Page 38 - Banking Finance October 2025

ARTICLE

CBDCs can add reasonable value to the unstable. This would constitute a considerable structural
change for the banking sector, which could see their inter-
economy. mediation margins eroded and have consequences for credit
Central banks increasingly look to draw on lessons offered provision, thereby posing a significant challenge to the
by cryptocurrencies and private digital-payment systems. sustainability of current bank business models.
They undoubtedly want to tap the efficiency gains and har-
ness the resilience of the technology. 'Permissioned' systems Credit risk agencies might play a bigger role in the world
are expected to do away with the fully decentralized ones dominated by CBDCs as the ability to offer narrowly tar-
but still retain some of the latter's advantages. On the tech- geted credit risk-based financial services might be more
nical front, so far, the main focus of central banks has been feasible. The Indian banking sector is one of the largest
on reducing transaction costs and making the CBDC plat- networks of banks in the world, catering to more than 80
forms more programmable. If we look at the cost of issu- percent of India's population. It consists of 12 public sector
ing electronic Rupee, as of end-March 2017, around 201 banks, 21 private sector banks, 46 foreign banks, 43 regional
billion pieces of notes including coins (one rupee and above) rural banks, 1,542 urban cooperative banks, and 94,384
were in circulation in India. rural cooperative banks. A general-purpose CBDC has the
potential to disrupt this intermediary network. Thus, RBI
In that year, the country's adult population (15 years and must assess thoroughly and adopt a cautious approach as
above) was estimated to be around 916 million. If all adults it would have wide-scale ramifications on financial inclusion
hold one wallet each, the estimated size of all header and employment.
records would be around 320 GB-not a large number by
any yardstick. The size of transaction database, assuming Payment system
1,000 transactions for each note during its lifetime, would People may exercise choice to hold digital sovereign money
be around 71 petabyte or .07 Exabyte. Amazon Redshift as an alternative to cash. This can enable payments and trans-
Spectrum Query service charges $5 per Terabyte of Query. fers to take place directly in risk-free central bank money, and
If in the extreme case we assume that all notes are trans- in real-time to businesses and individuals. There could also be
acted once every day of one year, then the cost would be benefits of having a CBDC for wholesale and interbank pay-
around USD 132 million or INR 862 crore. Taking storage ments; for example, it could facilitate faster settlement and
cost, it would be well below the cost of printing notes, which extended settlement hours. Implementation of CBDC through
the RBI incurs today. the existing structure of commercial banks and payment ser-
vice providers (PSP) would require considerable investments
Financial intermediation to set up a suitable infrastructure, redesign network, and in-
tegrate it with currently existing technologies.
The introduction of CBDC would have wide-scale implica-
tions on the traditional structure of the banking business
India is one of the few countries with a robust legal frame-
and financial intermediation model. Households and firms
work that empowers the central bank to regulate and su-
would have a choice to decide between banking deposits
or digital currency holdings, possibly directly at the central pervise payment systems. The payment system regulated
bank. Flight from commercial bank deposits to CBDC will by the Reserve Bank of India (RBI) is not just a safe and
shrink the balance sheet of commercial banks as they will secure but also efficient fast and affordable. For CBDC to
lose out on deposits (liabilities) and reserves (assets). be operationally effective, RBI would have to develop a
separate set of regulations. Policies around the remunera-
tion of private intermediaries providing value-added services
Commercial bank deposits may face stiff competition from
CBDCs as a potential group of people and firms would pre- would need thorough analysis.
fer moving existing deposits to CBDCs. It could result in re-
ducing the need for state guarantees to the bank liabilities. Stepping Towards CBDC
Furthermore, due to the intense competition on retail About 134 countries worldwide are considering a CBDC, just
transactional services, banks and other financial entities three have launches it. The Bahamas (population of 0.4
would be pushed to increasingly rely on wholesale or even million, spread across 21 islands) was the first to launch the
overseas funding, which is likely to be expensive and more "Sand Dollar", uniquely a CBDC, which also works off-line,

34 | 2025 | OCTOBER | BANKING FINANCE