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28 FEBRUARY 2019

Reforms Journey for EASE in PSBs CLEAN and SMART Banking for Aspiring India First EASE Reforms Index. 28 FEBRUARY 2019. Accelerating reforms. EASE Reforms Agenda. EASE Index. Responsible Banking Governance/HR Responsiveness MSME UdyamiMitra Credit Off-take Deepening FI.

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28 FEBRUARY 2019

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  1. ReformsJourney for EASE inPSBs CLEAN and SMART Banking for AspiringIndia First EASE ReformsIndex 28 FEBRUARY2019

  2. Acceleratingreforms EASE ReformsAgenda EASEIndex • ResponsibleBanking • Governance/HR • Responsiveness • MSMEUdyamiMitra • CreditOff-take • DeepeningFI Recap of 2.11 lakh crore ‘Shell’company accountsfrozen AdditionalTier-1 bondsrecalled Indradhanush IBC BanksBoard Bureau PMJDY AQR TReDS JAM trinity MudraYojana UPI -BHIM UdyamiMitra FY15 FY16 FY17 FY18 FY19 7

  3. Enhanced Access and Service Excellence (EASE) Reform Index KEY FACTS: • EASE index is prepared by the Indian Banking Association (IBA) and Boston Consulting Group. • It is commissioned by the Finance Ministry. • It is a framework that was adopted last year to strengthen public sector banks, and rank them on metrics such as responsible banking,

  4. FINDINGS OF THE REPORT: • Punjab National Bank has topped the list. It is followed by Bank of Baroda, State Bank of India (SBI), and Oriental Bank of Commerce. • The EASE Index report also noted PSU banks’ strengthening of the bad-loan recovery process, pointing to the success of the Insolvency and Bankruptcy Code (IBC) in fast tracking the resolution process.

  5. PSBs as drivers of economic growth and financial inclusion Drivinginclusion 97% geographicalcoverage2 Supportinggrowth 79% ofbranches 75% of saving a/cdeposits 97% of Financial Inclusionaccounts 72% of credit to Small & Micro enterprises1 and Small & MarginalFarmers 66% ofcredit 1. Small and Micro enterprises only in industry segment 2. Data for Sub Service Areas identified under PMJDY Note: Data for Mar 2018; PMJDY data for Feb 2019; PSBs includesRRBs Source: RBI; pmjdy.gov.in; Ministry ofFinance 1

  6. Stress build-up — substantiallyhidden Stressed assets of PSBs (% of grossadvances) Hidden stress:Standard restructuredadvances 7.0% Clean-up andreforms were required GNPA 5.0% 2.2% 1.1% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1. Standard restructured assets + GNPA for domestic operations till FY14 and for global operations post FY14 Source: RBI, Ministry ofFinance 2

  7. STRESSED ASSETS STRESSED ASSETS = Non Performing Assets: A loan whose interest and \or instalment of principal have remained overdue (not paid) for a period of 90 days is considered as NPA.

  8. NPA two types NET NPA = GROSS NPA – Provision GROSS NPA = NET NPA + Provision 100 – 60 = 40 (30) Net NPA = 10 Gross NPA =40

  9. RESTRUCTURED LOANS (Hidden Stress ) Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures

  10. WRITTEN OF ASSETS (Hidden Stress ) • Bank or lender doesn’t count the money borrower owes to it. • The financial statement of the bank will indicate that the written of loans are compensated through some other way. • There is no meaning that the borrower is pardoned or got exempted from payment.

  11. Stress recognition nearly complete, GNPA trendreversed Stressed assets1 of PSBs (% of grossadvances) Total stressedassets 15.4% 14.2% GNPApeaked 14.6% 13.7% GNPA reducedby ₹31,168cr. Hidden stresspeaked 7.0% Recognition nearlycomplete 5.0% 2.2% 1.1% FY08 FY15 1. Standard restructured assets for domestic operations till FY14 and for global operations post FY14 Source: RBI, Ministry ofFinance 0.8% 0.5% FY18 Dec-18 4

  12. Observation – Salan Hidden Stress (FY 18 – Dec 18 ) ratio Drops ? Why ? RBI Circular February 12 , 2018 (Most powerful Reform in Indian Economy )

  13. Banking Regulation (Amendment) Act , 2017 • It seeks to amend the Banking Regulation Act, 1949 to insert provisions for handling cases related to stressed assets • Initiating insolvency proceedings:  The central government may authorise the Reserve Bank of India (RBI) to issue directions to banks for initiating proceedings in case of a default in loan repayment. • These proceedings would be under the Insolvency and Bankruptcy Code, 2016

  14. Issuing directions on stressed assets:  The RBI may, from time to time, issue directions to banks for resolution of stressed assets.  Committee to advise banks:  The RBI may specify authorities or committees to advise banks on resolution of stressed assets.  The members on such committees will be appointed or approved by the RBI.

  15. IBC CODE

  16. WHY IBC 2016

  17. Insolvency and Bankruptcy Code, 2016

  18. The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the Reserve Bank of India. • The Code proposes two separate tribunals : (i) the National Company Law Tribunal for Companies and Limited Liability Partnership firms; and (ii) the Debt Recovery Tribunal for individuals and partnerships.

  19. IBC Ecosystem – Additional Arguments

  20. Where We are ?

  21. Limitation • As on September 30, 2018, around 30 per cent of the ongoing resolution processes has exceeded the prescribed time limit of 270 days. • Strengthening the infrastructure of insolvency resolution, including the proposed increase in the number of benches of National Company Law Tribunal (NCLT), should help reduce the overall time currently being taken for resolution under the IBC.

  22. Why - Information utilities • CIBIL is India’s leading credit information company and maintains one of the largest collections of consumer information globally • Following enactment of the Credit Information Companies (Regulation) Act in 2005, three other Credit Information Companies (CICs) were also set up

  23. Central Repository of Information on Large Credits (CRILC)[3]  was set up by RBI to collect, store and disseminate data on all borrowers' credit exposures including Special Mention Accounts (SMA 0, 1 & 2) having aggregate fund-based and non-fund based exposure of Rs.50 million and above However !

  24. Information utilities Setting up of IUs marked a shift as information as well as default filed with IUs are to be treated as prima facie evidence of the transaction for the purpose of proceedings under IBC, thus, freeing IRP process from the rigor of evidentiary regime thereby enabling completion of process within a time bound manner as laid down under IBC.

  25. IU functionalities

  26. First Information Utility

  27. National E-Governance Services Limited (NESL) was incorporated to augment the Information Infrastructure of India with a focus on delivering services for the public, government and public financial institutions

  28. Government Strategy

  29. Recognise NPAstransparently Resolve and recover value from stressedassets Government’s 4R’sstrategy RecapitalisePSBs Reforms to drive CLEAN and SMARTbanking 3

  30. Recognize NPA Transparently

  31. Stress recognition nearly complete, GNPA trendreversed Stressed assets1 of PSBs (% of grossadvances) Total stressedassets 15.4% 14.2% GNPApeaked 14.6% 13.7% GNPA reducedby ₹31,168cr. Hidden stresspeaked 7.0% Recognition nearlycomplete 5.0% 2.2% 1.1% FY08 FY15 1. Standard restructured assets for domestic operations till FY14 and for global operations post FY14 Source: RBI, Ministry ofFinance 0.8% 0.5% FY18 Dec-18 4

  32. That all started with the AQR !

  33. What had happened ? In 2016 • Normally, non - performing assets (NPAs) soar when there is an economic crisis, triggering widespread bankruptcies At one level, the explanation was straightforward Asset Quality Review

  34. Reserve Bank of India (RBI) inspectors check bank books every year as part of its annual financial inspection (AFI) process. • However, a special inspection was conducted in 2015-16 in the August-November period. This was named as Asset Quality Review (AQR)

  35. Why was it necessary? banks were resorting to ever-greening of accounts. Banks were postponing bad-loan classification and deferring the inevitable

  36. In a routine AFI, a small sample of loans is inspected to check if asset classification was in line with the loan repayment and if banks have made provisions adequately • However, in the AQR, the sample size was much bigger and in fact, most of the large borrower accounts were inspected to check if classification was in line with prudential norms

  37. medium-sized private sector bank HDFC was valued as much as 24 public sector banks put together

  38. Resolve and Recover Value From Stressed Assets

  39. Reset of creditor-debtor dynamics driving recordrecovery ₹2.87 lakh crore recovered since FY15 tillQ3FY191 103% YoY growth in recovery amounting to ₹98,493 crore in3QFY19 28,165 large defaulters publicly named and actedagainst 2,881 FIRs against wilful defaulters byDec-18 1. Includes provisional numbers forQ3FY19 Source:RBI,MinistryofFinance,EASEReformsIndex,TransUnionCIBIL,LokSabhaStarredQuestionNo.:†*64 byShriRamTahalChoudhary,ShriNaranbhaiKacchadiya 5

  40. FUGITIVE OFFENDERS ACT The Fugitive Economic Offenders Act, 2018 is an Act of the Parliament of India that seeks to confiscate properties and assets of economic offenders that evade prosecution by remaining outside the jurisdiction of Indian courts. Economic offences with a value of more than Rs 100 crores, which are listed in the schedule of the Fugitive Economic Offenders Act (55 economic offences), come under the purview of this law.

  41. As per the Act, a court (‘Special Court’ under the Prevention of Money Laundering Act, 2002) has to declare a person as a Fugitive Economic Offender. • Recently, on 5 January 2019, Special Prevention of Money Laundering Act (PMLA) court has declared Vijay Mallya a fugitive economic offender. His properties can now be confiscated by the government

  42. Some analysis (i) the Prevention of Money-Laundering Act (PMLA), 2002 which prohibits money-laundering, (ii) the Benami Properties Transactions Act, 1988 which prohibits benami transactions, and (iii) the Companies Act, 2013 which punishes fraud and unlawful acceptance of deposits.    Other laws such as the Indian Penal Code, 1860 and the Code of Criminal Procedure, 1973 also cover economic offences, such as forgery and cheating.

  43. None of these statutes contain specific provisions to deal with high value white collar criminals who have left the Indian borders primarily to escape proceedings against them, which thus forces authorities to resort to extradition proceedings under the Extradition Act, 1962

  44. Some analysis - • allows authorities to provisionally attach properties of an accused, while the application is pending before the Special Court. • Upon declaration as an FEO, properties of a person may be confiscated and vested in the central government, free of encumbrances (rights and claims in the property).  • Further, the FEO or any company associated with him may be barred from filing or defending civil claims.   

  45. Bank Recapitalization

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