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Pillar#1B: Burning Issues of Banking Sector

14 BURNING ISSUES OF BANKING  LOANS & NPA

RBI’s 6-member statutory MPC decides policy rate (=repo rate) to keep
inflation within 2-6%CPI (All India) but who decides lending rates of
individual banks, & how? Ans.

14.1 BANKS’ LENDING RATES % (बैंक ऋण की व्याज दरें )

Government began nationalization of private banks, and ‘administered
1969
interest rates’ on them.
M.Narsimham suggested deregulation: Govt should not dictate / administer
1991
individual banks’ interest rates. RBI should only give methodology to banks.
2003 RBI introduced _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (BPLR).
RBI introduced BASE Rate + Spread system; update frequency on individual
2010
banks’ discretion.
- RBI introduced _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (MCLR)
+ Spread system. Banks to calculate on monthly basis. It consists of
CRR Cost, Operating Cost, Marginal cost of funds (Repo Rate, Deposit
2016 Interest) etc.
- Benefits? Better transmission of Monetary Policy; transparency &
accountability to borrowers. Although RBI’s Janak Raj internal study
group (2017) showed MCLR did not yield all benefits so new method…
- NEW loans (not existing loans) to be linked with “_ _ _ _ _ _ _ _ _
Benchmark + Spread” system. 1 Category of Loans = 1 External
2019, 1st
Benchmark.
April
- Individual bank free to pick any one External Benchmark such as RBI
But
repo rate (6.50%) or 91-day T-bill yield (6.56%) or 182-day T-bill yield
deferred
(6.73%) or any other benchmarks by Financial Benchmarks India Ltd.
- Benefits? Same benefits which MCLR couldn’t fully deliver.

Table 1: Type of Loans based on Lending Rates

Fixed Interest Loan (निश्चित ब्याजदर का ऋण) 🎈 _ _ _ _ _ _ Interest Loan (िलायमाि)
e.g. Short-term crop loans upto Rs.3 lakh e.g. (External Benchmark) + Spread = 12%
rupees for farmers at fixed Interest 7%. But benchmark is regularly updated. So
This interest rate will not be changed resultant interest rate may increase or
throughout the loan tenure. decrease throughout the tenure of loan.
Teaser Loan: A sub-type of _ _ _ _ _ _ _
interest rate loan, wherein initial years
have low interest, but afterwards- higher
interest rate. While RBI has not banned
Teaser loans but has put stricter
regulations on them from 2011.

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Table 2: Type of Borrowers

🤵 Prime Borrower He has the capacity to repay loans.
Such person doesn’t have the capacity to repay loan. Giving
🤷‍♂️ Subprime
teaser rate home loans to sub-prime borrowers was among the
Borrower
reasons for Sub-prime Crisis in USA (2007-08), which ultimately
(Individual)
led to Global Financial Crisis (GFC).
🧔 Overleveraged Such company has borrowed too much money than its ability to
Borrower pay it back. An Overleveraged company has high ratio of Debt
(Company) (Bonds/loans) to Equity (Shares).
When a weak bank keeps giving new loans to a subprime /
🧟‍♀️ Zombie Lending
overleveraged borrower.

MCQ. Why is the offering of "teaser loans" by commercial banks a cause of economic
concern? (Asked in UPSC-Pre-2011)
1. The teaser loans are considered to be an aspect of sub-prime lending and banks
may be exposed to the risk of defaulters in future.
2. In India, the teaser loans are mostly given to inexperienced entrepreneurs to set up
manufacturing or export units.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 or 2

MCQ. What is/are the purpose/purposes of the 'Marginal Cost of Funds based Lending
Rate (MCLR)' announced by RBI? (Asked in UPSC-Pre-2016)
1. These guidelines help improve the transparency in the methodology followed by
banks for determining the interest rates on advances.
2. These guidelines help ensure availability of bank credit at interest rates which are
fair to the borrowers as well as the banks.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

14.2 NON-PERFORMING ASSETS (अनजजक पररसंपत्तियां)

14.2.1 NPA / TBS Problem: Three Stages of
1. Till mid-2000s: Boom period in global economy. Indian Corporates were taking large
amount of loans & became overleveraged.
2. From 2007-08: Subprime & Global Financial Crisis (GFC): Indian goods-services exports
declined. UPA government’s policy paralysis & judicial activism, environment
activism projects got delayed. Companies began facing difficulties finishing projects
& repaying loans.
3. By 2013: ~1/3rd of the bank loans were owned by “_ _ _ companies” i.e. companies
with interest coverage ratio less than 1, meaning they were not generating enough
revenue even to repay the loan interest.
Thus, balance-sheets of (1) some _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ &
(2) Public Sector Banks (PSB) became weak. It is called “Twin balance sheet syndrome
(TBS)” [दोहरे तल
ु नपत्र की समस्या] by Economic Survey 2015-16.

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14.2.2 NPA related definitions in Banking Sector

Loan account where borrower is repaying the principal and interest in
Std. Assets
timely fashion.
If loan principal or interest unpaid for 1-30 days from its due date, then
SMA-0
such loan account is classified as Special Mention Account-0.
SMA-1 31-60 days
SMA-2 61-90 days
If loan principal or interest is not paid for more than _ _ _ _ _ _ from
its due date, then such loan account is classified as Non-Performing
Asset (NPA). For the farm loans, NPA is not counted on number of
days but on number of cropping seasons.
🥂🧔✈️ Indian Commercial Banks’ NPA is over ₹12 lakh crores (absolute
NPA figures); and over 10% of total lending. [As of 31/3/2018].
NPA Size: PSB (₹10 lakh cr) > PvB > Foreign Banks.
Provisioning: As per RBI norms, banks must set aside funds to cover
losses against their NPA. Such ‘provisioning of funds’ decreases the
profitability of the Bank. Gross NPA MINUS Provisioning = NET NPA.
Substandard When loan account remains in the NPA classification for 12 months/>
asset
Doubtful When loan account remains in substandard classification for 12
asset months/>
When a bank, its auditor or RBI declares that given doubtful asset has
Loss Asset
little / no salvageable value.
When loan is written off from the ‘asset-side’ of the bank balance
Loan write- sheet, to save corporation tax (How? = we-are-not-here-for-CA-exam).
off Loan write-off doesn’t waive bank’s right to recover that bad loan, it’s
merely an accounting exercise for tax-benefits.
Restructured When principal / interest rate / tenure of the loan is modified. Banks
loan may do it when borrower facing difficulty in repaying loans.
Stressed NPA + Loans Written-Off + Restructured Loans = Stressed Assets
Asset
OTS with If bank allows the borrower to pay 60% of dues & forgoes 40% as loss,
Haircut then bank has offered “Onetime Settlement (OTS) with 40% haircut”
- Banking: When a borrower taking a new loan to pay off his old loan.
- Patents: When drug patent expires after 20 years, pharma-company
Evergreening
makes minor modifications in the old drug’s molecule to register
new patent, thus keeping its monopoly rights on the production.
14.3 RBI “3R” FRAMEWORK FOR REVITALIZING STRESSED ASSETS

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14.3.1 ✔️Rectification (सध ु ार)

- 2015: RBI ordered the Banks to conduct Asset Quality Review (AQR) and begin
rectification of bad loans i.e. Bank doesn’t change in loan interest, tenure or terms,
but asks client to rectify his irregularity in loan-repayment.
- In genuine case, additional loan may be given. Bank may also try to find a new partner
/ investor for reviving the project.

14.3.2 ⛏Restructuring (पि ु र्गठि)

Restructuring = Changing the loan interest (%) or tenure or ownership.
_ _ _ for Infrastructure loans: RBI allowed banks to extend infra-loan tenure upto 25
years, and even reduce loan interest rate. But such interest rate will be reviewed each
5 years.
CDR: Corporate Debt Restructuring: For non-infra corporate loan, RBI permitted loan
restructuring if 75% of the lenders approve.
_ _ _ : Strategic Debt Restructuring (रणिीनतक ऋण पि ु र्गठि) Scheme: Bank’s Debt
(Loan) is converted to Equity (Shares with Voting Rights) & bank sells it to highest
bidder  company’s ownership may change. Scheme unsuccessful as it required the
approval of existing shareholders.
_ _ _ - Scheme for Sustainable Structuring of Stressed Assets (तंर्हाली आश्ततयो की
संधारणीय संरििा): Similar to aforementioned SDR. Technical differences not important.
JLF- Joint lenders forum (ऋणदाताओ का संयक् ु त मंि): Consortium of the lenders, who
will work out aforementioned restructuring methods. But, proved unsuccessful because
PSB Officials would not vote positively due to the fear of Media & 4C [Courts, CBI, CAG
and CVC].
14.3.3 🔪 Recovery (वसल ू ी)
Bank liquidates loan-defaulter’s assets under either of the following acts:
1) SARFAESI Act 2002 (सरफेसी अधिननयम) OR
2) Insolvency and Bankruptcy Code 2016 (शोिन-अक्षमता एवं ददवाललयापन संदहता 2016): If
75% of the lenders don’t agree for restructuring / resolution plan, then assets will be
liquidated.
(UPSC-Prelim-2017) ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ is
related to:
a) procedure for ecological costs of developmental schemes.
b) scheme of RBI for reworking the financial structure of big corporates with genuine
difficulties.
c) disinvestment plan for Central Public Sector Undertakings.
d) Provision in ‘The Insolvency and Bankruptcy Code’.

14.4 🔪 SARFAESI ACT 2002: ORIGIN, OBJECTIVE & LIMITATIONS

1991: Narsimham-I Committee on banking sector reforms observed that borrowers
obtain stay orders from ordinary courts = banks have difficulty recovering NPA. So, _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ (DRT: ऋण वसल ू ी न्यायाधिकरण) were set up (1993)= ordinary
courts can’t interfere in the loan recovery process.
1998: Narsimhan-II Committee observed that DRTs need to be strengthened with a
law, so, Securitization and Reconstruction of Financial Assets and Enforcement of

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Security Interest (SARFAESI) Act enacted in 2002. [प्रनतभत

ू ीकरण और त्तविीय आस्स्तयों का
पनु र्जठन और प्रनतभनू त दहत को प्रभावी करने का अधिननयम 2002]
Under SARFAESI act, Banks and Housing Finance Companies (NBFCs) can attach the
mortgaged assets when loan is not repaid. They can change board of directors in such
companies, can auction such assets, can also sell such assets to Asset Reconstruction
Companies (ARC, NBFC). SARFAESI not applicable on farm loans.
If loan-defaulter wants to obtain a stay order, he cannot go to ordinary courts. He will
have to approach for DRT. If DRT doesn’t help then  higher appeal to Debt Recovery
Appellate Tribunal (DRAT), but DRAT will require him to deposit minimum 50% of the
loan dues (to discourage frivolous appeals).  higher appeal to high court.

14.4.1 Limitations of SARFAESI Act (मयागदाए)

The DRTs & DRATs are understaffed. 1 lakh+ cases pending (2016), so, case will go on
for years and the debtor will remain in possession of asset. This leads to erosion of
asset-value (machinery, vehicles) even when DRT allows auction at a later time.
In some businesses, auction or liquidation may not yield the best returns for the banks
e.g. hotel resort in remote area, where no other hoteliers are keen to invest. In such
cases, if the loans were restructured (i.e. reducing % interest rate, extending tenure,
finding new partners), then banks could salvage more value. But, SARFAESI act doesn’t
facilitate such arbitration ( मध्यस्थता) So, Govt. came up with a new law: IBC 

14.5 ⛏🔪 INSOLVENCY AND BANKRUPTCY (I&B) CODE 2016

शोिन-अक्षमता एवं ददवाललयापन संदहता 2016

Individual, Partnership firm or Company defaults on a business loan of ₹ 1 lakh or

more, then, lenders (Banks, NBFCs) approach National Company Law Tribunal (NCLT:
राष्ट्रीय कंपनी कानन
ू अधिकरण), to initiate proceedings under the I&B Code. NCLT has
over 10 benches across India, it is also creating facilities for e-filing of applications.
NCLT will grant moratorium (पाबंदी) of 180-270 days so no other lender can unilaterally
attach assets under SARFAESI Act.

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Within that period, an _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (IP: शोिन-अक्षमता संबि

ं ी पेशव
े र) will
make a resolution plan e.g. reduce loan interest, extend loan tenure, or IP could even
find another investor to finance the pending project etc.
If x% of the Lenders (ऋणदाता) agree with such _ _ _ _ _ plan, then it will be set in
motion, otherwise, IP will _ _ _ _ _ (पररसमापन) the assets to recover the dues.
Appeal Structure?
A. If Borrower is individual / partnership firm: @DRT → DRAT of SAFAESI Act. OR
B. If Borrower is a Company: @ National Company Law Appellate Tribunal (NCLAT:
राष्ट्रीय कंपनी कानन
ू अपीलीय न्यायाधिकरण) of the Companies Act.
I&B Code is not applicable to following defaulters:
A. _ _ _ _ _ _ _ _ _ _ Defaulter (जान-बझ ू कर बकाएदार): A borrower who has the
capacity to repay, but he’s not repaying the loan. E.g. Vijay Mallya was
declared willful defaulter by SBI (2017). OR
B. _ _ _ _ _ _ _ _ _ _ Defaulter (असमथज बकाएदार): A borrower whose loan account
is in NPA for more than a year, and he has no capacity to repay even partial
loan amount.
Above two categories of borrowers are not eligible for I&B resolution process. Their assets
will be directly liquidated under SARFAESI Act.

14.5.1 ⛏🔪 Insolvency and Bankruptcy Board of India (IBBI)

- भारतीय शोिन-अक्षमता एवं ददवाललयापन बोर्ज is the _ _ _ _ _ _ _ body that monitors and
implements I&B Code 2016.
- IBBI composition: 1 Chairman (M.S.Sahoo), 1 nominated member from RBI, 8 members
from Government’s side = total 10 people.
- IBBI’s administrative control rests with the Ministry of Corporate Affairs (MCA).
- Chairman has 5 years / 65 age tenure, whichever earlier. Also eligible for
reappointment.
- IBBI selects Insolvency Professionals Agencies (IPAs). These IPAs enroll and supervise
the members practicing as Insolvency Professionals (IPs). Presently, 3 organizations
given “IPA” status viz. 1) ICAI (Chartered Accounts) 2) ICSI (Company Secretaries) and
3) Institute of Cost Accountants.
- (Sidenote) 2019: Ministry of Corporate Affair's autonomous body Indian Institute of
Corporate Affairs (IICA) launched a two-year Graduate Insolvency Programme (GIP).
The student passing this program can register as IP, without the mandatory 10 years'
experience. The same IICA also setup Insolvency Research Foundation (IRF) and Centre
for Insolvency and Bankruptcy (CIB) to promote training & research in this field.
- IBBI also selects Information Utility (IU) organization to maintain database of
borrowers. In 2017, NeSL: National E-Governance Services Ltd (owned by consortium
of SBI, LIC etc.) was the first to get the IU status. It is compulsory for the lenders to
share data with IU. IU helps lenders in two ways:
1) by looking @borrowers’ credit history, lenders can make informed decisions
about whether to give loan or not, and how much interest to charge?
2) This database helps establishing documentary proofs during NCLT / DRT /
judicial / liquidation proceedings.

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14.5.2 Banking Regulation (Amendment) Act 2017: बैंककं र् ववनियमि (संशोधि) अधधनियम
I&B Code resolution process can start only AFTER a bank / NBFC files a motion at
NCLT. But, Public Sector Bank (PSB) officials fear Media, CBI, CVC, CAG & Courts -
hence were reluctant to even file motion @NCLT.
I&B Resolution plan can work only if x% of lenders approved. But even in such voting,
PSB-executives will shy away from voting positively fearing that media will make an
issue & it’ll harm their future career prospects.
To solve these problems, Government first issued an ordinance and then passed a bill
for amending Banking Regulation Act. This amendment increased RBI’s powers to force
the banks to begin process under I&B Act.

14.5.3 ⛏🔪 Insolvency and Bankruptcy Code Amendment (2018)

- Permits Govt to modify norms when applying IBC for MSME.
- RERA registered building (home & office) buyers are classified as ‘financial creditors /
lenders. So, if builder unable to finish project, unable to repay the loans to banks →
homebuyers will have voting power in the I&B resolution process. (More RERA in Pill#6)
- It reduced the voting requirements for faster resolution:
Lenders’ Voting requirements (ऋणदाताओ का प्रस्ताव के समथजन में मतदान) Before After

Routine decisions (सामान्य ननणजयों के ललए) 75% 51%

Key decisions like appointing IP, extending deadlines for resolution 75% 66%
process, approving the resolution plan
Withdrawing resolution plan from NCLT NotIMP 90%

14.5.4 💪 Project Sashakt by Finance Ministry (2018)

2018-Jul: Finmin’s Project Sashakt for PSB-NPA on report by Sunil Mehta (PNB CEO).
5 Pronged approach to resolve the NPA problem in a timebound manner:
1. Small sized bad loans upto ₹50 cr: SME-resolution template, 90 days. Bank itself
should work it out, without approaching NCLT/IP.
2. Mid-sized bad loans ₹ 50-500cr: Inter-Creditor Agreement (ICA: अंतर-लेनदार करार),
180 days. Banks themselves should work it out, without approaching NCLT/IP.
3. Large size above 500 cr: (Proposed) independent Asset Management Company
(AMC: पररसंपत्ति-प्रबंि कंपनी) to buy off bad loans from banks. AMC will not be funded
by Government.
4. Online asset trading platform.
5. NCLT/IBC legal-technical reforms.

(Pre19-SetA) Q72. What was the purpose of the Inter-Creditor Agreement signed by
Indian banks and financial institutions recently?
a) To lessen the Government of India’s perennial burden of fiscal deficit and current
account deficit
b) To support the infrastructure projects of Central and State Governments
c) To act as independent regulator in case of applications for loans of ₹ 50 crore or
more
d) To aim at faster resolution of stressed assets of ₹ 50 crore or more which are under
consortium lending.

14.5.5 RBI’s ‘Feb-12’ Circular (2018) & Prudential Framework (2019)

- Using the powers of RBI Act, RBI issued a circular on 12th Feb 2018. It discontinued
CDR, S4A, SDR etc. henceforth IBC to be main tool. 1-day default norms, lenders to

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immediately start resolution, IF resolution not finalized in 180 days then liquidation.
Penalties for noncompliance.
- 2019-April: SC declared it ultra-vires because not consistent with provisions in RBI Act.

2019-June: Consequently, RBI released Prudential Framework for Resolution of Stressed

Assets Directions 2019 (तनावग्रस्त पररसंपत्तियों के ददशा-ननदे शों के ललए त्तववेकपण
ू ज रूपरे खा)
- RBI applied it on Banks, AIFI and selected categories of NBFCs- using the powers under
Banking Regulation Act (1949) and RBI Act (1934).
- It discontinued CDR, S4A, SDR, JLF etc. henceforth IBC to be main tool.
- If principal / interest is overdue for 1-30 days, classify loan account as SMA-0. Then,
within 30 days, the lender shall review the loan account, & initiate resolution process
(RP). (Previous Feb-12 circular required lenders to start RP within 1-day of SMA-0.)
- It framed rules to facilitate Sashakt approach #1 and #2-inter-creditor agreement
(ICA).
- Lenders must upload data of ₹5 crore /> loans to RBI’s CRILC portal on weekly basis.
- Forbids loan restructuring for borrowers who have committed frauds/willful default in
past. Forbids evergreening of stressed loans.

14.5.6 🈶🌐 Cross-border Insolvency (सीमा-पार का ददवाललयापि)

- Cross-border insolvency has two facets: 1) foreign creditors should be able to recover
money lent to Indian corporates & VICE VERSA. 2) During Indian company's insolvency
in India, the Indian lenders should be able to recover money from Indian company's
foreign assets easily, AND VICE VERSA.
- IBC sections 234 & 235 have provisions for it, BUT they are not notified yet, so they are
not enforced.
- 2018: Corporate Affairs Ministry's Insolvency Law (reforms) Committee headed by Injeti
Srinivas recommended
o We should create a separate law for Cross-border Insolvency.
o More than 40 nations use United Nations Commission on International Trade
Law (UNCITRAL)'s Model Law of Cross Border Insolvency (1997)
o So, we can use it as a template while making our own law. Government is
working on such bill.

14.6 👁‍🗨 BORROWERS’ DATABASE & SURVEILLANCE (उधारकतागओं का डेटाबेज व ् निर्रािी)

14.6.1 👁‍🗨 Public Credit Registry (ऋण की सावगजनिक रश्जतरी)

Presently, multiple organizations keep borrowers’ database / credit history viz.
1) Under the I&B code, Insolvency and bankruptcy board of India (IBBI) has authorized the
National e-governance services Ltd (NeSL) to act as an Information Utility (IU).
2) Under the Credit Information Companies Regulation Act (CICRA 2005), RBI has given
license to CRISIL (oldest CIC-1987), CARE, FITCH India, ICRA, Brickwork Ratings , SMERA
etc. as Credit Information Company [ऋण सच ू ना कंपनी].
3) RBI has its own “Central Repository of Information on Large Credits (CRILC)” for Loans
above Rs 5 cr. Banks & NBFCs have to submit weekly updates in this portal.

But, not all of these databases are under the direct control of RBI. Each has their own
methodology for data collection & tabulation. Not all of these databases are covering all
individual and corporate borrowers of India.

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So, RBI’s _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Committee (2017-18) recommended setting up a

Digital Public Credit Registry (PCR) with following features:
1) PCR will be setup under RBI, using data from SEBI, Corporate Affairs Ministry, GST
authorities, IBBI, Banks, NBFCs etc.
2) PCR will help lenders to get complete 360-degree profile of borrower on real time
basis.
3) PCR will help RBI in early detection of systematic stress, checking the efficacy of
monetary policy & other big data analytics.
2018: RBI issued tender to select a company for developing PCR portal. _ _ _ _ _ Company
won the tender/contract. [Update when IT-Company is finalized]
[Asked in UPSC-CDS-2016-II] [Asked in UPSC-CDS-2018-1]
Which one of the following is/are credit The Reserve Bank of India has recently
rating agency/ agencies in India? constituted a high-level task force on
(a) CRISIL Public Credit Registry (PCR), headed by
(b) CARE (a) Sekar Karnam (b) Vishakha Mulye
(c) ICRA (c) Sriram Kalyanaraman
(d) All of the above (d) Y. M. Deosthalee

14.6.2 👁‍🗨 Legal Entity Identifier (LEI) Number: (कािि

ू ी इकाई पहिाि संखयांक)
Objective? Even if a company is blacklisted by Indian banks, it could apply for loans
overseas, and those overseas bankers may not be aware of company’s history. So,
there should be a global “Aadhar card” number for companies, and they must be
forced to quote that number during every financial transaction.
After Sub-Prime Crisis and Global Financial Crisis (GFC), the _ _ and its Financial
Stability Board (FSB) came up this LEI concept- a 20-digit alphanumeric code.
LEI’s Global Boss: Global Legal Entity Identifier Foundation (GLEIF), Frankfurt,
Germany. LEI’s Indian agent: Clearing Corporation of India.
RBI had ordered the large borrowers (who have taken loans above Rs.1,000 crore from
Indian banks) to obtain LEI number by 31/8/2018, then gradually smaller companies
must obtain LEI-number in a phased manner.
Companies must quote this LEI-number in their financial transaction. RBI has power to
issue such directives under: Payment and Settlement Systems Act, 2007 & Banking
Regulation Act 1949.
Even if a borrower has obtained LEI, his name is in PCR, yet one day he
runs away from India, then what to do? Ans. 

14.7 🈶🌐 🔪 FUGITIVE ECONOMIC OFFENDERS ACT, 2018

भर्ोडा आधथजक अपरािी अधिननयम: This act targets economic offenders accused of cheque
dishonor, loan / investment / chit-fund scam, money laundering etc. worth ₹ _ _ _ _
crores /> & left India to avoid facing prosecution / arrest.
Special courts under the PMLA (Prevention of Money-laundering Act, 2002) will order
the villain to appear within 6 weeks, if not then he is declared “Fugitive Economic
Offender” His Indian & _ _ _ _ _ _ & Benami properties will be attached (जब्ती).
Once property attached- the _ _ _ _ _ _ _ _ _ will oversee its administration /
liquidation (पररसमापन).
No ordinary civil court / tribunal can give stay order. Villain can make appeal only in
High Court and Supreme Court. (उच्च न्यायालय और सवोच्च न्यायालय).

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- Arvind S. also suggested RBI to give additional dividend to Govt. to start this bad bank
& finance its losses. Ofcourse, this idea was not implemented. But, media attention
landed on Urjit Patel- why he is unable to solve NPA problem & could Bad Bank solve
this problem!!? So, Urjit responded by tightening Prompt Corrective Action (PCA)
framework.

14.11 😼💉 PROMPT CORRECTIVE ACTION (PCA) FRAMEWORK

- 2002: RBI Governor Bimal Jalan designed it. (त्वररत सि ु ारात्मक कारज वाई रूपरे खा)
- 2017: Urjit Patel toughened PCA norms further.
- 2018: _ _ _ _ _ _ announced separate ‘Prompt Corrective Action (PCA) Framework’
framework for Regional Rural Banks (RRBs).
- In PCA framework, all Commercial Banks are monitored for Asset Quality (NPA),
Capital Sufficiency (BASEL-III), Profitability (Return on Assets: RoA)- and are classified
into Risk threshold #1, #2, #3. Higher the number, higher the risk. Then, accordingly,
RBI will take corrective actions such as:
1. RBI giving strict warning, conducting deeper audit & supervision.
2. Restricting bank’s directors’ salaries and dividend distribution to its investors.
3. Restricting bank’s branch expansion & lending operations.
4. Forcing merger / shutdown of a weak bank (under Banking regulation Act 1949).
PCA is “Monetary Policy => Qualitative / Selective Tool =>Direct Action”.
- If a PCA-listed bank wants to get ‘whitelisted’, it’ll have to reduce its _ _ _ , obtain
additional _ _ _ _ _ , improve its _ _ _ _ _ .
- As of Dec-2018: 11 out of 21 Public Sector Banks in PCA list. So, Govt. wanted RBI to
lift/ease PCA-restrictions. But Urjit did not oblige. Then Shaktikanta Das came &
removed certain PSBs from the PCA list ball by ball not-IMP.

14.12 📘 LATEST ECONOMIC SURVEY ON NPA (आधथजक सवेक्षण)

Economic Survey 2018-19 (released in 2019-July) observed:
- With I&B Code and other measures by RBI, the NPA % has declined in 2018-19, and
credit growth has improved. However,
o Banks’ return on assets (RoA: how much profit they generate from their assets)
has declined.
o Banks’ return on equity (RoE: how much dividend banks are generating for
shareholders against their equity-investment) has declined.
- I&B code's time-bound mechanisms have prompted 'behavioral changes' in corporate
borrowers (कॉपोरे ट दे नदार के व्यवहार में पररवतजन). Now they fear losing control of the
company. This has improved corporate governance, cash and financial discipline.
- By 31/3/2018: ₹ 50,000 crores worth NPAs have been upgraded to std assets (meaning
the (arrogant) borrowers have been forced to resume paying principal & interest
regularly.) Further, ₹ 1.70 lakh crore worth cases have been settled through I&B
mechanisms. Had the lenders went for SARFAESI liquidation, they’d have recovered
lesser amount compared to the restructuring under I&B.
- India's rank has improved in World Bank's Ease of Doing Biz report. (More in Pillar#4)
Road Ahead
✓ We need to increase the number of NCLT benches, number of IP Professionals, use ICT
technology for faster case proceedings.
✓ We should enact separate law on cross-border insolvency.

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✓ Group Insolvency (समह ू ददवाललयापन): Big Industrialists usually operate through groups
of companies, each having a separate identity e.g. Tata Sons ltd → 1) TCS 2) Tata
Motors 3) Tata Steel etc. If one of these company become insolent, it creates negative
ripples on entire group's financial health. Certain legal-technical reforms are necessary
to address such group-insolvency.
✓ Certain legal-technical reforms to address insolvency cases involving individual
proprietors and partnership firms. (They’re legally different entities than ‘Companies
registered under companies Act. More in SEBI handout)

14.13 🌐🕵🏻‍♀️ BASEL-III NORMS (बेसेल-3 मानदं र्)

Bank for International Settlements (BIS) is an international institution made up of 60
countries’ Central Banks. HQ @ BASEL, Switzerland. Its committee on banking supervision
set norms in 1988 (I), 2004 (II), 2011(III) to ensure global financial stability.

Figure 1: we need not bother with Tier-1 Tier-2 Capital etc.

- From 1/4/2013, RBI began phased implementation of BASEL-III norms in India:

- First, a bank needs to calculate its _ _ _ _ _ _ _ _ _ _ _ _ _ _ (RWA: जोखखमपण
ू ज संपत्ति).
- Against these RWA, (Universal) Scheduled Commercial Banks (SCB) must keep:
o “Minimum Capital to Risk Weighted Assets Ratio” (_ _ _ _) at 9% or higher
from 31/3/2019.
o “x%” Capital Conversation Buffer (CCB) from 31/3/2020.
o “y%” Counter Cyclic Capital Buffer (CCCB): whenever RBI notifies.
- “z%” Leverage ratio (LR) against their exposure in various loan assets from 2015

Q. How exactly do CCB, CCCB, LR etc work? Ans. Not important for
exam beyond that fact that they’re related to BASEL Norms.

- Each member country’s Central Bank can prescribe different ratios depending on their
country’s situation.

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- As NPA ↑ = bank’s asset quality degrades = its Risk-weighted assets (RWA) will ↑; then
bank must arrange more capital to comply with these ratios, norms and buffers.
- If a bank can’t comply with BASEL norms, then RBI puts it in _ _ _ list. In worst case,
bank will have to merge/ sell off its business to another bank or shut down.
- BASEL Norms also apply on Differential Commercial Banks (_ _ _ _ _ _ _ _ _ _ _ _ _ _
_ ), Cooperative Banks, AIFI (_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ) and
certain category of NBFCs, but RBI can prescribe separate norms / limits / deadlines
for them.

MCQ. (UPSC-Prelim-2016) Objective of BASEL-III norms?

a) Develop national strategies for biological diversity.
b) reduce the GHG emissions but places a heavier burden on developed countries.
c) transfer technology from developed Countries to poor countries to replace
chlorofluorocarbons in refrigeration.
d) improve banking sector’s ability to deal with financial and economic stress and
improve risk management.

14.13.1 🌐🕵🏻‍♀️ Liquidity Coverage Ratio & High-Quality Liquid Assets (HQLA)

Figure 2: SLR cuts as proposed by Urjit, though Shakti may/may not follow the timeline

BASEL-III norms require the banks to keep enough in High Quality Liquid Assets (HQLA)
so that bank can survive a 30 days high stress scenario of cash outflow / bank run. If a
Bank has enough HQLA assets to survive this test, we say this Bank has Liquidity
Coverage Ratio (LCR) of 1 (or 100%).
RBI implemented deadline came gradually Jan 2015: 60%, ..+ 10% each year…. Jan’19:
100% or more.
To help banks comply with these norms RBI has 1) gradually cut down SLR requirement
2) launched Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) window
from 1/10/2018. It basically allows banks to pledge their G-Sec (subjected to certain
ceilings) with RBI to borrow money, so on one hand they comply with LCR norms and at
the same time get cash for their biz requirements.

Hindi term not given for CCCB, HQLA etc. as very little utility in Mains.

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14.13.2 🌐🕵🏻‍♀️ D-SIB: Domestic Systematic Important Banks

In 2010, G-20’s brainchild Financial Stability board (HQ: BASEL) asked countries to
identify Systematically Important Financial institutions and put framework to reduce
risk in them. [Side note: Same parents responsible for birth of _ _ _ _ _ _ _ _ _ _ _ _ _ ]
Each year in August, RBI identifies banks that ‘too big to fail’ (=if they fail, it’ll
severely hurt the economy)’ and labels them as Domestic Systematic Important Banks
(D-SIB), & orders them keep additional equity capital against their Risk Weight Assets
(RWA) & imposes other technical norms on them.
e) Presently, 3 D-SIBs in India: _ _ _ _ _ _ _ _ _ _ _ _ (Latest Entry).

14.13.3 🌐🕵🏻‍♀️ Recapitalization of PSBs [सावजजननक क्षेत्र के बेंको का पन

ु :पज
ूं ीकरण]
If a bank doesn’t have enough capital to comply with BASEL-III norms it can issue debt
(bonds) and equities (shares) to gather new capital.
- 2015: Projected that Public Sector Banks (PSBs) will require ₹ 1.8 lakh crore additional
capital by 31/3/19 to comply with BASEL-III norms.
- So, Finance Ministry’s _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _came up with _ _ _ _ _ _ _ _ _
PLAN for phased-recapitalization of PSBs with ₹ 70,000 crores from 2015 to 2018.
Individual PSB will get funding based on outcomes / performance.
- 2017: It became clear ₹70,000 crores was insufficient for BASEL-III compliance. So,
Modi Govt. announced more than ₹ 2 lakh crore recapitalization package.
Component(s) Amt in ₹ Cr.
PSBs to mobilize equity (share) capital from private investors. However, Not imp.
investors shy away from smaller banks with weak balancesheets, so BMB
& 5 Associated Banks merged with SBI (2017). Vijaya & Dena to be
merged with BoB (2019, 1st April)
Government’s budget support to PSBs Not imp.
Government to issuing Bank Recapitalization Bonds (RCB) in the 1,35,000**
market with following features:
- These bonds will have interest rate of ~7%, mature @ 2028-2033.
- Non-transferable to third party, Non-convertible into shares.
Total (as of 2019-Feb) ~2.6 lakh cr.
**Critiques argue that PSBs themselves are forced to buy these Bonds using public
deposits, and thus Bank Recapitalization Bonds are merely a ‘creative-accounting’ practice
to comply with BASEL-III norms, but we need not bother with such “B.Com / Controversy
in News” for UPSC.

MCQ. With reference to the governance of public sector banking in India, Find Correct
Statement(s):(Asked in UPSC-Pre-2018)
1. Capital infusion into public sector banks by the Government of India has steadily
increased in the last decade.
2. To put the public sector banks in order, the merger of associate banks with the
parent State Bank of India has been affected.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2.

14.14 🤦🏻‍♂️BANKING SECTOR: GOVERNANCE / ADMINISTRATIVE REFORMS

14.14.1 🤦🏻‍♂️Gyan-Sangam-I, 2015, Pune
FinMin’s Dept of _ _ _ _ _ _ _ _ _ _ _ (त्तविीय सेवा त्तवभार्) organized a workshop of financial
regulators, Public Sector Bank, Insurance Companies etc. It resulted in 3 outcomes:

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1) PSBs’ CMD post bifurcated into 1) separate chairman and 2) separate MD&CEO so that
banks can function in more professional and accountable manner.
2) Indradhanush plan for bank recapitalization (₹ 70,000 crores) tied with governance
reforms in PSBs.
3) Finance Ministry setting up an autonomous body- Bank Board Bureau (BBB).

14.14.2 🤦🏻‍♂️Bank Board Bureau (BBB), 2016

- This non-constitutional, non-statutory body interviews & selects top officials (MD, CEO,
Chairman and full-time Directors) for PSBs, LIC and other public sector financial
institutions. Actual appointment done by FinMin’s Department of Financial Services.
(Just like UPSC selects candidates suitable for IAS but DoPT notifies appointment.)
- BBB also helps the banks in governance reforms, raising capital for BASEL-III etc.
- BBB has 1 Part-Time Chairman, 3 Part-Time Members and 3 Ex-officio Members (from
Govt & RBI side)
- 2018, April: Bhanu Pratap Sharma (retd.IAS) replaced Vinod Rai (retd.IAS, CAG) as the
new chairman of BBB.

(Pre19-SetA) Q73. The Chairman of public sector banks are selected by the _ _?
(a) Banks Board Bureau (b) Reserve Bank of India
(c) Union Ministry of Finance (d) Management of concerned bank

14.14.3 🤦🏻‍♂️Enhanced Access and Service Excellence (EASE) Agenda 2018

बढी पहुंच और सेवा उत्कृष्ट्टता

- 2017, October: Government announced ₹2 lakh+ crore package for recapitalization of

PSB. But critiques argued such relief measures will just make the PSBs officials lazy &
undisciplined (moral hazard). So,
- 2017, November: First Public Sector Bank (PSB)-Manthan organized by Dept of
Financial Services (DFS) at Gurugram. Based on the participants’ inputs…
- 2018, January: FinMin’s Dept of _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ released EASE
framework with 6 pillars to make PSBs more Responsive and Responsible viz.
1. Customer Responsiveness.
2. Responsible Banking: Reduce NPA, prevent frauds.
3. Credit Off Take: Try to reach out to potential borrowers for home, auto,
education, loans.
4. Help MSME entrepreneurs via SIDBI’s Udyamimitra.com portal. Approve/reject
loans in not more than 15 days.
5. Deepening Financial Inclusion & Digitalization.
6. Employees’ Human Resource Management (HRM): improve with training,
performance linked promotion-salaries-posting-transfers etc.

Implementation? Each whole-time director of a PSB will be entrusted with one pillar of
the framework. Their performance will be checked by the PSB’s board of directors. An
independent agency will be tasked to check public perception.
2019-Feb: First ever EASE-ranking released: PNB > BoB > SBI.

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Table 3: Points for assembling Mains Answers Rapidly

Eco.Survey-2015: “4R” framework Eco.Survey-2014: “4D” framework

Recognition: of bad loans via asset Disinter: "Digup graves, recover money": using
quality review (AQR)
Resolution: via schemes/mechanisms Differentiate among PSB: Profit Maker PSB:
______________ Capitalize for BASEL-III whereas Loss Maker
PSB: Merge or Privatize 

Recapitalization: for BASEL-III norms Diversify: Allow more number and variety of
 Indradhanush, Bank Recap Bonds & Banks. _ _ _ _ _ _ _ _ allowed. Wholesale
other measures: Total ₹_ _ _ _ lakh Bank proposed.
crore mobilized.
Reforms: Governance & Deregulate: Lower SLR, Promote Corporate
Administration of PSB _ _ _ _ _ _ _ _Bond market so they borrow less from Banks
e.g. Tri-Party Repo mechanism.
Further, you can also mention: PCA Norms, PCR registry etc.

14.15 💍 MISC. BANK CONTROVERSIES / ISSUES

14.15.1 💍 PNB, LoU, SWIFT, Nostro & Nirav Modi
PNB (Mumbai Branch): Give foreign currency loan to our client for purchase of goods
(diamonds, airplanes, whatever), if he doesn’t pay, we’ll pay.
- If such bank guarantee given to another bank in a foreign country, it’s called Letter of
Undertaking/ Letter of Credit/ Letter of Comfort: internal difference not important.
- Bank earns commission / fees from client for issuing such letters / guarantees.
- The foreign currency thus loaned, goes into PNB’s Nostro (Latin:Ours) account, & Nirav
uses the dollars to buy diamonds in HongKong.
- PNB Scam: PNB-Mumbai’s corrupt manager kept issuing LoUs to diamond merchants
Nirav Modi & Mehul Chowkasi without due-diligence or collaterals for 7 years, worth
~₹12,000 crores. And 2018-January: Duo left India.
- PNB officials couldn’t detect scam because LoUs were generated through SWIFT
platform, which was not integrated with their Core Banking Solution (CBS) server.

14.15.2 📞Financial Messaging Systems

Within India Globally
Structured Financial Messaging System Society for Worldwide Interbank financial
(SFMS) telecommunication (SWIFT)
designed by Tata Consultancy Services By a Cooperative organization in _ _ _ _ _
(TCS) for IDRBT (=Research arm of RBI) La Hulpe city (1973).
to serve the messaging function in NEFT, To serve the messaging function for Banks,
RTGS, and other inter-bank, intra-bank e- NBFCs & brokers who may / may not have
transactions platforms within India. direct bank relations / settlement systems
with each other due to international
borders.

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14.15.4 🐯🤲🏻🦁 RBI Dividend, Reserves, Economic Capital Framework

RBI’s income sources include: From its income, RBI allocates funds for
1. Interest on G-Sec that are not sold in 1. Staff retirement fund, provisions for
Open Market Ops. bad loans, depreciation in assets…
2. Interest on Foreign G-Sec / Sovereign 2. Reserves for contingency (emergency):
Bonds. ~₹ 2.5 Lcr.
3. Interest on Loans given to other Banks 3. Reserves for Exchange Rate Stability
/ NBFCs. (Technically called “Currency & Gold
4. Revaluation of foreign currency and Revaluation Reserve: ~₹7 lakh cr)
gold in RBI reserves.
5. Seigniorage: profits from printing After making these allocations, profit is
money- because face value > intrinsic shared with Union Govt. in form of
value. ‘Dividend’ (RBI Act Section 47).
6. Penalties imposed on errant banks.

14.15.5 🐯🤲🏻🦁 RBI’s Bimal Jalan panel (2018-Nov)

− It was setup to review RBI’s economic capital framework (आधथजक पज
ंू ी संरचना) & decide
the guiding principles for dividend transfer to Government.
− 2019-July: report release delayed.

14.15.6 🐯Section-7 Directive & Urjit Patel’s Resignation

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This topic is not very important because UPSC usually avoids “Controversy in News”. Urjit
Patel was unhappy with Government interfering / criticizing his work. Such as:
1) Higher Dividend: Govt. demanded higher dividend from RBI to finance the
recapitalization of PSBs for BASEL-III, and to finance its own fiscal deficit & populist
welfare programs. Urjit Patel felt RBI’s higher reserves are necessary to check any
financial crisis. Excessive dividend could increase inflation. He did not oblige.
2) BASEL-III-relaxation: These norms will become fully effective on 31/3/2019 but PSBs
don’t have enough capital to comply so they requested Finance Minister to tell Urjit
Patel to extend the deadline, Urjit Patel did not oblige.
3) PCA-relaxation: Urjit Patel vigorously implemented Prompt Corrective Action
framework, so Public Sector Banks’ branch expansion, lending operations were
restricted, they came running to FM. FM asked Urjit to relax PCA. He did not oblige.
4) Tight Money Policy: CEA Arvind Subramanian & BJP-Ministers were criticizing RBI’s
“Tight” Monetary Policy depriving MSMEs of cheap loans and thus harming India’s
growth rate. Whereas Urjit Patel deemed tight policy necessary to keep inflation @2-
6%CPI (All India) on durable basis so he did not oblige.
5) PNB Scam: Jaitley expressed displeasure that RBI couldn’t detect PNB-Nirav Modi
fraud, whereas Urjit Patel defended that he lacks effective powers under Banking
Regulation Act to take punitive actions against Public Sector Banks.
All these forced Govt. to issue Section -7 Directive to RBI.

14.15.7 🐯 Section-7 of RBI Act

 Section 7(1) of the RBI Act empowers the Government to consult with RBI Governor in
_________.
 In, 2018-October, for the first time in the history of Independent India, Govt began a
Section-7(1) consultation with RBI Governor Urjit Patel, on the issues of PCA norms,
BASEL-III deadline, higher dividend to Govt., Cheap Monetary Policy etc.
 If RBI Governor doesn’t positively respond in such Section-7(1) consultation, then
Section 7(2): Government can issue binding direction / orders to RBI _ _ _ _ _ _ _ _ _ to
implement its wishes.
 Although, fearing backlash from media & opposition parties, Govt did not issue any
specific directions to the RBI Board. But, 2018-Dec: Urjit Patel resigned before
completing 3-year term. He is not the first RBI governor to resign & we need not
prepare KBC-GK-names of all the RBI governors who resigned before their term.

14.16 ✍🏻 MOCK QUESTION FOR MAINS GSM3 (250 WORDS EACH)

1. “While Insolvency & Bankruptcy Code doesn’t fully cure the Twin Balance sheet Syndrome, it
certainly helps alleviating the pain.” Elaborate. "हालांकक शोिन-अक्षमता एवं ददवाललयापन संदहता
भारत के दोहरे तुलनपत्र की समस्या को पूरी तरह से ठीक नहीं करता है , लेककन यह ननस्चचत रूप से ददज
को कम करने में मदद करता है ." त्तवस्तत
ृ कीस्जए.
2. Explain the significance of governance reforms in Public Sector Banks (PSBs) for India’s
economic growth. भारत के आधथजक त्तवकास के संबंि में सावजजननक क्षेत्र के बैंकों में शासन सुिारों के
महत्व को समझाइए.
3. What is “Twin Balancesheet Syndrome”? Enumerate steps taken by RBI to resolve it. "दोहरे
तुलनपत्र की समस्या" क्या है ? इसके हल के ललए भारतीय ररज़वज बैंक द्वारा उठाए कदमों की सूधच दीस्जए.
4. With respect to India’s financial stability, explain significance of (i) PCA framework (ii) BASEL-
III Norms (iii) Public Credit Registry (iv) Shadow Banks. भारत की त्तविीय स्स्थरता के संबंि में इन्हे
समझाइए: (i) पीसीए ढांचा (ii) बेसल-III मानदं र् (iii) ऋण की सावजजननक रस्जस्री (iv) प्रनतछाया बैंक्स.

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