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The dominance of cash transactions in India comes at a cost, with the RBI and commercial banks spending Rs 21,000 crore annually in currency operations. It is opaque, facilitates tax evasion and is generally system inefficient. The biggest challenge before payments banks (which essentially promote financial inclusion by making it easier to set up an account) is to get this cash routed through formal banking channels, mostly electronic, and thus start a silent revolution to dethrone the king of inefficient times -- cash.
The Reserve Bank of India has given in-principle approval to 11 entities to set up payment banks. The objectives of such banks are (a) to further financial inclusion by providing small savings accounts; and (b) to provide payment/remittance services to the migrant labour force, low-income households, small businesses and other organised sectors. The new players in banking have to display out-of-the-box thinking in the following areas to make a distinct mark.
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The revised Indian Financial Code dated 23 July 2015 envisages a seven-member monetary policy committee - three from the Reserve Bank of India and four appointed by the Central Government. This effectively means that the Central Government will have the final say rather than the RBI in the administration of monetary policy and decision on interest rate.
Niti Aayog vice chairman Arvind Panagariya in a recent interview mooted the idea of a "bad bank", essentially a financial institution set up to hold and manage non-performing assets (NPA) acquired from other banks. It is like an isolation ward to prevent the spread of an infectious disease. Opponents to the idea have come up with the arguments that it is unwarranted and will transmit negative signals and create moral hazards. Here's why I think they are wrong.