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[op-ed snap] How banking frauds can be nipped in the bud


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Corporate governance, RBI, Blockchain technology

Mains level: Banking frauds and measures to reduce their incidence


Frauds in banking system

  1. The Nirav Modi case has once again cast the spotlight on the dark corners of the Indian banking universe
  2. The information available till now suggests that there was a failure at different levels—internal controls, corporate governance and weak regulatory capabilities

Ideas that could prevent such frauds in future

  1. Internal controls in a bank
  • This is the basic line of defense
  • Most banking regulation across the world works on this principle
  • A good technology system should make it impossible—or at least extremely difficult—for individual employees to bypass controls
  • Bank boards and especially the audit committees must have clear responsibilities

2.  Banks can also set up a special fraud monitoring agency

  • It may include officials specially trained to detect incipient frauds
  • Banks can also choose to appoint one member of the board to oversee fraud risk management

3. The role of third parties should be examined with a tough eye

  • Chartered accountants, auditors, and advocates who figure in bank frauds should be dealt with strictly
  • The regulator should revisit the role of auditors both in the case of borrowers and lenders

4. Banking regulators need to be a backstop

  • The Reserve Bank of India (RBI) has said it had earlier warned banks about frauds
  • The Indian central bank will have to build capabilities, both in terms of designing rules and making sure that they are effectively implemented

5. The government should actively pursue the idea of privatizing public sector banks (PSBs)

  • Public sector banks have always been marred by poor governance
  • It is reflected in their stock market valuations
  • High levels of non-performing assets and the recent fraud are consequences of inept governance
  • The required reforms will go the distance only when banks are free of political and bureaucratic control

6. Use of blockchain technology

  • Blockchain technology could be used to make banking transactions more transparent
  • This would mean that every link in the chain can be scrutinized publicly
  • This also won’t affect privacy as borrowers disclose a lot of information in public statements, while mutual funds provide detailed disclosures about their bond portfolios

Way forward

  1. India needs a safe and efficient banking system to service the needs of a growing economy
  2. The government and RBI would do well to use the current opportunity to strengthen the banking system

Bank bureau stares at uncertain future

Image source


Mains Paper 2: Polity | Statutory, regulatory & various quasi-judicial bodies

From UPSC perspective, the following things are important:

Prelims level: Banks Board Bureau, Indradanush programme, PJ Nayak committee

Mains level: Reform measures in banking sector and their successes


Term expiration near

  1. The Banks Board Bureau (BBB) is facing an uncertain future with the tenure of its members coming to an end on March 31, 2018
  2. The government is yet to communicate if the terms will be extended or a new board will be formed

Banks Board Bureau

  1. The BBB was set up under the government’s Indradanush programme to reform public sector banks
  2. It started operations in April 2016
  3. BBB has representatives from government and RBI apart from independent banking professionals
  4. The BBB was conceived by the PJ Nayak committee and was seen as a step taken towards reforming the boards of public sector banks
  5. The committee, in its report, had recommended that the government should distance itself from the appointment process of top management and board members of PSBs

Success of BBB

  1. The BBB was only involved in shortlisting and interviewing candidates
  2. The final appointment was always made by the government
  3. There were instances of delays in appointment by the government despite the BBB recommending it

[op-ed snap] Banking on good faith

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached stories

Mains level:  Complement this newscard with some of our previous newscards on the same issue, [op-ed snap] Reforms needed to back bank recapitalisation and [op- ed snap] A bold step in bank reform


Recapitalization plan

  1. About Rs. 1 lakh crore is expected to be pumped into India’s 21 public sector banks by March, which the Centre hopes will enable them to extend fresh credit lines worth over Rs. 5 lakh crore to spur economic activity

PCA (prompt corrective action)

  1. The Reserve Bank of India has placed, a significant part of the recapitalization plan, under the prompt corrective action, or PCA, framework
  2. The RBI deploys the PCA to monitor the operation of weaker banks more closely to encourage them to conserve capital and avoid risks
  3. For these entities, this capital(provided under the plan) offers a fresh lease of life as it will help meet regulatory requirements under the Basel-III regime
  4. Also, it cushions them to an extent from possible haircuts on stressed loans that are going through the insolvency resolution process

Government’s view on the Financial Resolution and Deposit Insurance legislation

  1. While announcing this package, the government has described each of the banks as “an article of faith”
  2. Its assertion that no public sector bank will fail and that depositors’ money will remain safe
  3. It diminish allay customers’ worry about the safety of their savings under the proposed Financial Resolution and Deposit Insurance legislation

Is there any future plan?

  1. More structural reforms may well be on the anvil(open for discussion) in the second half of this recap plan, which the RBI had described
  2. Yet, the absence of any reference to consolidation through mergers is glaring
  3. Moreover, the government has repeatedly ruled out privatisation of these banks, the only one where it intended to offload its majority stake

Cut loans to firms, focus on retail: Govt to smaller banks


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: NPA

Mains level: Banking reforms


Redirecting focus

  1. The government has directed small public sector banks (PSBs) to cut their corporate loan exposure to 25 percent of their risk-weighted assets over the medium term
  2. And to focus more on retail lending
  3. This strategy is being followed to shrink the size of relatively weaker banks over the next two years

Why curtailing corporate loans?

  1. Corporate loans have been mainly responsible for the build-up of stressed assets in the banking system
  2. Retail loans such as housing, vehicle and car loans typically exhibit low level of non-performing assets

Bank boards to approve reform plan 

  1. The government has asked the bank boards to approve each bank’s plans to implement the PSB reforms agenda and monitor it quarterly
  2. The government has announced a set of measures to keep close watch on the asset quality of the banks, including “specialized monitoring” by agencies for corporate loans of more than Rs 250 crore
  3. A total of around Rs 1 lakh crore will be infused in the PSBs by March-end

Rs 1,00,000 crore boost: Centre infuses cash, unveils reforms map for public banks


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Recapitalization bonds, Prompt Corrective Action, Annual EASE index survey

Mains level: Restructuring of PSBs


Reforms roadmap for public sector banks

  1. The government has announced details of how Rs 80,000 crore of funds raised through recapitalization bonds will be allocated to 20 PSBs by March-end
  2. A total of around Rs 1 lakh crore will be infused in the PSBs by March-end
  3. Twenty PSBs will be getting the amount from government
  4. These include 11 weak and 9 strong banks

PSBs under RBI’s Prompt Corrective Action 

  1. The eleven weak banks are currently under the RBI’s Prompt Corrective Action (PCA)
  2. PCA kicks in when banks breach regulatory norms on issues such as minimum capital, amount of non-performing assets and return on assets
  3. The central bank enforces these guidelines to ensure that banks do not go bust and follow prompt measures to put their house in order

Keeping a watch on banks asset quality

  1. The government announced a set of measures to keep a close watch on the asset quality of the banks
  2. These include “specialized monitoring” by agencies for corporate loans of more than Rs 250 crore
  3. Banks have been asked to ring-fence cash flows of corporate borrowers, to ensure that their earnings are not diverted for other purposes
  4. The government has also mandated each of the PSBs to have a stressed assets management vertical and monetize their non-core assets such as real estate to boost their capital adequacy

Annual EASE index survey

  1. An independent agency will conduct an Annual EASE (Enhanced Access & Service Excellence) Index Survey of banks
  2. This will be to ensure that banks comply with the reforms parameters
  3. As per the EASE plan, the government wants to ensure that there is a banking facility within 5 km of every village in the country

[op-ed snap] Long live India Post Payments Bank

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the IPPB, payments banks, etc.

Mains level: The newscard briefly discusses the issues related to the IPPB. Payment banks have very important role in providing banking services to the vulnerable, poor, etc.  sections of the society.


How has India Post Payments Bank (IPPB) been doing?

  1. IPPB has a customer base of a few thousands and its deposit kitty is less than Rs1 crore
  2. Important issue: IPPB started operations with a borrowed information technology (IT) platform from Punjab National Bank (PNB)
  3. How will a bank with very different objectives move ahead on the IT platform of a conventional universal bank?
  4. A large number of bankers coming on board from PNB on deputation hasn’t helped the cause either
    (Note: After using the PNB technology platform at the initial stage, IPPB is now looking for its own platform)

What is the primary objective of setting up payments banks ?

  1. RBI in its guidelines says “the objectives of setting up of payments banks will be to further financial inclusion by providing
    (i) small savings accounts and
    (ii) payments/remittance services
  2. to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users”

Some important conditions on the payment banks

  1. IPPB, like all other payment banks (and small finance banks), is required to maintain 15% minimum capital adequacy ratio and also the cash reserve ratio,
  2. Or the mandatory deposits with RBI on which it does not earn any interest (currently, it is 4% of deposits)
  3. A payments bank needs to invest 100% of its demand deposits (it cannot take fixed deposits and recurring deposits) in government securities and deposits of scheduled commercial banks in the ratio of 3:1

How will a payments bank make money?

  1. It cannot make money from deposits as the return typically is less than the cost of deposits
  2. It can make money from payments transactions only if it has a robust, secured and comprehensive technology platform that enables clients and service providers to come together and transact at an extremely competitive cost
  3. Not possible in current situation, for the IPPB

Is Department of Post affecting the working of the IPPB?

  1. IPPB’s dependence on DoP is understood to be continuing even after the bank will be fully operational
  2. For example, the connectivity of the bank for all its operations will be through the existing DoP network
  3. One can only hope that the technology shortcomings of DoP do not get replicated in the bank
  4. If the government aims to achieve deeper banking inclusion, it would be wise to let the board of IPPB and its top management decide on its strategy
  5. Piggy-backing DoP will create an inefficient animal always looking for the indulgent patronage of its parent—far removed from India’s digital banking dream


Financial Inclusion in India: Need and future; PMJDY; Payment Banks and Small Banks

RBI, govt may give banks more time to switch to IndAS


Mains Paper 3: Economy | Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: IndAS, GAAP standards, Banking Regulation Act, Companies Act, International Financial Reporting Standards, IRDA, National Advisory Committee on Accounting Standards

Mains level: Status of banks in India and way forward


New accounting standards for banks likely to be postponed

  1. The government and the Reserve Bank of India (RBI) may postpone the implementation of new accounting standards for banks
  2. This might be due to the legislative changes and additional capital requirements the process would entail

Indian Accounting Standards (IndAS)

  1. Banks and non-banking financial companies are due to switch to Indian Accounting Standards (IndAS) from 1 April 2018
  2. They currently follow Indian generally accepted accounting principles (GAAP) standards
  3. Other corporate entities started complying with IndAS with effect from 1 April 2016

Legislative hurdle

  1. The implementation of IndAS for public sector banks requires an amendment to the Banking Regulation Act
  2. The schedule in BR Act relating to financial statement disclosures needs to be changed to the IndAS format
  3. Due to a delay in amending the BR Act, RBI is yet to issue operational guidelines for the implementation of the new accounting standards

Banking regulation

  1. Section 29 of the BR Act deals with the accounts and balance sheets of public sector banks
  2. Private sector banks are covered by the Companies Act, which is based on the new accounting standards

NPAs might rise

  1. The transition to IndAS is expected to see a significant jump in bad-loan provisions
  2. Under the current rules, banks set aside money to cover loans that have turned bad
  3. Under IndAS, they must make provisions after assessing the expected loss from the time a loan is originated rather than waiting for a trigger event

International standards being followed

  1. These norms are in line with international norms, the International Financial Reporting Standards
  2. These were designed to avoid credit shocks like those seen in the aftermath of the global financial crisis in 2008

RBI may delay implementation like IRDA

  1. The Insurance Regulatory and Development Authority of India (IRDA), which had earlier decided to implement IndAS from 2018-19, has decided to defer it by two years
  2. It is likely that RBI will follow the Irda path and defer the implementation of IndAS starting FY20-21

National Advisory Committee on Accounting Standards (NACAS)

  1. RBI had agreed with the National Advisory Committee on Accounting Standards (NACAS) that banks would switch to IndAS by April 2018
  2. NACAS advises the government on the formulation and laying down of the accounting policy and standards for adoption by firms

[op-ed snap] Money in the bank, or for it?

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Bail-in and Bail-out clause given in the FRDI bill(read attached stories)

Mains level: It is a hot topic of discussion these days, due to the infamous ‘bail-in’ clause. Read this newscard with the attached newscards, for a comprehensive view on the issue.


What are the issues regarding The Financial Resolution and Deposit Insurance Bill 2017 (FRDI Bill)?

  1. Most experts want major clauses changed or dropped
  2. Some even argued for a rethink on the Bill itself
  3. No one talked about the one provision in the FRDI Bill: the infamous ‘bail-in’ clause
  4. It has caused alarm and despondency amongst millions of bank depositors, mostly India’s much-neglected poor, and the middle class
  5. [op-ed snap] Time to go to FRDI Bill’s roots

Why is this ‘bail in’ clause infamous?

  1. This is the clause that empowers the Resolution Corporation to either cancel, alter or modify the liability owed by a service provider
  2. The Corporation will be created to handle cases of bank failure if the Bill becomes law
  3. It will simply put, one’s money in the bank (whether in a savings account or in a fixed deposit) is a liability owed by the ‘service provider’, i.e., the bank
  4. If the bank is going bankrupt, the Resolution Corporation is empowered to either use your deposit money to shore up the bank’s finances and make you suffer the losses, or convert your deposit into bonds or equity

Government’s view on the bill

  1. According to the government, the Bill provides “enhanced protection” for depositors
  2. This includes a clause which says that no depositor will receive less than what he/she would have got if the bank had been liquidated and its assets distributed among creditors
  3. Further, your deposit can be cancelled or converted only if you have agreed to do so in the contract governing such debt

Is the Deposit Insurance and Credit and Guarantee Corporation (DICGC) a solution?

  1. The Deposit Insurance and Credit and Guarantee Corporation (DICGC), an RBI arm, insures deposits only up to Rs. 1 lakh — a sum unchanged since 1993
  2. Less than a third of the deposits with banks (by value) are covered by insurance
  3. The government and the RBI point out that the global average is 20-30% of deposits in the system (which India meets)
  4. But what they don’t tell you is that the quantum of cover is among the lowest in the world
  5. In the U.S., deposits up to $250,000 are covered
  6. Even Brazil offers coverage of over $75,000, while in India, this is a measly $1,500
  7. Furthermore, 85% of deposits are higher than the cover limit of Rs. 1 lakh
  8. So, if banks do fail, an overwhelming majority of depositors will suffer massive losses
  9. Therefore, the amount of insurance cover should be increased substantially, to at least half the average value of deposits

The way forward

  1. Forcing higher insurance premiums on banks will only worsen their already precarious situation
  2. But the alternative — of doing nothing, or letting a loosely worded FRDI Bill with no clear-cut provisions will only make the situation much worse

Bank recapitalization: The mockery of MoUs and statements of intent


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Department of financial services, Statements of intent (SoI), Memorandum of understanding (MoU)

Mains level: Management of Public sector banks


Sets of tools used ensuring “efficiency” in management of PSBs

  1. For ensuring “efficiency” in management of PSBs, two sets of tools were used by the administrative department, the department of financial services (DFS)
  2. These were: the statements of intent (SoI) and memorandum of understanding (MoU)
  3. Both were supposed to play a critical role in monitoring capital infusion in PSBs

Statements of intent (SoI) system

  1. The mechanism of SoI on annual goals to monitor the performance of PSBs was introduced on the directions of the finance ministry in June 2005
  2. A set of performance parameters was defined and targets were set for PSBs against these parameters
  3. There were 44 SoI parameters which were to be monitored by DFS
  4. The SOIs were also used to incentivize top management of PSBs when the SoI targets were achieved
  5. The SoI parameters were used as an instrument for efficient management of PSBs and not for ensuring either capital conservation or capital efficiency
  6. The SoI became a routine annual management tool on paper with little or no relevance to the process of capital infusion

Memorandum of understanding (MoU) system

  1. In February-March 2012, DFS introduced the system of MoU with PSBs
  2. This was to ensure that PSBs lay down a firm plan for long-term business development and performance enhancement, and relate the same to their capital requirement
  3. The MoU, signed by the PSBs and DFS, consists of a set of agreed targets that the PSBs are expected to achieve, which would form the basis for future capital infusion by the government
  4. The aim of the MoU was to achieve optimum utilization of scarce capital funds, with PSBs focusing on improving their efficiency simultaneously with the infusion of capital

Lax implementation

  1. Both these tools were not used the way they were supposed to
  2. DFS as well as PSBs did a lax implementation and made them survive only on paper

[op-ed snap] Three paradigms of banking regulation


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The newscard discusses evolution of banking regulations. And also talks about there importance from India’s point of view.


History of control over Banks

  1. Banks are among the most regulated businesses
  2. Ever since the inception of banking as a business in the medieval period, the state has exercised some form of control
  3. While banks have been regulated since their inception, the approach to regulation has followed an evolutionary path where we can discern different paradigms
  4. The Money paradigm, the Intermediation paradigm, and the emerging Marketplace paradigm(as described by the writer)

The Money paradigm

  1. It views banks essentially as monetary institutions whose primary role is to “create” money
  2. When banks are seen primarily as issuers of money, issuing loans is incidental
  3. The approach to bank regulation focuses on the role they play in the creation and use of money, and on controlling the price of money i.e interest rates
    Transformation from money paradigm to intermediation paradigm
  4. Central banks had became more powerful in the 20th century, with a monopoly in issuance of money which transformed note issuance of banks into deposits
  5. Post World War II, under the Bretton Woods system, the gold standard was abandoned and central banks started issuing “fiat” money, making the money role much less important
  6. The intermediation role became more prominent and progressively became the focus of regulation

The Intermediation paradigm

  1. I this, the role of banks is to use loans with deposits as “raw material”
  2. The Banking Regulation Act of 1949, defines banking as an activity of “accepting for the purpose of lending or investing, deposit of money from public”, thus indicating the primacy of the Intermediation paradigm
  3. The most prominent example of the Intermediation paradigm is the Basel regime that has at its core capital regulation based on risk-weighted assets

Issues with the above two paradigms

  1. These two traditional paradigms of bank regulation sit somewhat uncomfortably with each other
  2. The Money paradigm results in some form of administered interest rates, which will invariably result in mispricing of risk a
  3. And, hence, misallocation of capital by banks due to artificially and somewhat arbitrarily determined cost of funds
  4. The Intermediation paradigm, on the other hand, will mostly result in capital regulation with unregulated deposit pricing, which will invariably dampen monetary transmission
  5. As a result, the banking channel is quite poor in transmitting monetary policy, as we witness in India

The Marketplace paradigm

  1. The banking system can be viewed as a marketplace for funds where banks act as market makers
  2. Regulating market making is primarily about regulating the liquidity provided by the market maker
  3. In the more developed financial systems, there is a clear evolution of the regulatory approach from the Money to the Marketplace paradigm, reflecting the underlying evolution in the role and functioning of banks

The Marketplace paradigm in India

  1. As the financial markets develop in India and bank balance sheets have more tradable securities and loans, this paradigm will become more relevant

The way forward

  1. A comprehensive approach should carefully balance these three paradigms. Banks are a collection of several businesses and activities
  2. For specific businesses or activities, one of the three paradigms may be more relevant
  3. Especially for a developing country like India, the regulating banks(through the above discussed paradigms) is an important component of the management of the overall economy

Govt. injects funds into 6 public banks


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: PCA and CAR

Mains level: Importance of the CAR and steps taken by Government for saving the given banks.


Releasing of equity capital 

  1. The Centre has released the much-required equity capital to six stressed public sector banks (PSBs)
  2. Why: as some of these lenders were on the verge of breaching minimum capital norms on December 31, 2017

Particulars of the step taken by the government

  1. The PSBs are Bank of India (Rs. 2,257 crore), Central Bank of India (Rs. 323 crore), Dena Bank (Rs. 243 crore), IDBI Bank (Rs. 2,729 crore), Bank of Maharashtra (Rs. 650 crore) and UCO Bank (Rs. 1,375 crore)
  2. These lenders would be asked to improve on parameters such as bad loans and recovery to which effect a communication would be sent shortly
  3. All these banks are saddled with huge non-performing assets and are under the prompt corrective action (PCA) framework of the RBI, which means certain operations of these banks have been curtailed by the regulator

What is the minimum regulatory capital requirement?

  1. Banks are mandated to maintain minimum 9% capital adequacy ratio (CAR) plus a capital conservation buffer of 2.5%


Capital adequacy ratio(CAR)

  1. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk
  2. National regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements.
  3. It is a measure of a bank’s capital
  4. It is expressed as a percentage of a bank’s risk weighted credit exposures.
  5. This ratio is used to protect depositors and promote stability and efficiency of financial systems around the world
  6. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors

[op-ed snap] Another tool of resolution

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the Bill

Mains level: The article clears confusion on the ‘Bail in’ clause. Very important. Complement it with our other newscards on the same issue.


Why we need a special law to deal with the demise of a bank?

  1. The reason we need bank resolutions and also a special law to deal with the demise of a bank is simply because banks are special
  2. They have become a repository of public faith in the financial system
  3. So long as consumers have unrestricted access to deposits, their faith in the banking system is maintained

The Financial Resolution and Deposit Insurance Bill

  1. It is an attempt to make the system more credible, less chaotic, and systematic in times when credibility is at risk, by treating banks differently from regular corporations
    (as mentioned above)
    The issue of ‘Bail in’ clause
  2. The Bill brings in a system of risk-based monitoring of financial institutions
  3. At the stage of ‘critical’ risk to viability, when the proposed Resolution Corporation takes the decision to use a particular method of resolution which includes the tool of a ‘bail-in’
  4. It is the Corporation that takes all decisions, and not the bank
  5. A bare reading of the relevant provisions of the Bill shows that the Resolution Corporation can use this tool only in consultation with the regulator
  6. It is an exaggeration to suggest that the Reserve Bank of India (RBI), along with the Resolution Corporation, will ‘bail-in’ depositor’s money to recapitalise the bank
  7. Especially when the Bill is designed to take away power from the failed financial institution at the stage of failure

‘Bail in’ clause: Safeguards in the law

  1. The Bill makes it explicitly clear that only such liabilities may be cancelled where the liability/instrument contains a bail-in provision
  2. It makes it abundantly clear that the Resolution Corporation will specify the liabilities to be bailed in
  3. Creditors/depositors will need to consent in advance to have their liabilities bailed-in
  4. Even when liabilities are being bailed in, the Bill makes it incumbent upon the Resolution Corporation to follow the prescribed route
  5. Lastly, the Bill gives aggrieved persons a right to be compensated by the Resolution Corporation
    (if any of the safeguards have not been followed during a bail-in or in the conduct of any other resolution action)

The way forward

  1. When the rest of the world is finding ways to make its financial system more robust, we seem to be continuing with public discourse using incomplete information
  2. The Bill simply adds another tool of resolution without taking away from the government’s implicit guarantee to depositors

[op-ed snap] The potential of smart contracts in banking

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Mains Paper 3: Science & Technology- developments & their applications & effects in everyday life

From UPSC perspective, the following things are important:

Prelims level: Bankchain, blockchain, bitcoin, Smart contracts

Mains level: Use of Digital technology for easing banking and other services


Technology underpinning bitcoin—blockchain—is gaining mainstream acceptance

  1. Bankchain is a consortium of 27 banks (22 of them are Indian) of which the State Bank of India (SBI) was the first Indian member
  2. It is working to devise blockchain-based solutions for banking and, along with the SBI, planning to launch a beta program to use smart contracts next month

About Blockchain and bitcoin

  1. In late 2008, an unknown person (or group) named Satoshi Nakamoto created a crypto-currency, bitcoin
  2. Its novelty consists in the fact that its operations are authorized without any trusted third-party carrying out administrative or security tasks
  3. This minimizes the transaction fees eventually weighing on users and considerably reducing the time for processing the operations
  4. Centralized networks rely on one or more trusted bodies (for example, banks) to keep a detailed record of transactions and update users’ balance
  5. Bitcoin, on the other hand, decentralizes the administrative activity and lets “miners” process the transactions carried out in the system
  6. The transparency, accessibility and stability of the transactions’ record are ensured by the public broadcasting of the operations throughout the nodes of the network (the computers running the software)
  7. And their subsequent addition to a shared database containing the complete transaction history for any given bitcoin
  8. This shared ledger is called the “blockchain”, i.e the sequence of all the verified “blocks” of transactions, recorded chronologically—timestamped—one after the other

Use of Blockchain in Smart contracts

  1. Just as bitcoin uses the blockchain to maintain a ledger of a crypto-currency, the blockchain can be used to keep track of the ownership of any asset or data that can be digitized and represented by computer code
  2. Once the asset is on blockchain, users can compose smart contracts that contain the terms of the agreement, and automatically execute them once certain predetermined conditions are satisfied
  3. They roughly follow the scheme of an “if-then” function
  4. For example, if the smart contract relates to the acquisition of an intellectual property right licence, Party A creates a smart contract to which the licence X is permanently attached, programming that X is to be released upon certain conditions Y, and launches it into a blockchain
  5. Whenever Party B wishes to obtain the information/licence, they transfer consideration Y to the protocol
  6. Automatically, the smart contract algorithm releases X to party B and delivers Y to Party A, eliminating delays and room for non-compliance
  7. Once the obligation is fulfilled on the one side (Y), the computer protocol autonomously performs the other side of the agreement (X)

Disadvantages of traditional contracts and how smart contracts can help

  1. Traditional contracts are always subject to a degree of uncertainty with respect to their final outcome
  2. Smart contracts leave no room for voluntary breaches of the agreement
  3. By entrusting the network with the performance of the agreed terms, they reduce the likelihood of expensive and time-consuming disputes

Why are banks reluctant to Blockchain?

  1. Smart contracts on a decentralized, “permission-less” blockchain like bitcoin don’t allow any meddling by third parties
  2. This is because in a permission-less system, any computer can join as a node to run the code and amending the leger will require access to all the nodes
  3. Banks are uncomfortable with losing control of the system and they prefer “permissioned” blockchains like Bankchain
  4. Bankchain restricts the access to nodes to other banks, while individual customers can join as users after complying with know your customer (KYC) norms
  5. Pre-selected nodes allow banks to intervene between transactions, providing the ‘emergency entry’ into the system whenever interventions are deemed appropriate

Potential of Smart contracts

  1. Currently each bank carries out its own KYC process.
  2. This can be done by one bank and securely uploaded on the blockchain, thereafter shared with the other banks once the trigger is generated by the customer
  3. Smart contracts can automatically release insurance payments for verifiable claims like delayed flights, motor accidents or death
  4. This would involve bringing authorized third parties like hospitals and garages to join a single platform with insurers and the insured, and bring process efficiencies
  5. Most securities have settlement delays of two days or longer that can be brought down to minutes, which will also reduce working capital requirements for collateral
  6. Other applications include crowdfunding for small businesses, enabling the trading of tokenized equity shares and settlement of syndicated loans between banks

Threats involved

  1. While permissioned blockchains bring many benefits of a decentralized network, they compromise on the promise of immutability by limiting the nodes in the system
  2. The unlimited nodes in bitcoin make it tamperproof while pre-selected nodes in a permissioned blockchain allow authorities to intervene between transactions and expose the points of vulnerability
  3. It is quite unsure that banks can provide the same level of data integrity that is guaranteed by permission-less blockchains like bitcoin

More capital will push PSBs to up MSME credit: Arun Jaitley

Image source


Mains Paper 3 | Indian Economy and issues relating to planning, mobilization of resources, growth

Prelims level: FDI, Bank Recapitalization, MSME

Mains level: The news card highlights the need for increasing private investments in the economy and the steps taken by the government for the same.


Pumping Third Engine to propel growth and create jobs

  1. Amid declining credit to micro and small enterprises, the finance minister said more capital for public sector banks will prompt them to increase credit flow to MSMEs
  2. This will ensure that “third engine” of private investment is fired up to propel growth and create jobs
  3. While there has been a significant increase in public investment and FDI inflows, but the private investment a key growth engine has continued to lag

Why increase Credit flow to MSMEs

  1. This is because the sector creating jobs and giving the boost to the economy has no access to international finance or bond market
  2. Last year’s Demonetisation decision has especially affected the MSMEs

Steps Taken by the Government

  1. Last month, the government had unveiled a mega capital infusion worth Rs 2.11-lakh crore two-year roadmap to strengthen PSBs, which includes recapitalization bonds, budgetary support, and equity dilution
  2. The government has decided to put in more capital through bonds and banks’ equity expansion and therefore, it is the country which is virtually going to pay to keep the banking system in good health
  3. The government also ensured noninterference in commercial transactions
  4. A robust public sector banking system is desired so that ability to support growth itself increases

The Statistics

  1. Latest data from the Reserve Bank of India shows that credit to micro and small industry contracted at 3.4 percent in the financial year so far while for medium sector industry the credit contraction was at the rate of 5.7 percent
  2. Non-performing assets of PSBs have increased to Rs 7.33 lakh croreas of June 2017, from Rs 2.78 lakh crore in March 2015
  3. In the last three-and-a-half years, the government pumped in more than Rs 51,000 crore capital in PSU banks.

Rs 2.11-lakh crore recapitalisation plan: To help fund bank cash infusion, Government looks to tap RBI’s reserves


Mains Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth.

Prelims: RBI, Bank Recapitalization, FOREX.

Mains level: The news card talks about the government’s move to consider partial financing of bank recapitalization through RBI. It also talks about the Economic Survey recommendations regarding the same.



  1. The government is weighing the option of getting the Reserve Bank of India (RBI) to part-finance the capital infusion plan for public sector banks and has initiated discussions with the central bank to deploy a portion of its foreign exchange or other reserves for this purpose.
  2. The discussions are at a “nascent stage” and depending on the response of the RBI, the Finance Ministry will work on creating a mechanism for capital infusion that is in consonance with fiscal responsibility regulations.
  3. The government last month announced plans to inject Rs 2.11 lakh crore of equity in PSU banks — Rs 1.35 lakh crore through recapitalisation bonds, Rs 18,000 crore from budgetary resources and Rs 58,000 crore to be raised by banks from the market.
  4. The government will stick to the timeline of capital infusion announced earlier and a significant portion of the equity can be injected in a couple of months.

Foreign exchange Reserves and Bank Recapitalization

  1. With foreign exchange reserves crossing $400 billion, there is a view within the government that a portion can be used for capitalising banks without adversely affecting the country’s import cover and macro-economic stability.
  2. As of September 22, the RBI’s foreign exchange reserves were $402. 24 billion.
  3. The forex reserves comprised foreign currency assets of $377.751 billion, gold of $20.69 billion, special drawing rights of $1.51 billion and reserve tranche position of $2.29 billion with the International Monetary Fund.
  4. In 2007, the RBI had approved a proposal to invest up to $5 billion out of its forex reserves to fund a wholly-owned UK-based subsidiary of the India Infrastructure Finance Company Ltd (IIFCL).
  5. The IIFCL subsidiary used these funds to lend to Indian companies executing infrastructure projects in India, or to co-finance their external commercial borrowings for such projects for expenditure outside India for infrastructure projects.

Economic Survey Recommendations

  1. Earlier this year, the Economic Survey 2016-17 had suggested that the government use a part of the extra capital available with the RBI to capitalise banks.
  2. Even at current levels, the RBI is already exceptionally highly capitalised. In fact, it is one of the most highly capitalised central banks in the world. So, it would seem to be more productive to redeploy some of this capital in other ways.
  3. It could be used in several good ways:
  • For recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency (PARA);
  • And, for extinguishing debt to demonstrate that the government is serious about a strong public sector fiscal position.

Why there is a need for the creation of SPV ?

  1. The government may need to create a special purpose vehicle to use resources from the RBI.
  2. This is because the FRBM (Fiscal Responsibility and Budget Management) Act does not allow the government to borrow from the RBI.
  3. But routing resources through the SPV should be in conformity with the law.

The Government’s Approach

  1. The government plans to adopt a differential and selective approach for capital infusion in the public sector banks.
  2. While strong banks will get greater capital, weak banks may have to either shrink in size or not grow from the current position.
  3. Of the total 22 PSU banks, as many as eight PSU banks currently have gross non-performing assets (GNPAs) above 15 per cent and 14 banks have GNPA of more than 12 per cent.
  4. The government had earlier hoped to reap significant windfall gains from the decision to withdraw Rs 500 and Rs 1,000 n
  5. The amount of currency that was not be deposited with the banks could have been a gain to the Centre after extinguishing the RBI’s liability which could have been used to capitalise PSU banks.
  6. But with over 99 per cent of the demonetised currency coming into the banks, the government took the recapitalisation bonds route to fund the banks.

[op-ed snap] Capital infusion: Prepping strong banks to acquire the weak


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

The following things are important from UPSC perspective:

Prelims Level: Not Much

Mains level: Complement this article with our previous newscards on the recapitalisation of the banks. It will give you a comprehensive view. Very important for the Mains paper.



  1. The article talks about the plan of recapitalization and how it will get implemented

The government’s plan of recapitalization

  1. The mega recapitalisation of state-owned banks will begin with the Centre infusing greater capital in larger and stronger lenders
  2. And thus preparing them to take over smaller and weaker banks
  3. According to Finance Ministry officials, stronger PSBs helped by capital support, will be better equipped to consolidate weaker banks
  4. Contrary to expectations of consolidation taking a backseat post the announcement of capital infusion
  5. The government will strengthen the larger banks while at the same time priming them for taking over weaker ones

What will be the approach for recapitalisation of banks?

  1. Government officials have indicated the Centre’s plan to adopt a differential and selective approach for infusion
  2. While strong banks will get greater capital, weak banks may have to either shrink in size or not grow from the current position
  3. Banks that are well capitalised will be able to better absorb the weak banks through consolidation

Recent steps taken by the government for expediting consolidation of banks

  1. In order to expedite consolidation, the Cabinet had approved a framework for consolidation among PSBs, including a proposal to set up an Alternative Mechanism
  2. As per the consolidation framework, merger decisions should originate from the banks and these should be based on commercial decisions
  3. The proposals received from banks for in-principle approval to formulate schemes of amalgamation shall be placed before the Alternative Mechanism
  4. And after in-principle approval, the banks will take steps in accordance with the SEBI requirements

The way forward

  1. Resolution of bad loans, recapitalisation of banks and consolidation have to work alongside other reforms for creating a banking system
  2. Bad loan resolution helps the government in realistically estimating the capital requirements of the banks. It will help in cleaning up of the balance sheets
  3. Cleaning up of the balance sheets and injection of capital will mean that banks have the wherewithal to absorb any transitory shocks that may arise from merger of the weak banks

[op-ed snap] India needs a new banking policy framework

Image source


Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: 1991 reforms, Narasimham committee, Raghuram Rajan committee, international capital adequacy standards, fiscal deficit

Mains level: Present status of banking in India and need for banking reforms


Bold move by government

  1. The government has decided to spend big money to clean up the banks it owns
  2. This is despite the obvious risks of moral hazard that bank bailouts across the world have inevitably faced

What happened in the recent past

Three important policy documents laid the groundwork for banking reforms since the 1991 reforms

  1. The report of the first Narasimham committee set up in 1991
  2. The report of the second Narasimham committee set up in 1998
  3. The report of the Raghuram Rajan committee that was released in 2009

Changes that have happened over the years

  1. Indian banks now have to meet international capital adequacy standards
  2. A smaller portion of their deposits has to be handed over to fund the fiscal deficit
  3. Interest rates are determined by the market
  4. Branch expansion policies are more liberal
  5. New private sector banks offer competition to the public sectors banks

Banking policy issues that the government needs to deal with

  1. The need for public sector bank autonomy
  • India needs to now shift the needle from autonomy towards privatization
  • Banking is the only important sector of the economy in which the private sector is dwarfed by the public sector
  • The share of public sector companies has fallen sharply in most sectors such as airlines

2. India should move towards a three-tier banking structure

  • The first Narasimham committee had said that India should move towards a three-tier banking structure
  • Four large lenders were to be developed as global banks, 10 banks were to become nationwide universal banks and local banks would concentrate on specific regions
  • The ongoing debates about bank consolidation and differentiated licensing require a framework rather than the current ad hoc statements

3. The weakest banks cannot be shut down at once

  • This move could cause a disruption
  • There is a strong case to convert at least some of them into narrow banks that use all their deposit money to buy government bonds
  • They could in effect become large payments banks rather than the more traditional financial intermediaries

4. India needs to move towards a new financial structure

  • In this system, large companies get mostly funded by the bond markets while smaller firms depend more heavily on banks for their finance
  • The problem is that the corporate bond market is still illiquid, with most bonds held to maturity by a narrow set of investors

Lessons of the global financing crisis

  1. No country has figured out how to maintain financial stability
  2. Credit booms have inevitably left bad loans in their wake
  3. Bank-led financial systems such as Japan have been in trouble
  4. So have financial systems such as the US where the bond markets are more important

What do unstable financial systems lead to?

  1. Unstable financial systems hurt economic growth and job creation in the long run
  2. The fiscal costs of bailouts can also be staggering

What should be the next step?

  1. The next step should be a clear roadmap for future financial policy before India stumbles into its next banking mess
  2. The Indian political leadership needs to get a sense of what financial structure it desires—and then get experts to advise it on how to achieve it that goal

[op- ed snap] A bold step in bank reform

Image Source


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Recapitalisation of banks is hot topic of discussion these day. It is one of the most important steps taken by the government to counter credit problem in banks. Complement this newscard with our other newscards on the same topic.



  1. The article is about the recently announced plan of the government to recapitalise Public Sector Banks

Government’s plan to counter low growth rate

  1. With India’s economic growth falling in the last couple of years, the government has been casting about for ways to strengthen the economy
  2. The government have realised that a simpler, more effective remedy is at hand: recapitalising public sector banks (PSBs) and enhancing the flow of credit
  3. The proposal to recapitalise PSBs to the extent of Rs. 2.11 trillion (Rs. 2.11 lakh crore) is a much needed step
  4. It is, perhaps, the most effective way to provide a much-needed fiscal stimulus to the economy and revive growth

How Bank capital affects loan growth?

  1. When loans go bad and turn into non-performing assets (NPAs), banks have to make provisions for potential losses
  2. This tends to erode bank capital and put the brakes on loan growth
  3. That is precisely the situation PSBs have been facing since 2012-13

Level of stressed advances in the PSBs

  1. Stressed advances’ (which represent non-performing loans as well as restructured loans) have risen from a little over 10% in 2012-13 to 15% in 2016-17
  2. This has caused capital adequacy at PSBs to fall
  3. Average capital at PSBs has fallen from over 13% in 2011-12 to 12.2% in 2016-17
  4. The minimum capital required is 10.5%
  5. Inadequate capital at PSBs has taken its toll on the flow of credit
  6. Growth in credit has fallen below double digits over the last three years

Is poor demand behind this low credit growth?

  1. According to some experts, the deceleration in credit growth to poor demand
  2. They say that corporates have excessive debt and are in no position to finance any investment
  3. This may be true of large corporates
  4. However, it is not true of enterprises in general
  5. One study, which covered over 4,000 companies, showed that the debt to equity ratio fell below 0.8 (which is a low level of debt) in 2008-09 and remained low until 2012-13
  6. Moreover, demand for investment finance may have decelerated but demand for working capital remains strong
  7. If anything, the introduction of GST has increased small business demand for working capital
  8. Low growth in credit is confined to PSBs

Earlier stand of the government on the issue of stressed assets

  1. In 2014, market estimates had placed the requirement of government capital at a minimum of Rs. 2 lakh crore over a four-year period
  2. In 2015, under the Indradhanush Plan, the government chose to commit a mere Rs. 70,000 crore over the period.
  3. The dominant view in government at the time seemed to be that PSBs had messed up in a big way, so putting more capital into them was simply ‘money down the drain’
  4. Their role needed to be shrunk through consolidation or by selling strategic stakes to private investors
  5. This is a mistaken view
  6. The bad loan problem at PSBs is not entirely the result of mismanagement
  7. There have certainly been cases of malfeasance and poor appraisal of credit
  8. However, as the Economic Survey of 2016-17 made clear, these are not responsible for the bulk of the NPA problem
  9. The problem is overwhelmingly the result of factors extraneous to management

Fiscal impact of the recapitalisation package

  1. Analysts worry about the fiscal impact of the recapitalisation package
  2. International norms allow borrowings for bank recapitalisation not to be counted towards the fiscal deficit
  3. The proposed recapitalisation bonds are likely to add to the fiscal deficit’
  4. The government should not worry unduly about missing the fiscal deficit target of 3.2% of GDP
  5. The markets will understand that the fiscal stimulus is well spent

Other bank crisis around the world

  1. The International Monetary Fund has documented 140 episodes of banking crises in 115 economies in the world in the period 1970-2011
  2. The median cost of bank recapitalisation in these crises was 6.8% of GDP
  3. India’s cost of recapitalisation over a 20-year period is less than 1% of the average GDP during this period

Bank funding will be liquidity-neutral


Mains Paper 3: Indian Economy

The following things are important from UPSC perspective:

Prelims: Recapitalisation

Mains: This article gives points regarding why recapitalization is desirable and how it will bring market discipline in public recapitalization programme.



  1. The Centre’s move to infuse Rs. 2.11 lakh crore capital into public sector banks through recapitalisation bonds and budgetary support is a welcome step, according to Governor, Reserve Bank of India.
  2. He also said that the recapitalisation bonds will be liquidity-neutral for the government except for interest payment.
  3. The banks will be recapitalised over a period of two years through recapitalisation bonds and budgetary provision.
  4. According to him a well-capitalised banking system was a pre-requisite for stable economic growth and this package to restore the health of the banking system was a monumental step forward in safeguarding the country’s economic future.

Why recapitalsisation is desirable?

  1. By deploying recapitalisation bonds, it will front-load capital injections while staggering the attendant fiscal implications over a period of time.
  2. The move will involve participation of private shareholders of public sector banks by requiring that parts of the capital needs be met by market funding.
  3. The healthier banks could get the capital first which will prompt others to also address the balance sheet issues.


  1. It will allow for a calibrated approach whereby banks that have better addressed their balance sheet issues and are in a position to use fresh capital injection for immediate credit creation can be given priority while others shape up to be in a similar position.
  2. This provides for a good way of bringing some market discipline into a public recapitalisation programme compared to the past recapitalisation programmes.
  3. It is for the first time in the last decade that there was a real chance that all the policy pieces of the jigsaw puzzle will be in place for a comprehensive and coherent, rather than piece-meal, strategy to address the banking sector challenges.
  4. It bodes us well that this step has been taken in a time of sound macroeconomic conditions for the economy on other fronts.

[op-ed snap] Reforms needed to back bank recapitalisation

Image Source


Mains Paper 3: Economy | Indian Economy Issues relating to planning

The following things are important from UPSC perspective:

Prelims Level: Not Much

Mains Level: This plan of government is very necessary for countering the rising NPA problems in the Indian Banking Sector. Complement this article with one of our previous newscard on the same topic, Click here



  1. The article talks about the recent announcement of a plan of government that will infuse Rs 2.11 lakh crore into Banks

Bold step by the government

  1. The government has done well to commit itself to a bold programme to provide additional capital to public sector banks
  2. The Rs2.11 trillion recapitalisation plan—Rs0.76 trillion of equity from the government and financial markets and another Rs1.35 trillion through recapitalisation bonds, should be adequate for the next two years

Estimation by the CRISIL

  1. It has estimated that public sector banks will need about Rs1.4-1.7 trillion of additional capital by March 2019 to meet the international Basel III requirements

Three important issues that need to be dealt with

  1. The challenge will be to ensure that the improper lending to influential industrial groups that took place on both sides of the global financial crisis is not repeated
  2. Giving banks extra capital was only one of the seven grand themes of the Indradhanush programme announced in 2015
  3. The reform of the Indian banking sector—and especially the privatization of banks—should be the next step


  1. Banks will not take adequate precautions when they are lending when they know that the government will step in to help if the loans turn sour
  2. The government should be selective about which banks get the additional capital on offer
  3. A statement by RBI governor suggests that the banks which have worked harder to deal with their problem loans will get priority in access to fresh capital
  4. Such market discipline is needed


  1. The government needs to decide what proportion of the fresh capital will go for provisions against existing bad loans and how much is to be allocated for new loans
  2. That may not seem a crying matter right now, given the weak demand for loans
  3. But it is possible that companies will seek to borrow after a few quarters if the investment cycle does indeed turn in fiscal year 2019

Nature of the recapitalisation bonds

  1. The exact nature of recapitalisation bonds is not yet clear
  2. But it is possible that the government will keep them out of the budget to avoid expansion in the fiscal deficit
  3. Even if recapitalisation bonds are kept out of the budget, they will still add to the government’s debt stock and increase the interest liability
  4. According to estimates, interest payments could go up by about Rs9,000 crore
  5. It is also possible that international investors and rating agencies will look at deficit numbers after taking these bonds into account
  6. Although resorting to recapitalisation bonds is not a desired outcome, it is perhaps the best that the government could have done in the given circumstances
  7. It is important to note that India is predominantly a bank-financed economy and would find it difficult to grow at a higher rate without the necessary support from the banking system

The way forward

  1. The government should back bank recapitalisation with reforms in the financial sector—and in public sector banks in particular
  2. The fact that recapitalisation bonds can be used for capital infusion should not become an alternative for better governance

Government unveils Rs 2.11 lakh crore plan to strengthen PSU banks


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

The following things are important from UPSC perspective:

Prelims Level: Not Much

Mains Level: NPA issue is very crucial for Indian Economy. It is one of the biggest step taken by the government to solve this problem.


Roadmap for strengthening Banking Sector

  1. The government has announced a Rs 2.11 lakh crore two-year road map for strengthening NPA-hit public sector banks
  2. It includes re-capitalisation bonds, budgetary support, and equity dilution
  3. The capital infusion will be accompanied by reforms to enable the state-owned banks to play major role in the financial system and give a strong push to the job-creating MSME sector

Particulars of the programme

  1. The programme entails mobilisation of capital to the tune of about Rs 2,11,000 crore over the next two years, with maximum allocation in the current year
  2. These allocations will be through budgetary provisions of Rs 18,139 crore, and recapitalisation bonds to the tune of Rs 1.35 lakh crore

How will the balance be raised?

  1. The balance will be raised by banks from the market by diluting government equity
  2. The government’s equity dilution will help banks to raise about Rs 58,000 crore
  3. The government equity, as per the current policy, can come down to 52 per cent in state-owned banks

Rising level of NPA

  1. NPAs of banks have increased from Rs 2.78 lakh crore in March 2015 to a staggering Rs 7.33 lakh crore as on June 2017

Plan for MSMEs

  1. MSMEs will be handheld by extending support through compulsory TReDS (Trade Receivables electronic Discount System) registration by major PSUs within next 90 days, for shortening the cash cycle
  2. TReDS is an institutional setup for flow of finance to micro, small and medium enterprises (MSMEs) through multiple financiers at a competitive rate

Govt permits banks to sell more small savings schemes


Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: National Savings Certificate (NSC), Public Provident Fund, Kisan Vikas Patra-2014, Sukanya Samriddhi Account, Senior Citizen Savings Scheme-2004

Mains level: Impact of increased money with banks due to investment in savings schemes on economy


Banks can now sell most of the small savings schemes

  1. In order to encourage savings, the government has allowed banks, including top three private sector lenders, to accept deposits under various small savings schemes like National Savings Certificate (NSC), recurring deposits and monthly income plan
  2. Until now, most of the small savings schemes were sold through post offices

Schemes now accessible through banks

  1. According to a recent government notification, banks can also sell National Savings Time Deposit Scheme 1981, National Savings (Monthly Income Account) Scheme 1987, National Savings Recurring Deposit Scheme 1981 and NSC VIII issue
  2. So far, these banks were allowed to receive subscription under Public Provident Fund, Kisan Vikas Patra-2014, Sukanya Samriddhi Account, Senior Citizen Savings Scheme-2004

Interest rates decided on quarterly basis

  1. On the basis of the decision of the government, interest rates for small savings schemes are to be notified on a quarterly basis since April 1, 2016
  2. These schemes have a higher interest rate than that offered by banks on normal savings account
  3. Increased outlets for selling small savings scheme would result in higher mobilization under the scheme

Money-go-round is neat way to fix Indian banks



Mains Paper 3: Government Budgeting, Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.


From UPSC perspective, the following things are important:

Prelims level: Basel norms, Recapitalisation bonds

Mains level: Recapitalisation of banks



  1. The article bats for recapitalisation of public sector with a financial instrument called as the recapitalisation bonds.


What are recapitalisation bonds?

Here the government borrows from the banks by issuing them bonds, and then uses the proceeds to bail the lenders out.
Need for recapitalisation bonds-

  1. According to Fitch Ratings, local banks need as much as $65 billion by 2019 to meet Basel III standards. With valuations below book value for most state banks, the government could raise barely $6 billion by reducing its stake in around 20 lenders.
  2. Also, government does not have much cash to deploy in direct injections, since it is already stretched to meet a 2% fiscal-deficit target.


Benefits of recapitalisation bonds-

  1. This looks attractive because banks are flush with deposits, giving them firepower to lend, but credit demand is weak.
  2. Over time, government can potentially settle the debt by selling the bank equity it acquires using the bond proceeds.
  3. According to Credit Suisse, under some accounting standards this fix would not add to the fiscal deficit — though it would do under India’s current norms. Perhaps those might be changed.



  1. History and Working of recapitalisation bonds: In the early nineties, nationalised banks in India saw a severe erosion in their profitability and capital base. This prompted the government to issue recapitalisation bonds. It simply borrowed from the banks themselves to meet their capital requirements! To do this, it issued several tranches of special non-marketable securities to the nationalised banks. The banks subscribed to these bonds in the normal course of their business. The cash thus raised was used by the government to infuse fresh ‘equity’ into the beleaguered banks. Initially issued for a specified period, these bonds were later converted into marketable securities or into perpetual bonds, by mutual agreement between the banks and the Centre. While the government was merely postponing its obligations through these bonds, this move did not result in undue fiscal burden over the long term, as the Centre earned both dividends and market returns on bank shares.
  2. Basel norms: Baselguidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel


First, Fix the Banks


Mains Paper 3: Government Budgeting, Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.


From UPSC perspective, the following things are important:

Prelims level: Tier 1 Capital in banks, Fiscal stimulus

Mains level:Steps to revive economy, Recapitalisation of banks





  1. The article bats for selective recapitalisation of public sector banks in order to ease financing and revive the economy.



  1. The economy has seen growth spiralling downwards for the last six quarters consecutively.
  2. And as some experts suggest, due to poor design and implementation of GST the growth might further fall in the next two quarters.
  3. Some have suggested initiating a fiscal stimulus in order to revive demand and consequently the economy. However, fiscal stimulus will not address the root cause of the problem i.e. shrinking credit disbursement by the banks.

Main reason for deceleration of growth is
The massive tightening of credit disbursement by the banks.


Why have the banks reduced credit disbursement?

  1. The Indian Public Sector Banks comprising 21 “nationalised banks” and six of the State Bank of India group, account for almost 70 per cent of the assets and liabilities of the system.
  2. Post global financial crisis of 2008, government initiated fiscal stimulus and at that time banks were also keen to lend (sometimes with inadequate evaluation). This is the time when big projects were undertaken in the power, ports and housing sectors. However, the coal and spectrum scandals withthe policy paralysis experienced at the top leadership led to squeeze in debt disbursement by the banks. From a growth of around 15 per cent four years ago, Public Sector Banks (PSB) advances grew by just 3 per cent in 2015-16.
  3. As of December 2016, gross NPAs for the 27 PSBs were Rs 6,47,800 crore, or 88 per cent of the total NPAs recorded across all banks.
  4. Today for the PSBs as a whole, gross NPAs are greater than their tier-1 capital (the one that really counts).
  5. Another major reason for downfall in credit disbursement is the provisioning for bad loans done on account of the Asset Quality Review by the Reserve Bank of India.



  1. The RBI has done the right things: Tightened income recognition and provisioning and forced banks to book losses on their balance sheet.
  2. The banks have also done the right things of going after major defaulters and initiating better bankruptcy resolution.

What should the government do?

  1. It should initiate selective recapitalisation of better banks so that these banks can get back to lending.
  2. In order to avoid the ‘’moral hazard’’ government can recover this cost by raising capital directly from the market by divesting some shares from these banks. This will strengthen the stressed balance sheets of the banks and give them a breathing space to re-start credit disbursement.



  1. NPA: Read in detail here.
  2. Tier 1 Capital: This includes common shares, preferential shares and all the assets which are highly liquid and can be used to ward off any sudden crisis.
  3. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment, increase money supply in the market and increase demand in the economy.
  4. Moral hazard: The government believes that if it recapitalises the banks then it might cause a moral hazard. Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.
  5. Asset Quality Review: The RBI periodically conducts review of the asset qualities of banks. However, in 2015-16 it clubbed the procedure for two quarters and reviewed them collectively. This review is conducted to make sure banks are provisioning sufficient amount for bad loans.

Extra capital into PSBs: Recapitalisation bonds being considered


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached story.

Mains level: Important step to counter issues of loss making PSBs. It will definitely help solve the problems related to the NPAs.


Recapitalisation bonds

  1. The government is discussing infusion of an additional capital in public sector banks (PSBs)
  2. How and why: By issuing recapitalisation bonds, to provide capital(to PSBs) without disturbing the fiscal deficit figures
  3. Government’s plan: Discussions are underway to raise capital support by another Rs 20,000-25,000 crore for the PSBs
  4. This addition will be in addition of the Rs 10,000 crore provided in the current financial year’s Budget for PSBs’ capitalisation
  5. The extra capital is expected to be generated through sale of non-core assets of the banks and equity infusion by the government via the recapitalisation bonds
  6. With enough liquidity in the banking system post-demonetisation, lenders are expected to buy these bonds
  7. And the money so raised can be used to provide capital to government banks

Particulars of the proposed bonds

  1. The annual interest on these bonds and the principal on redemption will be paid by the Central government
  2. And the funds so raised are to be used to capitalise the PSBs

Banks’ cuppa to brew with mergers

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The step shows keenness of Government. The government wants to expedite the merger process.


Issues with Bank Merger

  1. Various governments has highlighted the need for large-sized banks to fund the huge infrastructure requirements of the country as well as compete with global lenders
  2. But a serious question arises: ‘Which chief executive will propose to merge his bank with another and lose his job?’

Seriousness of the current government

  1. Present government has no intention to make it ‘voluntary’ for the board of a bank to decide on a merger
  2. It is evident from the fact that government has wrote letters to banks to kick start the process of mergers and get their respective boards’ approval
  3. This may be the first time in recent history that an official communication has been made by the government to the banks asking them to act on mergers

Alternative Mechanism

  1. The government has also set up an ‘Alternative Mechanism’
  2. It would comprise a ministerial group, to oversee proposals for mergers among banks
  3. A framework had been conceived in which a bank’s board would first clear the decision to merge
  4. And then send the proposal to the ‘Alternative Mechanism’ for its in-principle approval
  5. After the in-principle approval comes through, the bank will take steps in accordance with law and SEBI’s requirements
  6. The final scheme will be notified by the government in consultation with the Reserve Bank of India (RBI)

No need of CCI permission, now

  1. Some hurdles have been removed to expedite the process
  2. For example, approval requirement from the Competition Commission of India(CCI) has been done away with

Post Merger Issues

  1. The merger would create a lot of complexities in terms of branch rationalisation and reduction in human resources productivity for the merged entity
  2. At present, we’ve an example of the merger of SBI with associate banks
  3. Bhartiya Mahila Bank; post merger, the merged entity fundamentals have weakened significantly
  4. Also, after its merger, SBI has seen NPAs rising significantly, from Rs. 1.01 lakh crore (6.94%) to Rs. 1.88 lakh crore (9.97%)

Centre tells PSBs to begin merger process ‘immediately’

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The step shows keenness of Government. The government wants to expedite the merger process.


Directions from the Central Government

  1. The Centre has send an official letter to public sector banks asking them to start the merger process immediately
  2. The government had also started preparing the ground to remove certain hurdles for consolidation, such as doing away with the approval from Competition Commission
  3. This is the first time in recent history that an official communication had come from the government to the banks asking them to start the merger process

Objective of the Government

  1. While giving the direction , the government cited the Narasimham committee report
  2. And highlighted the need for large-sized bank that could fund the huge infrastructure need of the country

Framework for the Merger Process

  1. The Centre has provided a broad framework to the banks to take the merger exercise forward
  2. According to the framework, once the board approves the merger plan, it has to be sent to the ‘alternative mechanism’(approved by the Union Cabinet, recently)

[op-ed snap] No silver bullet

Image result for Bank merger

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Mains Paper 3: Economy | Mobilization of resources

Once you are done reading this op-ed, you will be able to attempt the below.

“Mergers of state-owned banks are not the whole solution. Balance-sheets must be strengthened, governance improved.” Critically examine

From UPSC perspective, the following things are important:

Prelims level:  Not much

Mains level: Bank consolidation -Challenges



  • Government has announced that a ministerial panel headed by the finance minister will oversee mergers among state-owned banks


  • To create strong banks and that the merger proposals will have to come from the boards of these banks and decisions will be taken purely on commercial grounds

Why such a move?

  1. Bad loans as a ratio of total loans are already close to 10 per cent and the ratio could worsen given the current economic conditions
  2. To address twin balance-sheet problem
  3. The so-called Alternative Mechanism to oversee mergers of PSU banks could be seen as an attempt to skirt the challenge of infusing capital for banks which the government controls or divesting some of these weak banks.
  4. The RBI’s latest Financial Stability Report shows that the gross bad loan ratio of PSU banks could be as high as 14.2 per cent by March 2018 if there is no economic rebound.

Bank consolidation-Challenges?

  1. The global experience shown that they are bound to fail if they don’t meet the test of efficiency, synergy and cultural fit.
  2. Results show a deterioration in earnings of State Bank of India, after the merger of its associate banks with the parent.
  3. It is still not sure whether this planned consolidation will lead to rationalisation, both at the branch level and in terms of staff, and a more efficient banking system.
  4. Pursuing the mergers of these banks without strengthening their balance-sheets and raising governance standards poses the risk of compounding the problems being faced by these lenders.

New mechanism to spur PSB mergers

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: It is a step taken by government to counter rising NPA problems in banks. This step also have some other objectives.


Step for quicker consolidation among public sector banks

  1. The Cabinet has approved ‘in-principle’ the constitution of an alternative mechanism that will oversee the proposals for mergers among banks
  2. According to the government, the decision to create strong and competitive banks will be solely based on commercial considerations
  3. And such decisions must start from the boards of the banks

Why this step?

  1. Because most of the banks are facing with huge levels of NPAs, slow credit offtake and resultant pressures on capital adequacy
  2. Stronger public sector banks will help meet the credit needs of a growing economy, absorb shocks and give them the capacity to raise resources 

Amended Banking Regulation Bill gets elders’ nod

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the Bill

Mains level: Banks are facing huge NPA problem in India. This will help Banks to counter issues related to NPA.


Nod from Rajya Sabha

  1. The Rajya Sabha has passed the Banking Regulation (Amendment) Bill
  2. This Bill empowers the RBI to issue instructions to the banks to act against major defaulters
  3. It  will replace the Banking Regulation (Amendment) Ordinance, 2017

Why this Amendment?

  1. According to the Finance Minster, the capacity of banks to lend money to small creditors is being impacted, the growth is impacted

ATM expansion slows due to note ban

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Different types of ATMs

Mains level: Article gives shows bad effects of demonetisation on banking industry, as ATMs are important for financial inclusion.


Expansion of ATMs

  1. Cash crunch following demonetisation, have led to commercial banks cutting down on the number of automated teller machines (ATMs) 
  2. According to Reserve Bank of India (RBI), there were 98,092 off-site ATMs in June 2017 against 99,989 in the same month last year
  3. However, on-site (located within a branch) ATMs rose to 110,385 from 101,346 in the same period
  4. According to bankers, demonetisation was one of the factors that impacted ATM expansion

What is NHB Residex?

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It is a prelims specific article.

From the UPSC perspective, the following things are important:

Prelims Level: Particulars of the NHB and NHB Residex.


NHB Residex from the National Housing Bank

  1. It is a set of benchmarks that aims to track housing price indicators across Indian cities
  2. It is designed by a technical advisory committee comprising Government representatives, lenders and property market player

Two sets of indices

  1. The NHB Residex currently offers two sets of quarterly Housing Price Indices (HPIs) across the cities it tracks


National Housing Bank (NHB)

  1. It is a wholly owned subsidiary of Reserve Bank of India (RBI), was set up on 9 July 1988 under the National Housing Bank Act, 1987
  2. NHB is an apex financial institution for housing
  3. NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.
  4. NHB registers, regulates and supervises Housing Finance Company (HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-ordinates with other Regulators.

Centre for more PSB mergers

  • Fresh from the successful merger of five associates with the State Bank of India, the government is looking to
    consolidate more public banks going forward, with an aim to create only a few lenders of global size and scale.
  • The Finance Ministry will soon undertake a broad study on further consolidation and look at various options for merger among the remaining 21 public sector banks.
  • There are factors like regional balance, geographical reach, financial burden and smooth human resource
    transition that have to be looked into while taking a merger decision.
  • The merger process will get a boost with the likely improvement in the NPA (non-performing asset)
    situation over the next two quarters.
  • The merger proposals in the banking sector would require clearance from the Competition Commission of

Finmin revises criteria for recapitalisation of PSU banks

  1. Change: PSU banks looking forward to the next round of capital infusion will need to fulfil a new set of criteria, including credit recovery
  2. Conditions: The second tranche of capital allocation for the current fiscal would be based on cost of operations as well as recovery and quality of credit on the basis of risk weighted assets
  3. Background: Govt in July had announced the first round of capital infusion of Rs.22,915 crore for 13 banks
  4. The first tranche was announced with the objective to enhance their lending operations and enable them to raise more money from the market

India not ready to privatise public sector banks: Arun Jaitley

  1. Finance Minister: India has not reached the point where it can consider selling majority stakes in the public sector banks that control seven tenths of assets in the financial system
  2. Also, public or political opinion has not converged to the point where we can think of privatisation in the banking sector
  3. Govt is consolidating some of the public sector banks to strengthen them, but does not plan to reduce the state’s share below a threshold of 52%

Banks should identify key areas for certification of staff: RBI committee

  1. News: A Reserve Bank of India (RBI) committee has recommended that banks should identify specialised areas for certification of staff manning key responsibilities
  2. To begin with, banks should make acquiring of a certificate course mandatory for areas like treasury operations, risk management, accounting, audit function and credit management
  3. Background: RBI had constituted a Committee on Capacity Building in July 2014, under the chairmanship of former executive director, G Gopalakrishna
  4. Objective: Implementing non-legislative recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), relating to capacity building at banks and non-banks, streamlining training intervention
  5. Also, suggesting changes thereto in view of ever increasing challenges in the banking and non-banking sector

Centre injects money into public sector banks

  1. News: In a bid to boost credit growth in the economy, the Centre announced a sum of Rs 22,915 crore for recapitalisation of 13 public sector banks
  2. Union Budget: Proposed allocation of Rs 25,000 crore infusion in FY 2017, in line with the Indradhanush
  3. The remaining amount will be released later according to performance which would depend on efficiency improvements, growth in both credit and deposits, and reduction in the cost of operations
  4. The banks’ lending capacities are restricted by poor asset quality and weak capitalisation
  5. The infusions required in the current year were calculated from the Compound Annual Growth Rate (CAGR) of credit growth for the last 5 years and the banks’ projections of credit growth

State-owned banks widen reach quicker than private lenders

  1. Context: Recent data released by the Reserve Bank of India comparing private and public sector banks
  2. Public sector banks have increased their presence across the country in terms of ATMs and points of sale devices, far faster than private sector banks have
  3. ATMs & POS: There were 142,500 PSB ATMs as of March 2016, which amounts to 72% of the total number of ATMs in the country
  4. The issuance of credit cards and the share in credit card transactions are two areas where the private sector outshines the public sector
  5. There are 27 public sector banks and 19 private sector banks in operation currently

RBI to ease registration process for NBFCs

  1. Context: RBI to simplify the registration process for NBFCs
  2. The new application forms will be simpler and the number of documents required to be submitted will be reduced
  3. The entire process could be made online for ease, speed and transparency
  4. NBFC sector cannot be on a par with the banking sector and the step is meant to ‘harmonise, not equalise’
  5. Why? Totally exempting small NBFCs from regulations may not be feasible from the customer service point of view

What is Strategic Debt Restructuring (SDR)?

  1. What? It is about the terms that banks can write into the loan agreements, which will kick in at the time of default
  2. Aim: improving the working of banks faced with defaulters
  3. Restructuring: Transferring equity of the company by promoters to the lenders to compensate for their sacrifices
  4. Issues: Lack of clarity about its legal foundations
    SDR scheme adds one more layer of complexity into a complex system

RBI eases ECB norms for infra space

  1. Context: RBI allowed all companies engaged in the infrastructure sector to raise ECBs with a minimum maturity of five years
  2. NBFC: These also include the non-banking finance companies (NBFC) regulated by RBI
  3. Condition: The borrowings have to be fully hedged
  4. Limit: The individual limit of borrowing under the automatic route is $750 million
  5. NBFCs engaged in the infrastructure space were earlier allowed to raise ECB funding, but there were certain limitations

Govt, RBI move in step on banking sector

  1. Context: Govt & RBI are working together on long-overdue purging of stressed assets
  2. Both are chipping in to ensure that a capital cushion is available to banks as they go through clean-up
  3. Neither of them are sympathetic towards defaulting entities or banks that are hurting because of clean-up
  4. Political interferences in the loan approval process, an alleged reason for bad loan mess, have stopped
  5. The intensive asset quality review conducted by RBI was also aimed at clean up of balance sheets

Six or more anchor banks likely to lead consolidation

  1. Context: Recently, Gyan Sangam’ bankers’ retreat held at Gurgaon, discussed the idea of bank consolidation
  2. News: Govt. will identify 6 to 10 PSBs which will drive the consolidation process among the state-owned banks
  3. The govt will set up an expert panel for the consolidation process
  4. Reason: The health of PSU banks deteriorated sharply after RBI conducted an Asset Quality Review
  5. Parameter: Merger between the banks will be based on geographical and technological synergies, human resources and business profile



Learn about Bank Board Bureau

  1. Background: PJ Nayak committee was formed to review the governance of Board of Banks in India
  2. The committee recommended bureau as an interim step till the govt. hands over key governance roles to Bank Investment Company
  3. Composition: The bureau will have 3 ex-officio members and 3 expert members, in addition to the Chairman

Learn about Banks Board Bureau (BBB)

  1. Context: BBB will be a super authority of eminent professionals and officials for public sector banks (PSBs)
  2. Relevance: Will replace the Appointments Board of Government
  3. Structure: Chairman, 3 ex-officio members and 3 expert members
  4. Functions: Give recommendations for appointment of full-time Directors as well as non-Executive Chairman of PSBs.
  5. Give advice to PSBs in developing differentiated strategies for raising funds through innovative financial methods and instruments and to deal with issues of stressed assets

Centre’s nod for Bank Board Bureau(BBB)

  1. News: PM approved the setting up of the Bank Board Bureau with former Comptroller and Auditor-General of India Vinod Rai as its first Chairman
  2. Tenure: 2 years
  3. Why BBB? To improve the governance of public sector banks(PSBs), as part of the 7-point Indradhanush
  4. NPAs of PSBs are estimated at almost Rs. 4 lakh crore, and they need to raise capital of Rs. 2.4 lakh crore by 2018 to conform to Basel-III capital requirement norms
  5. Bureau’s Mandate: To play a critical role in reforming the troubled public sector banks
  6. By recommending appointments to leadership positions and boards in those banks and advise them on ways to raise funds and how to go ahead with mergers and acquisitions

Increase capital infusion in PSU banks, says Moody’s

  1. News: According to Moody’s, the govt should increase its proposed capital infusion in PSBs because of a surge in bad loans
  2. Reason: The credit profile of public sector banks will further worsen, if necessary steps are not taken
  3. Proposal: In 2015, the govt had proposed Rs.70,000 crore capital infusion over 4 years
  4. Criticism: Moody’s estimates that the 11 PSBs external capital requirements will be Rs.1.45 lakh crore for the four fiscal years

Government to lower stake in PSU banks to 51%

  1. Context: 9 state-owned banks have reported a combined loss of Rs 11,251 crore
  2. Background: PJ Nayak Committee report on banking reforms
  3. The news: The govt is going to announce a series of major banking reforms, including lowering its stake in state-owned banks to 51%
  4. Reason: The political govt needs to maintain arm’s-length distance from these banks and allow them to have more professionalised bank boards
  5. Importance: Public sector banks have played an important role in financial inclusion

Central bank calls for review of PSU banks’ dividend policy

  1. According to a RBI report, the dividend policy of public sector banks must be reviewed.
  2. PSBs pay hefty dividend to the shareholders irrespective of the quality of the balance sheet.
  3. The govt. is the majority shareholder in all the PSBs and it uses the dividend from its banks to meet its fiscal deficit target.
  4. As per Indradhanush reforms, PSBs are expected to work as ‘private’ entities in terms of their business strategies, operations, controls and financial target.

NBFCs’ sector-specific expertise drives sustained increase in market share

  1. The recent CII report on NBFCs shows that they have steadily eaten into retail banks’ share of credit in the Indian market over the last decade.
  2. NBFCs have taken large share in sectors such as home loans and commercial vehicle loans, due to their sector-specific expertise.
  3. NBFCs command 90% of the used commercial vehicle market, 80% of the loan against property market, and 70% of the consumer durables market.
  4. The NBFCs share of overall credit grew from 10% in 2004-05 to 13% in 2014-15.
  5. NBFCs are attractive to first-time buyers who value a strong relationship with the official from the lending agency.

Don’t cover up banks’ wrong acts, SC tells RBI

The Supreme Court held that RBI should not cover up the acts of banks and financial establishments indulging in “disreputable business practices”.

  1. RBI cannot withhold information on defaulters and other issues covered under the RTI Act.
  2. It is the responsibility of the RBI to take strict action against those banks.
  3. Earlier, CIC had directed RBI to furnish the information sought by applicants under the RTI Act.

Let’s explore some Banking terms

  1. A loan becomes a non-performing asset(NPA), if the borrower does not pay any interest or principle till 90 days.
  2. If the borrower pays his dues regularly and on time, then bank will call such loan as its Standard Asset.
  3. Banks are required to classify NPAs into 3 categories: Sub-standard, doubtful and loss, based on the period for which the asset has remained non performing.
  4. Sub-standard asset is the first category of NPA, that is when interest or principal is due for more than 90 days.

From non-performing to performing

A well-functioning insolvency resolution framework is fundamental for dealing with business failures

What’s new in IBC draft?

  • The ministry of finance recently released the draft Insolvency and Bankruptcy Code (IBC), proposed by the Bankruptcy Law Reforms Committee.
  • An effective insolvency resolution process is one tool, among others, for banks and other creditors to address low recovery rates.

What’s the issue of Banks in India?

  • Banks in India face acute problems of asset quality.
  • Perceiving that laws did not sufficiently empower secured creditors to activate recovery by seizing security.

How does single comprehensive law empowers the system, with the proposed IBC?

  • It empowers all creditors — secured, unsecured, financial and operational to trigger resolution.
  • It enables the resolution process to start at the earliest sign of financial distress.
  • It provides a single forum overseeing all insolvency and liquidation proceedings.
  • It replaces existing management during insolvency proceedings while keeping the enterprise as a going concern.

The way forward

  • The proposed framework strengthens creditors, without discrimination and it will prevent new loans from getting added to existing stock of NPAs.
  • It will aid development of alternative debt securities, spread the risk of corporate failure across larger sets of creditors.
  • It lead to the double benefit of lower systemic risk and deeper debt finance for a rapidly growing economy of entrepreneurs.

Did you know SARFAESI Act, 2002?

  1. It was enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest created in respect of Financial Assets to enable realization of such assets.
  2. It allows banks and financial institution to auction residential or commercial properties to recover loans.
  3. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act.

World recognises India’s strong standing amid global economic turmoil

From economic point of view, today, world is looking up to India not only with sense of hope but also satisfaction.

  1. PM announced that a series of banking sector reforms were in the pipeline that would boost growth in rural areas.
  2. Efforts are being made to make banking premises-less, paperless and eventually currency-less, thereby curbing black money menace.
  3. The govt. has plans to infuse Rs.70,000 crore in the PSBs in the next few years to help them deal with the distressed assets issue.
  4. The global rating agency S&P has retained the sovereign credit rating for India at ‘BBB-’ with stable outlook.

RBI’s steps to create small banks

  1. RBI, has selected 10 financial institutions to set up separate small banks to lend to small businesses and farmers, who typically struggle to get funding from traditional lenders.
  2. Private-equity backed Ujjivan Financial Services Pvt Ltd and Janalakshmi Financial Services Pvt Ltd were among institutions.
  3. More than 100 million people in the country work at small businesses but only about 4 percent of small businesses have access to institutional finance.
  4. The winners will in future be able to become fully fledged banks depending on their performance and if they comply with rules for banks.

What prompted RBI to classify some banks as systemically important?

  1. In November 2011, the Basel Committee on Banking Supervision (BCBS) came out with a framework for identifying Global Systemically Important Banks (G-SIBs) and the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs.
  2. The BCBS further required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs).


  • Supervisory scrutiny will be more strict for them
  • Concentration risks will have to be taken more seriously in doing business
  • Strategic business shift to meet higher standards

RBI declares SBI, ICICI Bank systemically important banks

  1. RBI has declared SBI and ICICI banks as Domestic Systemically Important Banks (D-SIBs).
  2. D-SIBs are perceived as banks which are equivalent of too-big-to-fall in other countries.
  3. D-SIB category banks need to set aside more capital per loan than their peers to prevent a contagion effect, in case of financial crisis.
  4. The D-SIB framework requires the RBI to disclose the names of banks designated as D-SIBs every year in August, starting from August 2015.
  5. This is in-line to directions of Basel Committee on Banking Supervision, to all member countries to have a regulatory framework to deal with SIBs.

RBI asks Govt to speed up reforms in banking system

  1. RBI warned govt. that any delay in reform of the banking system would lead to greater risk in the economy.
  2. He emphasized the need to increase efficiency through greater entry and competition.
  3. He stressed on the need for more govt. participation in the country’s financial markets to increase their size, depth, and liquidity.
  4. Govt. can create supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices.
  5. For a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk.

Bandhan gets final approval for banking licence from RBI

  1. On April 2, 2014, RBI had granted an in-principle approval to Bandhan and IDFC to set up a bank.
  2. As a bank, Bandhan plans to focus on retail clients and will not focus on corporate clients for lending.
  3. In early 2014, an RBI committee headed by Bimal Jalan submitted its report on the criteria, business plans and corporate governance practices of applicants applying for New Bank Licenses.

Banking sector to undergo sea change in two years: Rajan

  1. We might have a whole new set of institutions, payment banks, small finance banks, possibly a postal bank.
  2. Rajan also said the central bank was looking at allowing full capital account convertibility in a few years.
  3. Full capital convertibility means a foreign investor can repatriate his money into his own local currency at will, which is not allowed in the country now.

:( We are working on most probable questions. Do check back this section.

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