Mains Economy Pillar1B: Bank-NBFC Classification & Bad Loans

Table of Contents

13 Financial Intermediaries- origin, classification .......................................................................... 70

13.11 RBI as a Financial Regulator- an Evaluation .............................................................................. 71
13.11.1 DATA: Financial Frauds in India ................................................................................................................. 71
13.11.2 RBI’s performance: Positive & Negative (�रजवर् ब�क के प्रदशर्न का मू�ांकन)....................................................... 72
13.11.3 RBI power over the PSBs - some limitations ............................................................................................... 74
13.11.4 Need for more manpower and technology for supervision ...................................................................... 75
13.11.5 RBI as regulator: conclusion / way forward ................................................................................................ 76

13.12 RBI Governor Urjit’s Resignation .............................................................................................. 76

13.13 Constitutional status to RBI? ...................................................................................................... 77

13.13.1 Arguments in favour of giving RBI constitutional status .......................................................................... 77
13.13.2 Argument against giving RBI constitutional status .................................................................................... 78
13.13.3 Conclusion : Double Dholki nahi, take a stand .......................................................................................... 79

14 Sarkaari Banks - a performance review....................................................................................... 79

14.11.1 Sarkaari banks: +ve impact ........................................................................................................................... 80
14.11.2 Sarkaari banks - reasons behind inefficiency .............................................................................................. 80
14.11.3 Sarkaari Banks: Governance Reforms already done................................................................................... 81

14.12 Sarkaari banks – What reforms should be done? ...................................................................... 81

14.12.1 PSB Banking Personnel Reforms→ ES20 suggestions............................................................................... 82
14.12.2 Sarkaari banks - conclusion / way forward ................................................................................................. 82

14.13 PSB consolidation = A) Merger B) Privatization ....................................................................... 83

14.13.1 �Benefit? ..................................................................................................................................................... 83
14.13.2 ��Anti-Arguments against Merger and Privatization of PSBs (�वरोध म� तकर् )..................................... 84
14.13.3 Conclusion – yes we need to consolidate. ................................................................................................... 84
14.13.4 Banking Reforms: 4R4D Roadmap by Economic Survey .......................................................................... 85
14.13.5 � Ultimate Conclusion for Banks? (ब�कों के बारे म� �न�षर्- जब �लखने के �लए और कु छ ना बचा हो) ..................................... 85

14.14 �� � �� Should Adani/Ambani houses be allowed to set up banks? ...................... 85

14.14.1 �� � ��: Arguments in Favour प� म� तकर् ..................................................................................... 86
14.14.2 �� � ��: Arguments Against: �वप� म� तक...................................................................................... 86
14.14.3 �� � ��: Conclusion about banking license to Adani/Ambani? (�न�षर्)................................ 87

14.15 RRB problems and Coop Bank problems ................................................................................... 87

14.15.1 �� Mock Questions for Mains .............................................................................................................. 87

15 NPA / Bad Loans .......................................................................................................................... 88

15.11.1 NPA Intro ...................................................................................................................................................... 88
15.11.2 Easy loans help in GDP Growth how? / why Banking reforms req?....................................................... 89
15.11.3 ��� Bad Loan Fixing- RBI (2015-19): RBI “3R” ............................................................................ 89
15.11.4 �Rectification (सुधार) .................................................................................................................................... 89
15.11.5 ⛏Restructuring (पुनगर्ठन: �ाज दर या कजर् चुकाने क� अव�ध या मा�लक� म� बदलाव) ..................................................................... 89

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 15.11.6 � Recovery (वसूली) ........................................................................................................................................ 90
15.11.7 Bad loan fixing: RBI’s Prudential Framework (2019) ............................................................................... 90

15.12 Bad Loans: IBC Code 2016 (शोधन �मता और �दवा�लयापन सं िहता) ............................................................... 90
15.12.1 IBC +ve Benefits (इस कानून से �ा फायदे �ए) ........................................................................................................... 91
15.12.2 IBC: -Ve / limitation / challenges (चुनौ�तयां मयार्दा) ............................................................................................. 92
15.12.3 Conclusion- IBC............................................................................................................................................. 93
15.12.4 BAD Bank – NARCL / IDRCL...................................................................................................................... 93

15.13 👁👁👁🗨🗨🗨🗨🗨🗨-�
��NPA- surveillance improvement .................................................................. 94
15.13.1 👁👁👁🗨🗨🗨🗨🗨🗨-�
��NPA Surveillance – existing mechanism .................................................................... 94
15.13.2 👁👁👁🗨🗨🗨🗨🗨🗨-�
��NPA Surveillance - ES20: Use AI-ML Technology ................................................... 95
15.13.3 👁👁👁🗨🗨🗨🗨🗨🗨-�
�� NPA Surveillance- ES20: setup PSBN Network ........................................................ 95

15.14 Shadow Banks – Scams and Reforms.......................................................................................... 96

15.14.1 Shadow Banks → RBI’s steps ...................................................................................................................... 96
15.14.2 Shadow Banks → Govt’s steps .................................................................................................................... 96
15.14.3 �(�
��) � Shadow Banking → Remedies by SEBI ......................................................................... 97
15.14.4 �(���) � Shadow Banking → suggestions by Eco.Survey ........................................................... 97
15.14.5 Conclusion: Shadow Banks ........................................................................................................................... 97

15.15 ✍🏻🏻�
� Mock Question for Mains.................................................................................................. 97

13 FINANCIAL INTERMEDIARIES- ORIGIN, CLASSIFICATION

Classification chart already given in the prelims handout. Apart from that, noteworthy orgs are as
follows:

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13.11RBI AS A FINANCIAL REGULATOR- AN EVALUATION
• (Origin) The Reserve Bank of India (RBI) was established under the RBI Act of 1934 with
headquarters at Mumbai.

• (Function) RBI is the regulator of banks, All India Financial Institutions (AIFI) such NABARD,
SIDBI etc; selected categories of NBFCs (gold loan, microfinance etc.) and payment service
providers (card gateway, foreign remittance, Mobile wallets etc).

13.11.1 DATA: Financial Frauds in India

• Note: You don’t have to remember the data given in the NEXT table, except the last two
columns. I have given the data use so you feel emotionally convinced that indeed RBI has done
good work.

• Unless there is an emotional conviction, your words will not carry the strength.
Source: RBI annual report 2022–23.

Year 2020 2021 2022 Comment

Banking Frauds in ₹cr 1.32 lakh 60,000 cr 30,000 cr steady decrease= RBI is
cr serious.
out of them Loan frauds ₹1.30 ₹58,000 ₹29,000 majority scam via loan.
lakh cr cr cr
out of them card/internet ₹120 cr ₹155 cr ₹276 cr steady increase=worry.
Out of them how many in public 59% 67% 70% PSBs are inefficient.
sector banks?
�Points to Reflect:

1. Total banking sector frauds significantly decreased, it shows that RBI is conducting its work in a
professional and strict manner. (कु ल ब�िकंग घोटालों म� उ�रो�र कमी - �रज़वर् ब�क क� प्र�तबद्धता को दशार्ता है)
2. Majority of the frauds related to loans. (�ादातर ब�िकंग घोटाले लोन देने म� हो रहे है।)
3. Every year public sector banks account for the majority of the frauds - pointing to some type of
political pressure/nexus, some type of nexus with the businessman (e.g. PNB Manager
generating bogus Letter of Undertaking for Nirav Modi), not enough technology / specialised
officers to combat Cybercrimes. (�ादातर धांधली सरकारी ब�कों म� हो रही है जो िक वहां राजनी�तक दबाव बदमाश
उद्योगप�तयों के साथ सांठगांठ और साइबर क्राइम से लड़ने के �लए टे�ोलॉजी/प्रौद्यो�गक� क� कमी और का�बल अफसरों क� कमी को
दशार्ता है)

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4. The amount of card/internet frauds increased- hinting to more digitisation of the economy but
the banks’ cyber security, public awareness against cybercrime is not keeping up with the speed
of digitisation. (काडर्/इं टरनेट म� घोटालों क� सतत् बढ़ोतरी- यानी अथर्तंत्र का िड�जटल-करण �जस तेज़ी से हो रहा है, उतनी तेज़ी
से लोगों म� जागृ�त, और ब�को क� साइबर क्राइम से लड़ने क� टे�ोलॉजी म� वृ�द्ध नहीं हो रही। )

13.11.2 RBI’s performance: Positive & Negative (�रजवर् ब�क के प्रदशर्न का मू�ांकन)

RBI’s Role +ve -ve/challenges

⇒ has managed to control the ⇒ struggling to control inflation
inflation in the statutory limit of below 6%, due to Corona supply-
2–6% for majority of the years side issues, Russia Ukraine crisis
since 2016. etc since 2021–22.
⇒ Conducting experiments on ⇒ Some accuse RBI of doing
Controller Of CBDC/Blockchain. demonetisation (2016) in ill-
Money Supply ⇒ New tools / innovations like planned/illegal manner but SC
and Inflation (मुद्रा Op.Twist & SDF when given it clean chit/ declared it not
आपू�त और मुद्रा���त traditional tools of monpol illegal. (2023).
�नयं त्रक) became less effective.
⇒ has built adequate forex reserve ⇒ China over 3 trillion forex reserve.
to prevent any BoP crisis. ($600 ⇒ currency exchange became
Controller of bn) volatile in last two years. Dollar
Foreign ⇒ unlike Pakistan or Sri Lanka. strengthened from ₹70(2020) →
Exchange (�वदेशी we have not seen another ₹82(2023-June)
मुद्रा �नयं त्रक) balance of payment crisis after

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 RBI’s Role +ve -ve/challenges
1991- proving RBI conducting ⇒ But mainly due to external factors
the work professionally. like US Fed tapering and Ukraine
war. So RBI cannot be faulted for
mismanagement.
⇒ managed to reduce the cost of ⇒ Demands for separate Public Debt
borrowing for government management Authority to avoid
through operation twist conflict of interest in RBI’s role as
Banker To Govt banking regulator. More in
(सरकार का ब�कर) Pillar2.
⇒ Opened many new loan windows ⇒ N/A. Because, for Indian bankers’
during Corona to help bankers deposits tend to be the major
e.g. TLTRO, SLTRO. source of money supply.
Provided new investment ⇒ So Bankers as such never
Banker’s Bank opportunity through SDF complained for the lack of funds
(ब�करो का ब�क) window. from RBI.
⇒ India has never witnessed ⇒ Failed to prevent NPA/Bad Loans,
complete failure of the banking PMC Bank scam, PNB-Nirav
system unlike in USA’s (i) Modi, ICICI Videocon, etc.
Silicon Valley bank crisis (2023) mismanagement in RRB and
or (ii) sub-prime crisis (2007– Coop banks.
08). So proves that RBI has done ⇒ some of the payment banks had to
its work in a responsible manner. shut down/cancel license/facing
⇒ RBI launched Utkarsh-2022 problems = RBI allowed them
roadmap to improve its admin- without foresight.
process, Daksha-web system for
Regulator of online surveillance, Coop-banks
Banks (ब�कों का pe RBI’4-tiered regulatory
�नयामक) framework.
⇒ similar to above cell. ⇒ DHFL Home loan scam, ILFS.
⇒ 2010’s micro-finance crisis in
Southern States.
Regulator of ⇒ Heavy handed tactics by loan
Some NBFCs companies.
(कु छ एनबीएफसी का growth of illegal lending apps /
�नयामक) crypto investment apps.

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 RBI’s Role +ve -ve/challenges
⇒ Opened new loan/refinance ⇒ If NABARD, NHB, etc., have not
windows in Corona. RBI transfer lived up to their highest potential,
PSL Shortfall money to them. then the responsibility belongs
AIFI (NABARD more to the ownership/leadership
SIDBI Etc) of the Govt.
⇒ PSL norms, Initiatives with the ⇒ RBI Financial inclusion index
help of NPCi (e.g. 123Pay on score is 56 (2022; 100 means
Basic phones), complete financial inclusion.), so,
⇒ Note-identification App for RBI still has miles to go to
Financial blind people, improve access to
Inclusion (�व�ीय ⇒ providing PSL-shortfall funding banking/loan/digital payments to
समावेशन) to MUDRA, NABARD etc. villagers/remote areas.
⇒ Has ombudsman for banks, ⇒ Bank loan scams, Unauthorised
NBFCs and digital payments. loan apps, cyberfrauds, Bitcoin
⇒ Card Tokenization scams, malpractices of loan giving
⇒ Positive Pay mechanism against NBFC Companies, informal
check frauds moneylenders… More needs to
Consumer ⇒ RBI owns DICGC which gives be done.
Protection upto ₹5 lakh bank deposit
(उपभो�ा सं र�ण) insurance.
International ⇒ Has complied with agreements at ⇒ no negative news headline comes
Cooperation BASEL/BIS, IMF, G20’s to mind.
(अंतररा��ीय सहयोग) Financial Stability Board etc.

13.11.3 RBI power over the PSBs - some limitations

रा��ीय कृ त ब�को के ऊपर �रज़वर् ब�क का सं पूणर् �नयं त्रण नहीं है कु छ कानूनन बाधाओं के चलते ऐसी सरकारी ब�क के बोडर् सद� मैने�जगं डायरे�र
आ�द को हटाना �रज़वर् ब�क के अके ले से सं भव नहीं है

⇒ RBI bank regulates the banks using the power of the Banking Regulation Act, 1949. However,
certain provisions of the BR Act not applicable on the nationalised banks.

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⇒ This prevents RBI Governor from directly removing the MD / Board Members of PSBs, or force
their mergers or cancelling PSB license.

⇒ After the PNB -Nirav Modi scam, the then RBI Governor Urjit Patel complained about this
weakness/ legal loophole.

⇒ However, critics argue that it does not matter where formal power resides. Much depends on the
moral authority / moral suasion power of the Governor.

⇒ e.g. many years ago an RBI governor told the government that certain corrupt PSB MD should
be removed, then government -as the owner of the PSB - removed that MD.

⇒ RBI governor can also write to the Central vigilance Commissioner (CVC) to initiate inquiry.
Having said that, some of the limitations also need to be fixed at the level of government such as -

RBI’s limitation Solutions

Bad Loan resolution legal amendments to enhance the powers of SARFAESI Act and IBC
Code.
A Public Credit Registry with legal backing for Aadhar -PAN link etc.
while respecting right to privacy.
PSB/ RRB/ Coop It is also for the govt to amend the laws to fix certain grey areas in
inefficiency / frauds regulation, and ensure right people get appoint in the board.
crypto currency scams Parliament needs to make a law - esp. after SC judgement which
removed the RBI ban.

13.11.4 Need for more manpower and technology for supervision

As of 2023-March RBI PSBs

No. of Officers 13,000+ 7.70 lakh +
⇒ RBI delivers an average ₹50-80,000 crore dividend annually to the government. So RBI does not
have a shortage of money. RBI should invest more in technology upgradation and manpower
recruitment and training, especially the Specialist officers, to address the above issues.

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⇒ Some of the notable steps already done are given in above image, however, there is still scope for
doing more.

13.11.5 RBI as regulator: conclusion / way forward

⇒ Thus, overall, RBI has been conducting its mandates in an efficient and professional manner.

⇒ However, there is scope for improvement, especially in the NPA, cyberfraud prevention, and
financial inclusion.

⇒ Lastly, some of the lacunas of RBI also need to be fixed via legislative reforms, e.g., more clarity
over the regulation of cooperative banks and PSBs and administrative reforms in PSBs.

13.12RBI GOVERNOR URJIT’S RESIGNATION

Isn’t this topic outdated? Ans. Its points need to be understood for “GSM2-Regulatory Bodies
Problems”. (because earlier UPSC has asked why national commission for woman / Human rights
commission not unable to pay effective role et cetera?)

2018: RBI Governor Urjit Patel was unhappy with Govt interfering / criticizing his work. Such as:

- Higher Dividend: Govt. demanded higher dividend from RBI to finance the recapitalization of
PSBs for BASEL-III, and to finance its own fiscal deficit & populist welfare programs. Urjit Patel
felt RBI’s higher reserves are necessary to check any financial crisis. Excessive dividend could
increase inflation. He did not oblige. (सरकारी योजनाएं चलाने के �लए �ादा िड�वड�ड /लाभांश क� मांग)
- BASEL-III-relaxation: These norms will become fully effective on 31/3/2019 but PSBs don’t
have enough capital to comply so they requested Finance Minister to tell Urjit Patel to extend the
deadline, Urjit Patel did not oblige. (बासेल मानदंडों क� अं�तम �त�थ म� �रयायत क� मांग)

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- PCA-relaxation: Urjit Patel vigorously implemented Prompt Corrective Action framework, so
Public Sector Banks’ branch expansion, lending operations were restricted, they came running to
FM. FM asked Urjit to relax PCA. He did not oblige. (पीसीए �नयमों म� �रयायत क� मांग)
- Tight Money Policy: CEA Arvind Subramanian & BJP-Ministers were criticizing RBI’s “Tight”
Monetary Policy depriving MSMEs of cheap loans and thus harming India’s growth rate.
Whereas Urjit Patel deemed tight policy necessary to keep inflation @2-6%CPI (All India) on
durable basis so he did not oblige. (महंगाई से लड़ने के �लए लोन और महंगे क�ए → �ापारी वगर् नाराज)
- PNB Scam: Jaitley expressed displeasure that RBI couldn’t detect PNB-Nirav Modi fraud,
whereas Urjit Patel defended that he lacks effective powers under Banking Regulation Act to take
punitive actions against Public Sector Banks. (पं जाब नेशनल ब�क - नीरव मोदी कांड को पकड़ने रोकने म� असमथर्
रहे ऊ�जत पटेल)
All these forced Govt. to issue order to Urjit Patel to meet/discuss these matters under Section -7 RBI
Act. Urjit resigned citing ‘personal reasons’. But critiques argue that he resigned because of the
humiliation over Section-7 Notice.

☯ Ethics Angle: by resigning from job a person can protect his personal dignity but not the dignity
of the organisation because later, the minister can replace the officer with a “Yes man”. (नौकरी से इ�ीफा
देकर कोई ��� अपनी ���गत ग�रमा क� र�ा तो कर सकता है लेिकन सं गठन क� ग�रमा क� नहीं �ोंिक बाद म� मं त्री उस अ�धकारी के �ान पर
"यस मैन/जी-हजूर" िक� के अफसर को रख अपने अनै�तक काम करवा सकता है.)

13.13CONSTITUTIONAL STATUS TO RBI?

in GSM2–2020: UPSC asked can we improve the performance of national commission for woman by
giving it constitutional status? So on similar logic. Let’s prepare brainstorm for the points

Presently RBI is a statutory corporation setup under RBI Act 1934, with powers to regulate Banks,
some NBFC, AIFI and digital payment system providers.

13.13.1 👍👍Arguments in favour of giving RBI constitutional status

वतर्मान ���त म� �रजवर् ब�क के गवनर्र पर को हटाने/अपना मनमज� काम करवाने के �लए सरकार को कु छ सताए ह�
सं वैधा�नक दजार् �मलने पर गवनर्र अपना काम �ादा �तं त्रता से कर पाएगा.

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⇒ Currently, the RBI central board has the power to remove the governor and the government has
100% ownership of the central board.

⇒ Section 7 of the RBI Act allows the government to instruct the RBI governor in public interest.
However, sometimes the interests of the government do not align with the priorities of the
governor, resulting in fallout such as the resignation of Urjit Patel in 2018.

⇒ Currently, the RBI does not have full control to regulate public sector banks or remove their MD
(REF: the earlier section)

⇒ RBI does not have full authority over certain types of cooperative banks, and Shadow-banks like
ILFS.

⇒ The constitutional status will empower the RBI governor to overcome the above challenges.

13.13.2 ✋Argument against giving RBI constitutional status

िकसी बड़े देश म� ऐसा करने का �रवाज नहीं. सं वैधा�नक दजार् देने पर लचीलापन चला जाता है. कांड तो उसके बाद भी हो सकते ह�.
सं वैधा�नक दजार् ऐसी सं �ा को िदया जाता है जो सं �वधान के बु�नयादी ढांचे को कायम रखने के �लए ज�री हो जैसे िक चुनाव
आयोग �व� आयोग आिद. �रजवर् ब�क का काम मह�पूणर् है लेिकन ऐसा भी नहीं जो बु�नयादी ढांचे के �लए ज�री हो. प्र�तभावान
लोगों को गवनर्र बनाया गया है और उ�ोंने पूणर् �न�ा से अपना काम िकया है.

⇒ �No precedence in any mature economy / democracy to grant constitutional status to the
central bank.

⇒ �Inflation control, GDP growth, exchange rate stability, financial scam control require
dynamic / rapid changes required. But, after granting constitutional status = operational
flexibility decreases. Because to change anything, constitutional amendment may be required.

⇒ RBI Act, FRBM Act enough provisions to prevent any grave mischief by Govt in public debt
management.

⇒ Scams happened because of legal loopholes, tech loopholes, human mischief.

⇒ Constitutional status is merited / required when basic structure need to be protected e.g.
Democratic election (ECI), Fiscal federalism (Finance commission, GST council), Executive’s
accountability to parliament (CAG), Fair opportunity in public employment through
competitive exams (UPSC, StatePSCs).

⇒ Whereas, the work is done by RBI is important, but not essential to protect the basic structure of
the constitution.

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⇒ So far, successive governments have appointed meritorious persons Dr.Manmohan Singh to
Dr.Raghuram Rajan to present Shaktikanta Das. And each Governor has conducted himself with
best of his integrity and professionalism. So there is no mischief / political patronage happening
on the appointment-front, that needs to be corrected through constitutionalising of the body.

⇒ Yes, RBI has been facing challenges to control bad loans, crypto currencies, cooperative banking
schemes etc. But they can be fixed easily through amending suitable laws, instead of giving
constitutional status.

13.13.3 Conclusion : Double Dholki nahi, take a stand

Thus, after evaluating the arguments in favour and against, there is no need for giving constitutional
status to the RBI. (इस मुद्दे के प� और �वप� म� तकर् को का मू�ांकन करने के बाद �रजवर् ब�क को सं वैधा�नक दजार् देने क� कोई
आव�कता नहीं है)

14 SARKAARI BANKS - A PERFORMANCE REVIEW

⇒ (Origin) At the time of Independence, majority of the banks were owned by industrialist, princes
and foreigners. There was a deep nexus between the industrialists and bankers.

⇒ By 1960s- only 188 elite people controlled the economy by sitting in the board of top 20 banks
and top 1400 companies. Bankers recklessly loaned to directors and their kin. Bankers catered
the rich and influential. Helping the farmers, financial inclusion or five year plans was not in
their business priority.

⇒ So, Government of India begin the nationalisation of the banking sector two rounds in 1969 and
1980, with the the objectives of financial inclusion, poverty removal, social welfare, protection of
depositors and to prevent the concentration of wealth. (आजादी के बाद �ादातर ब�क �नजी �ेत्र के थे, के वल
अमीर-रसूखदारों क� मदद करते थे, इस�लए �व�ीय समावेशन गरीबी �नवारण आिद उद्दे�ों के �लए सरकार ने उनका रा�ी� यकरण शु�
िकया)

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14.11.1 Sarkaari banks: +ve impact

+ve -ve
• After nationalisation, the number of Bank • 2022: 70% of the ₹30,000 cr bank frauds
branches in India, the amount of loan given happened in PSBs alone.
to farmers and villagers= has increased. • Compared to private sector banks, the
• This helped in agriculture production and public sector banks have higher NPAs and
poverty removal in rural areas. (कृ �ष उ�ादन lower profitability.
और गरीबी �नवारण म� मदद क� है) • �Global top-100 banks: China (18
• PSBs account for 70% of the banking banks), USA (12 Banks), Japan > France >
business in India. …..India (only 2 bank: HDFC and SBI).
• SBI is among the top 100 banks of the given India’s size of economy (in terms of
world. GDP), India should have 6–8 banks in the
global top 100. (�व� क� 100 सबसे बड़ी ब�कों म�
भारत का �सफर् एक ही ब�क है)

14.11.2 Sarkaari banks - reasons behind inefficiency

• � Usually the persons favored by the present-day ruling party become the Board of directors,
irrespective of merit or qualification. Thus, political considerations have significant
control/influence over bank’s business operations. (बोडर् मे राजनी�तक त�- �जनम� ब�कों का सही प्रबं धन करने का
अनुभव या कौश� नहीं है)

• �PSB staff’s salary does not depend on the profitability of the bank. Employee unions
frequently engage in strikes/hartals. प्रदशर्न आधा�रत तन�ाह नहीं. बार बार हड़ताल पर चले जाते है
• �They’ve apathetic attitude towards marketing, and customer satisfaction- than pvt sector
bankers. (नई तकनीक� अपनाने म�, तथा ग्राहकों का सं तोष बढ़ाने म� इन ब�कों का उदासीन रवैया है.)

• � �:�
� PSBs subjected to Right to Information (RTI) act, Central Vigilance Commission
(CVC), Comptroller Auditor General (CAG), Central Bureau of Investigation (CBI), Courts &
media in a more stringent manner. (ब�कर खौफ म� रहते है क� ईमानदार �नणर्य क� भी शक से जांच होगी, और उनक�
पदो��त रोक दी जाएगी)

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• Consequently, PSB officials fear harassment under the veil of vigilance investigations & media-
trials. They prefer safety and conservatism over risk-taking and innovation. (�िढ़वाद पसं द, नवाचार
नापसं द)

14.11.3 Sarkaari Banks: Governance Reforms already done

⇒ PSBs’ CMD post bifurcated into 1) separate chairman and 2) separate MD&CEO so that banks
can function in more professional and accountable manner.
⇒ Indradhanush plan for bank recapitalization (₹ 70,000 crores)
⇒ Finance Ministry setting up an autonomous body- Bank Board Bureau (BBB)- later replaced
with Financial Services Institutions Bureau (FSIB) for selection of top management officials.
⇒ Enhanced Access and Service Excellence (EASE) framework to rank the PSB’s performance on
six parameters.
⇒ Staff Accountability Framework for PSB.

14.12SARKAARI BANKS – WHAT REFORMS SHOULD BE DONE?

⇒ Transfer the ownership of the government to a professional banking investment

company (BIC) so as to reduce the influence of government in appointment of
Ownership
board of directors – as recommend by P.J.Nayak committee
Reforms
(�ा�म� ⇒ Privatise the loss making / scam-ridden public sector banks (PSB) e.g. UTI
सुधार)
(Axis), IDBI.

⇒ Merge smaller PSBs into larger ones. e.g. Vijaya & Dena Bank to Bank of Baroda.
Personnel ⇒ Allow campus recruitment, lateral entry in higher management positions to
Reforms
(का�मक सुधार)
recruit best talented manpower.

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 ⇒ Make employees ‘part owners’ through Employee Stock Ownership Plan
(ESOP).

⇒ So they’ll become more sensitive about the profitability of the bank.

⇒ Use Artificial Intelligence (AI), Machine Learning (ML), Big Data Analytics,
geotagging of mortgaged assets etc.
Surveillance
(�नगरानी) ⇒ setup an organization PSBN Network to implement above ICT-solutions.
<More in NPA section of Mains-QEP Handout>

14.12.1 PSB Banking Personnel Reforms→ 📔📔📔📔ES20 suggestions

- PSBs should be allowed to do 1) campus recruitment of atleast some specialists (कु छ �वशेष�ों क�
के �स प�रसर से सीधी भत�) 2) lateral entry in higher management (उ� प्रबं धन म� पा��क भत� ).
- PSBs should give Employee Stock Option Plan (ESOP) to their employees. ESOP is a type of
benefit plan wherein employees given some shares of the company (Apart from their regular
monthly salary). [कमर्चारी �ॉक �वक� योजना: वेतन/तन�ाह के अलावा ब�िकंग कं पनी के शेयर भी कमर्चारी को िदए जाये]
When/if company makes profit → How does employee benefit from ESOP? (�ा फायदा होगा)
1) Market price of shares⏫ He can sell his shares to a third party for a large gain.
2) the dividend to the shareholders He can keep the shares with himself, and will get large
will increase. dividend from the company (in addition of his regular
salary) तन�ाह के अलावा कं पनी के मुनाफे म� से लाभांश भी �मलेगा
- As shareholders, some of these employees may even join as board members → help designing
more realistic business policies at the apex level. Thus, ESOP changes mind-set from an
“employee” to that of an “owner”. (कमर्चारी म� कं पनी का मा�लक होने क� भावना जगाता है)
- It encourages the employee to work harder with more dedication, loyalty and passion for the
company’s profitability and brand image. (वह समपर्ण �न�ा और जुनून से ब�क के �लए काम करना शु� करता है)

14.12.2 👋👋👟👟Sarkaari banks - conclusion / way forward

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• Thus, after Independence, the nationalized banks/public sector banks have helped in financial
inclusion and poverty alleviation, but areas of bad loans, profitability, cyber-frauds, remain a
concern.

• They need to be addressed through adequate reforms in ownership, manpower/personnel

reforms, surveillance, mergers, and privatization.

• Then PSBs can play a more effective role as a catalyst to make India a developed nation by 2047.
(�व�ीय समावेशन और गरीबी �नवारण म� अ�ा काम िकया है लेिकन मुनाफा बढ़ाना है घोटाले कम करने ह�, तो इनके
�ा�म�/मालीक� का�मक प्रशासन, �नगरानी, �वलीनीकरण �नजीकरण आिद के सुधार करने ज�री। तभी भारत को �वक�सत देश
बनाने म� यह उद्दीपक का काम अ�े से �नभा पाएं गे)

14.13PSB CONSOLIDATION = A) MERGER B) PRIVATIZATION

Term Definition
PSBs Public sector banks, where government is majority owner.
Merger (�वलीनीकरण) Merging of two or more smaller public sector banks in to a bigger
public sector bank.
Privatization (�नजीकरण) Transferring majority ownership to the private sector.
Consolidation Reducing the number of public sector banks through merger and
(एक�करण/समेकन) privatization.
⇒ (Data) Before 2019: we had over 20 PSBs. By 2023 it is reduced to 12 PSBs (Total 13 if you count
India post payment bank as well).

14.13.1 🔂🔂👍👍Benefit?
- Geographical & technological synergies in ATM, Branches, Security Staff, Servers cost etc.
(भौगो�लक और तकनीक� तालमेल)
- Presently only two Indian bank in the global top 100 i.e. HDFC and SBI. After consolidation, we
will be left with some bigger sized PSBs, who can get into global list.
- Then it will be easier for such globally recognized bank to open branches abroad, attract foreign
clients, issue FPOs/ADR/GDR in foreign nations to mobilize more capital.

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- Then, easier to Government to capitalize such large sized PSB to comply with BASEL-III Norms.

14.13.2 🔂🔂🔂🔂Anti-Arguments against Merger and Privatization of PSBs (�वरोध म� तकर् )

• Employees worried seniority, promotion, increments (व�र�ता, पदो��त, वेतन वृ�द्ध);

• Financial burden of Voluntary Retirement Scheme (VRS: �ै��क सेवा�नवृ�� योजना का �व�ीय बोझ).

��What is VRS? Ans. Explained in Video lecture.

• Transfer and VRS of employees → Banks may lose regional identities & customer intelligence.
(�ेत्रीय पहचान चली जाएगी)

• Big customers may shift to other banks for faster service and personalized privileges. (तेजी से सेवा
और ���गत सेवाए नहीं �मलने पर �ापारी दू सरे ब�कों म� खाता खोल�गे)

• Private sector banks are no saints. There have been instances of private sector banks engaging in
money laundering activities (e.g. Cobrapost Sting), taking bribes to pass loans to unworthy
borrowers (e.g. ICICI Loans to Videocon)- which ultimately harm depositors (�नजी �ेत्र के ब�क काले
धन को वैध बनाना, �र�त लेकर गलत लोगों के लोन पास करना, और दू सरी �व�ीय धांधलीयों म� शा�मल है। इस�लए �नजीकरण को
हमारी सम�ाओं का रामबाण इलाज मानना गलत होगा। )

14.13.3 Conclusion – yes we need to consolidate.

While there are some concerns/anti-arguments, but they are not strong enough to continue the
status quo. Therefore, in �Budget-2021 speech, Finance Minister announced to reduce the number
(PSBs) from 12 to just 4-5 through a combination of mergers and privatizations. This will help
improving the operational efficiency of the PSBs in banking, credit, and financial inclusion to make
India a developed nation by 2047.

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14.13.4 Banking Reforms: 4R4D Roadmap by Economic Survey
Table 1: Points for assembling Mains Answers Rapidly
Eco.Survey-2015: “4R” framework Eco.Survey-2014: “4D” framework
Recognition (पहचान): of bad loans via asset Disinter(खोदकर �नकालना): "Digup graves, recover
quality review (AQR) money": using SARFAESI Act, I&B code, Sashakt
Resolution (समाधान): via Differentiate among PSB (�भ� �वहार करना):
schemes/mechanisms I&B, Project Government should recapitalize Profit Making PSB:
Sashakt for PSBs. while merge or privatize Loss Making PSB.
Recapitalization(पुनपू�जीकरण): for BASEL-III Diversify (वै�व� लाना): Allow more number and
norms ⇒ Indradhanush, Bank Recap variety of Banks.⇒ SFB & PyB allowed. Wholesale
Bonds & other measures: Bank proposed.
Reforms(सुधार): Governance & Deregulate (�नयं त्रण मु�): Lower SLR, Promote
Administration of PSB⇒ BBB, EASE Corporate Bond market so they borrow less from
Banks
Further, you can also mention: PCA Norms, PCR registry, PSBN Network, ESOP etc.

14.13.5 ✍ Ultimate Conclusion for Banks? (ब�कों के बारे म� �न�षर्- जब �लखने के �लए और कु छ ना बचा हो)
 A vibrant banking system can support India’s growth story/ PSBs are growth levers for India.
 Inefficient PSBs can severely handicap the country's economic development.
 35% of Indians are in the 15-29 years age group. Majority of them live in rural areas and many of
them require education loans and business loans to progress in life.
 Therefore, aforementioned initiatives are imp in that regard/ need to be addressed on priority
basis to
o 1) Reap India’s demographic dividend and
o 2) To achieve developed nation status by 2047.
(भारत क� �वकासगाथा को आगे बढ़ाने, तथा जनसां��क�य लाभांश को प्रा� करने के �लए जीवं त बेिकंग प्रणाली आव�क। अत: उ� �रजवर्
ब�क|सरकार के उ� कदम सरहनीय है/ उ� सुधारो क� आव�कता है।)

14.14🚫🚫🚫🚫 � 🚗🚗🚗🚗 SHOULD ADANI/AMBANI HOUSES BE ALLOWED TO SET UP

BANKS?
2016: RBI issued guidelines for 'on-tap' Bank licence. ['On-Tap'= You may apply for it whenever you
are ready - just like a driving licence. You don't have to wait for the notification date or "last date to
apply" like UPSC.]

⇒ On-Tap guideline: Company with minimum ₹500 cr capital can apply. However, its technical
rules about assets/ownership were such that Large NBFCs (ILFS, Bajaj FinServ etc.) and
industrial houses (Tata/Adani/Ambani etc) could not apply for it.
⇒ 2020-June: RBI’s PK Mohanty committee for Corporate Structure for Indian Private Sector
Banks.

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⇒ Mohanty committee recommended allowing large NBFCs/Corporate/Industrial Houses to apply
for Bank licenses. (बड़ी गैर ब�क �व�ीय सं �ान और कॉरपोरेट समूह को ब�क बनाने क� छू ट �मले)
⇒ But, critiques argued it’ll create problems if Adani/Ambani open Banks.

14.14.1 🚫🚫🚫🚫 � 🚗🚗🚗🚗: 🤩🤩 Arguments in Favour प� म� तकर्

⇒ � competition, better interest rates, customer services. �ादा �धार्, अ�े �ाज दर, ग्राहकों को �ादा अ��
सेवाएं
⇒ Existing banks' balance sheets have deteriorated by scams & bad loans. So, they've become
overcautious and slow in lending to large business projects. Entry of fresh new banks to
invigorate the banking sector. पुरानी ब�कों म� �व�ीय घपलो/सम�ाओ के चलते बड़े प्रोजे� म� लोन देने म� सु�ी। नई ब�कों
के प्रवेश से इस �ेत्र म� �ू �त आएगी।
⇒ �Chances of scams associated with Shadow Banks / NBFCs in futures - after ILFS & other big
NBFCs convert themselves into Banks → RBI can supervise them more effectively.

14.14.2 🚫🚫🚫🚫 � 🚗🚗🚗🚗: 😰😰Arguments Against: �वप� म� तक

⇒ �Increased competition may lead to a natural tendency of mis-selling the products and
lending money to more risky businesses as evident from 2008's American Subprime crisis.
अ�ा�धक �धार् के चलते येन के न प्रकार से मुनाफा बटोरने के �लए अनाव�क �प से जो�खम लेकर कमजोर कं प�नयों को लोन िदए
जाएं गे
⇒ �PNB-Nirav Modi loan scam, Yes Bank-Rana Kapoor scam, ICICI-Vodafone loan scam = RBI
has failed to effectively supervise even the existing banks. (�रजवर् ब�क वतर्मान ब�कों क� �नगरानी करने म� भी
कमजोर सा�बत �आ है)
⇒ �Already large NBFCs are involved in scams: ILFS scam, DHFL scam, Karvy Capital Scam- the
critics are afraid that allowing large NBFCs in the Banking sector = more such scams. �व�ीय घोटालों
क� मात्रा बढ़ेगी
⇒ �Corporate governance in large industrial houses is not inspiring confidence at present e.g.
Ratan Tata vs Cyrus Mistry, Infosys founder Narayan Murthy versus ex-CEO Vishal Sikka etc.
Allowing them in the banking sector is not advisable. बड़ी कं प�नयों का कॉरपोरेट शासन ठीक नहीं है. सं �ापक
आपस म� ही लड़ते झगड़ते रहते ह�
⇒ �Large industrial houses like Tata, Ambani, Adani- may use the depositors money mainly to
finance their own projects/ nepotism, even if such projects are not viable- There will be
evergreening of loans for them. भाई भतीजावाद म� लोन िदए जाएं गे, पुरानी लोन चुकाने के �लए नया लोन िदया जाएगा,
भले कजर्दार का प्रोजे� बेकार हो.
⇒ �Could be misused for money laundering by big industrialists. (काले धन को वैध बनाने म� द�ु पयोग)
⇒ �May concentrate India's economic power, depositors' savings in the hands of few oligarchs.
Then it could destabilize the entire banking system. (बचत कतार्ओ ं क� जमा पूंजी और भारत क� आ�थक श��
कु छ �गने-चुने रसूखदार/कु लीनवगर् के हाथों म� क� िद्रत, �जसे पूरी ब�िकंग �व�ा अ��र होने का खतरा। )

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⇒ �Even in developed countries regulators do not encourage the entry of large corporates in the
banking sector mainly for the apprehensions about governance and financial stability. (�वक�सत
देशों म� भी �व�ीय �नयं त्रक इस प्रकार क� अनुम�त नहीं देते �ोंिक उ�� भी ब�िकंग शासन और �व�ीय ��रता म� जो�खम िदखता है)

14.14.3 🚫🚫🚫🚫 � 🚗🚗🚗🚗: Conclusion about banking license to Adani/Ambani? (�न�षर्)

⇒ �Anti: Considering aforementioned challenges, risks far outweigh the benefits. RBI and
government should focus on improving the administration & supervision of existing bank
instead of allowing large industrial houses here. (आकषर्ण/फायदे कम और चुनौ�तयां �ादा। इस�लए यह करने क�
जगह, वतर्मान ब�कों का प्रशासन और �नगरानी ठीक करने म� जोर देना चािहए.)
⇒ �Favor: Considering above benefits, Large NBFC and industrial houses may be given bank
licences after due diligence & effective supervision. (उ� फायदों को देखते �ए, प्रभावी �नगरानी के साथ इ�� ब�क
का लाइस�स देना चािहए)

14.15RRB PROBLEMS AND COOP BANK PROBLEMS

• RRB: capital starved, low deposit, NABARD dependent for funds.

• CooP: dual supervision problem until 2020 Amendment, political Nexus, casteism frauds

• More explanation refer to prelim handout classes.

14.15.1 ✍🎷🎷 Mock Questions for Mains

1) Examine critically the role of nationalised banks in Indian Economy since independence. Suggest
roadmap for their future growth. (�तं त्रता के बाद से भारतीय अथर्�व�ा म� रा�ी� यकृ त ब�कों क� भू�मका का
आलोचना�क परी�ण कर�। उनके भ�व� के �वकास के �लए िदशा�नद�श सुझाएं ।)
2) What do you understand by the term Development Finance Institutions? How are they different
from the banks? Discuss the rationale behind setting up of National Bank for Financing
Infrastructure and Development (NABFiD) (आप �वकास �व� सं �ानों श� से �ा समझते ह�? वे ब�कों से कै से
अलग ह�? NABFID क� �ापना के पीछे तकर् पर चचार् कर�) Ans. Refer to Prelims Handout.
3) Review/Evaluate the role of RBI as a financial sector regulator. Has it fulfilled its mandates
adequately? (- �व�ीय �ेत्र �नयामक के �प म� आरबीआई क� भू�मका क� समी�ा/मू�ांकन कर�। �ा इसने अपने जनादेश को
पयार्� �प से पूरा िकया है?)
4) Will converting RBI into a constitutional body make it more capable of achieving its objectives?
(- �ा आरबीआई एक सं वैधा�नक �नकाय म� प�रव�तत करना आरबीआई को अपने उद्दे�ों को प्रा� करने म� अ�धक स�म करेगा?)
5) “Discuss the evolution / structure / function / objective of Payment bank/RRB etc”= This is a too
simplistic Mains Question for UPSC. These institutions have to be seen in the context of
GDP/Economic Growth, Investment/NPA-Bad loans, Inclusive growth/Financial Inclusion. So,
indirectly you may use’em as fodder points in such questions. (इस प्रकार के सामा� प्र� नहीं पूछे जाते
यूपीएससीमु� परी�ा म�)

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15 🔪🔪NPA / BAD LOANS

15.11.1 🔪🔪 NPA Intro

- (Definition) If loan principal or interest is not paid for more than 90 days from its due date, then
such loan account is classified as Non-Performing Asset (NPA). िक� जमा करने क� �नयत �त�थ/तारीख के
ऊपर भी 90 िदनों से अ�धक हो चुके हो िक�ु िक� जमा नहीं क� गयी तो….
⇒ In any healthy economy, some of the companies and individuals suffer financial issues in loan
repayment so it is normal that 1-2% of the loans become NPA.
⇒ However, this problem skyrocketed during 2013-2018 when over 10% of the bank-loans became
NPA.
⇒ Economic Survey had used the term Twin balance sheet syndrome (TBS) to describe this
problem because balance-sheets of (1) some Large Corporates Companies & (2) Public Sector
Banks (PSB) became weak. [दोहरे तुलनपत्र क� सम�ा] <NOTE: TBS how happened- explained in
Prelim Handout>

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- However, In recent years, with the combined efforts of the RBI, Government, IBBI & the
bankers, the NPA amount has decreased steadily. (DATA) given in table below.
Year 2020-Mar 2021-Mar 2022-Mar
Total NPA in SCBs** Rs. 8.8 lakh cr Rs. 8.3 lakh cr Rs. 7.4 lakh cr
**SCBs = scheduled commercial banks. (अनुसू�चत वा�ण��क ब�क)

15.11.2 🔪🔪 Easy loans help in GDP Growth how? / why Banking reforms req?

आ�थक वृ�द्ध दर को बढ़ाने के �लए लोन आसानी से �मलना ब�त ज�री है

15.11.3 🐯🐯🐯🐯🐯🐯 Bad Loan Fixing- RBI (2015-19): RBI “3R”

15.11.4 ✔Rectification (सुधार)
- 2015: RBI ordered the Banks to conduct Asset Quality Review (AQR: प�रसं प�� गुणव�ा समी�ा) and
begin rectification of bad loans i.e. Bank doesn’t change in loan interest, tenure or terms, but
asks client to rectify his irregularity in loan-repayment.
- In genuine case, additional loan may be given. Bank may also try to find a new partner / investor
for reviving the project. ब�क अ�त�र� कजर् दे सकता था, नया �नवेशक ढू ंढने मदद कर सकता था।

15.11.5 ⛏Restructuring (पुनगर्ठन: �ाज दर या कजर् चुकाने क� अव�ध या मा�लक� म� बदलाव)

Restructuring = Changing the loan interest (%) or tenure or ownership. it consisted of following
schemes:

- 5/25 for Infrastructure loans: RBI allowed banks to extend infra-loan tenure upto 25 yrs, & even
�loan interest rate. But such interest rate will be reviewed each 5yrs. (e.g. airport, powerplant,
highway project etc. ke loans.)
- CDR, SDR, S4A schemes for: non-infrastructure loans. (what was their full form? how did they
work? Ans. not important / outdated current.)

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 Figure 1: तनावग्र� प�रस���ओं को पुनज��वत करने हेतु आरबीआई का ढांचा: 2019 से पहेले का
15.11.6 🔪🔪 Recovery (वसूली)
Bank liquidates loan-defaulter’s assets under either of the following acts: (सं प��यों क� ज�ी और नीलामी)

1) SARFAESI Act 2002 (सरफाएसी अ�ध�नयम/कानून) OR

2) Insolvency and Bankruptcy Code 2016 (शोधन-अ�मता एवं िदवा�लयापन सं िहता 2016)
Follow acts also help indirectly:

⇒ FUGITIVE ECONOMIC OFFENDERS ACT, 2018 (भगोड़ा आ�थर्क अपराधी अ�ध�नयम)

⇒ Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 (�न�ेप बीमा और प्र�य गारंटी
�नगम)
Above laws’ features explained enough in the Prelims handout. You should be intelligent and mature
enough to write this in your own words.

15.11.7 🔪🔪 Bad loan fixing: RBI’s Prudential Framework (2019)

RBI released Prudential Framework for Resolution of Stressed Assets Directions (तनावग्र� प�रसं प��यों के
िदशा-�नद�शों के �लए �ववेकपूणर् �परेखा)

1) It discontinued CDR, S4A, SDR, etc. Now IBC to be main tool for resolving business loans.
2) Lenders must upload data of ₹5 crore /> loans to RBI’s CRILC portal on weekly basis.
3) Forbids loan restructuring for borrowers who have committed frauds/willful default in past.
However 2023, RBI given some leniency to wilful defaulters ke if they repay full/partial loans
then banker can give them fresh loans after one year. However, critiques disliked this. (अगर कोई
��� जानबूझकर कजार् नहीं लौट आता तो उसक� सं प�� को ज� िकया जाता है और भ�व� म� उसको कजार् न िदया जाए ऐसी ���त बनती ह�.
हालांिक �रजवर् ब�क ने अब �रयायत दी है, िक अगर ऐसा अपराधी अपनी पुरानी लोन पूण/र् आं�शक �प से वापस चुका देगा तो 1 साल बाद उसको
ब�क अगर चाहे तो नया लोन भी दे सकता है.)

15.12🔪🔪 BAD LOANS: IBC CODE 2016 (शोधन �मता और �दवा�लयापन सं िहता)
- (Origin) until 2016, India had only 1 law to deal with bad loans i.e. SARFAESI Act, 2002.
However, it had certain limitations resulting in case pendency and suboptimal loan recovery, so
government came up with one more at law i.e. INSOLVENCY AND BANKRUPTCY (I&B)
CODE 2016 to permit arbitration / conciliation / mediation with the between the lenders and the
borrowers.

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15.12.1 🔪🔪👍👍 IBC +ve Benefits (इस कानून से �ा फायदे �ए)

15.12.1.1 🔪🔪👍👍Better resolution than SARFAESI

- �Appreciated that IBC proceedings take on average 340 days to complete, unlike SARFAESI
legal proceedings which take 4.3 years. के स का �नपटारा �ादा ज�ी से हो पाता है
- �Appreciated that IBC helps recovering more amount of loan than SARFAESI in 2018-19
Approx. Amount recovered in crores 2017-18 2018-19
SARFAESI 33,000 52,000
IBC 5000 71,000
(सरफ़ाएसी कानून के तुलना/मुकाबले आईबीसी कानून म� �ादा मोटी मात्रा म� बकाया कजर्/ऋण क� वसूली हो पाती है ऐसी प्रशं सा)

15.12.1.2 🔪🔪👍👍IBC +ve Benefits : Misc.

- With I&B Code and other measures by RBI=NPA % has � (अनजर्क प�रसं प��यों के �नपटान म� मदद �मली.)
- I&B code's time-bound mechanisms have prompted 'behavioural changes' in corporate
borrowers. Now they fear losing control of the company. This has improved corporate

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 governance, cash and financial discipline. (कॉप�रेट देनदार के �वहार म� प�रवतर्न, कं पनी क� मा�लक क� मेरे हाथ से
चली जाएगी इस डर म� �नय�मत कजार् वापस कर रहे ह�)
- By 31/3/2018: ₹ 50,000 crores worth NPAs have been upgraded to std assets (meaning the
(arrogant) borrowers have been forced to resume paying principal & interest regularly.)

15.12.2 🔪🔪👎👎IBC: -Ve / limitation / challenges (चुनौ�तयां मयार्दा)

15.12.2.1 🔪🔪👎👎Frequent amendments / Beta-stage experimentation

Just like a software or mobile app is amended frequently during the beta stage trials. Similarly IBC
has been amended 6 TIMES between 2016-2023. To accommodate the operational difficulties and
various Supreme Court judgements, this at had to be amended for

- Defining financial creditors and operational creditors.

- Increasing the powers of Insolvency and Bankruptcy Board of India (IBBI).
- Changing the minimum % of votes required by lenders for variety of decision making.
- Technical issues in auction/sale of assets, power of NCLT.
- Introducing Pre-packing system
- Pre-packaged Insolvency Resolution Process (PIRP)
- Suspending during Corona and then changing minimum amount of loan default for case-
registration.
- Must finish entire process within 330 days, instead of earlier limit of 180-270 days.

Frequent amendment = borrowers / PIL-activists approach the courts with new objections against
amendment itself, resulting in more delay. (बार बार इस कानून म� सुधार करने क� ज�रत..एक तरह से इसक� खामी है- �ोंिक
अगर शु� से ही ठीक से क़ानून बनाते तो इसम� बार बार सुधार नहीं करने पड़ते.।)

15.12.2.2 🔪🔪👎👎IBC Limitation: Misc. Challenges

⇒ We need to increase the number of NCLT benches, number of IP Professionals, use ICT
technology for faster case proceedings. (�ायपीठ, मानव बल और टे�ोलॉजी के उपयोग म� बढ़ोतरी क� ज�रत)
⇒ We should enact separate law on cross-border insolvency. (सीमा-पार िदवा�लयापन के �लए अलग से कानून
बने)
⇒ Group Insolvency: Big Industrialists usually operate through groups of companies, each having a
separate identity e.g. Tata Sons ltd → 1) TCS 2) Tata Motors 3) Tata Steel etc. If one of these
company become insolvent, it creates negative ripples on entire group's financial health. Certain

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 legal-technical reforms are necessary to address such group-insolvency. (समूह िदवा�लयापन के मामलों का
�नपटान करने के �लए कानून म� कु छ तकनीक� सुधार िकए जाएं )
⇒ Public sector banker usually do not agree for the loan restructuring during the IBC proceedings,
fearing media-trials, CVC/CAG inquries.
⇒ Cannot deal with wilful defaulters or economic offenders who abscond from the country. We
have separate Sarfaesi act and fugitive economic offenders act, respectively to deal with them.
However, looking at the amount of time taken to bring back Vijay Mallya and Nirav Modi and
Mehul Choksi from foreign countries more legislative reforms and global cooperation required.
IBC alone is not panacea.
⇒ Certain legal-technical reforms to address insolvency cases involving individual proprietors and
partnership firms. (���गत मा�लक और साझेदारी फमर् के �लए कानून म� कु छ सुधार िकए जाएं : They’re legally
different entities than ‘Companies under companies Act. More in Prelims-1C: SEBI handout)

15.12.3 🔪🔪👎👎Conclusion- IBC

Thus, the insolvency bankruptcy code is an experimentation in the right direction to deal with
mounting bad loans, problem in India. However, it needs to be complemented with greater use of
technical surveillance, governance reforms in the public sector banks, legislative measures against
willful defaulters, international cooperation to deal with fugitive economic offenders - to thoroughly
solve the existing bad loan problem and to prevent it from recurring in the future.

15.12.4 BAD Bank – NARCL / IDRCL

Sufficiently covered in the Prelims handout including introduction and conclusion.

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15.13👁👁👁🗨🗨🗨🗨🗨🗨-📔📔📔📔NPA- SURVEILLANCE IMPROVEMENT

15.13.1 👁👁👁🗨🗨🗨🗨🗨🗨-📔📔📔📔NPA Surveillance – existing mechanism

Portal/Org Description
CIC and CRA Credit Information Company and Credit Rating Agency. However, Some of
them engaging in corrupt practices and RBI/SEBI banned /penalized them in
2023.
Information Created by Insolvency and bankruptcy board of India (IBBI) with help of
Utility (IU) National e-governance services Ltd (NeSL)
CRILC RBI has setup “Central Repository of Information on Large Credits (CRILC)”
for Loans above Rs 5 cr.
Banks & NBFCs have to submit weekly updates in this portal.
Public Credit Proposed by RBI’s Yeshwant M. Deosthalee Committee. RBI yet to set it up.
Registry (PCR) (ऋण क� सावर्ज�नक र�ज��ी)
NFIR National Financial Information Registry (NFIR) Proposed in the Budget
2023.
To cover all types of loans taken by individuals and companies.
LEI Legal Entity Identifier (LEI) Number for loan surveillance at global level.

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15.13.2 👁👁👁🗨🗨🗨🗨🗨🗨-📔📔📔📔NPA Surveillance - ES20: Use AI-ML Technology
In PSBs, most of the loan-information processing (=Credit analytics) happens manually (ऋण �व�ेषण
ह�चा�लत �प से करते है). This causes inefficiency, frauds and loan default. Tools such as Artificial
Intelligence (AI), Machine Learning (ML) (कृ �त्रम बु�द्धम�ा/आसूचना और मशीन प्र�श�ण) can help them in
following ways:

⇒ Willful defaulters usually create fictitious companies to transfer their assets / shares / money just
before they stop paying loan installments. (जान-बूझकर लोन न चुकाने वाले, फज� क�नी बनाकर लोन के पैसो का
गबन करते है, उसपर �नगरानी सं भव)
⇒ Artificial Intelligence (AI) can alert the authorities through real time surveillance & data
analytics of the borrower’s NEFT/RTGS/DEMAT account transaction. (अलग-अलग खातों पर �नगरानी)
⇒ Geo-tagging of assets i.e. adding longitude and latitude data with the photos & videos of the
Factory building, machinery, vehicles, aeroplanes, helicopter etc. (सं प�� क� �जयो-टै�गंग) Then, →
o Scamster can’t pledge fictitious assets as collaterals for loans (फज� सं प�� �जसका अ��� ही नहीं,
उसे धोखेबाज़ �गरवी निह रख पाएगा।)
o Scamster can’t pledge the same asset as collateral to multiple banks/NBFCs. (एक ही सं प��
को एका�धक लोगों के पास �गरती रखकर लोन म� धांधली करना स�व निह होगा।)
⇒ GPS chips may be embedded in factory-machines and vehicle to track their real time location →
o If scamsters move the machinery out of the factory, the banker will be alerted.
o Bankers can remotely disable machines/vehicles, if loans are unpaid.
⇒ Blockchain Technology can used for storing and verifying the authenticity of the data.
⇒ AI can monitor Social media activities e.g. Borrower is not paying the loan and yet sharing the
Switzerland vacation photos on Instagram = He is a wilful defaulter → Attach his assets under
the SARFAESI Act. (कजर्दार के सोशल मीिडया ग�त�व�धयों पर �नगरानी रखी जाए)
✋ Caution? borrower’s privacy and dignity should also be respected while doing such
computerized surveillance. (उ� कदम उठाते व� कजर्दार क� �नजता का भी स�ान रखना चािहए)

15.13.3 👁👁👁🗨🗨🗨🗨🗨🗨-📔📔📔📔 NPA Surveillance- ES20: setup PSBN Network

⇒ Government should create a new organization named PSBN (Public Sector Bank Network),
which will act as a Financial Technology/Fintech Hub (FinTech: �व�ीय प्रौद्यो�गक� के �लए एक नई सं �ा
बनाई जाए).
⇒ Whenever a borrower applies for a loan to a public sector bank → Details will be sent to PSBN.
→ PSBN will verify the creditworthiness (�व�ीय साख) and risk profile (िदवा�लयेपन का जो�खम) of the
applicant through:
o Artificial Intelligence (AI), machine learning (ML) and Big Data Analytics- as explained
in the previous section
o E-KYC (Know Your Customer): Aadhar verification → cross checking his Aadhar
number against Financial data from Corporate Affair Ministry, SEBI/share market,
Income Tax Department, GST, etc. (आधार काडर् के ज�रए उस ��� के शेयर बाजार, आयकर, जीएसटी
इ�ािद का �व�ीय इ�तहास जांचा जाएगा)

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🤩🤩 Benefit? fraud prevention, ⏬ chances NPAs, quicker decision making, process loan
applications faster, cost saving for individual banks as all of them can use a single hub instead of
spending on separate servers/tech. (�व�ीय घोटाले का जो�खम कम होगा, लोन अज�ओं का ज�ी से �नपटान सं भव होगा)

15.14SHADOW BANKS – SCAMS AND REFORMS

- (Definition) Shadow banking is a set of activities and institutions. They operate partially (or
fully) outside the traditional commercial banking sector. They are not fully regulated by the RBI.
ये सं �ाए पारंप�रक ब�िकंग �नयमो के दायरे से बाहर काम करती है.
- They mobilize funds by borrowing from banks, issuing Commercial Papers (CP) and Bonds
(Non-convertible debentures). E.g. ILFS, DHFL- both of them suffered from scams, and faced
difficulty in repaying the lenders/investors.
- Authorities have initiated following reforms to clean up the mess:

15.14.1 Shadow Banks → RBI’s steps

- RBI has launched 1) TLTRO and 2) special liquidity window to give more funds towards NBFCs
- RBI tightened norms of Asset-Liability Management (ALM) norms for NBFCs.
- 2021: RBI proposes 4-tier structure for tighter regulation of NBFCs: NBFCs to be classified into
four categories BASE, MIDDLE, UPPER & TOP LAYER (most risky companies). Accordingly
tighter regulation on them.

15.14.2 Shadow Banks → Govt’s steps

- Partial Credit Guarantee Scheme (PCGS) 2.0 to cover upto 20% losses suffered by the public
sector banks in loans given to NBFCs.
- Under Companies Act: Ministry of Corporate Affairs (MCA:) replaced the IL&FS’s Board
members. Uday Kotak made new Chairman. कारपोरेट मामलों के मं त्रालय ने बोडर् ऑफ डायरे�र म� अपने �वशेष�ों
को आसीन िकया
- MCA constituted the statutory body National Financial Reporting Authority (NFRA) under
Companies Act 2013 for stricter vigilance over Chartered accountants and auditors. (More in
�1C: SEBI Handout) (कं पनी कानून के अंतगर्त रा��ीय �व�ीय �रपो�टग प्रा�धकरण नामक एक वैधा�नक सं �ा क� �ापना)

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- Corporate Affairs Ministry’s Serious Fraud Investigation Office (SFIO) investigating the IL&FS
officials & auditors. (गं भीर धोखाधड़ी जांच कायार्लय- इसके अफसरों और लेखा परी�कों क� जांच कर रहा है)
- 2019: Govt increased � RBI powers (under RBI Act) to regulate NBFCs in following ways: RBI
can remove NBFC’s board of directors, can inspect any NBFC or its associated group of
companies, RBI can force merger/splitting of non-viable NBFCs, higher fines/penalties for
violation. (�रजवर् ब�क क� �नगरानी श��यों म� बढ़ोतरी क� गई)
- Budget-2019: we will setup a Credit Guarantee Enhancement Corporation to help NBFCs.
(CGEC: क्रेिडट गारंटी वधर्न �नगम). (How it’ll work? Ans. We’ll study when it is actually started).
- Made certain changes in the Companies act regarding the debenture (bond) issued by
Companies/NBFCs.

15.14.3 👹👹(🚫🚫🚫🚫) 💊💊📔📔📔📔 Shadow Banking → Remedies by SEBI

⇒ SEBI tightened norms on Mutual Funds, regarding where/how they invest clients’ money. (सेबी ने
भी �नयमों को स� िकया है)

15.14.4 👹👹(🚫🚫🚫🚫) 💊💊📔📔📔📔 Shadow Banking → suggestions by Eco.Survey

- create a “Health Score for NBFCs” to monitors given NBFC company’s Asset Liability
Management (ALM) problems, balance sheet strength, etc. and gives them a score between -100
to +100. (�ा� सूचकांक बनाया जाए).
- Higher scores indicating higher financial stability of the firm. This health score can provide early
warning signals to the Financial regulators → they can initiate appropriate measures before it's
too late. (सूचकांक के आंकड़ों म� �गरावट एक प्रकार से पूवर् चेतावनी देगी → उसे देखकर �व�ीय �नयं त्रक तुरंत
आव�क/ज�री/यो� कदम उठा सके )

15.14.5 👋👋👟👟Conclusion: Shadow Banks

- Shadow banks have been prime culprits behind US Subprime Crisis (2007). If they are not kept
under check, then they could cause similar havoc in Indian economy as well. This will not only
erode the savings of the small investors but also harm our economic growth. So need of the hour
is to ensure robust oversight, control and regulation over such entities. (अमे�रका म� सबप्राइम घोटाले के
पीछे भी इसी िक� क� प्र�तछाया ब�को का हाथ था. यिद इ�� काबू म� नहीं रखा गया तो भारत म� भी बड़ी धांधली या हो सकती है-
�जसम� आम �नवेशक क� बचत तो बबार्द होगी ही, और आ�थक वृ�द्ध म� भी भारी �गरावट आएगी. इस�लए इन पर �ादा प्रभावी ढंग से
�नगरानी, अंकुश व �नयं त्रण ब�त ही ज�री है.)

15.15✍🏻🏻🎷🎷 MOCK QUESTION FOR MAINS

1. After 50 years of nationalization, the Public Sector Banks are lagging behind private sector banks
in majority of the performance indicators. Suggest remedies in this regard. (रा��ीयकरण के 50 वष� के
बाद, सावर्ज�नक �ेत्र के ब�क प्रदशर्न सं के तकों के �नजी �ेत्र के ब�कों से पीछे ह�। इस सं बं ध म� उपाय सुझाएं .)
2. Explain the significance of reforms in Public Sector Banks (PSBs) for India’s economic growth.
(भारत के आ�थक वृ�द्ध के सं बं ध म� सावर्ज�नक �ेत्र के ब�कों म� सुधारों के मह� को समझाइए.)

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3. Suggest the ways in which information-technology can be utilized for combating the NPA in
Indian economy. (अनजर्क प�रस��तयों से �नपटने के �लए सुचना प्रौद्यो�गक� कै से मदद कर सकती है?)
4. What is “Twin Balancesheet Syndrome”? Enumerate steps taken by RBI to resolve it. ("दोहरे
तुलनपत्र क� सम�ा" �ा है? इसके हल के �लए भारतीय �रज़वर् ब�क द्वारा उठाए कदमों क� सू�च दी�जए.)
5. “While Insolvency & Bankruptcy Code doesn’t fully cure the Twin Balance sheet Syndrome, it
certainly helps alleviating the pain.” Elaborate. ("हालांिक शोधन-अ�मता एवं िदवा�लयापन सं िहता भारत के दोहरे
तुलनपत्र क� सम�ा को पूरी तरह से ठीक नहीं करता है, लेिकन यह �न��त �प से ददर् को कम करने म� मदद करता है." �व�ृत
क��जए.)
6. With respect to India’s financial stability, explain significance of (i) PCA framework (ii) BASEL-
III Norms (iii) National Financial Information Registry (NFIR). भारत क� �व�ीय ��रता के सं बं ध म� इ�े
समझाइए: (i) पीसीए ढांचा (ii) बेसल-III मानदंड (iii) ऋण क� सावर्ज�नक र�ज��ी [Hint: given in Prelims-Handout]
7. Why are shadow banks considered to be a threat to the Indian economy? Discuss the reforms
undertaken by the authorities to address this challenge. (प्र�तछाया ब�कों को भारतीय अथर्�व�ा के �लए खतरा
�ों माना जाता है? इस अनुसंधान मे �लए गए सुधारों पर चचार् कर�।)
8. Justify the rationale behind Govt’s decision to setup a Bad Bank, despite the existence of IBC
Code and SARFAESI Act. How will this proposed bad bank alleviate the pain of NPA? (आईबीसी
कोड और सरफे सी अ�ध�नयम के अ��� के बावजूद, एक बैड ब�क �ा�पत करने के सरकार के �नणर्य के पीछे के तकर् का औ�च�
सा�बत कर�। यह प्र�ा�वत बैड ब�क कै से एनपीए का ददर् कम करेगा ?) [Hint: given in Prelims-Handout]

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