UPI, Bank Consolidation, Bank Nationalization, NPA, Bad loans, Banks Boards Bureau for UPSC Exam

Unified Payments Interface (UPI)

• It is a common platform through which a person can transfer money from his bank account to any other bank account in the country instantly using nothing but his/her UPI ID.

• It is developed by the National Payments Corporation of India (NPCI) under the guidelines of the RBI

• UPI as a unified payments interface for payments wherein you will be allotted a unique ID thus reducing hassles of using credit/debit cards or knowing the banking details of the person like in case of NEFT or RTGS

• Thus, it facilitates seamless transfer of money from peer-to-peer with the authentication of the bank.

• This comes at a time when mobile wallet banking companies like PayTM are taking away the banking market

• One can also raise payment requests and ask for money. Therefore, it is being expected that apart from consumers, even merchants and companies will widely use this platform.

• The main use will be the transition to cashless economy. It will help in reducing the cash transactions in India. The cost of cash transactions is nearly 21000cr.

Need for Independent Payment Regulator-


Ratan Watal Committee on Digital Payments suggested having an independent payment regulator for better regulation.

Recent committee under Subhash Garg also suggested. Govt brought a Payment and Settlement System Bill 2018 to set up PRB to protect consumer interest, ensure transparency and have systemic stability.

RBI objected because-

• No proof of inefficiency in the current system

• Payments are dominated by banks who are regulated by RBI. Hence RBI should stay regulator

• A totally new system would require extra money and expertise

• RBI is not opposed to amendment in Payment and Settlements Act 2007 but it should have an upper hand

• Threat to independence of RBI

Conclusion- FSLRC had mandated RBI be the regulator of banks and payment systems.

Bank Consolidation-

• There are 22 PSU banks plus 5 subsidiaries of SBI. Together, they own two third of the assets in the banking sector. The main banks that will drive consolidation are called anchor banks.

• State Bank of India (SBI) has started the process of merging five of its subsidiaries and Bharatiya Mahila Bank (BMB) with itself

• Since 1991, with Narasimham committee report, creation of large size banks is demanded

Advantages of bank consolidation –

• Increase in assets will make it easy to comply to Basel III norms

• larger capital base useful for lending for big infra projects

• issue of NPA will be sorted to some extent

• better banking network in rural areas

• From perspective of smaller banks- they will get technology, better practices and professional standards from big bank.

• reduction in administrative costs for following regulations for each bank • Consolidate capital and infrastructure.

Challenges in Bank Consolidation –

• merger of two unhealthy banks will yield no benefit

• SBI isn’t in a position to merge its subsidiaries as they are loss making entities

• Issue of pay scale matching and human resource management

• Opposition from trade unions as they might lose their identity

• If few big banks are created, it is a threat to financial stability.

• States like Kerala have adopted resolution against merger of State Bank of Travancore with SBI citing it will lose track of the welfare schemes under SBT.

Solution for bank consolidation –

• First tackle the problem of stressed assets. Let the banks have enough capital then think of merger

• Let merger be according to geographical areas or the core business capabilities. Vinod Rai has suggested this.

• Merger should be such that its effect in rural areas should not hamper the functioning of small banks and payment banks in any way.

Bank merger announced– PNB, Union Bank, OBC to be merged
From total 27 PSBs, the number to be brought down to 12.

Public Debt Management Agency PDMA-

• Public Debt Management Agency (PDMA) is a proposed specialized independent agency that manages the internal and external liabilities of the Central Government

• Suggested by FSLRC to take away debt management from RBI

Need-
• Presently the market borrowing is managed by RBI but external debt by central government directly.

Establishing a debt management office would consolidate all debt management functions in a single agency.


• There is a severe conflict of interest in the RBI responsibility of setting the short term interest rate (i.e. the task of monetary policy) and selling bonds for the government. If the Central Bank tries to be an effective debt manager, it would lean towards selling bonds at high prices, i.e. keeping interest rates low.
• Some functions that are crucial to managing public debt are not carried out. For instance, no agency undertakes cash and investment management, information relating to contingent and other liabilities are not consolidated. This will be taken care of by PDMA.
• Overall, it will free RBI and let it concentrate on banking which is severely stressed sector.
• Importance of India’s macroeconomic stability due to less sovereign debt as compared to USA, China, etc.
Challenges
• In India sovereign debt management is not merely an exercise for resource mobilization but has a wider socio-economic impact. It thus requires a broader outlook which might not be given by an independent agency.
• PDMA’s focus is only on central government but RBI can harmonize the Debt management of both union and State governments.

50 years of Bank Nationalization

• In 1969, 14 banks nationalized and 6 banks later

• High informal money lending, busting of private banks, crony capitalism, etc made private banks unsustainable.

Benefit-

• 6% share of institutional credit raised to healthy 67% by 1991

• Service in the rural areas

• Lending to the poor and vulnerable

• Priority sector lending, RRB, Lead Bank Scheme introduced.

• Financial benefits- increase in savings rate, share of bank deposits in GDP

• Driving of social goals possible through Jan Dhan

• Stability of India after 2008 subprime crisis

• Investment in govt securities

Drawbacks-
• Narsimhan Committee 1991 said banks should focus on profits and commercial prospects
• PSB have had multiple drawbacks like politicization in appointments, dual control, hiring freeze, etc
• Highest NPA due to socio-economic benefits
• Efficiency got affected
Way ahead- partial privatization or merging

Issue of Bad Loans

What is NPA?


No payment of installment on advances for 90 days or not clearing balance in 90 days in case of overdraft facilities. In short, any money those banks were to receive but did not in 90 days.

Various steps taken to deal with rising NPAs

• Corporate Debt Restructuring Mechanism

• Joint Lenders’ Forum

• Asset Reconstruction Company.

• Strategic Debt Restructuring Scheme

• Scheme for Sustainable Structuring of Stressed Assets (S4A).

• Bank Boards Bureau

• Insolvency and Bankruptcy code

• Proposal to set up a Bad Bank which will take up all bad assets

Indradhanush Strategy of 7 reforms- capitalization, governance of boards, accountability, bank board bureau, appointments, distressing and empowerment.

Focus on the 4 R—recognition, resolution, recapitalization, and reforms

Insolvency and Bankruptcy Code


Basics- part of Sashakt Strategy, NCLT/DRT as institutions, time limit of 180+90,
Information Utility, Insolvency Professionals, Focues on Financial as well as
Operational Creditors including employees
SC upheld the IBC and praised it

Concerns-
• Time limit of 180+90 days breached due to appeallate bodies
• SLP in SC made things complicated- Essar steel case
• Haircuts are still high
• Committee of Creditors- no consensus
• Cross border insolvency not included as India is not signatory to UNCITRAL code 1997

Advantages- • Cases solved
• Resolution of large accounts- Essar and Bhushan Steel
• Reduction in time of resolution- World Bank report in 2015 estimated time at 4.3 years while IBC limits it to 270 days
• Lesser haircut
• Amendment to article 29A
• Resolution without admission to NCLT
• No issues in outright liquidation which earlier laws like SICA and SARFAESI had

New amendments- 330 days for resolution, creditors get say about distribution of net proceeds, rights and duties of insolvency professionals

Prompt Corrective Action Plan- to detect financial health of assets and prevent banks from going bust.According to the latest Prompt Corrective Action (PCA) plan, the banks are assessed on three parameters
• Capital ratios- CRAR
• Asset Quality- Net NPA
• Profitability- Return on asset
PCA triggers- special audit, limit of lending to one entity, NPA reduction ways, limit on access to costly credit

Banks Boards Bureau


• It will oversee the appointment of the top PSU bank officials. This is the move to professionalize the appointments and take banks away from political intervention.
• This is in pursuance with government promise at NIBM, objectives of
Indradhanush plan and also the recommendations of PJ Nayak committee
• In the meet of bankers at NIBM, Govt proposed that every PSB should establish a holding company which contains the stake of govt in PSB and its subsidiaries. This will insulate bank from shocks from subsidiaries and also lessen govt control
• The BBB will be converted to an asset holding company that will help banks to innovate different capital raising plans.
• However, final decision of appointment will be done by the appointment committee of the cabinet. Secondly, non-official director appointment lies outside BBB

Nachiket Mor committee on financial inclusion –


• Providing a universal bank account to all Indians above the age of 18 years by January 1, 2016. To achieve this, a vertically differentiated banking system with payments banks for deposits and payments and wholesale banks for credit outreach. These banks need to have Rs.50 crore by way of capital, which is a tenth of what is applicable for new banks that are to be licensed.
• Aadhaar will be the prime driver towards rapid expansion in the number of bank accounts.
• Monitoring at the district level such as deposits and advances as a percentage of gross domestic product (GDP).
• Adjusted 50 per cent priority sector lending target with adjustments for sectors and regions based on difficulty in lending.

PJ Nayak – governance in banking boards
The government owns more than 50% stake in PSBs which makes it vulnerable to arm twisting of appointments to boards. The government generally appoints people in its good books as CMD of banks leading to scams like Syndicate bank. For reforming the governance of bank boards, PJ Nayak committee was set up.
• Main measure is that government should transfer its share to a holding company like Bank Investment Company and make all the banks the subsidiaries of it. The company will be established under the Companies Act. The government will sign an agreement with the company of no interference in appointments.
• Nayak proposes the repealing Bank Nationalization Act and SBI act as it mandates government majority.
• Nayak also proposes taking the banks out of the purview of audit of CVC, CAG and RTI which makes its heads more averse to taking bold decisions.
• By reduction in shares to less than 50%, government cannot force banks to invest their profits in G-secs. This will give the banks freedom to invest their profits according to their wish.
• Criticism – less government control can invite another subprime crisis, it can lead to corporate money laundering and crony capitalism, banks will run only for profit and not expand in rural areas even if RBI rules say so.

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