1.

The Reserve Bank of India (RBI) has become a reputable and major institution in public policy
throughout the past 10 years of economic reform, and its evolving position as a central bank
merits appreciation. In reality, the historic 1997 agreement between the Government of
India and the RBI to end the automatic monetisation scheme and implement a system of
Ways and Means Advances marks a turning point in the public policy guiding their respective
relationships. The Finance Minister's announcement of revisions to the law governing the
RBI and banking in the budget address for 2000–2001 and the RBI's subsequent submission
of draught legislation are signs of the evolving institutional changes. Advisory Groups on
Transparency in Monetary and Financial Policies, led by the former RBI Governor Mr. M.
Narasimham (September 2000), and Fiscal Transparency, led by the former Finance
Secretary Mr. M.S. Ahluwalia, have addressed the issues of transparency and accountability
governing their operations with one another (June 2001). In the framework of the current
review of the Indian Constitution by the Commission chosen for the task a year ago, there
have also been some discussions on the topic of appropriate provisions relating to the RBI.
Therefore, it is beneficial to have an opinion on the bigger question of the independence of
the Indian central bank so that the process of change is negotiated easily and consistently,
avoiding the risk of what can be called "disjointed incrementalism" in reform through vague
aims.
In addition to creating money and managing it more broadly, central banks frequently
handle the government's public debt, regulate and watch over banking institutions, provide
funding for developmental programmes, and perform other related tasks. Recognizing that
the role of debt management is primarily carried out by a central bank acting as an agent of
the government and that the autonomy question does not arise is important when talking
about the topic of autonomy. In fact, this role may conflict with independence in the
formulation of monetary policy. Regarding the role of regulation and supervision, the
justification for a central bank's participation stems from its commitment to serve as the
lender of last resort and to ensure the smooth operation of the payments system. In this
respect, the central bank's autonomy is no different from that of any other financial system
regulator. The developmental role necessitates close collaboration with the government,
which in some ways limits autonomy because it is connected to the production of money.
The ability of a central bank to control money creation and pricing, which affects the value of
money both domestically and outside, is what makes it particularly relevant for a central
bank's independence. The crucial question in this situation is how much discretion the
central bank has when selecting whether or not to use newly produced money to finance
government spending. According to popular consensus, the idea that government financing
from central banks should be formally limited and that central banks should be mainly
independent of political power only evolved in the 20th century. However, it would be
incorrect to draw the conclusion that the 20th century was the first time the significance of
central bank independence was acknowledged.
The time consistency issue is the main justification for central bank independence. When the
best plan currently developed for a future period is no longer optimal when that period
actually begins, there is a time inconsistency. The time inconsistency issue in monetary
policy occurs because a politically motivated policymaker may be enticed to try to take
advantage of the short-run trade-off between employment and inflation. Although there is
no assurance that there would be a positive output impact, expansionary monetary policy
may result in better growth and employment in the short run, thus policymakers may be
motivated to follow this strategy, even in the short run. But over time, such an expansionary
monetary policy will inevitably result in increased inflation, which will have negative effects
on the economy. Two different strategies have been presented to address the issue of
temporal inconsistency. The "conservative central banker approach" postulates the
appointment of a conservative central banker whose aversion to inflation is well known. This
would lead to low inflation because the economic agents would place their trust in the
central banker's reputation, which would lead to low inflation. The "optimal contract
approach" assumes that there is an ideal agreement between the government and the
central banker. The achievement of low inflation is a requirement for the central banker's
term in office; failing to meet this need would result in revocation of the tenure contract.
Both of these models of central bank independence have had success historically; whilst the
US central bank is frequently cited as an example of a conservative central bank, New
Zealand is viewed as a proponent of the optimum contract approach. The political business
cycle hypothesis investigates the relationship between political and economic policy choices.
The theory's most well-known prediction is that the business cycle will follow the election
cycle's schedule. In general, incumbent administrations will enact restrictive measures as the
election draws near, increasing unemployment early in their mandate and lowering inflation.
The idea emphasises how incumbent governments often use expansionary fiscal policies to
create pre-election booms. Once the incumbents are re-elected, the focus of policymaking
may shift from job creation to inflation management. In this sense, the hypothesis exposes
how inconsistently governments act throughout time. Even if the central bank eliminates the
fiscal stimulus through monetary tightening, its effects would normally be realised during
the post-election period when the incumbents may happen to be back in power because
monetary policy influences the economy with long and variable delays. The notion of public
choice, which has emerged as a key supporter of central bank independence during the past
thirty years as a result of the convergence of politics and economics, was born out of this
process. A constitutional amendment containing a predetermined restriction on central
bank loans to the government is the main recommendation made by public choice theory in
the context of decreasing the budget deficit. Nevertheless, some proponents of public
choice theory have recently made the argument for an independent central bank as an
alternative solution to the deficit issue. A democracy has a bias in favour of deficit spending,
barring constitutional or institutional restrictions to the contrary. As a result, they operate
under the assumption that politicians don't always act in the public interest but are instead
more focused on their own political or personal agendas. In this context, some economists
specifically discuss the independence of the central bank by proposing a method that will
both guarantee low inflation and serve as an effective institutional restraint. Despite the fact
that the arguments presented above make a compelling case for central bank independence,
the matter has not been definitively resolved and there are strong forces united against it.
First, opponents of autonomy claim that a central bank that is independent lacks democratic
credibility. Curiously, Milton Friedman's claim that money is too vital a topic to be left up to
the whims of central bankers gives such critics ammunition. Second, independence may
cause conflicts between the fiscal and monetary authorities, and these conflicts between
monetary and fiscal policy may result in fairly expensive expenses for society, impeding
progress. Thirdly, the preferences of independent central banks and society as a whole may
differ significantly. A powerful central bank might push its viewpoint on society, leading to a
less-than-ideal situation for economic welfare. However, these issues can be overcome and
avoided with sufficient sources of responsibility. In reality, attitudes on the relative
importance of growth vs inflation as monetary policy objectives vary greatly in this setting.
Practically speaking, the fundamental challenge is to balance sufficient independence with
acceptable responsibility so that central banks can respond to public concerns. In view of the
conflict between the Central government and the Reserve Bank of India, Section 7 of the RBI
Act has received attention (RBI). The RBI Act's clause gives the government the authority to
direct the RBI. Section 7 has never before been invoked by the government. Utilizing its
authority granted by this section, the government has recently written to RBI governor Urjit
Patel on a number of topics, including lending to micro, small, and medium-sized enterprises
(MSMEs), capital requirements for weak banks, and liquidity for non-banking financial
companies (NBFCs). Since it makes its own choices, the RBI is a separate body from the
government. But on occasion, it must pay attention to the government. The RBI Act's Section
7 contains this clause, which reads as follows:
(1) The Central Government may occasionally provide the Bank instructions that it deems
essential in the public interest after consulting with the Governor of the Bank.
(2) Subject to any such directives, the general supervision and management of the Bank's
affairs and business shall be vested in a Central Board of Directors, which may exercise all
powers and perform all actions that the Bank may be authorised to undertake.
(3) Subject to any contrary provisions in Central Board regulations, the Governor, and in his
absence the Deputy Governor he has designated in this regard, shall also have general
supervision and direction over the affairs and business of the Bank, and may exercise all
powers and perform all acts and things that the Bank may perform or act upon.
It is obvious that the clause gives the government the authority to command the central
bank in the public interest even though the central bank does not normally follow
government orders. For some time now, the government and RBI have been at odds on a
number of issues. According to a report in ET, the government thought loosening lending
requirements for banks under the prompt corrective action (PCA) framework could assist
relieve pressure on MSMEs. The regulator, however, maintained its position, claiming that
such a move would turn the clock back and negate clean-up efforts. After the IL&FS default
in September, the credit markets began to tighten, and non-banking financial companies
urged the government to provide more liquidity. However, the RBI kept its stance since
there was no increase in borrowing rates in the banking sector and because the market was
only repricing risk in a changing environment.
Therefore, the RBI should not be under complete control of government.
2. For a very long period, the banking business was considered outdated. Given that banks
have now been for several centuries, this makes sense. Traditional banking is used to
describe banks with a local banking licence and a physical location. These are the well-
known banks, including, to name a few, ING, Bank of America, and Banco Santander. A
traditional bank often has a physical presence, regional offices in each area where they
operate, own-branded ATMs, a sizable employee base, committed account managers, and
in-person or one-on-one client support. While online options are often offered by traditional
banking solutions, they are more often seen as a by-product of the bank's services than as
their primary focus. In contrast, an online bank is entirely focused on the design of its user
experience for its online banking system. The benefits of conventional banking include The
convenience of speaking with a live person when entering a nearby branch often seen as
secure, positive effect on clients' and suppliers' perspectives (increase trustworthiness),
customised services, easier to manage cash withdrawals and payments, Additional financial
products are offered. Greater KYC/AML procedures and lower accessibility are drawbacks of
traditional banking. Some conventional banks are risk-averse; they cannot conduct business
in certain countries; their online banking may be antiquated; they require more time to open
accounts; Banking must be done within regular business hours, there may be increased
monthly costs, and there is a lot of red tape for customers to cope with. It must be
acknowledged that traditional banks have increased their virtual activities recently. In the
next ten years, banking will likely be entirely digital. This indicates that opening a traditional
bank account now could eventually lead to a fully online banking solution from a respected,
top-tier global bank. This makes opening a conventional bank account around 2022
appealing. However, the majority of neobanks lack a banking licence and are unable to
function independently; instead, they collaborate with authorised banks to offer financial
services. Neobanks do not have physical branches, thus they are spared the costs of
infrastructure, infrastructure maintenance, rent, and other costs that cut into a typical
bank's profits. Customers receive these savings in the form of increased interest rates and
lower costs. Additionally, it indicates that neobanks have more manpower and financial
resources to devote to improving the banking experience for their clients. Opening a banking
account at a conventional bank is a time-consuming and frustrating process. There are
paperwork requirements and waiting periods. Some banks will even come to the customer's
home to confirm their address before requiring them to visit the real location. Everything in
a neobank is digital. On their mobile devices while lounging on their couches at home, users
can make accounts. In just a few minutes, the account is usable. On-the-go use of a user's
laptop or mobile device is possible for tasks like checking a check that otherwise need a trip
to a physical branch. This functionality has grown in importance, especially in the post-
COVID era when people choose the security and comfort of their own homes. Improving the
digital experience for customers was the top strategic focus for financial institutions in 2018.
Neobank apps are created to enhance the online banking process. Neo-apps are easy to use,
effective, and attractive. Traditional financial organizations have been compelled to create
their own digital solutions in order to stay current. However, because traditional brick-and-
mortar banks are not digitally first, the apps they produce have bugs and latencies.
Neobanks have access to the greatest talent available on the market to create some of the
most streamlined and slick banking experiences available in fintech. Neobanks are not true
banks because they lack banking licences and are not under RBI regulation. They
consequently have a little bit more freedom than conventional financial institutions. They
can maintain low expenses since they are exempt from the rules and regulations of
traditional banks.
Up until a few years ago, the standard procedure for opening an account was to get up early,
print your identification, and dash to the bank. Since then, the banking industry has
undergone numerous revolutions, and now we live in the era of neobanks. Neobanks may
sound like they belong in The Matrix series, but they have had a significant impact on the
financial industry recently. Let's first clarify what they mean. The Greek term that means
"new" is where the word Neo comes from. Neobanks are modern financial institutions with
similar operations to traditional banks. Like conventional banks, they provide loans, money
transfers, savings accounts, current accounts, and a number of other financial services. But
think twice before assuming that neobanks are just another kind of bank. Neobanks typically
don't have any physical locations, in contrast to regular banks. They are purely online-based.
They are able to reduce their operating and maintenance expenses as a result. Typically,
users use mobile applications to access these functionalities. Both a physical location and an
online presence are maintained by traditional banks. There might be mobile applications for
conventional banks as well. However, compared to their rivals, the neobank applications'
user interfaces tend to be much friendlier. Neobanks, despite their name, are truly financial
institutions. They vary from regular banks in that the latter are required to hold banking
licences. Neobanks, in contrast to ordinary banks, are just not recognised by the RBI.
Additionally, they are subject to far less restrictions than conventional banks, which enables
them to maintain low prices. Neobanks occasionally may hold a limited, comprehensive, or
specialised banking licence. They can provide a greater range of services thanks to a banking
licence. Neobanks function at far lower expenses than regular banks because they don't
have any physical locations. As a result, they feature lower maintenance expenses, no
minimum balance requirements, no additional fees, and greater interest rates on savings
accounts. They also have no startup fees. Neobanks also frequently have upfront costs that
are clearer. Traditional banks frequently have numerous hidden fees that customers may
first not understand without reviewing the fine print. In comparison to traditional banks,
neobanks make it simpler to register and open an account. Neobanks often conduct a
limited credit history check. Additionally, compared to a typical bank, borrowing money in
the form of a loan tends to be simpler through a neobank. Neobanks offer several benefits,
but they are still in their infancy, which is maybe the biggest distinction between them and
traditional banks. They consequently provide fewer services than conventional banks.
Physical debit cards, credit cards, and chequebook are just a few of the many services that
traditional banks provide. Neobanks have undoubtedly become extremely popular recently.
But their lack of digital literacy is a significant barrier. Because they are less familiar with
modern technologies, older generations find it more difficult to use digital banking services.
Due to their physical locations, traditional banks had a greater reach. For those who lack
tech skills, they continue to be the go-to source. Neobanks aim to change the way people
think about banking and financial services, whereas traditional banks rely on sound, time-
tested principles to sustain long-term customer relationships. In India, neobanks are
currently experiencing a rollercoaster, and everyone is waiting to see what the future holds
for them. Even though traditional banking services have its advantages, younger customers
are increasingly turning to neobanking for a more convenient banking experience.
Everything comes down to personal preference.
I think weather traditional banks and will survive the onslaught of Neo Banks depends on
how much they can adapt and compete with neo banks.
3. Loans or advances that are in default or in arrears are classified as nonperforming assets
(NPAs). When principal or interest payments are late or missed, a debt is in arrears. When
the lender believes the terms of the loan have been violated and the borrower is unable to
fulfil his responsibilities, the loan is in default. A loan or advance in which the principal or
interest payment was past due for 90 days is referred to as a non-performing asset (NPA).
The various categories of non-performing assets (NPAs) include:
NPAs that fall under this category are those that have been past due for less than or equal to
12 months.
NPA that is doubtful stays in the substandard NPA category for at least 12 months.
Loss Assets: According to the Reserve Bank of India's inspection, the Loss Assets arise when
the NPA has been acknowledged as a loss incurred by the bank or financial institution (RBI).
The Reserve Bank of India has established standards for provisioning that apply to NPA in
the same ways to all banks. Depending on the NPA category, they may differ to some extent.
These are listed below:
10% of the appropriate allowances for the total amount owed, without any budgeting for
securities or other forms of government assurance.
The NPA that comes within the subpar category would increase the coverage by an
additional 10%, for a total of 20% on the entire outstanding balance.
A dubious or unsecured NPA is defined as having a 100% provisional requirement.
a. The reasons for increasing NPAs since last decade is mismanagement and corruption.

The following are the contributing elements to non-performing assets (NPA):

The bank is assuming a lot of high risks by lending to businesses, individuals, and other
entities whose creditworthiness is not assured.
By fully comprehending the bank's capacity in terms of its loan or capital loss at a given time,
the banks are unable to reduce their losses.
The promoters of the enterprises are diverting the money to other uses.
The banks that attempt to finance unprofitable initiatives.
Lack of resources for the commercial banks to gather and share credit information, and
ineffective debt recovery from past-due customers.

The banking system is getting worse as a result of the NPAs.

As a result, banks' profits decline.

This lowers the capital adequacy of a bank or other financial organisation.
The banks are now reluctant to make loans and assume 100% risk. Therefore, it is prohibited
to create new credit.
Instead of focusing on growing their businesses, banks now prioritise managing credit risk.
The funds have a cost as a result of NPA.

India's economy was in a boom period prior to the global financial crisis of 2008. Banks made
large loans to businesses during this time in the hope that the good times would last.
However, events do not always turn out the same way as they did in the past. The global
economic recession that followed the financial crisis had a negative impact on the
companies of the majority of corporate entities. The suspension of mining projects and the
holdup in obtaining environmental permits had an impact on the iron and steel and power
industries, adding to the volatility of raw material prices. All of these issues had a significant
impact on the profits of the corporations. Their capacity to repay debts was impacted by low
 earnings. This is among the most significant causes of the rise in NPA at public sector banks.
The loose lending standards for corporate entities were a significant contributor to the rise
in NPA. Their credit history and financial situation weren't appropriately analysed. Less
promoter equity and larger leverage were acceptable to the banks. They even relied on the
promoter's investment banks' findings rather than conducting their own research. A little
over 40% of the total outstanding loans were given to businesses with interest coverage
ratios under one. Additionally, banks were marketing unsecured loans in order to remain
competitive, which added to the high levels of NPAs. A significant component of the credit
distributed to industries is provided by public sector banks, and this share of the credit
distribution accounts for a sizable portion of NPA. SBI gave a sizable loan to Kingfisher
Airlines during its financial difficulties, which the company is unable to recoup. The priority
sector lending (PSL) industry has made a major contribution to the NPAs. Agriculture,
education, housing, and MSMEs are among the priority industries. According to SBI
estimates, 20% of its non-performing assets are student loans. A significant component of
the credit distributed to industries is provided by public sector banks, and this share of the
credit distribution accounts for a sizable portion of NPA. SBI gave a sizable loan to Kingfisher
Airlines during its financial difficulties, which the company is unable to recoup. The priority
sector lending (PSL) industry has made a major contribution to the NPAs. Agriculture,
education, housing, and MSMEs are among the priority industries. According to SBI
estimates, 20% of its non-performing assets are student loans. There are also instances of
loan default by promoters, in which the money has been syphoned off by exporting to shell
firms or over-invoicing goods originating from a promoter-owned subsidiary abroad or
overseas and then claiming that they defaulted.

b. The banks have taken the following precautions to stop more loans from slipping into the
NPA category:
evaluating a person's or company's CIBIL score before extending credit or financing to that
individual or company.
a compromise or the use of the various resolution methods.
Utilization of other dispute resolution methods, such as the use of Lok Adalats and Debt
Recovery Tribunals, to obtain settlements more quickly
Information on the defaulters should be actively disseminated to prevent them from
selecting any other loans or financing sources.
use the services of the Asset Reconstruction Company.
taking tough action against significant NPAs.
The use of legal reforms like the adoption of the Insolvency and Bankruptcy Code is growing.
Using corporate debt restructuring (CDR).
putting up regulations for fund lapses and diversion.

The Reserve Bank of India has implemented the following major initiatives to stop NPA:
For a resolution plan, the community of lenders should follow very rigorous deadlines.
Certain incentives must be provided to the lenders in exchange for their consent to the
ongoing resolution initiatives.
Initiatives should be taken to enhance the current restructuring process, large value
restructuring, etc.
In order to resolve the situation, the lenders must make future borrowing for the
uncooperative borrowers more expensive.
The regulatory treatment of asset sales must unavoidably be more lenient.
The lenders must unavoidably be permitted to spread the loss on the sale for at least two
years in the event that a loss is disclosed.
It is necessary to permit leverage buyouts by specialist entities to acquire "stressed
enterprises."
Take the necessary actions to facilitate the Asset Reconstruction Companies' improved
performance.
Private equity firms and sector-specific businesses should receive assistance because they
are particularly active in the market for distressed assets.

The banks are free to develop and carry out their own policies for loan collection and loan
cancellation, compromise inclusion, and settlement negotiations with the board's consent.
After the Insolvency and Bankruptcy Code of 2016 (IBC) was successfully implemented,
modest debts like Rs. 1 lakh may perhaps be taken before the National Company Law
Tribunal (NCLT).
Lok Adalats - The Lok Adalats were established to handle small non-payable accounts (NPA)
up to Rs. 20 lakhs. They fully guarantee both a quick recuperation and the authoritative
cloak. The Lok Adalats are less expensive and time-consuming means to settle loan-related
problems and are typically less punitive on defaulters.
National Company Law Appellate Tribunal (NCALT) and NCLT - The Board of Industrial and
Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial
Reconstruction (AAIFR), which are both under the IBC, have been superseded by this entity.
This was done since the BIFR would not achieve the goal of stopping the industries that were
declared to be ill. According to the IBC, operational creditors may also submit an application
in order to liquidate before the NCLT in addition to financial creditors. The IBC very clearly
lays out the entire process of settlement, including the litigation that must be finished in 330
days.
Selling the NPA to all other banks - A bank is only permitted to sell its NPA to another bank if
it has been on the selling bank's books for more than two years. Additionally, the bank must
keep the NPA for at least 15 months before selling it to another bank. The NPA cannot,
however, be returned to the original bank to which it was sold, according to the law.