A STUDY ON THE ROLE OF RBI IN INDIAN ECONOMY

The Reserve Bank of India is India's central bank and regulatory body under the
jurisdiction of Ministry of Finance, Government of India. It is responsible for the issue and
supply of the Indian rupee and the regulation of the Indian banking system.
It also manages the country's main payment systems and works to promote its economic
development. Bharatiya Reserve Bank Note Mudran is one of the specialised divisions of
RBI through which it mints Indian bank notes and coins. RBI established the National
Payments Corporation of India as one of its specialised division to regulate the payment
and settlement systems in India. Deposit Insurance and Credit Guarantee Corporation was
established by RBI as one of its specialised division for the purpose of providing insurance
of deposits and guaranteeing of credit facilities to all Indian banks.
The overall direction of the RBI lies with the 21-member central board of directors,
composed of: the governor, four deputy governors, two finance ministry representatives,
ten government-nominated directors; and four directors who represent local boards for
Mumbai, Kolkata, Chennai, and Delhi. Each of these local boards consists of five
members who represent regional interests and the interests of co-operative and indigenous
banks.
RBI is a member bank of the Asian Clearing Union. The Asian Clearing Union (ACU),
with headquarters in Tehran, Iran, was established on December 9, 1974, at the initiative
of the United Nations Economic and Social Commission for Asia and the Pacific
(ESCAP). The primary objective of ACU, at the time of its establishment, was to secure
regional co-operation as regards the settlement of eligible monetary transactions among
the members of the Union to provide a system for clearing payments among the member
countries on a multilateral basis.
RBI Headquarter is in Mumbai. Current Governor of Reserve Bank of India is Shaktikanta
Das. Shaktikanta Das is a retired 1980 batch Indian Administrative Service (IAS) officer
of Tamil Nadu cadre. Currently serving as the 25th governor of the Reserve Bank of India
(RBI).
History
The Reserve Bank of India was established following the Reserve Bank of India Act of
1934. Though privately owned initially, it was nationalised in 1949 and since then fully
owned by the Ministry of Finance, Government of India (GoI).
At the time of establishment, the authorized capital of the Reserve Bank of India was Rs. 5
crores. The government's share in this was only Rs 20-22 lakhs.
The bank was set up based on the recommendations of the 1926 Royal Commission on
Indian Currency and Finance, also known as the Hilton Young Commission.
The Central Office of the RBI was established in Calcutta but was moved to Mumbai in
1937. The RBI also acted as Burma's (now Myanmar) central bank until April 1947.
After the Partition of India in August 1947, the bank served as the central bank for
Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though
set up as a shareholders' bank, the RBI has been fully owned by the Government of India
since its nationalisation in 1949.
In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru,
developed a centrally planned economic policy that focused on the agricultural sector. The
administration nationalised commercial banks and established, based on the Banking
Companies Act, 1949, a central bank regulation as part of the RBI. Furthermore, the
central bank was ordered to support economic plan with loans.
As a result of bank crashes, the RBI was requested to establish and monitor a deposit
insurance system. Meant to restore the trust in the national bank system, it was initialised
on 7 December 1961. The Indian government founded funds to promote the economy, and
used the slogan "Developing Banking". The government of India restructured the national
bank market and nationalised a lot of institutes. As a result, the RBI had to play the central
part in controlling and supporting this public banking sector.
In 1969, the Indira Gandhi-headed government nationalised 14 major commercial banks.
Upon Indira Gandhi's return to power in 1980, a further six banks were nationalised. The
regulation of the economy and especially the financial sector was reinforced by the
Government of India in the 1970s and 1980s. The central bank became the central player
and increased its policies a lot for various tasks like interests, reserve ratio and visible
deposits. These measures aimed at better economic development and had a huge effect on
the company policy of the institutes. The banks lend money in selected sectors, like
agricultural business and small trade companies. The Banking Commission was
established on Wednesday, 29 January 1969, to analyse banking costs, effects of
legislations and banking procedures, including non-banking financial intermediaries and
indigenous banking on Government of India economy; with R.G. Saraiya as the chairman.
The Discount and Finance House of India began its operations in the monetary market in
April 1988, the National Housing Bank, founded in July 1988, was forced to invest in the
property market and a new financial law improved the versatility of direct deposit by more
security measures and liberalisation.
The national economy contracted in July 1991 as the Indian rupee was devalued. The
currency lost 18% of its value relative to the US dollar, and the Narsimham Committee
advised restructuring the financial sector by a temporal reduced reserve ratio as well as the
statutory liquidity ratio. New guidelines were published in 1993 to establish a private
banking sector. This turning point was meant to reinforce the market and was often called
neo-liberal. The central bank deregulated bank interests and some sectors of the financial
market like the trust and property markets. This first phase was a success and the central
government forced a diversity liberalisation to diversify owner structures in 1998.
The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed
nationalised banks in July to interact with the capital market to reinforce their capital base.
The central bank founded a subsidiary company-The Bharatiya Reserve Bank Note
Mudran Private Limited on 3 February 1995 to produce banknotes.
A lot of committees analysed the Indian economy between 1985 and 1989 including;
1)Stock Holding Corporation of India Ltd. (SHCIL) a depository institution commenced
operations as well as Security & Exchange Board of India (SEBI) established to deal with
the development and regulation of the securities market and investor protection.
2) The Discount and Finance House of India set up as a money market institution,
commenced operations.
3) Board for Industrial and Financial Reconstruction set up and became operational on
May 1987 reflecting concerns related to Industrial Sickness.
4) Magnetic Ink Character Recognition (MICR) technology introduced for cheque
clearing.
5) Indira Gandhi Institute of Development Research (IGIDR) was established by Reserve
Bank as an advanced studies institute to promote research on Development issues from a
multi-disciplinary point of view.
6) Certificates of Deposit (CDs) and Commercial Paper (CPs) introduced in India to widen
the monetary instruments and give investors greater flexibility.

Recent Development
The Foreign Exchange Management Act, 1999 came into force in June 2000. It should
improve the item in 2004–2005 (National Electronic Fund Transfer).
The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions,
was founded in 2006 and produces banknotes and coins.
In 2016, the Government of India amended the RBI Act to establish the Monetary Policy
Committee (MPC) to set. This limited the role of the RBI in setting interest rates, as the
MPC membership is evenly divided between members of the RBI and independent
members appointed by the government.
In April 2018, the RBI announced that "entities regulated by RBI shall not deal with or
provide services to any individual or business entities dealing with or settling virtual
currencies," including Bitcoin. While the RBI later clarified that it "has not prohibited"
virtual currencies, a three-judge panel of the Supreme Court of India issued a ruling on 4
March 2020 that the RBI had failed to show "at least some semblance of any damage
suffered by its regulated entities" through the handling of virtual currencies to justify its
decision.

The court challenge was filed by the Internet and Mobile Association of India, whose
members include some cryptocurrency exchanges whose businesses suffered following the
RBI's 2018 order.
On 12th November 2021, the Prime Minister of India, Narendra Modi, launched two new
schemes which aim at expanding investments and ensuring more security for investors.
The two new schemes include the RBI Retail Direct Scheme and the Reserve Bank
Integrated Ombudsman Scheme.
The RBI Retail Direct Scheme is targeted at retail investors to invest easily in government
securities. According to RBI, the scheme will allow retail investors to open and maintain
their government securities account free of cost.
The RBI Integrated Ombudsman Scheme aims to further improve the grievance redress
mechanism for resolving customer complaints against entities regulated by the central
bank.
The Current reserves of India is ₹4,669,426 crore (US$620 billion)

Structure of RBI
 The central board of directors is the main committee of the central bank. The
Government of India appoints the directors for a four-year term. The board consists of a
governor, and not more than four deputy governors; four directors to represent the regional
boards.
 Usually the Economic Affairs Secretary and the Financial Services Secretary
from the Ministry of Finance and ten other directors from various fields. The Reserve
Bank – under Raghu ram Rajan's governorship wanted to create a post of a chief operating
officer (COO), in the rank of deputy governor and wanted to re-allocate work between the
five of them.
 The bank is headed by the governor, currently Shaktikanta Das.
 Two of the four deputy governors are traditionally from RBI ranks and are
selected from the bank's executive directors. One is nominated from among the
chairpersons of public sector banks and the other is an economist.
 An Indian Administrative Service(IAS) officer can also be appointed as deputy
governor of RBI and later as the governor of RBI
 Beside these positions, there are multiple people that work in the Reserve Bank
of India including general managers, deputy general managers, assistant general managers,
support staff, executive directors and chief general managers.

Branches and Support Bodies

The RBI has four regional representations: North in New Delhi, South in Chennai, East in
Kolkata and West in Mumbai. The representations are formed by five members, appointed
for four years by the central government and with the advice of the central board of
directors serve as a forum for regional banks and to deal with delegated tasks from the
Central Board.
It has two training colleges for its officers, viz. Reserve Bank Staff College, Chennai and
College of Agricultural Banking, Pune.
There are three autonomous institutions run by RBI namely National Institute of Bank
Management (NIBM), Indira Gandhi Institute of Development Research (IGIDR),
Institute for Development and Research in Banking Technology (IDRBT).
There are also four zonal training centres at Mumbai, Chennai, Kolkata, and New Delhi.
The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD
committee to control the financial institutions. It has four members, appointed for two
years, and takes measures to strength the role of statutory auditors in the financial sector,
external monitoring, and internal controlling systems. The Tarapore committee was set up
by the Reserve Bank of India under the chairmanship of former RBI deputy governor S. S.
Tarapore to "lay the road map" to capital account convertibility. The five-member
committee recommended a three-year time frame for complete convertibility by 1999–
2000.
On 8 December 2017, Surekha Marandi, Executive Director (ED) of Reserve Bank of
India, said RBI will open an office in the north-eastern state of Arunachal Pradesh.
Divisions
1) Bharatiya Reserve Bank Note Mudran
Bharatiya Reserve Bank Note Mudran was established by RBI on 3rd Feb 1995 for the
purpose to enable RBI to bridge the gap between demand and supply of Indian notes in the
country.
2) Deposit Insurance and Credit Guarantee Corporation
Deposit Insurance and Credit Guarantee Corporation was established by RBI for the
purpose of providing insurance of deposits and guaranteeing of credit facilities to all
Indian banks.
3) National Payments Corporation of India
National Payments Corporation of India was established by RBI for the purpose of
management of the payment and settlement systems in India.
4) Reserve Bank Information Technology
It has been set up by RBI to serve its Information Technology and cybersecurity needs and
to improve the cyber resilience of the Indian banking industry.
5) Indian Financial Technology and Allied Services
It was established by RBI, mandated to design, deploy and support IT-related services to
all Banks and Financial Institutions in the country and also to the Reserve Bank of India. It
manages and operates the financial messaging platform (SFMS) that comprises Real-Time
Gross Settlement and National Electronic Funds Transfer. INFINET is also managed by
IFTAS. The IFTAS has taken over the Indian Financial Networks (INFINET), Structured
Financial Messaging System (SFMS) and the Indian Banking Community Cloud (IBCC)
from the IDRBT, effective April 01, 2016.

Functions
The central bank of any country executes many functions such as overseeing monetary
policy, issuing currency, managing foreign exchange, working as a bank for government
and as a banker of scheduled commercial banks.
The preamble of the Reserve Bank of India describes its main functions as- To regulate the
issue of Bank Notes and keeping of reserves with a view to securing monetary stability in
India and generally to operate the currency and credit system of the country to its
advantage.
Financial supervision
The primary objective of RBI is to undertake consolidated supervision of the financial
sector comprising commercial banks, financial institutions, and non-banking finance
companies.
The board is constituted by co-opting four directors from the Central Board as members
for a term of two years and is chaired by the governor. The deputy governors of the
reserve bank are ex-officio members. One deputy governor, usually the deputy governor in
charge of banking regulation and supervision, is nominated as the vice-chairman of the
board. The board is required to meet normally once every month. It considers inspection
reports and other supervisory issues placed before it by the supervisory departments.
Regulator and supervisor of the financial system
The institution is also the regulator and supervisor of the financial system and prescribes
broad parameters of banking operations within which the country's banking and financial
system functions. Its objectives are to maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to the public. The Banking
Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for
effective addressing of complaints by bank customers. The RBI controls the monetary
supply, monitors economic indicators like the gross domestic product and has to decide the
design of the rupee banknotes as well as coins.
Regulator and supervisor of the payment and settlement systems
Payment and settlement systems play an important role in improving overall economic
efficiency. The Payment and Settlement Systems Act of 2007 (PSS Act) gives the Reserve
Bank oversight authority, including regulation and supervision, for the payment and
settlement systems in the country. In this role, the RBI focuses on the development and
functioning of safe, secure and efficient payment and settlement mechanisms. Two
payment systems National Electronic Fund Transfer (NEFT) and Real-Time Gross
Settlement (RTGS) allow individuals, companies and firms to transfer funds from one
bank to another. These facilities can only be used for transferring money within the
country.
From December 16, 2019, one can transfer money online using the National Electronic
Funds Transfer (NEFT) route 24x7, i.e., any time of the day and any day of the week. The
Reserve Bank of India stated earlier in December 2019 that bank customers will be able to
transfer funds through NEFT around the clock on all days including weekends and
holidays from December 16. In RTGS, transactions are processed continuously 24x7.
Banker and debt manager to government
Just as individuals need a bank to carry out their financial transactions effectively and
efficiently, governments also need a bank to carry out their financial transactions. The RBI
serves this purpose for the Government of India (GoI). As a banker to the Government of
India, the RBI maintains its accounts, receive payments into and make payments out of
these accounts. The RBI also helps the GoI to raise money from the public via issuing
bonds and government-approved securities.
RBI issue taxable bonds for investments. RBI is offering Floating Rate Savings Bonds,
2020 (Taxable) – FRSB 2020 (T). The interest on the bonds is payable semi-annually on 1
Jan and 1 July every year. Interest rate will be paid as 7.15% on Jan 2022. The Interest rate
for next half-year will be reset every six months, the first reset being on 1 January 2021.
There is no option to pay interest on cumulative basis.
Managing foreign exchange
The central bank manages to reach different goals of the Foreign Exchange Management
Act, 1999. Their objective is to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India. With the increasing
integration of the Indian economy with the global economy arising from greater trade and
capital flows, the foreign exchange market has evolved as a key segment of the Indian
financial market and the RBI has an important role to play in regulating and managing this
segment. The RBI manages forex and gold reserves of the nation.
On a given day, the foreign exchange rate reflects the demand for and supply of foreign
exchange arising from trade and capital transactions. The RBI's Financial Markets
Department (FMD) participates in the foreign exchange market by undertaking
sales/purchases of foreign currency to ease volatility in periods of excess demand
for/supply of foreign currency.
Issue of Currency
Other than the Government of India, the Reserve Bank of India is the sole body authorised
to issue banknotes in India.
The bank also destroys banknotes when they are not fit for circulation. All the money
issued by the central bank is its monetary liability, i.e., the central bank is obliged to back
the currency with assets of equal value, to enhance public confidence in paper currency.
The objectives are to issue banknotes and give the public adequate supply of the same, to
maintain the currency and credit system of the country to utilise it in its best advantage,
and to maintain the reserves.
The RBI maintains the economic structure of the country so that it can achieve the
objective of price stability as well as economic development because both objectives are
diverse in themselves.
For the printing of notes, RBI uses four facilities
The Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly
owned company of the Government of India, have printing presses at Nashik, Maharashtra
and Dewas, Madhya Pradesh.
The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the
RBI, has printing facilities in Mysore, Karnataka and Salboni, West Bengal.
For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and
Hyderabad for coin production.
New ₹500 and ₹2,000 notes were been issued on 8 November 2016. The old series of
₹1,000 and ₹500 notes were banned in 8 November 2016, and are no longer in use.
Bankers' bank
Reserve Bank of India also works as a central bank where commercial banks are account
holders and can deposit money. RBI maintains banking accounts of all scheduled banks.
Commercial banks create credit. It is the duty of the RBI to control the credit through the
CRR, repo rate, and open market operations. As the bankers' bank, the RBI facilitates the
clearing of cheques between the commercial banks and helps the inter-bank transfer of
funds. It can grant financial accommodation to schedule banks. It acts as the lender of the
last resort by providing emergency advances to the banks.
Regulator of the Banking System
RBI has the responsibility of regulating the nation's financial system. As a regulator and
supervisor of the Indian banking system it ensures financial stability & public confidence
in the banking system. RBI uses methods like On-site inspections, off-site surveillance,
scrutiny & periodic meetings to supervise new bank licences, setting capital requirements
and regulating interest rates in specific areas. RBI is currently focused on implementing
norms.
Developmental role
The central bank has to perform a wide range of promotional functions to support national
objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related
problems. Some of these problems are results of the dominant part of the public sector.
Key tools in this effort include Priority Sector Lending such as agriculture, micro and
small enterprises (MSE), housing and education. RBI work towards strengthening and
supporting small local banks and encourage banks to open branches in rural areas to
include large section of society in banking net.
Detection of fake currency
To curb the counterfeit money problem in India, RBI has launched a website to raise
awareness among masses about fake banknotes in the market.
www.paisaboltahai.rbi.org.in provides information about identifying fake currency.
On 22 January 2014; RBI gave a press release stating that after 31 March 2014, it will
completely withdraw from circulation of all banknotes issued prior to 2005. From 1 April
2014, the public will be required to approach banks for exchanging these notes. Banks will
provide exchange facility for these notes until further communication. The reserve bank
has also clarified that the notes issued before 2005 will continue to be legal tender. This
would mean that banks are required to exchange the notes for their customers as well as
for non-customers. From 1 July 2014, however, to exchange more than 15 pieces of '500
and '1000 notes, non-customers will have to furnish proof of identity and residence as well
as show aadhar to the bank branch in which he/she wants to exchange the notes.
This move from the reserve bank is expected to unearth black money held in cash. As the
new currency notes have added increased security features, they would help in curbing the
menace of fake currency.
Developmental role
The central bank has to perform a wide range of promotional functions to support national
objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related
problems. Some of these problems are results of the dominant part of the public sector.
Key tools in this effort include Priority Sector Lending such as agriculture, micro and
small enterprises (MSE), housing and education. RBI work towards strengthening and
supporting small local banks and encourage banks to open branches in rural areas to
include large section of society in banking net.
Related functions
The RBI is also a banker to the government and performs merchant banking function for
the central and the state governments. It also acts as their banker. The National Housing
Bank (NHB) was established in 1988 to promote private real estate acquisition. The
institution maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012
said that Indian banking system is resilient enough to face the stress caused by the
drought-like situation because of poor monsoon this year.
Custodian to foreign exchange
The Reserve Bank has custody of the country's reserves of international currency, and this
enables the Reserve Bank to deal with crisis connected with adverse balance of payments
position.
CSD for G-Sec (Government Securities)
Public Debt Office (PDO) acts as CSD (Central Securities Depository) for G-Sec.
MIFOR (Mumbai Interbank Forward Offer Rate)
With LIBOR cessation in 2021, RBI is set to replace MIFOR with a new benchmark.
MIFOR has LIBOR as one of the components and used in interest rate swap (IRS)
markets.

Policy rates and reserve ratios

Repo rate
Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the
RBI lends money to the commercial banks for a short-term (a maximum of 90 days).
When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants
to make it more expensive for the banks to borrow money, it increases the repo rate
similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate.
If the repo rate is increased, banks can't carry out their business at a profit whereas the
very opposite happens when the repo rate is cut down. Generally, repo rates are cut down
whenever the country needs to progress in banking and economy.
If banks want to borrow money (for short term, usually overnight) from RBI then banks
have to charge this interest rate. Banks have to pledge government securities as collateral.
This kind of deal happens through a re-purchase agreement. If a bank wants to borrow, it
has to provide government securities at least worth ₹ 1 billion (could be more because of
margin requirement which is 5%–10% of loan amount) and agree to repurchase them at
₹1.07 billion (US$14 million) at the end of borrowing period. So the bank has paid ₹65
million (US$860,000) as interest. This is the reason it is called repo rate.
The government securities which are provided by banks as collateral cannot come from
SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalties).
To curb inflation, the RBI increases repo rate which will make borrowing costs for banks.
Banks will pass this increased cost to their customers which make borrowing costly in the
whole economy. Fewer people will apply for loans and aggregate demand will be reduced.
This will result in inflation coming down. The RBI does the opposite to fight deflation.
When the RBI reduces the repo rate, banks are not legally required to reduce their own
base rate.
Reverse repo rate
As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate is
the short term borrowing rate in which commercial bank Park their surplus in RBI The
reserve bank uses this tool when it feels there is too much money floating in the banking
system. An increase in the reverse repo rate means that the banks will get a higher rate of
interest from RBI. As a result, banks prefer to lend their money to RBI which is always
safe instead of lending it to others (people, companies, etc.) which is always risky.
Repo rate signifies the rate at which liquidity is injected into the banking system by RBI,
whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity
from the banks. Currently, reverse repo rate is 3.35%
Statutory liquidity ratio
Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash
and approved securities. Higher liquidity ratio forces commercial banks to maintain a
larger proportion of their resources in liquid form and thus reduces their capacity to grant
loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts
the bank funds from loans and advances to investment in government and approved
securities.
In well-developed economies, central banks use open market operations—buying and
selling of eligible securities by the central bank in the money market—to influence the
volume of cash reserves with commercial banks and thus influence the volume of loans
and advances they can make to the commercial and industrial sectors. In the open money
market, government securities are traded at market-related rates of interest. The RBI is
resorting increasing to open market operations in recent years. Generally, the RBI uses
1) Minimum margins for lending against specific securities.
2) A ceiling on the amounts of credit for certain purposes.
3) The discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:
1) Parts of the interest rate structure, i.e., on small savings and provident funds, are
administratively set.
2) Banks are mandatory required to keep 18% of their NDTL (net demand and time
liabilities) in the form of liquid assets.
3) Banks are required to lend to the priority sectors to the extent of 40% of their
advances.

Bank rate
Bank rate is defined in Section 49 of the RBI Act of 1934 as the 'standard rate at which
RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible
for purchase'. When banks want to borrow long term funds from the RBI, it is the interest
rate which the RBI charges to them. It is currently set to 4.25.
Liquidity adjustment facility
Liquidity adjustment facility was introduced in 2000. LAF is a facility provided by the
Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need
or to park excess funds with the RBI on an overnight basis against the collateral of
government securities.
RBI accepts applications for a minimum amount of ₹5 crore (US$660,000) and in
multiples of ₹ 50 million thereafter.
Cash reserve ratio
CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the
bank's net demand and time liabilities to ensure the liquidity and solvency of the scheduled
banks. The share of net demand and time liabilities that banks must maintain as cash with
the RBI. The RBI has set CRR at 3%. A 1% change in CRR affects the economy by
1,37,000 crore. An increase draws this amount from the economy, while a decrease injects
this amount into the economy. So if a bank has ₹2 billion (US$27 million) of NDTL then
it has to keep ₹80 million (US$1.1 million) in cash with RBI. RBI pays no interest on
CRR.
Let's assume the economy is showing inflationary trends and the RBI wants to control this
situation by adjusting SLR and CRR. If the RBI increases SLR to 50% and CRR to 20%
then bank will be left only with ₹600 million (US$8.0 million) for operations. Now it will
be very difficult for the bank to maintain profitability with such a small amount of capital.
The bank will be left with no choice but to raise its interest rate which will make
borrowing by its customers more costly. This will in turn reduce the overall demand and
hence prices will eventually come down.
Open market operation
Open market operation is the activity of buying and selling of government securities in
open market to control the supply of money in banking system. When there is excess
supply of money, central bank sells government securities thereby sucking out excess
liquidity. Similarly, when liquidity is tight, RBI will buy government securities and
thereby inject money supply into the economy.
Marginal standing facility
This scheme was introduced in May 2011 and all the scheduled commercial bank can
participate in this scheme. Banks can borrow up to 2.5% per cent of their respective net
demand and time liabilities. The RBI receives application under this facility for a
minimum amount of ₹ 10 million and in multiples of ₹ 10 million thereafter.
The important difference from repo rate is that bank can pledge government securities
from its SLR quota (up to one per cent). So even if SLR goes below 20.5% by pledging
SLR quota securities under MSF, the bank will not have to pay any penalty. The marginal
standing facility rate currently stands at 4.25%.
Margin requirements (Loan to value ratio)
Loan-to-value (LTV) is the ratio of loan amount to the actual value of asset purchased.
The RBI regulates this ratio so as to control the amount a bank can lend to its customers.
The RBI can decrease or increase to curb inflation or deflation respectively.

Selective credit control

Under this measure, the RBI can specifically instruct banks not to give loans to traders of
certain commodities e.g. sugar, edible oil, etc. This prevents the speculation/hoarding of
commodities using money from banks.
Moral suasion
Under this measure, the RBI tries to persuade banks through meetings, conferences, media
specific things under certain economic trends. For example, when the RBI reduces repo
rate, it asks banks to reduce their base rate as well. Another example of this measure is to
ask banks to reduce their non-performing assets.

Limitations of monetary policy

In developing countries like India, monetary policy fails to show immediate or no results
because the following factors
1. Restricted Scope of Monetary Policy in Economic Development
In reality the monetary policy has been assigned only a minor role in the process of
economic development. The monetary policy is not given any predominant role in the
process of economic development.
The role assigned to the Reserve Bank is minor indeed. The Reserve Bank in expected to
see that the process of economic development should not be hindered for want of
availability of adequate funds.
2. Limited Role in Controlling Prices
The monetary policy of Reserve bank has played only a limited role in controlling the
inflationary pressure. It has not succeeded in achieving the objective of growth with
stability.
3. Unfavourable Banking Habits
An important limitation of the monetary policy is unfavourable banking habits of Indian
masses. People in India prefer to make use of cash rather than cheque. This means that a
major portion of the cash generally continues to circulate in the economy without
returning to the banks in the form of deposits. This reduces the credit creation capacity of
the banks.
4. Underdeveloped Money Market
Another limitation of monetary policy in India is underdeveloped money market. The
weak money market limits the coverage, as also the efficient working of the monetary
policy.
5. Existence of Black Money
The existence of black money in the economy limits the working of the monetary policy.
The black money is not recorded since the borrowers and lenders keep their transactions
secret. Consequently the supply and demand of money also not remain as desired by the
monetary policy.
6. Conflicting Objectives
An important limitation of monetary policy arises from its conflicting objectives. To
achieve the objective of economic development the monetary policy is to be expansionary
but contrary to it to achieve the objective of price stability a curb on inflation can be
realised by contracting the money supply. The monetary policy generally fails to achieve a
proper coordination between these two objectives.
7. Influence of Non-Monetary Factors
An important limitation of monetary policy is its ignorance of non-monetary factors. The
monetary policy can never be the primary factor in controlling inflation originating in real
factors, deficit financing and foreign exchange resources.
8. Limitations of Monetary Instruments
An important limitation of monetary policy is related to the inherent limitations in the
various instruments of credit control. There are limitations regarding frequent and sharp
changes in the bank rate, as these are supposed to conflict with the development
objectives. Most bank rates are virtually fixed and mutually unrelated so that the scope for
adjustment is very limited.
9. Not Proper Implementation of the Monetary Policy:
Successful application of monetary policy is not merely a question of availability of
instruments of credit control. It is also a question of judgement with regard to timing and
the degree of restraint employed or relaxation allowed.
ACHIEVEMENTS
1. Flexible Monetary Policy:
The Reserve Bank has adopted a flexible monetary policy. It has introduced changes in
monetary regulations keeping in view the seasonal character of Indian money market. The
pressure of seasonal demand has been adequately met.
On account of it the seasonal fluctuations in money rates have been negligible.
2. Stable Structure of Interest Rates:
The interest rate policy of the Reserve Bank has resulted into a relatively stable structure
of interest rates in the economy. The bank initially adopted cheap money policy from its
beginning.
The bank rate remained unchanged at the low level of 3 percent upto 1951. Some upward
changes have been made in subsequent years to combat inflationary pressure. The Bank
rate has remained substantially lower than the market rate of interest. The bank rate has
remained more or less stable.
3. Modern Banking and Credit structure:
The Reserve Bank has succeeded in building up a sound modern banking and credit
structure. The Bank enjoyed vast supervisory powers which enabled it to guide the
development of banking on sound lines. Training of bank personnel has improved their
efficiency. The geographical and fundamental coverage of the banking has also increased
substantially.
4. Cheap Remittance Facilities
The Reserve Bank has introduced very cheap remittance facilities. These have been widely
used by the commercial banks, the Government and cooperative banks.

5. Successful Management of Public Debt:

The Reserve Bank has successfully managed the public debt. It has floated loans for the
Government at low rates of interest. It has helped in raising funds for the expansion of
public sector in the economy. It has also provided short term advances to the Government.
6. Exchange Stability:
The Reserve Bank has succeeded in maintaining the exchange stability to a large extent.
The Bank has maintained the exchange value of the rupee at a relatively higher rate than
would have prevailed in the market.
It has made judicious use of exchange control measures to keep the demand for foreign
exchange within the limits of the available supplies.
7. Enhanced Public Confidence in Banking Sector
The Reserve Bank has taken appropriate measures to enhance public confidence in the
banking systems. Bank strictly supervises the working of the Commercial banks so as to
avoid their failures.
The Deposits Insurance System has also been introduced to protect the interests of the
depositors. It has proved an important factor in promoting depositors’ confidence in banks.
8. Central Authority of Indian Money Market:
The Reserve Bank has functioned as the central authority in the Indian money market. It
has supervised and controlled commercial banks, cooperative banks and non-banking
finance companies accepting deposits from the public.
9. Development of Bill Market:
The Reserve Bank has made serious efforts to develop a sound bill market in India. It has
imparted a substantial degree of elasticity to the credit structure of the country by
introducing the several Bill Market Schemes.
10. Rational Allocation of Credit:
The Reserve Bank has adopted measures to distribute credit to all productive sectors in
accordance with social objectives and priorities. The scheme of Differential Interest Rates
was introduced to grant loans at concessional rates to weaker sections of the society. The
priority sector including agriculture, small scale industries, exports, trades etc., get credit
at low rate of interest.
11. Monetary Stability:
The Bank has made a rational use of quantitative and qualitative measures of credit control
to maintain monetary stability. These controls were generally employed in the direction of
greater restraint in the context of persistent imbalances in the economy. It has tried to
control the pace of monetary expansion.
12. Contribution to Economic Development:
The Reserve Bank has played an active role in promoting economic development of the
Indian economy. It has helped in setting up a sound structure of Development Banking.
Several Industrial, Agricultural, Export and other specialised financial institutions have
been established.
The Reserve Bank has helped in building up a well-differential structure of financial
institutions to cater to the requirements of the different sectors of the economy.

2016 Demonetisation
On 8 November 2016, the Government of India announced the demonetisation of all ₹ 500
and ₹ 1,000 banknotes of the Mahatma Gandhi Series despite being warned by the
Reserve Bank of India. The government claimed that the action would curtail the shadow
economy and crack down on the use of illicit and counterfeit cash to fund illegal activity
and terrorism.
The Reserve Bank of India laid down a detailed procedure for the exchange of the
demonetised banknotes with new ₹ 500 and ₹ 2,000 banknotes of the Mahatma Gandhi
New Series and ₹ 100 banknotes of the preceding Mahatma Gandhi Series. The key points
were
1) Citizens had until 30 December 2016 to tender their old banknotes at any office
of the RBI or any bank branch and credit the value into their respective bank accounts.
2) Cash withdrawals from bank accounts were restricted to ₹10,000 per day and
₹20,000 per week per account from 10 to 13 November 2016. This limit was increased to
₹24,000 per week from 14 November.
3) For immediate cash needs, the old banknotes could be exchanged for the new
₹500 and ₹2,000 banknotes as well as ₹100 banknotes over the counter of bank branches
by filling up a requisition form along with a valid ID proof. It was announced that this
facility would be available until 30 December 2016.
4) All exchange of banknotes was abruptly stopped from 25 November 2016.
Cash crunch and demerits
The scarcity of cash due to demonetisation led to chaos, and most people
holding old banknotes faced difficulties exchanging them due to endless lines
outside banks and ATMs across India, which became a daily routine for
millions of people waiting to deposit or exchange the ₹500 and ₹1,000
banknotes since 9 November.
ATMs were running out of cash after a few hours of being functional, and
around half the ATMs in the country were non-functional. Sporadic violence
was reported in New Delhi, but there were no reports of any grievous injury,
people attacked bank premises and ATMs, and a ration shop was looted in
Madhya Pradesh after the shop owner refused to accept ₹500 banknotes.
Merits
It gave the country a 5 lakh crore advantage as there was a huge spike in
country's tax base and addition of 1 lakh more pan card holders.
There was a very big spike in digital transaction even small town and cities
people adopted paying digitally for goods and services leading to sustained
growth of non-cash payments.
CHAPTER 2
OBJECTIVE OF STUDY
1) Comparison of RBI with other countries central bank.-

2) RBI’s new ways to control inflation/deflation using new methods and its
effectiveness.
3) Analysis of reports of Reserve Bank of India.
4) To determine the differences and similarities between RBI and other regulators.
5) Recent development and limitation in policies of RBI
CHAPTER 3-LITERATURE REVIEW
Topic-Bank Capital and Monetary Policy Transmission in India
Author-Silu Muduli and Harendra Behera
The study finds evidence on the existence of the bank capital channel of monetary policy
transmission for India. There is a positive association between bank equity and credit
growth. This finding calls for the need for countercyclical capital buffer for the Indian
banks to protect their balance sheet against losses from changes in economic conditions
during the recessionary phase. Also, banks with higher CRAR face a lower cost of funds.
The pro-cyclical nature of leverage shows that banks lend during economic boom by
raising debt funds (through deposits, borrowings) rather than using their excess capital.
Higher CRAR unlocks the bank lending channel and helps in smooth transmission of
monetary policy. However, the magnitude of transmission of monetary policy was found
to be weak for banks with CRAR higher than a certain threshold level. Presence of non-
performing assets in a bank also weakens monetary policy transmission and lowers the
loan growth rate. These results support the need for bank capital regulation in India. Low
level of CRAR not only hampers bank health but also restricts smooth transmission of
monetary policy. Injection of capital by the Government of India in public sector banks is
likely to increase the credit flow to the real sector and help in smoother transmission of
monetary policy.
Topic-Are Food Prices Really Flexible? Evidence from India
Author-GV Nadhanael
In this paper, we provide evidence of the extent of price stickiness in food sector in India
using a newly constructed dataset for the period 2005-18. There is heterogeneity in the
degree of price stickiness within food products and the duration of price spell goes up
from 1.3 to 4.1 months if we use the reference prices (quarterly mode). Stylised facts about
price-setting behaviour indicate that frequency of price change is synchronised across
products and regions, co-move with inflation and exhibit strong seasonality in select
products.
At the aggregate level, both frequency and size of price change respond to marginal cost
shocks in the case of reference prices. These empirical findings are in alignment with the
predictions of a state-dependent pricing model with menu cost. The calibrated model
shows that price-setting behaviour can be explained by differences in productivity process
as well as menu costs. Finally, we show that trends in a stickiness re-weighted CPI food
inflation do not perfectly align with CPI excluding food and fuel inflation, and therefore,
the conventional measure of core inflation cannot fully capture the dynamics of sticky
component of food price inflation.
Topic-Does Financial Cycle Exist in India?
Author-Harendra Behera, Saurabh Sharma
The design and effectiveness of macro-prudential policies depend on how best we measure
and understand the characteristics of financial cycle. In this study, we have attempted to
determine the existence of financial cycle in India by examining the properties of financial
cycle in different variables, viz. credit, credit-GDP ratio, equity prices, house prices and
exchange rate. The average duration of business cycle in India is about 5 years as
compared to 15 years for credit cycle in the post-reform period. The length of cycles in
exchange rate is nearly identical to the duration of business cycle whereas credit-to-GDP
ratio and house prices experience cycles of much longer duration. On the other hand,
equity prices have exhibited both short and medium-term cycles. We also find the rising
dominance of medium-term cycles in explaining overall variation in credit and equity
prices in the post-reform period. However, a weakening of the importance of medium-term
cycles in shaping the exchange rate behaviour is observed since mid-1990s. Overall, the
core empirical features of the cycles from individual variables suggest that there exists a
financial cycle in India, which has gradually become more prominent with the
proliferation of financial liberalisation since mid-1990s. The overall financial cycle of
India can be best captured by the joint behaviour of credit, house prices and equity prices
wherein credit and equity prices play the most significant role. Overall, we find a longer
duration financial cycle with the average length of about 12 years.
The analysis and the paper suggest that at the peak of the financial cycle provides some
lead information about impending distress in the economy. Therefore, the policy should be
designed to dampen financial cycle. A close monitoring of financial cycle on a regular
interval is essential to enhance macroeconomic and financial stability.
Topic-Monetary Policy Transmission in India: New Evidence from Firm-Bank
Matched Data
Author-Saurabh Ghosh, Abhinav Narayanan and Pranav Garg
In this paper, we use a unique firm-bank matched data set and provide new evidence of the
monetary policy transmission mechanism in India. We show that in addition to slow or
lagged monetary policy transmission, an increase in credit may not always find its way
towards increasing investments. Firms may use their credit lines to finance their current
liabilities rather than undertaking capital formation.
At the firm level, in some cases, we find counter-intuitive results of a change in monetary
policy on the firm’s balance sheet. This may be because firms’ investment decisions may
be correlated with the demand conditions in the economy, which may in turn be correlated
with the monetary policy cycle. Thus, the effect of monetary policy that we estimate on
firms may not reflect the true effect of the policy itself.
Using firm-bank matched data we find evidence that firms which borrow from less liquid
banks do not increase their capital expenditure, while current liabilities increase for these
firms. This tells us that firms channel their credit lines towards meeting current liabilities
while investments take a back seat. On the other hand, we find that firms who borrow from
relatively more liquid banks are more responsive to increasing their capital spending when
the lenders increase their supply of credit.
Topic-Macroeconomic Effects of Uncertainty: A Big Data Analysis for India
Author-Nalin Priyaranjan and Bhanu Pratap
The importance of uncertainty in the evolution of financial markets and macroeconomic
conditions of a country has been highlighted in various studies. In this paper, we aimed to
develop alternative uncertainty indices for India. We constructed three uncertainty indices
based on newspaper articles, sentiment analysis of news articles and internet search
intensity, respectively. To capture overall uncertainty in the economy, a single index was
constructed using a principal components approach. This index captures views of news
media as well as economic agents and can capture both domestic and international events.
The validity of uncertainty index for India is assessed in terms of its impact on financial
markets as well as the real economy. As the theory suggests, uncertainty is positively
correlated with risk measures while it shows a negative relationship with measures of
economic activity in India. Using a robust local projections-based econometric framework,
we assess the impact of uncertainty shocks on financial markets and the real economy.
Results suggest that financial markets, private investment, inflation and overall economic
activity are negatively impacted by heightened uncertainty. From a policy perspective, our
results suggest that policymakers can use the information on uncertainty for devising
policy framework and institutional arrangements that foster sound and predictable policies.
The creation of a novel dataset and automated algorithms to compute uncertainty indices
undertaken for this study should pave way for further research on uncertainty within and
outside the Reserve Bank. For instance, it is now possible to create specific indicators on
uncertainty related to Trade Policy, Fiscal Policy, Monetary Policy, Regulatory Policy etc.,
using our dataset and algorithms. It may also be possible to compute state-level indicators
of uncertainty, which can be used to study the impact of uncertainty on investment flows
and medium-term economic activity at the state-level in India. Lastly, such uncertainty
indices can also help strengthen policy simulation exercises to study the impact of
low/high uncertainty scenarios and improve near-term projection of macroeconomic
variables which exhibit high degree of sensitivity to uncertainty.
Topic-Measuring Financial Capability of the Street Vendors
Author-D.V. Ramana and Silu Muduli
This study finds that individuals in higher age group and with longer business experience
are relatively more financially capable. The reason could be that with more experience
individuals learn how to manage the working capital of the business during lean seasons.
They also tend to develop a better understanding of their current and future financial
needs.
Education also plays an important role in determining one’s financial capability. Vendors
who had attained higher levels of education have higher financial capability, as measured
by our index. From financial technology point of view, we find that vendors who used
smartphones were more financially capable than those who did not use smartphones.
As individuals with smartphones have higher ability to understand financial products, and
can easily access such services, banks should aim at providing multiple services through
online platforms. This is likely to help in higher penetration of banking services, and at the
same time, expand the choices for different financial products.
One important finding of the paper is that areas with higher bank branches have vendors
with higher financial capability. This makes the case for branch expansion with a focus on
areas with low bank branches. This will help the financially deprived sections of the
society, who are also largely excluded from online banking platform, to access different
financial products. More choice in financial products may help vendors to choose
appropriate financial products, helping them in mitigating the impact of adverse business
shocks.
Topic-What Explains Call Money Rate Spread in India?
Author-Sunil Kumar
We have attempted to empirically investigate the impact of possible determinants,
identified based on the extant literature and domestic framework, on the WACR spread
over policy rate to draw some policy inferences. The liquidity conditions have been found
driving up the WACR spread, i.e. tightening of liquidity conditions lead to hardening of
WACR. Similarly, the skewed distribution of liquidity has been found impacting the call
money spread adversely. The impact of both liquidity conditions and liquidity distribution
has, however, been found to be very small, reflecting marksmanship in liquidity
management by the central bank.
Another important factor that has been found affecting the call money spread is liquidity
uncertainty, i.e., increase in liquidity uncertainty leads to rise in call money spread.
Potential liquidity uncertainty may have gone up with a large part of the central bank’s
liquidity being offered through variable rate repos under the new liquidity management
framework. Liquidity uncertainty, however, appears to have come down with the
introduction of fine tuning operations with effect from September 5, 2014 and,
accordingly, its impact on call money spread has moderated. In fact, these fine tuning
liquidity management operations aimed at proactively meeting evolving systemic liquidity
requirements, captured in our model through a dummy variable, have been found to be
reducing the call money spread.
During the period of our study, the average of absolute WACR spread (excluding
Saturdays) has come down substantially from 85 basis points during pre-fine tuning
operations period to about 13 basis points in the post fine tuning operations period. Banks’
reluctance to part with surplus funds at the quarter end due to regulatory/ balance sheet
consideration, known as quarter-end phenomenon and captured in our study through a
dummy variable, is found to impact the call money spread adversely.
In light of the above, some policy actions may help in improving further the alignment of
call money rate with the policy rate. Already RBI has taken a number of steps like more
proactive use of variable rate repos and reverse repos of various tenors for better liquidity
management to keep the rates aligned with the policy rate, reducing the minimum daily
reserve requirement from 95 per cent to 90 per cent, bringing the liquidity deficit in the
system closer to neutrality through OMO purchase auctions and narrowing of the policy
rate corridor to +/- 25 basis points very recently.
Topic-Net Interest Margin, Financial Crisis and Bank Behaviour: Experience of
Indian Banks
Author-Tushar B. Das
Indian banks are still operating with relatively high interest margin as compared to
international benchmark. It is, therefore, prudent to seek productivity augmentation by
reducing the margin through limiting the intermediation costs. Given the structure of the
banking system in India, foreign banks are operating with relatively high margins as
compared to other bank groups. However, after the globalization and introduction of
several regulatory policy measures by the Central Bank, the overall efficiency increased in
terms of other parameters.
Challenges remain in dealing with increasing NPAs for banks in maintaining their margin.
The study observed that variables such as size, NPA, cost of efficiency, capital cushion,
deposit concentration and economic growth are important in determining the banks’
behaviour regarding their interest margin.
Interestingly, the global financial crisis which posed a threat to the banking stability of
major economies around the world eventually had some impact on the interest margin of
banks in India. The public sector banks (PSBs) appears to be the worst affected as
compared to other bank groups. A reduction measuring 0.6 percentage points in overall
margin was observed for public sector banks during 2008, followed by a further reduction
of 0.6 percentage points in 2009. While banks with high capital and liquidity could sustain
the margin during the entire period of the crisis, the banks with low capital and liquidity
found it difficult to maintain the margin.
Topic-Cross-border Trade Credit: A Post-Crisis Empirical Analysis for India
Author-Rajeev Jain, Dhirendra Gajbhiye and Soumasree Tewari
The paper concludes that both demand and supply-side dynamics influence the flow of
cross-border trade credit to India. The fall in trade finance intensity in recent years is
clearly an indication of supply-side constraints. In particular, the financial health and size
of overseas network of banks operating in India matter for trade credit. Empirical evidence
suggesting positive impact of imports volume on trade credit flows makes short-term
external debt as one of the critical variables to be monitored for external sector
vulnerability. This is especially pertinent when imports payments are driven by higher
international commodity prices.
As tight global financial conditions are found to impede trade credit flows, policy efforts
towards strengthening of banks’ overseas business network may make these flows more
resilient. Domestic banks largely depend on their own branches or branches/subsidiaries of
other domestic banks which hitherto have been accepting non-standardised trade
instruments. The empirical findings of the paper suggest that banks need to expand their
global banking relationship and shift towards the use of globally accepted trade finance
instruments instead of indigenous instruments which, however, may push up the cost.
Topic-States’ Fiscal Performance and Yield Spreads on Market Borrowings in India
Author-Ramesh Jangili, N.R.V.V.M.K. Rajendra Kumar and Jai Chander
A significant increase in market borrowings of state governments over time has subjected
the fiscal authorities to the need for greater scrutiny by investors. The moot question is
whether states’ fiscal performance matters for SDL yield spreads. The narrowly clustered
SDL spreads, in a majority of auctions, make this question more pertinent. Moreover, the
existing empirical literature in the Indian context finds a weak association between SDL
yield spreads and fiscal metrics, suggesting the lack of perceived risk by investors across
Indian states in the market borrowings space.
The findings of the paper have important policy implications. The composite index can be
used by both – state governments and investors – for assessing states’ fiscal performance.
State governments can use the index to orient or reorient their fiscal policies towards
improving their performance in order to reduce the cost of borrowing. Analysis of
individual sub-indices provides a menu of choice to state governments. For example, a
state can offset the adverse impact of a high fiscal deficit by improving its expenditure
quality. A state can also reduce its cost of borrowing through the re-issuance of SDLs (that
will improve its liquidity). From the perspective of price discovery, it is often felt that
investors find it difficult to assess the states’ performance as multiple indicators often
show diverging assessments. Thus, the composite index developed in the paper provides
investors with a single measure to make more informed investment decisions, thereby
making the price discovery mechanism of SDLs more efficient.
Topic-India’s External Commercial Borrowings: Determinants and Optimal Hedge
Ratio
Author-Ranjeev
It has been observed that many Indian firms augment local banking sources for raising
funds with recourse to ECB route, thereby diversifying their debt profile. After the global
financial crisis, there was a surge in capital flows to emerging markets. This phenomenon
created scope for interest rate arbitrage as the policy interest rates in developed markets
moved to near zero. Over time such arbitrage benefit has diminished sharply, leading to a
moderation in ECBs issuance. However, due to major policy liberalization albeit with
certain restrictions in January 2019, ECBs issuance staged at a historically highest level of
USD 53 billion in 2019-20.
Expectation of the rupee depreciation had an adverse impact on the issuance of ECBs.
Large and lumpy principal repayments liability may arise during a short span of time on
account of ECBs borrower which if unhedged may lead to domestic forex market
susceptible to bouts of excessive volatility. Given the interest rate differential between
India and the developed markets, all foreign currency exposures carry a significant cost of
hedging. Hedging all FX exposures in their entirety may not be optimal in the sense that
with fully hedged FX exposure, the benefit of low-cost access to foreign capital is
foregone and at the same time unhedged foreign currency exposures may lead to
correlated defaults in debt servicing triggering build-up of systemic risk. Therefore, there
is a need to understand the optimal hedge ratio as may be discerned from empirical
estimation for a minimum variance hedge ratio. This study finds that the optimal hedging
ratio either financial or natural hedge at a system level may be in the vicinity of 63 per
cent, though as the strategy in practice could be time varying a somewhat higher ratio may
be useful in periods of expected stress. Also, firms may need to consider the dynamic
hedging strategy on firm specific and sector specific considerations as well.
From a macro-viewpoint with outstanding ECBs in the vicinity of 6.5 per cent of nominal
GDP, they constitute close to 30 per cent of India’s external debt. Therefore, from the
standpoint of maintaining macro-financial stability, it is prudent to have a judicious policy
on optimal hedge ratios.
Topic-Public Debt Management in India and Related Issues
Author-L. Lakshmanan & R. Kausaliya
The main objective of PDM is to ensure that the government’s financing needs and its
payment obligations to be met at the lowest possible cost over the medium to longer run,
consistent with the prudent degree of rollover risk as also to promote the development of
the domestic G-Sec market. The international experience reveals that development of the
G-Sec market across the yield curve, broaden the investor base with more retail
participation, transparent debt issuance calendar using standardized instruments, market-
based mechanisms, sound payment and settlement systems, lower interest rate policy, if
inflation expectation is not a threat and enhancement of liquidity to reduce the costs of
borrowings are the common lessons.
The public debt management in India has clearly traversed from a passive system to a
market driven process with developed institutions, varied instruments, intermediaries for
market making and well-developed market infrastructure. Market borrowing has emerged
as the primary source of financing of GFD of the GoI as well as the sub-national
Governments during the recent period. The internal control mechanism has to be
strengthened to address the operational risk, legal risk, security breaches, reputational risk,
etc., which would otherwise adversely reflect on the debt management structure. Excessive
reliance on short-term instruments to take advantage of lower short-term interest rates may
lead to increase in rollover risk and possibly increase the debt service costs. Balance sheet
risk of the Government should be reduced by issuing debt primarily in long dated, fixed
rate and domestic currency securities, which is being reflected in the debt management
strategy of India. The holding pattern of government debt shows some reduction in the
captive holdings by banks and financial institutions and increase in the relative share of
non-banks, reflecting a progressive proliferation of the investor base.
CHAPTER 4- DATA ANALYSIS
RBI (INDIAN CENTRAL BANK) VS OTHER COUNTRIES CENTRAL BANK
Every bank has a central bank to look after financial control within their country. In this
part of project we will compare Reserve bank of India with the top banks and their
policies.
Reserve bank Of India and Bank of Japan
Reserve bank Of India
Reserve bank of India uses open market operation to control inflation; the RBI sells the
securities in the money market which sucks out excess liquidity from the market. As the
amount of liquid cash decreases, demand goes down.
Similarly to control deflation, the central bank can increase the reserves of commercial
banks through a cheap money policy. They can do so by buying securities and reducing
the interest rate. As a result, their ability to extend credit facilities to borrowers increases.
Whereas the best tool to control inflation and deflation is changing the interest rates as per
the economic conditions.
If there is Inflation then RBI increases the interest rate, it increases the price of everything
in the market boosting savings and aggregate supply
In case of deflation the Central Bank can try to cut interest rates. In theory, this should
boost spending and aggregate demand.
Another way to control these rates is using Margin Requirement (Loan-to-value). It is the
ratio of loan amount to the actual value of asset purchased.
The RBI regulates this ratio so as to control the amount a bank can lend to its customers.
The RBI can decrease or increase to curb inflation or deflation respectively.
These are the few policies which Reserve Bank of India uses to Control inflation and
deflation
Bank of Japan
The Bank of Japan, as the central bank of Japan, decides and implements monetary policy
with the aim of maintaining price stability.
Price stability is important because it provides the foundation for the nation's economic
activity.
The Bank of Japan Act states that the Bank's monetary policy should be "aimed at
achieving price stability, thereby contributing to the sound development of the national
economy."
The Bank's Policy Board decides on the basic stance for monetary policy at MPMs. The
Policy Board discusses the economic and financial situation and then decides an
appropriate guideline for money market operations at (Monetary policy meetings) MPMs.
After every MPM, the Bank releases its assessment of economic activity and prices as well
as the Bank's monetary policy stance for the immediate future, in addition to the guideline
for money market operations.
The Bank supplies funds to financial institutions by, for example, extending loans to them,
which are backed by collateral submitted to the Bank by these institutions. Such an
operation is called a funds-supplying operation. The opposite type of operation, in which
the Bank absorbs funds by for example issuing and selling bills, is called a funds-
absorbing operation.
One of factors in policy-making that is different from RBI ways is giving accountability
and independence to Public
This approach helps public be more confident about the policies plus the person or the
government they elected to represent them.
The experience of a number of countries shows that conduct of monetary policy tends to
come under pressure to adopt inflationary policies. For this reason, it has become the norm
throughout the world for monetary policy to be conducted by a central bank that is neutral
and independent from the government, and equipped with the requisite expertise.
Monetary policy has a significant influence on the daily lives of the public, and thus the
Bank should seek to clarify to the public the content of its decisions, as well as its
decision-making processes, regarding monetary policy.
 In view of this, the Bank immediately releases its decisions on monetary policy, such as
the guideline for money market operations and its views on economic and financial
developments, after each MPM.
In addition, regular press conferences by the chairman of the Policy Board are held to
explain details of the monetary policy decisions. The Bank also releases the Summary of
Opinions at each MPM and the minutes of MPMs, and releases their transcripts ten years
later, to clarify points discussed by the Policy Board in the process of reaching decisions.

RBI & The Federal bank of America

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the
central banking system of the United States of America. It was created on December 23,
1913, with the enactment of the Federal Reserve Act, after a series of financial panics
The U.S. Congress established three key objectives for monetary policy in the Federal
Reserve Act: maximizing employment, stabilizing prices, and moderating long-term
interest rates.
The term "monetary policy" refers to the actions undertaken by a central bank, such as the
Federal Reserve, to influence the availability and cost of money and credit to help promote
national economic goals. What happens to money and credit affects interest rates (the cost
of credit) and the performance of an economy. The Federal Reserve Act of 1913 gave the
Federal Reserve authority to set monetary policy in the United States.
Interbank lending
The Federal Reserve sets monetary policy by influencing the federal funds rate, which is
the rate of interbank lending of excess reserves. The rate that banks charge each other for
these loans is determined in the interbank market and the Federal Reserve influences this
rate through the three "tools" of monetary policy described in the Tools section below. The
federal funds rate is a short-term interest rate that the FOMC focuses on, which affects the
longer-term interest rates throughout the economy. The Federal Reserve summarized its
monetary policy in 2005:

There are three main tools of monetary policy that the Federal Reserve uses to influence
the amount of reserves in private banks:

Tool Description

Purchases and sales of U.S. Treasury and federal agency securities‍—‌the Federal Reserve's
principal tool for implementing monetary policy. The Federal Reserve's objective for open market
operations has varied over the years. During the 1980s, the focus gradually shifted toward
Open market operations
attaining a specified level of the federal funds rate (the rate that banks charge each other for
overnight loans of federal funds, which are the reserves held by banks at the Fed), a process that
was largely complete by the end of the decade.
 The interest rate charged to commercial banks and other depository institutions on loans they
Discount rate
receive from their regional Federal Reserve Bank's lending facility‍—‌the discount window.

The amount of funds that a depository institution must hold in reserve against specified deposit
Reserve requirements

Federal funds rate and open market operations

The Federal Reserve System implements monetary policy largely by targeting the federal
funds rate. This is the interest rate that banks charge each other for overnight loans of
federal funds, which are the reserves held by banks at the Fed. This rate is actually
determined by the market and is not explicitly mandated by the Fed. The Fed therefore
tries to align the effective federal funds rate with the targeted rate by adding or subtracting
from the money supply through open market operations. The Federal Reserve System
usually adjusts the federal funds rate target by 0.25% or 0.50% at a time.
Open market operations allow the Federal Reserve to increase or decrease the amount of
money in the banking system as necessary to balance the Federal Reserve's dual mandates.
Open market operations are done through the sale and purchase of United States Treasury
security, sometimes called "Treasury bills" or more informally "T-bills" or "Treasuries".
The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these
securities affects the federal funds rate, because primary dealers have accounts at
depository institutions.
Open market operations are the primary tool used to regulate the supply of bank reserves.
This tool consists of Federal Reserve purchases and sales of financial instruments, usually
securities issued by the U.S. Treasury, Federal agencies and government-sponsored
enterprises. Open market operations are carried out by the Domestic Trading Desk of the
Federal Reserve Bank of New York under direction from the FOMC. The transactions are
undertaken with primary dealers.
The Fed's goal in trading the securities is to affect the federal funds rate, the rate at which
banks borrow reserves from each other. When the Fed wants to increase reserves, it buys
securities and pays for them by making a deposit to the account maintained at the Fed by
the primary dealer's bank. When the Fed wants to reduce reserves, it sells securities and
collects from those accounts. Most days, the Fed does not want to increase or decrease
reserves permanently so it usually engages in transactions reversed within a day or two.
That means that a reserve injection today could be withdrawn tomorrow morning, only to
be renewed at some level several hours later. These short-term transactions are called
repurchase agreements.
Repurchase agreement
To smooth temporary or cyclical changes in the money supply, the desk engages in
repurchase agreements (repos) with its primary dealers. Repos are essentially secured,
short-term lending by the Fed. On the day of the transaction, the Fed deposits money in a
primary dealer's reserve account, and receives the promised securities as collateral. When
the transaction matures, the process unwinds: the Fed returns the collateral and charges the
primary dealer's reserve account for the principal and accrued interest. The term of the
repo (the time between settlement and maturity) can vary from 1 day (called an overnight
repo) to 65 days.
New facilities
In order to address problems related to the subprime mortgage crisis and United States
housing bubble, several new tools have been created. The first new tool, called the Term
auction Facility, was added on December 12, 2007. It was first announced as a temporary
tool. Creation of the second new tool, called the Term securities Lending Facility, was
announced on March 11, 2008. The main difference between these two facilities is that the
Term auction Facility is used to inject cash into the banking system whereas the Term
security Lending Facility is used to inject treasury securities into the banking system.
Creation of the third tool, called the Primary Dealer Credit Facility (PDCF), was
announced on March 16, 2008. The PDCF was a fundamental change in Federal Reserve
policy because now the Fed is able to lend directly to primary dealers, which was
previously against Fed policy. The differences between these three new facilities are
described by the Federal Reserve.
The Term auction Facility program offers term funding to depository institutions via a bi-
weekly auction, for fixed amounts of credit. The Term securities Lending Facility will be an
auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-
eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The
Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing
Discount Rate for up to 120 days.
Primary dealer credit facility
The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide
funding to primary dealers in exchange for a specified range of eligible collateral and is
intended to foster the functioning of financial markets more generally. This new facility
marks a fundamental change in Federal Reserve policy because now primary dealers can
borrow directly from the Fed when this used to be prohibited.
Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
(ABCPMMMFLF) was also called the AMLF. All U.S. depository institutions, bank holding
companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies
of foreign banks were eligible to borrow under this facility pursuant to the discretion of the
FRBB.

Collateral eligible for pledge under the Facility was required to meet the following criteria:
 was purchased by Borrower on or after September 19, 2008 from a registered
investment company that held itself out as a money market mutual fund;
 was purchased by Borrower at the Fund's acquisition cost as adjusted for
amortization of premium or accretion of discount on the ABCP through the date of its
purchase by Borrower;
 was rated at the time pledged to FRBB, not lower than A1, F1, or P1 by at least
two major rating agencies or, if rated by only one major rating agency, the ABCP must have
been rated within the top rating category by that agency;
 was issued by an entity organized under the laws of the United States or a political
subdivision thereof under a program that was in existence on September 18, 2008; and
 Had stated maturity that did not exceed 120 days if the Borrower was a bank or
270 days for non-bank Borrowers.

Commercial Paper Funding Facility

On October 7, 2008, the Federal Reserve further expanded the collateral it will loan against
to include commercial paper using the new Commercial Paper Funding Facility (CPFF). The
action made the Fed a crucial source of credit for non-financial businesses in addition to
commercial banks and investment firms. Fed officials said they'll buy as much of the debt as
necessary to get the market functioning again. They refused to say how much that might be,
but they noted that around $1.3 trillion worth of commercial paper would qualify.

So in a way, Reserve bank of India and Federal Reserve Bank of America has similarities in
their policies in their inter-country borrowing schemes. However, India is a developing
country while America is a developed country. Development of a nation leads to better
execution of policies.

RBI REPORTS ANALYSIS

1) Report of the Working Group on Digital Lending including Lending through
Online Platforms and Mobile Apps
Recent spurt of disruptive innovations and consumerization of online lending apps (‘digital
lending’), both mobile and web-based, have reshaped the way financial services are
structured, provisioned and consumed. In its evolution, riding on other digital cousins such as
digital payment and social media, certain actors could use it for their own ends, with
unintended consequences for the nascent ecosystem. Against this backdrop, the Reserve
Bank had constituted a Working Group (WG) on digital lending on January 13, 2021 to study
all aspects of digital lending activities in the regulated financial sector as well as by
unregulated players so that an appropriate regulatory approach can be put in place. The terms
of reference and names of the members of the WG are as under:
Terms of Reference
1. Evaluate digital lending activities and assess the penetration and standards of outsourced
digital lending activities in RBI regulated entities
2. Identify risks posed by unregulated digital lending to financial stability, regulated entities
and consumers
3. Suggest regulatory changes, if any, to promote orderly growth of digital lending
4. Recommend measures, if any, for expansion of specific regulatory or statutory perimeter
and suggest the role of various regulatory and government agencies
5. Recommend a robust Fair Practices Code for digital lending players, insourced or
outsourced
6. Suggest measures for enhanced consumer protection
7. Recommend measures for robust data governance, data privacy and data security standards
for deployment of digital lending services.
The WG kept in view three broad tenets while considering the best fit approach for
crafting FinTech appropriate regulation for digital lending.

(a) Technology Neutrality: Regulatory approach should be neutral towards technological

differentials or business models; rather be encouraging healthy competition among all
players that maximize the benefits to the financial system. Technology neutrality theory
would imply that what is not legal offline, cannot be legal online. Many of the trouble
spots around the fringe digital lending were considered identical to the known types of
undesirable lending practices in the conventional lending landscape, albeit in a digital
edition. A proportionate approach of ‘same activity, same risk, same rule’ principle for the
entire lending ecosystem, digital or otherwise, required up-linking of a few
recommendations to the original guidelines already issued or those in the context of
broader FinTech that could be prospectively issued, rather than limiting these to narrow
confines of digital lending. This should also be seen to have forward compatibility in the
context of approach to regulations of broader digital financial services as and when it
evolves. Harmonizing market conduct rules and oversight for all comparable credit
offerings for all providers and channels would also fall under this tenet. The proportionate
regulatory framework for smaller players in certain key areas such as cyber security/ IT
risk should have similar regulatory frameworks to avoid the ‘weakest-link’ problem that
could pose risks to the payment and settlement systems.

(b) Principle Backed Regulations: A graded approach to any regulation generally moves
through minimum regulation, light precautionary regulation, and strong precautionary
regulation phases. As the report covers three distinctive regulatory dimensions of digital
lending, it blends all the grades of regulations. For a smooth integration, a principle-
backed approach has been preferred to a rule-based regime as it affords flexibility in terms
of its actual application to innovations, rather than a stifling over-prescriptive regime.
While a commensurate construct for the equilibrium trinity of innovation, regulation and
stability for digital lending has been attempted in the report, maintaining flexibility,
adaptability and continuous learning in a rapidly evolving and dynamic environment is
what should be attempted in its implementation. It is rightly argued that consumer
protection regulation should follow an approach of open texture rules/ standards and
responsibilization rather than being a ‘command and control’ type. However, for the
present context in India, the regulatory approach should include, among others, moving
beyond mere disclosure and fair practice framework to more regulatory guardrails,
particularly in respect of recurring issues.
(c) Addressing Regulatory Arbitrage: A sine qua non for an effective regulatory regime is
to prevent the emergence of regulatory gaps and arbitrages that might arise from
appearance of new service providers, innovative products, etc., which are like those being
regulated in respect of the incumbent players. A level playing field is key to ensure not
only fair competition but also consumer protection. The same regulatory conditions and
supervision should apply to all actors who seek to innovate and compete on FinTech:
incumbent banks, FinTech start-ups and BigTech firms. These efforts should be towards
better consumer protection and market integrity.
Digital Lending Landscape
The world has been talking about Bank 4.00 since 2014 indicating arrival of 4th
generation in evolution of financial services comprising FinTech, online/ mobile banking,
virtual global market and questioning the sustainability of conventional banking. The book
“Bank 4.00” by Brett King published in 2018 carried the sub-title “Banking Everywhere,
Never at a Bank”. India has been whetting its appetite for digital transformation in
financial services, slowly but steadily. Digital lending is one of the most prominent off-
shoots of FinTech in India. The digital/ FinTech lending has to be seen in the overall
context of the FinTech eco system per se, stylised in the following diagram.

In India, digital lending ecosystem is still evolving and presents a patchy picture. While
banks have been increasingly adopting innovative approaches in digital processes, NBFCs
have been at the forefront of partnered digital lending. From the digital lending
perspectives, such lending takes two forms, viz. balance sheet lending (BSL) and market
place lending (MPL), aka platform lending. The difference between BSL and MPL lays
where the lending capital comes from and where the credit risks of such loans reside.
Balance Sheet Lenders are in the business of lending who carry the credit risk in their
balance sheet and provide capital for such assets and associated credit risk, generated
organically or non-organically. Market Place Lenders (MPLs) or Market Place
Aggregators (MPAs) are those who essentially perform the role of matching the needs of a
lender and borrower without any intention to carry the loans in their balance sheet. While
P2P lending in India is a clear example of MPL, many other players who are in the
business of originating digital loans.
GLOBAL SCENE
Post global financial crisis, financial markets around the world have undergone a
significant transformation driven by technological innovation. In credit segment, P2P
lending platforms have emerged as a new category of intermediaries, which are either
providing direct access to credit or facilitating access to credit through online platforms.
Besides, there are companies primarily engaged in technology business which have also
ventured into lending either directly or in partnership with financial institutions. Such
companies include ‘BigTechs’, e-commerce platforms, telecommunication service
providers, etc. In digital lending space, we have global examples of Person-to-Person
(P2P), Person-to-Business (P2B), Business-to-Person (B2P), and Business-to-Business
(B2B) lending models.

INDIAN SCENE

As seen in the chart, Based on data received from a representative sample of banks and
NBFCs (representing 75 per cent and 10 per cent of total assets of banks and NBFCs
respectively as on March 31, 2020), it is observed that lending through digital mode
relative to physical mode is still at a nascent stage in case of banks (₹1.12 lakh crore via
digital mode vis-à-vis ₹53.08 lakh crore via physical mode) whereas for NBFCs, higher
proportion of lending (₹0.23 lakh crore via digital mode vis-à-vis ₹1.93 lakh crore via
physical mode) is happening through digital mode.
).

Overall volume of disbursement through digital mode for the sampled entities has
exhibited a growth of more than twelvefold between 2017 and 2020 (from ₹11,671 crore
to ₹1, 41,821 crore).
Private sector banks and NBFCs with 55 per cent and 30 per cent share respectively are
the dominant entities in digital lending ecosystem.
Trends and Future
If past performance is key to predict the future, then it can be unambiguously stated that
digital lending is the way to go. It makes sense for banking transactions to take newer
shape as purchases, payments and record-keeping go digital. The growth in digital lending
over last five years, when other enabling factors and supporting infrastructure were still
evolving, has been phenomenal and it is time for digital lending to operate in full swing,
enabled by support and participation from all stakeholders. This report values Indian
FinTech market at ₹8.35 lakh crore by 2026 in comparison to ₹2.3 lakh crore in 2020 thus
expanding at a compound annual growth rate of ~24.56 per cent.
Factors Spurting Growth of Digital Lending in India
 The smartphone revolution
 Big data analytics, Artificial Intelligence (AI) and Machine Learning (ML)
 Enabling technological developments
 Eco-system conducive for digital lenders and FinTech companies
 Increased digital uptake to overcome challenges posed by COVID-19
The Smartphone Revolution
The number of smartphones in India has increased from 100 million in 2014 to over 700
million in 2021. And this number is projected to increase in the coming years. This means
that most of the Indian population now has access to the internet. This process has been
hastened by the availability of low-cost smartphones and the proliferation of faster and
cheaper internet connections. This gives users, especially those who need urgent small-
ticket loans, the option to download lending apps and avail loans without long wait times,
multiple approvals and multi-pronged verifications.
Big Data Analytics, Artificial Intelligence (AI) and Machine Learning (ML)
Customer analysis: Big data analytics help digital lenders understand their customers’
needs and changes in their borrowing behaviour, in order to provide timely and customised
lending options.
Underwriting: AI/ML models can be used to assess risks and make unbiased underwriting
decisions. This allows for faster and more intelligent risk assessment, without human
intervention.
Fraud Detection: AI/ML allows lenders to detect suspicious behaviour, identify repeated
defaulters and flag high-risk loan requests.
Enabling Technological Developments
1) Aadhaar authentication and e-KYC: Digital lenders can utilize the biometric
service of the Aadhaar infrastructure to authenticate users and perform e-KYC.
2) E-Sign and Digilocker: After verification, the lending app can harness the
Aadhaar data to review borrowers’ banking activities, and also use scraping to gather data
from their phones. Apart from providing borrowers’ creditworthiness, this avoids the
collection and storage of paper documents. After selecting the loan option, the borrowers
can e-sign the documents remotely.
3) Unified Payments Interface (UPI): The UPI infrastructure can be used to
disburse the loan amount into the borrower’s bank account. The pull function of UPI can
also be used to receive loan payments.
4) User permission: Developments in obtaining users’ consent to access their data
from across the digital platforms can ensure transparency and security across the digital
lending lifecycle.
Favourable Regulatory and Policy Environment
India’s objective to increase financial inclusion and digitisation has led to the
implementation of favourable policies and regulations. These flexible regulations ensure
that unauthorised digital lenders are weeded out without affecting the growth of legitimate
lenders.
Eco-system Conducive for Digital Lenders and FinTech Companies
With an untapped base of 120 million formally employed Indians without a credit card,
start-ups and venture capital firms are making a beeline for the digital lending market and
in keeping with this trend, 44 per cent of FinTech funding in 2020 went to digital lending
start-ups. With more funding and increased collaboration between established and new
players in the digital lending market, the outlook for the sector is positive.
Increased Digital Uptake due to COVID-19
Lockdowns and restrictions imposed by COVID-19 in 2020 have driven consumers and
businesses to take their transactions online. This has increased receptivity and confidence
in digital transactions while enhancing consumers’ proclivity to avail instant loans from
lending apps. Given the low overhead costs, technology-driven optimization and minimal
manual intervention, compared to traditional loan processes, digital lenders can operate
efficiently to cater to the aggressive economic needs of the post-COVID era.
Privacy and Data Security
FinTech platforms generally collect a lot of data from customers, including sensitive
personal information and financial records. They also track information such as customers’
spending and social media patterns to generate an alternative credit score for determining
their risk profile. While accepting terms and conditions of these platforms, customers are
generally not conscious of the fact that they are signing away their privacy rights. This
leads to concerns about protection of customers’ data from unauthorised access, explicit
consent and awareness of customers about harvesting of their personal/ online behavioural
data and sharing of data with third parties.
Cyber Security and Fraud Risks
There are certain concerns which are inherent to any illegal act committed using
information technology and are not specific to digital lending per se such as anonymity in
cyberspace, the issue of jurisdiction, the question of evidence, and non-reporting of
cybercrimes to avoid bad publicity for businesses operating online. Digital lenders have to
deal with defaulters, the use of stolen identities and even higher risks in the absence of
loan collaterals. The constantly evolving and interconnected nature of disruptive business
models in FinTech lending makes it difficult to assign liability for consumer harms. Cyber
risks have heightened in recent period.
Infrastructure and Customer Protection
(a) Misconfigured Applications: Unsecured cloud servers, misconfigured applications,
open ports and exposed API keys allow threat actors to gain access to customers’
information.
(b) Breaches/ Data Leaks: Since lending apps collect users’ PII (Personally Identifiable
Information), financial data and other sensitive information, they are prime targets for
threat actors. With reports showing that financial services companies are 300 times more
likely than other companies to be targeted by cyberattacks25, lending apps should be
prepared for potential attacks. If a threat actor gets access to a database containing this
information, they can use it to hold the company to ransom or sell it on the dark web. They
could also use it to carry out phishing attacks, scams and even identity theft. Apart from
this, they can also use the initial access to deploy malware, ransomware or spyware.
(c) Fake Apps and Fake Domains: WG research shows that 600 out of 1100 lending apps
currently available are illegal apps. It is also likely that several copycat apps and websites
will mushroom across the internet. If a consumer uses such an app or website, it could
collect the user’s personally identifiable information (PII), financial data and other
sensitive details, which can then be used to compromise the user’s accounts, carry out
phishing attacks and identity theft. Apart from affecting the user, it also damages the
reputation of the company that the fake app is impersonating.
(d) Fake Customer Care Scams: There has been a burgeoning of fake customer care scams
across the internet, especially those affecting financial services and online businesses.
These scams are used to collect sensitive information from users and defraud them. This
can also damage the reputation of the digital lender.
Recommendations/ Suggestions
Loan Product Design and Distribution
Most digital lending apps rely on bulk SMS marketing campaigns and some deploy
contextual in-app/ web-search strategies to tap their prospective customers at their most
vulnerable state. Loan products must be advertised without making misleading claims and
without misleading the consumer. Each DLA must have “opt-in” and “opt-out” options,
the latter being the default option, for sending consumers/customers marketing messages.
The DLAs must adopt responsible advertising and marketing standards in line with the
Code of Conduct to be put in place by the proposed SRO.
Minimizing cases of repayment stress/ distress
(a) In order to discourage perpetuation of ‘payday loans’, fixed sum/ non-instalment
unsecured STCCs with very short contractual maturity should be put under regulatory
restrictions.
(b) The DLAs catering to low credit-penetrated markets, should design more sachetised/
simplified products with appropriate mobile interface designs in a manner that can be
easily understood by the target consumers. Sachetised/ Simplified products would help
consumers make well informed borrowing decisions.
(c) DLAs should provide mandatory user education at user/ customer on-boarding/ sign-up
stage itself about the product features and about computation of loan limit & cost.
 Borrowers must know the costs and conditions associated with the product before they
accept to borrow and assume obligation to pay.
(d) A cooling off/ look-up period of certain days (globally, it varies between 3 to 14 days)
should be given to customers for exiting digitally obtained loans by paying proportionate
APR without any penalty, regardless of source of funding for such exit i.e., own source or
refinance.
All disclosures about the proposed credit facility should be available to the borrower upfront
in an easily understandable manner to facilitate comparison. In this regard, the following are
recommended
(a) Each lender should provide a key fact statement (KFS) in standardized format for all
digital lending products. Besides, the lender should also send SMS/ email with a
summary of product information and ensure that the customers understand the lending
terms and conditions. Contracting process and delivery of information should include
digitally signed sanction letters to be emailed and abridged KFS to be sent by SMS/ e-
mail.
(b) A standardized and simplified loan agreement format may be prepared by the proposed
SRO for financial consumers of digital lending covering terms and conditions. The loan
agreement should be in a language understood by the borrower, say, in vernacular
language. Needless to add, such agreement should be in consonance with the applicable
laws, regulations and FPC.
(c) Responding to consumers with the reasons for decline of a credit application made
through DLAs should be mandatory.
(d) Lack of mutual information creates a wedge between user needs and the products that
they use. All digital lenders may be required to gather feedback/ rating of their service in
the formats to be designed by the proposed SRO.
Preventing Over-indebtedness
All DLAs should refrain from employing predatory lending practices that push the borrowers
to unsustainable levels of personal debt. Guiding principles in this regard may be developed
by RBI/ proposed SRO. These recommendations/ suggestions cover aspects beyond digital
lending in view of the commonality of concerns.
Responsible Pricing
The regulatory approach should include, among others, moving beyond mere disclosure and
fair practice framework to more regulatory guardrails, particularly in respect of recurring
issues.
RBI may establish standard definitions for the cost of digital STCC/ micro credit as Annual
Percent Rate (APR). All contingent costs should be appropriately factored in the APR. This
would enable disclosure of costs in a clear and understandable way. The disclosure should
include monetary and non-monetary impact of early, partial, and late or non-repayment of the
loan (contingent costs). Such information can be shared electronically, in a timely and cost-
effective manner. Better understanding of costs by financial consumers of STCC can
improve repayment performance.
Fair and Respectful Treatment of Borrowers
There is a need to develop responsible borrowing culture in the digital lending landscape as
much as responsible lending. This exercise of developing a positive financial behaviour and
attitude has to be taken up both by the industry as well as by regulators/ government. Such
awareness/ education drives should emphasize legally permissible method of borrowing;
building a credit score; improving appreciation for different features of credit and lower cost
alternatives i.e., methods for shopping around for informed choices by providing digital
comparison tools; addressing borrower’s behaviour biases through debt advice/ counselling
solutions for consumers in financial distress, etc.
The behaviour of consumers in understating their existing indebtedness at the time of seeking
a loan should be a factor for consideration during future grievance or consumer protection/
recourse processes. Increased awareness of financial consumers about their data trails and
credit histories - including their credit reports will, in turn, incentivize better repayment
performance.
Fair treatment of borrowers in financial difficulty refers to the lender’s obligation to detect,
as early as possible, consumers going into repayment difficulties; engage with those
consumers at an early stage to identify the causes for those difficulties and provide necessary
information; help the borrower to address temporary financial difficulties and return to
normal situation.
Formally disputed repayments should be indicated in the credit report along with the
disputed amount vis-à-vis default or repaid amount. Certain types of updates/ inquiries with
CIC about credit history of the borrower by any entity should be intimated to the borrower by
SMS/ email to avoid any misreporting or unsolicited enquiries.
Technological Aspects
1) Minimum technology standards may be prescribed to weed out non-serious players and
push the sector towards maturity.
2) Baseline technology/ security requirements expected from consumer facing service
provider operating the digital lending platform may be specified. Avoid conflict of
interest and data security/privacy for customers in case a DLE is servicing multiple
NBFC/ banks.
3) We may need to work closely with Google Play Store/ Apple App Store to review the
financial apps, having non-essential permissions which compromise the personal data of
consumers for identification of bad actors in the system.
4) A Government/ Non-Governmental agency may provide rating to the financial apps
registered in the app stores.
5) Digital Lenders should ensure that information is protected against disclosure to
unauthorised users (data confidentiality), improper modification (data integrity) and
inaccessibility when needed (data availability).
6) Suggestion may be made to Ministry of Electronics and Information Technology
(MeITY) for standardisation in registration of the financial app in Google Play
Store/Apple App store or other app stores.
7) Elaborate security processes and protocols needs to be instituted against potential cyber
intrusion and attacks by making it an integral part of software development life cycle.
8) Data security practices should include data encryption, masking, data audit program, clear
definition of data breach with reporting, and a data governance structure headed by a Data
Privacy Officer.
9) IT infrastructure monitoring also needs to be put in place for holistic security.
10) ISO 27001 (ISMS: Information Security Management Framework), and ISO 22301
(BCMS: Business Continuity Management Framework) have been recommended for
covering all IT security aspects comprehensively.
11) Classification of consumer data into essential (necessary for completing loan
journey) and peripheral. The borrower should have the ability to complete loan journey
without sharing peripheral data.
12) RBI should audit the books and use heavy duty ML to figure out potential
suspicion.
13) Access to confidential personal information of customers such as his contacts,
location, gallery, files etc. should be prevented.
14) While the personal data privacy laws will help to provide a legal framework for
information protection (customer data from their phone including personal data, pictures
etc.), RBI needs to take strong steps to discourage access to such data through online
lending applications.
15) Certification of digital lending apps by Govt appointed agency (like ISI) could
validate that the apps are genuine thus giving the customer an additional trust on the app
that is collecting various information from the customer.
16) As multiple domestic/ foreign apps are currently sourcing/disbursing loans, data
residency and privacy guidelines as prescribed by RBI are not being enforced, as these
become applicable only once the data reaches a regulated entity. Hence, licensing of
such platforms/ apps as Loan Service Providers shall bridge this regulatory gap.
17) In order to strengthen the onboarding process of lending apps on App stores,
RBI should frame required guidelines and include relevant clauses. Requirement of a
CoR should be stipulated during onboarding process. The platforms should be
instructed to regularly monitor the lending apps to ensure that guidelines are being
adhered to. Any breach should result in termination and reporting to the RBI.

Conclusion on this report

Digital Banking has taken over traditional banking. Similarly, digital lending has been
replacing traditional lending. Digital lending is quite important because it has lower
operating expense, saves time, improves client understandings, and enhances public
engagement. There are few setbacks like illiteracy about applications, theft and frauds,
technological inadequacy but there has been continuous monitoring of apps and efforts
are been made by Reserve Bank of India to make the process better.

Security system in these lending apps will be regularly monitored and efficiency will
also be improved. Regarding the application checking RBI has nearly checked 1200
applications till now and has declared 611 DLA’s legal and safe to use. Customer
grievances and customer feedbacks are been calculated on basis of technology used in
apps, client friendliness, grievances redressals, etc. Based on these feedbacks DLA’s
are rated. Foreign apps are also been monitored.

According to me Digitalization is the need of time as most of the work has been
revolutionised to online work. Also growing nations like India needs to adapt these
technologies as quick as possible.