Disintermediation: An overblown bank scare

Source: The post is based on an article “Disintermediation: An overblown bank scare” published in Live Mint on 13^th October 2022.

Syllabus: GS 3 – Economic Development

News: The Reserve Bank of India (RBI) has recently outlined a plan for the proposal of e-rupee which is a digital currency.

The proposal sets aside intermediaries like banks from the involvement in e-rupee. However, the Nobel Prize winner in economics this year, highlights the vital role of financial intermediation played by banks in an economy.

What will be the advantages of e-rupee?

First, an e-rupee can easily attract savings as it will bear an RBI promise.

Second, money held in cash-like e-token form would be a very safe asset when compared to an account at a bank that requires transfers via UPI which looks ‘digital’ but is not risk-free. Further, offering interest on e-rupee can increase the deposits.

Third, lenders could borrow funds from RBI to on-lend and to sharpen their skills of pricing credit risk.

Therefore, retail deposits play an important role in credit expansion.