THE GIST of Editorial for UPSC Exams : 18 MARCH 2019 (Deals to rules (Indian Express)

Deals to rules (Indian Express)

Mains Paper 4: Economy
Prelims level: RFRSA
Mains level: Economic growth and development, issues related to NPA

Context

•  Not creating the fear of immediate, automatic and borrower-blind consequences for default is one reason why India’s credit to GDP ratio is a low 50 per cent (Arunachal is 1 per cent, Bihar is 17 per cent, 100 per cent is the average for rich countries).
•  But over the last three years, the new Insolvency and Bankruptcy Code (IBC) and the RBI’s Revised Framework for Resolution of Stressed Assets (RFRSA, issued on February 12 last year) have begun to show impressive results in recognition (we know the truth), deterrence
  (defaults are reducing), resolution (defaults are being cured) and speed (defaults are being cured faster).

Steps taken towards financial inclusion

•  This is great news for financial inclusion of the small, honest, and non-politically connected.
•  The “willful defaulter” tag is a distinction without a difference; banks face pain irrespective of whether a default is caused by Fraud, Competition or Unsustainable Ambition.
•  It is working; bad loans went from 2.4 per cent in 2007 to 11.6 per cent in 2018 but may now be down to 10.2 per cent.
•  Of the 82 accounts resolved by the IBC, the average realisation by financial creditors was 48 per cent and average time taken for resolution was 310 days (versus World Bank estimates of 27 per cent and 1,580 days).
•  RFRSA fixed birth defects of past RBI interventions like SDR, S4A, JLF, CAP, etc by requiring weekly reporting by banks on all accounts in default anytime during the week with exposure greater than Rs 50 million, requiring all lenders to initiate steps to cure a default with any lender, requiring an independent credit opinion for resolution plans, and setting a 180-day implementation deadline for resolution plans in loans greater than Rs 2,000 crore.
•  Contrary to myth, the February 12 RFRSA circular doesn’t apply to small borrowers.
•  Recovery rates are still lower than global averages, and 31 per cent of the 898 ongoing insolvency cases at the end of 2018 have breached the 270-day deadline.
•  But the recent Supreme Court judgement upholding the constitutional validity of the IBC means that the IBC is not a passing shower but climate change.

Way forward

•  China can teach us a lot about labour markets but not about banking.
•  Their share of bank lending to the private sector has shrunk by 80 per cent since 2013, total bad loans may exceed $3 trillion, and total debt now exceeds 300 per cent of GDP (most loans went to construction because China produced three times as much cement between 2012 and 2016 as the US did in the entire 20th century).
•  While China’s treatment of defaulters is tempting they recently expanded restrictions on travel, buying homes, holding high-level jobs, kids school eligibility, etc for defaulters these practices are inconsistent with a democracy.
•  The Lok Sabha was told in 1969 that “bank nationalisation was being done to help farmers, self-employed and SMEs”.
•  This remarkable reform will not only recover Rs 3 lakh crore plus for banks but has hugely positive consequences for India’s productivity, wages and prosperity.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Basel norms, sometimes seen in news, are related to
(a) optimum range of fiscal deficit
(b) risk management of the banking sector
(c) tariff and non-tariff barriers to trade
(d) level of forex reserves with the central bank

Answer: B

Mains Questions:
Q.1) The government needs to hurdle public sector banks with care. Comment on problem of NPA in Banking Industry. Comment.