From the 1991 India economic crisis to its status of third largest economy in the world by 2011, India has grown significantly in terms of economic development. So has its banking sector. During this period, recognising the evolving needs of the sector, the Finance Ministry of Government of India (GOI) set up various committees with the task of analysing India's banking sector and recommending legislation and regulations to make it more effective, competitive and efficient. Two such expert Committees were set up under the chairmanship of M. Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report. These recommendations not only helped unleash the potential of banking in India, they are also recognised as a factor towards minimising the impact of global financial crisis starting in 2007. Unlike the socialist-democratic era of the 1960s to 1980s, India is no longer insulated from the global economy and yet its banks survived the 2008 financial crisis relatively unscathed, a feat due in part to these Narasimham Committees

Narsimhan Committee I – 1991

Narsimhan Committee I was formed to overhaul banking sector of India & to overcome its problems viz.
>> Rising NPA
>> Lack of Rural Expansion
>> Bank Nationalization
>> Lack of Financial inclusion
>> High Interest Rates

Recommendations

>> Government / RBI must not regulate the banks’ loan interest rates. Banks should be allowed to decide that by themselves.
>> Setup Debt recovery tribunals, so loan defaulters cannot get stay orders from courts.
>> Liberate Branch expansion policy.
>> Reduce CRR and SLR so banks are left with more money to lend.
>> NBFC regulatory framework
>> Government should reduce its shareholding from public sector banks.
>> Allow entry of private sector banks and foreign banks.

Results

>> RBI adopted Benchmark Prime Lending Rate (BPLR) → Now days Base Rate system (2010)
>> Debt recovery tribunal setup in 1993 → Later came SARFAESI act in 2002 with more powers
>> Banks can open branches anywhere. Only condition 25% of branches in rural areas.
>> Reduce CRR and SLR so banks are left with more money to lend--> Gradually reduced from (15,40) → (4, 21.5)
>> NBFC regulatory framework -Implemented
>> Government should reduce its shareholding from public sector banks --> Done, SBI shares sold, nowadays government owns ~ 60%. (this facilitates entry of professionals in the board of directors)
>> Allow entry of private sector banks and foreign banks --> Done, leads to first round of bank licenses

Narsimhan Committee II – 1998

>> Introduced Voluntary retirement scheme (VRS) in public sector banks.
>> Legal reforms for loan recovery → SARFAESI act 2002
>> Computerization, electronic fund transfer, legal framework
a> Payment and Settlement Act
b> Retail Transaction → ECS, NEFT, Credit Card
c> Wholesale Transaction → RTGS
>> Permit new private / foreign banks

Older Classification of Banking System

1> Banks
2> NBFI
3> DFI (Development Financial institutions) – ICICI, IDBI, IFCI etc.

New Classification

>> Banks
>> NBFI

Bank licences → 1st Round (1993)

>> Total 10 private banks given licenses → 6 still running + 4 closed/merged
>> 6 Running → ICICI, HDFC, UTI (became Axis bank (2007)), IDBI, Indusind, DCB (Development Credit Bank)
>> 4 Closed → Global Trust Bank merged with Oriental bank of Commerce,
Bank of Punjab merged with Centurion bank,
Centurion bank merged with HDFC bank,
Times Bank merged with HDFC bank

New Bank licenses 2nd round (2001)

This time RBI gave license only two strongest contenders viz.
>> Kotak Mahindra
>> Yes Bank

New Bank licenses 3rd Round (2013 – 14) – RBI conditions

>> 10 years successful work-ex with minimum capital Rs. 5 billion
>> Get its shares listed on stock exchange within 3 years; bring down voting rights to 15% within 12 years.
>> foreign shareholding must not be more than 49% (for the first five years)
>> 50% of directors should be independent & such bank must not invest in shares/bonds of its parent group.
>> Must open at-least 25% branches in the unbanked rural areas & Have to comply with PSL norms

RBI – Bimal Jalan Committee

Based on committees recommendations RBI gave license only two strongest contenders viz.
>> Bandhan Microfinance
>> IDFC

Bandhan Microfinance → Chandra Shekhar Ghosh

>> Micro-finance company at West Bengal
>> Net worth 1100 Cr., 45% branches in rural areas

IDFC (Infrastructure Development and Financial Corporation) → Rajiv Lal

>> Infrastructure finance company at Mumbai
>> Net worth 21000 cr., but rural presence low

SARFAESI Act - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law. It allows banks and other financial institution to auction residential or commercial properties to recover loans.The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act
Under this act secured creditors (banks or financial institutions) have many right for enforcement of security interest under section 13 of SARFAESI Act, 2002. If borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as Non performing Asset by secured creditor,then secured creditor may require before expiry of period of limitation by written notice to the borrower for repayment of due in full within 60 days by clearly stating amount due and intention for enforcement. Where he does not discharge dues in full within 60 days, THEN WITHOUT INTERVENTION OF ANY COURT OR TRIBUNAL Secured creditor may take possession (including sale,lease,assignment) of secured asset, or takeover management of business of borrower or appoint manager for secured asset or without taking any of these action may also proceed against guarantor or sell the pledged asset, if any

Debt Recovery Tribunals (DRTs)

Debt Recovery Tribunals were established to facilitate the debt recovery involving banks and other financial institutions with their customers. DRTs were set up after the passing of Recovery of Debts due to Banks and Financial Institutions Act (RDBBFI), 1993. Appeals against orders passed by DRTs lie before Debts Recovery Appellate Tribunal (DRAT). DRTs can take cases from banks for disputed loans above Rs 10 Lakhs. At present, there are 33 DRTs and 5 DRATs functioning at various parts of the country. In 2014, the government has created six new DRTs to speed up loan related dispute settlement.

Compared to the ordinary court procedures, DRTs were able to handle large number of cases with low delay during the initial phases. Though the DRTs have made impact on recovery front, several issues related to their performance in the background of rising volume of NPAs have appeared in later period. Inadequate infrastructure coupled with insufficient number of DRTs has made them incompetent to handle the rising volume of disputes.

Recent issues related with DRTs

The leading issue related with debt recovery through DRTs is the slow process of resolution (settling debts and finding end to defaults). Like several other debt recovery mechanisms, the DRTs are slow to work out on pending disputes. Nearly 93000 cases are pending in front of all the DRTs in the country at the end of 2016. The World Bank estimated that it took 4.3 years on average in India to resolve insolvency under the old laws, more than twice as long as in China. Similarly, the average recoveries were just 25.7 cents on the dollar in India. This is one of the worst among the similar economies.

The number of DRTs are small given the increasing number of cases. –
Delay in settling the cases is long.
The DRTs were not able to handle cases related to large borrowers.
Timely appointment of officials for DRT has not been made.

Willful Defaulter

There are many people and entities who borrow money from lending institutions but fail to repay. However, not all of them are called wilful defaulters. As is embedded in the name, a wilful defaulter is one who does not repay a loan or liability, but apart from this there are other things that define a wilful defaulter. According to the RBI, a wilful defaulter is one who-
(i) is financially capable to repay and yet does not do so;
(ii) or one who diverts the funds for purposes other than what the fund was availed for;
(iii) or with whom funds are not available in the form of assets as funds have been siphoned off;
(iv) or who has sold or disposed the property that was used as a security to obtain the loan.
Diversion of fund includes activities such as using short-term working capital for long-term purposes, acquiring assets for which the loan was not meant for and transferring funds to other entities. Siphoning of funds means that funds were used for purposes that were not related to the borrower and which could affect the financial health of the entity.
However, a lending institution cannot term an entity or an individual a wilful defaulter for a one-off case of default and needs to take into account the repayment track record. The default should be established to be intentional and the defaulter should be informed about the same. The defaulter should also be given a chance to clarify his stand on the issue. Also, the default amount needs to be at least Rs.25 lakh to be included in the category of wilful defaults.
If an entity's or individual's name figures in the list of wilful defaulters, the following restrictions get in action on them-
(a) Barred from participating in the capital market.
(b) Barred from availing any further banking facilities and to access financial institutions for five years for the purpose of starting a new venture.
(c) The lenders can initiate the process of recovery with full vigour and can even initiate criminal proceedings, if required.
(d) The lending institutions may not allow any person related to the defaulting company to become a board member of any other company as well.