Current Affairs - Banking & Finance

• A glimpse of the magnitude of the economic destruction wreaked was revealed at the 41^st meeting of the Goods and Services Tax(GST) Council, where the shortfall in compensation cess for this year was estimated at around Rs 2.35 lakh crore.
• The Finance Ministry revealed that the Centre would not be able to make good the shortfall.
• Now, the businesses are looking towards a legal provision -the Force Majeure or “Act of God” clause that has its origins in the Napoleonic Code - to cut losses.
• Back in February, 2020, the Ministry had issued an official memorandum clarifying that the pandemic “should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate”.

About Force Majeure Clause

• The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled’.
• It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.

Indian Jurisprudence on the Concept of Force Majeure

• The concept has neither been defined nor specifically dealt with under the Indian statutes.
• However, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the "Contract Act")
• It isalso mentioned in the 2017 Manual for Procurement of Goods issued by the Department of Expenditure.

Difference between an “Act of God” and “Force Majeure”

• Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.

Situations Legally Qualify for Use of Force Majeure

• War, riots, natural disasters or acts of God, strikes, introduction of new government policy imposing an embargo, boycotts, outbreak of epidemics and such situations are generally listed.
• If an event is not described, then it is interpreted in a way that it falls in the same category of events that are described.

Incase Force Majeure Clause is Triggered

• When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
• Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.
• If a party to a contract believes that the other party has invoked the FMC in an unjustified situation, it can move court seeking performance of the contract.

Incase of Absence of FMC in Contract

• In case a contract does not have a force majeure clause, there are some protections in common law that can be invoked by parties.
• For example, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.

Court’s View on FMC

• Court rulings have established that force majeure cannot be invoked when performance of the contract has become difficult, but only when it has become impossible.
• It looks into whether the party arguing impossibility of performance has tried all other avenues to fulfil its liabilities before invoking force majeure.
• The court would look into specifics like whether a lockdown imposed to contain the pandemic locally prevented performance of the contract.
• The court would also look into how unforeseen the cited circumstance really is when catalogued in the contract specifically.
• In April, 2020, the Bombay High Court did not accept the force majeure argument in a case where the petitioner argued that Covid-19-related lockdowns had frustrated a contract for supply of steel.

Importance of FMC for Businesses

• It can usually be found in various contracts such as power purchase agreements, supply contracts, manufacturing contracts, distribution agreements, project finance agreements, agreements between real estate developers and home buyers, etc.
• This provision is important for businesses as it relieves the parties from performing their respective obligations and which are to be undertaken under the contract and consequential liabilities, during the period that force majeure events continue provided that the conditions for clause to become applicable (which have been discussed above) are met.

Global Examples of Invoking FMC

• In China, where the Covid-19 outbreak originated, the Council for Promotion of International Trade is issuing force majeure certificates to businesses.
• Also, it had recognised the 2002 SARS outbreak as a force majeure event.
• Singapore enacted the Covid-19 (Temporary Measures) Act in April, 2020, to provide relief to businesses that could not perform their contractual obligations due to the pandemic.
• TheParis Commercial Court in July, 2020, ruled that the pandemic could be equated to a force majeure event.

• The Ministry of Commerce and Industry has launched a first-of-its kind GIS-enabled national land bank portal on 27th August.It is a prototype only and will be developed further with inputs from states.
• It will help investors zero in on land located in various states for potential projects.
• Investors will also get access to details of logistics, land, rail & air connectivity, tax incentives, drainage system, power supply and raw material availability from the portal on various industrial belts.
• To start with, extensive information about industrial belts in six states is available on the portal.

• On 20^th August, 2020, the Reserve Bank of India (RBI) released the National Strategy for Financial Education(NSFE): 2020-2025 document in order achieve the vision of creating a financially aware and empowered India.
• This is the second national strategy; the first NSFE was launched in 2013.

Background and Rationale of NSFE

• India has a large population of adults.This demographic advantage can beleveraged to ensure that India becomes one of the fastest growing economies, with emphasis on inclusive growth through a vibrant and stable financial system.
• Over the last few years, there has been rapid progress towards digitalization which has brought newer opportunities to the forefront like never before.
• There is a paradigm shift in digital transactions and Payment Infrastructure in the country (Goal of Less Cash Economy). Due to all these developments, it has become imperative to revise the existing National Strategy for Financial Education (NSFE) and to adopt innovative measures to implement the same.
• Towards this objective, the National Centre for Financial Education (NCFE) has been set up by all the Financial Sector Regulators as a Section (8) company under Companies Act, 2013 to undertake basic financial education and to develop suitable content for increasing financial literacy among the masses in the country.

Strategic Objectives of NFSE

• Inculcate financial literacy concepts among the various sections of the population through financial education to make it an important life skill.
• Encourage participation in financial markets to meet financial goals and objectives.
• Develop credit discipline and encourage availing credit from formal financial institutions as per requirement.
• Improve usage of digital financial services in a safe and secure manner.
• Manage risk at various life stages through relevant and suitable insurance cover.
• Knowledge about rights, duties and avenues for grievance redressal.

Major Highlights

• This NSFE has been prepared by the National Centre for Financial Education (NCFE) in consultation with all the Financial Sector Regulators viz. RBI, Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA), etc. under the aegis of the Technical Group on Financial Inclusion and Financial Literacy (TGFIFL).
• To prepare a comprehensive Strategy based on people’s needs and the country’savailable resources, the following process has been adopted in the Indian context:
• Assessing and evaluating gaps in financial literacy.
• Comparison of NSFE with the OECD International Network on Financial Education(OECD-INFE) Policy Handbook on National Strategies for Financial Education.
• It focuses on advancement of skills of financial service providers and other intermediaries involved in dissemination of financial literacy.
• It intends to support the vision of the Government of India and the Financial Sector Regulators by empowering various sections of the population to develop adequate knowledge, skills, attitudes and behaviour which are needed to manage their money better and to plan for the future.
• The Strategic Objectives are envisaged to be achieved through the following dimensions-

Key Recommendations

• In order to achieve the Strategic Objectives laid down, the document recommends adoption of a ‘5 C’ approach-

Content

• Financial Literacy content for school children (including curriculum and co-scholastic), teachers, young adults, women, new entrants at workplace/ entrepreneurs (MSMEs), senior citizens, persons with disabilities, illiteratepeople, etc.

Capacity

• Develop the capacity of various intermediaries who can be involved in providing financial literacy.
• Develop a ‘Code of Conduct’ for financial education providers.

Community

• Evolve community led approaches for disseminating financial literacy in asustainable manner.

Communication

• Use technology, mass media channels and innovative ways of communicationfor dissemination of financial education messages.
• Identify a specific period in the year to disseminate financial literacy messageson a large/ focused scale.
• Leverage on Public Places with greater visibility (e.g. Bus Stands, RailwayStations, etc.) for meaningful dissemination of financial literacy messages.

Collaboration

• Preparation of an Information Dashboard.
• Streamline efforts of other stakeholders for financial literacy.
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• The Strategy also suggests adoption of a robust ‘Monitoring and Evaluation Framework’ to assess the progress made under the Strategy.

Expected Impact

• The strategy will develop credit discipline and encourage availing credit from formal financial institutions as per requirement. It will improve usage of digital financial services in a safe and secure manner.
• Besides encouraging active savings behavior, it will encourage participation in financial markets to meet financial goals and objectives.
• It will help improve research and evaluation methods to assess progress in financial education.

 About Financial Education

• Financial Education is defined as the process by which financial consumers/investors improve their understanding of financial products, concepts and risks and through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help and to take other effective actions to improve their financial well-being.
• While, Financial Literacy is defined as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being.

Components of Financial Education

Basic Financial Education

• The basic financial education consists of fundamental tenets of financial well-being.With the introduction of Government’s Pradhan Mantri Jan DhanYojana (PMJDY) scheme along with APY, PMJJBY &PMSBY besides MUDRA Yojana, many people have already been included. They alsorequire financial education so that they can take full benefits from these schemes.
• These basic concepts need to be communicated to everyone by adopting different modes ofdelivery, suitable to the target audience.
• Special emphasis shall be laid on the financially excluded and those newly included but not operating their accounts.
• The basic financialeducation acts as a foundation for sector-specific and process education.

Sector Specific Financial Education

• Sector specific financial education is being imparted by the Financial Sector Regulators and focuses on “What” of the financial services and the contents cover awareness on ‘Do’s & Don’ts’, ‘Rights & Responsibilities’, ‘Safe usage of digital financial services’ and approaching ‘Grievance Redressal’ Authority.

Process Education

• Process education is crucial to ensure that the knowledge translates into behavior.

Way Forward

• Financial education plays a vital role in creating demand side response to the initiatives of the supply side interventions.
• Incidentally, financial education also supports achievement of Sustainable Development Goal (SDG) No. 4 on Education which aims to ensure inclusive and equitable quality education and promote life-long learning opportunities for all (SDG Target 4.6 on Literacy and SDG Target 4.4 on Life Skills under SDG 4 on Education).
• Financial education initiatives by concerned stakeholders will help people achieve financial well-being by accessing appropriate financial products and services through regulated entities.
• There is a need to increase the size of banking as well as other financial sectors to ensure that the benefits of these developments reach the common masses.
• Keeping in view the vast and rapid changes taking place in the financial sector, all the stakeholders need to appreciate the dynamic nature of evolution of financial services and the concomitant changes that are required towards financial literacy.
• Arobust and scientific assessment method would go a long way in helping Policy makers identify priorities and assess the impact of their interventions.
• Some of the broad issues that need to be considered in this regard are as under:
• National Strategy evaluation to include an assessment of the governance, co-ordination and monitoring mechanisms of the implementation methods, the role of stakeholders and the effects of any communication or publicity plans/ initiatives.
• Each stakeholder needs to clearly plan and articulate their role in the design, development and implementation of the Strategy which shall be monitored through qualitative and quantitative indicators.
• A scientifically designed template for gathering feedback through various channels, from both the beneficiaries of financial literacy programmes and the intermediaries involved in disseminating the same, needs to be prepared and periodically reviewed keeping in view the vast changes in the financial sector.
• Selection of appropriate evaluation methods need to be finalized in view of the challenges involved in evaluation.

• On 6^th August, 2020, the Reserve Bankof India(RBI) gave the green signal to a loan restructuring scheme for stressed borrowers.
• The so called ‘Resolution Framework for Covid19-related Stress’, has been announced as a special window under the Prudential Framework on Resolution of Stressed Assets issued on June 7, 2019.

 Beneficiaries

• Only those companies and individuals whose loans accounts are in default for not more than 30 days as on March 1, 2020, are eligible for one-time restructuring.
• For corporate borrowers, banks can invoke a resolution plan till December 31, 2020 and implement it till June 30, 2021.
• For personal loans, the resolution plan can be invoked till December 31, 2020 and will be implemented within 90 days thereafter.

Implementation

• The RBI has set up a five-member expert committee headed by K V Kamath, former Chairman of ICICI Bank, which will make recommendations on the financial parameters required.

How it is Differentfrom Previous Recast Schemes

• Entry Barriers:The earlier restructuring schemes did not have any entry barrier, unlike the current scheme that is available only for companies facing Covid-related stress, as identified by the cut-off date of March 1, 2020.
• Defined Timeline:Strict timelines for invocation of resolution plan and its implementation have been defined in the scheme, unlike in the past when this was largely open-ended.
• ICA Signing Mandatory:The structuring of the scheme makes signing of theInter-Creditor Agreements (ICA) largely mandatory for all lenders once the resolution plans has been majority-voted for, otherwise they face twice the amount of provisioning required.
• Independent Validation:Loans above Rs 100 crore will require only one credit agency’s validation.Large loans above Rs 1,500 crore will also require to be vetted by Kamath committee.
• Penalties for Delays: Earlier schemes had no disincentives for lenders delaying an agreement for restructuring. The present scheme provides a for a 20% penal provision for lenders not signing the ICA.
• Post-Monitoring Performance: In this scheme a default with any of the lenders will automatically lead to a 30-day review period. Loans will be classified as NPAs if 10% repayment is not done during this period.

Impact

• Key sectors, such as micro, small and medium enterprises (MSMEs), hospitality, aviation, retail, real estate and auto, which are facing liquidity crunch, will benefit from the move.
• This restructuring plan will also enable lenders to implement a resolution plan in respect of eligible corporate debtors without a change in ownership, while classifying such exposures as standard, if they meet certain conditions.
• The central bank’s move will also incentivise banks to lend more to corporates through bonds, something that had stalled in the wake of covid-19.
• The biggest impact will be that banks will be able to check the rise in non-performing assets (NPAs) to a great extent.
• However, it will not bring down the NPAs from the present levels; legacy bad loans of close to Rs 9 lakh crore will remain within the system.
• Banks will have to maintain additional 10% provisions against post-resolution debt, and lenders that do not sign the ICA within 30 days of invocation of the plan will have to create a 20% provision.

 Provisions against Misuse

• The RBI has built in safeguards in the resolution framework to ensure it does not lead to ever-greening of bad loans as in the past.
• Restructuring of large exposures will require independent credit evaluation done by rating agencies and a process validation by the Kamath-led expert committee.
• Unlike in the case of restructuring of larger corporate exposures, for personal loans there will be no requirement for third party validation by the expert committee, or by credit rating agencies.
• The RBI has said that the term of loans under resolution cannot be extended by more than two years.
• To mitigate the impact of expected loan losses, banks need to make a 10% provision against such accounts under resolution.

• The Ministry of Corporate Affairs (MCA) has set up a committee to look into the possibility of including what are called “pre-packs” to offer faster insolvency resolution under the Insolvency and Bankruptcy Code (IBC).

Background

• Since the start of the year 2019, the Government has been planning to introduce the concept of Pre-Package Insolvency Schemes in the Indian Insolvency & Bankruptcy Code (IBC).
• Now due to COVID-19, the businesses all over the country are worst hit since the global economic slowdown of 2008-2009 and it is imperative that the Government would chalk out a more concrete plan for the implementation of this system.

Need

• Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC.
• Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.

About ‘Pre-Packs’

It is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.

A pre-pack process is carried out by the debtors who try to keep their entity afloat and try to negotiate with the creditors for a resolution of the debt. Therefore, if such a process fails, it can always lead to a creditor filing an application under Section 7 or 9 of the IBC and triggering insolvency.

The objectives are -

• To obtain a better return to creditors than would be possible if the company were to be sold through an insolvency process (through the preservation of value that could otherwise be eroded because of a formal insolvency process);
• To reduce professional costs associated with an insolvency process by streamlining the process;
• To provide certainty of outcome to stakeholders (including creditors and the purchaser).
• These objectives are aligned to the objectives of the corporate insolvency resolution process (CIRP).

Benefits

• Retaining Business in the Hands of Existing Management: It can incentivise the existing management and promoters of the company to initiate the pre-pack proceedings before the occurrence of a default or at an earlier stage of default. It can help the business to retain its current management and would be agreed by the creditors as they generally agree to hold on to the existing management.
• Better Return: In most cases it would provide a better return to the creditors. In a pre-pack scheme, the value would be determined beforehand which would yield better returns to the creditors.
• Speedy & Cheaper Resolution: Pre-packs are usually a cheaper and less time-consuming method than the proper insolvency and bankruptcy proceedings. It reduces the legal cost involved in the formal procedure and also the insolvency professional cost.
• Certainty of Outcomes: There is a surety of the outcome since the resolution plan has been discussed and finalized beforehand.This gives a lot of confidence to the creditors since they are assured of their money and helps put more faith in the Corporation Insolvency Resolution Process (CIRP).
• Reducing Burden: If implemented in India, the pre-pack schemes will reduce the already burdened NCLT’s as already there will exist a resolution plan.

Issues with Pre-pack

• Reduced Transparency:The key issue of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP as financial creditors would reach an agreement with a potential investor privately and not through an open bidding process. This could lead to stakeholders such as operational creditors raising issues of fair treatment when financial creditors reach agreements to reduce the liabilities of the distressed company.
• No Shield of Moratorium: Another major concern that may arise during the pre-pack scheme implementation is that it would not have the shield of moratorium like it is there when a case is admitted under Section 7 or 9 of IBC.
• Biased towards Secured Creditors:One major criticism of pre-pack schemes is that it is more in the favour of secured creditors and neither do the operational creditors have much say in the negotiation nor they are given a fair share. This challenge has to be overcome if pre-pack schemes are to be implemented in India.

Way Forward

• With the current Pandemic creating havoc in almost every industry, it is almost certain that a lot of companies would be pushed into insolvency in the coming times and there this scheme of pre-packaged deals, if introduced, may act as a catalyst in helping those companies survive.
• It is expected and emphasized that if the pre-pack system is implemented well, it would lead to smoother implementation of resolution plans, would promote growth and keep the company as a going concern while retaining jobs and ensuring creditors receive the funds due to them.
• Especially during these difficult financial times, it is imperative that such a system would only yield fruitful results and would have more pros than cons.

• The 15th India-European Union Summit was held virtually.
• It was co-chaired by Prime Minister Narendra Modi, President of European Council Charles Michel and President of European Commission Ursula von der Leyen. 
• India and the European Union signed a civil nuclear agreement before the India-EU virtual summit.
• Though India-EU summits discuss several topics, the major thrust has been working on a Broad-based Trade and Investment Agreement (BTIA) since 2007, but India's trade regime and regulatory environment remains comparatively restrictive that is why after several rounds of negotiations still there is no consensus on Free Trade Agreement.
• Differences related to matters such as the level of FDI & market access, manufacture of generic drugs, greenhouse gas emissions, civil nuclear energy, farming subsidies, regulation & safeguards of the financial sector, cooperation on tax evasion, overseas financing of NGOs in India, trade controls, technology transfer restrictions and cooperation on embargoes (Russia) are the hurdles.

• Technology giant Google will invest $10 billion (₹75,000 crore) in India over the next five-seven years with a focus on digitising the economy and building India-first products and services.
• The investment will focus on four areas important to digitization including:

1. Enabling affordable access and information for every Indian in their own language,
2. Building products and services that are deeply relevant to India’s unique needs,
3. Empowering businesses in their digital transformation journey, and
4. Leveraging technology and AI for social good, in areas like health, education, and agriculture.

• The US remained India's top trading partner for the second consecutive fiscal in 2019-20 according to the data of the Commerce Ministry.
• The US is one of the few countries with which India has a trade surplus.
• The trade gap between the countries has increased to $17.42 billion in 2019-20 from $16.86 billion in 2018-19.
• In 2018-19, the US first surpassed China to become India's top trading partner.
• The bilateral trade between India and China has dipped to $81.87 billion in 2019-20 from $87.08 billion in 2018-19. Trade deficit between the two neighbours have declined to $48.66 billion in 2019-20 from $53.57 billion in the previous fiscal.
• The data also showed that China was India's top trading partner since 2013-14 till 2017-18. Before China, UAE was the country's largest trading nation.

• India has become the second largest Foreign Direct Investor in the United Kingdom (UK) after the United States in 2019, by investing in 120 projects and creating 5,429 new jobs in the UK.

• The Union Cabinet has approved the capital infusion in the three Public Sector General Insurance Companies (PSGICs) namely Oriental Insurance Company Limited (OICL), National Insurance Company Limited (NICL) and United India Insurance Company Limited (UIICL).
• The capital infusion will enable the three PSGICs to improve their financial and solvency position, meet the insurance needs of the economy, absorb changes and enhance the capacity to raise resources and improved risk management.