Power Play in the Indian financial sector

The much-speculated change in repo rates has not happened in the RBI Governor’s Monetary Policy announced today. It does bring about a shift in power play in the Indian financial sector, though.

WHAT CHANGES FOR THE INDIVIDUAL USER?

1. No change in interest rates

The repo rates have been left untouched. So, the EMI on your repo-rate linked home loan will not increase.

At the same time, hopes of a marginal increase in fixed deposit interest rates have been dashed. One needs to focus on small savings schemes where the interest rates do not change till maturity, and book the rates in this quarter. If you recall the commotion on 31st March, 2021 due to a DFS order ‘issued by oversight’, a drastic drop in rates is expected in the next quarter.

2. Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) 

Electronic payments move out of the ambit of the banking sector to include prepaid payment issuers (PPIs) and White Label ATMs. 

PPIs are wallets like PayTM and GPay.

The popularity of these instruments, along with the 24/7 funds transfer facility offered by banks will facilitate digital transfer of funds at any hour.

Know more about PPIs on this link

https://www.livemint.com/money/personal-finance/three-must-know-prepaid-payment-instruments-11617611317926.html

White label ATMs are ATMs owned by entities outside the banking sector, which allow cash withdrawal from any bank, subject to terms and conditions applicable to the concerned bank account. 

Popular white label ATM service providers are

  1. AGS Transact Technologies

2. BTI Payments 

3. Hitachi Payment Services

4. SREI Infrastructure Finance

5. Muthoot Finance

6. Tata Communications

7. Riddhi Siddhi Bullions

Non-banking entities have been demanding inter-operability amongst various service providers for a long time.

The move indicates a liberalisation of the Indian financial system to include a larger number of players.

3. Payment Bank accounts can hold more

Payment banks can open only savings and current accounts, with a maximum balance of Rs. 1 lakh. They shift balances above Rs. 1,00,000/- to a designated account with another bank, details of which are given by the account holder at the time of opening.

The maximum limit has been increased from Rs. 1,00,000/- to Rs. 2,00,000/-.

This does not make a major difference to the account-holder, other than avoiding the hassles of frequent balance transfers. Unfortunately, interest rates offered by payment banks are not as attractive as they started out to be. All payment banks offer savings interest rate in the range of 2.75% p.a. to 4% p.a., which is the same as public and private sector banks.

If you wish to enjoy a higher interest rate on savings accounts, with fixed deposit facilities, you might as well opt for an account with small finance banks.

However, let us remember that the intent of issuing licenses to payment banks was financial inclusion. RBI proposes to issue a Financial Inclusion Index every quarter, which will show the penetration of financial services to last-mile users in the system.

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4. CRED Power Play

This is unrelated to the RBI Monetary Policy, but is attracting considerable attention from credit card users who get rewarded for paying bills through CRED. Attractive rewards are being announced by CRED in collaboration with other players, keeping with the theme of IPL 2021.

Keep your eyes peeled for more.

5. FINANCE TO FARM SECTOR

Loan limit to farm sector for loan against negotiable warehouse receipts (NWRs) and e-NWRs has been increased from Rs. 50 lakhs to Rs. 75 lakhs per borrower.

WHAT CHANGES FOR FINANCIAL INSTITUTIONS?

1. Targeted Long-Term Repo Operations (TLTRO) by RBI

This window has been extended for another six months till 30th September, 2021. Under this arrangement, RBI releases liquidity in the system, to finance certain stressed sectors. Banks which avail of this liquidity need to invest the amount in bonds, non-convertible debentures and commercial paper issued by entities in the specified sectors. Banks can also use these funds to finance these sectors directly.

2. All India Financial Institutions

AIFIs like NABARD are given another window of refinance for the next 3 months.

3. Banks

They can continue on-lending to preferred sectors through non-banking finance companies.

4. Asset Reconstruction Companies

Reserve Bank of India proposes to set up a committee to oversee and redefine changing role of asset reconstruction companies (ARCs)

The intent of the above measures is to boost the economy further, as corona virus induced changes in the economy look set to continue for some time.

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