Prime Minister Narendra Modi introduced the RBI’s novel grievance redressal mechanism— the integrated ombudsman scheme, on November 12,2021. The two schemes, the retail direct scheme and the integrated ombudsman scheme, will ease access to the government securities’ market for retail investors, deepen India’s debt market and improve customer experience. Under the “RBI Retail Direct Scheme”, investors will be able to easily open and maintain their government securities’ accounts online with the RBI for free. The scheme places India in a list of select few countries offering such a facility. The Reserve Bank-Integrated Ombudsman Scheme (RB-IOS) is aimed at fast tracking and resolving customer complaints against entities regulated by the central bank. The central theme of RB-IOS is based on “One Nation-One Ombudsman” with one portal, one e-mail address and one postal address for the customers to lodge their complaints.
Retail Direct Scheme will give a new dimension to the concept of inclusivity by bringing within its fold the middle class, employees, small businessmen and senior citizens who can participate in the government securities’ market, irrespective of the size of their savings in a well regulated, financially hassle-free, safe and secure environment. In last seven years, India has jumped over nineteen times in terms of digital transactions. Thanks to Unified Payments’ Interface (UPI), India has become the world’s leading country in terms of digital transactions which crossed 4 billion in number and over Rs 7.7 lakh crore in terms of value, in a single month, in October 2021. Today India’s banking system is operational 24 hours, 7 days and 12 months anytime, anywhere in the country. Against this vibrant backdrop, it is even more important to ensure seamless customer experience and that is precisely what the RB-IOS initiative seeks to achieve.
The Indian government securities’ market for decades, suffered from lack of depth and liquidity, required to encourage greater participation from retail investors. The secondary market was also characterised by relatively lower volume of trades vis-a-vis global peers. The bulk of the trading remained concentrated in a few securities and a few maturity buckets. Further, the lack of seamless integration of the bond market infrastructure with the securities’ market infrastructure, resulted in prohibitive costs. However, in the last few years, a number of sweeping changes were initiated by the Modi government to make the debt markets vibrant. The results are now increasingly visible. For instance, the corporate bond market which is currently 16-18% of GDP, is slated to rise to 22-24% of GDP by 2024-25.
At present, the RBI faces the challenge of managing the government’s massive borrowing programme at a cheaper cost. Rise in global crude oil prices and commodity prices are translating into higher input costs, leading to a broad-based rise in headline inflation of virtually every major economy, worldwide. While the RBI has placed greater priority on reviving growth, as recovery gains momentum and demand picks up, it would have to change its accommodative stance and move towards interest rate hikes at some point in the future. Hence, deepening and broadening of India’s G-Sec market assumes even greater significance and the decision to allow retail participation in the government bond market couldn’t have come at a better time. Rising rates could make it challenging for the RBI to keep in check, the overall cost of the government’s borrowing programme. In this backdrop, allowing greater access to retail investors to widen the investor base is a brilliantly, well timed and much needed move. In the recent past, the RBI has sought to widen the investor base by allowing greater foreign investor participation in government bonds. A ‘fully accessible route’ for investment by foreign investors was opened, under which certain specified securities were opened for them without any restrictions. Direct retail participation in government securities is a massive financial sector reform, in India’s march towards becoming a US $5 trillion economy.
Till seven years back, banking, pension, insurance, everything used to be the exclusive preserve of a few, in India. Common citizens of the country, poor families, farmers, small traders-businessmen, women, dalits and the deprived, backward classes, had little access to all these facilities. The people who had the responsibility of taking these facilities to the poor, particularly the likes of an inept and corrupt Congress Party which ruled the country for the longest time,never really paid any attention to last mile delivery. Before PM Modi took charge, in many semi-urban and rural areas, there was no bank branch, no staff, no internet, no awareness and the political dispensation of that period (Congress led UPA), was oblivious to the issues plaguing the masses. Lack of transparency was the biggest hurdle but now with PM Modi at the helm, transparency and accountability, have been reinforced.
To further strengthen the banking sector, in July last year, the Modi government decided to bring all urban cooperative and multi-state cooperative banks under the supervision of the RBI. Due to this, the governance of these banks is improving and trust in the system is getting stronger among lakhs of retail depositors. In the last seven years, NPAs were recognized without obfuscation. The focus was on resolution and recovery, public sector banks (PSBs), were recapitalized and banking consolidation was carried out in the right earnest. Thus far, cooperative banks had been under the thumbs of politicians, who misused their positions as bank heads to extend credit to those who had little intention to repay, leading to massive financial frauds. With regulatory changes last year, however and RBI now in control, the Modi government sought to protect Rs 4.84 lakh crore held by over 8.6 crore depositors, in over 1540 cooperative institutions. The 1540 banks which include over 1482 urban cooperative banks and 58 multi-State cooperative banks will enable RBI’s writ to apply on these cooperative banks, just as it applies to other scheduled banks in the country. This is a huge reform, since the RBI, till now, did not have adequate powers to control the cooperative banks, which came under the purview of the respective State governments. In view of this, depositors were at risk if there were any irregularities, but all that is now in the past.
For example, the net worth of multi-state Punjab and Maharashtra Cooperative (PMC) Bank had turned negative in 2019 following financial irregularities, especially, misreporting on loans extended to real estate developers.
The RBI had to intervene due to the fraud running into crores of rupees, restricting depositors’ withdrawal and barring the bank from either lending or accepting deposits.
Following this, the Modi government introduced a Bill in Parliament to amend the Banking Regulation Act to give RBI more regulatory powers over cooperative banks.
In Maharashtra, the NCP and the Congress have a stake or a say, directly or indirectly, in many cooperative banks. However, PM Modi took the brave and bold decision of bringing many cooperative banks under RBI purview, caring little for the protests by vested political parties, who were clearly miffed with this move. Modi does what he does,guided by the India First approach, political compulsions be damned. That is also precisely why he is both a great reformer and an innovator.
In July this year, another massive step was taken to protect retail deposit holders in banks, with the deposit insurance limit being increased from Rs 1 lakh to Rs 5 lakh. This covers 98.3% of all deposit accounts and 50.9% of all deposits in terms of value. Just compare this with what prevails globally, where only 80% of deposit accounts are insured, with merely 20%-30% of deposit values covered. The Deposit Insurance premium normally paid by banks to the DICGC was also raised from 10 paise for every Rs 100 deposit, to 12 paise and a limit of 15 paise was imposed. This was an enabling provision however and an increase in the premium payable will be determined based on consultations with the RBI and relevant stakeholders including the government.
The Deposit Insurance Credit Guarantee Corporation Bill 2021, was in fact a landmark one for many reasons. Normally, it takes about 8-10 years, after complete liquidation of the bank, for depositors to access their own money if a bank gets into trouble and runs into liquidation due to irregularities, fraud or other reasons. Now, however, even if there is a moratorium, this (90-day) measure will set in. The country’s deposit insurance law will mandatorily return up to Rs 5 lakh of savings of retail depositors, within 90 days of the central bank’s imposition of a moratorium on the said bank’s operations.
In many developed economies, the bond market is much larger than the equity market. For instance, the size of the global bond market was $106 trillion in 2019,of which the USA alone accounted for a solid $41 trillion. Coming to India and its bond market’s composition, the Indian government securities’ market is 2.7 times that of the corporate bond market. Hence the RBI Retail Direct Scheme is a very well timed move that will not only lead to greater financialisation of small savings and further widen the ambit of government bonds, but more importantly, in the long run, it can become a significant avenue for powering infrastructure growth, given that infrastructure is a capital guzzling sector and needs committed,long term capital. The relevance of a healthy bond market that was ignored for the longest time by erstwhile dispensations, is finally getting its due under the Modi government, in more ways than one.
The writer is an Economist, National Spokesperson of the BJP and the Bestselling Author of ‘Truth & Dare-The Modi Dynamic’.
The Indian government securities’ market for decades suffered from lack of depth and liquidity, and required to encourage greater participation from retail investors. The secondary market was also characterised by relatively lower volume of trades vis-a-vis global peers. The bulk of the trading remained concentrated in a few securities and a few maturity buckets. Further, the lack of seamless integration of the bond market infrastructure with the securities’ market infrastructure, resulted in prohibitive costs. However, in the last few years, a number of sweeping changes were initiated by the Modi government to make the debt markets vibrant. The results are now increasingly visible. For instance, the corporate bond market which is currently 16-18% of GDP, is slated to rise to 22-24% of GDP by 2024-25.
