers cannot function if the money can be demanded back at a short notice.

Resolving this Mismatch

• Diamond and Dybvig showed that these mismatches can best be solved by institutions constructed exactly like banks.
• They developed a theoretical model that explains how banks create liquidity for savers, while borrowers can access long-term financing.

Banks as an Intermediaries in Crisis

• Their analysis also showed how the combination of these two activities (savings and lending) makes banks vulnerable to rumours about their imminent collapse.
• If a large number of savers simultaneously run to the bank to withdraw their money, the rumour may become a self-fulfilling prophecy – a bank run occurs and the bank collapses.

Scrutinizing Investments

• Diamond demonstrated how banks perform another societally important function. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.

Ben Bernanke’ Analysis: Bank Run

Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history. Among other things, he showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged.

What is Bank Run?

• Bank runs happen when depositors become worried about the bank’s survival, and rush to withdraw their savings.

Effects of Bank Run

• Bankruptcy: If enough people withdraw their money simultaneously, the bank’s reserves cannot cover all the withdrawals, and it is driven to bankruptcy.
• Productive Investments are hampered: When the banks collapsed, valuable information about borrowers was lost and could not be recreated quickly. Society’s ability to channel savings to productive investments was thus severely diminished.

Finally Financial Crisis Decoded

• Until Bernanke’s paper, bank failures were seen as a “consequence” of the financial crisis. But Bernanke’s 1983 paper proved it was exactly the opposite— bank failures were the “cause” of the financial crisis.
• Using a combination of historical sources and statistical methods, his analysis showed which factors were important in the drop in GDP. He found that factors that were directly linked to failing banks accounted for the lion’s share of the downturn.

Remedy Options

• Bernanke demonstrated that the economy did not start to recover until the state finally implemented powerful measures to prevent additional bank panics.
• The deposit insurance provisions — where a certain amount of one’s deposits in a bank are insured — is a critical tool towards building trust and preventing bank runs.

On 29^th July 2022, India International Bullion Exchange (IIBX) was launched at Gujarat International Finance Tec-City (GIFT City) - India’s maiden International Financial Services Centre (IFSC).

Operator of the IIBX

• A holding company India International Bullion Holding IFSC will operate the International Bullion Exchange.
• It has been established by the National Stock Exchange, Multi Commodity Exchange, India INX International Exchange, National Securities Depository and Central Depository Services Ltd.

Some Criteria for Trading in IIBX

• To become a qualified jeweller, one must have a minimum net worth of Rs 25 crore and 90 per cent of the average annual turnover in the last three financial years through deals in goods categorised as precious metals.
• Apart from qualified jewellers, non-resident Indians and institutions will also be able to participate on the exchange after registering with the IFSCA.

Some other Facts

• The exchange will have three vaults – one operated by Sequel Global (ready and approved), the second one to be operated by Brinks India is ready and awaiting final approval and the third under construction.

Working Procedure

• Once gold is imported, it will be stored at the IFSC Authority-approved vault.
• Following this, a bullion depository receipt will be made and the gold will be ready for trading.
• Being a spot exchange, all the open positions will be marked for delivery at the end of the day.

Advantages

• The IIBX will be a gateway for bullion imports into India, where all bullion imports for domestic consumption shall be channelised through the exchange.
• In addition to providing a trading avenue to various participants, a bullion exchange will also offer the advantages of price discovery, transparency in disclosures, guaranteed centralised clearing and assurance of quality.
• A bullion exchange, apart from providing standardisation and transparent mechanism, will also be an important step towards financialisation of bullion-based products.

The government garnered Rs. 96,000 crore under the National Monetisation Pipeline in FY22, surpassing the target of Rs. 88,000 crore.

• The figure could touch Rs.1 lakh crore as data was still trickling in and was yet to be finalised.
• The roads and highways sector monetised assets worth Rs. 23,000 crore, power sector garnered Rs.9,500 crore, coal mining generated Rs. 40,000 crore and mining of minerals fetched Rs. 18,700 crore, and railways added Rs. 900 crore.

Targets for Monetization

• FY23: Rs 1.62 trillion
• FY24: Rs 1.79 trillion
• FY25: Rs 1.67 trillion

What is Asset Monetisation?

• Asset Monetisation involves creation of new sources of revenue by unlocking of value of hitherto unutilized or underutilized public assets. Internationally, it is recognized that public assets are a significant resource for all economies.

About National Monetisation Pipeline

• The National Monetisation Pipeline was launched in August 2021.
• It aims to unlock value in brownfield projects by engaging the private sector, transferring to them revenue rights and not ownership in the projects, and using the funds generated for infrastructure creation across the country.
• The National Monetisation Pipeline (NMP) estimates an aggregate monetisation potential of Rs 6 lakh crores through core assets of the Central Government, over a period of four years from FY 2022 to FY 2025.