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Islamic window in Banks

In News: RBI has proposed the opening of an ‘Islamic window’ in banks to ‘gradually’ introduce Islamic Banking

Islamic window/Islamic Principles

Islamic window refers to services provided by conventional banks but based on Islamic principles.
Islamic bank is a complete banking system is based on and run with Islamic principles.
There are two basic principles behind Islamic banking are the

Sharing of profit and loss and
Collecting and payment of interest or “riga” is not permitted.

Also this money cannot be used for speculative trading, gambling, or trading in prohibited commodities such as alcohol or pork.

How Do Islamic Banks Earn Money Without Using Interest?

Islamic banks use equity-participation systems.
This means that if bank loans money to a business, the business pays back the loan without interest, but it gives the bank a share in its profits.
If the business defaults on the loan or does not earn any profits, the bank does not receive any profit either.
For example, in 1963, Egyptians formed an Islamic bank in Mit Ghmar. When the bank loaned money to businesses, it did so on a profit-sharing model.
To reduce risk, the bank only approved about 40% of its business loan applications, but the default ratio was zero.

What are the hurdles?

There is some political opposition against its introduction.
It will call for a complete overhaul of the banking regulatory system.
India lacks adequate manpower trained in Sharia banking.

Steps taken

A committee headed by Raghuram Rajan had suggested the need to have interest-free banking in India.

The Kerala government had subsequently tried to co-promote an Islamic finance institution, but the move was challenged in the High Court.
A few simple products which are similar to conventional banking products may be considered for introduction through Islamic window of the conventional banks.
Introduction of full-fledged Islamic banking with profit-loss sharing may be considered at a later stage on the basis of experience.

Purchase Preference Policy

In News: The Commerce Department contests that the proposed Petroleum ministry’s purchase preference policy violated the WTO rules.

Purchase Preference Policy

The Petroleum Ministry plans to infuse 50 per cent domestically manufactured content in all public sector oil and gas contract.
While keeping the contract open for bidding by all, public sector undertakings (PSUs) has to specify a certain percentage of required domestic content in supplies of goods and services — those providing local content product as well as those supplying pure imports.

Contentions of Commerce Department

The Commerce Department contests that the proposed purchase preference policy violated the WTO rules.
“Under the WTO National Treatment on Internal Taxation and Regulation, any discrimination to imports in comparison to domestically manufactured goods is inconsistent with the obligations undertaken by the member countries, including India,”
Though WTO rules provided an exception for PSUs, but it is limited for products purchased for “immediate and ultimate consumption in governmental purposes and not otherwise for resale or use in the production of goods for resale”.

RBI to Absorb Excess Liquidity

In News: The Reserve Bank of India (RBI) has said banks have to maintain 100 per cent cash reserve ratio (CRR) for the deposits they have received between September 16, 2016 and November 11, 2016 to absorb excess liquidity in the banking system following demonetization.

What is Liquidity?

Liquidity is basically how “easy” one can convert any asset into cash.
It is also an ability to buy or sell a security without affecting the asset’s price.

Cash reserve ratio (CRR)

CRR is the proportion of deposits that banks have to keep as cash with the central bank (RBI).
Banks do not earn any interest on CRR balances kept with the RBI.
It is intended to absorb a part of the surplus liquidity, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy.

New Norms

The RBI has asked banks to set aside 100 per cent of the deposits accrued between September 16 and November 11 as incremental CRR.

Incremental CRR is a temporary measure to drain excess liquidity following demonetization

What is incremental CRR?

The incremental CRR prescribes the reserve ratio based on the extent of growth in deposits.
It immobilizes the fast-growing liquidity from where it is lodged.
In the late 90s, a 10 per cent incremental CRR was in vogue on the non-resident deposits to regulate (reduce) the flow of funds from overseas Indians.

Reason Behind this Move

First, the surplus in the banking system, at about 5 lakh crore, was moving closer to the maximum absorption capacity of the central bank.
The RBI has only 5 lakh Crore of government securities (G-Secs) to absorb banking system surplus through the reverse repo window prior to the demonetization drive.
For absorb further liquidity this option cannot be viable.
Other liquidity-absorption measures like Market Stabilization Scheme (MSS) bonds are too small given the liquidity-absorption requirement.
As the funds parked by banks with the Reserve Bank of India (RBI) under the reverse repo facility surging the government security rate had fallen below the repo rate of 6.25 per cent.
Thus sharply fall in rates indirectly impacting the spot dollar-rupee rate.

This liquidity-absorption measure could reverse some of these distortions.

Market Stabilization Bonds
In 2003-04 government issued a new category of bonds specifically to offset the impact of excess liquidity.
In case of normal borrowings by the government money goes to the Consolidated Fund of India.
Funds collected under MSS cannot be used by the government for its own expenditure, and would be maintained in the public account.
RBI has revised the ceiling on MSS to Rs6 trillion, from the previous limit of Rs30, 000.

Committee to promote digital payment system
The government under NITI Aayog set up a 13-member committee to formulate a roadmap to implement measures that promote digital payment systems and move towards a healthy financial ecosystem.
Chandrababu Naidu, Chief Minister of Andhra Pradesh, will be the convener of the committee which includes five other Chief Ministers.
Other members include NITI Aayog Vice-Chairman Arvind Panagariya and NITI Aayog CEO Amitabh Kant who will also serve as the Secretary of the Committee.
It shall evolve an action plan to reach out to the public at large with the objective to create awareness and help them understand the benefits of such a switch over to digital economy.
The committee has also been commissioned to identify and address bottlenecks pertaining to adoption of steps required to move towards a digital payment economy.
Vittiya Saksharata Abhiyan
It is launched by Union HRD Ministry.
‘Vittiya Saksharata Abhiyan’ to encourage, creates awareness and motivates all people around them to use a digitally enabled cashless economic system for transfer of fund.

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