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There are a large number of laws, which charge the Executive with adjudicatory functions, and the authorities so charged are, in the strict scene, administrative tribunals.

Administrative tribunals are agencies created by specific enactments. Administrative adjudication is a term synonymously used with administrative decision-making.

The decision-making or adjudicatory function is exercised in a variety of ways. However, the most popular mode of adjudication is through tribunals.

Main characteristics of Administrative Tribunals

 

 

1. Administrative Tribunal is a creation of a statute.
2. An Administrative Tribunal is vested in the judicial power of the State and thereby performs quasi-judicial functions as distinguished from pure administrative functions.
3. Administrative Tribunal is bound to act judicially and follow the principles of natural justice.
4. It is required to act openly, fairly and impartially.
5. An administrative Tribunal is not bound by the strict rules of procedure and evidence prescribed by the civil procedure court.

Criticisms of Tribunals

1. The tribunal consists of members and heads that may not possess any background of law.
2. Tribunals do not rely on uniform precedence and hence may lead to arbitrary and inconsistent decisions.

Evolution of Tribunals

The growth of Administrative Tribunals, both in developed and developing countries, has been a significant phenomenon of the twentieth century. In India also, innumerable Tribunals have been set up from time to time, both at the center and the states, covering various areas of activities like trade, industry, banking, taxation etc.

The question of establishment of Administrative Tribunals to provide speedy and inexpensive relief to the government employees, relating to grievances on recruitment and other conditions of service, had been under the consideration of Government of India for a long time.

Due to their heavy preoccupation, long pending and backlog of cases, costs involved and time factors, Judicial Courts could not offer the much-needed remedy to government servants, in their disputes with the government. A need arose to set up an institution, which would help in dispensing prompt relief to harassed employees, who perceive a sense of injustice and lack of fair play in dealing with their service grievances. 

This would motivate the employees better and raise their morale, which in turn would increase their productivity.

The First ARC and a Committee under J.C. Shah recommended the establishment of an independent tribunal to exclusively deal with service matters. The same was validated by the Supreme Court in 1980.

The Constitution (through 42ndAmendment Act, Article 323-A) empowered the Parliament to provide for adjudication or trial by Administrative Tribunals of disputes and complaints with respect to recruitment and constitution of service of persons appointed to public service and posts in connection with the affairs of the union or of any state or local or other authority within the territory of India or under the control of the government or any corporation, owned or controlled by the government.

In pursuance of the provisions of Article 323-A of the Constitution, the Administrative Tribunals Bill was introduced in Lok Sabha on 29th January 1985 and received the assent of the President of India on 27th February 1985.

Judicial Review of Cases handled by Tribunals

In S. P. Sampath Kumar case, the Supreme Court directed the carrying out of certain measures with a view to ensuring the functioning of the Administrative Tribunals along constitutionally sound principles. In an amendment the jurisdiction of the Supreme Court under article 32 was restored.

Constitutional validity of the Act was finally upheld in S. P. Sampath Kumar case subject to certain amendments relating to the form and content of the Administrative Tribunals. The suggested amendments were carried out by another amending Act. Thus the Administrative Tribunals became an effective and real substitute for the High Courts.

However, in 1997, a seven-Judge Bench of the Supreme Court in L. Chandra Kumar held that clause 2 (d) of article 323A and clause 3(d) of article 323B, to the extent they empower Parliament to exclude the jurisdiction of the High Courts and the Supreme Court under articles 226/227 and 32 of the Constitution, are unconstitutional.

The Court held that the jurisdiction conferred upon the High Courts under articles 226/227 and upon the Supreme Court under Article 32 of the Constitution is part of the inviolable basic structure of our Constitution.

All decisions of the Administrative Tribunals are subject to scrutiny before a Division Bench of the High Court within whose jurisdiction the concerned Tribunal falls. As a result, orders of the Administrative Tribunals are being routinely appealed against in High Courts, whereas this was not the position prior to the L. Chandra Kumar’s case.

On 18th March 2006, the Administrative Tribunals (Amendment) Bill, 2006 was introduced in Rajya Sabha to amend the Act by incorporating therein, inter alia, provisions empowering the Central Government to abolish Administrative Tribunals, and for appeal to High Court to bring the Act in line with L. Chandra Kumar.

The Department-related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice in its 17th Report said that the appeal to High Court is unnecessary, and if a statutory appeal is to be provided it should lie to the Supreme Court only. The Law Commission also took up the topic suo-moto and agreed with the opinion put forward by the Parliamentary Standing Committee.

Categories of Tribunals in India

There are four categories of tribunals in India:

1. Administrative bodies exercising quasi-judicial functions, whether as part and parcel of the Department or otherwise.
2. Administrative adjudicatory bodies, which are outside the control of the Department involved in the dispute and hence decide disputes like a judge free from judicial bias . Example: The Income Tax Appellate Tribunal is under the Ministry of Law and not under Ministry of Finance.
3. Tribunals under Article 136 in which the authority exercises inherent judicial powers of the State. Because the functions of the body are considered important over the control, composition and procedure, even Departmental bodies can be classified as Tribunals.
4. Tribunals constituted under Article 323A and 323B having a constitutional origin and enjoying the powers and status of a High Court.

Though the distinction between quasi-judicial and administrative action has become blurred, yet it does not mean that there is no distinction between the two.

In A.K. Kraipak vs. The Union of India, the Court was of the view that in order to determine whether the action of the administrative authority is quasi-judicial or administrative, one has to see the nature of the power conferred, to whom power is given, the framework within which power is conferred and the consequences.

Thus broadly speaking, acts, which are required to be done on the subjective satisfaction of the administrative authority, are called ‘administrative’ acts, while acts, which are required to be done on objective satisfaction of the administrative authority, can be termed as quasi-judicial acts.

Administrative decisions, which are founded on pre-determined standards, are called objective decisions whereas decisions which involve a choice, as there is no fixed standard to be applied are so called subjective decisions.

The former is a quasi-judicial decision, while the latter is an administrative decision. In case of an administrative decision, there is no legal obligation, upon the person charged with the duty of reaching the decision, to consider and weigh submissions and arguments or to collate any evidence.

However, the Supreme Court observed, “It is well settled that the old distinction between a judicial act and administrative act has withered away and we have been liberated from the pestilent incantation of administrative action.”

Important quasi-judicial bodies in India are as under

1. National Human Rights Commission
2. State Human Rights Commission
3. Central Information Commission
4. State Information Commission
5. National Consumer Disputes Redressal Commission
6. State Consumer Disputes Redressal Commission
7. District Consumer Disputes Redressal Forum
8. Competition Commission of India
9. Appellate Tribunal for Electricity
10. State Electricity Regulatory Commission
11. Railway Claims Tribunal
12. Income Tax Appellate Tribunal
13. Intellectual Property Appellate Tribunal
14. Central Excise and Service Tax Appellate Tribunal
15. Banking Ombudsman
16. Insurance Ombudsman
17. Income tax Ombudsman
18. Electricity Ombudsman
19. State Sales tax Appellate Tribunal

Quasi-judicial bodies are institutes which have powers analogous to that of the law imposing bodies but these are not courts.

They primarily oversee the administrative zones. The courts have the power to supervise over all types of disputes but the quasi-judicial bodies are the ones with the powers of imposing laws on administrative agencies.

These bodies support to lessen the burden of the courts. Quasi-judicial activity is restricted to the issues that concern the particular administrative agency. Quasi-judicial action may be appealed to a court of law.

These organizations generally have authorities of settlement in matters like breach of discipline, conduct rules, and trust in the matters of money or otherwise.

Their powers are usually limited to a particular area of expertise, such as financial markets, employment laws, public standards, immigration, or regulation.

Awards and judgements of quasi-judicial bodies often depend on a pre-determined set of rules or punishment depending on the nature and gravity of the offence committed.

Such punishment may be legally enforceable under the law of a country it can be challenged in a court of law which is the final vital authority.

Emergence of Quasi-Judicial Bodies in India

1. As the welfare state has grown up in size and functions, more and more litigations are pending in the judiciary, making it over-burdened. It requires having an alternative justice system.
2. Ordinary judiciary has become dilatory and costly.
3. With scientific and economic development, laws have become more complex, demanding more technical knowledge about specific sectors.
4. The conventional judiciary is suffering from procedural rigidity, which delays the justice.
5. Further, a bulk of decisions, which affect a private individual come not from courts, but from administrative agencies exercising ad judicatory powers.

Financial Inclusion in India

Financial Inclusion is about

1. The broadening of financial services to those people who do not have access to financial services.
2. The deepening of financial services for people who have minimal financial services.
3. Greater financial literacy and consumer protection so that people can make appropriate choices.
4. The importance of FI is both a moral one as well as economic efficiency one.

The need for Financial Inclusion

Reasons for Limited Success

How to Take Financial Inclusion Further?

                                Pradhan Mantri Jan Dhan Yojana

Jan Dhan Yojana was launched in 2014 to bring financial inclusion in India. The important features of Jan Dhan Yojana include

Zero Balance Account 

• The accounts under PMJDY will be zero balance accounts which mean account holders do not need to maintain any bank balance. Most regular bank accounts require that a minimum balance which might vary from Rs 500 to Rs 5000 will have to be maintained in the bank account failing which a penalty will have to be the customer.
• In April this year , RBI announced that banks could no longer charge a penalty for non-maintenance of average quarterly balance, this was after it received complaints from bank account holders that their bank balances had disappeared over several months. Keeping this in mind , banks have now introduced zero balance accounts under Pradhan Mantri Jan Dhan Yojana.

Insurance Cover of Rs 1 Lakh along with Rupay Cards

• All account holders will receive a Rupay Debit Card so that they can withdraw money from any ATM and also use it to make payments at merchant establishments.
• Each Rupay Card will also insure the Card Holder with accident insurance of up to Rs 1 Lakh from HDFC Ergo and Medical Insurance of up to Rs 30,000 for sick account holders. This money could be used for treatment and pay medical bills when the need arises.

Pass Book and Cheque Books

• Some Banks are issuing additional pass books and cheque books to some users if they make an additional payment of Rs 100 to Rs 500. This is an additional feature and can be availed by account holders only if they feel the need for it.

Direct Benefit Transfers

• Another valuable feature of Pradhan Mantri Jan Dhan Yojana is that bank accounts which are linked to Aadhaar ID’s can avail government subsidies by electronic transfer directly into their accounts. For Example, The government might transfer food subsidies, it provides to ration card holders directly into their bank account.

Overdraft / Loan 

• Overdraft facility of Rs 5000 will be provided to account holders who transact regularly using their rupay card and maintain a good balance in their bank accounts.

Progress under PMJDY

• As many as 20.38 crore bank accounts were opened under the PMJDY as per the latest data available. These 20.38 crore bank accounts had deposits of Rs 30,638.29 crore.
• As per trends available, the percentage of accounts with ‘Zero Balance’ have actually shown a significant decline. Accounts with no balance in them were as high as 76.81 per cent of the total opened under the scheme as on September 30, 2015. They have come down to just about 32 per cent at the end of December 2015.
• The Finance Ministry data further showed that 8.74 crores of the accounts were seeded with Aadhaar and 17.14 crore account holders were issued RuPay cards.
• As on January 15, 2016, banks had offered 53.54 lakh account holders overdraft facility of which the sanction was issued for 27.56 lakh cases, and 12.32 lakh account holders availed it. The total amount availed was Rs 166.7 crore.

Payment Banks

What is the main objective of a Payments Bank?

• Let us consider an example – You pay salary to your Car driver in cash because he does not have a bank account. Individuals like him generally send money to his family members (who might be residing in his native place, a small village) through known people or he may use Money-order facility to remit the cash. But, more and more people like him are becoming mobile phone savvy. The payments Banks applicants will look to unbanked people like your car driver as low-hanging fruit to harvest as their first customers.
• (India has around 90 crore mobile users and out of which around 70 crores are active users. The total no of mobile subscribers in rural areas are 38 crores)
• Don’t get surprised if your neighbourhood supermarket or even your mobile phone can soon be doubled up as a Bank.
• So, the main objective of Payments Banks is to increase financial inclusion (to get more people into the banking system) by providing Small Savings Accounts, Payment or remittance services to low-income households / labour, small businesses etc.,
• Payments banks will provide basic banking services to people who currently do not have a bank account, including millions of migrant workers. Almost half of India’s population is unbanked.
• These banks will aim at providing high volume-low value transactions in deposits and Payments / remittance services in a secured technology-enabled environment.

Why do we need Payment bank?

• As discussed above, payments bank allow you only to open savings and current accounts. But doesn’t a normal bank allow you to do that even now? Yeah, but the difference is a payments bank can now be your mobile service provider, supermarket chain or a non-banking finance company. (Bharti Airtel, with 20 crore subscribers, has nearly the same number of customers as State Bank of India. The transactions done through mobile wallets have tripled over the last two years to Rs 2,750 crore.)
• Payment banks may make handling cash a lot easier. For example, you can transfer money using your mobile phone to another bank or to another mobile phone holder and also receive amounts through your device. Or you can transfer the amount to point-of-sale terminals at large retailers and take out cash.
• Payment banks will pay an interest rate on savings accounts.
• The deposits are covered by the DICGC (Deposit Insurance & Credit Guarantee Corporation), like your Bank Fixed Deposits.

Challenges Faced by Payment bank

• The impact of these banks is not guaranteed, and they will face the same hurdles as any financial services provider that aims to serve the country’s low-income, rural communities. If it were simple to serve these customers, India’s previous Business Correspondent efforts – not to mention its experience with private services like M-PESA, which captures almost every payment in countries like Kenya and Tanzania – would have met with more resounding success.
• A payment bank will be working on a thin margin. They are expected to go to the hinterland and tap the consumer base there. This is a cost-heavy structure and, therefore, financial viability for a bank will not be easy.

Small Banks

What is a small bank?

• Small finance banks are a type of niche banks in India. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending.
• The main purpose of the small banks will be to provide a whole suite of basic banking products such as bank deposits and supply of credit but in a limited area of operation. The objective for these Small Banks is to increase financial inclusion by the provision of savings vehicles to underserved and unserved sections of the population, the supply of credit to small farmers, micro and small industries, and other unorganized sector entities through high technology-low cost operations.

Why there is a need for small banks?

• India has seven branches per 100,000 population compared with 40 branches per 100,000 population in developed countries.
• The financial inclusion aims to have one bank account per member of the family. But, there are many families those have adult members without a bank account. Cent per cent financial literacy means one bank account per adult. Small banks can tap this population.
• Independent studies have revealed that around 90 per cent of the micro and small businesses have no access to the formal mainstream financial institutions. Since their ticket size is small, these banks can bring micro and small entrepreneurs into their fold.
• The main purpose of the small banks will be to provide a whole suite of basic banking products such as bank deposits and supply of credit but in a limited area of operation. The objective for these Small Banks is to increase financial inclusion by the provision of savings vehicles to underserved and unserved sections of the population, the supply of credit to small farmers, micro and small industries, and other unorganized sector entities through high technology-low cost operations.
• Many people in rural areas lend or deposit their hard-earned monies with money lenders and financiers. Chit funds are also very popular. The main reason for all these things is that they do not have access to banks. Small Banks can change this scenario as According to the guidelines, at least 50% of a small bank’s loan portfolio should constitute loans and advances of up to Rs.25 lakh. Which means loans will be smaller in size.
• The opening of small Banks would also increase competition in the Banking sector which could improve Monetary transmission for example Recently; RBI had cut the key policy rates. But, bank customers have not yet benefited from these interest rate cuts. Most of the banks have not yet passed on the benefits to its customers as they have an informal understanding with other Banks. However, they are fast enough to reduce deposits rates though. This situation could improve if more competition is introduced in the banking sector

Challenges Small Banks will face

• Nowhere in the world so far have small banks been a roaring success. In the US, where they are called community banks, a few are doing well, such as State Bank of Texas and Prinz Bank, but overall, they hold less than 15 per cent of the country’s total banking assets.
•  Small banks, apart from extending credit, will also have the job of mobilizing deposits. This requires inspiring immense trust. Neither MFIs nor NBFCs have experience in this aspect. “Building a retail deposit portfolio is a big challenge where existing public and private sectors banks have an advantage because of their strong brands.
• 75% of net credits of small banks should be in the Priority Sector lending. However, the issue really is that priority sector loans tend to become vulnerable to becoming non-performing assets (NPAs) with the propensity being higher for them. In the past, the NPA ratio for priority sector loans has ranged from 4-5% while that of the non-priority sector has been around 3%. Thus this can affect the financial stability of the small banks.
• The challenge would be to control NPAs here, as an unfavourable monsoon would have an impact on farm loans. Similarly, any slowdown in the industrial sector is first felt on the small and medium-sized enterprises (SMEs), which have payments problems. Therefore, on both scores, they would be at a disadvantage compared with the commercial banking system.
• Banks are able to diversify their portfolio by lending to all sectors which include retail, services and manufacturing, while these banks would be left with dealing with the smaller ones only. Besides, given that these accounts would be small and well dispersed, the cost of monitoring would also be higher for them.

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

A regulatory body also called regulatory agency is a public authority or a government agency which is accountable for exercising autonomous authority over some area of human activity in a regulatory or supervisory capacity.

It is established by legislative act in order to set standards in a specific field of activity, or operations, in the private sector of the economy and to then implement those standards. Regulatory interventions function outside executive observation.

Because the regulations that they adopt have the force of law, part of these agencies’ function is essentially legislative; but because they may also conduct hearings and pass judgments concerning adherence to their regulations, they also exercise a judicial function often performed before a quasi-judicial official called an administrative law judge, who is not part of the court system.

Some independent regulatory agencies perform investigations or audits, and some are authorised to fine the important parties and order certain measures.

The notion of the regulatory agency was initiated in the USA and it has been basically an American establishment. The first agency was Interstate Commerce Commission (ICC), established by Congress in 1887 to control the railroads.

It was stopped in 1996 but long served as the model of such an agency. Initially, the ICC was to serve only as an advisory body to Congress and the courts, but it was soon granted these powers itself. Furthermore, an independent commission could be unbiased and nonpartisan, a necessity for impartial regulation. The ICC was the first step taken to control industries instead of taking each on a case-by-case basis, as had been previously done.

The proclamation of governmental control in other industries led to the formation of many other regulatory agencies modelled upon the ICC, chief among these being the Federal Trade Commission (FTC, 1914), Federal Communications Commission (FCC, 1934), and Securities and Exchange Commission (SEC, 1934). Additionally, regulatory powers were convened upon the ordinary executive departments.

The functions of the FTC illustrate those of regulatory agencies in general. It supervises the packaging, labelling, and advertising of consumer goods. It applies broadly stated legislative policies to concrete cases of trade competition by a procedure patterned after that of the courts.

It grants licenses to those interested in export business. It also regulates collection and circulation of credit information. Regulatory agencies use a commission system of administration, and their terms of office are fixed and often very long.

All nations outside the USA, the role of regulatory agencies is taken by the regular administrative departments of government and, in the case of utilities and public transportation, often by means of state ownership.

Regulatory agencies are generally a part of the executive branch of the government, or they have statutory authority to execute their functions with oversight from the legislative branch. Their actions are generally open to legal review. Regulatory authorities are usually established to implement standards and safety, or to oversee use of public goods and regulate business.

Important Regulatory bodies are as under

1. Advertising Standards Council of India
2. Competition Commission of India
3. Biodiversity authority of India
4. Press Council of India
5. Directorate General of Civil Aviation
6. Forward Markets Commission
7. Inland Waterways Authority of India
8. Insurance Regulatory and Development Authority
9. Reserve Bank of India
10. Securities and Exchange Board of India
11. Telecom Disputes Settlement and Appellate Tribunal
12. Telecom Regulatory Authority of India
13. The Food Safety and Standards Authority of India (FSSAI)
14. Central pollution control board
15. Financial Stability and Development Council
16. Medical Council of India
17. Pension Fund Regulatory and Development Authority

Non-Banking Financial Companies

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
• A non-banking institution which is a company and has a principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).

NBFCs are doing functions similar to banks. What is the difference between banks & NBFCs?

NBFCs lend and make investments, and hence their activities are akin to that of banks; however, there are a few differences as given below:

1. NBFC cannot accept demand deposits;
2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
4. Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple regulators; Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance Institutions- State Government, RBI and NABARD.
5. The norm of Public Sector Lending does not apply to NBFCs.
6. The Cash Reserve Requirement also does not apply to NBFCs.

Classification and Categorization of NBFCs

Asset Finance Company	AN AFC is a company which is a financial institution whose principle business is the financing of physical assets such as automobiles, tractors, machines etc.
Investment Company	AN IC is any company which is a financial institution carrying on its principle business of acquisitions of securities.
Loan Company	LC is a financial institution whose primary business is of providing finance by making loans and advances.
Infrastructure Finance Company	IFC is an NBFC which deploys 75% of its total assets in infrastructure loans and has a minimum net owned fund of Re 300 Crore.
Systematically Important Core Investment Company	CIC is an NBFC carrying on the business of acquisition of shares and securities. CIC must satisfy the following conditions: It holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies; Its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets; (c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment; (d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI Act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies. (e) Its asset size is ₹ 100 crore or above and (f) It accepts public funds
Infrastructure Debt Fund NBFC	IDF NBFC primary role is to facilitate long term flow of debt into infrastructure projects. Only Infrastructure Finance Companies can sponsor IDF.
Micro Finance NBFC	MFI NBFC is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria: a) loan disbursed by a NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000; b. loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles; c. total indebtedness of the borrower does not exceed 1,00,000; d. tenure of the loan not to be less than 24 months for the loan amount in excess of 15,000 with prepayment without penalty; e. loan to be extended without collateral; f. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs; g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

 

Non-Performing Assets

An NPA is a loan or advance for which the principle or interest payment remained overdue for a period of 90 days.

Banks are further required to classify NPA into:

Key Facts about India’s NPA Problem

• The financial position of India’s Public Sector Banks has deteriorated sharply since 2011.
• Gross NPA has risen to 9.5 percent of total advances in 2015-16.
• Gross NPA has expected to rise further and touch 11.5 percent in coming years.
• At the aggregate level, PSBs reported a loss of 17672 crores in 2015-16.
• Most of the loans were made during the boom period of 2004-2008.
• The banks inspired by the boom kept on lending to business houses without inspecting the projects.
• When Global Crisis happened, the projects become unviable, and losses started to happen.
• Healthy Banking relies on healthy debt contracts. A debt contract is an agreement between a borrower and a lender, where the borrower promises to repay the lender principle with interest as per scheduled timeline. If the borrower can not repay, he is in default.
• In India, most of the defaulters in recent years are not the small retail borrowers but are large borrowers and corporate houses.
• Across the World, when a borrower defaults irrespective of how big he is, the borrower has to make sacrifices if he defaults. Sacrifices can be in terms of asset confiscation, taking over of firms etc.
• The biggest problem in India’s Banking system is lack of incentives the big borrower has to repay the loans back. They do not have to make many sacrifices if they default. This is the single most major reason of the NPAs in Public Sector Banks.
• In much of the Globe when large borrower defaults they are filled with guilt and desperate to convince their lenders that they should continue their trust in them.
• In India, however, large borrower insists on their divine right to stay in control despite their unwillingness to put in new money. The firms and its workers, as well as past bank loans, are taken as hostages in this game. The promoters threaten to run the enterprise into the ground unless the government do not bail them out.

Reasons for NPAs

How to Tackle Problem of NPAs

Resolving the NPA Problem

• The legacy of the NPAs must be resolved as quickly as possible so that banks can focus on resuming lending.
• Some assets that are classified as Loss assets should be written off from banks books.
• The new Bankruptcy code can be a game changer but will take time to operationalise.
• In many cases, the projects can be turned around through a combination of fresh capital from investors and new management.
• RBI has devised two schemes in this regard: the Strategic Debt Restructuring Scheme, which allows the bank to convert their debts into equity, take control of the company and then induced a new management to turn it around.
• Action has been initiated under the SDR, but no successful revival has been completed so far.
• The second RBI scheme is the Scheme for Sustainable Structuring of Stressed Assets (S4A) under which bank can offer existing management an opportunity to rehabilitate the project by dividing the debt into two parts: a “sustainable component” which can be serviced by the project based on some assumption by revenue and the “excess component” which can be converted into equity or redeemable preference shares.
• Sustainable debt must be more than 50% of the total debt.
• S4A leaves the project in the hands of existing managements and also gives the banks more flexibility in the time taken to resolve the problem. A key issue is how large a part of the debt is deemed to be sustainable. Management and banks are bound to differ on this issue.
• There is much talk of selling assets to privately managed asset reconstruction companies (ARCs), which can then organize the turnaround.
• Another idea is that the proposed National Infrastructure and Investment Fund (NIIF), operating with private partners, provide both equity and new credit to stressed infrastructure projects going through the SDR mechanism.
• The problem could be solved by creating a government-owned “bad bank” which purchases problem loans from the banks and concentrates on turning the projects around, possibly with the help of private ARCs.
• Bank managements will be much more willing to sell assets at a discounted price to another public sector company, which will then undertake the task of negotiating the best deal with potential new owners. The terms of reference of the new entity can be sufficiently clarified to encourage it to negotiate the best possible deal with new private managements. It could work in partnership with ARCs to fulfil this mandate.

Improving the Quality of Lending

• The quality of lending by PSB must be improved in future so that the same problem does not arise again.
• To provide Public sector banks with greater autonomy the shareholding of the government can be reduced to less than 50 percent or 33 percent.
• The P.J. Nayak committee had suggested that if the dilution of shareholding is not acceptable, it should be possible to distance the government from the managements of the banks by creating a public sector holding company and vesting the government’s shares in the holding company. Some statements have been made that this may be acceptable and the newly created Banks Board Bureau is the first step in this direction.
• There are two key elements in any effort to distance government. One is that the public sector banks should deal with only one regulator, RBI, and the extensive quasi-regulatory control exercised by the department of financial services should be ended. The role of the government as the owner would be performed by the holding company, and the government would deal only with the holding company on all issues.
• A second requirement is that public sector banks should become board-managed institutions, with the board responsible for all appointments, including that of the chief executive officer (CEO). If the shares of the government are actually transferred to a holding company, then decisions regarding appointments could be taken by the board of the new company on the recommendation of the board of the bank.
• The objective of creating a genuinely commercial environment in which public sector banks can function and managements are made accountable can only be achieved if the government is willing to step back from exercising direct control. Unless strong action is taken along these lines, we can assume that things will continue as they have.

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

Banking Sector Reforms

First Narasimhan Committee Report – 1991

To promote the healthy development of the financial sector, the Narasimhan committee made recommendations.

Recommendations of Narasimhan Committee

1.    Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at the top and at bottom rural banks engaged in agricultural activities.

2.    The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body sponsored by RBI.

3.    A phased reduction in statutory liquidity ratio.

4.    Phased achievement of 8% capital adequacy ratio.

5.    Abolition of branch licensing policy.

6.    Proper classification of assets and full disclosure of accounts of banks and financial institutions.

7.    Deregulation of Interest rates.

8.    Delegation of direct lending activity of IDBI to a separate corporate body.

9.    Competition among financial institutions on participating approach.

10.  Setting up Asset Reconstruction fund to take over a portion of the loan portfolio of banks whose recovery has become difficult.

 Banking Reform Measures of Government: –

On the recommendations of Narasimhan Committee, following measures were undertaken by government since 1991: –

1.    Lowering SLR and CRR

• The high SLR and CRR reduced the profits of the banks. The SLR had been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with banks for allocation to agriculture, industry, trade etc.
• The Cash Reserve Ratio (CRR) is the cash ratio of banks total deposits to be maintained with RBI. The CRR had been brought down from 15% in 1991 to 4.1% in June 2003. The purpose is to release the funds locked up with RBI.

2.    Prudential Norms: –

• Prudential norms have been started by RBI in order to impart professionalism in commercial banks. The purpose of prudential norms includes proper disclosure of income, classification of assets and provision for Bad debts so as to ensure that the books of commercial banks reflect the accurate and correct picture of financial position.
• Prudential norms required banks to make 100% provision for all Non-performing Assets (NPAs). Funding for this purpose was placed at Rs. 10,000 crores phased over 2 years.

3.    Capital Adequacy Norms (CAN): –

• Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained the ratio of 8%. It was also attained by foreign banks.

4.    Deregulation of Interest Rates

• The Narasimhan Committee advocated that interest rates should be allowed to be determined by market forces. Since 1992, interest rates have become much simpler and freer.
• Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject to minimum floor rates and maximum ceiling rates.
• The interest rate on domestic term deposits has been decontrolled.
• The prime lending rate of SBI and other banks on general advances of over Rs. 2 lakhs has been reduced.
• The rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.
• The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to a minimum lending rate of 13%.

5.    Recovery of Debts

• The Government of India passed the “Recovery of debts due to Banks and Financial Institutions Act 1993” in order to facilitate and speed up the recovery of debts due to banks and financial institutions. Six Special Recovery Tribunals have been set up. An Appellate Tribunal has also been set up in Mumbai.

6.    Competition from New Private Sector Banks

• • Banking is open to the private sector.
  • New private sector banks have already started functioning. These new private sector banks are allowed to raise capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. This has led to increased competition.

7.    Access To Capital Market

• The Banking Companies (Acquisition and Transfer of Undertakings) Act was amended to enable the banks to raise capital through public issues. This is subject to the provision that the holding of Central Government would not fall below 51% of paid-up-capital. SBI has already raised a substantial amount of funds through equity and bonds.

8.    Freedom of Operation

• Scheduled Commercial Banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudential accounting norms. The banks are also permitted to close non-viable branches other than in rural areas.

9.  Local Area Banks (LABs)

• In 1996, RBI issued guidelines for setting up of Local Area Banks, and it gave Its approval for setting up of 7 LABs in private sector. LABs will help in mobilizing rural savings and in channelling them into investment in local areas.

10.  Supervision of Commercial Banks

• The RBI has set up a Board of financial Supervision with an advisory Council to strengthen the supervision of banks and financial institutions. In 1993, RBI established a new department known as Department of Supervision as an independent unit for supervision of commercial banks.

Narasimham Committee Report II – 1998

In 1998 the government appointed yet another committee under the chairmanship of Mr Narsimham. It is better known as the Banking Sector Committee. It was told to review the banking reform progress and design a programme for further strengthening the financial system of India. The committee focused on various areas such as capital adequacy, bank mergers, bank legislation, etc.

It submitted its report to the Government in April 1998 with the following recommendations.

1. Strengthening Banks in India : The committee considered the stronger banking system in the context of the Current Account Convertibility ‘CAC’. It thought that Indian banks must be capable of handling problems regarding domestic liquidity and exchange rate management in the light of CAC. Thus, it recommended the merger of strong banks which will have ‘multiplier effect’ on the industry.
2. Narrow Banking : Those days many public sector banks were facing a problem of the Non-performing assets (NPAs). Some of them had NPAs were as high as 20 percent of their assets. Thus for successful rehabilitation of these banks, it recommended ‘Narrow Banking Concept’ where weak banks will be allowed to place their funds only in the short term and risk-free assets.
3. Capital Adequacy Ratio : In order to improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms. This will further improve their absorption capacity also. Currently, the capital adequacy ratio for Indian banks is at 9 percent.
4. Bank ownership : As it had earlier mentioned the freedom for banks in its working and bank autonomy, it felt that the government control over the banks in the form of management and ownership and bank autonomy does not go hand in hand and thus it recommended a review of functions of boards and enabled them to adopt professional corporate strategy.
5. Review of banking laws : The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc. This up gradation will bring them in line with the present needs of the banking sector in India.

Apart from these major recommendations, the committee has also recommended faster computerization, technology up gradation, training of staff, depoliticizing of banks, professionalism in banking, reviewing bank recruitment, etc.

C.Nachiket Mor committee

The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, set up by the RBI in September 2013, was mandated with the task of framing a clear and detailed vision for financial inclusion and financial deepening in India.

In its final report, the Committee has outlined six vision statements for full financial inclusion and financial deepening in India:

The Committee further lays down a set of four design principles namely;

1. Stability,
2. Transparency,
3. Neutrality, and
4. Responsibility,

• The principles will guide the development of institutional frameworks and regulation for achieving the visions outlined. Any approach that seeks to achieve the goals of financial inclusion and deepening must be evaluated based on its impact on overall systemic risk and stability, and at no cost should the stability of the system be compromised.
• A well-functioning financial system must also mandate participants to build completely transparent balance sheets that are made visible in a high-frequency manner, accurately reflecting both the current status and the impact of stressful situations on this status.
• In addition, the treatment of each participant in the financial system must be strictly neutral and entirely determined by the role it is expected to perform in the system and not its specific institutional character.
• Finally, the financial system must maintain the principle that the provider is responsible for sale of suitable financial services to customers and ensure that providers are incentivised to make every effort to offer customers only welfare-enhancing products and not offer those that are not.
• At its core the Committee’s recommendations argue that in order to achieve the vision of full financial inclusion and financial deepening in a manner that enhances systemic stability, there is a need to move away from a limited focus on anyone model to an approach where multiple models and partnerships are allowed to emerge, particularly between national full-service banks, regional banks of various types, non-bank finance companies, and financial markets. Thus, the recommendations of the Committee seek to encourage partnerships between specialists, instead of focussing only on the large generalist institutions.
• In the spirit of the RBI’s approach paper on differentiated Banks, the Committee recommends that the RBI may also seriously consider licensing, with lowered entry barriers but otherwise equivalent treatment, more functionally focused banks like Payments Banks, Wholesale Consumer Banks, and Wholesale Investment Banks.
• Payments Banks are envisaged as entities that would focus on ensuring rapid out-reach with respect to payments and deposit services.
• The Wholesale Consumer Banks and Wholesale Investment Banks would not take retail deposits but would instead focus their attention on expanding the penetration of credit services.
• The Committee also recommends that the extant Priority Sector Lending norms be modified in order to allow and incentivize providers to specialise in one or more sectors of the economy and regions of the country, rather than requiring each and every bank to enter all the segments.
• Finally, the Committee proposes a shift in the current approach to customer protection to one that places a greater onus on the financial services provider to provide suitable products and services.
• The committee has suggested a fixed term of 5 years for the chairman/managing director of a bank and a term of 3 years for a whole-time director.

PJ Nayak Committee

Key Observations

Specific Recommendations made by the committee.

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University

 

Statutory bodies are established by acts which Parliament and State Legislatures can pass. These bodies are entities shaped by an Act of Parliament or state legislatures and set up by the government to consider the data and make judgments in some area of activity.

Basically, a statutory body is an organization of government which is not demarcated in Constitution of India but it gets its powers, service rules, authority by an act of parliament or state legislatures. They are generally established to perform specific functions which a government considers effectively performed outside a traditional departmental executive structure.

They fulfil the requirement for some operational independence from the government; funding arrangements that are not dependent on the annual appropriations processes; or to establish a separate legal body. Statutory bodies are normally set up in countries which are ruled under parliamentary democracy form of political setup.

Under the law, statutory bodies are organizations with the authority to monitor that the activities of a business and check whether these institutions are legal and follow official rules. For example, the General Medical Council is the statutory body which regulates doctors.

The statutory bodies may be established to permit a certain level of independence from government, the government is still accountable to guarantee that taxpayers funds expended in the operations of statutory bodies are spent in the most, effective and economical way.

These bodies are subject to varying degrees of ministerial control which are identified in the statutory body’s enabling legislation. Ministers are accountable to Parliament for the operation of all government boards and agencies within their portfolios and are necessary to table their annual reports in Parliament. State representatives have authority for many reasons such as transparency, accountability, effectiveness, and bipartisanship.

The meaning of a ‘statutory body’ may change depending upon the legislation. For example, a local council is not a statutory body for the purposes of the Financial Accountability Act, but it is for the purposes of the Statutory Bodies Financial Arrangements Act.

All statutory bodies are established and operate under the provisions of their own enabling legislation, which sets out the purpose and specific powers of the agency.

The enabling legislation may also include provisions for the levels of fees to be charged for services/products provided by the statutory body, the power of the statutory body to borrow or invest funds, whether the board can delegate powers to officers of the statutory body and whether the body represents the State.

The example of statuary body is The University Grants Commission, a statutory organization established by an Act of Parliament in 1956 for the coordination, determination, and maintenance of standards of university education. Apart from providing grants to eligible universities and colleges, the Commission also recommends the Central and State Governments on the measures which are necessary for the development of Higher Education.

It functions from New Delhi as well as its six Regional offices located in Bangalore, Bhopal, Guwahati, Hyderabad, Kolkata, and Pune.

Important Statutory Bodies

1. National Human Rights Commission
2. National Commission for Women
3. National Commission for Minorities
4. National Commission for Backward Classes
5. National Law Commission
6. National Green Tribunal
7. National Consumer Disputes Redressal Commission
8. Armed Forces Tribunal

Lead Bank Scheme

After the Nationalisation of the commercial Banks, the government took the initiative for extending banking facilities in rural areas.

Prof D. R. Gadgil, chairman of National Credit Study Group, recommended the adaptation of an “area approach” to evolve plans and programs for the development of an adequate  banking and credit structure in rural areas.

As a sequel to this “area approach”, recommended by DR Gadgil study group, the Lead Bank Scheme was introduced in December 1969.

The Lead Bank Scheme: Under this scheme, a particular district is allotted to every nationalized commercial bank. The allotment of districts to the various banks was based on such criteria as the size of the banks, the adequacy of their resources for handling the volume of work.

The lead banks initially conduct basic surveys in their respective lead districts and prepare district credit plans designed for the purpose of estimating credit needs of the concerned district so that physical and manpower resources available may be utilized properly.

The district credit plans are linked with the development programs and are based on the integrated development of the concerned district with a special emphasis on the development of rural and backward areas. Since the introduction of lead bank scheme, notable progress has been achieved by commercial banks in respect of branch expansion, deposit mobilization and credit deployment.

Undoubtedly, the scheme is a major step towards banks fulfilling their new social objectives and holds promise for making banks as an effective instrument for bringing about the economic development of the allotted districts.

Objectives of Lead Bank Scheme

Why the Scheme Failed

Nationalisation of Banks

In a Free Market economy, business houses operate as per the invisible hand of the market (responding to demand and supply conditions) with the sole objective of profits. The case of commercial banks is no different. In a capitalist economy, they operate only for profit and not for any social purpose.

In a poor country like India which lacks resources and has inequitable wealth distribution the access to credit to all is an important bottleneck. In a poor country, the Profit making Banking can lead to following problems:

To avoid all such problems the Government decided to Nationalised Commercial Banks in 1969. The major Rationale of Nationalisation was the following;

The Timeline of Bank Nationalisation

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University