Vishleshan for Regulatory Exams: Check Daily News Analysis 18th June 2025
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In today’s Vishleshan, we are covering two important topics. First is “Why It Is Too Soon To Write Off the e-Rupee”. We explain what the e-rupee is, why its use is still low, and why it still matters. The second is “Transition of Small Finance Banks to Universal Banks”. We look at why small banks want to become big banks and the problems they face.
Context: Despite the initial push for central bank digital currencies by many nations, the adoption of CBDCs has been slow across the globe, including that of India’s e-rupee. However, the future holds better prospects.
Source: Mint
In response to the growing landscape of private digital currencies, numerous central banks globally, including the Reserve Bank of India (RBI), have embarked on developing their own Central Bank Digital Currencies (CBDCs). India’s e-rupee, launched for retail use in December 2022, represents a cautious yet strategically important step in this direction. While its adoption has been slow so far, mirroring international trends, its potential for geopolitical influence, financial innovation, and targeted welfare delivery underscores its long-term significance.
What is a CBDC (e-Rupee) and how is it Different from a UPI Payment?
Central Bank Digital Currency (CBDC) is a digital form of a country’s fiat currency that is issued and backed by the central bank. In India’s case, it is known as the e-Rupee. It is legal tender, just like physical banknotes and coins, but exists purely in a digital format.
How is it different from a UPI payment?
Nature of Money:
e-Rupee (CBDC): The e-Rupee is direct liability of the central bank (RBI). It is essentially digital cash, directly equivalent to a physical rupee held by the central bank. When you hold e-Rupee, you hold money issued directly by the RBI.
UPI Payment: A UPI (Unified Payments Interface) payment, while digital, is essentially a digital instruction to transfer funds that are already held in a commercial bank account. When you make a UPI payment, you are instructing your bank to transfer your existing bank deposits to another bank account. The money itself remains commercial bank money, not central bank money.
Underlying Technology: While both are digital, CBDCs can potentially leverage distributed ledger technology (DLT) or blockchain (though not exclusively), offering unique features like programmability. UPI relies on existing banking infrastructure for real-time payments.
Intermediation:
e-Rupee: Can potentially be “token-based” or “account-based,” offering a direct central bank relationship (though retail CBDCs are often intermediated by banks for customer-facing services).
UPI: Always requires commercial banks as intermediaries to hold and transfer funds.
Risk:
e-Rupee: Carries zero credit risk or liquidity risk, as it is a direct claim on the central bank, similar to holding physical cash.
UPI: Involves commercial bank risk, as the funds reside in a commercial bank account. While typically very low in stable banking systems, it’s not zero.
Evolution of e-Rupee in Both Retail and Wholesale Levels
India’s e-Rupee rollout has followed a phased and cautious approach, beginning with wholesale and then retail pilots.
Wholesale CBDC (e₹-W): The RBI launched the wholesale CBDC pilot on November 1, 2022. This was primarily for interbank settlement of secondary market transactions in government securities. The goal was to make interbank transactions more efficient and secure.
Retail CBDC (e₹-R): The e-rupee for individuals (retail CBDC) was launched in a pilot phase on December 1, 2022. It is currently “at the pilot stage, available only to some customers of participating banks and non-banks”.
The RBI has adopted a “patient rollout” strategy, “going slow, and testing use-cases patiently and systematically” to minimize “outages and execution problems that plagued CBDC pioneers like Nigeria”.
Notably, the RBI allowed two non-banks to offer e-rupee wallets and made digital rupee wallets compatible with the ubiquitous UPI. This integration with UPI is crucial for its potential success given UPI’s dominance in India’s digital payment ecosystem.
Core Purposes of Launching e-Rupee
The RBI’s decision to launch the e-Rupee is driven by multiple strategic objectives:
Financial Stability: To offer a safer, central bank-backed digital alternative to private cryptocurrencies, thereby mitigating risks associated with volatile private digital assets. The e-rupee “runs on the same secure blockchain technology but offers a safer store of value”.
Efficiency and Innovation in Payments: To potentially lower transaction costs, speed up settlements, and facilitate innovative payment solutions through features like programmability.
Reducing Cash Management Costs: Over time, a successful CBDC could reduce the operational costs associated with printing, distributing, and managing physical currency.
Financial Inclusion: To provide a digital payment option that is accessible to a wider population, potentially including those who are currently unbanked or underbanked (especially with offline functionality).
Geopolitical Imperative: This is a crucial long-term purpose. As “China pushes to internationalize its currency” (Renminbi’s share in global trade finance increased from 1.79% in May 2021 to 6.15% in May 2025), and builds fintech infrastructure to bypass US-dominated SWIFT, India sees its e-rupee as a strategic response. Developing robust infrastructure will allow the e-rupee to “link with other CBDCs when it becomes possible; this will be a big plus for India, given the size of the country’s inward remittances”.
Addressing Cryptocurrency Popularity: India’s crypto adoption is “quite high relative to its income level” (India ranked 1st in retail crypto transactions in both 2023 and 2024). The e-rupee can serve as an “effective foil for cryptocurrencies”, offering the benefits of digital currency without the volatility and regulatory risks of private cryptos.
New Use-Cases and Programmability: To enable innovative applications like direct transfer of government benefits, and particularly programmable money. Examples include “programmed agricultural loans to tenant farmers… [to] ensure that credit is used only to buy farm inputs from approved vendors”. HDFC Bank has introduced “user-programmable e-rupee wallets, which let the user decide the location and validity of use”. The RBI is also exploring offline usage for remote and disaster-prone areas.
Analysis of the Issue: Decoding the e-Rupee’s Journey
The article highlights the initial slow uptake of the e-rupee but emphasizes its long-term potential, driven by strategic foresight and careful implementation.
1. Slow Initial Uptake and Global Trends:
Low Circulation Value: As of March 2025, the value of e-rupee in circulation was a “tiny drop in the ocean of India’s digital payment ecosystem,” at ₹1,016 crore.
Minimal Share of Currency in Circulation: Central bank digital currencies are less than 1% of currency in circulation in most countries. India’s e-rupee’s share is particularly low at 0.03% in March 2025, significantly lower than Bahamas (0.39%) and Nigeria (0.38%).
Poor Public Demand: The “value of CBDCs currently in circulation indicates poor public demand and a lack of incentive to shift from existing payment methods”.
Mirroring Global Experience: This slow uptake “mirrors the experience of other countries,” including Nigeria (e-naira, launched Oct 2021, with only 13 million wallets by May 2024) and China (e-CNY, launched 2020, with 180 million wallets by mid-2024, but many dormant).
2. RBI’s “Patient Rollout” and Smart Moves:
Avoidance of Forceful Adoption: RBI has been “in no rush to roll out the e-rupee” and has “minimized outages and execution problems”. This is in contrast to Nigeria, where withdrawing old notes to force e-naira adoption led to “much hardship” and “severely eroded people’s trust” without lasting impact on digital naira use.
No Cash Incentives: India has “haven’t even offered cash incentives to encourage adoption,” which is “probably wise” as such incentives often lead to temporary adoption.
UPI Integration: Making digital rupee wallets “compatible with the ubiquitous UPI” is a “smart move” as the majority of digital payments in India ride on UPI.
Non-Bank Wallets: Allowing non-banks to offer e-rupee wallets helps leverage their innovative product design and different customer bases.
3. Long-Term Potential and Future Use Cases:
Geopolitical Imperative: The e-rupee is a “geopolitical imperative” in a world where China is pushing to internationalize its currency and build alternative trade settlement infrastructures.
Countering Cryptocurrencies: The e-rupee can be an “effective foil” to private cryptocurrencies by offering the security of a central bank-backed digital currency.
Programmable Money: This is where the “real excitement is”. Examples include programmed agricultural loans ensuring funds are used only for farm inputs from approved vendors. HDFC Bank has introduced “user-programmable e-rupee wallets” for location and validity of use.
Offline Usage: Exploring offline usage is a “game-changer for remote rural areas,” enabling “digital fund access to affected population” in disaster-prone areas by pre-seeding wallets.
In conclusion, while the e-rupee’s journey has just begun with modest adoption rates, its strategic importance for India’s digital economy, geopolitical positioning, and financial innovation is profound. The RBI’s cautious yet deliberate approach, coupled with integration into existing popular payment systems like UPI and the exploration of advanced programmable features, positions the e-rupee as a crucial long-term experiment rather than a short-term failure.
Transition of Small Finance Banks to Universal Banks
Context: Reserve Bank of India (RBI) Governor Sanjay Malhotra, in an interview to Business Standard this week, said the central bank would soon take a decision on the applications made by small finance banks (SFBS) to convert into a universal bank.
Source: Business Standard
The Reserve Bank of India (RBI) introduced the concept of differentiated banks to foster financial inclusion and cater to the specific needs of underserved segments of the economy. Among these, Small Finance Banks (SFBs) play a crucial role in expanding access to banking services in remote and unbanked areas. The RBI is now reviewing applications from SFBs seeking to transition into universal banks, a move that signifies their growth and potential to contribute more broadly to the financial system. However, this transition comes with stringent eligibility criteria and ongoing challenges for SFBs.
Origin of Differentiated Banks
The concept of “differentiated banks” in India largely stems from the recommendations of the Nachiket More Committee (Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households), constituted by the RBI in 2013.
Rationale: The Committee recognized that the “one-size-fits-all” approach of traditional universal banks was not adequately addressing the diverse financial needs of all segments of the Indian economy, particularly small businesses, micro-enterprises, and low-income households.
Purpose: To enhance financial inclusion by creating specialized banks that could focus on specific customer segments or provide specialized services, thereby improving access to credit, savings, payments, and other financial services in underserved areas.
Recommendation: The committee recommended the establishment of “differentiated banks” such as Small Finance Banks (SFBs) and Payments Banks (PBs), which would operate with a narrower set of activities or a more focused customer base compared to universal banks.
What is a Differentiated Bank?
A differentiated bank is a type of bank that operates with a specific and narrower license compared to a full-fledged universal bank. This specialization can be in terms of the types of services offered, the customer segments served, or the geographical areas of operation.
How SFBs Serve the Purpose:
Financial Inclusion Focus: SFBs were primarily conceptualized to further financial inclusion by providing basic banking services (deposits, loans, payments) to unserved and underserved sections of the population, including small business units, marginal farmers, micro and small industries, and the unorganized sector.
Niche Lending: They focus on providing credit to segments that often find it difficult to access loans from large commercial banks due to higher perceived risk or lack of collateral.
Local Connect: SFBs often have a strong local presence and understanding of the needs of their target customers, which helps in better credit assessment and service delivery.
Limited Scope Initially: Unlike universal banks that can engage in a broad range of banking activities (corporate lending, investment banking, international banking), SFBs initially have a more restricted scope, focusing on granular retail lending and deposit mobilization.
RBI’s Conditions and Eligibility Criteria for Starting an SFB
The RBI lays down stringent conditions and eligibility criteria for entities aspiring to set up an SFB. These typically include:
Minimum Paid-up Capital: While the article does not specify the initial capital for setting up an SFB, historically, the RBI has required a minimum paid-up capital of ₹200 crore for SFBs.
Experience in Financial Services: Applicants must have a successful track record of at least 5 years in financial services.
Promoter Background: Promoters should have a sound financial track record and professional competence.
Fit and Proper Criteria: The RBI assesses the “fit and proper” status of the promoters and directors, ensuring integrity and experience.
Priority Sector Lending (PSL) Targets: SFBs are required to achieve 75% of their Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposures (CEOBE) to sectors identified as priority sectors (e.g., agriculture, MSMEs, education, housing loans for weaker sections).
Lending Limits: There are restrictions on the maximum loan amount that can be given to a single borrower or group, to ensure diversification and focus on small-ticket loans. At least 50% of their loan portfolio must consist of loans up to ₹25 lakh. Furthermore, the maximum exposure to a single borrower or group is limited to 10% and 15% of their capital funds, respectively.
Branch Network: SFBs are encouraged to set up a significant portion of their branches in unbanked rural areas.
Analysis of the Article: SFBs’ Bumpy Road to Becoming Universal Banks
The article discusses the “transition woes” of Small Finance Banks (SFBs) on their “bumpy road to becoming universal banks,” based on an interview with RBI Governor Sanjay Malhotra. The RBI is undertaking a “comprehensive study and assessment of the extant framework” for this conversion.
1. Current Status of SFB Applications for Universal Bank Conversion:
The RBI will “soon take a decision” on applications from SFBs seeking to convert into universal banks.
As of now, three SFBs have applied for universal bank conversion: AU SFB, Ujjivan SFB, and Jana SFB.
AU SFB applied in September last year, Ujjivan SFB applied in February, and Jana SFB applied earlier in March 2025.
The applications are currently “under various stages of assessment and processing”.
2. Eligibility and Challenges for SFBs in Conversion:
RBI’s Revised Criteria (April 2025): The RBI announced revised conversion criteria in April 2025. To be eligible, an SFB must have:
A minimum net worth of ₹1,000 crore at the end of the preceding quarter.
A “satisfactory track record of at least five years”.
A Gross Non-Performing Asset (GNPA) of 3% or less.
A Net NPA of 1% or less in the past two financial years.
SFBs must also have reported a net profit in the past two financial years and meet prescribed capital adequacy norms.
Only listed (on at least one of the stock exchanges) SFBs are eligible to apply for conversion.
Meeting Eligibility: The article states that “except for Equitas Small Finance Bank, most others remain far from meeting the eligibility requirements”.
FY25 was “a challenging year for them due to stress in the microfinance segment”. Most SFBs saw “asset quality worsening in FY25”.
SFB Performance Data (FY25): The table above provides key financial indicators for the SFBs that have applied for conversion.
AU SFB: Net profit (₹ million) 7206, Net worth (₹ million) 17042, GNPA (%) 2.2, NNPA (%) 0.6, CRAR (%) 20.1.
Jana SFB: Net profit (₹ million) 669.5, Net worth (₹ million) 2097, GNPA (%) 2.7, NNPA (%) 0.9, CRAR (%) 23.1.
3. Reasons for SFBs’ Interest in Universal Bank Conversion:
Diversified Loan Portfolio: Becoming a universal bank allows SFBs to have a “diversified loan portfolio,” moving beyond their niche microfinance segments. This reduces concentration risk and opens up new avenues for growth.
Broader Business Scope: Universal bank licenses permit a wider range of activities, including corporate lending, international banking, wealth management, and larger ticket-size loans, enabling SFBs to compete with larger commercial banks.
Lower Cost of Funds: Universal banks typically have access to a broader and cheaper deposit base (e.g., current and savings accounts from a wider clientele), which can significantly lower their cost of funds compared to SFBs, which often rely on more expensive sources due to their niche focus.
Enhanced Credibility and Scale: Universal bank status brings greater public trust and allows for operations at a larger scale, attracting more customers and institutional investors.
4. RBI’s Perspective on Granting Universal Bank Licenses:
The RBI’s decision will involve assessing the “current as well as the evolving economic priorities”.
The RBI requires SFBs to provide a “detailed rationale for their design to convert into a universal bank”.
SFBs with a “diversified loan portfolio will be preferred”.
The central bank’s objective is to ensure that converting banks can “meet the funding needs of an aspirational India”. This implies a focus on financial stability and supporting broader economic growth.
In summary, while the RBI is open to SFBs converting to universal banks to meet India’s evolving financial needs, it maintains a cautious approach, emphasizing strict eligibility, a proven track record, and a commitment to broad-based financial stability and diversification rather than mere expansion. The mixed performance of SFBs in FY25, particularly regarding asset quality, presents a hurdle for several aspiring universal banks.
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