Discussions to lower CRR on Green Deposits

• The Reserve Bank of India (RBI) and State Bank of India (SBI) are in discussions to lower the cash reserve ratio (CRR) requirement for green deposits.

Green Deposits: What Are They?

• Definition: Green deposits are fixed-term financial instruments designed for people and organizations that want to contribute to green projects.
• Environmental, social, and governance (ESG) investing is reflected in these deposits, which are in line with the expanding trend of sustainable financing.
• Utilization: Initiatives supporting clean transportation, renewable energy, pollution prevention, green infrastructure, and sustainable water management are funded using funds from green deposits.

RBI Framework for Green Deposits

• Greenwashing is prevented by the RBI’s framework, which guarantees the veracity of environmental claims made in connection with green deposits.
• alternatives for Deposits: Banks provide rupee-denominated green deposits, with the option of either cumulative or non-cumulative alternatives.
• Application: This framework is mandatory for non-banking financial organizations (NBFCs), housing finance companies (HFCs), small finance banks, and scheduled commercial banks.
• Eligibility: Investing in green deposits allows both business entities and individual customers to support environmentally friendly activities.
• Allocation: The industries that benefit most from the money raised by green deposits include afforestation, waste management, and renewable energy.
• Limitations: Lenders are not allowed to invest money from green deposits in industries such as nuclear power, fossil fuels, or tobacco.
• Verification: To evaluate the distribution and effects of money raised through green deposits, an independent third-party verification is carried out once a year.
• Supervision: Every year, lenders must assess the effects of the money they’ve provided for green financing initiatives.
• Financial institutions are afforded flexibility as there are no penalties for underutilizing funds obtained through green deposits.

Distinguishing Green Deposits from Normal Deposits

• Project Allocation: Unlike conventional deposits, green deposits designate money for particular ecologically beneficial initiatives.
• Interest Rates: Lenders set the interest rates on green deposits, which are currently similar to those on conventional deposits.

Call for imposing Financial Emergency in Kerala

• After the parties’ failed negotiations, the State of Kerala filed a lawsuit against the Center alleging arbitrary interference in its financial affairs, and the Supreme Court heard the case.
• A financial emergency was previously requested by the governor of Kerala under Article 360(1) of the Constitution as a result of the State’s declining financial resources.

What is Financial Emergency?

• Enshrined in Article 360, it is an essential clause designed to deal with serious financial crises that pose a threat to the stability of the Indian economy.
• Declaration and Authority: The President may issue a proclamation if he is satisfied that there is a risk to India’s credit or financial stability, or to any portion of its territory.
• CoM Advice: The statement, which reflects the executive branch’s collective responsibility, is based on the Council of Ministers’ advice.

Legislative Approval

• A Financial Emergency may be declared by the President, but it requires the consent of both Houses of Parliament to be extended beyond two months.
• When authorized, it is enforceable until the President revokes it, providing for adaptable financial crisis management.

Effects and Implications

• During a financial emergency, the Center’s executive authority greatly increases, allowing it to provide states financial directions.
• Fiscal policy becomes more centralized, with the President able to hold up bills approved by state legislatures for further review.
• To overcome financial difficulties, austerity measures such as reducing public officials’ salaries and benefits are a viable option.

Judicial Review and Criticism

• The President’s judgment is final and not subject to court review thanks to the 38th Amendment Act of 1975.
• The 44th Amendment Act of 1978, however, made judicial review possible.
• By ensuring checks and balances within the constitutional structure, this amendment prevented the executive branch from acting without power.

Historical Context and Usage

• Despite experiencing major financial crises like the one in 1991, India has rarely used the term “financial emergencies” throughout its history.
• The judicious application of this clause emphasizes how crucial it is to match its execution with federalism and democratic ideals.

Cooperative federalism is crucial for resolving interstate disputes, as demonstrated by the Supreme Court’s intervention in the Kerala-Centre financial dispute.

India’s Fintech Landscape: Challenges and Recommendations

• The prevalence of foreign-owned fintech apps in India’s digital payment ecosystem has raised concerns, as recently brought to light by the Standing Committee on Communications and Information Technology.
• Although UPI controls a sizable volume share of digital payments, its value share is still quite small, which raises concerns regarding the ownership and management of digital payment networks.

What are Fintech?

• Fintech Definition: Fintech refers to companies that use technology to improve or automate financial services. It is a combination of the words “financial” and “technology.”
• Fintech companies come in a variety of forms. Some examples are payment systems like Bharatpe, financing platforms like CRED, insurance companies like Digit Insurance, investment platforms like Zerodha, and regulatory technology companies like Razorpay.

Regulatory Framework in India

• Regulatory Environment: Although the RBI does not now directly oversee fintech companies, there are programs like the Fin-Tech Regulatory Sandbox and Payment System Operators license that attempt to accept and control some aspects of this industry.
• Future Regulatory Outlook: In order to promote the orderly expansion of digital lending, the RBI is creating a regulatory framework. It is important to note that lending operations should only be carried out by organizations that are subject to central bank regulation or other applicable legislation.

Why discuss Fintech?

• One of the Fintech markets with the fastest global growth rates is India. The market size of India’s FinTech industry is projected to reach ~$150 billion by 2025, from $50 billion in 2021.
• By 2025, the total addressable market for the Indian Fintech industry is projected to be $1.3 trillion, and by 2030, assets under management and revenue will amount to $1 trillion and $200 billion, respectively.

Analysis of Existing Ecosystem

• Regulatory Oversight: Considering the growing trend of digital transactions in India, the Committee emphasizes the necessity of efficient regulation of digital payment apps. It implies that regulating local apps would be more practical for regulatory authorities like the RBI and NPCI than regulating overseas companies.
• Foreign Fintech Dominance: With substantial market shares in terms of transaction volume, foreign-owned fintech companies like PhonePe and Google Pay dominate the Indian market. On the other hand, NPCI’s BHIM UPI has a very small market share.
• Regulatory Measures: In order to preserve market equilibrium and manage risks, the NPCI previously placed a 30% volume cap on transactions made over UPI by third-party apps. The deadline for compliance was extended to December 2024 in order to accommodate market expansion.

Concerns about Fraud

• Money Laundering: Pyppl, an app located in Abu Dhabi that is run by Chinese investment scammers, is one example of how the Committee saw fintech platforms being exploited for money laundering. This makes it difficult for law enforcement to follow illicit money trails.
• Fraud Trends: The ratio of fraud to sales has stayed comparatively low, even with the increase in digital transactions. Nonetheless, worries about UPI frauds that impact a tiny portion of users continue to exist.

Impact on the Ecosystem

• Benefits of Local Players: Local fintech companies have an inherent advantage in knowing the requirements of their clients and the larger market landscape. Conversely, foreign fintechs contribute their knowledge of emerging technology and worldwide connectivity.
• Revenue Growth: Because of their low transaction costs, fast payments—including UPI—might account for less than 10% of future revenue growth, according to McKinsey’s Global Payments Report. On the other hand, the move to digital payments reduces the expenses related to handling currency transactions by improving security and opening up new avenues for trade.

INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (IBBI)

The Insolvency and Bankruptcy Board of India (IBBI) has released a circular directing resolution professionals (RPs) to share copies of their findings with creditors and debtors involved in bankruptcy cases in order to ensure fairness in these cases.

Context:

• The circular identifies situations in which parties did not have equal access to information due to the actions of resolution professionals (RPs), resulting in a discrepancy in comprehension.
  
  About The Insolvency and Bankruptcy Board of India (IBBI):
  
  
• Overseeing bankruptcy processes and companies such as bankruptcy Professional Agencies (IPA), Insolvency Professionals (IP), and Information Utilities (IU) in India is the Insolvency and Bankruptcy Board of India (IBBI).
• It was founded on October 1st, 2016 in accordance with the Insolvency and Bankruptcy Code, 2016, a statute designed to expeditiously and effectively settle insolvency and bankruptcy matters.
  Under the Companies (Registered Valuers and Valuation Rules), 2017, the IBBI also oversees the regulation of the valuer profession in India.
• Its three tiers of membership are as follows: a chairperson, three central government ex-officio members, one RBI ex-officio member, and five additional members selected by the central government.

Some of the key functions and features of the IBBI are:

• It provides registration to valuers, IUs (information utilities), IPAs (insolvency professional agency), and IPs (insolvency professionals). It also establishes the curriculum for the IPs’ qualifying exam prior to enrollment.
• It creates rules and recommendations for how the Code and the Rules should be implemented and then uses sanctions, investigations, and inspections to enforce them.
• It gathers and preserves documents about cases of insolvency and bankruptcy and distributes data about them.
• The organization fosters understanding and investigation of insolvency and bankruptcy issues and interacts with a range of stakeholders, including the government, courts, business community, and academic institutions.