FINANCE CURRENT AFFAIRS – RBI 247

AUGUST WEEK 3
TABLE OF CONTENT

1. RBI’s Srei Intervention: Boards, Insolvency &

Regulatory Powers

2. RBI- Additional CRR for Scheduled banks

3. Deflation in China’s economy

 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers
Srei is an ‘Asset Finance Company: non–deposit taking NBFC’.

What Happened?
RBI superseded the boards of:
• SIFL: Srei Infrastructure Finance
• SEFL: Subsidiary Srei Equipment Finance

Reasons:
→ Corporate Governance
→ Default on loan repayment obligations.
→ Evergreening of loans
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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers

Srei’s Promoter’s plea to NCLAT:

• RBI didn’t consider the situation of covid pandemic that affected the
liquidity of the firm
• RBI acted abruptly and 'in complete undue haste,’
• RBI does not have the power to supersede the board.

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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers
RBI ordered the process of resolution of the two NBFCs under the country’s
insolvency and bankruptcy code (IBC).

What did Srei do?

→ Srei moved to NCLT with a scheme: To pay full dues in a structured manner.
→ Srei’s proposal was rejected and National Company Law Tribunal (NCLT)
admitted Srei into the corporate insolvency process.
→ Srei moved to NCLAT with a plea

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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers

Does RBI have the power to supersede a firm?

The Banking Regulation Act, of 1949 empowers the RBI to:
 Inspect and supervise commercial banks.
 Supersede the BOD of a bank for a year if the board is not working in the
interest of shareholders and depositors.
 Run the bank by appointing an administrator till a new board is appointed
ensuring depositors’ money stays safe.

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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers

o The Union budget 2019-20 has expanded the RBI’s powers by bringing HFCs
under its scope and deepening its governance over NBFCs.
o Increase in RBI’s autonomy can be attributed to the crisis at Infrastructure
Leasing and Financial Services Ltd (IL&FS), which led to a liquidity crisis in
NBFC sector.

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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers

Wider Regulatory Powers:

The Union budget 2019-20 has proposed to amend the RBI Act 1934, to
strengthen regulatory powers in the following domains:

➢ It can supersede the board of NBFCs (other than those owned by the
government) in the public interest and to protect the interests of the
depositor or creditor.

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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers

➢ It can remove and can further appoint the director of a board of NBFC.
➢ RBI Act allows it to frame schemes for amalgamating, splitting, and
reconstructing an NBFC.
➢ RBI can also remove auditors, call for an audit of any group company of
an NBFC, and have control over the compensation of senior
management.

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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers
What is NCLT?
NCLT is a Quasi-judicial body in India for company-related matters.
➢ Responsibilities:
• Handles arbitration, arrangements, compromise, reconstruction, and
winding up of companies.
• Disposes of insolvency cases as per the Insolvency and Bankruptcy
Code(IBC).
• Addresses oppression and mismanagement cases within companies.

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 RBI's Srei Intervention: Boards, Insolvency &
Regulatory Powers

Insolvency and Bankruptcy Code (IBC)

Enacted in 2016 to address rising NPAs and debt defaults.

IBC Resolution Objectives:

• Save business through restructuring, mergers, or ownership change.
• Maximize corporate debtor's asset value.
• Foster entrepreneurship, credit availability, and balanced interests

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 Deflation in China

What
• China, the world's second-largest economy, is going through a tough time.
For a long time, the Asian giant has been under tremendous pressure,
reflected by weak economic data.

China is facing deflation:

• Fall in imports and exports
• low consumer demand

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 Deflation in China

Deflation: Prices of goods and services Disinflation: "Increase in Prices but a

decrease. Lower Rate“

Impact: Impact:
• Fewer jobs and slow growth • Needs economic growth to avoid
compared to inflation. negative impact.
• People save more, and spend • Rapid slowdown without GDP growth.
less, slowing the economy. • Can raise unemployment
• Money gains value, reducing India's current scenario: Significant
earnings. slowdown in price rise.

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 Deflation in China

It all started with the pandemic:

During the pandemic, all economies were facing low demand:

→ Economies like US and India reduced their repo rates to inject money
into the market.

→ China did not lower its key interest rates during pandemic.

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 Deflation in China

China’s situation in post-pandemic

➢ Made no attempt to boost market liquidity by lowering interest rates.
➢ Extended the COVID restrictions till the end of 2022 due to a rise in covid
cases.
➢ It has been resisting itself from falling its interest rate heavily. However,
there was a need to respond quickly to stabilize the market and stop
deflation.

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 Deflation in China

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 Deflation in China

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 Deflation in China

Other factors have contributed to

China’s market deflation:
• Imports decreased
• Decreased exports
• Increase in the unemployment rate
in China
• Fall in the industry sector
• Policy Paralysis

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 RBI- Additional CRR for Scheduled banks

What's the News?

RBI ordered banks to maintain:
• CRR at 4.50% of NDTL.
• I-CRR at 10% of the increase in NDTL between May 19-July 28, 2023.

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 RBI- Additional CRR for Scheduled banks
Incremental -CRR
I-CRR is an additional Cash Reserve Ratio (I-CRR) applied to unexpected deposit excess
for a specified period.
Objective:
• Prevents excessive lending
• Prevents inflation
• Ensures RBI absorbs extra liquidity.

Net Demand and Time Liabilities (NDTL)

The Net Demand and Time Liabilities (NDTL) show the difference between:
NDTL = Demand & Time Liabilities - Deposits with other banks

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 RBI- Additional CRR for Scheduled banks

Why I-CRR?
The RBI ‘State of the economy report’, expresses concerns about potential
problems:
• Risk of asset price bubbles and easy lending.
• I-CRR (10% of increased NDTL) will absorb extra liquidity.
• Prevents inflation and ensures monetary control.
• As per the report, despite some price increases, the risk of both high
inflation and slow economic growth (known as stagflation) is currently
low.

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 RBI- Additional CRR for Scheduled banks

Asset Price Bubble

An asset price bubble is → Rapid price rise without fundamentals.

• ‘An asset bubble occurs when the price of an asset (like stocks, bonds, real
estate, or commodities) rises at a rapid pace without underlying
fundamentals to justify the price spike.’
• The ‘fundamental’ asset price is equal to the net present value of the cash
flows which the owner of the asset is entitled to receive.

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 RBI- Additional CRR for Scheduled banks

Stagflation
Stagflation: High inflation and slow economic
growth.
→ It is a Dangerous situation for the economy.

How government treat it?

Increase aggregate supply through supply-side
policies

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Q.1) Which of the following appropriately describes the concept of Asset price
bubble.

[a] When housing price crashes leading to an increase in demand

[b] When the price of an asset rises at a rapid pace without underlying
fundamentals to justify the price spike.
[c] When the book value of the asset is more than the market price
[d] When housing prices overshoots leading to a market crash
[e] When prices of assets are uncontrollable by the monetary policy
committee
Q.2) Which of the following is/are true about the impact of incremental Cash reserve
ratio?
1. Helps control the excess money in the system
2. Prevents it from causing inflation
3. I-CRR occurs when banks experience an unexpected deposit fall.

[a] 1 only
[b] 2 only
[c] 1 and 2 only
[d] 1,2 and 3 only
[e] None of the above
Q.3) Which of the following statements is/are incorrect about RBI’s powers?
1. RBI cannot supersede the board of NBFC like in banks.
2. RBI can remove and can further appoint the director of a board of NBFC
3. RBI cannot remove auditors, call for audit of any group company of an NBFC

[a] 1 only
[b] 2 only
[c] 1 and 3 only
[d] 1,2 and 3 only
[e] None of the above
Q.4) Recently in the month of August 2023, RBI the process of resolution of the which
of the following NBFCs under the country’s insolvency and bankruptcy code.

[a] Srei Infrastructure Finance

[b] Sahara Infrastructure group
[c] Mohina Asset Finance Company
[d] Larsen & turbo
[e] Kohima Micro Finance Company
Q.1) B
Q.2) C
Q.3) C
Q.4) A