e-RUPI: A Digital Payment Solution


e-RUPI, a person and purpose specific digital payment solution was launched on 2nd August 2021.

  • It has been developed by National Payments Corporation of India on its UPI platform, in collaboration with the Department of Financial Services, Ministry of Health & Family Welfare and National Health Authority.

Features

  • e-RUPI is a cashless and contactless instrument for digital payment.
  • It is a QR code or SMS string-based e-Voucher, which is delivered to the mobile of the beneficiaries.
  • The users of this seamless one-time payment mechanism will be able to redeem the voucher without a card, digital payments app or internet banking access, at the service provider.
  • e-RUPI connects the sponsors of the services with the beneficiaries and service providers in a digital manner without any physical interface. It also ensures that the payment to the service provider is made only after the transaction is completed. Being pre-paid in nature, it assures timely payment to the service provider without involvement of any intermediary.

Expected Benefits

  • It is expected to be a revolutionary initiative in the direction of ensuring a leak-proof delivery of welfare services.
  • It can also be used for delivering services under schemes meant for providing drugs and nutritional support under Mother and Child welfare schemes, TB eradication programmes, drugs & diagnostics under schemes like Ayushman Bharat Pradhan Mantri Jan Arogya Yojana, fertilizer subsidies etc.
  • Even the private sector can leverage these digital vouchers as part of their employee welfare and corporate social responsibility programmes.

Lic to have MD and CEO, Chairman Post Abolished


  • Life Insurance Corporation of India (LIC), which is gearing up to launch a mega initial public offering (IPO), will now have a Managing Director and Chief Executive Officer instead of an Executive Chairman on the pattern of public sector banking industry.
  • The changes have been made by the Department of Financial Services under the Finance Ministry by amending Life Insurance Corporation of India (Employees) Pension (Amendment) Rules. Various rules have been amended in the LIC Act to replace the post of chairman and create the position of CEO.
  • Both CEO and MD will be appointed by the central government.
  • Presently, MR Kumar is the LIC chairman, whose tenure was extended by another two years recently. Currently, LIC has four MDs.

Development Council for Cement Industry (DCCI)


The Department for Promotion of Industry and Internal Trade has established a 25 member Development Council for Cement Industry (DCCI) headed by Dalmia Bharat Group CMD Puneet Dalmia.

Mandate of the Council

  • It will suggest ways to eliminate waste, obtain maximum production, improve quality, reduce costs and promote standardization of products.
  • It will recommending measures for securing the full utilization of the installed capacity and for improving the working of the industry, particularly of the less efficient units; promote training of persons; and promoting or undertaking scientific and industrial research.
  • It would also work for standardization of accounting and costing methods and practice; and promoting the adoption of measures for increasing the productivity of labour, including measures for securing safer and better working conditions.
  • The council's functions also include promoting or undertaking inquiry as to materials and equipment and as to methods of production, management and labour utilization, including the discovery and development of new materials, equipment and methods.

Post Devolution Revenue Deficit Grant released to States


The Department of Expenditure, Ministry of Finance, has released the 4th monthly installment of Post Devolution Revenue Deficit (PDRD) Grant of Rs. 9,871.00 crore to the States on 7th July 2021.

About Post Devolution Revenue Deficit Grant

  • The Post Devolution Revenue Deficit Grant is provided to the States under Article 275 of the Constitution.
  • The grants are released as per the recommendations of the Fifteenth Finance Commission in monthly installments to meet the gap in Revenue Accounts of the States post devolution.
  • The Commission has recommended PDRD grants to 17 States during 2021-22.

Eligibility Criteria for States

  • The eligibility of States to receive this grant and the quantum of grant was decided by the Commission based on the gap between assessment of revenue and expenditure of the State after taking into account the assessed devolution for the financial year 2021-22.

States recommended for PDRD Grant

  • The states recommended for the PDRP Grant by the Fifteenth Finance Commission are - Andhra Pradesh, Assam, Haryana, Himachal Pradesh, Karnataka, Kerala, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttarakhand and West Bengal.

Exports of GI Certified Bhalia Wheat from Gujarat


  • The first shipment of Geographical Indication (GI) certified Bhalia variety of wheat was exported on 7th July to Kenya and Sri Lanka from Gujarat.
  • The GI certified wheat has high protein content and is sweet in taste.
  • The crop is grown mostly across Bhal region of Gujarat which includes Ahmadabad, Anand, Kheda, Bhavanagar, Surendranagar, Bharuch districts.
  • The unique characteristic of the wheat variety is that grown in the rainfed condition without irrigation and cultivated in around two lakh hectares of agricultural land in Gujarat.

Department of Public Enterprises comes under Finance Ministry


  • The government has brought Department of Public Enterprises (DPE) under the Finance Ministry in a bid facilitate its ambitious disinvestment programme.
  • As per the gazette notification, these rules may be called the Government of India (Allocation of Business) Three Hundred and Sixty First Amendment Rules, 2021.
  • Earlier, DPE was part of Ministry of Heavy Industries and Public Enterprises.
  • With the addition, this will be the sixth department under the Finance Ministry. Others being
    • Department of Economic Affairs
    • Department of Expenditure
    • Department of Revenue
    • Department of Financial Services
    • Department of Investment and Public Asset Management

Retail and Wholesale Trades come under MSMEs


On 2nd July 2021, the Minister of MSME and Road Transport and Highways Shri Nitin Gadkari has announced revised guidelines for MSMEs with inclusion of Retail and Wholesale trades as MSMEs.

  • This will strengthen MSMEs and make them engines for economic growth.

Benefits for the Retail and Wholesale Traders

  • Currently, 95 per cent of the retail industry in the country is MSMEs, and this move is set to benefit 13-14 million retailers in India.
  • Retail and wholesale trade will get benefit of priority sector lending under RBI guidelines.
  • They will be now allowed to register on Udyam Registration Portal.

Action Plan to make India Aatmanirbhar in Rock Phosphate


  • The Department of Fertilisers is expediating an action plan to make India Aatmanirbhar in Rock Phosphate.
  • Rock Phosphate is the key raw material for DAP and NPK fertilisers and India is 90 per cent dependent on imports. Volatility in international prices affects domestic prices of fertilisers and hinders the progress and development of agriculture sector in the country.
  • In view of this, the Department of Fertilisers has asked stakeholders to expedite the exploration and mining of available rock phosphate reserves in India.
  • Phosphorite deposits are available in Rajasthan, central part of peninsular India, Hirapur, Lalitpur, Mussoorie syncline and Cuddapah basin.
  • Further, discussion and planning with Department of Mining and Geological Survey of India is going on to expedite the exploration in the potential potassic ore resources in different parts of the country.

HFCs above Rs 100 cr can use SARFAESI Law


  • The Ministry of Finance has allowed Housing Finance Companies (HFCs) with asset sizes of more than Rs. 100 crore to recover the dues using SARFAESI law.
  • Prior to this, Finance Ministry allowed HFCs with assets over Rs. 500 crore to use SARFAESI law to recover dues.
  • The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) allows banks and other financial institution to auction residential or commercial properties to recover loans.

IFFCO To Launch Nano Urea


  • Indian Farmers Fertiliser Cooperative (IFFCO) will launch Nano Urea in the market shortly.
  • 500-ml Nano Urea, which costs 240 rupees, is equivalent to 45kg of normal urea.
  • Nano Urea is environment friendly and cuts the input cost of the farmers by 15 percent.
  • Apart from enriching the soil, this new product will increase yield by 15 to 20 percent.
  • The country needs 350 lakh metric tonnes of urea every year. Introduction of Nano urea is said to reduce the usage of ordinary urea used now, thereby saving 600 crore rupees subsidy given by the Government. The country’s dependence on import of urea will also come down.

RBI Appoints Rajesh Bansal As CEO Of RBIH


  • The Reserve Bank of India has appointed Rajesh Bansal, an expert in electronic cash transfers and digital financial services, as the Chief Executive Officer of the Reserve Bank Innovation Hub with effect from May 17.
  • Reserve Bank Innovation Hub (RBIH) has been set up to test potential new capabilities, opportunities in technology and leverage on the same to create viable products or services and enable their adoption for wider reach and greater impact across the country.
  • The Hub would develop internal infrastructure to promote fintech research and facilitate engagement with innovators and start-ups.
  • RBIH is managed by an independent board consisting of industry and academic stalwarts as its members.

RBI Amends India’s Inflation-forecasting Model


  • The Reserve Bank of India (RBI) has revised its inflation-forecasting model to better capture how fiscal and monetary policy, interact with real-economy elements.
  • The adjustments incorporate fiscal-monetary dynamics, India’s unique and often chaotic fuel pricing regime, and exchange-rate fluctuations and their impact on balance of payments.
  • Dubbed as the Quarterly Projection Model 2.0, the RBI’s economists describe the framework as a forward-looking, open economy, calibrated, new-Keynesian gap model. The previous version had often been criticized for over-estimating upside risks to inflation.

The new model is broken into three blocks:

  • Fiscal Block: The first, or fiscal block, decomposes the government’s primary deficit into structural and cyclical components. A shock to the former impacts inflation through aggregate demand and country risk premia; for instance, a structural increase in the deficit would create a positive output gap and the higher debt makes borrowings costlier and depreciates the currency, leading to higher inflation. A cyclical shock is negligible.
  • Fuel Block: The second, or fuel block, takes into account India’s complex system of pricing. Items like petrol and diesel are priced on the basis of international oil prices, exchange rates, and local taxes, while liquefied petroleum gas and kerosene prices are market-determined but with lagged pass-through. Electricity costs are administered by state governments. Headline inflation goes up by 25 basis points in response to a fuel tax increase of 10 rupees per liter and inflation expectations edge higher and remains entrenched if tax reversals do not happen.
  • Balance of Payments Block: The balance of payments block recognizes the costs associated with spurts in volatility in the exchange rate. In case of a capital outflow shock of 1% of GDP, and assuming the RBI intervenes and sterilizes 70% of this outflow, reserves will deplete by 0.7% of GDP and the exchange rate will depreciate, inducing inflationary pressure.

DFI Will Be Set Up For Long-term Infra Funds


  • The Union Cabinet has approved a bill to set up Development Finance Institution (DFI) with an initial capital infusion of 20 thousand crore rupees.
  • The bill will be tabled in Parliament during the current Budget Session.
  • DFI is expected to raise long-term funds for infrastructure development projects in the country.
  • The initial grant to the DFI will be 5 thousand crore rupees and additional increments of grants will be made within the limit of 5 thousand crore rupees.

First Export Consignments Of ‘Red Rice’ From Assam To The USA


  • In a major boost to India’s rice exports potential, the first consignment of ‘red rice’ was flagged off on 4th March 2021 to the USA.
  • Iron rich ‘red rice’ is grown in Brahmaputra valley of Assam, without the use of any chemical fertilizer.
  • The rice variety is referred as ‘Bao-dhaan’, which is an integral part of the Assamese food.
  • APEDA is promoting rice exports through collaborations with various stakeholders in the value chains. The government had set up the Rice Export Promotion Forum (REPF), under the aegis of the APEDA.

Economic Survey 2020-21 Introduced Bare Necessities Index


  • To assess equity, Economic Survey 2020-21 has introduced a bare necessities index.
  • The Survey has underlined the need to focus on reducing variations in the access to bare necessities across states, between rural and urban areas, and between income groups.
  • Inequalities in access to bare necessities like drinking water, sanitation, hygiene and housing conditions continue to exist between urban and rural India despite “widespread” improvements in each of these aspects, the Economic Survey for 2020-21 has shown.
  • The BNI builds on the idea of Thalinomics in the Economic Survey for 2019-20, through which it had sought to examine the access to food in the country.
  • The BNI summarises 26 indicators on five dimensions — water, sanitation, housing, micro-environment, and other facilities — and has been created for all states for 2012 and 2018 using NSO data. The index classifies areas on three levels of access — high, medium, low — to bare necessities.
  • Government schemes such as the Jal Jeevan Mission, SBM-G (Swachh Bharat Mission-Gramin), PMAY-G (Pradhan Mantri Awaas Yojana), may design appropriate strategy to address these gaps to enable India to achieve the SDG (UN Sustainable Development Goals) goals of reducing poverty, improving access to drinking water, sanitation and housing by 2030.

EDISON Alliance to Ensure Equitable Access to Digital Economy

  • At the Davos Summit 2021, the World Economic Forum (WEF) has launched Essential Digital Infrastructure and Services Network, or EDISON Alliance.
  • The aim of this alliance is to ensure global and equitable access to the digital economy.
  • The EDISON Alliance will prioritize digital inclusion as a platform of partners with a common purpose for achieving the Sustainable Development Goals. In 2021, the Alliance will focus on increasing digital inclusion in healthcare, education and financial services.

Global AI Action Alliance (GAIA)

  • At the Davos Summit 2021, the World Economic Forum (WEF) has launched the Global AI Action Alliance (GAIA), an initiative to accelerate the adoption of inclusive, transparent and trusted artificial intelligence.
  • The GAIA is a multi-stakeholder collaboration platform designed to accelerate the development and adoption of such tools globally and in industry sectors.
  • It brings together over 100 leading companies, governments, international organisations, non-profits and academics united in their commitment to maximising AI's societal benefits while minimising its risks.

Ministry Of Corporate Affairs Brings Amended CSR Rules Into Effect


The Ministry of Corporate Affairs has released a new order notifying the amendments in the CSR rules for companies.

  • The provisions of the 2019 Amendment to the Companies Act, 2013 pertaining to Corporate Social Responsibility (CSR) came into force on January 22.
  • These rules may be called the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

New Provisions

  • Every entity that intends to undertake any CSR activity will have to register itself with the Central Government by filing the form CSR-1 electronically with the Registrar of Companies, with effect from April 1, 2021.
  • Form CSR-1 shall be signed and submitted electronically by the entity and shall be verified digitally.
  • On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically.

Besides this, companies undertaking CSR activities will have to share:

  • Impact Assessment for big CSR projects.
  • Carry forward and set off of CSR expenditure Annual action plan for CSR by Board every year in addition to CSR policy.
  • Tweaks in reporting formats of Board Report.
  • Mandatory disclosure of CSR projects and activities on company website.
  • Capital Asset acquisition and its holding restricted to three bodies broadly.
  • In the event of the company failing to spend the earmarked two percent of net profits towards CSR, it will "have to specify the reasons for not spending the amount" and, unless the unspent amount relates to any ongoing project, transfer it to a government notified fund.

“Liberalised MSME AEO Package” For MSMEs


The Central Board of Indirect Taxes & Customs (CBIC) has taken a new initiative to introduce its flagship “Liberalised MSME AEO Package” for micro, small and medium enterprises (MSMEs).

  • Through this package, CBIC encourages all eligible MSMEs to avail advantages of faster Customs clearances for accredited stakeholders in the global supply chain viz. importers, exporters, logistic service providers, custodians, etc.
  • To attract MSMEs to become Authorised Economic Operators (AEOs) and avail the various benefits, the CBIC has relaxed the compliance criteria provided the MSMEs have a valid certificate from their line-Ministry.
  • The relaxed requirements allow MSMEs who have filed minimum 10 Customs clearance documents in one year and who have a clean compliance record over two years to apply for the scheme. The documentary requirements have also been appreciably simplified.

Benefits for AEOs

  • The approved AEOs derive various benefits including the facility of Direct Port Delivery (DPD) of imported containers, Direct Port Entry (DPE) of their Export Containers, high level of facilitation in customs clearance of their consignments thereby ensuring shorter cargo release time, exemption from bank guarantees, as well as a Client Relationship Manager at the customs port as a single point of interaction.

RBI Fully Operationalizes ‘College Of Supervisors’


The Reserve Bank of India (RBI) is now fully operationalising a College of Supervisors (CoS) to further strengthen supervision over regulated entities.

Objective of CoS

  • To augment and reinforce supervisory skills among its regulatory and supervisory staff both at entry level and on a continuous basis.
  • To facilitate the development of unified and focused supervision by providing training and other developmental inputs to the concerned staff.

Composition of the CoS

  • The CoS will be headed by former deputy governor of RBI, N S Viswanathan and will have five other members.
  • The CoS will have a full-time Director supported by an Academic Advisory Council (AAC).Rabi Narayan Mishra, former Executive Director, RBI, has been appointed as the Director of CoS.

Function of AAC

  • The AAC will identify areas where skill building/up-skilling is required, plan and develop curricula of all programmes, benchmark the programmes with international standards/best practices, develop appropriate teaching methods, etc.

RBI Introduces Legal Entity Identifier


The Reserve Bank of India on December 5, 2021 introduced the Legal Entity Identifier (LEI) for large value transactions over Rs 50 Crore in Centralised Payment Systems, which will be effective from April 1, 2021.

  • The 20-digit LEI number is used to uniquely identify parties to financial transactions worldwide while improving the quality and accuracy of financial data systems for better risk management post the global financial crisis.
  • Those seeking to obtain an LEI can reach out to any Local Operating Units (LOUs) accredited by the Global Legal Entity Identifier Foundation (GLEIF). In India, RBI has given the permit to Legal Entity Identifier India Ltd. (LEIL) to issue LEI under the Payment and Settlement Systems Act, 2007.

RBI Operationalizes PIDF Scheme to Boost Digital Payments

  • The Reserve Bank has operationalised Payments Infrastructure Development Fund to create 30 lakh new touch points every year for digital payments in Tier-3 to Tier-6 centres.
  • In June last year, the RBI had announced the creation of Payments Infrastructure Development Fund (PIDF).
  • The fund intended to subsidise deployment of payment acceptance infrastructure in Tier-3 to Tier-6 centres, with special focus on the north-eastern states.
  • An Advisory Council (AC), under the Chairmanship of RBI Deputy Governor BP Kanungo, has been constituted for managing the PIDF.
  • It will be operational for a period of three years from January 01, 2021, and may be extended for two more years, depending upon the progress.
  • The objective of PIDF is to increase the number of acceptance devices multi-fold in the country.
  • The Scheme is expected to benefit the acquiring banks/non-banks and merchants by lowering overall acceptance infrastructure cost.

Govt. Extends Benefit Of RoDTEP Scheme To All Export Goods


  • Government has decided to extend the benefit of the scheme for Remission of Duties and Taxes on Exported Products (RoDTEP) to all export goods with effect from 1 January 2021 to boost export.
  • The scheme will refund to exporters the embedded Central, State and local taxes that were so far not being given rebate or refunded.
  • The refund will be credited in the exporter's ledger account with Customs and used to pay Basic Customs duty on imported goods. The credits can also be transferred to other importers.
  • The RoDTEP rates will be notified shortly by the Department of Commerce, based on the recommendation of a Committee chaired by former Commerce and Home Secretary Dr. G.K. Pillai.
  • The final Report of the Committee is expected shortly.
  • An exporter desirous of availing the benefit of the RoDTEP scheme will have to declare his intention for each export item in the shipping bill or bill of export.
  • The notified rates, irrespective of the date of notification, shall apply with effect from 1st January, 2021 to all eligible exports of goods.

Initiatives Towards Controlling GST Frauds


  • Various measures have been taken by the GST Council Secretariat towards the rising menace of GST fake invoice frauds.
  • oMandatory Physical Verification:The government has introduced mandatory in-person physical verification of business premises for the purposes of obtaining GST registration.
  • oBiometric-Based Aadhaar Authentication: In case an applicant opts for Aadhaar authentication, he will undergo biometric-based Aadhaar authentication at one of the facilitation Centres notified by the Commissioner.
  • o‘Pay 1% in Cash’: Separately, a new rule has been introduced by the Central Board of Indirect Taxes and Customs that mandates businesses with monthly turnover of over Rs. 50 lakh to pay at least 1% of their GST liability in cash instead of using input tax credits to discharge their entire liability.
  • oChanges in Validity of e-Way Bills: The validity of e-way bills has also been tweaked, doubling the distance to be covered for each day of validity, effective January 1. Till now, an e-way bill for transporting goods under GST allowed transporters to cover 100 km in one day. Now, that distance for each day of validity has been increased to 200 km. While four days were granted in terms of e-way bill validity to cover 400 km, going forward, only two days will be granted for the same distance.

First ‘International Day Of Banks’


  • The United Nations (UN) celebrated the first ever International Day of Banks across the globe on 4th December 2020.
  • The United Nations General Assembly (UNGA) adopted the resolution on 19th December 2019.
  • The day is observed to recognise the important potential of multilateral development banks and other international development banks in financing sustainable development.
  • This reaffirms the importance of achieving the targets of Sustainable Development Goals (SDG) by 2030.

Technology Vision For Cyber Security For Urban Co-operative Banks – 2020-2023


  • On 24th September, 2020, the Reserve Bank of India(RBI) released Cyber Security Vision Framework for Urban Cooperative Banks (UCBs).

Need

  • In recent time, the number, frequency and impact of cyber incidents/attacks have increased manifold in the financial sector including Urban Co-operative Banks (UCBs).
  • Therefore, it has, become essential to enhance the security posture of UCBs so as to prevent, detect, respond to and recover from cyber-attacks.

Mission

The framework aims at enhancing the cyber security posture of the UCB sector through a five-pillared strategic approach –GUARD

  • Governance Oversight
  • Utile Technology Investment
  • Appropriate Regulation and Supervision
  • Robust Collaboration
  • Developing IT and Cyber Security Skills Set

Mission – Specific Action Points

Governance Oversight

Focus on Board Oversight

  • The Board of Directors shall be ultimately responsible for the information security of the UCBs and shall play a proactive role in ensuring an effective IT (Information Technology) and IS (Information Security) governance.

IT Vision Document

  • UCBs could play a crucial role in strengthening financial inclusion.
  • Therefore, UCBs need to develop their own technology vision document outlining their plans to incorporate IT solutions into their business in a secure manner.

Utile Technology Investment

Creation of Fund for Implementation of Cyber Security Projects

  • Fund for cyber security projects may be created out of UCBs’ annual net profits over a period of time.

Management of Business IT Assets

  • In order to have proper monitoring of life cycle of its IT assets, both hardware and software, UCBs shall venture to invest and upgrade their IT infrastructure.
  • Furthermore, a comprehensive process for Software License Management (SLM) shall be implemented by the UCBs.

Banking Services Availability

  • In order to avoid major operational disruptions, UCBs shall have a Business Continuity Plan (BCP).
  • The focus may be on prioritizing systems and processes in order to keep business operating smoothly and safely.

Appropriate Regulation and Supervision

Supervisory Reporting Framework

  • Considering the large number of UCBs, an effective supervision of UCBs will be setup to monitor compliance of UCBs with respect to cyber security guidelines.

Appropriate Guidance in Implementing Secure Practices

  • A uniform Cyber Security Hygiene document for all the cooperative banks shall be issued.
  • It shall cover various best practices such as Privilege access management, network segmentation,secure configuration and security incident.

Robust Collaboration

Forum to Share Best Practices

  • UCBs may explore the possibility of setting up a forum at State/regional level with stakeholders from various banks.

Adoption of Cloud Services

  • Cost effective technologies such as cloud based services may be used for implementing IT solutions and cyber security controls after taking appropriate risk assessment.

Developing IT and Cyber Security Skills Set

Imparting Technical Skills to manage IT and Cyber Security

  • Targeted skill-oriented training and certification programmes would be designed to impart technical skills to personnel for managing the risk of cyber security.
  • Steps would be taken to tap expertise available in various institutes/ universities across the country to provide such training in regional languages.

Providing Training for all UCBs on Cyber Security

  • Awareness training programmes would be imparted to all UCBs through various training institutes of the RBI and other such institutes approved by RBI.
  • The main objective is to communicate the cyber security challenges and regulatory expectations to the UCBs in local language for better understanding of the cyber security.

Significance

  • The implementation of the approach outlined in Technology Vision document will strengthen the cyber resilience ecosystem of the Urban Co-operative Banks.

Fin CEN Files


FinCEN Files is a cross-border investigation based on secret documents that exposes how banks and regulators have failed the public by allowing dirty money to flow unchecked around the globe. It shows how politicians, crooks, and tycoons profit at the expense of governments and ordinary people.

  • The FinCEN Files are leaked documents from the Financial Crimes Enforcement Network (FinCEN), investigated by International Consortium of Investigative Journalists (ICIJ), and globally publicised on 20 September 2020.
  • The reports describe over 200,000 suspicious financial transactions valued at over US$2 trillion that occurred from 1999 to 2017 across multiple global financial institutions.
  • The documents appear to show that while both the banks and the United States Government had this financial intelligence, they did little to stop activities such as money laundering.
  • The information implicates financial institutions in more than 170 countries who played a role in the facilitation of money laundering and other fraudulent crimes.

What is FinCEN?

  • It is a bureau of the United States Department of the Treasury that collects and analyses information to combat money laundering, terrorism financing, evasion of economic sanctions and other financial crimes.
  • FinCEN collates suspicious activity reports (SARs), reports required to be filed by financial institutions when they suspect their clients are engaging in financial crime.
  • Unauthorized disclosure of a SAR is a US Federal criminal offense, as it could undermine or hamper ongoing investigations, and threaten the safety of financial institutions and those who file the SARs.
  • SARs are not evidence of a crime, but the FinCEN claims they provide vital information to the investigate crimes.

Who worked on the FinCEN Files investigation?

  • ICIJ, BuzzFeed News and 108 other media partners in 88 countries spent 16 months organizing and analyzing leaked documents, and obtaining hundreds of other confidential documents, court records, archives, public records, and interviews.

What is ICIJ?

  • The International Consortium of Investigative Journalists (ICIJ) is an independent, Washington, D.C.-based international network of more than 200 investigative journalists and 100 media organizations in over 70 countries.

‘Aatmanirbhar Bharat ARISE-Atal New India Challenges’Programme


  • The Centre on September 9 launched the Aatmanirbhar Bharat ARISE-Atal New India Challenges programme to support MSMEs and start-ups for making India innovative, resilient, tech-driven, and research and development (R&D)-oriented.
  • The NitiAayog's Atal Innovation Mission (AIM), in collaboration with ISRO and four ministries (defence, health and family welfare, housing and urban affairs, and food processing industries), will focus on challenges in 15 sectors through the programme.
  • The programme provides a great opportunity for the government to become the first buyer of indigenous Made in India technology solutions.
  • A grant-in-aid of up to Rs 50 lakh for 9-12 months have been earmarked for start-ups to develop a minimum usable prototype.
  • The AIM is a flagship initiative of the NitiAayog to promote innovation and entrepreneurship in the country, based on detailed study and deliberations on innovation and entrepreneurial needs of India in the years ahead.

K V Kamath Committee Report On ‘Resolution Framework For Covid-19 Related Stress’


  • On 7th September, 2020,the Reserve Bank of India (RBI) released a report by the K V Kamath Committee which was formed to make recommendations on the required financial parameters to be factored in the resolution plans under the ‘Resolution Framework for Covid-related Stress’, along with sector specific benchmark ranges for such parameters.

Key Highlights

  • The Committee recognizes that:
    • The Covid-19 pandemic has affected the best of companies.
    • These businesses were otherwise viable under pre-Covid-19 scenario.
    • Impact is pervasive across several sectors but with varying severity – mild, moderate and severe.
  • The committee has recommended financial parameters including aspects related to leverage, liquidity and debt serviceability.
  • It selected five parameters based on their relevance while considering the resolution plan(RP).These ratios would provide the requisite assessment framework for the RP. These include:
    • Total Outside Liability/Adjusted Tangible Net Worth (TOL/Adjusted TNW)
    • Total Debt/EBIDTA
    • Current Ratio
    • Debt Service Coverage Ratio (DSCR)
    • Average Debt Service Coverage Ratio (ADSCR)
  • It suggested financial ratios for 26 sectors which could be factored by lending institutions while finalising a resolution plan for a borrower. These sectors include aviation, hospitality, real estate which are some of the most stressed sectors in the economy due to the impact of Covid-19 pandemic.

Source: Business Standard

  • Considering the large volume and the fact that only Standard assets are eligible under the proposed scheme, a segmented approach of bucketing these accounts under mild, moderate and severe stress, may ensure quick turnaround.
  • To complete this task simplified restructuring for mild and moderate stress may be prescribed. Severe stress cases would require comprehensive restructuring.

Key Recommendations on Sector Specific Parameters

  • The sector specific parameters may be considered as guidance for preparation of RP for a borrower in the specified sector.
  • The RP may be prepared based on the pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance in Q1 and Q2FY21, to assess the cash-flows for FY21 / FY22 and subsequent years. In these financial projections, the threshold TOL/Adjusted TNW and Debt/ EBIDTA ratios should be metby FY23.
  • The other three threshold ratios should be met for each year of the projections starting from FY22. The base case financial projections need to be prepared as part of RP.
  • In respect of those sectors where the threshold parameters have not been specified by the Committee, lenders can make their own internal assessments for the solvency ratios i.e. TOL/Adjusted TNW and Total Debt/EBIDTA. However, the current ratio and DSCR shall be 1.0 and above, and ADSCR shall be 1.2 and above.
  • The Committee has uniformly proposed thresholds for current ratio, DSCR and ADSCR in most of the sectors.
  • The borrowers eligible under the current Framework are Standard Accounts and as such, they may require some time to restore their position to pre-Covid-19 levels.
  • As per the recommendations, the resolution process should be treated as invoked once lenders representing 75 percent by value and 60 percent of lenders agree to do so.

Analysis

  • According to the experts, the K V Kamath panel's loan recast recommendations are better than the erstwhile corporate debt restructuring (CDR) mechanism, but these may result in banks postponing recognition of stress through short-term relief.
  • The CDR was extensively used to suppress non-performing assets and had a success rate of as low as 15 percent.
  • The framework is for a limited time-period and stresses upon upfront heavy provisioning, stringent financial thresholds for eligibility and supervisory mechanism.
  • In the absence of an economic revival and sector-specific packages to be introduced by the government, the new mechanism will be "challenging" and may also end up induce uncertainty in the credit markets as banks focus on working out the recast plans in the limited window.
  • Stressed borrowers in real estate, traders, hotels/restaurants segments will be helped, but resolving stress in lumpy power and infrastructure sectors through this mechanism will be challenging without economic revival and sector-specific packages or initiatives by the government.
  • It is feared a "good portion" of the accounts which will be restructured will eventually turn non-performing and added that it gives a ""short-term relief" alone.
  • The framework is much broader than anticipated but leaves some scope for subjectivity as thresholds are to be met 2021-22 onwards based on base-case financial projections.

Shapes Of Economic Recovery


The shapes of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

  • Z-shaped recovery: It is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash. It more than makes up for lost ground (think revenge-buying after the lockdowns are lifted) before settling back to the normal trend-line, thus forming a Z-shaped chart.
  • V-shaped recovery: It isthe next-best scenario in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
  • U-shaped recovery: It is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.
  • W-shaped recovery: It is a serious situation - growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart.
  • L-shaped recovery: Itis the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.
  • J-shaped recovery: It is a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
  • Swoosh shaped recovery:It is similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.
  • Inverted square root shaped recovery: In this, there could a rebound from the bottom, the growth slows and settles a step down.

K Shaped Economic Recovery

  • As the economy struggles to shake off the pandemic effects, worries are growing that the recovery could look like a ‘K’.
  • Essentially, the concept rests on the idea that while the fortunes of some in the economy have nearly or fully recovered (broadly defined), the fortunes of many are still declining, or at least failing to recover nearly as quickly.
  • K is reflective of the performance of the stock market — a sharp decline followed by sharply divergent pathways.
  • The rolling lockdowns due to Covid 19 have sent the economy into a tailspin. Growth in India, and indeed much of the world, is set to fall off a cliff in FY21.
  • That would be one where growth continues but is uneven, split between sectors and income groups.
  • K-shaped recovery means the growing gap between ‘winners and losers’. An example in India is the stock market being healthy while millions have lost their jobs.

Why is it important?

  • The Indian economy was slowing down even before Covid hit, and the trouble has now been amplified manifold because of the lockdowns.
  • Experts predict a fall of up to 5 per cent in the GDP in FY-21. This is clearly a crisis situation, and our getting out of the hole will depend a great deal on the shape of the economic recovery that will hopefully follow.

Which Shape of Recovery is Favourable?

  • A Z- or at least V-shaped recovery would be the most preferable. If not, we should at least have a U-shaped recovery or a Swoosh to get back on our feet in a couple of years.
  • A W-shape will bring in much pain before the eventual gain, while an L-shape or the Inverted-square root will make a wreck of the growth train.

Andhra Pradesh Top State In Ease Of Doing Business


  • Andhra Pradesh has topped the country in the latest ease of doing business rankings, according to the State Business Reform Action Plan 2020 (State BRAP) ranks released on 5th September 2020.
  • Andhra Pradesh is followed by U.P. and Telangana at the second and third spots, respectively.
  • Ease of Doing Business (EODB) is a joint initiative by the Department for Promotion of Industries and Internal Trade (DPIIT) and the World Bank to improve the overall business environment in the States.
  • The State has stood first in the overall ranking of the State business process reforms undertaken during 2019.
  • The Business Reform Action Plan 2019 released by DPIIT contains a list of 80 reforms (187 reform action points) to be implemented by 19 State departments and Andhra Pradesh had achieved 100% compliance.

Force Majeure Clause


  • A glimpse of the magnitude of the economic destruction wreaked was revealed at the 41st 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.

Model Code on FMC

  • The International Chamber of Commerce has developed a Model Code on the force majeure clause reflecting current international practice.
  • It says that the impediment triggering the operation of the force majeure clause must be beyond the party’s reasonable control; and that it could not reasonably have been foreseen at the time of the conclusion of the contract; and that the effects of the impediment could not reasonably have been avoided or overcome by the affected party.

GIS-enabled National Land Bank Portal


  • 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.

National Strategy For Financial Education


  • On 20th 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.
  •  
  • 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.

OECD/INFE Policy Handbook on National Strategies for Financial Education

  • It support policy makers and public authorities to design and implement national strategies for financial education and individual financial education programmes, while also proposing innovative methods for enhancing financial literacy among the populations of partner countries.
  • The Policy Handbook was developed at the OECD/INFE technical meeting in Istanbul, Turkey, in May 2014.

Four Key Policy Areas Related to Financial Education

  • Standard setting, implementation and evaluation
  • Financial education and the impact of digitalisation
  • Financial Education in the workplace
  • The impact of ageing populations and the needs of older consumers

 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.

OECD-INFE Definition of Components of Financial Literacy

  • Financial literacy encompasses aspects of knowledge, attitude and behaviour coveringthe range of context such as money management, planning for short and long termfinancial goals and awareness and choice of financial products.Financial Knowledge involves understanding of key financial concepts and ability toevaluate benefit in real life financial situations. The concept of simple interest, compoundinterest, time value of money, inflation, diversification, division, risk-return and interestpaid on loan are tested to determine the financial knowledge of an individual.
  • Financial Behaviour involves study of day-to-day money management, financialplanning, spending, savings, investment, reliance on credit to meet daily requirement andbuilding a safety net for future well-being.
  • Financial Attitude aims at studying people’s response towards savings, prioritization ofshort-term wants over long-term security, inclination towards risk for future wellbeing.

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.

RBI’s New Loan Recast Scheme


  • On 6th 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.

Misuse of Earlier Restructuring Scheme by  Banks and Corporates

Corporate Debt Restructuring (CDR)

  • The RBI discontinued the CDR scheme from April 1, 2015.
  • For several years, corporates were misusing the debt recast plans with the regulator turning a blind eye to manipulations by shady promoters in connivance with some banks.
  • The promoters of many big corporates siphoned off bank funds while their units suffered. They approached the CDR Cell and to get their loans recast, some of them more than once.
  • These promoters managed to get fresh loans and they used liberal loan recasts to evergreen their accounts and keep out of the NPA books.

Strategic Debt Restructuring (SDR)

  • Under the SDR scheme, banks were given an opportunity to convert the loan amount into 51% of equity which was to be sold to the highest bidder, once the firm became viable.
  • This was unable to help banks resolve their bad loan problem as only two sales have taken place through this measure due to viability issues.

Sustainable Structuring of Stressed Assets (S4A) Scheme

  • Under this, banks were unwilling to grant write-downs as there were no incentives to do so, and write-downs of large debtors could exhaust banks’ capital cushions.

5/25

  • The 5/25 scheme was derailed because refinancing was done at a higher rate of interest so that banks could preserve the net present value of the loan amount.
  • There was a perception that this was one of the tools deployed to cover NPAs by banks.

Asset Reconstruction Scheme(ARC)

  • In the ARC, the major problem was that asset reconstruction companies (ARCs) were finding it difficult to resolve assets they had bought from banks. Therefore, they wanted to purchase the loans only on low prices.
  •  Consequently, banks were reluctant to sell them loans on a large scale.

 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.

KV Kamath Committee

  • On 7th August, 2020, the RBI constituted an expert panel headed by K V Kamath, to give recommendations on the required financial parameters, along with the sector specific benchmark ranges which need to be factored into the resolution plans.
  • Other Members:Diwakar Gupta (effective September 1, 2020, after the completion of his term as Vice President, ADB);T.N. Manoharan (effective August 14, 2020, after the completion of his term as Chairman, Canara Bank);Ashvin Parekh, Strategy AdvisorCEO, Indian Banks’ Association, as the Member Secretary.
  • The expert committee shall undertake the process validation for the resolution plans to be implemented under this framework, without going into the commercial aspects, in respect of all accounts with aggregate exposure of Rs1,500 crore and above at the time of invocation.
  • The Indian Banks’ Association (IBA) will function as the secretariat to the committee and the committee will be fully empowered to consult or invite any person it deems fit.
  • The Committee shall submit its recommendations on the financial parameters to the Reserve Bank which, in turn, shall notify the same along with modifications, if any, in 30 days.

Pre-Packaged Deals In Insolvency And Bankruptcy Code


  • 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.

15th India-EU Summit


  • 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.

India-EU Economic Relations

  • The EU is India's largest trading partner, whilst India is the EU's 9th largest partner. The EU is the second-largest destination for Indian exports after the USA.
  • The EU's share in foreign investment inflows to India has more than doubled from 8% to 18% in the last decade, making the EU the first foreign investor in India. The EU’s foreign direct investment stocks in India is also significant but way below to EU foreign investment stocks in China (€175 billion) or Brazil (€312 billion).
  • Some 6,000 European companies are present in India, providing directly 1.7 million jobs and indirectly 5 million jobs in a broad range of sectors. Indian companies invested over €50 billion in Europe since 2000. 


India Digitization Fund


  • 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.

US Remains India's Top Trading Partner


  • 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: Second-Largest Foreign Investor In UK


  • 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.

Capital Infusion For Three Public Sector General Insurance Companies


  • 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.

15th FC & Health Financing


  • The Fifteenth Finance Commission, for the first time, will devote an entire chapter on health financing.
  • The High Level Committee on Health sector constituted by Fifteenth Finance Commission and the World Bank will dove-tail their study and analysis to come up with suitable recommendations for health sector.
  • The Government of India’s spending on health through centrally sponsored schemes will also be studied in detail by the Commission before it gave its recommendations to the Union government.

WTO Dispute Settlement Body Sets Up Panel Against India’s ICT Duties


  • The World Trade Organization (WTO) Dispute Settlement Body (DBS) has established a panel after the European Union (EU) has dragged India into the Dispute Settlement System of WTO for the second time against import duties on ICT (information and communication technology) products, including mobile phones, cameras, headphones and earphones, imposed by the country.
  • India is levying a fee upto 20 % on them & these charges will affect the EU’s exports of 400 million euros annually.

Tamil Nadu Tops Market Borrowings Among States


  • According to data from the Reserve Bank of India (RBI), Tamil Nadu has raised ₹30,500 crores in the fiscal 2020-21 and has topped market borrowings among States in the country.
  • Tamil Nadu has been followed by Maharashtra ₹25,500 crores (14%), Andhra Pradesh ₹17,000 crores (9%) and Rajasthan ₹17,000 crores (9%).

Merger Of Banks


  • The merger of 10 public sector undertaking banks into four came into effect from 1st April, 2020.

Background

  • In the biggest consolidation exercise in the banking space, the government in August 2019 had announced mergers of public sector banks, a move aimed at making state-owned lenders global sized banks.
  • The Cabinet Committee on Economic Affairs (CCEA) approved consolidation of 10 state-run banks into four on 4th march, 2020.
  • It is to be noted that in 2019, Dena Bank and Vijaya Bank were merged with Bank of Baroda.
  • Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the State Bank of India.

Key Points

  • The banks are being amalgamated with a larger bank, referred to as the anchor bank.
  • Account holders of merging banks will now be treated as customers of the anchor banks
  • Oriental Bank of Commerce (OBC) and United Bank of India will be merged into Punjab National Bank (PNB). After the merger, these together will form the second-largest public sector bank (PSB) in the country, after State Bank of India (SBI).
  • Syndicate Bank will be merged into Canara Bank, which will make it the fourth-largest public sector lender.
  • Indian Bank will be merged with Allahabad Bank.
  • Union Bank of India will be merged with Andhra Bank and Corporation Bank.
  • Customers, including depositors of merging banks will be treated as customers of the banks in which these banks have been merged with effect from 1st April, 2020.
  • For multiple bank accounts with both merging as well as anchor banks, there might be a single customer ID now
  • There will be no change in the existing interest rates and fixed deposits after the merger. It will just be transferred to the anchor bank.
  • New cheque books will be issued by the anchor banks and the existing ones will no longer be effective.
  • After the merger, there will be 12 PSUs - six merged banks and six independent public sector banks.

Six Merged Banks

  • SBI, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Bank.

Six Independent Banks

  • Indian Overseas Bank, Uco Bank, Bank of Maharashtra, Punjab and Sind Bank, Bank of India, Central Bank of India.

Impact

Smooth Functioning & Better Delivery of Services

  • The mega consolidation would help create banks with scale comparable to global banks and capable of competing effectively in India and globally.
  • Greater scale and synergy through consolidation would lead to cost benefits which should enable the PSBs enhance their competitiveness and positively impact the Indian banking system.
  • In addition, consolidation would also provide impetus to amalgamated entities by increasing their ability to support larger ticket-size lending and have competitive operations by virtue of greater financial capacity.

Boost to Financial Inclusion

  • The adoption of best practices across amalgamating entities would enable the banks improve their cost efficiency and risk management, and also boost the goal of financial inclusion through wider reach.

Competitive Advantage

  • Further, with the adoption of technologies across the amalgamating banks, access to a wider talent pool, and a larger database, PSBs would be in a position to gain competitive advantage by leveraging analytics in a rapidly digitalising banking landscape.

Associated Challenges

Integration Challenge

  • The main hurdle will be to the smooth process of integration. All banks have their own importance in terms of origin, growth, expansion and geographical , and have been contributing to economic development in their own way.
  • Merger of banks will take away their identity and customers will find it difficult to deal with the new bank.
  • It might create a lot of problems for employees in inter-se seniority, transfers to their place of choice, etc. This will pose a challenge to the unions dealing with these problems.

Loss of Job

  • Branch rationalisation and branch closures are bound to happen on account of mergers, which would lead to job losses and back room operations may reduce face to face interaction of the service providers with the customers.

Better Service Delivery Challenge

  • By merging branches in a certain locality, the number of customers to be taken care of by the merged branch will double or treble. Hence, customer attention and quality of customer service are bound to be affected adversely. When every customer wants better service, the branch will face a big hurdle in this regard.
  • Further, there are many welfare schemes, fringe benefits and other schemes that vary from bank to bank. Mergers will impact these benefits and schemes and unionists have to address these issues to harmonise these benefits.
  • Mergers will totally divert the attention of the banks from loan recovery and it is bound to take a back sea

High-Cost Model

  • The merged entity would not get any benefit of efficiencies. The PSBs have a very high-cost structure. The biggest challenge in PSB merger is to cut costs, bring efficiencies, improve profit per branch and profit per employee.

High Cost of Funds

  • The cost of funds plays a very important role in the competitive banking landscape. The weak entities that are merging tend to have a higher cost of funds.
  • While the private banks are using the digitisation and also digital modes to raise deposits and target new customers, the PSBs have this challenge of reducing the cost of the deposit.
  • At the same time, they have to deploy their resources to high yielding assets to earn high interest.

Way Forward

  • With the introduction of financial service convergence and competitions from outside and within, it is quite justifiable that to bring a sound transparent, efficient, and effective and culture friendly banking practices should be on the anvil of the government as well as policy makers.
  • The legal implications combined with the ethical and governance issues need to be redefined very soon so that the positive impact of mergers may be ensured.
  • Mergers strategies should be designed to improve the financial and operational soundness of existing small and capital needy banks and these should not be focused merely to gut the beautiful entities.

AT-1 Bonds


  • Recently, the private lender YES Bank additional tier 1 (AT1) bonds worth Rs. 8,415 crore have been written down to zero by the Reserve Bank of India(RBI) under the scheme of reconstruction of Yes Bank.

About AT-1 Bonds

  • AT-1 bonds are unsecured perpetual bondswith no maturity — issued by banks to shore up their capital base to meet Basel III requirements.The RBI is the regulator for these bonds.
  • The concept of Additional Tier-1 (AT1) Bonds was introduced by Basel III post the 2008 financial crisis, to protect depositors of a bank on a going concern basis. These bonds are also commonly known as Contingent convertible capital instruments (CoCos).
  • Under the Based III framework, bank’s regulatory capital is divided into Tier 1 and Tier 2 capital. Tier 1 capital is subdivided into Common Equity (CET) and Additional Capital (AT1).
  • In simple terms, equity and preference capital is classified as CET and perpetual bonds are classified as AT1. Together, CET and AT1 are called Common Equity.

Difference between Tier 1 and Tier 2 Capital

  • Tier 1 capital is a bank's core capital and includes disclosed reserves—that appears on the bank's financial statements—and equity capital. This money is the funds a bank uses to function on a regular basis and forms the basis of a financial institution's strength.
  • Tier 2 capital is a bank's supplementary capital. Undisclosed reserves, subordinated term debts, hybrid financial products, and other items make up these funds.
  • In India, banks are required to maintain capital at a minimum ratio of 11.5 per cent of their risk-weighted loans.
  • Of this, 9.5 percent needs to be in Tier-1 capital and 2 percent in Tier-2.

 

Features of AT-1 Bonds

  • AT1 are a special category of debt designed to absorb losses in case the bank’s equity capital dips below a certain threshold.
  • These are quasi-equity instruments. These are meant to be like equity, but are structured as bonds.
  • These bonds are listed and traded on the exchanges.So, if an AT1 bondholder needs money, he can sell it in the market.
  • Banks cannot use conversion or write down of AT1 instruments to support expansion of balance sheet.

Risk Involved

  • As these bonds are perpetual and carry no maturity date, they carry call options that allow banks to redeem them after five or 10 years.
  • Banks can stop paying interest on them and also write off their value.
  • In case, if the RBI feels that a bank is tottering on the brink and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors. This is what has happened to YES Bank’s AT-1 bond-holders.

RBI Guidelines Regarding AT-1 Bonds

  • According to the RBI’s Basel III capital regulations, if the relevant authorities decide to reconstitute a bank or amalgamate it with any other lender under Section 45 of Banking Regulation Act, 1949, the bank will be deemed as non-viable or approaching approaching non-viability.
  • The RBI has also added an additional trigger in Indian regulations, called the ‘Point of Non-Viability Trigger’ (PONV), which gives power to the RBI to decide if the bank has reached a situation wherein it is no longer viable.
  • The RBI can then activate a PONV trigger and assume executive powers and can do whatever is required to get the bank on track, including superseding the existing management, forcing the bank to raise additional capital and so on.
  • The PoNV condition requires all AT1 and Tier 2 instruments to be capable of being converted into common equity or written off.

Basel III

  • It is an international regulatory accord that introduced a set of reforms designed to improve the regulation, supervision and risk management within the banking sector.
  • It was published in 2009, largely in response to the credit crisis associated with the Great Recession.

Objectives

  • Improve the banking sector's ability to absorb ups and downs arising from financial and economic instability
  • Improve risk management ability and governance of banking sector
  • Strengthen banks' transparency and disclosures

Impact of Write Down

Impact on Investors

  • RBI’s write-down of Yes Bank AT1 bonds will not only be detrimental to the financial interests and may cause panic redemptions in situations where it is not warranted, it will severely affect investor’s confidence in debt markets and financial institutions.
  • This could also result in the contraction of the investor base in these bonds, as many would seek to avoid these bonds in future.

Impact on Banking and Financial System

  • Any write-down on existing AT1 bonds will set a wrong precedence as it may lead to drying up of the AT-1 market in India completely for all issuers, especially in light of the fact that the banking system seems to be under stress.
  • Any negative impact on these bonds could also increase the credit spreads across the assets classes and would have a detrimental impact on RBI’s objective of transmission of rate cuts to the larger economy.

Curbs On Cryptocurrency Trades Lifted


  • In a significant judgment, the Supreme Court on 4th March, 2020, lifted the curbs imposed by the Reserve Bank of India(RBI) on regulated entities such as banks and NBFCs from dealing with virtual currencies (VC) and from providing services to crypto businesses.
  • The court held that the ban did not pass the “proportionality” test.
  • The test of proportionality of any action by the government must pass the test of Article 19(1)(g), which states that all citizens of the country will have the right to practise any profession, or carry on any occupation or trade and business.

Background

  • The circular issued on April 6, 2018 directed the entities regulated by RBI:
  1. Not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies.
  2. To exit the relationship with such persons or entities, if they were already providing such services to them.

While striking down the circular, the Court took note of three factors:

  • RBI, in the past 5 years or more, has not found any of the activities of Virtual Currency exchanges to have actually impacted adversely, the way the entities regulated by RBI function.
  • In its reply, dated 04-09-2019, RBI said that it has not prohibited Virtual Currencies in the country.
  • Even the Inter-Ministerial Committee constituted on 02-11-2017 was of the opinion that a ban might be an extreme tool and that the same objectives can be achieved through regulatory measures.

Reasons to Ban Virtual Currencies

  • Owing to the lack of any underlying fiat, episodes of excessive volatility in their value, and their anonymous nature which goes against global money-laundering rules, the RBI initially flagged its concerns on trade and use of the currency.
  • Risks and concerns about data security and consumer protection on the one hand, and far-reaching potential impact on the effectiveness of monetary policy itself on the other hand, forced RBI to impose the ban on trading of virtual currencies.
  • Further, owing to a significant spurt in the valuation of many virtual currencies and rapid growth in initial coin offerings, virtual currencies were not safe for use.

Petitioner’s Argument

  • The petitioner, Internet and Mobile Association of India (IMAI), had argued in the top court that the RBI had banned cryptocurrencies on "moral grounds" as no prior studies were conducted to analyse their effect on the economy.
  • It was also argued that cryptocurrencies were not "currency" in the strict sense, and that they could be termed as a medium of exchange or a store of value.
  • The RBI should have adopted a wait-and-watch approach, as taken by other regulators such as the Directorate of Enforcement or the Securities and Exchange Board of India.

Impact of SC Judgment

  • The order is likely to come as a big relief to VC proponents in the country.
  • It could lead RBI to reconsider its approach to cryptocurrency and come up with a new calibrated framework or regulation that deals with the reality of these technological advancements.

Digital Currencies

  • Digital currency is the blanket term used to describe all electronic money; that includes both virtual currency and cryptocurrency. It can be regulated or unregulated.
  • Digital currencies, which can only be owned and spent using electronic wallets or designated connected networks, are also commonly called digital money, or cyber cash.

Forms of Digital Currencies

Virtual Currencies

  • Virtual currencies are a type of digital currency, typically controlled by its creators and used and accepted among the members of a specific virtual community.
  • Cryptocurrencies such as Bitcoin and Ethereum are considered to be virtual currencies.
  • Satoshi Nakamoto, widely regarded as the founder of the modern virtual currency -Bitcoin

Cryptocurrencies

  • Cryptocurrencies are digital currencies because they exist online, but they are also virtual currencies created with cryptographic algorithms.
  • Most cryptocurrencies now operate on the blockchain or distributed ledger technology, which allows everyone on the network to keep track of the transactions occurring globally.

Risks Associated with Cryptocurrencies

Business Risk

  • Cryptocurrencies are not backed by a central bank, a national or international organization, or assets or other credit, and their value is strictly determined by the value that market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value.

Cyber/Fraud Risk

  • Even with encryption to protect cryptocurrency transactions, there have been hacks resulting in substantial losses.
  • Passwords can be stolen or hacked. Hardware can be corrupted or taken.

Regulatory/Compliance Risk

  • Some countries may prevent the use of the currency or may state that transactions break anti-money laundering(AML) regulations, notwithstanding the global implications.
  • Due to the complexity and decentralized nature of the Bitcoin and the significant number of participants — senders, receivers (possibly launderers), processors (mining and trading platforms), currency exchanges, a single AML approach does not exist.

Market Risks

  • The market risks are idiosyncratic as the currency trades only on demand. There is a finite amount of the currency which means that it can suffer from liquidity concerns and limited ownership may make it susceptible to market manipulation.
  • Further more, given its limited acceptance and lack of alternatives, the currency can appear more volatile than other physical currencies, fueled by speculative demand and exacerbated by hoarding.

Share Swap Ratio


  • Recently, seven of the 10 public sector banks slated for merger have invited independent experts to determine their share swap ratios.
  • The valuer will adopt all market prevalent practices/principles for arriving at the valuation (including principles specified by the Reserve Bank of India and the Ministry of Finance).

Seven Banks

  • Allahabad Bank, United Bank of India, Oriental Bank of Commerce, Punjab National Bank, Union Bank of India, Canara Bank and Syndicate Bank.

Objective

  • Improving Investor Sentiment: The share swap ratio that the government would hammer out for the merger of the three public sector banks would go a long way in improving investor sentiment.

Share Swap Ratio

  • When a company pays for an acquisition by issuing its own shares to the shareholders of the target company, this is known as a share Swap.
  • The number of shares to be issued in lieu of their existing holdings in the target company is known as Swap Ratio.

Basis of Calculation

  • To calculate the swap ratio, companies analyze financial ratios such as book value, earnings per share, profits after tax as well as other factors, such as size of company, long-term debts and strategic reasons for the merger or acquisition.
  • If the target company is listed, the market value of its shares is often a key consideration to arrive at the right price to be paid.

How it Works?

  • Suppose, if company A is acquiring company B and offers a swap ratio of 1:5, it will issue one share of its own company (company A) for every 5 shares of the company B being acquired.
  • In other words, if company B has 10 crore outstanding equity shares and 100% of it is being acquired by company A, then company A will issue 2 crore new equity shares of company A to the shareholders of company B, proportionately.

Benefits of Share Swap

Risk Sharing Benefit:

  • As shareholders of the target company will also be shareholders of the merged entity, the risks and benefits of the expected synergy from the merger will be shared by both the parties.
  • In a cash deal, if the acquirer has paid a premium and the synergies don’t materialise, shareholders of the acquiring company alone bear the fallout.
  • Benefits would also flow as a result of wider reach and distribution network, and reduction in distribution costs for the products and services through sub-sidiaries.

Saving of Borrowing Costs:

  • In a share swap, there is no cash outgo involved for the acquirer, saving the acquirer borrowing costs.
  • The acquirer companies, in turn, can put their cash to use for investments in the business or for other buyouts.

No Capital Gains Tax:

  • In case of a share swap, when shareholders of the acquired company are given shares of the acquirer company as part of the deal, this is not considered a transfer of shares.
  • Hence, capital gains tax will not arise in the hands of the shareholders (including minority shareholders) of the acquired company. The tax liability will arise only when the shares of the merged entity are sold.

Way Forward

  • Share Swap is not always beneficial to shareholders. For ex- In the recently concluded merger of Bank of Baroda (BoB) with Dena Bank and Vijaya Bank, shareholders of Vijaya Bank and Dena Bank got 402 and 110 equity shares, respectively, of BoB for every 1,000 shares they held, hurting both the shareholders of Vijaya and Dena bank.
  • The share swap regime also entails certain practical challenges involving shareholders’ rights and governance issues concerning the incoming shareholders. Since both acquirer and target tend to have investors at different stages of lifecycle, friction may arise if incoming shareholders secure the same terms as are available to existing shareholders. Thus, balancing rights of various investors and finding the right leverage becomes crucial.
  • However, the share swap framework is becoming common as it facilitates acquisitions even when the transaction is unviable due to cash crunch.
  • A swap ratio also brings to lights many aspects of the Merger and Acquisition (M&A) transaction between two companies. Firstly, it shows the relative size and strength of both companies. In general, if more shares of the target company are exchanged for one share in the acquiring company, then the latter is likely to be bigger and stronger.
  • Secondly, it determines the control that each set of shareholders has on the combined company. For example, the acquiring company may have greater control over the firm if the swap ratio is high and, therefore, its Board of Directors could have a larger share in the new Board.

Sashakt Panel On Bad Loans


Why is it in News?

Sashakt committee has praised the mandatory norm of Inter Creditor Agreement (ICA) for its effectiveness in tackling bad loans.

Relevance of the News: It highlights the committee formed for addressing bad loans crisis and its observations.

More about the News:

  • Sashakt Committee has observed that the mandatory norm of ICA allows banks to decide resolution strategy outside the Insolvency and Bankruptcy Code (IBC) which will accelerate the resolution process.
  • The committee has recommended that the existing ICA, which is executed by 35 banks/ FI’s, must be adopted to incorporate the revised voting threshold and other changes in decision making that are stipulated by the RBI recently.
  • RBI has recently changed norms which state that if 75% of lenders by value of the loans or 60% by number agree to a resolution plan then the plan can be adopted.

Sashakt Committee:

Sashakt committee is a group consisting of chiefs of 5 Indian public sector banks pioneered by PNB chairman Sunil Mehta. This committee had forwarded ‘Project Sashakt’ last year, a five-pronged strategy to resolve bad loans, which has been accepted by the government, which aims at

Project Sashakt:

  • The five-pronged resolution route includes:
  • oOutlining an SME resolution approach
  • oBank-led resolution approach
    AMC/AIF led resolution approach
  • oNCLT/IBC approach
  • oAsset-trading platform
  • This 5 pronged approach will be applicable to smaller assets with exposure up to Rs 50 crore, mid-size assets between Rs. 50 crore and Rs. 500 crore, and large assets with exposure of Rs 500 crore and more which have a potential for turnaround.
  • Bad loans of up to Rs. 50 crore will be managed at the bank level, with a deadline of 90 days.
  • For bad loans of Rs. 50-500 crore, banks will enter an inter-creditor agreement, authorizing the lead bank to implement a resolution plan in 180 days, or refer the asset to National Company Law Tribunal.
  • For loans above Rs. 500 crore, the panel recom­mended an independent asset management company (AMC), supported by institutional funding through the alternative investment fund (AIF). The idea is to help consolidate stressed assets.

Inter Creditor Agreement (ICA):

  • ICA is an agreement hashed out by public and private banks in July 2018 to deal with the bad loans crisis in Indian banking sector. It is a part of Project Sashakt.
  • ICA framework envisages effective communication among lenders and lays down some ground rules for multiple-banking arrangements and consortium lending.
  • Some large borrowers often take loans from multiple banks for a single project and in case of failure of the project all creditors face loss from that one common project’s failure. ICA allows all creditor banks to communicate with each other and commonly arrive at a resolution plan for the project.
  • ICA makes sure that there is effective, good communication amongst banks and if any bank has a difference with another bank, then they will resolve it among themselves.
  • ICA was earlier voluntary for banks but recent RBI guidelines have made ICA mandatory for banks.

New NPA Norms Of RBI


Why is it in News?

RBI released new norms on NPA management for banks on 7 June 2019.

Relevance of the News: It lists the changes made in the NPA norms by the RBI which would help in curbing the menace of bad loans in Indian banking sector.

Some Changes made by the RBI include:

  • Balanced between tight timelines and extreme delays:
  • oIn the earlier circular even a single day's default in debt servicing would have required reporting to the RBI and implementation of Resolution Plan (RP). If RP is not completed in 180 days the company would be subject to IBC mandatorily.
  • oIn the changed rules lenders have been given 30 days (in place of one day earlier) to decide upon a strategy. If RP is not implemented in 180 days banks will have to pay penalty rather than mandatory IBC referral.
  • Improved realizations to banks:
  • oDoing away with the mandatory referral to the IBC after 180 days can lead to improved realizations as intrinsic value of assets can be preserved.
  • oIn case of mandatory referral RBI has placed penalties on banks if they fail to deliver within 180 days.
  • oIf RP is not implemented in 180 days from the start of the review period, banks will have to make additional provision of 20% and another 15% if the plan is not implemented within 365 days.
  • Accelerated provisioning by RBI: The central bank would issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults. This will force lenders to refer some specific cases to IBC.
  • ICA has been made more practical: The Inter Creditor Agreement has been made more practical as approval percentage has been reduced from 100% to 75% by value of total outstanding credit facilities and 60% of lenders by number which is mandatory now.

Financial Intelligence Unit – India (FIU-IND)


Why is it in News?

FIU-IND is in news due to recent arrest and auction of the properties of fugitive jeweler Nirav Modi.

Why was FIU-IND set up?

  • Financial Intelligence Unit – India (FIU-IND) was set by the Government of India in 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.
  • FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes.

What are the Functions of FIU-IND?

The primary responsibility of FIU-IND is to collect the data, analyse the data and disseminate that data to the regulators like RBI, SEBI, IRDAI etc. The functions of FIU-IND are:

  • Collection of Information: Acts as the central reception point for receiving Cash Transaction Reports (CTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs) from various reporting entities.
  • Analysis of Information: Analyze received information in order to uncover patterns of transactions suggesting suspicion of money laundering and related crimes.
  • Sharing of Information: Share information with national intelligence/ law enforcement agencies, national regulatory authorities and foreign financial intelligence units.
  • Act as Central Repository: Establish and maintain national data base on cash transactions and suspicious transactions on the basis of reports received from reporting entities.
  • Coordination: Coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes.
  • Research and Analysis: Monitor and identify strategic key areas on money laundering trends, typologies and developments.

Composition of FIU-IND:

  • The FIU-IND is a multidisciplinary body with members from various government departments. The members are inducted from organizations including Central Board of Direct Taxes (CBDT), Central Board of Excise and Customs (CBEC), Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Department of Legal Affairs and Intelligence agencies of the Government.

Whom does this Organization report to?

  • FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

Economic Intelligence Council (EIC):

  • EIC was formed in 1990 and is the apex forum overseeing government agencies responsible for economic intelligence and combating economic offences in India.
  • EIC is responsible for coordination, strategy and information-sharing amongst the government agencies responsible for intelligence and control of economic offences such as smuggling, money laundering tax evasion and fraud. The Council also advises the Finance Minister and the Union Council of Ministers on laws regulating the financial sector and fighting economic crimes.
  • EIC is headed by the Union Finance Minister.

Source: www.fiuindia.gov.in, TH, IE