Page 45 - Banking Finance February 2023

ARTICLE

Handling of physical cash is less cost and time efficient
in comparison with digital currency and it is vary
Intricate.
Central banks seek to meet the public's need for digital
currencies, manifested in the increasing use of private
virtual currencies, and thereby avoid the more
damaging consequences of such private currencies.
Payments using Central Bank Digital Currencies are final
and thus reduce settlement risk in the financial system.
In UPI system if Central Bank Digital Currency is
transacted instead of bank balances, the need for
interbank settlement disappears.
Central Bank Digital Currency would also potentially
enable a more real-time and cost-effective globalization
of payment systems. knowledge that they can withdraw quickly. One
consequence could be that banks would be motivated to hold
Time zone difference would no longer matter in
currency settlements - there would be no 'Herstatt' risk. a larger level of liquidity which could result in lower returns
for commercial banks.
Impact on Banks and its Capacity of
This is the reason that the e-rupee is unlikely to earn interest
Credit Creation: as the central bank is worried about the impact of mass
If the Central Bank Digital Currency will be used in withdrawals on India's financial and banking system.
transaction, it can cause a reduction in the transaction
demand for bank deposits. Since transactions in Central Bank There is possibility of increasing of P2P lending and further
Digital Currency reduce settlement risk as well, they reduce disintermediation of banks.
the liquidity needs for settlement of transactions (such as
intra-day liquidity). Central Bank Digital Currency: The way

ahead in India.
In addition, by providing a genuinely risk-free alternative to
bank deposits, Central Bank Digital Currency could cause Central Bank Digital Currency (CBDC) will be known as E-
rupees in India.
reduction in bank deposits.
At the same time reduced disintermediation of banks carries Central Bank Digital Currency can be classified into two
its own risks. If banks begin to lose deposits over time, their broad types' viz. general purpose or retail and wholesale.
ability for credit creation gets constrained. Retail Central Bank Digital Currency would be potentially
available for use by all, while wholesale Central Bank Digital
Not only that, Banks will lose significant volume of low-cost Currency is designed for restricted access to select financial
transaction deposits known as CASA. institutions. Wholesale Central Bank Digital Currency is
intended for the settlement of interbank transfers and
Due to less CASA deposit, their interest margin might come related wholesale transactions, Retail Central Bank Digital
under stress leading to an increase in cost of credit. Currency is an electronic version of cash primarily meant for
retail transactions.
Availability of Central Bank Digital Currency makes it easy
for depositors to withdraw balances if there is stress on any Central Bank Digital Currency can be structured as 'token-
bank. Flight of deposits can be much faster compared to based' or 'account-based'. A token-based Central Bank
cash withdrawal. On the other hand, just the availability of Digital Currency is a bearer instrument like banknotes,
CBDCs might reduce panic 'runs' since depositors have meaning whosoever holds the tokens at a given point in time

BANKING FINANCE | FEBRUARY | 2023 | 39