MAINS DAILY QUESTIONS & MODEL ANSWERS
Q1. Discuss the Reserve Bank of India’s involvement in the country’s banking sector reforms, emphasising the effects on the country’s commercial banks and the overall economy.
GS III – Indian Economy
Introduction:
- In India, the Reserve Bank of India (RBI) is essential to the implementation of reforms in the banking industry. The RBI, the nation’s central bank, was founded in 1935 and is in charge of policing and monitoring the banking industry to guarantee both financial stability and economic expansion.
The Reserve Bank of India’s role:
- Bank Licencing: The Reserve Bank of India (RBI) grants licences to banks, controlling the admission of new banks and guaranteeing their adherence to rules pertaining to Scheduled Commercial Banks (SCBs) and Small Finance Banks.
- Prudential Norms: To preserve the financial stability of banks, the RBI establishes prudential norms pertaining to capital adequacy, asset classification, and provisioning requirements.
- Stricter capital adequacy standards, or Basel Accords, are being implemented to guarantee banks have enough capital reserves.
- application of the Prompt Corrective Action (PCA) framework to identify and resolve stressed banks as soon as possible.
- Monitoring: To guarantee regulatory compliance and stop financial misconduct, the RBI regularly inspects, audits, and reports on banks.
- Encouraging Digital Transformation: To improve accessibility and efficiency, the RBI has concentrated on encouraging digital innovation in the banking industry in recent years.
- The payment ecosystem has undergone a change because to programmes like the Payment and Settlement Systems Act, the Bharat Bill Payment System (BBPS), and the Unified Payments Interface (UPI), which have encouraged cashless transactions and financial inclusion.
Effect on Banks of Commerce:
- Enhanced Efficiency: The RBI’s banking sector reforms have improved commercial banks’ operational efficiency by encouraging the use of new technologies, streamlining workflows, and implementing better risk management techniques.
- Financial Inclusion: In order to increase the reach of banking services, the RBI has encouraged banks to extend their services to underserved communities and locations.
- Financial Inclusion efforts: Both in rural and urban regions, the number of bank accounts and access to financial services has dramatically expanded thanks to RBI efforts like the Pradhan Mantri Jan Dhan Yojana.
- Better Governance: To ensure accountability and transparency in the operations of commercial banks, the RBI has required corporate governance reforms.
- Bank Merger: To enhance the financial stability, efficiency, and governance of a number of public sector banks, the RBI facilitated their merger.
- For instance, in 2020, the RBI helped Punjab National Bank merge with Oriental Bank of Commerce and United Bank of India to become a more powerful, competitive bank with a broader customer base.
- Stress Testing: To help banks improve their risk management procedures, the RBI puts banks through stress tests to determine how resilient they are to economic shocks.
Effect on the Financial System:
- Financial Stability: By guaranteeing the health of the banking industry, the RBI’s regulatory and supervisory function has helped to ensure financial stability in the economy.
- Monetary Policy Transmission: By utilising banking sector reforms, the RBI improves the economy’s ability to receive monetary policy decisions, which in turn affects lending rates and liquidity.
- Credit Availability: As a result of reforms, credit is now more readily available to consumers and enterprises, which promotes economic growth.
- Bank Recapitalization: In order to fortify banks’ capital bases and guarantee their solvency and resilience, the RBI started bank recapitalization programmes.
- Decreased Non-Performing Assets (NPAs): The economy and the banking industry are both doing better overall as a result of the RBI’s reforms, which have assisted in lowering NPAs in the banking sector.
- The GNPA ratio of SCBs decreased to 3.2% at the end of September 2023 after reaching a decadal low of 3.9% at the end of March 2023.
- The implementation of banking sector reforms in India, which have had a significant effect on commercial banks and the economy, is mostly the responsibility of the Reserve Bank of India. The RBI has improved the efficiency, stability, and inclusivity of the banking industry through its regulatory and supervisory actions, which has aided in the expansion and development of the economy as a whole.
Q2. Analyse the impact on asset reconstruction companies (ARCs) in India of the Insolvency and Bankruptcy Code (IBC) and its efficacy in handling non-performing assets (NPAs).
GS II – Government Policies and Interventions
Introduction:
- 2016 saw the introduction of the Insolvency and Bankruptcy Code (IBC) in an effort to address the problem of non-performing assets (NPAs) in India. Its goals were to enhance the recovery of bad loans and speed up the resolution procedure for enterprises that were bankrupt. Through their acquisition of these assets from banks and efforts to recover dues, Asset Reconstruction Companies (ARCs) are essential to the resolution of non-performing assets (NPAs).
IBC’s efficacy in addressing NPAs:
- Resolution of Stressed Assets: By offering a time-bound framework, the IBC has sped up the resolution process for stressed assets. Under the settlement arrangements, the creditors have received Rs 2.43 lakh crore as of September 2022.
- Higher Recovery Rates: When compared to alternative settlement procedures, the IBC has produced higher recovery rates. Compared to previous recovery rates, the recovery rate for cases resolved under the IBC was around 42%.
- But between March 2019 and September 2023, recovery rates under the IBC decreased from 43% to 32%.
- Better Credit Culture: By encouraging discipline among both lenders and borrowers, the IBC has also helped to improve the credit culture in the nation. Defaulting borrowers are more inclined to pay their debts because they are afraid of losing control of their businesses.
- NPA reduction: The IBC has helped to lower non-performing assets (NPAs) in the banking sector. By December 2020, gross non-performing assets (NPAs) was at Rs. 5.77 lakh crore, down from Rs. 8.96 lakh crore in March 2018.
- Resolving Big Corporate Defaults: The IBC has been successful in resolving big corporate defaults, including those of Jaypee Infratech, Essar Steel, and Bhushan Steel. Banks and other financial organisations have recovered substantial sums of money thanks to these rulings.
Consequences for Asset Rehabilitation Organisations (ARCs):
- Growth in Business possibilities: As a result of the IBC, banks are now more inclined to sell their non-performing assets (NPAs) to ARCs for resolution, resulting in a rise in business possibilities for these firms. As a result, ARCs have been able to acquire more assets for rehabilitation.
- Difficulties in Resolution: For a variety of reasons, including litigation, a dearth of bidders, and delays in the resolution process, ARCs encounter difficulties in resolving assets acquired under the IBC. This has an impact on their capacity to make money and collect debt.
- Capital Requirement: Smaller ARCs may find it difficult to meet the IBC’s requirement that they have a minimum net owned fund of ₹300 crore. The ARC sector is restricted from new participants by this criterion.
- Innovation is Required: In order to increase their recovery rates and profitability, ARCs must develop and implement novel asset resolution techniques. This entails looking into possibilities like co-lending, asset securitization, and collaborating with other financial institutions.
- Regulatory Environment: The rules governing ARCs are changing, and some things, such how tax benefits are handled and capital requirements, need to be made clearer. This uncertainty may have an effect on ARCs’ operations and growth.
- India’s NPA problem has been effectively addressed by the Insolvency and Bankruptcy Code (IBC), which has sped up the resolution process and increased recovery rates. To further improve the efficiency of the IBC in resolving NPAs and bolstering the banking industry, there are obstacles and repercussions for ARCs that must be addressed.
