Service sector, NBFC sector, Chit funds, Cryptocurrencies, Digital literacy for UPSC Exam

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Service sector-

• Largest contribution to GDP, mainly IT, employs 30% pooulation.
• 2017-18 saw growth of 8.8% in service sector even when the economy was at 6.5%
• However, India’s share in global service export is barely 3-4% which needs to be increased. 8th largest
• Ease of Doing Business- easy FDI rules, e-visa
• Champion sectors in Service declared by DIPP to be promoted
• Foreign Trade Policy 2015-20 focus on service export from India scheme (SEIS)
• IPR policy
• Proposed TFA in services

Important Economic terms for UPSC
Crisis in NBFC sector-

• ILFS defaulted on its Commercial Paper payment and so did DHFL
• It’s an asset-liability mismatch which gave rise to a liquidity crisis, India’s own Lehman Brother moment. NBFCs account for 20% credit in the economy, which is substantial
• ILFS borrowed from short term money market and lent for longer term, which resulted in default.
• RBI Deputy Gov Viral Acharya said that excess govt borrowing forced NBFCs to buy short term debt than long term
• It also is a failure of corporate governance as well as credit rating agencies
• Further investigation showed ILFS had more than 300 subsidiaries while on paper it had only 169.
• Result- stock market crash, NBFC sector affected, liquidity crisis
• RBI allowed Partial Credit Enhancement by banks which would improve credit ratings of NBFC
• RBI has asked NBFC with asset size more than 5000 crore to appoint a Chief Risks Officer
• RBI given powers to reconstruct, merge and amalgamate defaulting NBFC, along with control over housing NBFCs from NHB
• NBFC borrowing from debentures asked to maintain a Debenture Redemption Reserve
• Way ahead- rating agencies improve, capital markets be deepened, banks should be allowed to securitize NBFC assets, implement Kotak Committee on corporate governance
• Suggestions- allow bank’s credit to NBFC be classified as Priority Sector Lending.

Slowdown in the economy-

• GDP slowdown, consumption expenditure slowdown mostly in rural areas, FMCG slowdown, auto sales slowdown, tax collections grew at mere 1.4% in first quarter as against 18.2%
• Demand not able to pickup mainly due to high real interest rates
• Liquidity crisis due to problems in NBFC sector which accounts for 20% of total credit
• Even in the minutes of MPC, members opined that rates be reduced to arrest the falling demand in the economy,
• Consumption Expenditure data shows that essential goods are growing but discretionary goods like AC, TV, etc are slowing down. Second aspect is that slowdown is in non-agri rural consumers. This means that the rural segment needs to be targeted to refuel growth

Economic Capital Framework for RBI

1.76 lakh crore to be transferred
• Transfer of excess capital of RBI to govt for recapitalizing PSB. Suggested by Bimal Jalan
• Usha Thorat committee for 20% reserves and same said by Economic Survey
• Reserves come from forex, retained earnings, revaluation, sale and purchase of govt securities, RBI’s deposits in banks, etc. They are classified into 2 types- revaluation reserves and buffers
• Possible usage- slowing economy can be kickstarted, need for funds for banks, clear govt debt
• Concerns are- increase in fiscal deficit and inflation, affecting ratings of India, erosion of autonomy of RBI
• 1 lakh to 3 lakh can be transferred to govt.

Foreign currency denominated bonds-
• Domestic borrowing squeezes out corporate bond
• Stable macroeconomic parameters with healthy forex
• India’s external debt:GDP ratio is very low at 5% abd borrowing of 10 billion dollars is reasonable
• World bond yields are flat or even negative. Thus investment would flow into Indian bonds
• Force fiscal prudence on govt
• Benchmark for Indian companies tobborrrow abroad
• Overall more confidence in Indian economy and opening up of external sector

Issues include
• Volatility of exchange rates
• Interest rate differential would reduce due to need for hedging for exchange rate risks
• Issue of rising inflation due to inflow of funds
• Investors investing in rupee bonds will switch over thus making no increase in foreign borrowing.

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Chit funds-

• Chit Fund Company is a company which collects subscriptions from specified number of subscribers periodically and in turn distributes the same as prizes amongst them
• Under central law of Chit Fund act 1982. They are regulated by the respective state governments.
• Collective Investment Schemes regulation gives SEBI sweeping powers to oversee all such schemes that pool investor money.
• RBI has permitted NRI to invest in chit funds.
• Officially, chit funds are classified as NBFC.
• Some state governments also officially run Chit Fund companies.
• Saradha and Rose Valley scams
• They cannot accept demand deposits or give other financial services

Reasons of such scams

• Multiplicity of regulations and confusion over jurisdiction. Eg. Centre and State regulate chit funds whereas SEBI regulates other collective investment schemes.
• Poor regulation. Eg. Lack of registration of such companies. • Low financial literacy in the investors about such schemes.
• Quick-get-rich attitude and greed in a consumeristic society


• It bans deposit schemes which are not registered under any of the 9 authorities
• It makes provision for special courts to deal with the cases
• It creates a data repository to list the regulated and unregulated schemes
• It lists offences like running unregulated schemes, accepting deposits, defrauding people, etc and lays down 7 years RI and attaching of property of owners.


A cryptocurrency is a digital or virtual currency that uses cryptography for security and stored using Distributed Ledger Technology.

The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. Bitcoin’s success has spawned a number of competing cryptocurrencies, such as Litecoin, Namecoin and PPCoin.

Factors responsible for growth of cryptocurrencies

• The rise of computational power that allows algorithms to programmatically issue currencies
• Distrust towards governments that can idiosyncratically debase currency or even demonetise at will
• Scarcity of safe assets to store wealth over the long term.

Benefits of cryptocurrency

• Easier to transfer funds with minimal processing fees.
• It uses block chain to store an online list of all the transactions that have ever been conducted with them. This provides a data structure that is safe from hackers.
• It is difficult to counterfeit

Drawbacks of cryptocurrency

• Lack of central authority means consumers can be defrauded and duped and there is no grievance redressal.
• The anonymous nature of transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion.
• Rise of digital currencies would mean RBI’s control over monetary policy would decline
• Lack of central control means the technology is not scalable to a larger population
• As cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash.


• Issue of loan waivers has come up again due to rural distress and drought in 9 states in India. Number of farmer suicides have increased mostly due to non-payment of loans.
• Loan waivers nothing new. One in 1990 by VP Singh was of 10000cr while latest in 2008 was of nearly 52000 cr. The issue is riddled with political compulsions and getting votes through populism.
• Main concern is of political intentions of waiving loans. It can impress farmers but will cost the exchequer.
• However, the financial health of banks has never been considered. Already, the banks under priority sector lending are obliged to lend to farmers which in many cases are not capable of paying back the loans.
• How many farmers take institutional credit? All India Debt and Investment Survey says 44% from non-institutional.
• Moreover, most of the informal credit accessors are small and marginal farmers and landless labourers. Thus, loan waiver will not benefit the intended.
• No guarantee that farmers won’t accumulate loans again because basic structural problems are not solved like lack of irrigation, lack of technology, crash in prices leading to distress sales, etc.
• Reduction in capital expenditure.
• RBI governor also pointed out that loan waivers are a harm to honest credit culture.
• A RBI report has said loan waivers could add 0.2% to inflation.
• The loan waiver worked to some extent in 2008 as economy was growing at 8% and credit growth was good. In 2016, banks are not in a shape to take up the load.

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Payment Banks

• Objective is to provide small savings accounts and remittance/payment services to small businesses, unorganized sector, low income households, farmers and migrant work force
• Eligible applicants include NBFC, telephone companies, super market chains, corporate BC, Indian Post etc.
• It can accept demand deposits up to 1 lakh per customer
• It can issue debit/ATM cards but no credit cards
• It cannot undertake lending activities
• Apart from CRR, 75% of demand deposit balances to be kept as SLR. • 74% FDI allowed

Why payment banks

• Commercial banks can’t establish branches in every village. Hence banking services given through mediums like mobile can be a game changer
• Govt can use to for DBT transfers like pensions, subsidies, etc.
• Move towards cashless economy which will reduce black money in circulation.
• For the first time since nationalization that the private business groups are being given licenses.
• They can be connected to payment gateways like PayTM, etc.

Concerns of payment bank-

• Business is uncertain because the customers are small and marginal people who may or may not remit money regularly.
• For financial inclusion, the Jan Dhan accounts have been opened in Commercial banks. If payments start to proceed through payment banks, it will be a problem.
• Initiatives like UPI can lead to less customers for payment banks
• Since they cannot lend, it restricts business scope and profitability.
• 75% of money in SLR can seriously cripple the business margins.
• Shadow banking is a possibility where the payment bank might illegally lend money.
Solution- Better products for marginal sections, better use of technology, better use of Business Correspondents to spread awareness, etc can be done.

Indian Post Payment Bank declared. The use of the reach and physical infrastructure of Indian Post to be leveraged for financial inclusion.
Small Finance Banks
The small finance bank will primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities. They are established under Companies Act, 2013.

Functions of payment banks-

• Take small deposits and disburse loans.
• Distribute mutual funds, insurance products and other simple third-party financial products.
• Lend 75% of their total adjusted net bank credit to priority sector.
• Minimum 50% of loans should be up to 25 lakhs.

Limitations of payment banks-

• Lend to big corporates and groups.
• Cannot open branches with prior RBI approval for first five years.
• Other financial activities of the promoter must not mingle with the bank.
• It cannot set up subsidiaries to undertake non-banking financial services activities.
• Cannot be a business correspondent of any bank.

Small banks have complained to RBI that they cannot set up banks in rural areas within a year since converting MFI offices into bank branches is not easy. Also, they have to follow Basel norms but that is not easy owing to the size of bank.

Wholesale and Long-Term Finance Banks

• It will be a combination of term-lending institution and an investment bank.
• It will accept current account deposits, fixed deposits and term deposits above a certain value and lend it as long term finance
• It will help grow bond market. WLTF Banks would be allowed to raise funds from selling rupee denominated bonds, commercial bank borrowing and certificate of deposits
• Need- short term finance everywhere. NPA problems too.
• No requirement for SLR but CRR needed

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Cashless Economy

• Definition- It is a situation in which the flow of cash within an economy is non-existent and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as IMPS and RTGS.
• A study by Moody Analytics says that 1% increase in usage of electronic payment can add 29 billion dollars to GDP of EM
• Measures- Jan-Dhan accounts, UPI, mobile wallets, reduction in Merchant Discount Rate, etc.

Benefits of cashless economy –

• Increases financial inclusion
• From people’s point of view- less cash to carry, less reliance on cheques and other forms, no issue of cashout on bank holidays, etc.
• Faster transfer and settlement of claims.
• Help in curbing black money and tax avoidance as the money trail can be traced.
• if economy runs on digital services it is in tune with Digital India • cashless economy will mean less danger from FICN • Fewer resources to physically print money.
• Available of short term credit through Credit Cards.

Limitations of cashless economy –

• A BIS report says India fares very bad as compared to other BRICS countries. The amount of Point of Sales and ATMs are also very less. • Banking frauds are increasing. 12000 recorded in April-Dec 2015 • Problem of internet penetration and connectivity in India.
• Lack of anonymity
• Concept of Bitcoins has been put forth but it is also a very doubtful and shady way of economic transactions.
• Trust in electronic system.
• Digital Literacy- S&P report – 73% men and 80% women not financially literate.

Other Steps Taken for cashless economy –

• Ratan Watal committee suggested- regulatory body and greater use of Aadhar and Mobile.
• Vittiya Saksharta Abhiyaan by HRD minjstry to encourage high education studdents to take up cashless transactions
• Aadhaar Enabled payment System (AEPS) gives services for cash deposit, aadhar to aadhar fund transfer and gateway authentication services
• The Income Tax department is planning to implement the first phase of ‘Project Insight’ from May 2017 to monitor high value transactions, with a view to curbing the circulation of black money
• RBI removes charges for NEFT and RTGS

Digital Literacy

• A report by a parliamentary standing commiittee defines digital literacy as the ability to use digital appliances for meaningful use in their lives • NSSO 71st round found that mere 18% people are digitally literate.
• Digital literacy is important because it forms the base for govt schemes, benefits and subsidies.
• For improving it, a National Digital Literacy Mission was launched. PM Grameen Digital Saksharta Abhiyasn was launched in 2017 where CSC and skill training institutes were used to impart digital literacy
• Challenges- Lack of awareness, less infra as only 6% rural households used computers, less funds as only Rs 500 crore released, coordination with states, local language not used, connectivity issues.