On 26 August 2024, Shaktikanta Das, governor of the Reserve Bank of India (RBI), stated that the bank is considering a nationwide launch of a technological platform dubbed the Unified Lending Interface (ULI) to expedite the distribution of loans, particularly to smaller borrowers and those residing in rural areas.
At a worldwide conference in Bengaluru on “Digital Public Infrastructure and Emerging Technologies,” Das predicted that ULI will revolutionise retail financing in the same way that UPI did.
“We expect ULI to transform the lending landscape,” the governor stated, comparing it to how the Unified Payments Interface changed the payments sector.
For the purpose of facilitating frictionless financing, the central bank created the Public Tech Platform one year ago today. The original intent was to simplify the process of obtaining a loan or credit by giving lenders digital information in a matter of minutes.
“VoloFin welcomes the Reserve Bank of India’s initiative to introduce a unified lending interface, a pivotal step towards enhancing financial inclusion across rural India. This platform will empower borrowers in remote areas by providing quick and seamless access to credit, bridging the gap between financial institutions and the underserved segments of our society. The availability of instant loans will not only boost economic activity but also enable entrepreneurs in these regions to scale their businesses, create jobs, and contribute to the overall development of their communities. As a company dedicated to simplifying finance and extending support to MSMEs, we believe that this move will revolutionize the way rural India interacts with financial services,” said Roshan Shah, Co-Founder & CEO, VoloFin.
Echoing similar sentiments, Pramod Kathuria, Founder and CEO of Easiloan stated, “The ULI will simplify the loan application process by integrating multiple financial institutions, including banks, non-banking financial companies (NBFCs), and digital lenders, onto a single platform. This streamlined process ensures that loan applications are processed more quickly and efficiently. Through real-time data sharing and advanced algorithms, ULI enables instant verification of borrower credentials, such as KYC (Know Your Customer) details, credit history, and income verification. This reduces the time taken for loan approval from days to mere minutes, accelerating the disbursement process.”
The System Aims to Make Entire Lending Process Hassle Free
Banks, account aggregators, digital identification authorities, banks, credit information businesses, and state and federal governments were among the several sources from which RBI retrieved the data needed for credit evaluation. A delay in the smooth and timely distribution of loans was caused by the data being available in several systems.
Because of this, the entire digital platform was built with an open architecture and open APIs so that all the participants in the financial sector can connect with each other in a ‘plug and play’ fashion.
The tech platform is the result of several pilot initiatives that started in 2022. These experiments included digital dairy loans and end-to-end digitisation of Kisan Credit Card (KCC) loans. As a result of these initiatives, the loan processing time was significantly reduced and the desired efficiency was achieved. Additional digital loans were added to the platform last year.
According to Das, the digital Public Tech Platform is an aspect of the central bank’s efforts to digitise banking services. “Data privacy is fully protected, and the new platform is also based on consent of potential borrowers,” he assured.
Das mentioned that there is a new suggested trinity that would replace the old one, which consisted of Jan Dhan Accounts, Aadhaar, and mobile phones or JAM.
He proclaimed that the Central Bank Digital Currency (CBDC), which will be introduced gradually and consists of the new trinity of JAM, UPI, and ULI, is a groundbreaking development in India’s digital public infrastructure. “This initiative streamlines the integration of multiple technical systems, which means borrowers can enjoy the benefits of easier credit delivery and faster processing times without having to provide a mountain of paperwork,” he continued.
Lenders, customers, and data service providers are all winners with this platform. Through consent architecture, customers can acquire streamlined, personalised credit without submitting paper forms or physically visiting banks. The network effect, standardisation, cost efficiency, innovation in the loan process, scalability, and increased reach are all to the advantage of lenders and data service providers.
The UPI limit for tax payments has been suggested to be raised from INR 1 lakh to INR 5 lakh by the Reserve Bank of India (RBI). The increase in the cap will allow taxpayers to swiftly settle their increased tax obligations. In most cases, there are no extra fees associated with payments made using UPI. This does not apply when paying taxes using a debit or credit card. There has been a prior instance of the RBI raising the cap. The central bank increased the ceiling on some payments, like those to hospitals and schools, to 5 lakh rupees in December 2023.
There is a limit of up to INR 1 lakh per transaction for conventional UPI, according to NPCI. The maximum transaction limit for certain UPI categories is 2 lakh, while for IPOs and the Retail Direct Scheme, it is 5 lakh. Other categories include Capital Markets, Collections, Insurance, and Foreign Inward Remittances.
The Statement on Development and Regulatory Policies states that UPI has become the most preferred payment method because of its user-friendly characteristics. At this time, INR 1 lakh is the maximum amount that may be transferred using UPI. Periodically, the Reserve Bank reviews and enhances the restrictions for a few categories based on the various use cases. These categories include capital markets, initial public offering subscriptions, loan collections, insurance, medical and educational services, and more. It has been determined to increase the ceiling for tax payments using UPI from INR 1 lakh to INR 5 lakh per transaction since both direct and indirect tax payments are frequent, high-value, and prevalent. “
The Impact of the New Limit on People’s Ability to Pay Taxes
During a fiscal year, a person must pay their income tax, property tax, advance tax, and other related taxes. Depending on one’s income, the tax amount can be higher. It will be easier to pay both direct and indirect taxes with the increased UPI limit.
This is because a user needs an active bank account, a mobile number associated with that account, and an app that supports UPI in order to make a transaction using UPI. After creating a UPI ID, users can pay using the app by inputting a 4- or 6-digit PIN.
Additional UPI Announcements
Not only has the RBI announced the implementation of delegated payments via UPI, but they have also raised the UPI ceiling for tax payments to INR 5 lakh. Delegated UPI payments would enable one user to authorise another user to use their bank account to establish a restriction on UPI transactions, according to the release.
Essentially, this means that one person can grant access to their bank account for UPI payments to another person, for example, a family member. It is believed that this product will increase the penetration and use of digital payments nationwide. Prompt and comprehensive instructions will be sent out soon.
In India, there is hardly anyone who hasn’t heard about LIC. The line ‘Zindagi Ke Saath Bhi, Zindagi Ke Baad Bhi’ is a part of our childhood as well as adulthood. From radio to television, to newspapers, and the internet, it is anywhere and everywhere, and honestly, with its presence on every media platform, it is quite hard to not get noticed.
Life Insurance Corporation owns LIC and comes under the Ministry of Finance. It is India’s biggest life insurance company and has over 70% of the market share.
LIC was founded in the year 1956 and since then has played the role of a constant supporter for most of the people seeking life insurance in India. The importance of life insurance is growing throughout the country.
LIC can grow at a faster rate if the organizational and operational efficiency of LIC can be improved, new kinds of insurance covers are introduced, its services are extended to smaller lesser-known places and the general price level is kept stable. LIC’s assets under management (AUM) have increased by 16.48% year-on-year, reaching INR 51,21,887 crore by the end of March, up from INR 43,97,205 crore at the end of FY23.
Now LIC is not just an insurance company anymore, it has many subsidiaries that serve different sectors. In this article, we will find out about the subsidiaries of LIC. So let’s get started with it.
This subsidiary of LIC was established in the year 1989 and is said to be one of the biggest Housing Finance Companies in the country. They provide long-term financial services to their consumers so that they can purchase or construct their choice of residence. The headquarters is situated in Mumbai and it has over 2103 people working under it as of 2019.
Apart from that, the company also provides finance to the people who want to renovate and repair their residential places. LIC Housing Finance went public in the year 1994 and has over 450 centers across the country. As of 2023, LIC Housing Finance revenue is 200 billion INR.
LIC International
LIC Subsidiary
LIC International
Established
1989
Headquarters
Manama, Bahrain
Revenue
–
LIC Subsidiaries – LIC International
Established in the year 1989 on the 23rd of July in Bahrain, the main objective of this subsidiary of LIC is to provide life insurance to the Indian people living in the GCC countries. As of now, LIC International is operated in four countries, that is Bahrain, Kuwait, Oman, and UAE.
Apart from this, LIC also has a license to sell life insurance to people from any other country in some selected markets. As of 2016, LIC International is said to be a billion-dollar company that ruled the Kingdom of Bahrain for several years. Such is the impact that it has won several awards amongst them, it has won the MEIF 2012 award from the Central Bank of Bahrain.
LIC Cards Services
LIC Subsidiary
LIC Cards Services Limited
Established
2008
Headquarters
New Delhi
Revenue
INR 8.2 trillion (2023)
LIC Subsidiaries – LIC Cards
This subsidiary was established in the year 2008 on the 11th of November. LIC launched its Credit cards in the market. Four different types of credit cards are offered here with some common features and some distinct features that make them unique. It is mainly suited for those who pay a large LIC premium. The cards offer lots of unique features to its users and attract users by providing reward points and cashback.
The headquarters is situated in New Delhi, India, and the total revenue as of the company is INR 8.2 trillion (2023).
The types of LIC cards are:
LIC Gold Credit Cards (for regular users)
LIC Platinum Credit Cards (for shopping and rewards)
LIC Titanium Credit Cards ( for travel and hotel booking)
LIC Signature Credit Card (for premium services)
Fee/Charge
Amount/rate
Finance Charges on Revolving Credit and Cash Advance
3.25% p.m. (46.78% annual)
Free Credit Period
Free Credit Period Up to 50 days
Cash Withdrawal Fee
2.5% of the amount withdrawn (min. Rs. 500)
Cash Payment Fee
Rs. 100
Over Limit Fee
3% of the amount (min. Rs. 500)
Foreign Currency Mark-up Fee
3.5% of the transaction amount
There are certain criteria that the financial institution looks into before accepting your credit card application. Your credit score, age, monthly income, location, etc. are some of the parameters that you should keep in mind before you apply for a credit card. To apply for an LIC credit card, you should be over 18 years old and should either be an LIC agent or an LIC policyholder. The documents required to apply for an LIC credit card are:
Proof of Identity: PAN Card, Aadhaar card, Driver’s License, Passport, Voter’s ID, Overseas Citizen of India Card, Person of Indian Origin Card, Job card issued by NREGA, Letters issued by the UIDAI.
Proof of Address: Aadhaar card, Driver’s License, Passport, Utility Bill not more than 3 months old, Ration Card, Property Registration Document, Person of Indian Origin Card, Bank Account Statement.
Proof of Income: Latest one or 2 salary slips (not more than 3 months old), Latest Form 16, Last 3 months’ bank statement.
LIC Mutual Fund
LIC Subsidiary
LIC Mutual Fund
Established
1989
Headquarters
Mumbai
Revenue
INR 59.88 crore (2022)
LIC Subsidiaries – LIC Mutual Fund
LIC Mutual Fund Ltd. started its journey in April 1989; it is a direct subsidiary of LIC and is one of the premium brands that provide financial security services to its customers. It is said to be managed over INR 15002.38 crore worth of assets. It offers a total 25 numbers of schemes. The Headquarters is situated in Mumbai, India and the company’s revenue was INR 59.88 crore (2022). Dinesh Pangtey is the CEO of LIC Mutual Fund Ltd.
LIC Pension Fund
LIC Subsidiary
LIC Pension Fund
Established
2007
Headquarters
Mumbai
Revenue
–
LIC Subsidiaries – LIC Pension Fund
LIC Pension Fund Limited is India’s first pension fund. Established in the year 2007 on November LIC Pension Fund is the Subsidiary of LIC and is considered India’s first pension fund. This fund is to secure the future related to the finances of the people after their retirement. LIC is one of India’s three public sector pension fund managers and has a one-third share in all investments made through Central and State Government NPS. It is also open to the private sector as a fund manager. LIC Pension Fund is the first Pension Fund Company in India to be incorporated and to receive a commencement of business certificate.
These four schemes are provided by the LIC Pension Fund. There is Jeevan Shanti, LIC Jeevan Akshay-VII, Pradhan Mantri Vaya Vandana Yojana, and Saral pension. Its headquarters is situated in Mumbai, India. Smt. Priti Panwar is the current CEO of LIC Pension Fund Ltd.
The government of India introduced the New Pension System (NPS), with effect from 2004. Pension Fund Regulatory And Development Authority (PFRDA) through a process of competitive bidding, has appointed Life Insurance Corporation (LIC), State Bank of India (SBI), UTI Asset Management Company (UTI –AMC), and as The Pension Fund under the NPS. “NPS-Lite Model” is designed to ensure ultra-low administrative and transactional costs, to make such small investments viable.
National Pension System NPS Lite makes pensions possible for small investors. It is an initiative of the Pension Fund Regulatory and Development Authority (PFRDA), the apex body established by the Government of India to regulate and develop the pension sector in India. NPS extends help to the weaker and economically disadvantaged sections of society with their limited investment potential. This is why PFRDA has launched NPS Lite to specifically target marginal investors and promote small savings during their productive lives. It also aims at building up a corpus sufficient enough to buy an annuity for their old age.
IDBI Bank was established in the year 1964 and has been providing banking and financial services since then. Apart from that, they are constantly offering digital services to their customers and have a wide range of ATM networks all across the country. In 2019, RBI has categorized it as a private bank.
As of September 2023, IDBI Bank has over 18,283 employees working for it and the bank has 2005 branches and 3353 ATMs all across the country as on 26th April 2024. Apart from that, it also has one overseas branch in Dubai. Since 2018, Rakesh Sharma has been the CEO of IDBI Bank.
IDBI Bank Ltd., as a full-service universal bank provides a wide amount of financial products and services encompassing deposits, loan payment services, and investment solutions. The Bank also has an established presence in associated financial sector businesses including capital market, investment banking, and mutual fund business. IDBI’s very business philosophy is to provide relevant financial solutions and ensure maximum customer convenience through easy access to branches and ATMs as well as digital offerings and excellence in customer service.
The vision is to be the most preferred and trusted bank enhancing value for all stakeholders defining and shaping our day-to-day business, helping us to build long-lasting relationships. IDBI Bank Limited has been categorized as a ‘Private Sector Bank’ for regulatory purposes by the Reserve Bank Of India with effect from January 21, 2019, consequent upon Life Insurance Corporation Of India acquiring 49.24% of the total paid-up equity share capital of the bank. To cater to its ever-expanding needs, IDBI Bank has formed subsidiaries and joint ventures across diverse areas of the Banking and Financial System.
Some of its subsidiaries are:
IDBI Subsidiaries
IDBI Capital Markets and Securities Limited (ICMS)
Its businesses include Merchant Banking, Stock Broking, Distribution of Financial Products, Corporate Advisory Services, Debt Arranging and undertaking, Portfolio management of pension, and Research Services.
IDBI Intech Limited (IIL)
The major business activities of the company are Information technology services, information security practices, a national contact center, and an outbound sales team.
IDBI Asset Management Limited (IAML)
IAML is the investment manager of schemes launched by IDBI Mutual Fund. The Fund offers a bouquet of product inequity and risk profiles of investors.
IDBI Trusteeship Services Ltd (ITSL)
The company operations are acting as trustees to securitization transactions, acting as Bond/Debenture trustees, Security trusteeship assignments, Share pledge Trustee, Venture Capital Fund, Safe Keeping, and other trusteeship services.
IDBI Federal Life Insurance Company Limited (IDBI Federal)
The Company’s life insurance business comprises individual life and pension and group life, including non-participating, health, and linked segments.
LIC has established itself as a brand in India, with so many subsidiaries; it has been trying to keep up with its name of being one of the biggest companies in India. It is doing everything, from providing mutual fund services to banking services to pensions as well. LIC is taking every chance to serve its customers in the biggest and best way possible and take the company to the top.
FAQ
When was LIC established?
LIC was established in the year 1956.
Is LIC government or private?
LIC is a government organization and the government of India owns a 100% stake in the insurance company.
What is the subsidiary of LIC?
IDBI Bank, LIC Mutual Fund, LIC Pension Fund, LIC Housing Finance, LIC Cards Services, and LIC International are some of the subsidiaries of LIC.
How many types of Cards does LIC provide?
LIC provides 4 types of cards as below:
LIC Gold Credit Cards (for regular users)
LIC Platinum Credit Cards (for shopping and rewards)
LIC Titanium Credit Cards ( for travel and hotel booking)
Following a “scrutiny” of “select NBFC-P2P companies” from June to September 2023, the Reserve Bank of India (RBI) discovered “multiple violations” of the regulations established in October 2017, when the licensing standards were published, to welcome these companies to the Indian financial market.
It was preceded by the RBI’s March 2016 release of the initial P2P lending draft for stakeholder comment. In addition to meeting the criteria for being “fit and proper” to operate P2P platforms, a minimum of around 2 crore net-owned money is required according to the licensing standards.
Although not all of the approximately 25 licenses issued by the RBI have gone live, some of them have. Approximately one-third of the fifteen entities that went live have now gone dark. According to analysts, the industry’s outstanding loan book is estimated to be over 6,000 crore, and four companies control more than 90% of the market.
A loan of approximately 10 lakhs could be made at the outset. The amount increased to over 50 lakhs in December 2019. Through P2P platforms, a lender can distribute this funding to numerous borrowers. But regardless of how many lenders there are, a borrower cannot receive more than ~10 lakh. The maximum amount that a lender can lose due to a single borrower is around $50,000. (A minimum of 20 lenders are required in the event that a borrower requests ~10 lakh.)
Platforms that facilitate peer-to-peer (P2P) lending allow users to pool their savings in escrow accounts and then lend those funds to other users or small businesses without requiring collateral.
Lenders can access their money before loans are fully processed on P2P platforms. This implies that over the remaining time of the loan, a different lender will take over for the first one, without the lenders on the platform having to say anything. The “deposit-taking” feature of these NBFC-P2Ps is the root cause of loan replacement.
Loan contracts on the platform must be signed by both the lender and the borrower in accordance with RBI regulations. But instead of that, platforms are only giving out loans to people who have lenders’ whole approval. The standards for licensing are being violated here.
The standards that control the transfer of money are another source of worry. In order to reinvest the funds, these platforms are moving the repayments from the borrower’s escrow accounts to the lenders’ escrow accounts. Repayment funds must be sent from the borrower’s escrow account to the bank account of the lender.
P2P platforms have been issued a stern warning by the RBI, urging them to immediately cease these actions. They risk regulatory and supervisory measures if they do not.
Number of Peer to Peer Non Banking Financial Companies in India as of January 2022, by City
Industry Adopting a ‘Wait and Watch’ Policy
P2P Lending Platforms
The official explained that new alliances take substantial time, technological, and legal resources to be integrated, thus the industry is simply taking a “wait and watch” approach rather than rapidly expanding.
Liquiloans has partnered with a number of prominent P2P lenders, including Cred, Avail Finance, Uni, and BharatPe; LenDen Club has partnered with PhonePe, Karza, and BharatPe. The general pace of business has decreased, even though partnerships are still continuing. Since October, corporations have been consistently engaging with the RBI, therefore experts do not see this trend continuing.
During an occasion, RBI deputy governor M. Rajeshwar Rao reportedly stated that NBFC-P2Ps’ actions did not seem to comply with regulatory norms. The majority of the lenders on these sites probably don’t have the training or education to properly assess the dangers of lending money.
While the RBI first published comprehensive rules for the market in 2017, 2019 saw the introduction of certain updates to those rules. However, the central bank has been providing platforms with guidance on several aspects of compliance over the past 12 to 18 months.
The Department of Regulation at RBI has been approached by these businesses to clarify several important matters. A decision on these practices is also required by the Department of Supervision.
The peer-to-peer lending market is currently valued at an estimated 7,000–8,000 crore rupees. About twenty P2P licensing systems can be found in India. They are all NBFCs that have registered with the RBI.
Payouts, processing fees, and platform fees all contribute to the platforms’ bottom lines. The maximum amount that a lender can put on a platform is Rs 50 lakh. One borrower is limited to an investment of no more than Rs 50,000.
At no point in time should a borrower’s total loan amount exceed Rs 10 lakh. This loan has a maximum maturity term of 36 months. An annual interest rate of 36% is charged by some sites.
The Reserve Bank of India’s intensified scrutiny of NBFC-P2P companies has revealed multiple violations of established regulations, including issues with loan processing, fund transfers, and compliance with licensing standards.
Despite partnerships and engagement with the RBI, concerns persist regarding the industry’s compliance and operational practices. The conclusion underscores the need for stringent regulatory oversight and enhanced industry compliance to sustain the integrity and stability of the P2P lending market in India.
FAQs
Which is the largest P2P lending platform in the world?
Lending Club is the world’s largest P2P platform.
Is P2P lending legal in India?
Yes, P2P lending is completely legal and fully regulated by RBI in India.
Which P2P lending is best in India?
Some of the most popular P2P lending platforms in India are LenDenClub, Faircent, Lendbox, etc.
The Indian government has taken a bold step towards boosting the country’s gold reserves. The Reserve Bank of India (RBI) has been granted the authority to import gold without the burden of customs duty and the Agriculture Infrastructure and Development Cess (AIDC).
Traditionally revered in Indian culture as a symbol of wealth and prosperity, gold has received special attention from policymakers.
This government’s decision, notified on March 12, marks a pivotal moment in the country’s economic landscape, with implications that extend far beyond the glittering precious metal.
Let’s delve into the intricacies of this exemption, its impact on the Indian economy, and the rationale behind this significant policy shift.
As the world’s second-largest consumer of gold, after China, India’s relationship with the metal is multifaceted, shaping not only personal adornment but also economic policies and trade dynamics.
Gold imports in India have been subject to customs duty and the Agriculture Infrastructure and Development Cess (AIDC), acting as barriers to the seamless importation of this valuable resource.
At present, the import duty on gold, silver findings, and coins of precious metals is at 15%, comprising a Basic Custom Duty (BCD) of 10%, along with 5% for the Agriculture Infrastructure Development Cess (AIDC).
Even the Reserve Bank of India (RBI), tasked with managing the nation’s foreign exchange reserves, was not exempt from these levies until the recent policy change.
According to the latest reserve management report from the Reserve Bank of India, as of September 2023, the central bank possessed a total of 800.79 tonnes of gold, inclusive of gold deposits amounting to 39.89 tonnes. Out of this total, 388.06 tonnes were held in overseas locations, while 372.84 tonnes were held domestically.
The decision to waive these charges for the RBI signifies a notable departure from past practices and signals a fundamental shift in India’s approach to gold imports.
The exemption granted to the RBI not only strengthens the central bank’s position in managing foreign exchange reserves but also underscores the government’s commitment to enhancing financial stability.
RBI Governor Shaktikanta Das informed reporters during the customary post-policy review press conference on April 5 that the accumulation of gold reserves is a component of our reserve deployment strategy.
“We are building up a gold reserve that is a part of our reserve deployment,” a media report quoted Das.
With gold prices often rising during economic uncertainty, bolstering gold reserves can serve as a vital buffer against external shocks and contribute to the country’s sovereign wealth.
By allowing the RBI to import gold without additional levies, the government is not only recognizing the central bank’s pivotal role in financial management but also sending a positive signal to the gold market in India.
This move aligns with global trends of central banks diversifying their reserves, positioning gold as a safe-haven asset in times of economic volatility. The policy shift reflects a broader strategy to promote reserve diversification, support the domestic gold market, and fortify India’s overall economic resilience in a rapidly changing world.
“Equity markets have gained while bond yields and US dollar have remained volatile. The overall outlook is challenged by continuing geopolitical conflicts, disruptions in trade routes and high public debt burden,” RBI chief said in his statement after the monetary review.
Implications of the Exemption
The exemption granted holds significant implications for various aspects of the Indian economy.
Here are some key points to consider:
Boost to Gold Reserves
This decision allows the RBI to increase its gold reserves, strengthening the country’s overall foreign exchange holdings. According to the World Gold Council, India’s official gold reserves stood at 695.31 metric tons as of December 2023, representing 6.7% of total foreign reserves.
Cost Advantage for the RBI
Importing gold without levies provides a cost advantage to the RBI, enabling more strategic management of foreign exchange reserves. With gold prices fluctuating, this exemption allows the RBI to capitalize on favorable market conditions without the burden of additional costs.
“In the Reserve Bank, we have embarked on strengthening and building up higher (forex) reserves. Our reserves are around USD 620 billion at the moment. Individual emerging market economies have to insulate and protect their economies from the spillovers of global currency movements and fluctuations,“ RBI head Shaktikanta Das has said. The RBI’s forex reserves rose to an all-time high of USD 645.6 billion as of March 29, 2024.
Breaking: RBI Governor Shaktikanta Das announces India’s Foreign Exchange reserves have surged to a record-breaking $645.6 billion as of March 29, 2024! 💰💥 This milestone showcases India’s economic strength and resilience. #CongressManifesto pic.twitter.com/gh6wVfzIJ5
The exemption can potentially stabilize the gold market in India, impacting market sentiment and prices due to the RBI’s significant gold purchases.
According to data from the India Bullion and Jewellers Association (IBJA), gold price in India is around Rs 71,210 per 10 gm as of April 8. As per market analysts, the gold rate may range around Rs 75,000 per 10 gm in the coming weeks.
“Gold prices have surged on safe-haven demand,” said the Monetary Policy Statement, 2024-25 Resolution of the Monetary Policy Committee (MPC) April 3 to 5, 2024.
Gold prices are currently reaching near record-high levels in both domestic and international markets, largely due to increasing speculation that the US central bank could implement its first rate cut as soon as June.
The impact of this exemption goes beyond the surface of gold importation. By reducing dependence on imports and promoting financial stability, the RBI’s increased flexibility in gold imports sets a new precedent for economic management. This move aligns with the government’s goal of enhancing sovereign wealth and fostering a more robust gold market in India.
As per the World Gold Council: “Gold is an important component of central bank reserves because of its safety, liquidity and return characteristics – the three key investment objectives for central banks. As such, they are significant holders of gold, accounting for around a fifth of all the gold that has been mined throughout history.”
The exemption granted to the RBI from paying customs duty and cess on gold imports has profound implications for the Indian economy.
Reduced Dependence on Imports
India heavily relies on gold imports, with cumulative imports surging by 38.76% reaching USD 44 billion from April to February in 2023-24, as per data from the Ministry of Commerce and Industry. Gold imports jumped substantially by 90.0 percent during October to February 2023-24 period, reflecting strong retail demand.
“Gold prices rallied in Q4 of 2023-24 as financial markets priced in deeper policy rate cuts for 2024 as reflected in lower bond yields and a weaker US dollar. The hardening of gold prices continued in Q1:2024 to record high in March on growing expectations of interest rate cuts by the US Fed, coupled with demand by central banks and Chinese investors,” as per RBI’s monetary policy report released on Friday, April 5th.
The exemption to RBI helps reduce the country’s dependence on external sources for gold supply, enhancing India’s self-sufficiency in the gold market.
On March 28, the Reserve Bank of India authorized Indian Overseas Bank, Punjab National Bank, and Union Bank of India to exclusively import gold for the fiscal year 2024-25, effective from April 1st.
RBI has also listed 11 other banks to import gold and silver both from April 1.
Banks act as intermediaries in the importation process, assisting gems and jewelry makers in acquiring the necessary gold for their operations.
Foreign Exchange Management
The RBI plays a crucial role in managing India’s foreign exchange reserves. By importing gold without additional levies, the RBI can diversify its reserves and manage foreign exchange fluctuations more effectively. This strengthens the RBI’s ability to maintain a stable exchange rate and manage any external shocks.
“The Indian rupee (INR) has remained largely range-bound as compared to both its emerging market peers and a few advanced economies during 2023-24. The INR was the most stable among major currencies during this period. As compared to the previous three years, the INR exhibited the lowest volatility in 2023-24. The relative stability of the INR reflects India’s sound macroeconomic fundamentals, financial stability and improvements in the external position,” RBI Governor Das said in a statement after the monetary policy review.
On the external financing side, India’s foreign portfolio investment (FPI) flows saw a significant turnaround in 2023-24. Net FPI inflows stood at USD 41.6 billion during 2023-24, as against net outflows in the preceding two years (USD 14.1 billion in 2021-22 and USD 4.8 billion in 2022-23). “This is the second highest level of FPI inflow after 2014-15,” Das said in his statement.
Enhancing Sovereign Wealth
Accumulating gold reserves enhances the country’s sovereign wealth. As gold prices tend to rise in times of economic uncertainty, having substantial gold reserves can act as a buffer against external shocks and support the Indian economy in challenging times.
“In January, the Reserve Bank of India made a significant addition to its gold reserves, acquiring 8.7 tonnes. This marks the most substantial purchase since July 2022, elevating the RBI’s total gold holdings to 812.3 tonnes—up from 803.58 tonnes in December 2023. Data from the World Gold Council confirms this increase. The strategy behind the central bank’s gold accumulation is to diversify its foreign exchange reserves and provide a buffer against foreign currency fluctuations, as noted by financial experts,” a senior manager at Kotak Mahindra Bank said.
Gold Reserves of Largest Gold Holding Countries Worldwide as of 2nd Quarter 2023
Rationale Behind the Exemption
By acknowledging the RBI’s crucial responsibility in maintaining financial stability and diversifying foreign exchange reserves, the government aims to empower the RBI to effectively manage the economy’s monetary aspects.
Granting this exemption to the RBI also serves as a positive signal to gold importers in India, showcasing the government’s commitment to facilitating gold imports and supporting the domestic gold market. This move is poised to attract more investors and stimulate economic activity within the gold sector, fostering growth opportunities and bolstering the overall economic landscape.
Furthermore, the decision aligns with the global trend of central banks diversifying their reserves, with gold being recognized as a safe-haven asset. Allowing the RBI to import gold without levies not only promotes reserve diversification but also enhances the stability and strength of India’s foreign exchange holdings. This strategic move positions the country favorably in the international financial arena.
Central banks around the world, including those of Russia, China, Turkey, Kazakhstan, and Poland, have been actively buying gold as part of their reserve management strategies. They view gold as a valuable asset for diversifying their holdings and enhancing financial stability.
Unwavering demand from central banks has been supportive of gold demand again this year and helped offset weakness in other areas of the market, keeping 2023 demand well above the ten-year moving average.
“In addition to monetary policy, geopolitical uncertainty is often a key driver of gold demand, and in 2024 we expect this to have a pronounced impact on the market. Ongoing conflicts, trade tensions, and over 60 elections taking place around the world are likely to encourage investors to turn to gold for its proven track record as a haven asset. We know that central banks often cite gold’s performance in times of crisis as a reason to buy, which suggests demand from this sector will stay high this year and may help to offset a slowdown in consumer demand due to elevated gold prices and slowing economic growth,” Louise Street, Senior Markets Analyst at the World Gold Council, commented.
In essence, the rationale behind this exemption underscores a multi-faceted approach aimed at promoting financial stability, fostering economic growth, and empowering the RBI in its pivotal role. By exempting the RBI from import levies on gold, the government paves the way for a more robust and resilient economy, reinforcing India’s position as a key player in the global financial landscape.
India ranked as the second-largest gold importer globally following China, possesses approximately 14% of the world’s gold reserves, amounting to around 27,000 tonnes.
Conclusion
Embracing a Golden Future
By leveraging gold as a strategic asset, India is poised to navigate economic uncertainties with greater resilience and fortitude.
Fortifying Financial Resilience
The exemption granted to the RBI signifies a pivotal step towards fortifying India’s financial resilience and sovereignty. As the RBI accumulates gold reserves free from additional levies, the country enhances its sovereign wealth and insulates itself against external shocks. With gold prices serving as a reliable hedge during turbulent times, India’s decision to exempt the RBI from import levies underscores a proactive approach to safeguarding the nation’s economic well-being.
Paving the Path to Prosperity
This exemption not only streamlines the gold import process but also signals a positive outlook for investors and industry stakeholders. As India embraces its rich cultural affinity for gold while embracing modern economic strategies, the future shines bright with possibilities for growth and prosperity.
Shaping a Resilient Economic Landscape
By empowering the central bank to diversify its reserves and strengthen its financial position, India is laying the groundwork for a more stable and robust economy. This strategic move aligns with global trends in reserve management and positions India as a forward-thinking player in the international arena.
“All central banks are moving towards de-dollarization strategies.As rightly pointed out, this could be a big & bold move by the Govt.of Bharat towards stabilizing the Indian Rupee!,” said Building MyGold-‘Bharat ka pehla Gold Bank’ Founder & CEO Amol Bansal. MyGold is a distinct platform or an app that addresses various shortcomings commonly found in existing digital gold platforms.
The MyGold app offers users the flexibility to monetize physical gold lying in homes and bank lockers. With features like ‘Upload Gold’ for digitizing existing idle gold at home or in the bank, and ‘Sell Gold’ for converting gold into money, users can easily manage their gold assets with a simple appointment booking.
Future Implications
As the Reserve Bank begins to import gold without the burden of customs duty and cess, the future implications of this decision loom large on the horizon. The exemption granted to the RBI opens doors to a myriad of possibilities that could shape the Indian gold market in the years to come.
Here are some key future implications to consider:
Diversification of Investment Portfolios
With the RBI’s increased ability to import gold at a lower cost, there is a potential for a shift towards diversification in investment portfolios. According to the World Gold Council, central banks across the globe have been increasing their gold reserves, with purchases reaching 273.9 tonnes in the third quarter of 2023. One tonne of gold is equal to 1000 kg of gold.
Technological Advancements
The exemption granted to the RBI could pave the way for technological advancements in the gold market. Innovations in digital platforms, blockchain technology, and secure transactions may revolutionize the way gold is traded and stored, offering greater convenience and transparency to consumers.
Global Market Influence
The RBI’s enhanced capacity to import gold without levies could position India as a significant player in the global gold market. Increased gold reserves and strategic imports may impact international prices, fostering stronger ties with gold-producing nations and shaping India’s role in the global economic landscape.
The government’s decision to allow the RBI to import gold without levies may spark broader policy reforms in the gold sector. Discussions on regulatory frameworks, trade agreements, and market interventions could take center stage, paving the way for a more dynamic and resilient gold market in India.
The future implications of the RBI’s exemption from customs duty and cess on gold imports hold the promise of transforming the Indian gold market into a hub of innovation, investment diversification, and global influence. As stakeholders navigate these uncharted waters, the evolving landscape presents both opportunities and challenges that will shape the trajectory of the gold market in India and beyond.
Navigating the realm of gold imports without paying customs duty and cess poses a set of potential challenges that must be carefully considered.
One key concern is the impact on the domestic gold market dynamics. With the RBI’s increased ability to import gold at a reduced cost, there may be fluctuations in supply and demand, potentially leading to price volatility and market uncertainties. Balancing the need for a stable market with the benefits of reduced import levies will require a delicate equilibrium.
Furthermore, the exemption granted to the RBI could also raise questions about fair competition within the gold industry. As the central bank gains a cost advantage in importing gold, there may be implications for other market participants, including gold traders, jewelers, and investors. Ensuring a level playing field and addressing any disparities that may arise from this exemption will be crucial to maintaining a healthy and transparent gold market ecosystem in India.
Another challenge that may arise from allowing the RBI to import gold without levies is the potential impact on revenue generation for the government. Customs duty and cess on gold imports serve as significant sources of revenue, contributing to the country’s fiscal resources. The exemption could lead to a shortfall in revenue, prompting the government to explore alternative sources or adjust fiscal policies accordingly to mitigate any adverse effects.
However, the revenue department is pretty happy with the revenue generated by gold imports this fiscal.
“Gold imports have given us good revenue….In nine months this fiscal, gold imports are at 617 tonnes. So gold imports should exceed 800 tonnes at this rate,” Revenue Secretary Sanjay Malhotra had said in an interview to Moneycontrol in February.
Moreover, managing the increased gold reserves accumulated by the RBI as a result of this exemption could present logistical challenges. Safeguarding and effectively utilizing these reserves to support financial stability and economic growth will require strategic planning and prudent decision-making.
Overall, while the decision to allow the RBI to import gold without paying import levies brings significant advantages, it also brings a set of challenges that need to be carefully addressed. By proactively addressing these challenges and implementing effective mechanisms to mitigate any potential drawbacks, India can harness the benefits of this policy change while safeguarding the integrity and stability of its gold market and economy.
While the implications of this exemption are still unfolding, it is evident that this move will have a profound impact on various stakeholders, from consumers and investors to policymakers and experts.
As India navigates through the complexities of this policy change, it is essential to closely monitor its effects on the economy and assess the long-term implications for the country’s financial well-being.
FAQs
What is the recent announcement regarding gold import by RBI?
The Indian government has allowed the Reserve Bank of India (RBI) to import gold without having to pay customs duty and the Agriculture Infrastructure and Development Cess (AIDC).
What are the implications of this exemption?
This exemption has significant implications for the Indian economy, gold market, and financial stability. It opens up new opportunities for RBI to manage its gold reserves more efficiently.
How will this exemption impact the Indian economy?
The exemption is expected to have a positive impact on the Indian economy by potentially boosting the gold market, increasing financial stability, and enhancing RBI’s ability to manage its gold reserves effectively.
What is the rationale behind this significant policy shift?
The rationale behind this exemption is to streamline the process of gold import by RBI, enhance its operational efficiency, and align with the government’s efforts to promote economic growth and stability.
Paytm company has become the talk of the town these days as RBI is cracking down on its business operations. Those in the know say that the Reserve Bank of India’s technical audit exposed accounting and supervisory issues caused by data and money traffic flows between the highly regulated Paytm Payments Bank Ltd. and the rest of the Paytm universe. According to those who asked not to be named since the issue is private, the regulator had previously notified Paytm about these problems, but they have not been remedied.
Those in the know also alleged that the regulator became concerned about the bank’s and Paytm’s shared management structures. They noticed that the same group of senior executives were representing both the bank and the fintech firm as a whole, which raised concerns about possible biases.
Citing ongoing noncompliance and supervisory concerns, the Reserve Bank of India (RBI) issued an order to Paytm Payments Bank, a subsidiary of Paytm and 49% owner of the parent firm, on January 31, 2024, ordering it to cease operations, including its popular mobile wallet business. The part of the bank that handles payments for the massive Paytm brand was ordered by the regulator to cease all banking operations as of February 29.
Stock in the affiliated company, One 97 Communication, fell below 20% the day after the Reserve Bank of India (RBI) forbade Paytm Payments’ Bank from accepting deposits and conducting credit transactions, including top-ups, in any customer accounts, wallets, FASTags, or other instruments after February 29.
On the National Stock Exchange, the stock price plummeted 19.99%, reaching Rs 609. On the BSE, it dropped 20% to Rs 608.80, its lower circuit limit. Following many brokerages’ downgrades of the stock, the company’s market capitalization dropped 9,664 crore rupees to 38,664 crore rupees in early trade.
According to an analyst call by One97 Communications, the parent company of Paytm, the company is collaborating with partner banks to expand its financial services and payments business. The CEO and creator of Paytm, Vijay Shekhar Sharma, has stated categorically that the firm will reduce its reliance on its affiliate, Paytm Payments Bank.
“Marketing business services are not affected due to these directions,” Sharma said, adding that OCL and PPSL are already in the process of shifting nodal accounts to other banks. Companies will collaborate with major banks, according to Milind Deora, president and group financial officer, who also offers these services to other consumer-facing businesses.
Fintech Players Supporting Paytm
Despite RBI’s strong crackdown on the fintech firm, many fintech players have come out with strong support for Paytm. There has been a lot of support for the Paytm founder from other company founders and VCs.
Some members of the startup community have spoken out against the RBI, claiming that it has an unsupportive attitude towards financial technology companies.
Following a protracted period of non-compliance with central bank regulations regarding customer due diligence, fund usage, and technology infrastructure, the Reserve Bank of India (RBI) has decided to block new deposits into Paytm Payments Bank accounts and other popular digital wallets starting in March.
Co-founder of BharatPe Ashneer Grover vented his anger at the RBI in a tweet, calling the limits imposed on Paytm “Doglapan.”
Extending his disappointment, Grover wrote on X “I don’t understand RBI. Clearly RBI does not want FinTechs in business – of late all regulations / moves are against Fintechs. Such moves will kill the sector altogether. The @FinMinIndia @nsitharaman @PMOIndia need to step in. Startups have been biggest creators of market cap and employment in last decade. Today IIM and IIT are struggling to place people – we as a country cannot afford such overreach ! Tom-Tom-Ing @UPI_NPCI to the world and punishing pioneers in the space is pure ‘Doglapan’ !”
I don’t understand RBI. Clearly RBI does not want FinTechs in business – of late all regulations / moves are against Fintechs. Such moves will kill the sector altogether. The @FinMinIndia@nsitharaman@PMOIndia need to step in. Startups have been biggest creators of market cap…
The prime minister’s office, the finance ministry, and Nirmala Sitharaman, the finance minister, are among the important authorities that Grover urged to swiftly resolve the issue because such regulatory restrictions could hinder the expansion of fintech in India.
Capitalmind CEO Deepak Shenoy was shocked by the RBI’s judgment and drew comparisons to the bank’s handling of the Yes Bank issue.
Paytm Experiences an Effect of ₹300-500 CR EBITDA
According to brokerage Macquarie, Paytm Payments Bank’s capacity to provide loan and payment products and retain customers will be significantly hindered by RBI’s restrictions.
Macquarie analyst Suresh Ganapathy noted, “We think revenue and profitability implications in the medium- to long-term could be significant and remain a key item to monitor. I couldn’t agree more.”
The RBI is essentially taking away Paytm’s PPI (pre-paid instrument) license, according to Ganapathy, since there is no immediate plan to fix the issues.
“Lending partners may reevaluate their relationships with Paytm moving forward due to the company’s poor standing with the regulator,” he added further.
One97 Communications and Paytm Payments Services Ltd’s nodal accounts must also be terminated by February 29, according to RBI’s Wednesday announcement.
Diwali festivities seem to have started a wee bit early within the fintech ecosystem. Spirits are high after the tough taskmaster and India’s banking regulator Reserve Bank of India gave a no-objection certificate to what is being touted as a rare merger.
Digital payments app company–Slice Pay–merging with the lesser-known Guwahati-based North East Small Finance Bank has certainly piqued the interest of stakeholders. This move effectively gives Slice the power to raise deposits, and lend and offer their own unique products to customers of NESFB.
Slice began operations in 2016 and was essentially a prepaid card with a credit line. According to data tracking platform Tracxn, the Bengaluru-based unicorn fintech company was valued at $1.8 billion as of March 2023. Meanwhile, NESFB’s valuation has been pegged at around $72.4 million.
For financial technology companies, this move comes as a lifeline as it opens up another avenue for scaling up operations.
In this article, we explore how fintech companies can lay the foundation and prepare for a probable merger-like scenario with a bank in the future.
Getting a banking license in India is a big deal. RBI scrutinizes applications under a microscope. Earlier this year in July, the RBI rejected three applications for small finance bank licenses, maintaining its reputation for being a taskmaster. In 2022, the regulator had rejected 6 licenses as it found it unsuitable.
One exception was the central bank’s green signal in 2021 to Resilient Innovations Pvt. Ltd (owned by fintech unicorn BharatPe) to buy a 49% stake in Unity Small Finance Bank. But, then this was a distress sale, where RBI was doing its job of safeguarding the deposit holders’ interest.
PwC’s 2021 report on neobanks in India delved into the ambiguity surrounding regulations for smaller digital financial institutions. Neobanks is a term used for financial institutions or fintech companies that operate digitally, without a physical presence. “Currently, unlike neobanks, the regulatory regime does not envisage a completely digital method of offering financial products. It is extremely critical that the current indirect regulations are relooked at in light of the digital offerings of neobanks and their relationship with financial entities.”
Transaction Value in the Neobanking Market
For a fintech company, opting to go through the due diligence of getting a bank license and following regulatory norms can prove to be a headache. At present, RBI rules state that a payments bank or an NBFC with a successful track record of 10 years is eligible to apply for a bank license. This may seem like a long wait for a fintech company as it may take years for some companies to even break even.
A fintech company usually has three options when it comes to the renewal of its license. One, it either applies for a non-banking finance company license with the RBI. Two, it can choose to join hands with another fintech company. And three, taking the heartbreaking decision of shutting shop in case they don’t rake in enough value. The option of merging with a small finance bank as a business objective was never really given much thought, until now.
Meanwhile, for a small finance bank, merging with a fintech company is a shortcut to upgrading its technology, staying relevant to the youth, and paring its losses to some extent. North East Small Finance Bank reported losses for the third straight year with losses widening to ₹288 crores in 2022-23. Its net worth dropped to ₹60 crore, much lower than RBI norms of maintaining a net worth of ₹200 crore. A section of the media has raised eyebrows over the shelf-life of this collaboration, given the losses on both sides and the contrasting cultures in both organizations.
However, the Slice-NESFB merger seems to be a well-planned strategy and not a spur-of-the-moment decision. In March, Slice acquired a 5% stake in NESFB, to get “comfort”. Media reports have also quoted an unnamed source from the company claiming that Slice had been following through with due diligence over the past 15 months to get the deal through.
True to their nature, startups, and fintech companies prefer to see this merger as a window of opportunity rather than view the deal with scepticism.
Before celebrations begin within the fintech space, it is time for companies to ponder over making the most of this development. How can they be the next in line as far as envisioning their banking ambitions are concerned? Taking cues from this new-age merger, we enlist a few parameters on which fintech companies can buckle up and chart a similar route to growth:
Self-regulate Prudently
Fintech companies have long borne the ‘bad boy’ image in the eyes of the regulator.
In 2022, RBI barred non-banking entities from embedding credit lines in their loading PPIs (prepaid payment instruments) such as prepaid cards or mobile wallets. This decision had hit Slice itself which then applied for a PPI license and received it by the end of 2022.
Recently RBI Governor Shaktikanta Das asked fintech companies to form a self-regulatory organization. In RBI’s view, such an organization would help to evolve best practices, protect privacy and data norms, avoid mis-selling, and promote ethical business practices.
“You need to think you are already a small finance bank and create those kinds of capabilities within the organization before the regulator would even consider something like this,” said Yogi Sadana, Founder and CEO of Zype Loan App. He added, “Unlike an NBFC, the amount of opportunities and liabilities that rests on a bank which a banking license allows taking customer deposits, to open bank accounts, that’s a completely different ball game altogether as compared with an NBFC which was not taking customer deposits, in terms of governance standards, in terms of operating stats, cheques, and balances, more importantly, the management. “
It’s only a matter of time before RBI comes cracking the whip on those who fail to comply, which could in turn tarnish the company’s image.
“Eventually they (fintechs) should be ready to come under regulation…the framework for regulation may come. RBI does not leave any stone unturned to leave anybody out of their purview,” said Jaslene Bawa, from Flame University who has worked as a financial market researcher in the corporate sector.
Bawa also said that having rigid mechanisms, assessing credit profiles, regular audits, keeping an easy cash flow, and creating a robust board can help a fintech or an NBFC get bank-ready.
Play to Your Strengths
Setting up an intricate financial technology infrastructure for a mid-sized or a small bank is an exhaustive process. In such a scenario, merging with a fintech company is akin to adding a bit of zing to their portfolio. In addition, fintech apps are a popular choice among the youth, giving ready access to a younger customer base, albeit small to begin with.
“Strategic plan for a fintech should be how nimbly can they set this (technology) up. Can they set it up internally or do they need to acquire an existing company with skill sets and reputation which can marry their reputation, culture, and ethos so that integration of both is seamless and easier,” said Badrinarayan Vedanthan, a banker with 26 years experience across MNCs, SME and MSME/Rural Finance business sectors. Vedanthan, now an independent financial consultant, also previously served as the head of strategy at Suryoday Small Finance Bank.
Slice’s main target has been the Gen Z and millennial crowd. In a media interview in 2021, Rajan Bajaj, founder of Slice emphasized how they would continue to target the young segment, despite their high-risk profile. “The average age of slice’s customers is 23-24, which differentiates us from the rest. We understand the risk and demand profile of this young customer and know how to help them navigate through their finances. At present, there is no other solution at a slice’s scale in the market that can cater to the needs of this generation in a transparent and scalable manner.”
Fintech companies should play to their strengths as far as their technological reach is concerned. Digital payments have revolutionized the way Indian banks and organizations have managed to get millions of unbanked individuals into the purview. RBI’s Das acknowledged this feat in his speech at the G20 summit held in September.
Just a month before the Slice-North East Small Finance Bank merger was announced, RBI Deputy Governor Rabi Sankar took note of the upper hand that fintech companies possess. Sankar said, “An arrangement of financial institutions buying services of fintech companies was “functional” adding, …fintech entities can perform functions where they have a competitive advantage and banks focusing on areas of their expertise. While customers benefit from an improved experience with curated products and services at competitive prices…”.
Customer is King
A customer-service-oriented approach will help a financial technology company deepen its stronghold and make it an attractive proposition for merging.
“Banking is not just a business, it’s a responsible service, so if they wish to merge with any such entity, they have to make sure that the customer is well taken care of,” said former banker and head of department – finance at Lexicon MILE, Dr Manju Chopra. “Secondly, they (fintech companies) can go slow on the entire due diligence, the valuation study. Don’t hurry into valuing or finding these banks, ensure that synergies are very very high,” she added.
The segment and geographies where a fintech company operates could also end up being their USP (unique selling point). Deepening that stronghold could turn fintech into an attractive proposition.
RBI’s Das has himself stressed the three key aspects that will make fintech “future-ready”.
“…key issues which are critical for the Fintech ecosystem to be stable and future ready. In this context, three critical issues, viz., customer centricity, governance, and self-regulation merit attention.”
On the surface, this merger seems like a foot in the door for financial technology companies’ growth, but it has raised many eyebrows for its “unusual marriage” of two contrasts.
It’s indeed an uphill task for both entities to find a middle ground as far as expanding their customer base, scaling up technology, and customer data sharing are concerned. Only time will tell if these opposites, who have attracted themselves to each other, will result in a honeymoon period for customers.
Unarguably, the merger has set the ball rolling for a number of possibilities for fintech companies and small finance banks to stay afloat. In the meantime, it only makes sense for these smaller players to clean up their image and books so that they are not caught by surprise when the RBI comes knocking at the door.
The US Dollar is the most commonly held currency in the world today holding over 60% of global foreign reserves. All the countries across the globe, including India, measure their currency values against USD in the global market. The fluctuating value of any currency against USD 1 is called the exchange rate.
Global trade is possible because of the existence of exchange rates and it is an important determinant of any country’s economic prowess.
It has been 75 years since India became a free country. Since then, the country’s currency has been on a roller-coaster ride against the US dollar. There have been various reasons for the largely downward trajectory of the INR’s journey including economic reforms, geopolitical issues, and even international issues. Currently, the Indian Rupee’s value against USD 1 is approximately INR 82.
It all began with the Bretton Woods Agreement in 1944 which required each country to measure its currency against the US Dollar. The dollar itself was convertible to gold at the rate of USD 35 per ounce. Being a part of this agreement, India followed the par value system of relative exchange rates. As the country was under British rule, INR value was derived from the British pound which was GBP 1 equaled INR 13. Similarly, GBP 1 equaled USD 2.73, which roughly translated to USD 1 equalling INR 4.76.
History of Indian Rupee vs US Dollar
INR Journey Post Independence
The journey of the Indian Rupee against the US Dollar can be mapped in different phases since India won independence.
Phase I – From Independence to the 1960s
India gained independence from British rule on 15th August 1947. It was a time of great turmoil as the country’s economy was in shambles. In a bid to jump-start the economy, the first prime minister, Jawaharlal Nehru adopted the five-year plans from Russia and began consistent loan borrowing in the 1950s which substantially increased in the 1960s.
However, even with increased borrowing, the country’s economy was facing a budget deficit which was further aggravated by the two wars in the decade. The first was the Indo-China war of 1962 and the second was the Indo-Pak war of 1965. Then struck the natural disaster of drought in 1965-1966. All of these added to increased spending on defense which reached a high of 24.06% of the total government expenditure.
Also, by 1966, the Indian Rupee finally moved away from the rate comparison of GBP 1 equalling INR 13 to a direct comparison with the US Dollar. All the economic upheaval of the previous years led the then Prime Minister to devalue the Indian Rupee to INR 7.50 against USD 1, which till then, had held a constant value of INR 4.76 against USD 1. This devaluation, in return, led to cheaper exports and expensive imports resulting in sharp inflation.
Phase II – Reduced Oil Production by OAPEC – The 1970s Decade
This was a decade of two major changes. First, the Bretton Woods Agreement collapsed in 1971, which meant India adopted the fixed rate system, linking its currency exchange rate to the UK Pound Sterling. A couple of years later, in 1973, the Organisation of Arab Petroleum Exporting Countries (OAPEC) decided to reduce oil production. By 1974, the INR value further deteriorated to INR 8.10 against USD 1 in reaction to the oil crisis. In a bid to ensure stability and to its currency and to ensure that the increasing disadvantages of associating with a single currency were curbed, the Indian Rupee was pegged to various other currencies as well.
Phase III – The 1980s and 1990s
The two decades of the 1980s and 1990s were politically unstable for India. The assassination of Prime Minister, Indira Gandhi, in 1984 reduced foreign investor confidence in the economy. A few years later, in 1991, the Soviet Union collapsed, which was, till then, a crucial trade partner of India. This led to a sudden and large export fall. The Persian Gulf nations had doubled crude oil prices just a year prior leading to India facing a serious balance of payment crisis. The fiscal deficit of the country decreased to 7.8% of the GDP and the interest payment rose a whopping 39% of the total government’s revenue. Furthermore, the WPI inflation within the country was around 14%. The country was on the brink of bankruptcy and had no choice but to further borrow money from IMF (International Monetary Fund) against its gold reserves.
This severe economic crisis of 1991 was dealt with by the then government by further devaluing the Indian Rupee and by 1992 the exchange rate of USD 1 was INR 25.92.
Phase IV – The 21st Century
The Indian Rupee’s decline continued into the new century and by 2002 it was valued at INR 48.99 against USD 1. However, this also proved to be a turning point in the country’s economy as Foreign Direct Investment (FDIs) increased within India and sustained till 2007 when the Indian Rupee appreciated reaching INR 39.27 against USD 1.
Unfortunately, the global financial market collapsed in 2008 ending the upward trend of the Indian Rupee and by 2009 it fell to a record of INR 51.75 against USD 1. Contributing global and domestic factors saw the INR further fall to 56.57 against USD 1 by early 2013.
Three years later, in an effort to combat corruption and black money within the economy, the Indian government announced demonetization which discontinued Rs. 500 and Rs. 1000 notes with immediate effect. This led to almost 86% of the country’s currency being invalid adversely impacting consumption patterns, investment, and income. It was also a major push to a new digital India, thereby increasing cashless transactions. However, in 2016, the value of the Indian Rupee further decreased to INR 68.77 against USD 1.
Last but not least, was the global economic crises that followed in the wake of the coronavirus pandemic of 2020 and the ongoing war between Russia and Ukraine. Currently, the exchange rate of the Indian Rupee against the US Dollar is approximately INR 82.7.
The journey of the Indian currency against the US dollar is also a testament to the economic journey of the country since independence. Being one of the fastest-growing economies today and also one of the top 5 in the world, India is in a strong position of recovery. It will be interesting to watch how the Indian currency fares against the US dollar in the coming days.
FAQs
What factors affect the exchange rate between the Indian rupee and the US dollar?
Several factors can affect the exchange rate between the Indian rupee and the US dollar, including:
Interest rates
Inflation
Economic performance
Political stability
Trade balance
Capital flows
Monetary policies
How has the exchange rate between the Indian rupee and the US dollar changed over time?
The exchange rate between the Indian rupee and the US dollar has varied over time due to economic and political factors. The rupee has appreciated and depreciated against the dollar at different times, influenced by global economic conditions, monetary policies, and geopolitical events.
How do changes in oil prices affect the exchange rate between the Indian rupee and the US dollar?
Oil price changes impact India’s import bill and can affect the exchange rate between the Indian rupee and the US dollar. Higher oil prices lead to a higher import bill, putting pressure on the rupee, while lower oil prices can support the value of the rupee.
What is the role of the Reserve Bank of India in managing the exchange rate between the Indian rupee and the US dollar?
The RBI manages the exchange rate by intervening in the foreign exchange market, using monetary policy tools, and managing India’s foreign exchange reserves.
As the digital revolution took over the regular life of people by storm, there are not many areas that remain uninterrupted by it. With the huge impetus given to Digital India by the Government of India, the domain of finance and accounting has also undergone tremendous changes.
Beginning with online payment with the help of UPI, it has gone to newer avenues, wherein digital platforms offer credits to the user. It is widely called digital lending. Using the technology of credit assessment and authentication, websites and apps these days allow their users to lend money. Today, banks are not far behind in this domain. They have come up with their own digital lending platforms. Their experience in traditional lending further gives them the edge to sustain themselves in the market.
In India, a large section of the society depends on the unorganized sector for credit which cracks down on poor farmers and micro enterprises with their high rate of interest. In that regard, the popularity of digital lending has, in fact, bought in financial inclusion meeting the hitherto unmet credit requirements of the people. As digital lending got more popular, it became necessary to keep a check on the activities that are taking place in this domain.
The Reserve Bank of India, in August 2022 released guidelines on digital lending so as to ensure the smooth and safe conduct of transactions through digital platforms. This article will look at important parts and implications of the guidelines issued.
The Reserve Bank of India has issued these guidelines keeping in mind the lending ecosystem of Regulated Entities (RE) and Lending Service Providers (LSP). They have classified digital lenders into three different groups. Firstly, those entities that are regulated by the Reserve Bank of India for lending business in itself.
Secondly, those entities authorized to carry out lending are based on the statutes and regulatory provisions of certain other bodies but are not managed by the RBI.
The third groups include those entities that are outside the purview of any kind of regulatory or statutory provisions.
All those lending groups that do not come within the discretion of the above-mentioned categories are free to formulate their own rules and regulations alluding to the recommendations of the working group.
Let’s take a brief look into the highlighting aspects of the guidelines:
Payments
The guideline mandates that all digital transactions should be made between the bank accounts of the regulated entity and the borrower. It should not include any third party or pool account. When they say Regulated Entity, it means any banking or non-banking financial company.
With regard to the payment of fees during the credit intermediation process, the guidelines clarify that the payment is not to be made by the borrower but should be made by the Non-Banking Financial Companies (NBFCs) i.e, the regulated entities.
If at all there are any penal interest or charges, they are to be disclosed in the key fact statement (KFS) on an annual basis and should be based on the outstanding amount of the loan.
Data Privacy
Data Breaches Worldwide
Data privacy is one of the most concerning thoughts in today’s digital world. The guidelines carefully address this issue by delineating that the usage of user information should be need-based. The digital lending platforms are barred from accessing the user’s files, contact lists, call logs, media, and other telephonic functions.
However, they can have one-time access to their camera and microphone to complete their KYC procedures. This will be possible only after the explicit consent of the customer. Additionally, the guideline also states that the user has the option to deny access to certain data, restrict disclosure of certain information to any third party and deny data retention. The user can also revoke the consent given later if they feel so. They can also delete the application and forget the data when it is being uninstalled or deleted.
While signing up, the digital lending platform needs to disclose the credit limit information related to product features and the related costs. It includes the disclosure of the all-inclusive costs of digital loans in the form of Annual Percentage Rates (APRs). The guidelines also prohibit these platforms from increasing the credit limit without the consent of the borrower.
Reporting Lending to CICs
Any form of lending carried out through Digital Lending Applications (DLAs) of RE or LSPs is to be reported to the Credit Information Companies (CICs) irrespective of their tenure or nature.
The guidelines extend these requirements even to those lending carried out through Buy Now Pay Later model. This is with regard to the provisions of the Credit Information Companies (CIC) Regulation Act, 2005, issued by the Reserve Bank of India at regular intervals.
Options to Exit Loans
The RBI guidelines give the user an option to exit the availed digital loan by paying only the principal and proportionate APR without paying any fine within a stipulated time called the cooling-off period or look-up period. The cooling-off time is determined by the boards of the respective regulating entities. Such a time period should not be less than three days for loans having a tenure of seven days or more and one day for loans having a tenure of fewer than seven days. For those borrowers, who continue even after this period, the provisions of pre-payment will be continued based on the extant RBI guidelines.
Grievance Redressal
Every Regulated Entity (RE) and Lending Service Provider is required to appoint a grievance redressal officer. They are supposed to address the FinTech and Digital lending-related complaints issues, faced by the customers.
Apart from that, the issues related to one’s own Digital Lending Applications are also to be addressed by the officer. Apart from facilitating the option to lodge complaints, the contact details of the respective nodal grievance redressal officer have to be visibly displayed on the website of the regulated entity.
To further foolproof the grievance redressal system, RBI allows the user to file complaints through the Complaint Management System (CMS) portal under the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS) in case the complaint is not resolved within 30 days of filing.
The development of technology services has tremendously contributed to the mushrooming of Digital Lending Services, which gained quick popularity among the young and middle-aged population alike. While such schemes have been helpful to a lot of people, it has also resulted in many unethical and fraudulent practices, wherein users get scammed.
Apart from that, various platforms also use this service as a way to charge exorbitant interest rates from users. It is in such a context that the guidelines released by the RBI become all the more relevant. There was a need to manage and control the proliferation of this budding service. These guidelines will ensure that lending through digital platforms happens responsibly wherein both the parties benefit from the advancement of fintech facilities.
FAQs
When and where was RBI established?
The Reserve Bank of India was established on 1st April 1935, in Kolkata.
Where is the central office of RBI?
RBI headquarters is currently located in Mumbai after it was shifted from Kolkata in 1937.
Who is the current governor of RBI?
Shaktikanta Das is the present governor of RBI.
When did RBI release Guidelines for Digital Lending?
RBI released the Guidelines for Digital Lending in August 2022.
International economies are adopting unconventional stimulus measures, such as printing money, in response to the Covid-induced crisis. The United States, the European Central Bank, Japan, and even developing economies like Turkey and Indonesia are creating money to revive their economies.
Now as people have very smartly pointed out saying; “India must do the same.” The question entails, can India afford to do it? If yes then how will it help? as well as what India can do about it?
Now going by the textbook meaning, The Reserve Bank of India has a monopoly on printing the country’s currency notes. Except for one rupee note, it has sole authority to issue currency notes of various values (which are issued by the Ministry of Finance.)
So basically, the Central bank buys Government debts/ bonds – Which injects money into the economy – This is similar to printing new money, but this is done electronically.
Should the RBI print money to boost the economy?
The Reserve Bank of India
Is it as easy as it sounds? In India, small industries have sprung up recently, pleading with the Reserve Bank of India to generate money and give it to the government to spend.
The central government’s revenue collection through excise duty and the goods and services tax, or Goods and Services Tax (GST), has collapsed due to low employment and a sharp decline in non-essential consumption beyond food, medicine, and a few other basic products.
Given how adversely foreign trade has been affected in the post-Covid era, there is reason to assume that tax collection through customs duties has also suffered. The central government is expected to benefit from the recent significant rise in excise duty on gasoline and diesel.
Are Other Economies Doing the Same?
Yes, In April 2020, the Bank of England granted a direct monetization facility to the UK government, despite Bank of England Governor Andrew Bailey’s fierce opposition until the last minute. Similarly, the US Federal Reserve used it extensively to tackle the financial crisis of 2008, and the same pattern is being used to combat the Covid situation.
A snippet of an article published on the Financial Times website about the Bank of England granting direct help to the UK government.
The European Central Bank has lifted the restriction on the number of bonds it can purchase from any single Eurozone country. The Bank of England has come on record and said, If necessary, we are willing to lend money to the government on a temporary basis. The Bank of Japan will also purchase an infinite number of government bonds.
The Bank of England
Is Monetization Necessary?
In the past, The RBI “naturally” monetized the government’s deficit until 1997. Direct monetization of deficit spending, on the other hand, has downsides. Manmohan Singh (then-RBI Governor and then-Finance Minister) and C Rangarajan (then-RBI Governor) decided in 1994 to scale out the facility by 1997.
However, even Rangarajan now believes that India would have to monetize its deficit. “Deficit monetization is necessary. He recently stated that “such a big increase in expenditure cannot be controlled without monetization of government debt.”
State governments also aren’t making a lot of money from taxes. With lockdown in place for more than two years, private automobiles are hardly moving; as a result, state governments’ sales tax/value added tax revenues on gasoline and diesel use have taken a hit. Even though several state governments have raised the sales tax/VAT on gasoline and diesel, this trend continues.
At the start of the lockdown, alcohol shops were closed, and state and local governments lost all of the income generated through this channel. As a remedy, alcohol stores were opened amid the concern of societal tensions and moral concerns.
A snippet of the news article explaining the opening of liquor shops during the pandemic by TOI
As a result, both the federal government and state governments earn very little revenue from taxation. However, to meet its usual obligations (salaries, pensions, vendor payments, debt servicing, and so on), this is also the moment when the government is supposed to act as the last-resort spender.
Due to various reasons (varying from people being confined in their houses to the psychology of a recession setting in), private sector expenditure has fallen, and the government must spend money to get the economy moving again.
The above graph shows the Indian GDP growth for the years 2015-2021
Challenges for the Government
The central assumption against it is not really about how it started as it is about how it ended. This power, in theory, allows the government to boost overall demand at a time when private demand is falling, as it is right now. This instrument, however, sows the seeds for another crisis if governments do not withdraw quickly enough. But how?
Expenditure by the government with this new cash enhances salaries and raises private demand in the economy. As a consequence, inflation is fueled. A small increase in inflation is helpful since it stimulates economic activity. However, if the government does not intervene in a timely manner, more money will flood the market, causing high inflation.
And, while inflation takes time to show up, it’s sometimes too late for governments to realize they’ve over-borrowed. Macroeconomic instability is exacerbated by rising prices and government debt.
One argument against direct commercialization is that governments are seen as inefficient and corrupt whenever it comes to spending decisions, such as who to bail out and how much.
In short; taking most of these variables into account, practically everyone who has knowledge of regular economics or business recommends money printing. This is largely what representatives of this emerging small-scale industry are proposing, urging the RBI to generate money and the government to spend it.
Conclusion
As for the effect of Covid-19 on the nation, the economy was most affected by it. But to revive the economy, printing money is an option to consider or not is still a debatable topic.
It is best believed to provide better wages to the poor instead of directly dropping the pot of money to them. Yet, many countries have gone with the idea of printing their currency to revive the economy but with the increased inflation as an after effect.
FAQs
Does printing money cause inflation?
Increased money might create more need for products. This can also hinder the basic demand and supply model causing inflation in the nation.
Can a country print unlimited money?
Basically, there is no national restriction over the printing of money. Yet, printing money is a solution that is accepted by governments when the nation falls short of money. With increasing money in a nation, inflation will automatically increase and the power of currency will fall weak.
Who decides how much money to be printed?
Each country has different regulations and responsible bodies to print their money. For India, RBI is given the power to print money and decide on the same. Yet, the final decision is still kept under the government to decide.
What happens to an economy if the government print too much money?
If a country keeps on increasing money, inflation will rise an equal percentage. With the situation, there can come a time when inflation will be highest in the market because of no supply of goods and infinite demand.
Nitin Konde
