The Reserve Bank of India recently launched a pilot project for central bank digital currency (CBDC) in the wholesale segment. It will soon test the waters for eRupee in the retail segment. While CBDC promises financial inclusion, lower cost of the transaction, faster transfer of money etc, it could also make the banks irrelevant at many levels, feel many experts.
CBDC or e-rupee is an electronic form of money, which is currently in a trial phase, issued by the RBI that can be used in contactless transactions. It can be classified into two types - retail CBDC and wholesale CBDC. While retail CBDC would be available for general use by everyone, wholesale CBDC has been designed for select financial institutions and banks.
eRupee: A threat to banks?
CBDC is a legal tender in a digital form, so it will have an intrinsic value. It is exchangeable at par with cash and can be used even if a person doesn’t have a bank account. In the case of UPI payment, Google pay or Paytm, a money transfer takes place between two bank accounts. CBDC would be a direct transaction, so it is just like holding cash in your bag. Because of this unique quality of CBDC, there are fears that the banks may lose their essence in the long run.
The central bank could directly issue eRupee to customers, who in turn could maintain an account with the central bank and directly transact with it without having the need to have a commercial bank as an intermediary. While these are early days, many believe in the future CBDC could limit the role of banks in the financial sector.
Banks play a vital role in society by providing loans to people and businesses at competitive rates. They provide remittance services and help people in saving and invest their money in different financial instruments like government securities, long-term bonds, etc.
Too early to write off banks' role
As per experts, it’s premature to comment on the changing role of banks after the formal launch of eRupee, as the RBI hasn’t yet given out any details related to the technology, denomination, opening of accounts etc.
“Currency is issued by the RBI but other functions like payments, deposits, and taking credit are done by other agencies and banks. So even if a digital currency is launched by the RBI, banks will continue to play its role,” former economic affairs secretary Subhash Chandra Garg said.
“RBI will never involve in disbursing credit. Banks will continue as intermediaries. RBI may maintain the current account but will not do payments that have been always done by banks and payment agencies,” Garg added.
As per Charan Singh, CEO of EGROW Foundation and former non-executive chairman of Punjab & Sind Bank, banks are important financial intermediary institutions, which accept deposits and are involved in credit creation.
“eRupee does not threaten the banking system at all. The ease of doing business with banks should improve as well as the volume of business after eRupee is introduced. As financial inclusion should improve, so should the reach of the banking system. In the financial sector, I visualise improvement in efficiency and reduction in the cost of conducting business,” Singh said.
Rachit Chawla, the CEO of Finway FSC, also echoed the same observation. He said ultimately, banks are only given the responsibility of moving this digital rupee. So banks will continue to play a vital role.
“It is a means of making the transfer of money efficient. That’s all it is. And also low cost in terms of emitting payments. But the banks will play a key role,” he added.
As per experts, digital currency will help in improving financial inclusion, as there are many places in India, particularly in remote areas, where access to physical currency or banks is difficult due to cultural or geographical issues. In those cases, CBDC will help as money can be accessed easily through a smartphone.
“There will be a major impact only on one thing. Digital payments will increase as there won’t be any need to have bank accounts. So people will be able to make payments with the help of digital cash. I don’t see any other major impact,” Garg said.
RBI in its statement on the CBDC pilot project in the wholesale segment had said the use of e-Rupee is likely to make the inter-bank market more efficient. Settlement in RBI money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.
“Going forward, other wholesale transactions, and cross-border payments will be the focus of future pilots, based on the learnings from this pilot”, the RBI had stated.
As per RBI Governor Shaktikanta Das, there is a need to keep pace with the changing times. It is costly to print, store and supply paper notes, it involves the cost of printing, so digital currency will be less costly. It will be crucial for cross-border transactions and for cross-border payments.