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Subject: Banking Regulations

  • Bankers’ Books Evidence Act, 2026

    Bankers’ Books Evidence Act, 2026

    Why in the News?

    • The Bankers’ Books Evidence Act, 2026 comes into force on 1 October 2026, replacing the Bankers’ Books Evidence Act, 1891.
    • It modernises the evidentiary framework for banking records by recognising physical, electronic and digital records.

    Key Highlights

    • Applies to court cases, arbitrations, investigations and inquiries where banking records are required as evidence.
    • Covers banking records stored in physical or digital forms.
    • Introduces standardised authentication and certification of bankers’ books.
    • Certified copies can generally be used instead of producing the original banker’s book.
    • Bank officials are protected from routine appearance solely to prove bank records when the bank is not a party.
    • Government can extend the Act to specified financial sector entities by notification.
    • Provides safeguards against unauthorised changes, tampering and loss of data integrity.

    Bankers’ Books

    • Include:
      • Ledgers
      • Day-books
      • Cash-books
      • Account books
      • Other records maintained in the ordinary course of banking business.
    • Records may be maintained in written/physical form or any data-storage mechanism.
    • The definition of bank/banker also covers specified financial-sector entities to which the Act is extended, besides banks and certain post office offices.

    Electronic and Digital Records

    • Electronic/digital records are admissible subject to conditions including:
      • Copy must be a true and accurate representation of the original record.
      • Unauthorised changes must not be detected.
      • No tampering or event affecting integrity and accuracy of the system should be detected.
    • Authentication may use manual, digital or electronic signatures.

    Production of Bankers’ Books

    • A certified copy can ordinarily prove the contents of a banker’s book.
    • Bank officers ordinarily cannot be compelled to produce the original records or appear as witnesses merely to prove them.
    • A court may require production or appearance through a written order recording special cause.

    Special Cause

    A court may require production/appearance where:

    • Accuracy or authenticity of an entry is uncertain.
    • Regular record-keeping was interrupted by an event.
    • The bank failed to comply with a previous court order concerning inspection or production of certified copies.

    Prelims Quick Revision

    • 2026 Act replaces: Bankers’ Books Evidence Act, 1891.
    • Effective from: 1 October 2026.
    • Covers physical + electronic + digital banking records.
    • Certified copies can ordinarily establish the contents of bankers’ books.
    • Bank officer appearance requires a court order recording special cause.
    • Government can extend the Act to specified financial-sector entities by notification.
    • Electronic records require safeguards relating to authenticity, unauthorised changes and data integrity.
    • The Act applies to proceedings including arbitration, investigation and inquiry.

    UPSC Prelims Trap

    • The 2026 Act does not discard the certified-copy framework of the 1891 law; it retains and modernises it.
    • Electronic/digital records are not automatically admissible; prescribed authenticity and integrity conditions apply.
    • A bank officer is not routinely required to appear to prove records, but a court can order appearance for special cause.
    • The Government can extend the Act to other financial-sector entities by notification; such extension is not automatic.

  • Who has to pay MDR on UPI and who stands to gain the most?

    Why in the News

    The National Payments Corporation of India (NPCI) has released a circular allowing a Merchant Discount Rate (MDR) to be levied on certain Unified Payments Interface (UPI) payments from 15 October. The charge falls on person to merchant (P2M) payments above Rs 2,000 and is paid by merchants to payment processors and banks rather than by consumers. The circular follows a long public argument over whether UPI would be charged at all, which the Ministry of Finance answered with a press release saying banks have been advised to ensure merchants do not pass the charge on to customers, and that UPI application providers are expressly prohibited from imposing platform fees or hidden charges on users. The tension is over incidence. The Opposition argues the charge will raise prices for consumers, while the government argues it will not, and that even the impact on merchants will be minimal.

    What is the Merchant Discount Rate (MDR)?

    1. Definition: MDR is a fee for using UPI that is paid by the merchant to the payment processors and the banks that carry the transaction. Consumers do not pay it directly.
    2. Who it is collected from: It is deducted from the merchant’s receipts, so the merchant receives less than the amount the customer sent.
    3. Coverage on UPI: It applies only to person to merchant payments above a value threshold, not to transfers between two individuals.

    What does a merchant actually pay, and on which transactions?

    1. The standard rate: Mid to large sized merchants receiving UPI payments in excess of Rs 2,000 per transaction pay 0.4% of the transaction value.
    2. The absolute cap: For transactions of Rs 75,000 and above, the MDR is capped at Rs 300 per transaction, so the charge stops rising with the ticket size.
    3. Essential and thin margin sectors: Transactions of Rs 2,000 or more in railways, telecommunications, insurance, fuel and agricultural inputs attract a flat Rs 5 per transaction. The stated purpose is cost certainty for critical public services and for businesses operating on narrow margins.
    4. Capital market payments: Payments to mutual funds, stockbrokers, dealers and for equities attract 0.02%, capped at Rs 300 per transaction, a lower rate justified as support for retail participation in formal financial markets.

    How much of UPI escapes the charge altogether?

    1. Person to person transfers: All P2P transactions remain free regardless of amount, under the specification that no transaction fee, platform fee or other charge may be imposed on individuals for sending or receiving money through UPI. P2P is about 37% of total UPI transaction volume.
    2. Small ticket merchant payments: Payments to merchants of up to Rs 2,000 remain free of MDR, and these are another 60.5% of all UPI transactions by volume.
    3. The combined exemption: Taken together, 97.5% of all UPI transactions remain free, since P2M payments above Rs 2,000 are just 2.5% of volume.
    4. Small merchants and street vendors: Merchants receiving up to Rs 1 lakh per month through UPI QR codes under the Person to Person Merchant (P2PM) category are exempt, which pushes the charged share below 2.5%.

    How large is the revenue pool, and how is it divided?

    1. Value concentration: P2M transactions above Rs 2,000 are only 2.5% of volume but 20% of all UPI transactions by value.
    2. The monthly ceiling: Of the Rs 29.8 lakh crore transacted over UPI in August 2026, P2M payments above Rs 2,000 were Rs 5.99 lakh crore, so the absolute maximum collectible is about Rs 2,400 crore a month. The caveats, exemptions, flat rates and caps mean the actual receipts will be lower.
    3. The split: The payer’s bank takes about 40%, because it holds the customer’s account and bears the core authorisation, security and settlement costs. The merchant’s bank takes 30% for managing the merchant relationship, QR code deployment and merchant settlements.
    4. The technology layers: The UPI app or Third Party Application Provider (TPAP) receives 20%, and the Payment Service Provider that links the technology partner bank to the central network switches receives the final 10%.
    5. The promotion fund: A dedicated fund to promote UPI adoption among small merchants will receive an amount equal to 5% of total MDR collections. The circular does not specify which payment system player contributes that 5%.

    Which institutions stand to gain the most?

    1. Yes Bank on both legs: It is the payer bank in more than 50% of all UPI transactions and the payee bank in about 55%, so it collects the largest share of both the 40% and the 30% pools.
    2. The next largest banks: ICICI Bank is the second largest payer bank at 18.3%, and Axis Bank is the second largest payee bank at about 19%.
    3. The two dominant apps: PhonePe accounts for about 46% of UPI transactions by volume and Google Pay another 32%, so the TPAP pool flows overwhelmingly to two applications.

    Challenges to the MDR on UPI

    1. Pass through to consumers: The instruction that merchants must not recover the fee from customers is an advisory rather than an enforceable term, so the cost can surface as a higher listed price. Eg. Surcharging on card payments continued at fuel outlets and small retailers for years after similar advisories were issued.
      The Fix: Write the no pass through condition into the merchant onboarding agreement of the acquiring bank, with a customer complaint route attached to it.
    2. Structuring below the threshold: A hard cut off at Rs 2,000 rewards splitting a single large payment into several smaller ones, which costs the payment system volume without collecting revenue. Eg. Cash dealings were routinely broken up below the Rs 2 lakh limit introduced under Section 269ST of the Income Tax Act, 1961 in 2017.
      The Fix: Charge on the merchant’s monthly aggregate receipts above a threshold rather than on each transaction, so splitting yields no saving.
    3. The cliff at the small merchant limit: The P2PM exemption ends abruptly once monthly receipts cross Rs 1 lakh, so a marginal increase in turnover removes the exemption from the whole of a merchant’s qualifying receipts. Eg. A vendor receiving Rs 1.05 lakh a month loses the exemption entirely rather than on the excess alone.
      The Fix: Taper the charge above the limit so only receipts beyond Rs 1 lakh attract MDR.
    4. Reinforcement of app concentration: A revenue stream keyed to transaction share rewards the applications that already hold most of the market. Eg. NPCI’s cap limiting any third party application to 30% of UPI volume has been deferred repeatedly since it was first framed in 2020.
      The Fix: Weight the small merchant promotion fund toward applications below a defined market share, so the subsidy runs against concentration rather than with it.

    Conclusion

    The charge is deliberately narrow in reach and wide in value. Almost all of UPI stays free, yet the fifth of transaction value that is charged sits with a small set of banks and two applications, which is where the revenue will settle. Whether the advisory against pass through holds is the thing to watch once the framework takes effect on 15 October.

    Back2Basics: National Payments Corporation of India (NPCI)

    1. What it is: An umbrella organisation for retail payments and settlement systems in India, incorporated in 2008.
    2. Legal and institutional basis: It was set up as a not for profit company under the guidance of the Reserve Bank of India and the Indian Banks’ Association, and operates under the Payment and Settlement Systems Act, 2007.
    3. Systems it runs: UPI, RuPay, the Immediate Payment Service, the National Automated Clearing House, FASTag and the Aadhaar Enabled Payment System.
    4. Rule making role: It sets the operating circulars, pricing rules and participation norms that member banks and third party applications must follow on these systems.

    Matching Previous Year Question

    “[2018] Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news? (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank. (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services. (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards. (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards. Answer: (c)”

  • Banks can’t use force to seize vehicles over loan default: SC

    Why in the News

    The Supreme Court has reiterated that banks and Non-Banking Financial Companies (NBFCs), which are Reserve Bank of India registered lenders that extend credit without holding a banking licence, cannot use force to seize financed vehicles in loan default cases. A two judge Bench recorded that the guidelines the Reserve Bank of India (RBI) issued to prevent exactly this have “existed only on paper, and no steps have been taken to implement it”. The ruling answers the Court’s own decision in Manager, ICICI Bank Ltd vs Prakash Kaur and Others (2007), which held that recovery of loans and seizure of vehicles can be made only through legal means. The tension the Court set out is between a financier’s contractual right to take possession without going to court, and a borrower’s entitlement to notice and due process before losing the asset he earns his living from.

    What is the Fair Practices Code for Lenders?

    1. What it is: It is a set of RBI guidelines, issued on 5 May 2003, governing how lenders may conduct loan recovery.
    2. What it bars: It states that in matters of recovery, lenders should not resort to undue harassment, including persistently bothering borrowers at odd hours and the use of muscle power for recovery.
    3. Status of the instrument: It operates as a supervisory direction on regulated entities rather than as a penal statute, so compliance turns on the regulator enforcing it.

    On what basis can a financier repossess a vehicle at all?

    1. Repossession as a contractual right: The right to take possession of a financed vehicle in the first instance is a matter of contract between the lender and the borrower.
    2. Commercial purpose of the right: Such clauses make it commercially feasible for institutions to extend credit against the security of the financed asset to borrowers of modest means.
    3. Why it demands strict reading: The right operates outside the supervision of a court at the first instance, so it must be construed with great circumspection.
    4. What happens if it is left unchecked: Read loosely, it becomes a licence to seize property by stealth, by force or in the dead of night, converting a facility meant to promote financial inclusion into an instrument of oppression against the class it was designed to serve.

    Why was this particular repossession held unlawful?

    1. How the vehicle was taken: Four unidentified persons broke the truck’s steering lock at about 1 am on 9 April 2023 while it stood parked after a delivery at a godown in Ayodhya, and drove it away.
    2. Absence of notice: No seven-day notice was issued to the borrower before repossession, and the sale proceeds were adjusted before he was asked to pay the outstanding amount.
    3. The Court’s characterisation: Taking possession by breaking open the steering lock bears every mark of the “goondaism” that the Court in Prakash Kaur and the RBI in its successive guidelines have condemned.
    4. The loan clause itself: The agreement placed the borrower entirely at the mercy of the financier’s unilateral discretion, both on whether notice would be given at all and on the manner and timing of the sale. The Bench held this to be in consonance with neither the RBI guidelines nor the provisions of the Indian Contract Act, 1872.

    What did the Court order, and what does it demand of the regulator?

    1. Compensation to the borrower: The Bench ordered payment of compensation for violation of the borrower’s constitutional rights, treating a private recovery action as engaging rights rather than as a purely contractual dispute.
    2. Direction to the regulator: The RBI was directed to take effective steps to secure genuine compliance with its guidelines and circulars.
    3. The balance the Court named: The failure identified was of the balance between the financier’s legitimate need for an efficient recovery mechanism and the borrower’s equally legitimate entitlement to fair treatment before being deprived of the asset by which he earns his bread.
    4. Route the case took: The Chief Judicial Magistrate’s court at Ayodhya and the Allahabad High Court had earlier dismissed the borrower’s plea, so relief came only at the third tier.

    Challenges to enforcing the Fair Practices Code

    1. A direction without a penalty: The Code binds regulated entities but attaches no automatic consequence to a breach in an individual recovery. Eg. The Court found the 2003 guidelines had existed only on paper for over two decades.
      The Fix: Attach a defined monetary penalty and a compensation floor to each proved instance of forcible repossession, payable by the lender to the borrower without separate litigation.
    2. Outsourced recovery breaks the accountability chain: Lenders engage third party recovery agents, and the agent’s conduct is difficult to attribute to the regulated entity. Eg. The Prakash Kaur ruling of 2007 turned on banks employing “goondas” to take possession of vehicles.
      The Fix: Make the lender vicariously liable in the circular itself for every act of a contracted recovery agent, with the agent’s identity recorded against the loan account.
    3. Borrowers cannot realistically litigate: A commercial vehicle borrower who loses the asset also loses the income needed to fund a case through three tiers. Eg. This borrower’s plea was dismissed by a magistrate’s court and a High Court before the Supreme Court heard it.
      The Fix: Route repossession complaints to the RBI Ombudsman with a fixed timeline, so the first remedy is administrative rather than judicial.
    4. One-sided loan contracts: Standard-form agreements let the lender decide unilaterally whether notice is given and when the asset is sold. Eg. The clause in this case left both notice and the timing of sale to the financier’s discretion.
      The Fix: Prescribe a mandatory model repossession clause, carrying a minimum notice period and a floor price mechanism for sale, that no lender may contract out of.
    5. Supervisory attention follows systemic risk, not conduct: Prudential supervision of NBFCs concentrates on capital and asset quality rather than on recovery conduct at the branch level. Eg. Digital lending recovery practices drew RBI action only after the 2021 working group report on digital lending.
      The Fix: Add a conduct-compliance return on recovery complaints to the periodic supervisory reporting NBFCs already file.

    Conclusion

    The prohibition on forcible seizure was settled in 2007 and has been restated now because restating it has not been enough. What is new is the direction to the RBI, which moves the problem from the borrower’s ability to litigate to the regulator’s willingness to supervise its own conduct rules. The measure to watch is whether the RBI converts the Fair Practices Code into a reporting and penalty framework rather than a circular, and whether repossession complaints begin to be resolved before they reach a court.

    Back2Basics: Non-Banking Financial Companies

    1. What they are: Companies registered under the Companies Act, 2013 that lend, invest or acquire financial assets, without holding a banking licence.
    2. Registration and supervision: They must register with the RBI under the Reserve Bank of India Act, 1934, and are supervised by it.
    3. How they differ from banks: They cannot accept demand deposits, are not part of the payment and settlement system, and cannot issue cheques drawn on themselves.
    4. Deposit insurance: Deposit insurance cover from the Deposit Insurance and Credit Guarantee Corporation is not available to NBFC depositors.

    Matching Previous Year Question

    “No direct PYQ traced in the provided files”

  • Subhash Chandra case: IBBI to tighten guarantor resolution

    Why in the News

    The Insolvency and Bankruptcy Board of India (IBBI) has proposed four amendments to the insolvency resolution process for personal guarantors to corporate debtors, extending to banks and creditors safeguards already available under the corporate insolvency resolution process (CIRP) of a company. The proposals follow a special bench of the National Company Law Tribunal (NCLT) staying a single bench order that had approved a repayment plan offering creditors Rs 6.25 crore against admitted claims of Rs 22,006.57 crore. That case led experts to question the efficacy of the Insolvency and Bankruptcy Code, 2016, which was introduced to revive companies under heavy debt and secure repayment to banks. The contested point is that the guarantor track of the Code was built with weaker creditor protections than the corporate track, and a related party of the guarantor can currently vote on the plan that decides what creditors recover.

    What is the personal guarantor resolution process?

    1. Who a personal guarantor is: An individual, usually a promoter, who personally guarantees a company’s borrowing, so the lender can proceed against that individual’s own estate when the company defaults.
    2. How the process runs: A resolution professional is appointed, a repayment plan is prepared for the guarantor, and the plan is put to a vote of the creditors before it goes to the adjudicating authority for approval.
    3. How it differs from the corporate track: Under CIRP the plan is decided by a committee of creditors from which a related party of the debtor company is excluded from voting. In a personal guarantor resolution only an associate is barred, and the definition of associate is far narrower.

    What triggered the review?

    1. The order under stay: On August 25 the NCLT single bench approved a repayment plan involving personal guarantor and Essel Group founder Subhash Chandra, and a special bench has since stayed that order.
    2. The recovery on offer: Creditors were offered Rs 6.25 crore against admitted claims of Rs 22,006.57 crore.
    3. What the banks alleged: The banks alleged that the non bank entities voting on the plan were associates or related parties of the guarantor and had acted under his influence to push through a plan carrying a very large haircut.
    4. The gap the case exposed: The narrower associate test let entities that would fail a related party test vote on the plan. The IBBI’s own illustration is a company that habitually acts on the guarantor’s advice or instructions, without the guarantor holding any shares in it or controlling its board.

    What are the four proposed amendments?

    1. Voting rights of related parties: Any creditor who is a related party of the guarantor would get no voting right in approving the resolution plan, replacing the narrower associate test.
    2. Scrutiny of avoidance transactions: Resolution professionals would have to examine whether the guarantor was party to any avoidance transactions, meaning undervalued transactions, transactions giving preference and extortionate credit transactions, present those findings to creditors before the vote, and initiate legal proceedings with creditor approval.
    3. Independent asset valuation: A registered valuer would have to determine the fair value and the realisable value of the guarantor’s assets, and the valuation report would go to creditors along with the repayment plan.
    4. Reasoned minutes of creditor meetings: Resolution professionals would have to record creditors’ deliberations and the reasons for their decision in the minutes of creditors’ meetings.

    How do these proposals close the gap with the corporate process?

    1. Parity on the voting bar: The related party exclusion is the CIRP standard, and applying it to guarantor resolutions removes the mismatch the Chandra case turned on.
    2. A duty that does not currently exist: When a guarantor’s repayment plan is put to a vote, the resolution professional is today under no obligation to examine whether an avoidance transaction took place or whether the guarantor made full disclosure of affairs.
    3. Informed commercial judgement: The IBBI’s stated purpose for the valuation report is to let creditors assess the adequacy of the proposed security, the viability of the repayment plan and the potential recovery available from the guarantor’s assets.
    4. An auditable record: Recording only raw voting tallies leaves no record of commercial reasoning, and reasoned minutes give an appellate forum something to review beyond the arithmetic of the vote.

    Challenges to the personal guarantor resolution framework

    1. Asset shielding before the filing: A guarantor can move assets into family or trust structures well before insolvency begins, leaving little to value. Eg. Promoter assets held through family trusts have repeatedly fallen outside the estate available to lenders in large default cases.
      The Fix: Extend the look back period for avoidance transactions involving a guarantor’s relatives and require a sworn asset disclosure covering it.
    2. Proving a related party connection: The related party test is broader than the associate test and is also harder to establish, since control through habitual instruction leaves no shareholding trail. Eg. The IBBI’s own example is a company acting on the guarantor’s instructions without any shareholding or board control.
      The Fix: Place the burden on the creditor claiming unrelated status to establish it, rather than on the objecting bank to disprove it.
    3. Delay in adjudication: The guarantor track sits in the same tribunals already carrying a heavy corporate caseload, so an order and its stay can consume months while asset value erodes. Eg. The stay in this case leaves the approved plan in suspension with no fixed date for a decision.
      The Fix: Fix a statutory outer limit for disposal of a personal guarantor repayment plan and report breaches bench wise.
    4. Valuation of illiquid personal assets: Fair value and realisable value diverge sharply for unlisted shareholdings, disputed land and pledged promoter stock. Eg. Pledged promoter shareholdings lose value the moment a lender begins to sell them into the market.
      The Fix: Require two independent registered valuers where the guarantor’s estate is dominated by unlisted or pledged securities.

    Conclusion

    The guarantor track of the Code was written as a lighter version of the corporate one, and the difference has turned out to matter most in exactly the cases where recovery is largest. The four proposals move that track towards the corporate standard on voting, scrutiny, valuation and record keeping, and each of them constrains the resolution professional rather than the tribunal. The proposals sit in a discussion paper open for public comment, and the special bench’s stay holds until it decides the matter.

    Back2Basics: Insolvency and Bankruptcy Board of India

    1. What it is: The IBBI is the regulator for insolvency and bankruptcy proceedings in India, established in 2016 under the Insolvency and Bankruptcy Code, 2016.
    2. Who it regulates: Insolvency professionals, insolvency professional agencies, registered valuers and information utilities.
    3. What makes it unusual: It holds regulatory, executive and quasi judicial functions over the same set of entities, which is rare among Indian regulators.
    4. Its rule making role: It frames the regulations that govern both the corporate insolvency resolution process and the resolution of personal guarantors, which is what the present discussion paper proposes to amend.

    Matching Previous Year Question

    “[2019] What was the purpose of Inter-Creditor Agreement signed by Indian banks and financial institutions recently? (a) To lessen the Government of India’s perennial burden of fiscal deficit nd current account deficit (b) To support the infrastructure projects of Central and State Governments (c) To act as independent regulator in case of applications for loans of Rs. 50 crore or more (d) To aim at faster resolution of stressed assets of Rs. 50 crore or more which are under consortium lending Answer: (d)”

  • Subhash Chandra case: why are creditors set to recover only ₹6.5 cr. against ₹22,006 cr. claims?

    Why in the News

    The NCLT approved Subhash Chandra’s personal insolvency repayment plan, allowing creditors with ₹22,006.57 crore in admitted claims to recover just ₹6.25 crore, a 99.97% haircut.

    Core issue: The case highlights how personal insolvency under the IBC, 2016 works when a guarantor’s admitted liability is much larger than the assets available in their personal estate. Dissenting creditors, including HDFC Bank, are considering an appeal.

    How does personal guarantor insolvency work under the Insolvency and Bankruptcy Code, 2016?

    1. A personal guarantee is a promise to pay another’s debt: An individual undertakes to repay a borrower’s debt if the borrower defaults.
    2. The firm and the guarantor are separate legal persons: Proceedings against a company and against its personal guarantor are separate proceedings even when they arise from the same borrowing.
    3. The guarantor proposes, the creditors vote: In personal insolvency the first step is for the borrower to propose a repayment plan, which the creditors then vote on.
    4. Approval triggers a statutory discharge: Once the creditors and the NCLT approve the plan, Section 119 of the Code passes a discharge order giving the guarantor a fresh start.

    Why do the corporate and personal proceedings run in parallel?

    1. Section 60 sends the guarantor to the same tribunal: The IBC provides for insolvency of a personal guarantor of a corporate debtor to be dealt with by the NCLT where proceedings against the corporate debtor are pending.
    2. A guarantor’s liability is coextensive and independent: Contract law treats that liability as running alongside the principal borrower’s rather than only after it.
    3. A corporate process seeks a buyer, a personal process seeks a plan: Corporate insolvency resolves a firm’s debt by taking over its management and finding a buyer or revival plan, and failing that leads to liquidation.
    4. The personal order settles nothing for the firms: The founder’s personal insolvency does not extinguish the liabilities of the Essel linked firms that borrowed the money.

    Why does the 99.97 per cent haircut overstate what was lost?

    1. The comparison is against admitted claims, not realisable assets: The haircut measures the gap between claims admitted in the proceedings and the amount proposed for distribution.
    2. The disclosed estate was Rs 31.79 crore: The resolution professional assessed the guarantor’s disclosed personal assets at that figure.
    3. The tribunal applied a better off test: The NCLT considered whether creditors would recover more under the repayment plan than if the guarantor were pushed into bankruptcy.
    4. The guarantor disputes the claim base: His office has stated that he borrowed no money, and that the claim against him by the objectors to the plan is Rs 3,992 crore.

    How did the plan clear the creditors despite objections?

    1. The plan carried 80.814 per cent of voting share: The statutory threshold is more than three-fourths, so the requirement was met.
    2. No individual creditor holds a veto: A plan sanctioned by the tribunal binds every creditor covered by it, including those who voted against it.
    3. Five entities were alleged to be associates: Dissenting creditors argued those entities were connected to the founder and should not have been permitted to vote. The NCLT did not accept the objection.
    4. The Bench itself was divided: The original NCLT Bench differed over the plan, and a third judicial member decided the matter.

    What did the tribunal do with the net worth discrepancy?

    1. Earlier certificates showed a far larger figure: A 2017 net worth certificate furnished to RBL Bank put his net worth at about Rs 45,888 crore, and a 2018 certificate at about Rs 40,562 crore.
    2. Creditors sought a forensic audit: They asked for an examination of the gap between those certificates and the assets disclosed in the present proceedings.
    3. Suspicion was held not to be proof: The NCLT held that the creditors had not shown with evidence that specific assets were transferred, concealed or diverted to defraud them.
    4. A forensic audit is not a precondition: The tribunal held that such an audit is not mandatory before a repayment plan can be approved.

    What grounds remain if the creditors appeal?

    1. The appeal lies to the appellate tribunal: Creditors can challenge the order before the National Company Law Appellate Tribunal (NCLAT).
    2. The challenge must be legal or procedural: Available grounds include ineligible creditors being allowed to vote, the statutory majority being wrongly calculated, or the law being wrongly applied.
    3. A low recovery is not itself a ground: A creditor cannot overturn a plan merely because it considers the amount recovered too small.
    4. The associate votes are the strongest ground: If the appellate tribunal finds those votes were wrongly counted and the required majority was consequently not reached, it can interfere with the approval.
    5. The corporate borrowers stay exposed: Creditors can continue to pursue the principal borrowers through separate legal or insolvency proceedings.

    Is this outcome exceptional or the norm?

    1. 5,186 cases have produced 64 repayment plans: Since the personal guarantor provisions came into force, creditors have filed about that many cases and only 64 ended in a repayment plan.
    2. Recovery across those plans is about 1 per cent: Creditors recovered roughly that share of what they were owed in the cases that did reach a plan.
    3. The case is therefore representative: A near total haircut is the ordinary result of this regime rather than an outlier produced by one guarantor’s circumstances.

    Challenges to the personal guarantor insolvency regime

    1. Admitted claims bear no relation to the estate: A guarantor is admitted for the whole defaulted corporate debt, and the recovery pool is one individual’s property, so the ratio is guaranteed to look catastrophic. Eg. Guarantees securing multi-thousand crore project loans are routinely taken from promoters whose personal balance sheets are a fraction of that size.
      The Fix: Require lenders to record and periodically revalue the guarantor’s net worth against the guaranteed exposure, so the guarantee is priced as security rather than counted at face value.
    2. Voting power can sit with connected parties: The Code sets a voting threshold without a tested standard for excluding creditors related to the guarantor, so a majority can be assembled from within the group. Eg. Related party voting was the reason corporate insolvency law had to bar connected persons from the committee of creditors through Section 29A.
      The Fix: Extend a Section 29A style disqualification expressly to voting in personal guarantor repayment plans, with the burden of disclosure on the guarantor.
    3. Asset disclosure is self reported: The estate rests on what the individual declares to the resolution professional, who has limited power to trace assets held through family members or offshore structures. Eg. Benami holdings and trust structures sit outside the disclosure a resolution professional can compel.
      The Fix: Give the resolution professional statutory access to income tax, benami property and foreign asset reporting records for the guarantor and immediate family.
    4. The process is slow relative to the value at stake: A guarantor’s estate does not appreciate during the proceedings, and delay erodes the small recovery that exists. Eg. Corporate insolvency resolution has routinely overrun the 330 day outer limit the Code prescribes.
      The Fix: Set a hard outer timeline for personal guarantor cases with automatic escalation to the appellate tribunal on breach.
    5. Discharge closes the file without closing the debt: A discharge order releases the guarantor while the borrowing companies remain in default, so lenders keep the exposure and lose the security. Eg. Group structures allow the operating company, the borrower and the guarantor to fail in three separate forums on different timelines.
      The Fix: Require the corporate and personal proceedings arising from the same borrowing to be heard by a single Bench, so the two outcomes are decided against one record.

    Conclusion

    The regime was built to do two things at once. It gives an honest guarantor a fresh start, and it gives a lender a second claim on a defaulted loan. It cannot do both when the claim admitted is the whole debt and the estate is one person’s property. The marker to watch is whether the appellate tribunal treats disqualification of connected voters as a live standard, since that is the only part of this process a dissenting creditor can still reach.

    Back2Basics: Insolvency and Bankruptcy Board of India

    1. Establishment: Set up in 2016 as the regulator created by the Insolvency and Bankruptcy Code, 2016.
    2. Regulated entities: It regulates insolvency professionals, insolvency professional agencies and information utilities.
    3. Powers: It carries legislative, executive and quasi-judicial functions, framing regulations under the Code and enforcing them.
    4. Data role: It publishes case level outcomes of the insolvency process through periodic newsletters.

    [2017] Which of the following statements best describes the- term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news?

    (a) It is a procedure for considering ecological costs of developmental schemes formulated by the Government.

    (b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.

    (c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.

    (d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government.

  • Chandra’s settlement comes as IBC turns 10, with bank haircuts at five-year high

    Why in the News

    The National Company Law Tribunal (NCLT) has approved a personal insolvency repayment plan under which Zee Group founder Subhash Chandra will pay Rs 6.5 crore against admitted claims of Rs 22,006.57 crore. That is a 99.97 per cent haircut, one of the highest in the history of the insolvency regime. It comes as the Insolvency and Bankruptcy Code, 2016 (IBC) completes ten years in force. Banks are considering an appeal before the National Company Law Appellate Tribunal (NCLAT). The dispute is whether the Code should be judged by what creditors recover or by whether a stressed asset is resolved at all.

    What is a “haircut” under the Insolvency and Bankruptcy Code, 2016?

    1. The term is not defined in the Code: The IBC nowhere defines a haircut. Banking practice uses the word for the percentage reduction in the value of an asset pledged as collateral, applied to protect the lender against loss.
    2. What the Code was enacted to do: The IBC was enacted in 2016 to rescue companies under financial stress or heavy debt through resolution and repayment to creditors.
    3. A creditor majority binds the minority: Once the required majority of creditors approves a repayment plan and the tribunal sanctions it, a dissenting creditor cannot walk away and demand a separate settlement.

    Why has the Chandra order revived the haircut debate?

    1. The size of the write down: The order of 25 August approved payment of Rs 6.5 crore to creditors, plus Rs 25 lakh towards the costs of the process.
    2. The liability arises from personal guarantees: Much of the admitted claim relates to personal guarantees and indemnities given for borrowings by companies associated with the Essel Group.
    3. The route is personal insolvency: The proceedings ran against the individual promoter as a personal guarantor rather than against a corporate debtor.
    4. Lenders are weighing a challenge: Banks are considering an appeal against the approval before the NCLAT.

    What does the recovery record under the Code look like?

    1. Cases resolved and value realised: Between 2021-22 and 2025-26, 1,077 cases were resolved under the IBC, with a realisation of Rs 2.47 lakh crore for creditors.
    2. The five year average: Average recovery against admitted claims across those five years was close to 29 per cent.
    3. The year wise trend: Recovery was 24 per cent in 2021-22, 39 per cent in 2022-23, 28 per cent in 2023-24 and 37 per cent in 2024-25, before falling to 20 per cent in 2025-26, the lowest in five years.
    4. What the figure means for a lender: A bank may hold claims running into thousands of crore rupees and receive only a fraction of what it is owed.

    Why do the banks contest the vote that approved the plan?

    1. The margin of approval: Twenty three creditors participated in the voting, and the plan was approved with 80.814 per cent of the votes cast in its favour.
    2. Every bank voted against: The banks that opposed the plan held a combined vote share of only 19.186 per cent.
    3. The related party allegation: Banks say at least five entities holding 61.78 per cent of the votes cast, all of which backed the plan, are linked to the debtor as associates or related parties.
    4. The exclusion sought: A trustee company argued that the votes of an investment company and its two subsidiaries should not have been counted. A resolution professional is the person appointed to manage the affairs of an entity under insolvency and to facilitate its resolution.
    5. The subsidiary argument: The debtor’s counsel argued that a parent company that is not itself an associate of the debtor cannot pass that classification to its downstream subsidiaries.
    6. The debtor’s response: Chandra’s office rejected the allegation as inaccurate. It said the entities referenced belonged to a relative whose business interests were separated in 2008-09, and that they do not qualify as associate entities under the Code.

    Is the Code meant to maximise recovery, or to resolve?

    1. The government’s position: The Ministry of Corporate Affairs holds that the primary objective of the Code is resolution and not recovery.
    2. Why claims are treated as the wrong benchmark: The Ministry told the standing committee on finance in December 2025 that the assets available on the ground are the better measure, since the market values what a company brings to the table and not what it owes.
    3. What an admitted claim contains: A claim often includes a non performing asset (NPA) that may be fully written off, the interest on that asset, and both a loan and the guarantee given against it.
    4. The value that is not counted: Realisation figures exclude the value that may come from equity holdings after a resolution.
    5. The indirect gain claimed: The Code is credited with creating credit discipline, which has contributed to reducing the gross non performing assets of banks.
    6. The banks’ counter: Banks argue that the problem lies in the valuation of stressed companies, that all assets should be included and properly valued, and that the process is opaque.
    7. The valuation mechanism in dispute: At least two valuers are appointed to give a fair value and a liquidation value, based on records and physical examination of the assets. The Chairman of the State Bank of India told the standing committee that valuation should reflect enterprise value instead of liquidation value.

    Challenges to the Insolvency and Bankruptcy Code, 2016

    1. Delay erodes the value a resolution can fetch: A stressed company loses value for every year it stays unresolved, so the price a resolution applicant will pay falls with time. Eg. Videocon Industries was resolved in 2021 at about five per cent of admitted claims, and the NCLAT stayed the approved plan on that ground. Fix. Tie admission to a fixed outer date from the default so the asset reaches the market before it is stripped of value.
    2. Liquidation remains a more common outcome than rescue: A large share of admitted cases ends in liquidation rather than in an approved resolution plan, which inverts the Code’s stated purpose. Eg. The Insolvency and Bankruptcy Board of India’s quarterly newsletters have consistently reported more closures by liquidation than by resolution. Fix. Extend the pre-packaged insolvency route, available to micro, small and medium enterprises since 2021, to larger firms so a rescue is negotiated before value is lost.
    3. The individual insolvency framework is only partly in force: Part III of the Code was notified in December 2019 for personal guarantors to corporate debtors alone, and the remaining provisions for individuals and partnership firms have not been brought into force. Eg. A defaulting individual who is not a personal guarantor has no route under the Code at all. Fix. Notify the remaining Part III provisions along with a designated adjudicating forum for individual cases.

    Conclusion

    The appeal now being prepared will decide whether the disputed votes were correctly counted, and that is the next milestone in this case. Valuation is the point on which the recovery and resolution positions turn, and shifting stressed asset valuation to enterprise value is still only a suggestion before the committee.

    Matching Previous Year Question

    “[2017] Which of the following statements best describes the- term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news? (a) It is a procedure for considering ecological costs of developmental schemes formulated by the Government. (b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties. (c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings. (d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government. ANSWER: (b)”

  • PSU banks more efficient than private peers: EAC-PM

    PSU banks more efficient than private peers: EAC-PM

    Why in the News

    A paper by two economists for the Economic Advisory Council to the Prime Minister (EAC-PM), a body that advises the Prime Minister on economic policy questions, found that public sector banks (PSBs) are more efficient than private and foreign banks.

    Titled “Reforms, Efficiency, and Productivity of Indian Banking Sector in the Last Decade: DEA Approach”, the paper used Data Envelopment Analysis (DEA), a method that measures how far a unit could shrink its inputs while producing the same output, to compare 47 banks.

    What does the study find?

    1. PSBs improved significantly: During 2014-15 to 2025-26, PSBs recorded average efficiency of 88.53%, compared with 85.62% for private banks. Foreign banks led over the full period: Foreign banks had the highest 12-year average of 88.98%, but their efficiency declined from 95.86% in 2014-15. Most efficient banks:
    2. HSBC and JPMorgan Chase: 100% efficiency in all 12 years.
    3. HDFC Bank: 97.54% average efficiency among private banks.
    4. State Bank of India (SBI): 97.49%, highest among PSBs.
    5. DBS Bank India: Lowest single-year efficiency of 40.12% in 2021-22, linked to its merger with Lakshmi Vilas Bank.
    6. Impact of PSB mergers: PSBs were relatively less efficient than private banks during FY2019 to FY2022, partly due to the merger and rationalisation of branches, employees and business operations.

    Data Envelopment Analysis (DEA)

    1. DEA is a method for measuring the relative efficiency of units, here banks, that produce the same kind of output from different combinations of inputs.
    2. An efficiency score below 100% means the unit could reduce its inputs by that shortfall and still produce the same output. Eg. A score of 85% means the unit could cut inputs by 15% without any loss of output.

    “[2024] Consider the following statements:
    Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders.
    Statement-II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line.
    Which one of the following is correct in respect of the above statements?
    (a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
    (b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
    (c) Statement-I is correct, but Statement-II is incorrect
    (d) Statement-I is incorrect, but Statement-II is correct

  • Relief to digital fraud victims: How losses upto 50K can be recovered

    Why in the News?

    The RBI notified a revised compensation framework for victims of digital payment fraud, effective 1 January 2027. Under the scheme, victims can recover part of losses up to ₹50,000 through a state-supported fund. The move follows a sharp rise in fraud value despite fewer reported cases.

    Why did the RBI intervene now, and what does the scale of digital fraud reveal about the existing liability framework?

    1. Rising fraud value: Fraud cases fell to 10,114 in FY26, but the amount involved increased 46% to ₹48,021 crore, indicating fewer but larger frauds.
    2. Consumer liability gap: The earlier framework placed the burden of proof and recovery on customers. Banks faced limited liability unless negligence was established
    3. Electronic Banking Transactions (EBTs) as the primary vector: EBT are a digitally initiated banking transaction, including NEFT, RTGS, UPI, and card-based payments. They became the primary fraud channel, exposing a liability gap.
    4. State absorption of residual risk: The new framework makes the RBI the majority loss-bearer for unrecovered fraud amounts. This signals that the regulator treats digital fraud loss as a systemic risk requiring regulatory underwriting, not merely a bilateral consumer-bank dispute.

    What is the consumer entitlement under the new framework, and what conditions govern eligibility?

    1. Maximum compensation ceiling: A victim is eligible for compensation of up to 85% of net loss amount or ₹25,000, whichever is less. This applies to gross fraudulent EBT losses up to ₹50,000.
    2. Lifetime cap: The compensation is available once during the lifetime of the account holder. Repeat claims for subsequent fraud events are not covered under this mechanism.
    3. Complaint filing window: Victims must lodge a complaint regarding the fraud within five calendar days of the event. Claims filed beyond this window are ineligible regardless of the loss amount.
    4. Loss verification standard: The loss must be established in accordance with the internal processes set out in the victim’s bank’s policy. The framework does not prescribe a uniform evidentiary standard across banks, leaving verification to individual bank procedures.
    5. Threshold-based compensation rate: For losses below ₹29,412, the victim receives 85% of the amount lost. For losses between ₹29,412 and ₹50,000, the victim receives a flat ₹25,000 (the ceiling).

    How is the cost of compensation shared between the RBI, the victim’s bank, and the beneficiary bank?

    1. Domestic fraud (below ₹29,412): RBI bears 65% of compensation. The victim’s bank and beneficiary bank contribute 10% each.
    2. Domestic EBT fraud between ₹29,412 and ₹50,000 (₹25,000 flat compensation): The RBI contributes ₹19,118 (76.5%). The victim’s bank and the beneficiary bank each contribute ₹2,941 (approximately 12% each).
    3. Cross-border EBT fraud (elevated bank contribution): In cross-border cases, the victim’s bank’s contribution rises to 20% for frauds below ₹29,412, and to ₹5,882 for frauds in the ₹29,412-₹50,000 band.
    4. Multiple beneficiary banks (proportionate allocation): Where more than one beneficiary bank receives the fraudulent amount, each bank’s share of the compensation is proportionate to the amount credited to its accounts.
    5. Numerical illustration (official example): If fraud loss is ₹40,000 and ₹15,000 is recovered, the net compensable loss is ₹25,000. The victim receives 85% of ₹25,000 = ₹21,250. The RBI contributes ₹16,250; victim’s bank and beneficiary bank contribute ₹2,500 each. If nothing is recovered, the victim receives ₹25,000 (ceiling), distributed in the same proportion.

    What standard of bank negligence triggers full bank liability, and what are the banks’ procedural obligations?

    1. Full bank liability for own negligence: Where fraud arises from the bank’s own negligence, the bank must compensate the victim entirely. The RBI cost-sharing mechanism does not apply in such cases.
    2. Safety and security failures: Failing to ensure proper safety and security mechanisms for EBTs constitutes negligence. This includes system malfunctions and security breaches.
    3. Alert failures: Failing to send mandatory transaction alerts for EBTs above ₹500 is classified as negligence. The alert obligation is non-discretionary.
    4. Complaint handling failures: Failing to provide 24×7 channels for customer complaints and failing to act diligently on received complaints both constitute negligence. Banks cannot limit complaint access to business hours.
    5. Complaint resolution timelines: Banks must resolve fraudulent EBT complaints within 45 calendar days for domestic EBTs and within 60 calendar days for cross-border EBTs. Breach of these timelines has implications for bank liability assessment.
    6. Post-complaint containment obligation: On receipt of any fraudulent EBT complaint, a bank must take prompt steps to prevent further unauthorised EBTs in the customer’s account. This is a proactive duty, not a passive acknowledgment obligation.

    Does the framework resolve the consumer’s structural vulnerability to digital fraud, or does it shift the problem without eliminating it?

    1. Consumer protection: The framework guarantees time-bound compensation and imposes liability for proven bank negligence.
    2. Limited bank incentives: RBI bears most compensation costs. Banks usually contribute only 10-20%, reducing incentives to strengthen fraud prevention.
    3. Procedural burden: Victims must report fraud within five days and satisfy bank-specific verification standards.
    4. Source of fraud: The framework compensates losses but does not strengthen EBT security standards or regulate payment intermediaries.
    5. Residual reporting: Victims must also report fraud to the National Cyber Crime Reporting Portal or Cyber Crime Helpline. This supports record-keeping, not recovery.
    6. Coverage mismatch: The compensation cap is ₹25,000, whereas average fraud value in FY26 was about ₹4.75 crore per case, limiting relevance to small-value consumer fraud.

    Conclusion

    The RBI framework introduces the first regulatory mechanism for sharing consumer losses from digital fraud. It reduces immediate customer losses but leaves banks with limited financial incentives to prevent fraud. Large-value frauds, security standards and accountability of payment intermediaries remain unresolved.

  • Consider the following pairs

    Consider the following pairs :
    1. ABN Amro Bank :USA
    2. Barclays Bank :UK
    3. Kookmin Bank :Japan
    Which of the above pairs is/are correctly matched ?

  • Consider the following statements

    Consider the following statements:
    Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders.
    Statement-II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line.
    Which one of the following is correct in respect of the above statements?