Hello everyone,   

Welcome to the 122nd edition of The Pattern, a weekly newsletter where we delve into the latest from the world of economy, finance, and technology. Let’s get started.   

Aesop, the famed Greek fabulist, once said that it is possible to have too much of a good thing. This seems to certainly be the case for the RBI when it comes to digitisation. Or so it would seem, going by the many challenges that the RBI has been trying to combat lately -- from mitigating financial fraud risks to keeping the growth of unsecured lending in check.  

At a conference with the International Association of Deposit Insurers, RBI Deputy governors Swaminathan J and Michael Patra placed emphasis on a crucial macro-economic risk that may stem from digitisation: deposit liquidity. It’s a problem that the RBI has voiced concerns over before. And this week, the officials addressed the issue at length. Let's take a closer look: 

Ease of payments and risk of bank runs  

The officials pointed out that the access to 24/7 banking and digital payments has left banks vulnerable to possibilities of bank runs and liquidity crises during periods of stress. These risks may be exacerbated by digital influencers like social media, leading to coordinated financial behavior.  

Cross-border implications  

The liquidity risk has implications beyond borders too. “ While digital innovations can ease cross-border supply of financial services, they can also increase the likelihood of deposit insurers exposed to member banks with a significant share of non-domestic depositors and additional challenges in the case of a payout following bank default,” Mr. Patra said. 

The failure of deposit-taking institutions is an extreme and rare possibility. But let’s be honest: digitisation – while it has definitely changed financial services for the better – has exposed all stakeholders to an array of risks. So proactive action by the RBI is always a welcome move.  

This becomes increasingly clear when one considers that India’s bank deposit liquidity already stands on shaky ground. There is a widening credit-deposit gap in the Indian banking system. Infact, we’re currently facing its worst deposit crunch in the last two decades . Amidst this backdrop, it’s only fair that the RBI pulls all stops to systematically mitigate our banking system’s deposit-liquidity risks. In fact, the apex bank has already rolled up their sleeves to set things in motion!  

Frameworks underway?  

To combat the above-mentioned problems, RBI has proposed implementing risk-based pricing for bank deposit insurance. This move encourages deposit insurers to set premiums based on the member-banks' exposure to deposit-liquidity risks. "The implementation of risk-based premium for deposit insurance merits consideration. By tying insurance premiums to the level of risk posed by individual financial institutions, deposit insurers can incentivize banks to adopt stronger risk management practices," Mr. Swaminathan said. 

Furthermore, Mr. Patra has also encouraged deposit insurers and other safety net participants to put in place a framework to “manage the failure of deposit-taking institutions”. He also added that the Deposit Insurance and Credit Guarantee Corporation is prioritising risk management, including contingency planning and crisis management frameworks."  

These measures seem to be the first of many steps that the RBI will take to combat the issue of bank deposits and liquidity. Can we expect the central bank to take more concrete steps in the months to come? We’ll have to wait and watch.  

That’s all for this week. As always, leaving some reading recommendations below.   

All companies need a fintech fraudstack, here’s why  

E-way bill generation surges to record high of 10.48 crore in July  

How fintech startups are dealing with bleak credit cards outlook  

SROs: A proactive approach in maintaining compliance in the Fintech ecosystem  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to always get all updates. 

Cheers, 

Mayank 

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.