What would happen to your Fixed Deposits if your bank fails?
Fixed deposits (FD) are facing the wrath of the recent PMC Bank crisis and associated FUD in the Indian Banking Sector. Did you know that irrespective of your investment amount in Fixed Deposits, you are insured for only 1 lakh rupee (approx. $1400)?
This essentially means that even if you have invested $1 million in FD in Indian Banks, you will be repaid only $1400 in case of a bank failure. This is probably the lowest deposit insurance than most of the developed nations or even what India’s peer economies in the BRICS are offering. This also smashes the widely-held notion of FDs being the safest bet when it comes to investment options for the retail investor.
When the safest bet is prone to such vulnerabilities, one wonders what lies under the safely guarded guise of security in traditional banking?
RBI can “Only Try” to save a Failing Bank
The Banks have long enjoyed the trust (sometimes, blinding trust) of the consumers. However, the PMC Bank crisis, a well-timed FUD created around YES Bank, the infamous fiasco with the FRDI bill, has made skeletons fall from the closet ceaselessly.
The pretence of banking being safe is fading. People now realize that an unannounced financial crisis can throw them into disarray. Ironically enough, the crisis does not hit you announced, but are ever-looming considering the large trust cycle involved in the banking system.
See how a berlin restaurant challenged traditional banking.
When a restaurant refuses to do business with #Banks, it is time to expand horizons beyond traditional banking.
— Ish Goel (@ishgoel) October 16, 2019
There’s this argument that no Indian commercial bank is allowed to fail as the RBI intervenes and “tries” to ensure that failed banks are acquired. However, isn’t it a case of too little, too late?
RBI being the guarantor is far from a solution to this increasing trust deficit between consumers & banks. It only complicates the trust cycle and increases the chances of a single point of failure. The degrading autonomy of RBI does not help the cause either – with the recent invoking of Section 7 of the RBI Act, the accountability and autonomy of RBI is prone to dilution and can lead to RBI being reduced to a pliant organisation.
Decentralized Finance – A Emerging Alternative
Did you know that as of Oct 2019, more than half a billion dollar ($539 mil) has been invested in Decentralized Finance (DeFi) startups across the globe?
The concept of Decentralized Finance triggered on the Ethereum Blockchain in the year 2018 with the aim of providing all the services that traditional banks provide, but without the need of banks! This ambitious cult started receiving traction with the advent and success of stablecoins like DAI, USDt, USDc and some others.
How DeFi works?
Today, a consumer can deposit money in DeFi apps, invest & earn interest to the tune of 8-10% per annum, take loans for as low as 10-12% and withdraw money back at their own discretion. Just about everything that a traditional bank offers, however this time sans the bank itself. Sweet, isn’t it?
This is just the tip of the iceberg. Startups across the globe are building DeFi products in the category of assets, lending, payments, exchanges & derivatives which are changing the entire financial landscape, this time as a parallel economy using blockchain technology
Banking on the DeFi Network v/s Traditional Banks
The basic premise of DeFi is – “Code is the new bank”. Blockchain provides the capability to launch a software program (smart contracts) that are not owned by any single institution. Naturally, such software programs become free from institutional control and can be better managed with respect to compliance and claim processing. Imagine how easy will it be to manage and detect bad loans and NPAs?
In the current traditional banking scenario of India where depositors are supporting wrinkles on their foreheads, Blockchain Technology and innovation around DeFi could have functioned as a soothing balm to their wrinkled foreheads. For example, a startup called Compound Finance is offering peer to peer lending where investors can deposit their stablecoins as an investment which in-turn provides liquidity for the loan borrowers. Such investments are earning interests for the investors to the tune of 10% per annum. There’s absolutely no need for any intermediary/human intervention in this entire process. All the transactions are governed by the smart contracts deployed on the Ethereum Blockchain. This could mark a major uprising in the peer to peer revolution.
The major criticism of cryptocurrency has been due to its volatile nature which sort of makes it a not-so preferred mode of transaction on a day-to-day basis for the retail investor. However, with the entry of stablecoins that are pegged to the value of a dollar at all times, drastically reduces the volatility thus making an ideal alternative for daily transactions. This new aspect of a digital asset, uncontrolled by a single institute, is making the shift from traditional banks even more enticing.
Can Indian consumers participate in the DeFi network?
The sad answer is No. The unfortunate step taken by RBI in putting a tap on Indian banks to support the cryptocurrency exchanges means that the entry point for the Indian consumer for purchasing stablecoins is no longer feasible. That means the DeFi innovation remains unavailable to the country.
Indians who already own cryptocurrencies, thanks to the Bitcoin bubble, can convert their cryptocurrencies into stablecoins which are equal to a dollar at all times and then start using the DeFi network. However, entry for new enthusiasts has been shut by the government.
Well-thought out move or reckless regulation?
On the official statement of RBI on the so-called ban, it could be gauged that the intention is to protect the hard-earned money of Indians to go into a hastily taken decision of investing in crypto-currency and to prevent illegal money laundering. Yet, the decision does more harm than good. It is almost like killing a living human being because we couldn’t find medicine for his/her headache.
While the whole world is on the cusp of ushering into the world of financial inclusion through Decentralized Technology where the banking system is set to be evolved to a more trustless environment, India has shut the doors with its own hands. Public blockchain frameworks that are driving the DeFi innovation has received a bloody nose from the hands of the Government. Ironically, the Indian Government is itself mulling at launching its own digital currency, the same technology it just KO’ed. Whether it is the glaring hypocrisy or borderline ignorance, is something that is being awaited with bated breath.
The revoking of this RBI circular will need an awareness like in the FRDI bill’s case, but probably with 10 times more effort. Because let’s face it, fear is a stronger emotion than hope. And, while FRDI bill invoked fear among masses, Blockchain is supposed to instil hope and hopefully, just like in FRDI Bill’s case, Government puts its ear to the ground and realizes that Blockchain is an aircraft set to take off. If we don’t hurry up, we will miss the flight!
Ish Goel established the ‘Blockchain Centre of Excellence’ at Somish in 2016. Through the Somish Group, he has worked with the Government, Real Estate, BFSI, Manufacturing, Retail, Agriculture and Logistics industry over the past one decade.
Ish is one of the key blockchain architects at Somish and has led delivery of multiple blockchain products using platforms like Ethereum and Hyperledger globally. Key product offerings include: DEF (Data Exchange Framework powered by blockchain, getdef.io), GovBlocks (Decision Making Protocol, govblocks.io) and Certy (Issue Certificates on Blockchain, certy.io)