Provisions related to real estate

Requires of a minimum of 10 per cent of allottees or 100 individual allottees in a real estate project
to initiate insolvency proceedings

homebuyers are recognized as financial creditors under the IBC

So, individual homebuyers coming together could initiate insolvency against a real estate company
for delays in possession

Liabilities for wrongful trading

A director or a partner of the corporate debtor may be held liable to make personal contributions to
the assets of the company in certain situations.

This liability can occur if despite knowing that the insolvency proceedings cannot be avoided, the
person did not exercise due diligence in minimizing the potential loss to the creditors

FDRI bill, 2017

Was proposed for resolution of bankruptcy in financial institutions

But became controversial due to bail in provision

Scrapped DICGC – deposit

insurance and credit guarantee
corporation (upto 1 lakh deposit
insurance).
Classification of Financial
institutions based on risk of failure
(will precipitate bank runs)
Creates IRC – Independent
resolution corporation (insurance a

Bail in? Post 2008 crisis in US – financial stability board (FSB) established.
It recommended bail-in clause to prevent moral hazard, contagion risk and repeat of 2008 type crisis

Already implemented in UK, EU, Canada, Australia. In India we adopted the same clause in FDRI bill
FDRI bill

2018 – uproar over bail in clause and removal of deposit insurance

Bill was dropped

2019 – bill being proposed again, may have some changes.

Bad bank
the concept of a “bad bank” was applied in previous banking crises in Sweden, France, and Germany.

based on the principles of an asset restructuring company (ARC), which buys bad loans from the
commercial banks at a discount.

tries to recover the money from the defaulter by providing a systematic solution over a period of
time

Since a bad bank specialises in loan recovery, it is expected to perform better than commercial
banks, whose expertise lies in lending.

Government may create this bank and guarantee the loans it buys.

Advantages

Solves twin balance sheet syndrome as bad loans move into a single entity.

Can develop capacity and unique methods. Can invite investment as government guarantee
reduces risks Can maintain professional management and build expertise.

Issues It is costly – new organization, IT structure, employees etc Taxpayers have to bear burden
of bad loans Creates moral hazard – banks feel they can just sell the bad loans.

In India Public sector Asset Rehabilitation Agency (PARA) proposed by economic survey 2016-17.
ARCs so far have not been allowed to raise capital from the market to prevent contagion effect
But PARA would need around 30,000 cr + and has to tap into the market
Another solution,
To reduce risk associated with bad bank
Viral acharya – recommended 2 bodies instead of one. Private asset management company – for
those assets that have value in the short run, can easily be recovered ex: telecom, textile sector
National Asset management company – for the long term projects – cannot expect short term
recovery ex: Power sector, infrastructure.

Has the bad bank been setup? • The government has set up the India Debt Resolution Company Ltd
(IDRCL), an asset management company (AMC) that will work in tandem with the National Asset
Reconstruction Company Ltd (NARCL) to clean up bad loans.

In all these solutions,

Problem of equity IBC – compromises some debtors and shareholders
Bad bank – needs taxpayer money
Bail in –needs Depositor’s money
In Economy, Rich give loans to govt, earn interest. Govt has to collect taxes to pay this interest.
Tax collection – around 50% from indirect taxes which everyone pays
So redistribution of wealth happening from poor to rich.

Project Sashakti
Proposed by Sunil Mehta panel
1> Bad loans of up to ₹ 50 crore will be managed at the bank level, with a deadline of 90 days
2> 50-500 crore, banks will enter an inter-creditor agreement, authorizing the lead bank to
implement a resolution plan in 180 days, or refer the asset to NCLT
3> For loans above ₹ 500 crore, the panel recommended an independent AMC, supported by
institutional funding through the AIF.
Economic capital framework EPF
Economic capital framework refers to the risk capital required by the central bank while taking into
account different risks. The
economic capital framework reflects the capital that an institution requires or needs to hold as a
counter against unforeseen risks or events or losses in the future.

Bimal Jalan committee Recommendations:

Realized equity (vs) revaluation reserves.
Framework may be periodically reviewed after every five years.
Align the central bank’s accounting year with the financial year, which could reduce the need for
paying interim dividend.
Only realised equity built from profits must be distributed.
The contingency fund be maintained within a range of 6.5% to 5.5% of rbi’s balance sheet. (crb)
Realized equity is used for Contingent risk buffer (CRB)
Revaluation gains from market fluctuations on foreign currency, gold or other assets not
distributable revaluation reserve cannot be used to bridge shortfalls in other reserves.
What does RBI act say?
Under Section 47 of the RBI Act, “after making provision for bad and doubtful debts, depreciation in
assets, contributions to staff and superannuation funds and for all other matters for which provision
is to be made by or under this Act or which are usually provided for by bankers, the balance of the
profits shall be paid to the Central government”.
What RBI did so far?
Has been transferring profits every year averaging over Rs 50,000 crore over the last few years.
But 1st time such high payout
Sources for RBI?
Open Market operations
Government securities
Foreign currency assets, i.e investment in bonds of foreign central banks
Management commission
Expenditure for RBI
printing of currency notes,
Staff salaries
Commissions to primary dealers
Which is higher?
Expenditure is only 1/7th of the net interest income it gets So in general, RBI is in profit
What happens in other countries?
In most countries, especially after 2008, central banks build adequate buffer for easing in times of
crisis
Higher buffer enhances credibility of the central bank
No need to ask governments permission for printing money – independence maintained
What was done with the money earlier?
Transferred to the Consolidated Fund of India Salaries, pensions Interest payments, welfare schemes

What will this money be used for?

Could be
Provide a fiscal stimulus reduce borrowings of government
Government had an optimistic expectation of raising 4.76 lakh cr – but slowdown – this money can
cover revenue shortfall.

Advantages of this transfer

Address slowdown
Reduce borrowings
Raise revenue
Prevent crowding-out effect
Lower fiscal deficit
Lower government borrowing  Lower interest rates in the market
If revenues increase, can be used for capital expenditure (infrastructure, etc)
As inflationary pressure is low currently, it won’t have large negative impact
Concerns
Economic capital framework takes a conservative assessment of risks
RBI feels it needs to maintain stronger reserves to be able to handle unforeseen situations
Perception about RBI’s independence being eroded
New money flowing into the economy can create inflation

Basel requirements
Basel is a place in Switzerland
1974 – Herstatt, a German bank failed
G10 countries + Spain and Luxemburg wanted to prevent such incidents
Some regulations must be developed
Basel committee for banking supervision formed (BCBS)
Banks do a lot of innovations every year – so rules need to change too
So, we have 3 sets of Basel norms

For all multinational banks in the world

Basel 1 – 1988
Basel 2 – 2004
Basel 3 -- 2008
In India,
They are automatically applicable on multinational banks
Domestic banks were not following for a while, But later implemented. Currently under basel 2,
going to implement basel 3
Basel norms focus on
1> Minimum capital requirement
2> supervisory review (supervision to meet norms)
3> Market discipline (disclosure norms)
Minimum capital requirement
Measured by capital adequacy ratio
Must be at least 8% But RBI says 9% for India

Capital adequacy ratio

Measure of bank’s financial strength to ensure that banks have enough cushions to absorb losses
before becoming insolvent and losing depositors’ funds.
CAR is required to be 9% by RBI (based on BASEL III norms), where 7% has to be met by Tier 1 capital
while the remaining 2% by Tier 2 capital.
Tiers of capital of a bank
Tier 1 capital consists of shareholders' equity and retained earnings. (permanent)
Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt,
general loan-loss reserves, and Undisclosed reserves.(Temporary)
Risk weighted assets
Assets of a bank -- loans
Given weight according to their risk
Capital adequacy ratio (CAR)
(Tier I + Tier II Capital)/
Risk Weighted Assets X 100
Capital conservation buffer
The capital conservation buffer is a capital buffer of 2.5% of a bank's total exposures that needs to
be met with an additional amount of Common Equity Tier 1 capital.

Domestic systematically important banks (DSIBS)

Very big banks need to be more cautious
If they fail, economy fails
So need to take extra measures.
Basel 3 says (for D-sibs)
4 factors based on which we choose D-sibs
1>Size (40%)
2>Interconnectedness
3>Complexity in operations
4>Substitutability
RBI
If 2% GDP, then sufficient size
RBI declared  SBI, ICICI, HDFC Too big to fail banks
50 years of bank nationalization 1969
'Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969'
nationalized 14 banks with deposits of over Rs 50 crores.
brought more than 75% banking sector under state control along with its assets, liabilities, entire
paid-up-capital.
Negotiated compensation to be paid in the form of G-secs
But banks went to court
No clear principles in determining compensation
SC struck down nationalization act as it violated right to property under art 31(2)
Parliament enacted it again with specific provisions of compensation of each of the banks
Also, 25th Amendment act was passed
To enable socialistic legislation
Right to property not a fundamental right.
compensation will be decided by parliament
Why nationalization of banks?
1>Private Banks were unreliable – in the previous decade 40 banks a year failed on an average
2> To achieve the larger goals of socialism
3> To ensure flow of credit to critical sectors
4> To ensure funds for planned development of the economy
Impact
1> Rural branches increased 4 fold in a decade
2> PSL ensured credit to critical sectors
3> Increased loans to government under SLR
4> Large employment generation due to rapid branch expansion
Issues
1> Profits reduced
2> Poor efficiency due to bureaucratic attitude
3> CAG audits, PoCA, CVC etc made their functioning risk averse
4> recently, RTI and other extra obligations have increased burden
In hindsight,
It had an overall positive impact on the economy
Building on it’s success, various banking reforms implemented in 90s
Now merger of banks also a structural measure in the right direction

Banking reforms
Narasimhan 1 (1991)
1> Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at
the top and at bottom rural banks engaged in agricultural activities.
2>A phased reduction in statutory liquidity ratio.
3>Phased achievement of 8% capital adequacy ratio.)
4> Abolition of branch licensing policy.
5> Proper classification of assets and full disclosure of accounts of banks and financial institutions.
6> Deregulation of Interest rates
Narasimhan 2 (1998)
1. Need for a stronger banking system for which mergers of the PSBs and the financial institutions
Close weak ones, merge strong with strong (Recent mergers between weak and strong banks also)
2. A 3-tier banking structure was suggested after mergers:
(a) Tier-1 to have 2 to 3 banks of international orientation;
(b) Tier-2 to have 8 to 10 banks of national orientation; and
(c) Tier-3 to have large number of local banks.
Banking reforms Narasimhan 2 (1998)
Higher norms of Capital-to-Risk— Weighted Adequacy Ratio (CRAR) suggested—increased to 10 per
cent.
Budgetary recapitalisation of the PSBs is not viable and should be abandoned.
Legal framework of loan recovery should be strengthened (the government passed the SARFAESI
(Act, 2002).
Net NPAs for all banks suggested to be cut down to below 5 per cent by 2000 and 3 per cent by
2002.
Rationalisation of branches and staffs of the PSBs suggested.
Licencing to new private banks (domestic as well as foreign) was suggested to continue with.
Banks’ boards should be depoliticised under RBI supervision.
Nachiket mor committee (2014) – setup by RBI
On financial inclusion
1> universal bank account to all Indians (Jan Dhan)
2> Use Aadhaar as a tool for financial inclusion (JAM trinity)
3> Create differentiated banks (being done) Nachiket mor committee (2014) – setup by RBI
4> 50% PSL with regional differences – not done
5> Stop loan waivers, interest subvention – not done

Banking reforms
Nationalization
Narasimhan 1 and 2
PJ Nayak
Merger of banks
NPA crisis and measures being taken
Nachiket mor – financial inclusion
Basel norms

Prompt corrective action

set of guidelines for banks that are weak in terms of identified indicators including – poor asset
quality, insufficient capital and insufficient profit or losses.
It is an early intervention package or resolution guideline
Banks under PCA
Jan 2018 – there were 12 banks under PCA
Govt recapitalized and took several measures By March 2018 only 6 banks
2019 Aug – 5 banks under PCA
Leverage?
Leverage ratio -- ratio of tier 1 capital to total assets
Was suggested in basel 3
Now RBI using in PCA
Financing of infrastructure
Take out financing
NIIF, FDI , Invits VGF, VCF, asset monetization

NBFCs
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities
Who can be an NBFC?
50:50 test
Financial activity as principal business is when a company’s financial assets constitute more than 50
per cent of the total assets and income from financial assets constitute more than 50 per cent of the
gross income.
Regulation of NBFCs
Multiple regulators
Based on their operation
Systematically important NBFCs
NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as
systemically important NBFCs.
The rationale for such classification is that the activities of such NBFCs will have a bearing on the
financial stability of the overall economy.
Are they same as banks?
Majorly yes, but some exceptions
NBFCs cannot accept demand deposits
NBFCs are not a part of the payment and settlement system
NBFCs cannot issue cheques drawn on itself
NBFC depositors do not have deposit insurance facility of the Deposit Insurance and Credit
Guarantee Corporation, unlike banks.

Banking in India
Bank of Hindustan – 1st bank – 1770
General bank of India – 2nd bank- 1786
Oudh commercial bank – 1881 – 1st commercial bank
1 st bank that was started by Indians and still in operation – PNB - 1894
1 st foreign bank still operating in India – Chartered bank(1858), now standard chartered
Recently – on the tap licenses allowed.
Bandhan microfinance and IDFC bank were given license in 2015

RBIs Internal working group suggestions

Nov 2020 Revise licensing norms for banks
1> large corporates should be allowed as promoters of banks – cap on promoters stake can be
increased from current 15% to 26%
2> Initital paid up capital required to setup a bank to be increased to 1000 cr for full fledged banks
3> Big NBFCs (50kcr+ assets, 10+ years of operation) to be considered for conversion to banks
Positives of corporates as bank promoters
1> Bring more capital to banking sector, reduce pressure on govt
2> better competition in the banking sector
3> More choices available for people – to deposit, take loans
Negatives of corporates as bank promoters
Connected banking – Corporates as promoters of banks give loans to their own companies
Circular banking – Quid pro quo to bypass regulations and go for connected banking
Destabilization of banking sector is possible – due to increased risk transfer

Inflation
Meaning
Increase in the general price level of an economy is called inflation.
If general price levels fall over a period of time it is called deflation.
Disinflation is the reduction of rate of inflation.

Causes of Inflation
Demand pull – Either the demand increases over the same level of supply, or the supply decreases
with the same level of demand and thus the demand-pull inflation arises.
Cost push --The price rise which is the result of increase in the production cost is cost-push inflation.

Demand Pull Factors

Rise in population.
Black money.
Rise in income.
Excessive government expenditure
Examples : Cost Push Factors
Infrastructure bottlenecks which lead rise in production and distribution costs.
Rise in Minimum Support Price (MSP).
Rise in international prices.
Hoarding and black marketing.
Rise in indirect taxes.
Terms related to inflation
Reflation is when inflation returns after a spell of deflation and recession
Stagflation is inflation along with rising unemployment due to recession
Skewflation --phenomenon in which there is a price rise of one or a small group of commodities over
a sustained period of time.
Inflation Indices
WPI
Wholesale Price Index (WPI) It is the most widely used inflation indicator in India.
Published by the Office of Economic Adviser, Ministry of Commerce and Industry.
All transactions at the first point of bulk sale in the domestic market are included.
Major criticism for this index is that the general public does not buy products at wholesale price.
The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.
Inflation Indices WPI Wholesale Price Index -- WPI continues to constitute three major groups—
Primary Articles, Fuel and Power, and Manufactured Products. The number of items is 697
New series was adopted for WPI based on Saumitra Chaudhury working group (setup in 2012) Some
major changes done
Items have been increased from 676 to 697 Item level aggregates for new WPI have been compiled
using Geometric Mean (GM) following international best practice.
Inflation Indices
CPI----- It measures price changes from the perspective of a retail buyer.
It measures changes over time in the level of retail prices of selected goods and services on which
consumers of a defined group spend their incomes.

Consumer Price Index -----CPI

Depending upon the socioeconomic differentiations among consumers, India has three differing sets
of CPI with some differentials in the basket of commodities
Inflation Indices
(CPI) released at national level are:
1> CPI for Industrial Workers (IW)
2>CPI for Agricultural Labourers/Rural Labourers (AL/RL)
3> CPI (Rural/Urban-Combined)
Inflation Indices
The first three are compiled by the Labour Bureau in the Ministry of Labour and Employment.
Fourth is compiled by the Central Statistical Organisation (CSO) in the Ministry of Statistics and
Programme Implementation.
CPI vs. WPI WPI, tracks inflation at the producer level and CPI captures changes in prices levels at the
consumer level. differ in which weightages assigned to food, fuel and manufactured items.(food in
CPI is far higher (46%) than in WPI (24%).) WPI does not capture changes in the prices of services,
which CPI does. In April 2014, the RBI had adopted the CPI as its key measure of inflation. (before
this, WPI) Issues with WPI 1> Not according to global standards – most countries use PPI or CPI 2>
Rates captured from mandis, wholesalers does not necessarily reflect how much people actually pay
for household consumption 406 407 2/12/2022 100 Issues with CPI Started in 2011, doesn’t have
sufficient data for analysis Consumer prices affected by subsidies, taxes, distribution costs Producer
price index (PPI) Abhijit sen(2003) committee had recommended The PPI measures price changes
from the perspective of the producer while the consumer price index (CPI) measures it from the
consumers’ perspective taxes, trade margins and transport costs are excluded B.N. Goldar
committee (2014)setup to advise on methodology for PPI, has given it’s report Another committee
setup under Ramesh chand for the same (June 2019) – revise WPI and suggest PPI methodology 408
409 2/12/2022 101 Producer price index (PPI) 1> Easier for international comparison 2> Includes
services, whereas WPI doesn’t 3> Removes multiple counting bias inherent in WPI 4> Comparison
between CPI and PPI shows where actual inflation is happening.

Inflationary gap The excess of total government spending above the national income (i.e., fiscal
deficit) is known as inflationary gap. Brings some extra money into the economy Creates inflationary
pressure Deflationary gap The shortfall in total spending of the government(i.e., fiscal surplus) over
the national income Reduces overall money supply Creates deflationary pressure 412 413 2/12/2022
103 What is healthy level of inflation? Multiple committees – between 4 to 6% (Chakravarthy,
Tarapore etc) Current inflation targeting is also at 2 to 6% But why? Some inflation good for the
economy Why? 1> Producers feel there is demand – produce more 2> Consumers feel prices rise
steadily and predictably, don’t put off buying decisions 3> Investment is forthcoming as there is
indication of healthy demand in the economy 4> Borrowers benefit and this creates more borrowing
– more consumption and investment 414 415 2/12/2022 104 Control of inflation through interest
rate
Liquidity trap Liquidity trap is a situation when expansionary monetary policy (increase in money
supply) does not increase the interest rate, income and hence does not stimulate economic growth.
When does it occur: A liquidity trap usually happens after a severe recession. Families and
businesses are afraid to spend, no matter how much credit is available. 418 419 2/12/2022 106
Double financial repression(Economic survey) Savings getting lower returns is called as financial
repression On asset side – SLR + PSL restrict banks, so they give less interest rates to depositors On
liabilities side – High inflation reduces the real interest rates that people get for their savings Index
of Industrial production IIP Index of Industrial Production (IIP) measures the quantum of changes in
the industrial production in an economy and captures the general level of industrial activity in the
country. The base year is always given a value of 100. The current base year for the IIP series in India
is 2011-12. So, if the current IIP reads as 116 it means that there has been 16% growth compared to
the base year. 420 421 2/12/2022 107 Index of Industrial production IIP IIP is a short term indicator
of industrial growth till the results from Annual Survey of Industries and National Accounts Statistics
are available compiled and published every month by Central Statistics Office (CSO) of the Ministry
of Statistics and Programme Implementation with a time lag of six weeks from the reference month
National Statistical Office (NSO) May 2019 CSO – central statistical office and NSSO – National
sample survey organization merged to form NSO Will be headed by MOSPI secretary 424 425
2/12/2022 109 Base year A base year is the first of a series of years in an economic or financial
index. It is typically set to an arbitrary level of 100. Change in base year means, the new base year is
taken as 100 How is it chosen? Base year How do we choose 1> Should be recent(usage of goods
change with time) 2> shouldn’t be a recession or a boom year 3> normal monsoon 4> Normal year
without major reforms affecting indicators 426 427
Proposed rebasing Presently the base year for most national statistics calculations is 2011-12.
(MoSPI) has proposed to change the base year to 2017- 18 GDP, Index of Industrial Production (IIP),
and the consumer price index (CPI)’s base year proposed to be changed 428 429 2/12/2022 111
Challenges with rebasing 1> Continuity – last time rebasing did not release back series, making trend
analysis difficult 2> Metrics were revised recently – frequent revisions can create confusion Problem
with 2017-18 as base year 1> Impact of demonetization and GST present in the year 2> data for this
year hasn’t even been finalized yet 430 431 2/12/2022 112 Purchasing managers index Purchasing
Managers’ Index (PMI) is an indicator of business activity — both in the manufacturing and services
sectors. It is a survey-based measure that asks the respondents about changes in their perception of
some key business variables from the month before. It is calculated separately for the manufacturing
and services sectors and then a composite index is constructed. Purchasing managers index PMI A
figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
Higher the difference from this mid-point greater the expansion or contraction. If the figure is higher
than the previous month’s then the economy is expanding at a faster rate. If it is lower than the
previous month then it is growing at a lower rate