1 B2 Flashcards

Question 1

Q

What are the types of loans?

Answer

A

Types of loans
1- based on interest rates - Fixed interest loans; Floating interest loans- Teaser Loan
2- based on borrowers - Prime borrower, Subprime borrower (individual), over-leveraged borrower (company), Zombie Lending

Question 2

Q

What is twin balance sheet syndrome?

Answer

A

The twin balance sheet syndrome was given by economic survey 2015-16.

Till mid-2000s: Boom period in global economy. Indian Corporates were taking large amount of loans & became over-leveraged.
From 2007-08: Subprime & Global Financial Crisis,
Indian exports ⏬. UPA government’s policy paralysis & judicial activism, environment activism -> projects got delayed. Companies began facing difficulties finishing projects & repaying loans.
By 2013: ~1/3rd of the bank loans were owned by “IC1 companies” i.e. companies with interest coverage ratio less than 1, meaning they were not generating enough revenue even to repay the loan interest.

Thus, balance-sheets of (1) some Large Corporates Companies & (2) Public Sector Banks
(PSB) became weak. It is called “Twin balance sheet syndrome (TBS)” by Economic Survey 2015-16.

Question 3

Q

What are standard assets?

Answer

A

Loan account where borrower is repaying the principal and interest in timely fashion.

Question 4

Q

What is SMA-0, SMA-1, SMA-2?

Answer

A

If loan principal or interest unpaid for 1-30 days from its due date, then such loan account is classified as Special Mention Account-0.

SMA1- 31-60 days
SMA-2 - 61-60 days

Question 5

Q

What is NPA?

Answer

A

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). For the farm loans, NPA is not counted on number of days but on number of cropping seasons.
As of 2019: Indian Commercial Banks’ NPA approx. ₹10 lakh crores
Gross NPA Size: PSB (₹7.4 lakh cr) > PvB > Foreign Banks.
Provisioning: As per RBI norms, banks must set aside funds to cover losses against their NPA. Such ‘provisioning of funds’ decreases the profitability of the Bank. Gross NPA MINUS Provisioning = NET NPA.

Question 6

Q

What are substandard assets?

Answer

A

When loan account remains in the NPA classification for equal to or more than 12 months

Question 7

Q

What is a doubtful asset?

Answer

A

When loan account in substandard classification for equal to or more than 12 months

Question 8

Q

What is Loss asset?

Answer

A

When a bank, its auditor or RBI declares that given doubtful asset has little / no salvageable value.

Question 9

Q

What is a loan write-off?

Answer

A

When loan is written off from the ‘asset-side’ of the bank balance sheet, to save corporation tax.

Loan write-off doesn’t waive bank’s right to recover that bad loan, it’s merely an accounting exercise for tax-benefits.

Question 10

Q

What is restructured loan?

Answer

A

When principal / interest rate / tenure of the loan is modified. Banks may do it when borrower facing difficulty in repaying loans.

Question 11

Q

What is stressed asset?

Answer

A

NPA + Loans Written-Off + Restructured Loans = Stressed Assets

Question 12

Q

What is OTS with haircut?

Answer

A

If bank allows the borrower to pay 60% of dues & forgoes 40% as loss, then bank has offered “One time Settlement (OTS) with 40% haircut”

Question 13

Q

What is evergreening?

Answer

A

Banking: When a borrower taking a new loan to pay off his old loan.
Patents: When drug patent expires after 20 years, pharma-company makes minor modifications in the old drug’s molecule to register new patent, thus keeping its monopoly rights on the production.

Question 14

Q

How does loan moratorium in Atmanirbhar Bharat benefit its borrowers?
Challenges?

Answer

A

If his income ⏬ due to Corona, he gets relief from Equated Monthly Instalments (EMIs) for 3 months. (It’s not compulsory to skip EMI. Borrower can repay loan regularly, if his financial situation is sound.)
- If a borrower opts for moratorium, it’ll not be considered into his credit score / rating prepared by the credit information companies (CICs)

Challenge/controversy?
✓ If he doesn’t pay for 3 months, then Banks will continue to charge interest (on those 3 months) and add it to the total outstanding loan → compound interest
rate system → his total burden may⏫

✓ SC PIL: interest should be waived. But RBI opposed, because if borrowers don’t pay interest, then how can banks give interest to depositors for their deposits. Banking system will become unsustainable!

Question 15

Q

How does loan moratorium benefit its lenders?

Answer

A

Unpaid loan doesn’t accumulate under the ‘NPA’ category for a bank. Otherwise, their responsibilities may increase unnecessarily in
✓ RBI Prompt Corrective Action (PCA) Framework
✓ BASEL-III Capital norms

Question 16

Q

What is RBI’s framework for revitalising stressed assets?

Answer

A

RBI “3R” FRAMEWORK FOR REVITALIZING STRESSED ASSETS (2015-19)

Rectification - No change in tenure or interest
Restructuring - Ease tenure, interest, ownership may change. 5/25, CDR, SDR, S4A
Recover - Auction/liquidate (SARFAESI Act 2002)

(Read in detail in handout)

Question 17

Q

Scheme for Sustainable Structuring of Stressed Assets (S4A)’ is related to: (UPSC- Prelim-2017)
a) procedure for ecological costs of developmental schemes.
b) scheme of RBI for reworking the financial structure of big corporates with genuine
difficulties.
c) disinvestment plan for Central Public Sector Undertakings.
d) Provision in ‘The Insolvency and Bankruptcy Code’.

Question 18

Q

Origin of SARFAESI ACT 2002

Answer

A

1991: Narsimham-I Committee on banking sector reforms observed that borrowers obtain stay orders from ordinary courts = banks have difficulty recovering NPA. So,
Debt Recovery Tribunals were set up (1993) = ordinary
courts can’t interfere in the loan recovery process.

1998: Narsimhan-II Committee observed that DRTs need to be strengthened with a law, so, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act enacted in 2002.

Under SARFAESI act, lenders can attach the mortgaged assets when loan is not repaid. They can change board of directors in such companies, can auction such assets, can also sell such assets to Asset Reconstruction Companies. SARFAESI not applicable on farm loans.

If loan-defaulter wants to obtain a stay order, he cannot go to ordinary courts. He will have to approach for DRT. If DRT doesn’t help then=> higher appeal to Debt Recovery Appellate Tribunal (DRAT), but DRAT will require him to deposit minimum 50% of the loan dues (to discourage frivolous appeals). => higher appeal to high court.

Question 19

Q

Which lenders have SARFAESI powers?

Answer

A

✓ All types of Banks
✓ Housing Finance Companies (HFCs)
✓ if an NBFC fulfills two conditions 1) The NBFC having asset size of ₹100 cr or more, AND SIMULTANEOUSLY 2) loan given is at least ₹50 lakhs.
✓ For example Bajaj Finserv, Reliance Capital, Muthoot Finance, IL&FS.

2020-May: Supreme court finally clarified the matter: “Entry 45: banking involves all types of banks- both commercial and cooperative banks. Therefore, when the Union made the SARFAESI Act to empower the banking sector, → same powers are also available to Cooperative banks.”

Question 20

Q

Limitations of SARFAESI Act?

Answer

A

The DRTs & DRATs are understaffed. 1 lakh+ cases pending (2016), so, case will go on for years and the debtor will remain in possession of asset.
This leads to erosion of asset-value (machinery, vehicles) even when DRT allows auction at a later time.
In some businesses, auction or liquidation may not yield the best returns for the banks
e.g. hotel resort in remote area, where no other hoteliers are keen to invest.
In such cases, if the loans were restructured (i.e. reducing % interest rate, extending tenure, finding new partners), then banks could salvage more value.
But, SARFAESI act doesn’t facilitate such arbitration. So, Govt. came up with a new law: IBC 2016

Question 21

Q

How does INSOLVENCY AND BANKRUPTCY (I&B) CODE 2016 work?

Answer

A

check handout pg 91 1b2

Question 22

Q

I&BC is not applicable on?

Answer

A

A. Wilful Defaulter: A borrower who has the capacity to repay, but he’s not repaying the loan. E.g. Vijay Mallya was declared willful defaulter by SBI (2017).
OR
B. Incapable Defaulter: A borrower whose loan account is in NPA for more than a year, and he has no capacity to repay even partial loan amount.

Above two categories of borrowers are not eligible for I&BC resolution process. Their assets will be directly liquidated under SARFAESI Act.

Question 23

Q

I&BC amendment 2018, 2019 - i and ii

Answer

A

handout page 92

Question 24

Q

Insolvency and bankruptcy board of India (IBBI) is a what body?

Answer

A

Statutory body that monitors and implements I&B Code 2016.

Question 25

Q

IBBI composition

Answer

A

1 Chairman (M.S.Sahoo), 1 nominated member from RBI, 8 members from Government’s side = total 10 people.

Question 26

Q

Who controls IBBI’s administration

Answer

A

Min of Corporate Affairs (MCA)

Question 27

Q

Tenure and reappointment eligibility for the chairman of IBBI

Answer

A

Chairman has 5 years / 65 age tenure, whichever earlier. Also eligible for reappointment.

Question 28

Q

How does IBBI select IPs?

Answer

A

IBBI selects Insolvency Professionals Agencies (IPAs). These IPAs enroll and supervise the members practicing as Insolvency Professionals (IPs).
Presently, 3 organizations given “IPA” status viz.

1) ICAI Institute of Chartered Accountants of India
2) ICSI Institute of Company Secretaries of India and
3) Institute of Cost Accountants.

Question 29

Q

IBBI also selects Information Utility organization to..?

Answer

A

IBBI also selects Information Utility organization to
maintain database of borrowers.

In 2017, NeSL: National E-Governance Services Ltd (owned by consortium of SBI, LIC etc.) was the first to get the IU status.
It is compulsory for the lenders to share data with IU.

IU helps lenders in two ways:

1) by looking @borrowers’ credit history, lenders can make informed decisions about whether to give loan or not, and how much interest to charge?
2) This database helps establishing documentary proofs during NCLT / DRT / judicial / liquidation proceedings.

Question 30

Q

Indian Institute of Corporate Affairs functions and ministry?

Answer

A

Indian Institute of Corporate Affairs (IICA) is an autonomous body under the Ministry of Corporate Affair.

It has launched a two-year Graduate Insolvency Programme (GIP).
The student passing this program can register as IP, without the mandatory 10 years’ experience.
IICA also setup Insolvency Research Foundation (IRF) and Centre for Insolvency and Bankruptcy (CIB) to promote training & research in this field.

Question 31

Q

What is Project SASHAKT?

Answer

A

Project Sashakt is by the Finance Ministry.

2018-Jul: Finmin’s Project Sashakt for PSB-NPA on report by Sunil Mehta (PNB CEO).
5 Pronged approach to resolve the NPA problem in a timebound manner:

Small sized bad loans upto ₹50 cr: small and medium enterprises (SMEs) resolution template, 90 days. Bank itself should work it out, without approaching NCLT/IP.
Mid-sized bad loans ₹ 50-500cr: Inter-Creditor Agreement, 180 days. Banks themselves should work it out, without approaching NCLT/IP.
Large size above 500cr: (Proposed) independent Asset Management Company to buy off bad loans from banks. AMC will not be funded by Government.
Online asset trading platform.
NCLT/IBC legal-technical reforms.

Question 32

Q

What was the purpose of the Inter-Creditor Agreement signed by Indian banks and financial institutions recently? (Pre19-SetA-Q72)
a) To lessen the Government of India’s perennial burden of fiscal deficit and current account deficit
b) To support the infrastructure projects of Central and State Governments
c) To act as independent regulator in case of applications for loans of ₹ 50 crore or
more
d) To aim at faster resolution of stressed assets of ₹ 50 crore or more which are under
consortium lending.

Question 33

Q

2019-June: Consequently, RBI released Prudential Framework for Resolution of Stressed
Assets Directions 2019. What are the guidelines?

Answer

A

RBI applied it on Banks, AIFI and selected categories of NBFCs- using the powers under Banking Regulation Act (1949) and RBI Act (1934).
It discontinued CDR, S4A, SDR, JLF etc. henceforth IBC to be main tool.
If principal / interest is overdue for 1-30 days, classify loan account as SMA-0. Then, within 30 days, the lender shall review the loan account, & initiate resolution process (RP). (Previous Feb-12 circular required lenders to start RP within 1-day of SMA-0.)
It framed rules to facilitate Sashakt approach #1 and #2-inter-creditor agreement (ICA).
Lenders must upload data of ₹5 crore /> loans to RBI’s CRILC portal on weekly basis.
(Central Repository of Information on Large Credits)
Forbids loan restructuring for borrowers who have committed frauds/willful default in past. Forbids evergreening of stressed loans.

Question 34

Q

What is cross border insolvency?

Answer

A

Cross-border insolvency has two facets:
1) foreign creditors should be able to recover money lent to Indian corporates & VICE VERSA.
2) During Indian company’s insolvency in India, the Indian lenders should be able to recover money from Indian company’s foreign assets easily, AND VICE VERSA.
IBC sections 234 & 235 have provisions for it, BUT they are not notified yet, so they are not enforced.
2018: Corporate Affairs Ministry’s Insolvency Law (reforms) Committee headed by Injeti Srinivas recommended:

o We should create a separate law for Cross-border Insolvency.
o More than 40 nations use United Nations Commission on International Trade
Law (UNCITRAL)’s Model Law of Cross Border Insolvency (1997)
o So, we can use it as a template while making our own law. Government is working on such bill.

Question 35

Q

Economic Survey 2018-19 on IBC/NPA (released in 2019-July)
AND
Economic Survey 2020 on IBC/NPA (released in 2020-Jan-31st)

Answer

A

Handout pg 95 96

Question 36

Q

BORROWERS’ DATABASE & SURVEILLANCE - What is the use of AI-ML technology

Answer

A

It was suggested in ES 20
In PSBs, most of the loan-information processing (=Credit analytics) happens manually. This causes inefficiency, frauds and loan default. Tools such as Artificial Intelligence (AI), Machine Learning (ML) can help them in following ways:

1- Wilful defaulters usually create fictitious companies to transfer their assets / shares / money just before they stop paying loan installments.

2- Artificial Intelligence (AI) can alert the authorities through real time surveillance & data analytics of the borrower’s NEFT/RTGS/DEMAT account transaction.

3- Geo-tagging of assets i.e. adding longitude and latitude data with the photos & videos of the Factory building, machinery, vehicles, aeroplanes, helicopter etc. Then, →
o Scamster can’t pledge fictitious assets as collaterals for loans
o Scamster can’t pledge the same asset as collateral to multiple banks/NBFCs.

4- GPS chips may be embedded in the 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.

5- Blockchain Technology can used for storing and verifying the authenticity of the data.

6- 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.
Borrower’s privacy and dignity should also be respected while doing such computerized surveillance.

Question 37

Q

BORROWERS’ DATABASE & SURVEILLANCE - What is PSBN and how is it beneficial?

Answer

A

Suggested by ES20: setup PSBN Network
1- Government should create a new organization named PSBN (PSB Network), which will act as a Financial Technology Hub (FinTech).

2- Whenever a borrower applies for a loan to a public sector bank → Details will be sent to PSBN. → PSBN will verify the credit worthiness and risk profile of the applicant through:
o Artificial Intelligence (AI), machine learning (ML) and Big Data Analytics (as explained in the previous section)
o E-KYC-Aadhar verification → cross checking his Aadhar number against Financial data from Corporate Affair Ministry, SEBI/share market, Income Tax Department, GST, etc.

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/technology.

Question 38

Q

BORROWERS’ DATABASE & SURVEILLANCE - What is Public Credit Registry?

Answer

A

Presently, multiple organizations keep borrowers’ database / credit history viz.

1) Under the I&B code, Insolvency and bankruptcy board of India (IBBI) has authorized the National e-governance services Ltd (NeSL) to act as an Information Utility (IU).
2) Under the Credit Information Companies Regulation Act (CICRA 2005), RBI has given license to CRISIL (oldest CIC-1987), CARE, FITCH India, ICRA, Brickwork Ratings, SMERA etc. as Credit Information Company.
3) RBI has its own “Central Repository of Information on Large Credits (CRILC)” for Loans above Rs 5 cr. Banks & NBFCs have to submit weekly updates in this portal.

But, not all of these databases are under the direct control of RBI. Each has their own methodology for data collection & tabulation.
Not all of these databases are covering all individual and corporate borrowers of India.

So, RBI’s Yeshwant M. Deosthalee Committee (2017-18) recommended setting up a Digital Public Credit Registry (PCR) with following features:

1) PCR will be setup under RBI, using data from SEBI, Corporate Affairs Ministry, GST authorities, IBBI, Banks, NBFCs etc.
2) PCR will help lenders to get complete 360-degree profile of borrower on real time basis.
3) PCR will help RBI in early detection of systematic stress, checking the efficacy of monetary policy & other big data analytics.

2018: RBI issued tender to select a company for developing PCR portal. (When the portal becomes fully operational the media will highlight it greatly and announce name of the company which has developed. We need not worry about it UNTIL that happens.)

Question 39

Q

Which one of the following is/are credit rating agency/ agencies in India?

(a) CRISIL
(b) CARE
(c) ICRA
(d) All of the above

Question 40

Q

The Reserve Bank of India has recently constituted a high-level task force on Public Credit Registry (PCR), headed by

(a) Sekar Karnam
(b) Vishakha Mulye
(c) Sriram Kalyanaraman
(d) Y. M. Deosthalee

Question 41

Q

BORROWERS’ DATABASE & SURVEILLANCE - What is LEI number?

Answer

A

Even if a company is blacklisted by Indian banks, it could apply for loans overseas, and those overseas bankers may not be aware of company’s history. So, there should be a global “Aadhar card” number for companies, and they must be forced to quote that number during every financial transaction.

After Sub-Prime Crisis and Global Financial Crisis (GFC), the G20 and its Financial Stability Board came up this LEI concept- a 20-digit alphanumeric code.

Question 42

Q

LEI’s Global Boss: ?

LEI’s Indian agent: ?

Answer

A

LEI’s Global Boss: Global Legal Entity Identifier Foundation (GLEIF), Frankfurt, Germany.
LEI’s Indian agent: Clearing Corporation of India.

Question 43

Q

Companies must quote LEI-number in their financial transaction. who has power to issue such directives under which acts?

Answer

A

RBI has power to issue such directives under: Payment and Settlement Systems Act, 2007 & Banking Regulation Act 1949.

Question 44

Q

What is FUGITIVE ECONOMIC OFFENDERS ACT, 2018 and what are the provisions?

Answer

A

This act targets economic offenders accused of cheque
dishonor, loan / investment / chit-fund scam, money laundering etc. worth ₹ 100 crores /> & left India to avoid facing prosecution / arrest.

Special courts under the PMLA (Prevention of Money-laundering Act, 2002) will order the villain to appear within 6 weeks, if not then he is declared “Fugitive Economic Offender” => His Indian & Overseas & Benami properties will be attached
Once property attached- the Union Govt will oversee its administration / liquidation
No ordinary civil court / tribunal can give stay order. Villain can make appeal only in High Court and Supreme Court.

Question 45

Q

If Borrowers don’t repay, SARFAESI auctions give little recovery, CRR- SLR insufficient to repay deposits then bank collapse imminent. Then, how to protect the depositors?

Answer

A

DICGC ACT: OBJECTIVE & LIMITATIONS

1961: Deposit Insurance and Credit Guarantee Corporation Act- mandates that all types of banks must buy insurance on their deposit accounts from DICGC.
Banks have to pay premium for this insurance.

DICGC is 100% owned by RBI. One of RBI Dy. Governor acts as chairman of DICGC.
HQ: Mumbai.
When a bank shuts down, DICGC will pay upto ₹ 1 lakh insurance to every deposit holder for his principal and interest.
Budget-2020: ⏫ the insurance coverage to ₹ 5 lakhs

Question 46

Q

DICGC owned by and chairman?

Answer

A

DICGC is 100% owned by RBI. One of RBI Dy. Governor acts as chairman of DICGC.

Question 47

Q

Limitation of DICGC?

Answer

A

If a customer had deposited more than ₹5 lakh rupees in a single commercial / cooperative bank, then he gets only ₹5 lakh from DICGC. And for the remaining amount he must wait till RBI / Cooperative Registrar liquidates the bank. (Ref 1B1: Banking Regulation Ordinance 2020)
DICGC doesn’t cover PACS and NBFCs. Those victims may have to approach courts.
2002: UTI (a Government owned mutual fund company) made big losses. DICGC not liable to protect UTI-clients. So, Govt had to pay ₹14,561 crores bailout package.
Therefore, Financial Sector Legislative Reform Commission under Justice B.N. Srikrishna (2011-13) recommended a new organization called Resolution Corporation (RC) via FRDI Bill.

Question 48

Q

what is FRDI BILL 2017? Objectives and why was it withdrawn?

Answer

A

Financial Resolution and Deposit Insurance (FRDI) Bill
was aimed to transform the DICGC into a Resolution Corporation (RC).

All financial intermediaries (Banks and NBFCs) will have to buy insurance from RC, to protect their depositors.

RC will monitor these Banks and NBFCs, if they come in ‘imminent financial risk’, RC will draft a resolution plan e.g. merging it with another entity, or finding new investors for infusing additional capital etc.
However, in case of weak bank, if no investor is found & merger with another bank is not possible, then RC could even use the weak-bank’s depositors’ money to infuse equity (share) capital into the Weak-Bank. This was called “Bail-In” provision - highly criticized by media and Opposition parties.

2018-Aug: Government withdrew the bill.

Question 49

Q

What is PARA and what does it do?

Answer

A

Former Chief Economic Advisor (CEA) Arvind Surbamanian’s Economic Survey 2016-17 had proposed a bad bank named “Public Sector Asset Rehabilitation Agency” (PARA)

PARA will buy bad loans from PSBs, try to salvage the maximum value from loan- restructuring / liquidation-auction and absorb the losses.
- Arvind S. also suggested RBI to give additional dividend to Govt. to start this bad bank & finance its losses.

Ofcourse, this (stupid) idea was not implemented

Question 50

Q

😼💉👹🦵💬✋🏻 PROMPT CORRECTIVE ACTION (PCA) FRAMEWORK ?

Answer

A

2002: RBI Governor Bimal Jalan designed it for all Scheduled Commercial Banks, except
RRBs.

2017: Urjit Patel toughened PCA norms further.
2018: NABARD announced separate ‘Prompt Corrective Action (PCA) Framework’ for Regional Rural Banks (RRBs).
In PCA framework, all Commercial Banks are monitored for
o Asset Quality (NPA or bad loans)
o Capital Sufficiency (BASEL-III)
o Profitability (Return on Assets: RoA)
Accordingly, are classified into Risk threshold #1, #2, #3. Higher the number, higher the risk.
Then, accordingly, RBI will take corrective actions such as:
1. RBI giving strict warning, conducting deeper audit & supervision.
2. Restricting bank’s directors’ salaries and dividend distribution to its investors.
3. Restricting bank’s branch expansion & lending operations.
4. Forcing merger / shutdown of a weak bank (under Banking regulation Act 1949).
If a PCA-listed bank wants to get ‘whitelisted’, it’ll have to ⏬its NPA, obtain additional capital, ⏫its profitability.
PCA is “Monetary Policy → Qualitative / Selective Tool → Direct Action”.

Question 51

Q

PCA is for what banks and SAF for what banks?

Answer

A

Prompt Corrective Action is for commercial banks

Supervisory Action Framework is for Urban cooperative banks

Question 52

Q

What is BIS?

Answer

A

Bank for International Settlements (BIS) is an international institution made up of 60 countries’ Central Banks.

HQ @ BASEL, Switzerland.
Its committee on banking supervision set norms in 1988 (I), 2004 (II), 2011(III) to ensure global financial stability.

Question 53

Q

Since when was BASEL-III norms implemented and how to calculate?

Answer

A

From 1/4/2013, RBI began phased implementation of BASEL-III norms in India:

First, a bank needs to calculate its Risk-Weighted Assets
Against these RWA, (Universal) Scheduled Commercial Banks (SCB) must keep:
“Minimum Capital to Risk Weighted Assets Ratio” (CRAR) at 9% or higher from 31/3/2019.

{ “a%” Capital Conversation Buffer (CCB) from XX date..
“b%” Counter Cyclic Capital Buffer (CCCB): whenever RBI notifies.
“c%” Leverage ratio (LR)
“d%” Net Stable Funding Ratio (NSFR)
“e%” High quality liquid assets (HQLA)
“f%” Liquidity Coverage Ratio (LCR) } just word association

Each member country’s Central Bank can prescribe different %, ratios depending on their country’s situation.

As Bad loans (NPA) ⏫ = bank’s asset quality degrades ⏬= its Risk-weighted assets (RWA) ⏫ → bank must arrange more capital to comply with these ratios, norms and buffers.
If a bank can’t comply with BASEL norms → RBI puts it in PCA list. In worst case, bank will have to merge/ sell off its business to another bank or shut down.

Question 54

Q

BASEL Norms apply on what banks?

Answer

A

Schedule commercial banks, Differential Commercial Banks (LAB, RRB, SFB, PyB), Cooperative Banks, AIFI (EXIM, NABARD, NHB, SIDBI) and certain category of NBFCs, but RBI can prescribe separate norms / limits / deadlines for them.

Question 55

Q

What is the objective of BASEL-III norms? (UPSC-Prelim-2016)
a) Develop national strategies for biological diversity.
b) reduce the GHG emissions but places a heavier burden on developed countries.
c) transfer technology from developed Countries to poor countries to replace
chlorofluorocarbons in refrigeration.
d) improve banking sector’s ability to deal with financial and economic stress and
improve risk management.

Question 56

Q

Basel Convention provides: (UPSC-IES-2020)
(a) Indian standards for pollution measurement and prevention
(b) International guidelines to control the transboundary movements of hazardous wastes
between different countries
(c) Indian standards for the disposal of municipal and industrial wastes
(d) International standards to categorize pollution in air and wastewater

Question 57

Q

What are D-SIB: Domestic Systematic Important Banks?

Answer

A

In 2010, G-20’s brainchild Financial Stability board (HQ: BASEL) asked countries to identify Systematically Important Financial institutions and put framework to reduce risk in them.
[Side note: Same parents responsible for birth of Legal Entity Identifier (LEI)]

Each year in August, RBI identifies banks that ‘too big to fail’ (=if they fail, it’ll severely hurt the economy)’ and labels them as Domestic Systematic Important Banks (D-SIB), & orders them keep additional equity capital against their Risk Weight Assets (RWA) & imposes other technical norms on them.
Presently, 3 D-SIBs in India: SBI, ICICI, HDFC (Latest Entry).

Question 58

Q

BASEL NORMS DEFERRED IN CORONA - Ministry of Corporate Affairs (MCA) ordered all the companies to keep their balance sheet as per the format prescribed according to?

Answer

A

Indian Accounting Standards (IndAS).
- Institute of Chartered Accountants of India (ICAI) → Accounting Standards Board (ASB) has designed IndAS Norms.
IndAS norms are similar to International Financial Reporting Standards (IFRS)

Question 59

Q

What is the benefit of IndAS?

Answer

A

Benefit?

IndAS accounting format makes it easier for the local and global investors and regulators to compare, analyze and understand a company’s financial position from its balancesheet.
IndAS is not part of BASEL norm. But, since commercial banks are basically ‘companies doing banking activity’, so they also have to comply to IndAS norms. But, only RBI has the power to notify its implementation deadline on banks.
2019- RBI deferred the deadline seeing banks had not fully prepared for the transition.
2020- Critics demanded RBI should implement it, but RBI is in no hurry due to Corona crisis.

Question 60

Q

What is Indradhanush PLAN?

Answer

A

Finance Ministry’s Dept. of Financial Services up with Indradhanush PLAN for phased-recapitalization of PSBs with ₹ 70,000 crores from 2015 to 2018.

Individual PSB will get funding based on outcomes / performance.

Question 61

Q

Features of Bank Recapitalization Bonds (RcB)

Answer

A

These bonds will have interest rate of ~7%, mature@ 2028-2033. Non-transferable to third party, Non-convertible into shares.

Govt instructed PSBs to mobilize equity (share) capital from private investors.
However, investors shy away from smaller banks with weak balance sheets, so BMB (Bharatiya Mahila Bank ) & 5 Associated Banks merged with SBI (2017). Vijaya & Dena to be merged with BoB (2019, 1st April) etc. (More in Pillar#1B1)
Total Capital infusion in recent years as per Budget-2020 speech: ₹3.50 lakh cr

Question 62

Q

BANKING SECTOR: GOVERNANCE / ADMINISTRATIVE REFORMS

What is Gyan-Sangam-I ?

Answer

A

FinMin’s Dept of Financial Services organized a workshop of financial regulators, Public Sector Bank, Insurance Companies etc. It resulted in 3 outcomes:

1) PSBs’ CMD post bifurcated into 1) separate chairman and 2) separate MD&CEO so that banks can function in more professional and accountable manner.
2) Indradhanush plan for bank recapitalization (₹ 70,000 crores) tied with governance reforms in PSBs.
3) Finance Ministry setting up an autonomous body- Bank Board Bureau (BBB).

Question 63

Q

BANKING SECTOR: GOVERNANCE / ADMINISTRATIVE REFORMS

what is Bank Board Bureau?

Answer

A

This non-constitutional, non-statutory body interviews & selects top officials (MD, CEO, Chairman and full-time Directors) for PSBs, LIC and other public sector financial institutions.

Actual appointment done by FinMin’s Department of Financial Services.
(Just like UPSC selects candidates suitable for IAS but DoPT notifies appointment.)

BBB also helps the banks in governance reforms, raising capital for BASEL-III etc.
BBB has 1 Part-Time Chairman, 3 Part-Time Members and 3 Ex-officio Members (from Govt & RBI side)

Question 64

Q

❓The Chairman of public sector banks are selected by the _ _? (Pre19-SetA-Q73)

(a) Banks Board Bureau (b) Reserve Bank of India
(c) Union Ministry of Finance (d) Management of concerned bank

Answer 58

A

ES20 suggested

PSBs should be allowed to do 1) campus recruitment of at least some specialists 2) lateral entry in higher management.
PSBs should give Employee Stock Option Plan (ESOP) to their employees.

ESOP is a type of benefit plan wherein employees are given some shares of the company (Apart from their regular monthly salary).

When/if company makes more profit →

1) Market price of its shares will increase.
2) the dividend to the shareholders will increase.

How does employee benefit from ESOP?

He can sell his shares to a third party for a large gain.
He can keep the shares with himself, and will get large dividend from the company (in addition of his regular salary)

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”.
It encourages the employee to work harder with more dedication, loyalty and passion for the company’s profitability and brand image.

Answer 59

A

2017, October: Government announced ₹2 lakh+ crore package for recapitalization of PSB. But critiques argued such relief measures will just make the PSBs officials lazy & undisciplined (moral hazard). So,
2017, November: First Public Sector Bank (PSB)-Manthan organized by Dept of Financial Services (DFS) at Gurugram. Based on the participants’ inputs,
2018, January: FinMin’s Dept of Financial Services released EASE framework with 6 pillars to make PSBs more Responsive and Responsible viz.
1. Customer Responsiveness.
2. Responsible Banking: Reduce NPA, prevent frauds.
3. Credit Off Take: Try to reach out to potential borrowers for home, auto, education, loans.
4. Help MSME entrepreneurs via SIDBI’s Udyamimitra.com portal. Approve/reject
loans in not more than 15 days.
5. Deepening Financial Inclusion & Digitalization.
6. Employees’ Human Resource Management: improve
with training, performance linked promotion-salaries-posting-transfers etc.

Implementation?
Each whole-time director of a PSB will be entrusted with one pillar of the EASE-framework. Their performance will be checked by the PSB’s board of directors. An independent agency will be tasked to check public perception.

2019-Feb: First ever EASE-ranking released: PNB > BoB > SBI.

Answer 60

A

BASEL-III norms require banks to keep capital against their risk weighted asset ratio. This capital is subdivided into:
Tier1 / core capital → - Common Equity Tier-1 (CET1) e.g. ordinary shares.
- Additional Tier1 (AT1) e.g. AT1 Bonds, Preferential
shares etc.
Tier2 →  Bonds/Debenture, Hybrid instruments

BASEL-III prescribed that banks must keep minimum x%, y% etc in each of these tiers, depending on their Risk Weighted Asset (RWA).

Answer 61

A

They have no maturity date (i.e. bank has to pay interest for infinite time / perpetuity and principal will not be returned). However, bank may ‘buyback’ them after certain years.
If / when a bank makes huge losses → AT1 Bonds’ liability may be
A. written off OR
B. converted into shares (process called ‘Bail-In’).

Answer 62

A

A shadow banking system can be composed of a single institution or multiple entities forming a chain. They mobilize funds by borrowing from banks, issuing Commercial Papers (CP) and Bonds (Non-convertible debentures)

Answer 63

A

HFCs
Housing Finance Companies. E.g. Dewan Housing Finance Limited (DHFL)

LDMFs
- Liquid Debt Mutual Funds invest clients money into short term debt instruments such as T-bill (of Govt) and Commercial Papers (of companies).
- e.g. certain schemes by UTI, Kotak, L&T, Tata mutual funds
- 2019: Some of these LDMFs had invested clients money in IL&FS and DHFL, but failed to get the money back. Nearly ₹4000 crore of investors’ money is stuck, triggering the NBFC crisis in India.
Retail NBFCs
- Retail Non-Banking Financial Companies such as Gold loan companies, asset NBFCs finance companies etc.

Answer 64

A

Budget 2019: If NBFCs/MFCs/Micro Finance Institutions (MFIs) borrowed money by issuing debt securities (Bonds or Commercial Papers) → Public sector banks (PSB) invested in it → but borrower default then the government paid 10% of loss to PSB.
During Corona= total 20% loss cover guaranteed to PSB.

Answer 65

A

Special purpose Vehicle company (SPV) by SBI Capital Markets Limited (SBICAP). RBI will be regulator.

 This company will buy ₹30,000 crore worth short-term debt securities of NBFCs from primary and secondary market.
 → liquidity for those (shadow banks) → they can revive their operations, pay off their other investors etc.
 If shadow bank fails to repay principal/interest to SPV, then losses will be covered by FinMin → Dept of FinServices.
 In other words, those securities will be fully guaranteed by the central government.

Answer 66

A

Under Budget-2019 and again under Atmanirbhar Bharat 2020: a Credit Guarantee Enhancement Corporation (CGEC) willl be set up. It’ll be an NBFC company, regulated by RBI.

 ATMANIRBHAR Bharat 2020= Yes, we’ll do above thing, (which was already promised in Budget 2019).

 This company will provide Credit Guarantee to debt securities issued by Non-Banking Financial Companies

 Thus, debt securities’ credit rating will ⏫ = investors will find it safe to park money without demanding high interest.

 Benefits?
o Investors and Mutual Fund companies will feel safe parking clients’ money in NBFC = economic revival.
o NBFC may lend such borrowed funds to Microfinance institutions (MFI)= help poor borrowers.

Answer 67

A

1) Under Companies Act: Ministry of Corporate Affairs
replaced the IL&FS’s Board members. Uday Kotak made new Chairman. MCA constituted the statutory body National Financial Reporting Authority (NFRA) under Companies Act 2013 for stricter vigilance over Chartered accountants and auditors.

2) Corporate Affairs Ministry’s Serious Fraud Investigation Office (SFIO) investigating the IL&FS officials & auditors.
3) Companies Act requires all companies (incl. NBFCs) to setup a Debenture Redemption Reserve (DRR), fill it with % from profit to protect bond investors incase of default. Government exempted NBFCs, housing finance companies and listed firms from this requirement so they can easily mobilize new funds to revive old biz.
4) LIC says we’ll not allow IL&FS to collapse (=we may use Policy holders’ money to rescue it just like IDBI) = may result in “Financial Repression of households”.
5) National Housing Bank introduced Liquidity Infusion Facility (LIFt) of ₹30,000 crore for additional liquidity to HFCs for individual affordable housing loans.
6) Through Finance Act, 2019, Govt amended RBI Act 1934 to increases RBI power to regulate NBFCs in following ways: RBI can remove NBFC’s board of directors, debar its auditors, can inspect any NBFC or its associated group of companies, RBI can force merger/splitting of non-viable NBFCs, higher fines/penalties for violation.

Answer 68

A

7) RBI tightened asset-liability management (ALM) norms for NBFCs.

8) 2019 July: Dy. Gov Viral Acharya Committee → RBI board approved 3 year medium term framework to improve regulation & supervision, based on global best practices =
“Utkarsh-2022” roadmap.

9) RBI ordered certain NBFCs to implement BASEL-III norm’s Liquidity Coverage Ratio (LCR) High Quality Liquid Assets (HQLA) framework in a phased manner.
10) PSBs unable to lend more to IL&FS due to PCA framework. But, RBI relaxed ‘securitization norms’ for NBFCs so they can use existing loan papers to issue new securities to borrow money from market, thus increasing liquidity /money supply for NBFCs’ biz operations.
11) SEBI tightened norms for Credit Rating Agencies (CRAs). They’ve to disclose ‘default probability’ of bonds & other debt instruments. SEBI tightened norms on Mutual Funds, regarding where/how they invest clients’ money.

Answer 69

A

2) Chief Economic Advisor Subramanian K. has created a “Health Score for NBFCs”. It monitors given NBFC company’s Asset Liability Management (ALM) problems, balance sheet strength, Operating Resilience etc. and gives them a score between -100 to +100. 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.

Answer 70

A

Within India

Structured Financial Messaging System (SFMS)
designed by Tata Consultancy Services (TCS) for IDRBT (=Research arm of RBI)
to serve the messaging function in NEFT, RTGS, and other inter-bank, intra-bank e- transactions platforms within India.

Globally

Society for Worldwide Interbank financial telecommunication (SWIFT)
By a Cooperative organization in Belgium’s La Hulpe city (1973).
To serve the messaging function for Banks, NBFCs & brokers who may / may not have direct bank relations / settlement systems with each other due to international borders.

Answer 71

A

RBI’s income sources include:

Interest on G-Sec that are not sold in Open Market Ops.
Interest on Foreign G-Sec / Sovereign Bonds.
InterestonLoansgiventootherBanks / NBFCs.
Revaluation of foreign currency and gold in RBI reserves.
Seigniorage:profitsfromprinting money- because face value > intrinsic value.
Penalties imposed on errant banks.

From its income, RBI allocates funds to

Staff retirement fund, provisions for bad loans, depreciation in assets…
Reserves for contingency (emergency): ~₹ 2.5 Lcr.
Reserves for Exchange Rate Stability (Technically called “Currency & Gold Revaluation Reserve: ~₹7 lakh cr)
After making these allocations, profit is shared with Union Govt. in form of ‘Dividend’ (RBI Act Section 47).

Answer 72

A

RBI had setup Bimal Jalan panel was setup to review RBI’s economic capital framework & decide the guiding principles for dividend transfer to Govt.

2019- August: RBI board approved its report.
It updated / reduced buffer related technical norms in such manner that RBI will be able to transfer more dividend / surplus to the Government.
Accordingly for 2018-19: (1.23L dividend+52k extra)= ₹ 1.76 crore to be transferred to government. This will help the government to meet its fiscal deficit target.

Answer 73

A

BEFORE
RBI’s financial year
- 1934 onwards: January to December
- 1940 onwards: July to June

But Govt’s financial year is April-March so, RBI had to give interim dividend to govt until RBI’s final balance sheet was prepared, then another (full) dividend was given.

AFTER
For 2020: a smaller balance sheet will be prepared from 1/July/2020 to 31/March/2021. Then From 1st April, 2021, RBI will switch to annual April-March format.

After this reform, no need for interim dividend

Answer 74

A

Section 7(1) of the RBI Act empowers the Government to consult with RBI Governor in Public Interest.

In, 2018-October, for the first time in the history of Independent India, Govt began a Section-7(1) consultation with RBI Governor Urjit Patel, on the issues of PCA norms, BASEL-III deadline, higher dividend to Govt., Cheap Monetary Policy etc.
If RBI Governor doesn’t positively respond in such Section-7(1) consultation, then Section 7(2): Government can issue binding direction / orders to RBI Central Board to implement its wishes.
Although, fearing backlash from media & opposition parties, Govt did not issue any specific directions to the RBI Board. But, 2018-Dec: Urjit Patel resigned before completing 3-year term. He is not the first RBI governor to resign.

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