BANKING

REFORMS OF PUBLIC SECTOR BANKS (PSBs)

COMMITTEE TO REVIEW GOVERNANCE OF THE BOARDS OF BANKS IN INDIA

(P.J. Nayak Committee), 2014
Key recommendations of the Committee are:
 Reduce government stake in PSU banks to less than 50 percent. Governance difficulties in
public sector banks arise from several externally imposed constraints. These include:
o Dual regulation i.e. by RBI and Ministry of Finance
o Board constitution, wherein it is difficult to categorise any director as independent;
o Significant and widening compensation differences with private sector banks,
o External vigilance enforcement though the CVC and CBI, and limited applicability of the RTI
Act.
 Splitting the post of chairman and MD and ensuring the minimum five-year tenure and
minimum three year tenure for Executive Directors
 The government should transfer its holdings in PSBs to a Bank Investment Company (BIC).
 All PSBs should be incorporated under the Companies Act, 2013.
 Bank Boards Bureau (BIC) should be established to advise on all board appointments.
 The promoters should be permitted to hold up to 25% stake in a private sector bank (currently,
15%).
 Allow voting rights in proportion to the stake held.
 Bank officers guilty of ever-greening loans (offering new loans to repay old ones) should be
penalized financially.

MISSION INDRADHANUSH
In August 2015, the Indian Finance Ministry announced a critical 7 point action plan - Mission
Indradhanush, to help turnaround these public sector financial giants.
1) Appointment
Government has decided to separate the post of a Chairman and Managing Director. These posts are
open to even private sector candidates selected on the basis of merit.
2) Bank Board Bureau (BBB)
The BBB will replace the earlier Appointments Board for appointment of whole-time Directors as well
as Non-Executive Chairman of PSBs.

Bank Boards Bureau (BBB)

BBB became functional from 1st April, 2016. It has three ex-officio members (government) and three
expert members, two of which will be from the private sector, in addition to Chairman. Functions of
BBB
1. The Bureau will recommend for selection of heads - Public Sector Banks and Financial Institutions
and help Banks in developing strategies and capital raising plans.
2. The Bureau will help Banks in developing differentiated strategies and capital raising plans through
innovative financial methods and instruments.
3. BBB will also advise banks on strategies for consolidation among them including mergers and
acquisitions.
3) Capitalization
While PSBs have been under stress, yet they are still sufficiently capitalized and are meeting both
BASEL III and RBI norms.
4) De-stressing PSBs
 Better provisioning and building mechanisms to tackle willful defaulters and Non-Cooperative
borrower.
 Strengthening resources of DRTs
 !00% FDI through automatic route in ARCs
5) Empowerment
A no-political interference policy to encourage independent working of PSBs has been implemented.
This provides a greater flexibility to hire manpower.
6) Framework of Accountability
A new framework of key performance indicators for state-run lenders to boost efficiency in functioning
while assuring them of independence in decision making on purely commercial considerations has
been formulated.
7) Governance Reforms
The process of governance reforms started with “Gyan Sangam. There was focus group discussion on
six different topics, which resulted in specific decisions on optimizing capital, digitizing processes,
strengthening risk management, improving managerial performance and financial inclusion.

“Gyan Sangam” – A conclave of PSBs and FIs organized at the beginning of 2015 in Pune, attended
by all stake-holders including Prime Minister, Finance Minister, MoS (Finance), Governor, RBI and
CMDs of all PSBs and FIs.
Gyan Sangam 1: Decision to set up a Bank Board Bureau came out of the recommendations of Gyan
Sangam.
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Gyan Sangam 2: Suggested Consolidation of Public Sector Banks.

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Recapitalizing the Public Sector Banks (PSBs)

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Recapitalization bonds are proposed as a part of the Rs 2.11 trillion capital infusion packages declared by
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the government on October 24th, 2017. The term recapitalisation means giving equity money to cover
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debt of an entity.
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Recapitalization bonds: These are special type of bonds to be issued by the government for
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recapitalizing the Public Sector Banks (PSBs). The banks subscribed to these bonds and there was no
cash outgo from the budget during the year of recapitalisation. However, it was an addition to the public
debt. Consequently, the real impact on the budget was only when interest was paid by the government
to the banks on the securities held by the latter. Issue of these bonds will not lead to any cash flow. They
will have to be held till maturity, and will not get the status of statutory liquidity ratio.
TERMS RELATED WITH BANKING SECTOR
i. Interest Spread: It is the difference between the average rate of interest charged by banks from its
borrowers and averages rate of interest, which it gives to its depositors.
ii. Bancassurance: It refers to the distribution of the insurance and related financial products by the
Banks whose main business is not insurance. So, simply Bancassurance, i.e., banc + assurance, refers
to banks selling the insurance products.
iii. Shadow Banks: The shadow banking system is a term for the collection of non-bank financial
intermediaries that provide services similar to traditional commercial banks but outside
normal financial regulations. It is the group of financial intermediaries facilitating the
creation of credit across the global financial system but whose members are not subject
to regulatory oversight. The shadow banking system also refers to unregulated activities
 by regulated institutions. Examples of intermediaries not subject to regulation include
hedge funds, unlisted derivatives and other unlisted instruments, while examples of
unregulated activities by regulated institutions include credit default swaps.
iv. Credit Default Swaps (CDS): A specific kind of counterparty agreement, which allows the transfer of
third party credit risk from one party to the other. One party in the swap is a lender and faces credit
risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in
exchange of regular periodic payments (essentially an insurance premium). If the third party
defaults, the party providing insurance will have to purchase from the insured party the defaulted
asset. In turn, the insurer pays the insured the remaining interest on the debt, as well as the
principal.

NON PERFORMING ASSETS (NPAs)

According to RBI, terms loans on which interest or installment of principal remain overdue for a period
of more than 90 days from the end of a particular quarter is called a Non-performing Asset.
For Agriculture / Farm Loans; the NPA is defined as under:
 For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment
/ interest) is not paid for 2 crop seasons, it would be termed as a NPA
 For Long Duration Crops, the above would be 1 Crop season from the due date
For MSMEs Loans, loans on which interest or installment of principal remain overdue for a period of
more than 180 days to be classified as Non-performing Assets, as per the RBI Guidelines announced in
Feb 2018. For the new norm to be effective, three conditions need to be satisfied: the MSMEs must be
GST-registered; the aggregate exposure, including non-fund based facilities, should not exceed Rs 25
crore on January 31, 2018; the borrower account should be standard on August 31, 2017.
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Trend of Non-Performing Advances (NPAs)

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Gross Non-Performing Advances (GNPA) ratio (i.e. GNPAs as a percentage of Gross Advances) of
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Scheduled Commercial Banks decreased from 8.2 per cent at the end-March 2020 to 7.5 per cent at
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end-September 2020. Restructured Standard Advances (RSA) ratio of Scheduled Commercial Banks
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(SCBs) increased from 0.36 per cent to 0.41 per cent during the same period. Overall, the Stressed
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Advances ratio of SCBs decreased from 8.6 per cent at end- March 2020 to 7.9 per cent at end-
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September 2020.
4.21 GNPA ratio of Public Sector Banks (PSBs) decreased from 10.25 per cent at the end- March 2020
to 9.4 per cent at end-September 2020 and the Stressed Advances ratios decreasedrom 10.75 per cent
to 9.96 per cent during the same period. Net NPA ratios also declined and
stood at 2.1 per cent for SCBs and 2.85 per cent for PSBs as at end- September 2020.
Classification of NPA
It can be classified under 3 categories:
i. Sub-standard Asset: When the NPAs have aged <= 12 months.
ii. Doubtful Asset: When the NPAs have aged > 12 months.
iii. Loss Asset: When the bank or its auditors have identified the loss, but it has not been written
off.
Special Mention Accounts (SMA)
Before a loan account turns into an NPA (Non-performing asset), banks are required to identify incipient
stress in the account by creating three sub-categories under the Special Mention Account (SMA)
category as given in the table below:
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SMA Sub categories Basis for classification

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SMA-0 Principal or interest payment not overdue for more than 30 days
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but account showing signs of incipient stress.

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SMA-1 Principal or interest payment overdue between 31-60 Days.

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SMA-2 Principal or interest payment overdue between 61-90 Days.

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A Central Repository of Information on Large Credits (CRILC) collects, stores, and disseminates credit
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data to the lenders. The latter are required to report all such information here, including classification of
an account as SMA, on all borrowers having aggregate fund-based and non-fund-based exposure of Rs. 5
crore and above.

Reason behind rising NPA

i. The rising incidence of NPAs has been generally attributed to the domestic economic slowdown.
It is believed that with economic growth slowing down and rate of interest going up sharply,
corporates have been finding it difficult to repay loans, and it has added up to rising NPAs.
ii. Apart from the slowdown in India, the global economy has also slowed down. This has adversely
impacted the corporate sector in India.
iii. The ban in mining projects, delay in environmental related permits affecting power, iron and
steel sector, volatility in prices of raw material and the shortage in availability of power have all
impacted the performance of the corporate sector. This has affected their ability to pay back
loans.
 iv. Indiscriminate lending by some state-owned banks during the high growth period (2004-08) is
also one of the main reasons for the deterioration in asset quality. There is a lack of rigour in
loan appraisal systems and monitoring of warning signals at state-run banks. This is particularly
true in case of infrastructure projects, many of which are struggling to repay loans. Besides,
these projects go on for 20 to 30 years.

PNB FRAUD
In February 2018, Punjab National Bank (PNB) disclosed fraud allegedly by Nirav Modi relating to
fraudulent letter of undertaking worth 11,600 crore.
Basic terms related to PNB fraud:
LoUs- (Letter of Undertaking): Letter of Undertaking is a bank guarantee under which a bank allows its
customer to raise money from another Indian bank’s foreign branch in the form of short-term credit.
The loan is used to make payment to the customer’s offshore suppliers in foreign currency.
SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. It is a global
communication network that facilitates 24 hour secures international exchange of payments
instructions between banks, central banks, multinational corporations and major security firms.
CBS: CBS refers to Core Banking System where all branches are inter-connected to ensure that the
bank customers - regardless of their home branch - are able to operate their account and transact in
any of the member branch located anywhere in the world.
Letter of Credit: A written commitment to pay, by a buyer's or importer's bank (called the issuing bank)
to the seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank).
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Chanda Kochhar Case : Videocon-ICICI Bank Loan Controversy

Kochhar and her husband, Deepak Kochhar facing allegations of quid pro quo and conflict of interest with respect
to a loan extended to certain entities, including the Videocon group, whose owner has invested in the firm owned
by Deepak Kochhar, after ICICI bank under Chanda Kochhar cleared the loans to Vidocon. The Enforcement
Directorate has registered a criminal case of money laundering against former ICICI Bank Chief Executive Officer
Chanda Kochhar, her husband Deepak Kochhar, Videocon Group promoter Venugopal Dhoot and others to probe
alleged irregularities and corrupt practices in sanctioning of Rs 1,875-crore loans by the bank to the corporate
group. Plus the loan sanctioned to Videocon of Rs 1,730 crores later turned to be NPA in 2012, causing loss to
ICICI.
IMPACT OF RISING NPA
As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security markets. Few
banks will be willing to lend if they are not sure of the recovery of their money. The shareholders of the
banks will lose a lot of money as banks themselves will find it tough to survive in the market. This will
lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up badly.
Shooting of interest rates will directly impact the investors who wish to take loans for setting up
infrastructural, industrial projects etc. It will also impact the retail consumers, who will have to shell out
a higher interest rate for a loan. All of this will lead to a situation of low off take of funds from the
security market. This will hurt the overall demand in the Indian economy. And, finally it will lead to lower
growth rates and of course higher inflation because of the higher cost of capital. This trend may
continue in a vicious circle and deepen the crisis. Total NPAs have touched figures close to the size of UP
budget. Imagine if all the NPA was recovered, how well it can augur for the Indian economy.

MEASURES TO RESOLVE NPAs

Over the past three years the RBI has implemented a number of schemes to facilitate resolution of the
stressed asset problem.
1. More powers to RBI- Banking Regulation Act 1949 has been amended to give RBI broad powers to
deal with specific bad loans cases. It also empowered the central bank to direct banks on its own to
settle bad loans with defaulters, and to form oversight committees to deal with the issue. It also gives
the government powers to authorize RBI to invoke the Insolvency and Bankruptcy Code against
defaulters.

2. Asset Quality Review (AQR): Resolution of the problem of bad assets requires sound
recognition of such assets. Therefore, the RBI emphasized AQR, to verify that banks were assessing loans
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in line with RBI loan classification rules. Any deviations from such rules were to be rectified by March
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2016.
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Evergreening refers to the practice of "managing" the balance sheet through means, which
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may not be violating banking laws in letter, but breaching them in spirit. For instance, a bank
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can lend money to a company to pay off another bank's loan. This way, the second bank can
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save an account from going bad and reduce its non-performing assets (NPAs).
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3. Restriction on fund raising on Willful Defaulters - On May 25, 2016 SEBI amended the SEBI
regulations to impose restrictions on Willful defaulters- No issuer shall make any public issue of debt
securities, if as on the date of filing of draft offer document or final offer document, the issuer or any of
its promoters or directors is a willful defaulter or it is in default of payment of interest or repayment of
principal amount in respect of non-convertible redeemable preference shares issued by it to the public,
if any, for a period of more than six months.
Willful defaulters
Willful default means that a party does not make a payment out of its will. The Willful default is defined
as follows:
i. The party defaults in meeting its payment obligations even if it has capacity to repay.
ii. The party defaults in meeting its payment obligations and diverts the finance away from the purpose
it was availed for.
iii. The party defaults in meeting its payment and also disposed off the removable
assets/immovable property which was used for the purpose of secured loan, without the knowledge of
the Bank.
S.S. Kohli Committee on Willful Default
 Willful defaulters not able to access the markets, so a copy of the list of the willful defaulters to
be shared by the RBI to SEBI.
 No facility is provided by a Bank / FI to a willful defaulter till 5 years from the date of publishing
its name in the list of willful defaulters.
 Expeditious legal action is initiated against for the recovery of the amount.
 The banks and FIs are required to compile the list of the suit filed willful defaulters and submit
the same to the Credit Information Bureau of India Ltd. every quarter, provided the outstanding
amount is ‘ 25 Lakh or more.
4. SARFAESI Act, 2002: The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI Act India) empowers Banks and Financial Institutions to recover
NPA loan dues without the intervention of the Court. The provisions of this Act are applicable only for
NPA loans with outstanding above Rs. 1 lakh. Further, NPA loan accounts where the amount is less than
20% of the principal and interest are not eligible to be dealt with under this Act.
SARFAESI Act India empowers the Bank to
 To issue notices under the act to the borrower
 Recall the entire loan advance
 Bring pledged assets to auction
 If the borrower fails to comply with the notice, the Bank may take recourse as follows:
 Take possession of the asset pledged (Agricultural property is exempt)
 Sell or lease or assign the right of the asset pledged
Key features of amendment Bill 2016 to SARFAESI ACT 2002
• The SARFAESI Act allows secured creditors to take possession over a collateral, against which
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a loan had been provided, upon a default in repayment. This process is undertaken with the
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assistance of the District Magistrate, and does not require the intervention of courts or
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tribunals. The Bill provides that this process will have to be completed within 30 days by the
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District Magistrate.
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• The Bill empowers the District Magistrate to assist banks in taking over the management of a
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company, in case the company is unable to repay loans. This will be done in case the banks
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convert their outstanding debt into equity shares, and consequently hold a stake of 51% or
more in the company.
• The Act creates a central registry to maintain records of transactions related to secured
assets. The Bill creates a central database to integrate records of property registered under
various registration systems with this central registry.
• The Bill provides that secured creditors will not be able to take possession over the collateral
unless it is registered with the central registry.

5. NPA Resolution Schemes

a. Joint Lenders’ Forum (JLF): Under the stressed asset norms of the RBI, as soon as interest payments
on a loan are delayed by 60 days, a JLF comprising all lenders must be put in place. JLFs were intended
to recognize stressed assets early and come up with a corrective action plan (CAP) within 45 days. The
corrective action plan (CAP) may include handholding, or if the forum should opt for debt restructuring
or recovery.
b. Strategic Debt Restructuring (SDR): The RBI came up with the SDR scheme in June 2015 to provide an
opportunity to banks to convert debt of companies (whose stressed assets were restructured but which
could not finally fulfil the conditions attached to such restructuring) to 51 percent equity and sell them
to the highest bidders, subject to authorization by existing shareholders.
c. Scheme for Sustainable Structuring of Stressed Assets (S4A): Under this arrangement, introduced in
June 2016, large ticket loans are restructured by separating a sustainable loan from an unsustainable
loan. Sustainable level of debt is one, which the banks think the stressed borrower can service with its
current cash flows. This sustainable level of debt should not be less than half the loans or funded
liabilities of the stressed entity. The rest (‘unsustainable’) will be converted into equity and preference
shares. Unlike the SDR arrangement, this involves no change in the ownership of the company.
d. The 5/25 refinancing of Infrastructure Scheme: Under this scheme, lenders were allowed to extend
amortisation periods to 25 years with interest rates adjusted every 5 years, so as to match the funding
period with the long gestation and productive life of these projects.

Analysis of the schemes

Success of schemes, however, has been limited due to slow process of decision making by the
JLF, lack of consensus among the banks, balance sheet concerns of banks, etc.

6. RBI Circular, February 13, 2018

The Reserve Bank of India abolished half a dozen existing loan-restructuring mechanisms like
Corporate Debt Restructuring Scheme, Strategic Debt Restructuring Scheme (SDR) and Scheme for
Sustainable Structuring of Stressed Assets (S4A).
Under the new rules, insolvency proceedings would have to be initiated in case of a loan of Rs.
2,000 crore or more if a resolution plan is not implemented within 180 days of the default.
All lenders are required to submit report to Central Repository of Information on Large Credits
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(CRILC) on a monthly basis effective April 1, 2018. In addition, the lenders shall report to CRILC, all
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borrower entities in default (with aggregate exposure of Rs. 5 crore and above), on a weekly basis.
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Supreme Court quashes RBI circular

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The Supreme Court (SC) in April 2019, had stayed the RBI circular which directed the banks to report any
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loan account of over Rs 2,000 crore under the Insovency and Bankruptcy Code (IBC) if it was not
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resolved within in 180 days of default.

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7. Other measures
1. Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides setting
up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for
expeditious and exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA
accounts with outstanding amount of Rs. 10 lac and above.
2. Lok Adalats: Section 89 of the Civil Procedure Code provides resolution of disputes through ADR
methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalat mechanism
offers expeditious, in-expensive and mutually acceptable way of settlement of disputes.
3. Insolvency and Bankruptcy Code, 2016, which will fast track exit or winding up of the sick
companies.
4. Asset Reconstruction Companies (ARCs): ARCs were introduced under the SARFAESI Act (2002),
with the notion that as specialists in the task of resolving problem loans, they could relieve
banks of this burden.

8. Sunil Mehta Committee – June 2018

A high level committee headed by Punjab National Bank CEO Sunil Mehta was constituted on
“Restructuring stressed assets and creating more value for public sector banks (PSBs)”. The committee
recommended five prolonged strategy titled ‘Project Sashakt’ to resolve NPAs (Non Performing Assets)
as follows.
1. Small loans (upto 50 crores): such loans/NPA’s should be resolved by banks through steering
committee.
2.Mid size (50-500 crore): Bank led resolution approach. Banks/FI have to designate a bank as a lead
lender for preparation of resolution plan which should be approved by at least 66% of the creditors as
per the Inter creditor agreement (ICA).
3. Large loans (>500 crore): Resolved through National asset management company(AMC). It will be a
type of ARC which will purchase NPA’s from banks and will recover dues from them or takeover
management for their revival as per the legal provisions.
4. The fourth approach is to go to National Company Law Tribunal (NCLT) for insolvency and
bankruptcy.
5.The panel also suggested an Asset Trading Platform for stressed assets, which will allow smaller
public sector banks to offload large corporate exposures.

9. Inter creditor agreement (ICA)

1.Drafted by Indian banks association(IBA) as per the recommendations of Sunil Mehta committee.
2.Under ICA banks/FI have to designate a bank as lead lender, which will prepare a resolution plan,
which should be approved by 66 % of the creditors by value.
3.The dissenting creditors can exit either by selling their stake to other creditors at 15% discount of the
resolution/liquidation value or can purchase the entire share of other creditors at 25% premium of
liquidation/resolution value.
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On June 7, RBI had issued revised guidelines for resolution of stressed assets. Under the new
framework, it is a mandatory requirement for lenders to enter into an Inter-Creditor
Agreement (ICA) during the review of the borrower account within 30 days from date of first
default to any lender.
 RBI had said ICA must “provide that any decision agreed to by lenders representing 75% by
value of total outstanding credit facilities and 60% of lenders by number shall be binding upon
all the lenders.”

10. Prompt & Corrective Action (PCA)

Prompt Corrective Action or PCA is a framework under which the RBI puts banks with weak
financial metrics under watch. The PCA is invoked when certain risk thresholds are breached.
1. Capital (CRAR – regulatory capital to risk-weighted assets ratio – and Leverage ratio),
2. Asset quality (NNPA – net non-performing assets to advances ratio), and
3. Profitability (ROA – return on assets)
Two types of restrictions are imposed on such banks:
 Mandatory restrictions include restrictions on dividend, branch expansion, higher
provisioning requirement, directors compensation, restrictions on management
compensation, etc.
 Discretionary restrictions could include curbs on lending, accepting deposits,
restrictions on the bank on borrowings from interbank market.
Obligations of the Banks
 Banks will also have to launch a special drive to reduce the stock of NPAs and contain
generation of fresh NPAs. They have to take steps to increase their fee-based income.
The 11 banks under the PCA were:
Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India,
Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank
of Maharashtra.
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There were 11 banks under the PCA in January 2019. Currently, four banks are
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remaining under PCA. The Finance Ministry has asked the remaining public sector banks,
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currently under Prompt Corrective Action (PCA), to improve on seven parameters to get the
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government's support for coming out of the PCA framework.

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11. Public Credit Registry (PCR)

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Currently, the RBI is in the process of establishment of a public credit registry. The
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move is based on the recommendations of a committee, headed by Y.M. Deosthalee. A public

credit registry is an information repository that collates all loan information of individuals and
corporate borrowers. It becomes important because Credit information is now available across
multiple systems in bits and pieces and not in one window.
Data on borrowings from banks, non-banking financial companies, corporate bonds or
debentures from the market, external commercial borrowings (ECBs), foreign currency
convertible bonds (FCCBs), masala bonds, and inter-corporate borrowings are not available in
one data repository. The PCR will also include data from entities like market regulator Sebi, the
corporate affairs ministry, Goods and Service Tax Network (GSTN) and the Insolvency and
Bankruptcy Board of India (IBBI) to enable the banks and financial institutions to get 360
degree profile of existing and prospective borrowers on a real-time basis. The PCR will be the
single point of mandatory reporting for all material events for each loan, notwithstanding any
threshold in the loan amount or type of borrower.
Currently, there are multiple granular credit information repositories in India, with each
 having somewhat distinct objectives and coverage. Within the RBI, CRILC is a borrower level
supervisory dataset with a threshold in aggregate exposure of Rs 5 crore. Also there are four
privately owned credit information companies (CICs) operating in India. They are CIBIL,
Equifax, Experian and High Mark Credit Information Services.
Benefits of having a PCR
 A credit repository helps banks distinguish between a bad and a good borrower and
accordingly offer attractive interest rates to good borrowers and higher interest rates to
bad borrowers.
 PCR will address issues such as information asymmetry, improve access to credit and
strengthen the credit culture among consumers.
 It can also address the bad loan problem staring at banks, as corporate debtors will not
be able to borrow across banks without disclosing existing debt.
 A PCR may also help raise India’s rank in the global ease of doing business index.
 With satisfactory payment history and validated debt details made available, it will
increase the credit availability to micro, small and medium enterprises along with
deepening of the financial markets. This will support the policy of financial inclusion.
Consequent to the publication of expression of interest (EOI) the Reserve Bank had received responses
from several vendors for implementation of end-end solution for PCR. In March 2020, the RBI has
identified Tata Consultancy Services and Dun & Bradstreet as the L1 bidders to implement the project
after a technical evaluation.

Credit Information Bureau (India) Limited (CIBIL)

It is a Credit Information Company founded in August 2000, now known as TransUnion CIBIL. It collects and
maintains records of an individual‘s payments pertaining to loans and credit cards. These records are
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submitted to CIBIL by banks and other lenders on a monthly basis. This information is then used to create
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Credit Information Reports (CIR) and credit scores which are provided to lenders in order to help evaluate
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and approve loan applications.

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BAD BANK
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A bad bank will buy bad assets or NPAs from banks and then get around to reviving them or disposing
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them off. They will be bought at a lower value and could reside in the books of the bad bank until they
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are sold or even be returned to the bank once they cease to be delinquent.
The bad bank proposal is a variant of the Asset Restructuring Company. The idea is to transfer NPAs of
banks, perhaps only PSBs, to the bad bank. The bad bank will manage these NPAs in suitable ways —
some may be liquidated, others may be restructured, etc. Getting NPAs off the books will help the PSB
management focus on new business instead of having to expend their energies on trying to effect
recoveries. A bad bank will be better focused on the task of recovery. If it’s a private entity, it can also
bring in superior expertise. The Economic Survey 2016-17, suggested establishing a bad bank namely,
Public Sector Asset Rehabilitation Agency’ (PARA).
Merits
1. Such an approach could eliminate most of the obstacles currently plaguing loan resolution.
2. It could solve the coordination problem, since debts would be centralised in one agency;
3. It could be set up with proper incentives by giving it an explicit mandate to maximize
recoveries within a defined time period;
4. It would separate the loan resolution process from concerns about bank capital.
5. An overhaul of balance sheet weeding out the NPAs will improve functioning starting afresh.
 Demerits
The biggest problem with 'Bad Bank' will be who would own it as the size of NPA is huge, both
government and private sector would find difficulty in raising capital to buy all NPAs.
1. There will be a question mark over viability of the bad bank, even the Asset Restructuring
Companies buy only those NPA which have some prospect of return.
2. If we go by RBI’s Strategic Debt Restructuring (SDR) scheme- converting loans into equity,
acquiring a majority stake, dislodging old management and bringing in new ones- This is
however not feasible as it’s difficult to find new ones and PSBs don't have the caliber to take
care of business before they find new management.
3. The pricing of NPAs are another issue, if rates are high, they won't be bought, if too less then it
would turn into something like NPA scam.
4. Transfer needs time and would stop the fund flow for projects and simultaneously mount more
debt.
Challenges that need to be resolved
3 major issues have bedeviled other agencies, and would need to be resolved to ensure a PARA would
actually work as intended:
 First, there needs to be a readiness to confront the losses that have already occurred in the
banking system, and accept the political consequences of dealing with the problem.
 Second, the PARA needs to follow commercial rather than political principles. To achieve this, it
would need to be an independent agency, staffed by banking professionals. It would also need a
clear mandate of maximizing recoveries within a specified, reasonably short time period.
 The third issue is pricing. If loans are transferred at inflated prices, banks would be transferring
losses to the Rehabilitation Agency. As a result, private sector banks could not be allowed to
participate – and then co-ordination issues would remain – while private capital would not want
to invest in the Agency, since PARA would make losses.
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Twin Balance Sheet Problem

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Twin balance sheet problem pertains to the stressed balance sheet of PSBs on one hand and
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Corporates on the other. Public Sector Banks (PSBs) are burdened with high NPAs and corporate
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houses are under financial stress as demand has slowed down for them globally.
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The rising NPAs are a direct hit on the financial health of a bank and more so when the bank is a public
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sector one, since it gets a major share of its capital and monetary strength from the Reserve bank of
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India, which essentially gets it from the Government Exchequer. Similarly, corporates also face huge
strain on their cash position off late due to various reasons including the global market’s sluggishness.
ECONOMIC SURVEY 2019-20
Way Ahead : Enhancing Efficiency of PSBs

I. Credit Analytics using Artificial Intelligence and Machine Learning

 Young demography along with near universal coverage of JAM trinity has led to formalization
and financial inclusion of businesses and individuals.
 This is backed by state-of-art digital infrastructure that generates and stores an abundance of
high quality structured data on the all aspects of the economic lives of firms and individuals.
This data can be goldmine for economic growth in 21st Century.
 The data that can be employed for credit analytics is available in both structured and
unstructured form.
o Data in a structured form include credit information and credit scores based on loan grants
and repayments held in the credit registries or credit bureaus.
 o The richer, though unstructured, micro-data is available in text, images, geo-tagged data,
social network data, mobile apps, as well as other shallow or deep digital footprints of
current and potential customers.
Benefits of credit analytics
• Analytics based on market data are quite capable of providing accurate predictions of corporate
distress. Many NPAs of Indian banks could have been prevented if data and analytics were
employed in corporate lending.
• There are several leading indicators that data and analytics could have clearly highlighted about
wilful defaulters.
o Disclosure of related party transactions, pledging of promoter shares, and large loans to
related parties between wilful defaulters and non-defaulters, etc. These are easily
quantifiable measures that a robust credit analytics platform could have easily picked up and
provided warning signals.
II. The Public Sector Bank Network (PSBN): FinTech Hub for PSBs
 FinTech is forcing traditional banks to review their outdated business paradigms to come up
with effective, low-cost, banking solutions.
 Currently PSBs employ technology for limited purposes. As a result PSBs face many challenges
such as high operating costs, disjointed process flows from manual operations and subjective
decision making.
 Use of Fintech can benefit in following ways
o Tools such as Machine Learning (ML), Artificial Intelligence (AI) as well as Big Data and
matching provide banks the ability to recognize patterns quickly by analysing vast datasets,
an activity that would be virtually impossible for humans, even using conventional
technology.
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o Using FinTech allows banks to better screen borrowers and set interest rates that better
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predict ex-post loan performances.

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o PSBs will be able to enhance their efficiency by fulfilling their role of delegated monitors if
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all the PSBs can pool their data into one entity.
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• Survey proposes establishment of a GSTN like entity, called PSBN (PSB Network), to use
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technology to screen and monitor borrowers comprehensively and at length.

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– It will utilize data from all PSBs as well as other Government sources and service
providers to develop AI-ML ratings models for corporates.
– The AI-ML models can not only be employed when screening the corporate for a fresh
loan but also for constantly monitoring the corporate borrower so that PSBs can truly
act as delegated monitors.
• PSBN will lead to better decision making on credit underwriting would reduce the burden of
NPAs ,fraud prevention, Lesser turn-around-time (TAT), Reduce operating costs etc. This will
ultimately enhance efficiency of PSBs and help them compete with NPBs
III. The case for employee stakes in PSBs
 To enable employees to become owners in the banks and thereby incentivize them to embrace
risk-taking and innovation continually, a portion of the government stakes can be transferred to
employees exhibiting good performance across all levels of the organization through Employee
Stock Option Plans (ESOPs). It will benefits in following ways:
o reduce agency problems
 o possible change of the mind-set from that of an employee to that of an owner
o align employees incentives with what is beneficial to the PSB, and create a mind-set of
enterprise ownership for employees.
IV. The need for best talent and organizational verticals based on technology
 PSBs need to enable cutting-edge recruitment practices that allow lateral entry of professionals
and recruitment of professionally trained talent at the entry level.
 For example, the possibilities generated by FinTech call for recruitment of professionals with
domain skills in technology, data science, finance, and economics.
 A generous ownership offer by the Government to PSBs employees would help them provide
the incentive structures to attract high-quality banking professionals and thereby improve their
human capital acquisition strategies.

INSOLVENCY AND BANKRUPTCY CODE, 2016

The Code offers a uniform, comprehensive insolvency legislation encompassing all companies,
partnerships and individuals (other than financial firms). The World Bank’s doing business report 2017
pointed out that it takes more than 4 years to resolve insolvency cases in India, as against 1.5 years in
OECD countries. In summary, it is very difficult to solve insolvency and similarly difficult to exit from a
business. This is one of the reasons of India’s low rank on ease of doing business.

Difference between insolvency & bankruptcy

Insolvency refers to a situation when an individual or company are not able to pay the debt in present
or near future and the value of assets held by them are less than liability. Bankruptcy is a legal
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declaration of insolvency. In this, the debtor files an application with the court to declare himself
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insolvent or the creditor files an application against the insolvent. Therefore, it is a last stage of
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insolvency. We note here that while insolvency is a financial situation and bankruptcy is a legal
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condition. Insolvency may or may not lead to bankruptcy.

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Main Features of the code:

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q Under the Code, where a corporate debtor fails to pay a debt that is due, the corporate insolvency
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resolution process may be initiated by a financial creditor or by an operational creditor or by the

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corporate debtor itself.

A financial creditor is a creditor to whom a financial debt is owed by the corporate debtor. An
operational creditor is a creditor who has provided goods or services to the corporate debtor,
including employees, central or state governments.

q The Code creates time-bound processes for insolvency resolution of companies and individuals.
These processes will be completed within 180 days. If insolvency cannot be resolved, the assets of
the borrowers may be sold to repay creditors.
q The resolution processes will be conducted by licensed insolvency professionals (IPs). These IPs will
be members of insolvency professional agencies (IPAs). IPAs will also furnish performance bonds
equal to the assets of a company under insolvency resolution.
q Information utilities (IUs) will be established to collect, collate and disseminate financial
information to facilitate insolvency resolution.
q The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.
The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
q The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and
IUs.

Corporate Insolvency Resolution Process:

Application on default: Any financial or operational creditor(s) can apply for insolvency on default of
debt or interest payment
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Appointment of IP: IP to be appointed by the regulator and approved by the creditor committee. IP will
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take over the running of the Company. From date of appointment of IP, power of Board of directors to
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be suspended and vested in the IP.

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Moratorium period: Adjudication authority will declare moratorium period during which no action can
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be taken against the company or the assets of the company. Key focus will be on running the Company
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on going concern basis. A Resolution plan would have to be prepared and approved by the Committee
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of creditors
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Credit Committee: A credit committee of creditors will be constituted. Related party to be excluded
from committee. Each creditor shall vote in accordance to voting share assigned if 75% of creditors
approve the resolution plan same needs to be implemented.
Liquidation: Failure to approve resolution plan within specified days will cause initiation of Liquidation.
Debtor can also opt for voluntary liquidation by a special resolution in a General Meeting.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017
q The Ordinance amends the Insolvency and Bankruptcy Code, 2016 to prohibit certain people from
submitting a resolution plan (specifying details of restructuring a defaulter’s debt). These persons
include:
(i) wilful defaulters
(ii) Disqualified directors
(iii) Promoters or management of the defaulting company, and
(iv) Any person who has committed these activities abroad.
q The Ordinance bars an insolvency professional from selling the property of a defaulter to any such
person during liquidation.
Key Issues and Analysis
q The Ordinance prohibits certain persons from submitting resolution plans as it may be considered
undesirable to let them take charge of the company. However, this may reduce competition among
applicants seeking to resolve the company and result in lower recoveries for creditors.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018
q Home Buyers included in financial creditors: The Code defines a financial creditor as anyone who
has extended any kind of loan or financial credit to the debtor. The Ordinance clarifies that an
allottee under a real estate project (a buyer of an under-construction residential or commercial
property) will be considered as a financial creditor, as the amount raised from allottees for financing
a real estate project has the commercial effect of a borrowing.
q Voting threshold of committee of creditors: The voting threshold for decisions of the committee
of creditors has been lowered from 75% to 51%. For certain key decisions of the committee, the
threshold has been reduced from 75% to 66%. These include: (i) appointment of the resolution
professional, (ii) approval of the resolution plan, and (iii) increasing the time limit for the insolvency
resolution process.
q Applicability of the Code to Micro, Small, and Medium Enterprises (MSMEs): The Ordinance states
that the ineligibility criteria for resolution applicants regarding NPAs and guarantors will not be
applicable to persons applying for resolution of MSMEs.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019

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The Act addresses three issues. First, it strengthens provisions related to time limits. Second, it specifies
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the minimum payouts to operational creditors in any resolution plan. Third, it specifies the manner in
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which the representative of a group of financial creditors (such as home-buyers) should vote.
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 Resolution plan: The Code provides that the resolution plan must ensure that the operational
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creditors receive an amount, which should not be lesser than the amount they would receive in
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case of liquidation.
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 Initiation of resolution process: As per the Code, the NCLT must determine the existence of
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default within 14 days of receiving a resolution application. Based on it’s finding, NCLT may
accept or reject the application. The Act states that in case the NCLT does not find the existence
of default and has not passed an order within 14 days, it must record its reasons in writing.
 Time-limit for resolution process: The Code states that the insolvency resolution process must
be completed within 180 days, extendable by a period of up to 90 days. The Act adds that the
resolution process must be completed within 330 days. This includes time for any extension
granted and the time taken in legal proceedings in relation to the process.
 Representative of financial creditors: The Code specifies that, in certain cases, such as when
the debt is owed to a class of creditors beyond a specified number, the financial creditors will be
represented on the committee of creditors by an authorised representative.

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019

 1. Additional thresholds introduced for Financial Creditors represented by an authorized
representative due to large numbers in order to prevent frivolous triggering of Corporate
Insolvency Resolution Process (CIRP).

2. Ensuring that the substratum of the business of corporate debtor is not lost, and it can continue
as a going concern by clarifying that the licenses, permits, concessions, clearances etc. cannot be
terminated or suspended or not renewed during the moratorium period.

3. Ring-fencing corporate debtor resolved under the IBC in favour of a successful resolution
applicant from criminal proceedings against offences committed by previous
management/promoters.

SC Judgement on Essar Steel Case under IBC

In a landmark judgment, the Supreme Court has upheld the supremacy of the Committee of Creditors
comprising the financial creditors of the bankrupt firms over the distribution of claims. The Supreme
Court quashed the earlier NCLAT order which brought parity between financial and operational creditors
of Essar Steel in matters of distribution of proceeds. With the Supreme Court finally upholding CoC's
primacy over distribution of funds, a major area of concern has been addressed.
The Supreme Court has done away with the 330-day mandatory deadline for the resolution of
insolvency and bankruptcy cases after which liquidation will be invoked. The 330-day deadline was
brought in through amendments by the government this year with the purpose of bringing down
litigation time. The original window of 270 days had been breached in many cases on account of
litigation. Courts treated the time spent in litigation as outside of the 270-day window, thereby causing
major delays to the resolution process. The 330-day deadline included time spent on litigation. The
Supreme Court has given the adjudicating authority the powers to decide if it needs more time to decide
on a specific case.
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The SC Judgement will be a breather for these companies if the resolution process is ongoing and they
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may not be forced to be liquidated just because of lapse of a certain time.

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Criticism of the Act
The Code provides a hard deadline of 180/270 day for completion of corporate insolvency process,
failing which, the Code mandates the “Adjudicating Authority” to order liquidation. A hard deadline will
push otherwise salvageable companies into liquidation, disrupting markets and affecting jobs and
livelihoods.
The code tilts heavily in favor of creditors, depriving debtors of fair participation and a level playing field.
The Committee of Creditors has been made the sole, all-powerful authority that can either accept or
reject the revival plan of the debtor company. All other creditors and stakeholders have been kept out
of the decision-making processes.
Under the Code once an application of an operational creditor is admitted by the adjudicating authority
an interim resolution professional gets appointed and the management of the corporate debtor passes
to the interim resolution professional. Displacement of management of corporate debtor on account of
a few unpaid operational creditors and financial creditors can cause great damage to the cause of
entrepreneurship. It must be very clearly laid down in the Code that management of corporate debtor
shall get displaced only if significant amount says 20–25 per cent of the debt of the corporate debtor
remains due and unpaid.
Appraisal
India is a capital starved country and therefore it is essential that capital isn’t frittered away on weak
and unviable businesses. Quick resolution of bankruptcy can ensure this. Today, bankruptcy proceedings
in India are governed by multiple laws — the Companies Act, SARFAESI Act, Sick Industrial Companies
Act, and so on. The entire process of winding up is also very long-winded, with courts, debt recovery
tribunals and the Board for Industrial and Financial Reconstruction all having a say in the process. The
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new Code streamlines and consolidates all these laws to make the process simpler. Industry anticipates
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that the change will provide an easy exit option for insolvent and sick firms. The passage of this bill will
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enable quick and prompt action to be taken in the early stages of debt default by a firm, maximising the
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recovery amount. The creditors will not be stymied by redtape and promoters will directly become
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accountable for any financial lapses.

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Recovery Rate- Since it started operating and until 30 June, 2019 financial creditors (primarily banks
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whose loans had been defaulted on by corporates) had filed claims worth ₹2.53 trillion under IBC. The
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total recovery has been at ₹1.08 trillion. This means a rate of recovery of 42.8%.The biggest recovery for
banks was when Bamnipal Steel, a unit of Tata Steel, bought Bhushan Steel. Bhushan Steel had
defaulted on loans worth ₹56,022 crore. Bamnipal Steel paid ₹35,571 crore for the company. The rate of
recovery was 63.5% of the defaulted loans.
Time Taken to resolve the cases-According to IBC, the entire process needed to be completed in 270
days. As of March, the average time taken in cases that were resolved, typically, with the company that
has defaulted on a loan being sold to another company, was 324 days. This was longer than the 270-day
deadline, but much less than the 4.3 years it used to take before IBC was implemented. In July, the
government extended the deadline for the corporate insolvency resolution process to 330 days.

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