FTAPCCI 2016/FR 2016 08 31... · 2019. 9. 10. · equity, respectively. So far, IOCL has planted jatropha in 8,000 hectares—for biofuel production in the states of Chhattisgarh,

Aug 31, 2016 || FAPCCI Review || 3

FTAPCCI

ESTD. 1917 Weekly Journal of the Federation of Andhra Pradesh Chambers of Commerce & Industry

Vol.XVI - No.35 Aug 31, 2016 Rs.15

Editor : T. SUJATHA, Dy.Director

Editorial Advisory Board

M. GOPALAKRISHNA, I.A.S. (Retd.)

OMPRAKASH TIBREWALA NITIN K. PAREKHPast President, FAPCCI Member – FAPCCI

Dr. C.V. NARASIMHA REDDYDirector, Dept. of Information & Public Relations, Govt. of AP (Retd.)

The views expressed by the authors in their articles published in this magazine aretheir personal views and do not necessarily reflect the views of FAPCCI.

Contents

PresidentRAVINDRA MODI

Senior Vice-PresidentGOWRA SRINIVAS

Vice-PresidentARUN LUHARUKA

Immediate Past PresidentANIL REDDY VENNAM

Managing Committee

VENKAT JASTIM.S.P. RAMA RAO

MANOJ KUMAR AGARWALARUN KUMAR DUKKIPATI

MEELA JAYADEV ANIL AGARWAL

C.V. ANIRUDH RAOB. P. SINGHAL

K. RAMABRAHMAMA. PRAKASH

ATHUKURI ANJANEYULURAMAKANTH INANI

SHYAM SUNDER AGARWALAVINASH GUPTADr .M. APPAYYA

SURESH KUMAR SINGHALRAJ KUMAR AGRAWAL

PREM CHAND KANKARIAK. BHASKER REDDYGOWRA L. PRASAD

ARVIND KEDIAV.V. SANYASI RAO

PRAKASH CHANDRA GARGSURESH KUMAR JAINABHAY KUMAR JAIN

RADHA KRISHAN AGARWALCHALLA GUNARANJAN

SHYAM SUNDER PASARIDR. K. NARAYANA REDDYJITENDER KUMAR GUPTA

SHIV KUMAR GUPTAR. RAVI KUMAR

RAJENDRA AGARWALKARUNENDRA S. JASTI

UMA GHURKA

Head Office

Federation House, FAPCCI Marg

Red Hills, Hyderabad - 500 004

� : 23395515 (8 Lines)

� Fax : 040-23395525

e-mail : [email protected]

� Website : www.ftapcci.com

The Federation of Andhra Pradesh Chambers of Commerce and Industry

Branch Office

38-5-4, G F-1 Satyavati Apts,

Punnamathota, 1st Lane,

Near Montessori College,

Venkateswara Puram, Vijaywada-10

Ph : +91 866 2499055 | Fax:+91 866 2499056

e-mail : [email protected]

President’s Desk 4

Power News 6

Economy Watch 8

ARTICLES

BANKING SECTOR REFORMS:A Journey, not a Destination 10

The Changing Paradigm for Financial Inclusion 13

Recent Changes to the Debt RecoveryRegime in India 19

Why we need to worry about Indian banking 21

ABCD of MSME Credit 23

FTAPCCI EVENTS 28

FORTHCOMING EVENTS

Seminar on E-COMMERCE 31

FTAPCCI Expert Committees NominationsRequested 32

Circulars 33

CPI Points for Telangana and AP 37

4 || FAPCCI Review || Aug 31, 2016

FTAPCCI

From President’s Desk

Dear FTAPCCIates,

FTAPCCI welcomes the passage of The Constitution (122nd) AmendmentBill, 2014 for Goods and Services Tax. The government is looking at rollingout the country’s biggest indirect tax reform from April 1, the start of thefiscal. However, this will be an uphill task to the Govt. to implement. Theindustry wants the GST to be introduced at the earliest in view of its benefitsto all stake holders, with clarity in all aspects of the law. The Governmentand Empowered Committee (EC) should give adequate time for preparationfor its smooth transition, considering significant increase in documentaryrequirements and digitization of the entire GST process. Trade and Industryhas to gear up and need to be more computer system competent after theGST rolls out.

GST will be a good opportunity for the manufacturing companies fromTelangana and Andhra Pradesh, who have historically done business inintegrated Andhra Pradesh, the cascading effect of CST will be nullified byGST. This will also be a big in road of business into the neighboring TamilNadu and Karnataka markets, where low tax regime exist now than inTelangana and Andhra Pradesh.

Manufacturing has emerged as one of the high growth sectors in India. The‘Make in India’ program is intended to place India on the world map as amanufacturing hub and give global recognition to the Indian economy. India’sranking among the world’s 10 largest manufacturing countries has improvedby three places to sixth position in 2015. The Government of India has setan ambitious target of increasing the contribution of manufacturing output to25 per cent of Gross Domestic Product (GDP) by 2025, from 16 per centcurrently. India is an attractive hub for foreign investments in themanufacturing sector. The impetus on developing industrial corridors andsmart cities will ensure holistic development of the nation. The industrialcorridors would further assist in integrating, monitoring and developing aconducive environment for the industrial development and will promoteadvance practices in manufacturing.

MSME sector is crucial for the success of the national agenda of FinancialInclusion. There is a need to create an ecosystem which can facilitatehandholding and nurturing of MSME units particularly at the nascent stages.Also, there is a need to eliminate a host of impediments – of permits,inspections, red tapism and provide a set of enablers like skill development,infrastructure, markets, technology. However, of all the enablers, probablynone is more important than the Credit flow to the industry. Credits to MSMEsfrom the formal financial channels would make these businesses sustainable

The ‘Make in India’

program is

intended to place

India on the

world map as a

manufacturing hub

and give global

recognition to the

Indian economy.““


FTAPCCI

Ravindra Modi

and help them to grow. Key steps are also required in the directionof supporting the industry in distress and the issuance of guidelineson the Framework on Revival and Rehabilitation. This will providean institutionalized framework for rehabilitation of enterprises whichare potentially viable, but are under temporary duress. FTAPCCI isplaying a significant role in linking and also by spreading awarenessabout various facilities available/ guidelines issued by the regulatorsto bridge the information asymmetry.

FTAPCCI Centenary Celebrations are under in a big way and I amhappy to mention that Hon’ble President and the Chief Minister ofAndhra Pradesh have readily agreed to address the members ofFTAPCCI and share their vision for economic development. Severalevents have been planned in different areas and I request everymember to actively participate and make the centenary year amemorable one.

FTAPCCI welcomes the signing of agreements between Telanganaand Maharahstra related to irrigation projects, paving the way tosolving a long-drawn row over sharing of waters. It is expected toprovide water to 40 lakh acres of land in Adilabad, Karimnagar,Medak, Nalgonda, Nizamabad and Warangal districts and wouldhelp in improving the agri productivity.

Telangana and Andhra Pradesh Governments have taken initiativesto hone the skills of students and make them employable. Skilldevelopment is the need of the hour and it held special significancein the Indian context, as the country is going through a favorabledemographic phase. However, there is a need to strengthen thelinks between education, employable skills and jobs to work wellboth from the perspective of a young working population as well asa competitive advantage for the country. In this direction, FTAPCCIis working closely with Universities/Educational Institutions bybonding strong linkages with industry and academic institutions forthe benefit of both. The industry can utilize the knowledge hub bygiving the industry centric projects to the students & in turn students& academician understand the present need of the industry.FTAPCCI will also act as a bridge between Govt. & academicinstitutions for various surveys & research.

I welcome your suggestions and feedback on the articles moreparticularly on the events/activities that we should plan and alsoinvite your ideas which may help the FTAPCCI members, for theirgrowth and development.

Let us make this year as a memorable and eventful year.

MSME sector is crucial

for the success of the

National agenda of

Financial Inclusion.

There is a need to

create an ecosystem

which can facilitate

handholding and

nurturing of MSME

units particularly at

the nascent stages.“

“


FTAPCCI

Hydel firm responsible for 2013 flood in Srinagar:NGT

Holding a private hydroelectric company responsiblefor aggravating the situation during the 2013 flash floodin Srinagar town, the National Green tribunal (NGT)has directed GVK-Alaknanda Hydro Power companyto pay Rs 9 crore as compensation to flood-affectedresidents of the town in Pauri district for damage causedto properties and also for the restoration of flood-affected areas.

Thousands of metric tons of muck swept by strongcurrents of the river Alaknanda during the torrentialrain on June 16 and 17 caused massive destruction inthe town. The NGT found the company responsiblefor not disposing of the muck and debris generated dueto the construction work for the 330 MW Srinagarhydroelectric project as per the guidelines. Whentorrential rains lashed the town on June 16 and 17, 2013,the gates of the dam were closed because of whichthe reservoir got filled up.

Later, when the gates of the dam were opened suddenly,a huge volume of water gushed out and flooded someareas of the town. The force of the water was so greatthat it swept the debris and muck and deposited themin the flooded areas.

http://energy.economictimes.indiatimes.com/news/power/hydel-

firm-responsible-for-2013-flood-in-srinagar-ngt/53852944

OMCs shut biodiesel joint ventures due to lackof commercial viability

Once touted as the fuel of the future, biodiesel, extractedfrom jatropha seeds, has lost its sheen for oil marketingcompanies. Due to lack of availability and commercialviability, the three oil marketing companies (OMCs)—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp.Ltd (BPCL) and Hindustan Petroleum Corp. Ltd(HPCL)—have shut down the joint ventures companiesthey had started for jatropha cultivation to manufacturebiodiesel.

Oil extracted from seeds of the jatropha plant, whichcan grow on wasteland across the country, is blendedwith diesel to manufacture biodiesel. Biodiesel is alsoproduced with vegetable oils, the primary feedstock forthe fuel, which is scarce.

Biodiesel was considered the answer to diesel’s pollutingnature and thus was considered an attractive alternative

fuel option. IOC, HPCL and BPCL had in 2008-09planned to take up cultivation of jatropha across morethan 180,000 acres in the states of Chhattisgarh,Madhya Pradesh and Uttar Pradesh.

IOC and HPCL had formed a joint venture with theChhattisgarh State Renewable Development Agency(CREDA) to take up large-scale jatropha farmingacross 74,100 acres and 37,000 acres, respectively.

“IndianOil CREDA Bio-Fuels Ltd has not beenincorporated in the preparation of consolidated financialstatements as the management has decided to exit fromthese entities and provided for full diminution in thevalue of investment,” said IOCL in its 2015-16 annualreport.

The joint venture was incorporated in February 2009with Indian Oil and CREDA holding 74% and 26%equity, respectively. So far, IOCL has planted jatrophain 8,000 hectares—for biofuel production in the statesof Chhattisgarh, Madhya Pradesh and Uttar Pradesh.

HPCL in its annual report said, “During 2015-16, inview of non-viability of operations, all business activitiesof CREDA HPCL Biofuel Ltd (CHBL) includingcultivation and maintenance of Jatropha plantationshave been suspended.” HPCL holds 74% in CHBLwhile CREDA holds 26%.

BPCL which had formed a company called BharatRenewable Energy in 2008 for its biofuels needs andhas shut down the same. “Due to non-viability, theoperations of this company have been closed downfrom September, 2014,” BPCL said in its 2015-16annual report.

Bharat Renewable Energy was set up in associationwith Hyderabad-based Nandan Biomatrix—a researchand development company—and Shapoorji Pallonji Co.,for producing bio-diesel from jatropha in Uttar Pradeshacross 70,000 acres. The company had plans to investRs.2,200 crore in the next seven years to produce 1million tonnes of bio-diesel from jatropha plantations.

India, which imports 80% of its oil consumption,envisaged blending of bio-diesel with diesel as ameasure to cut the import dependence on fossil fuel,enabling it to reduce the oil import bill. The country istargeting a more than seven fold expansion in itsbiofuels market over the next six years, oil ministerDharmendra Pradhan had said on 10 August.


FTAPCCI

Blending 5% of biodiesel with regular diesel and 10%ethanol with petrol could boost the market to Rs.50,000crore by 2022, from about Rs.6,500 crore currently. Toexpand its biofuels market in six years, India wouldneed 6.75 billion liters of biodiesel and 4.5 billion litersof ethanol, Pradhan had said.

An industry analyst who offers solutions to bio-ethanoland bio-diesel manufacturing plants, said claims byscientists that jatropha could be planted without wateron barren land misled many entities.

“A jatropha tree takes seven-eight years to grow. Thusthe gestation period is long. Besides, there wereassumptions that jatropha should be grown on barrenland. Though Jatropha survived without water, it didnot yield oil. The assumption that it would give oil evenwithout irrigation was misleading. No wonder theventures of these companies has gone kaput,” he said.

http://www.livemint.com/Industry/YEFSwu07x2GzwzspmSmIoO/OMCs-shut-biodiesel-joint-

ventures-due-to-lack-of-commercial.html

HPCL board gives nod for Visakha Refineryexpansion

The Hindustan Petroleum Corporation Limited (HPCL)board has given the go ahead for expansion of its VisakhRefinery in the city. The project envisages expansionof capacity from the current 8.33 mmtpa (million metrictonne per annum) to 15 mmtpa and is expected to bridgethe product gap between the refining and marketingvolumes of HPCL.

According to HPCL, the project would involve a totalcapital cost of Rs 20,928 crore and would have bottomupgradation facility that will improve distillate yield ontotal refining capacity and thereby improve the GRM(gross refining margin). According to sources, theconstruction phase of the project is expected to takearound 48 months.

http://energy.economictimes.indiatimes.com/news/oil-and-gas/hpcl-board-gives-nod-for-visakh-

refinery-expansion/53841315

Government distributes over 15 crore LED bulbsunder DELP scheme

Domestic Efficient Lighting Scheme (DELP) hastouched a new milestone with the distribution of 15 croreenergy efficient LED bulbs to households via discoms.

These 15.10 crore LED bulbs will help in saving of53.74 million units of electricity per day and Rs 21.49crore daily, stated information updated on UJALA webportal. According to information provided on thewebsite, these 15.10 crore bulbs will help avoiding

around 4,000 MW peak demand of electricity andreduce 43,534 tonnes of carbon dioxide per day. UnderDELP, the government wants to replace all the 77 croreincandescent bulbs sold in India with LED bulbs. Thiswill result in reduction of 20,000 MW load, energysavings of 105 billion KWh and Green House Gas(GHG) emissions savings of 80 million tonnes everyyear.

The annual saving in electricity bills will be Rs 40,000crore, considering an average tariff of Rs 4 per kWh.Each LED bulb helps a consumer save anywherebetween Rs 160 to Rs 400 every year and has a lifeexpectancy of 25,000 hours, thus making the costrecovery lesser than a year.

For availing the scheme, the customer needs to providea copy of the latest electricity bill, along with a copy ofID proof to discoms. The LED bulbs are also madeavailable through other channels by Energy EfficiencyServices Ltd. Prime Minister Narendra Modi hadlaunched the scheme last year in January.

Railways move on coal tariff likely to drive inflation

Faced with decline in freight earning, railwaysrationalised coal tariff on 23rd August by reducing therate for long-distance transportation and increasing itfor short distances which is likely to push up inflation.

The transporter has also imposed Rs 55 per tonne coalterminal surcharge at loading and unloading for distancebeyond 100 km. “ The new coal loading rate effectivefrom today (Tuesday) will be less by 4% to 13% forcoal transportation beyond 700 km,” said railway boardmember (traffic) Mohammed Jamshed. The rate hasbeen hiked by 7% to 13% for transportation between200 km and 700 km distance, he told agencies.

There will be no change for transportation up to 200km.As per the new rate, coal loading would cost Rs712 per tonne for transportation upto 497 km now asagainst Rs 702. It will be Rs 2,138 per tonne for 1,807km transportation now as against the existing rate ofRs 2,348. The state-run transporter’s move is anattempt to arrest the decline in freight revenues whichhas seen a 7.74% fall in July, compared with the sameperiod a year ago. Coal loading also witnessed a declinein the last four months. While the coal loading targetwas 200 million tonnes for April-July period, railwayshas carried only 177 MT during this period.

“The aim is to increase the coal loading volume as “Coalrakes are lying idle so there is a need for raterationalisation.”

Source: ETEnergyworld.com | New Delhi, 25th August, 2016


FTAPCCI

Gross NPAs of banks nearly double to 8.7% inQ1: S S Mundra

Reserve Bank Deputy Governor S S Mundra todaysaid level of stressed advances in banking sector hasrisen to 12 per cent as gross non-performing assetsnearly doubled to 8.7 per cent in June quarter.

System-level stressed advances, which includesGNPAs and restructured standard advances duringMarch 2016, were 11.4 per cent, while they were 10.9per cent as of March 2015.

Reeling out the numbers, he said stressed assets ofpublic sector banks have jumped to 15.4 per cent in theJune quarter as against 14.4 per cent in March 2016and 13.2 in March 2015.

“The level of stressed advances, which include NPAsand restructured assets for the industry, is around 12per cent, but for the public sector banks it is around15.4 per cent as of June 2016,” Mundra said at a bankingevent. Gross non-performing assets of scheduledcommercial banks almost doubled to 8.7 per cent in thequarter to June compared to 4.6 per cent in March2015 and 7.8 per cent in March 2016, led by publicsector banks.

The situation in public sector banks was the worst withtheir bad loans jumping to 11.3 per cent in June 2016from 9.8 per cent in March 2016 and 5.4 per cent inMarch 2015, he said. Private sector lenders’ bad loanswere at 2.8 per cent in June as against 2.7 per cent inMarch 2016 and 2.2 per cent in March 2015. But theforeign players bettered their asset quality as their grossNPAs improved to 3.7 per cent in June 2016 from 4.2per cent and 3.2 per cent, respectively in March 2016and March 2015.

In the financial year to March 2016, banks’ profitabilitydropped a whopping 59 per cent to Rs 32,285 crorefrom Rs 79,465 crore a year ago, hit by higher nonperforming assets. State-run banks reported a net lossof Rs 20,006 crore in the financial year ended 2015-16as against a profit of Rs 30,869 crore. Private sectorsplayers net profit marginally increased to Rs 39,672crore in March 2016 from Rs 35,832 crore in March2015.

RBI retains ‘too big to fail’ status for SBI,ICICI Bank

The Reserve Bank of India on Thursday retained StateBank of India and ICICI Bank, the nation’s top two

lenders by assets, as “domestic systemically importantbanks”, or the equivalent as “too big to fail” for a secondconsecutive year. The two banks had been assignedthe status last year, the first time the Reserve

The Reserve Bank of India on Thursday retained StateBank of India and ICICI Bank, the nation’s top twolenders by assets, as “domestic systemically importantbanks”, or the equivalent as “too big to fail” for a secondconsecutive year.

The two banks had been assigned the status last year,the first time the Reserve Bank of India moved to sucha classification.

Being named as systemically important imposesadditional capital requirements for the two lenders.

In compiling the list, the RBI considers factors includingsize, complexity, interconnectedness, international linksamong others.

www.financialexpress.com/industry/banking-finance/rbi-retains-too-big-to-fail-status-for-sbi-icici-bank/357825/

RBI curbs large loans to single group

Cuts Cap From 55% To 25% Of Equity Capital AllowsCorp Bonds As Collateral

Mumbai: The RBI on Thursday announced a series ofmeasures to prevent banks from building up largeexposures to a few big corporates and move them tothe bond market. The measures come after a handfulof distressed borrowers wiped out profits of severalbanks due to large loans going bad.

As a first step, the RBI proposed to cap the exposurelimit of banks to a single borrower group at 25% oflenders’ equity capital. At present, banks can go up to55% of their tier-I capital in case of infra loans. In thecase of individual entities, the limit has been raised from15% to 20%. Outgoing governor Raghuram Rajan hassaid that cleaning up bank balance sheets and pushinglarge borrowers to the Bond Market was part of hisunfinished agenda.

Even as the RBI discouraged loans, it announcedmeasures that would help compa- | nies to raise moneyby floating bonds. The RBI has raised the limit forguarantees that banks can provide to bond offerings.The central bank also proposes to allow corporate bondsas a collateral for short term borrowing under repo —a mechanism where bonds are sold and bought backat a predetermined price. To bring in new foreign


FTAPCCI

investors, the RBI said that it would allow foreigninvestors to directly trade in corporate bonds.

Rajan has been asking banks that they should build upskill in lending to retail and SMEs to reduce risk. Bylinking the exposure limit to capital, it proposes to preventsmaller banks from giving chunky loans. Gross NPAsof public sector banks stand at 11.3% of their loansdue to their exposure to large corporates. Private bankshave an NPA ratio of 2.8% due to their focus on retailand SMEs.

To help banks improve their capital base, the RBI saidthat lenders would be allowed to float rupee-denominated perpetual debt instruments overseas whichwould qualify as tier-I or tier-II capital. “The proposalto allow banks to issue rupee bonds for tier-I and IIcapital for financing infrastructure projects augurs wellfor the economy,” said Munesh Khanna, partner, PWC.

According to Karthik Srinivasan, Sr VP at ICRA, thepermission given to banks to issue ‘Masala Bonds’would create a market for rupee-denominated bonds.‘Masala Bonds’ are instruments through which Indiancorporates can raise funds overseas in rupee. Liquiditywould also improve in the domestic bond market asbrokers have been allowed to trade directly ongovernment securities and foreign portfolio investorsin corporate bonds.

http://timesofindia.indiatimes.com/business/india-business/RBI-curbs-large-loans-to-single-group/

articleshow/53864615.cms

Provide loans to women SHGs at 7%: RBI tobanks

The Reserve Bank asked banks to provide loans towomen self-help groups (SHGs) at 7 per cent perannum, as per the government’s revised guidelines for2016-17.

“All women SHGs will be eligible for interest subventionon credit up to Rs 3 lakh at 7 per cent per annum (underDeendayal Antyodaya Yojana-National RuralLivelihoods Mission). SHGs availing capital subsidyunder SGSY in their existing credit outstanding will notbe eligible for benefit under this scheme,” RBI said ina notification.

The banks will lend to all the women SHGs in ruralareas at 7 per cent in 250 districts, it said.

“Further, the SHGs will be provided with an additional3 per cent subvention on the prompt repayment of loans.For the purpose of interest subvention of additional 3per cent on prompt repayment, an SHG account willbe considered prompt payee if it satisfies the followingcriterion as specified by RBI,” it added

http://economictimes.indiatimes.com/industry/banking/finance/banking/provide-loans-to-women-shgs-at-7-rbi-to-banks/

articleshow/53863455.cms

Vizag Steel Quality Circle bags gold medals

Vizag Steel Quality Circle (QC) has bagged three QCteams and two Kaizen team gold medals at InternationalLevel Convention on Quality Control Circles (ICQCC-2016) which is being held in Bangkok, Thailand, fromAugust 23 to 26 by the Association of QC headquartersof Thailand.

The top three QC teams from Vizag Steel Plant whichare Moksha from Wire Rod Mill, Tarun from PowerEngineering Maintenance (PEM) and Saraleekaranfrom Blast Furnace presented their case studies duringthe convention.

http://www.newindianexpress.com/states/andhra_pradesh/Vizag-Steel-Quality-Circle-bags-gold-medals/2016/08/26/

article3597136.ece

Banks unaware of SME issues, says NirmalaSitharaman

After pitching for a two per cent cut in RBI’s interestrate, Commerce Minister Nirmala Sitharaman has saidbanks have not sufficiently understood the problemsfaced by small and medium enterprises (SMEs),especially those related to high credit costs.

Responding to Twitterati on the issue, the minister said:“The argument here is 1. Banks haven’t beenunderstanding enough of #SMEs. 2. High interest ratesfor long period.”

Interest rate

Demanding a lower interest rate regime, Ms.Sitharaman had said last week: “I still hold that thecost of credit in India is high...Undoubtedly, particularlyMSMEs, which creates a lot of jobs contribute toexports... are all hard pressed for money and for them,approaching a bank is no solution because of theprevailing rate of interest. I have no hesitation to say,yes 200 basis points, I would strongly recommend,”she said.

Ms. Sitharaman also wanted the banks to entirely passthe benefits arising from RBI’s lower interest rateregime to the industry. She said she will ask the financeministry to raise the issue with the RBI and banks.

Citing rising inflation, RBI has kept its key interest rateat 6.5 per cent since April this year. The central bankis slated to hold its next policy review on October 4.

Source: http://www.thehindu.com/business/Economy/banks-unaware-of-sme-issues-says-nirmala-sitharaman/

article9043059.ece


FTAPCCI

BANKING SECTOR REFORMS: A Journey, not a Destination

Dignitaries on the dais; colleagues from the bankingand financial sector; members of the print and electronicmedia; ladies and gentlemen! At the outset I thank theManagement of the Governance Now, one of thecountry’s leading publications shaping the public opinionon governance and public policy, for inviting me todeliver the inaugural address at this India BankingReforms Conclave 2016. I feel this conclave comes ata very important juncture for the economy and moreparticularly, for the banking sector.

The title of my speech today is “Banking SectorReforms: A Journey, Not A Destination.” Why do I sayso? It would be relevant here to peep into some history.Though some of the issues cut across the bankingindustry, the emphasis here is predominantly on publicsector banks (PSBs).

* PSBs came into existence with nationalizationin the year 1969/1980. How was the bankingscenario in the next couple of decades?

- Highly regulated credit flow (selective credit control,credit authorization scheme, no consumption credit& so on)

- Militant unionized atmosphere- resistance totechnology

- Stiff branch authorization norms, loan melas, opaqueincome recognition & asset classification (IRAC)norms ….Just to name a few.

* Post-reform years (after 1991) saw several far-

* Shri S.S.Mundra

reaching reforms in banking industry also. A few ofthese include:

- Deregulation of credit processes and interest ratestructures

- Introduction of prudential IRAC norms

- Licensing of banks in the private sector/partdivestment in PSBs

- Migration to CBS

- VRS(year 2001)

- Gradual reduction in pre-emptions

* Resultantly by the year 2008, banks’ balancesheets were much stronger/growth was strong/NPAs had come down from the peak of around12% to slightly over 2%

* Then two developments took place:- Global Financial Crisis- Introduction of PPP model in Infrastructure

building

Banks were enthusiastic, rather major partners, in thisnewly opened field supported by accommodative fiscaland easy monetary policies. However, the process gotplagued by:

- Weak governance, lax underwriting, highcorporate leverage, several policy logjams

- Resultant consequences are well known

Fast Forward to June 2016Asset Quality

Mar-15 Mar-16 Jun-16 Mar-15 Mar-16 Jun-16 Mar-15 Mar-16 Jun-16

PSBs 5.4 9.8 11.3 7.8 4.6 4.1 13.2 14.4 15.4Pvt. SBs 2.2 2.7 2.8 2.4 1.8 1.6 4.6 4.5 4.4FBs 3.2 4.2 3.7 0.1 0.3 0.3 3.3 4.5 4.0All SCBs 4.6 7.8 8.7 6.3 3.7 3.3 10.9 11.4 12.0

BankGroup

Gross NPAs to GrossAdvances (%)

Stressed Advances(GNPAs+RestStdAdv) toGross Advances (%)

Restructured Std Advto Gross Advances (%)


FTAPCCI

PSBs 0.43 (0.26) 127,419 124,810 57,842 1,44,608 30,869 (20,006)

Pvt. SBs 1.65 1.54 66,208 79,858 12,953 20,099 35,832 39,672

FBs 1.82 1.67 25,192 25,160 3,092 5,923 12,764 12,619

All SCBs 0.78 0.29 218,819 229,829 73,887 1,70,630 79,465 32,285

Mar-15 Mar-16 Jun-16 Mar-15 Mar-16 Jun-16 Mar-15 Mar-16 Jun-16

PSBs 5.4 9.8 11.3 7.8 4.6 4.1 13.2 14.4 15.4

Pvt. SBs 2.2 2.7 2.8 2.4 1.8 1.6 4.6 4.5 4.4

FBs 3.2 4.2 3.7 0.1 0.3 0.3 3.3 4.5 4.0

All SCBs 4.6 7.8 8.7 6.3 3.7 3.3 10.9 11.4 12.0

BankGroup

Gross NPAs to GrossAdvances (%)

Stressed Advances(GNPAs+RestStdAdv) toGross Advances (%)

Restructured Std Advto Gross Advances (%)

BankGroup

Profitability

Return on TotalAssets(annualized)

Earning BeforeProvisions &Taxes (EBPT) FY

Provisions forNPAs during theyear

Net Profit/Loss (PAT)

Mar 15 Mar 16 Mar 15 Mar 16 Mar 15 Mar 16 Mar 15 Mar 16

Source: OSMOS returns, Domestic Operations, Figures for Jun-16 are provisional.

* To be fair to the sector, some of the events wereexternal & hence, not in control of the Bankmanagement. But the important lesson is unambiguous:

“In absence of strong structural and Governancereforms, consistency of the performance wouldalways remain susceptible to such events”

* Such reforms in private sector banks have to befocussed on misaligned incentives/compensations

Agenda for PSBs is much larger, however, theimmediate and overriding priority is to complete theclean-up of the banks’ balance sheets which isunderway

* Resultant provisioning needs coupled with meetingBasel III norms/migration to IFRS & to capture duemarket share in growth funding would entailrecapitalisation of most of these banks. Seeking thiscapital externally at this stage may be difficult as alsovalue eroding for the majority owner.

* Simultaneously process has to continue to bestowgreater “Governance Autonomy” to these banks. Mysense is that the Government ownership of these bankshas resulted in crucial stability and resilience in tryingtimes. Immediate roadmap should, therefore, be towards

complete “managerial autonomy”. If Governmentremains the largest shareholder, not necessarilymajority shareholder, it still serves the intended purpose.At the same time, it releases these banks from multi-institutional oversights and overlapping controls.

* HR autonomy would naturally flow from theabove. Banks would be able to move towardscompetitive compensation, flexible hiring and moveaway from the “collective bargaining”-just to quote afew from many possible outcomes.

* There could be a reasonable apprehension thatsuch measures can adversely impact the objectives ofinclusive growth being attempted through severalnational missions and schemes. I would argue thatadvent of several new institutions (as recently licensedby RBI), new processes, digital advancements &competition would ensure that these objectives are wellsupported.

* Similarly, some of the reforms are driven by aglobal reform structure. These pertain to capital, liquidityand disclosure standards under the Basel III package.Some such other measures are TLAC, SIBs,Misconduct rules, etc. Few other


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measures are currently under discussion, such as,imposing risk weight on sovereign exposure and newstandardised approach for credit and operational risk.

Having dealt with the framework of macroreforms, let me now briefly touch upon nuts andbolts of the reform process.

Governance in Banks

� Some action already taken- Setting up of BBB, postof CMD split into a non- executive Chairman and aCEO, Selection process made more objective

� Going forward, BBB should also cover selection ofother Board members

� Continuity of Top Management is crucial, hencereasonably longer tenure for CEO (say 5 years) isnecessary. Initial appointment could be for 3 years withcertain set milestones, which if achieved , should earnautomatic extension for next 2 years

� An orderly succession plan is crucial to ensure noabrupt changes in key direction of the organization

Apart from the whole gamut of credit risk, which isalready discussed extensively several times and atseveral places, the following are the other areas needingprior attention of the Boards.

Operational Risks

� Fraud cases – Recurrent failure of internal controlmachinery noticed, Delayed Recognition and laxity infollow up leads to cold trails, Need to bring fraudstersas also errant valuers, accountants , lawyers to book tostop them from duping the system in future

� Fraud Registry and a Quick Response Team set upat RBI to facilitate information –sharing and for closelytracking high-value fraud cases

� KYC/AML Compliance failures – Stricterenforcement action a global norm now, StrongCentralized processing and surveillance needed asbranches do not have the capability to handle such areaseffectively.

Customer service

� Charter of customer Rights- RBI’s Observanceperiod now over, Implementation monitoring a priority

� Mis-selling- Risk of silent customer simply movingaway as account number portability is now a realpossibility

Technology: Cyber/Digital

� Digitization/ Fintech driving new possibilities in thefield of finance

Technology, a double edged sword - instances of cyber-attacks, identity thefts, ATM frauds etc. BangladeshBank case and other near-misses

Hence, Bank Boards would do well to focus onthe following Governance issues:

� Strategy and Risk Management are two mostimportant and least focussed items

� Boards should set the “ Risk Appetite” and ensureadherence- Importance of

3 lines of defence- Business verticals themselves/ RiskManagement Department and Compliance / InternalAudit

� Hiring/Grooming/Retention of frontline staff... e-learning for capacity building

� Instil Organisational Culture (what you do when noone is watching)

� Put an enabling mechanism to ensure that voice ofmiddle/lower level functionaries reaches the Top quickly(G-30 Report)

� Bad news should travel faster

Conclusion

Reform measures especially on Governance haveachieved traction and attained a certain degree ofmaturity. Need now is to accelerate this process onthe lines as covered in various preceding points.

Thank the Governance Now management forinviting me to this event and providing me anopportunity to share my thoughts with this intelligentaudience.

* Special Address by Shri S.S.Mundra, Deputy Governor,Reserve Bank of India at India Banking Reforms Conclave

2016 organized by Governance Now in Mumbaion August 24,2016.


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The Changing Paradigm for Financial Inclusion* Dr. Raghuram Rajan

Thank you for inviting me to address this seminar onequity, access, and inclusion. Financial inclusion is about(a) the broadening of financial services to those peopleand enterprises who do not have access to financialservices sector ; (b) thedeepening of financialservices for those who haveminimal financial services;and (c) greater financialliteracy and consumerprotection so that those whoare offered financial productscan make appropriate choices.The imperative for financialinclusion is both a moral oneas well as one based oneconomic efficiency. After all,should we not give everyoneaccess to the services we allin this room enjoy? Moreover,if everyone had the tools andresources to betterthemselves, would this not increase output, growth, andeconomic prosperity?

It would be fair to say that while we have madetremendous advances since independence, we have stillsome way to go to ensure widespread financialinclusion. What are the economic impediments togreater financial inclusion?

Perhaps the most important is the economic conditionof the excluded. World over, the poor, the small, andthe remote are excluded. It is not just because thefinancial system is underdeveloped, but because theyare hard to service profitably. Nevertheless, this is nota reason to abandon hope, but to ask how we canovercome the impediments in the way of inclusion. Thebest way to characterise the impediments are throughthe acronym IIT: Information, Incentives, andTransaction Costs.

IIT

The excluded may live in remote areas or may belongto communities or segments of society that undertakeeconomic activity informally – they do not maintainrecords or have signed contracts or documentation.They often do not own property or have regularestablished sources of income.

As a result, a banker, especially if as is typical, he isnot from the local region, will have difficulty gettingsufficient information to offer financial products.

A second concern is incentives. For example, loansare easily available only ifthe lender thinks he will berepaid. When the legalsystem does not enforcerepayment quickly orcheaply, and when theborrower does not have anycollateral to pledge, thelender might believe that hewill find it difficult to getrepaid.

The third impediment istransactions costs. Since thesize of transactions by thepoor, or by micro farmers orenterprises is small, thefixed costs in transacting are

relatively high. It takes as much time helping a clientfill out the forms and to provide the necessarydocumentation if he is applying for a loan for Rs. 10000as it takes to help another one borrow Rs. 10 lakhs. Abanker who is conscious of the bottom line wouldnaturally focus on the large client in preference to thetiny one.

How does the moneylender manage?

One of the primary motivations for the country to pushfinancial inclusion is to free the excluded from theclutches of the moneylender. How does themoneylender boldly lend where no banker dares to lend?Because he does not suffer the same impediments!Coming from the local community, the sahukar is wellinformed on what everyone’s sources of income andwealth are, and how much they can repay. He is quitecapable of using ruthless methods to enforcerepayment. Moreover, the borrower knows that if hedefaults on the sahukar, he loses his lender of lastresort. So the borrower has strong incentives to pay.Finally, because the sahukar lives nearby and usesminimal documentation – after all, he is not going touse the courts to force repayment — loans are easilyand quickly obtained. In an emergency or if the poorneed to borrow on a daily basis, there are few more


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readily available alternatives than the moneylender. Nowonder he has so many in his clutches.

How then should public policy approach this problem?I will now describe three approaches: mandates andsubventions, transforming institutions, and moving awayfrom credit.

Approach 1: Mandates and Subventions

One approach is to push formal institutions into reachingout to the excluded, even if it is unprofitable. This iswhy, for example, we mandate that banks allocate acertain fraction of their loans to the “priority sector”and that they open 25 percent of their branches inunbanked areas. There are also interest subventionsthat are made available for loans to particular sectors.Furthermore, banks have been urged to open bankaccounts for all under the Pradhan Mantri Jan DhanYojana (PMJDY), while today they are being exhortedto make loans to small businesses under the MudraScheme.

Because there are positive social benefits to financialinclusion that are not captured by the service provider(what economists call “externalities”), such mandatesare reasonable from a societal perspective. Forinstance, the higher familial and community status afarm worker gets from starting her own poultry farmand contributing to the family income may, on net,outweigh the costs the bank incurs on making the loan.The bank cannot monetise the status benefits, but agovernment can decide those benefits are worthgenerating and mandate them.

In a similar vein, there may be network benefits fromuniversal access – for instance, direct transfer ofbenefits is easier when the vast majority of beneficiarieshave a bank account, and the accounts themselves willbe used heavily when account to account transfers aremade easier through mobile phones via the soon-to-be-introduced Unified Payment Interface (UPI). Mandatedaccount opening essentially creates the universalnetwork with its associated positive networkexternalities.

There are, however, a number of risks emanating frommandates. The first is that there is no market test ofusefulness, and indeed, these may not be possible –how does one measure the value of the enhanced socialstatus of the poultry farmer? So mandates are drivenby the beliefs of the political leadership, and may persista long time even if they are not effective. Furthermore,some vested interests may benefit from specificmandates and push for their perpetuation long after they

have ceased being useful. Bankers themselves, seeinglittle profit in obeying the mandate, will try and “achieve”it at least cost by targeting the most accessible andleast risky in the eligible category, and even mislabelingnormal activity so that it fits in the eligible list. Finally,some mandates fall primarily on the public sector banks.As competition reduces their profitability, their capacityto carry out mandates and still earn enough to survivediminishes.

So while acknowledging the value of mandates at theRBI, we have tried to make them more effective. Forexample, the list of sectors eligible for priority sectortreatment has been revised, with an emphasis ontargeting the truly excluded. Specifically, the share ofadjusted net bank credit (ANBC) that has to go to smalland marginal farmers (including share croppers) is setat 8 percent for March 2017, and that for microenterprises set at 7.5 percent. At the same time, thescope for banks to meet priority sector norms withoutlending to the truly excluded has been reduced. Forexample, large loans to firms producing agriculturalproducts no longer qualify. Also, banks are now requiredto meet their targets at the end of every quarter, ratherthan at the end of the year, which reduces the scopefor window-dressing with short-term end-of-year credit.Finally, Priority Sector Lending Certificates, whichallow a lender to “sell” any over-achievement inparticular categories to others who are deficient, arenow being traded, thus encouraging those who have abetter capacity to make such loans to do so. All in all,the priority sector mandate is now not only bettertargeted at the truly excluded, but will be deliveredmore efficiently.

Mandates are not costless. Rather than forcing banksto recover costs by overcharging ordinary customers,or by demanding recapitalisation by the government,better to bring the costs into the open by paying for themandate wherever possible. So, for instance, accountsor cash machines opened in remote areas could attracta fixed subsidy, which would be paid to anyone whodelivers them. Not only will the cost of the mandatebecome transparent and will be borne by the authorities,thus incentivising them to make sensible decisions abouthow long to impose the mandate, the mandate can bedelivered by the most efficient service providers,attracted by the

subsidy. This is why the RBI today explicitly subsidisescash recyclers set up in underserved areas, and whycentral and state governments are paying banks formaintaining and servicing specified accounts. Goingforward, narrow targeting of mandates to the truly


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underserved and explicit payment for fulfilling themandate so that they are delivered by the most efficientshould be the norm.

Approach 2: Creating the Right Institutions

As I argued earlier, the moneylender is particularlyeffective because he knows the neighbourhood and itspeople, and can make a good assessment of who iscredit worthy. A large national bank with a local branchsuffers from two infirmities. First, the branch managerhas typically been recruited through an all-India exam,is from a different state, and typically is not intimatelyfamiliar with the local people. While many good branchmanagers do indeed learn about the community, somedo not. The higher socio-economic status of bankofficers also creates a distance with the poorersegments of the community, and their high salary makesmany branches in remote areas economically unviableeven if they could solicit business intelligently. Finally,given that the excluded do not have formal documents,bank managers in large banks with bureaucraticcentralised procedures find it hard to provide effectiveservice – how does one convey to head office therationale for a loan to an intelligent enthusiastic tribalwho wants to set up a small shop, but who has noformal education or track record?

Local financial institutions, with local control and staffedby knowledgeable local people, could be more effectiveat providing financial services to the excluded. HDFCBank, for example, has been very successful growingits loan portfolio in Kashmir by recruiting local youthas loan officers. Certainly, this is also the obvious lessonto be drawn from the success of micro financeinstitutions, who combine their local knowledge withstronger incentives for repayment through peer pressureand frequent collection of repayments. Indeed, this wasalso the rationale for local area banks, regional ruralbanks, and is a strong feature in the cooperativemovement.

Yet, while there have been some grand successesamong these institutions, each form has somedeficiencies. Micro finance institutions do not haveaccess to low cost deposit financing, thoughsecuritisation of loans has been a growing avenue offinance. Local area banks could not expand out of theirlocal area, exposing them to the geographicalconcentration risks. Regional rural banks agitated forparity in salary structures with parent scheduledcommercial banks, and having achieved parity, find thattheir costs are not optimally suited for the clientele theyneed to service. There are some very successful

cooperative banks, on par with any universal bank, butfar too many suffer from governance problems. TheRBI has been engaged in bringing stronger governanceto urban cooperative banks, but split supervision withstate authorities limits how much it can do.

To provide an alternative institutional avenue for thesecategories of institutions to fulfil their mission, the RBIhas created a new institution called the small financebank, where “small” refers to the kind of customer thebank deals with, not its size. With 75% of the loansmandated to be below 25 lakhs, the small finance bankis intended to provide services to the excluded. Thusfar, the licenses have been largely given to micro-finance institutions and one local area bank, but thereis no reason why these cannot be given to regionalrural banks and co-operatives in the future. The hopeis that these institutions will maintain a low coststructure, augmented by technology, to provide a menuof financial services to the excluded.

New institutions can also help ease the flow of credit.For instance, credit information bureaus have helpedtremendously in solving both the information andincentive problem in retail credit. When an individualknows that a default will spoil their credit rating andcut off future access to credit, they have strongincentives to make timely payments. In rural India, weneed to expand the reach of credit bureaus, includingby bringing borrowing under Self Help Groups into theirambit. The use of Aadhaar in identifying individualswill also help eliminate duplicate records, while makingexisting records more accurate. Going forward, by theend of the year, the Credit Information Bureau of Indiawill start providing individuals with one free credit reporta year, so that they can

check their credit rating and petition if they see possiblediscrepancies. An important proposal by thegovernment is to give small businesses “UdhyogAadhaar” numbers, which are unique IDs tied to boththe entity as well as the promoter. Such IDs could allowsmall firms to build credit histories with credit bureaus,especially as the histories are tied to specific promoters.

Land is often the single most valuable source of wealthin rural areas. The digitisation of land records,accompanied by a guarantee of certificates of finalownership by the state government, as proposed inRajasthan, will ease the use of land as collateral againstwhich funds can be borrowed. Even a formalrecognition of share cropping agreements, as in thepattas registered by the state government in AndhraPradesh, could ease access to credit for share croppers.


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As a final example, MSMEs get squeezed all the timeby their large buyers, who pay after long delays. Allwould be better off if the MSME could sell its claim onthe large buyer in the market. The MSME would getits money quickly, while the market would get a claimon the better rated large buyer instead of holding aclaim on the MSME. All this will happen as the threeTrade- Receivables Discounting Systems (TReDS)which the RBI has licensed, start later this financialyear. The key is to reduce transaction costs byautomating almost every aspect of the transaction sothat even the smallest MSMEs can benefit.

Approach 3: Don’t Start with Credit

We have been trying for decades to expand credit. Wehave focused much less on easing payments andremittances, on expanding remunerative savingsvehicles, or on providing easy-toobtain insuranceagainst crop failures. In the emerging financial inclusionparadigm, the Government and the RBI are trying toexpand inclusion by encouraging these other products,allowing credit to follow them rather than lead. Indeed,many successful organisations working with the poorestof the poor try to get them to put aside some money assavings, no matter how little, before giving them loans.Some of our self-help groups (SHGs) work on thisprinciple. Not only does the savings habit,

once inculcated, allow the customer to handle the burdenof repayment better, it may also lead to better creditallocation.

Easy payments and cash out will make formal savingsmore attractive. Today, a villager who puts money intoa bank has to either trudge the “last miles” to the bankbranch to take out her money, or wait for an itinerantbanking correspondent to come by. We are engaged instrengthening the network of banking correspondents;by creating a registry of banking correspondents, givingthem the ability to take and give cash on behalf of anybank through the Aadhaar Enabled Payment System(which will also give them adequate remuneration), andrequiring that they are adequately trained in providingfinancial services. Cash-in-cash-out points will expandsoon as the Postal Payment Bank and telecom affiliatedpayment banks make post offices and telephone kiosksentry points into the financial system. Perhaps mostinterestingly, transfers from bank account to bankaccount will become easier in a few weeks via mobilethrough the Unified Payment Interface. A villagerneeding to pay a shopkeeper only needs to know thelatter’s alias – say [email protected].

He feeds that into his mobile app, writes the paymentamount, puts in his password, and presses “send” andthe payment is made, with both getting messages tothat effect. Neither needs to visit the bank to take outor deposit money, no point of sale machine is needed.With the price of smartphones falling sharply, we areon the verge of solving the last mile problem.

With the power of information technology, perhaps theanalysis of the savings and payment patterns of a clientcan indicate which one of them is ready to use creditwell. Small businesses, which use the services of anon-line internet platform to sell, can establish a verifiablerecord of revenues that can form the basis for loans.Indeed, we are encouraged by the emergence of fullservice entities that help the small business withmarketing and logistics, while tying up with a financecompany to provide the business with credit. This willhelp the carpet seller from Srinagar advertise his waresto the world, even while expanding his business. Wealso propose to encourage

peer-to-peer lending platforms with light-touchregulation, anticipating that they may have innovativeapproaches to gathering the information necessary tolend.

Some Issues

Having highlighted the various approaches to expandinclusion, let me now focus on some important issuesthat arise in managing the process. These are 1) Knowyour customer requirements

2) Encouraging competition to prevent exploitation 3)Ensuring some flexibility and forgiveness in financialarrangements 4) The need for skilling and support 5)Encouraging financial literacy and ensuring consumerprotection.

Know Your Customer

Missing basic documentation is often an impediment toobtaining financial services. Knowing this, the ReserveBank has steadily eased the required documentationfor basic financial services. For instance, recognisingthat proof of address is difficult, especially for thosemoving location, RBI requires only one documentshowing permanent address be presented. Currentaddress can be self-certified by the account owner,preventing the considerable problems customers facewhen they migrate inside the country. Unfortunately,the RBI’s instructions sometimes do not percolate toevery bank branch – which leads to unnecessaryharassment for consumers, as vividly described by acolumnist recently. Going forward, we have asked the


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Indian Banks’ Association to devise common accountforms, where minimum RBI requirements will beprinted on the back of the form. It will, for instance,become clear, that a very basic account with somerestrictions on amounts and transactions can be obtainedwith no official documents whatsoever.

Competition to Prevent Exploitation

As I have argued, the excluded are typically risky, aswell as costly to service. At the same time, they arealso liable to exploitation because they have so littleaccess. Exploitation may come from a moneylenderwho charges usurious rates, or a banker demandingpersonal gratification for

giving a government-subsidised loan. The fundamentalway to deal with exploitation is to increase competitionamongst suppliers of financial services. Regulation canhelp, but we should be careful that regulation does notshut out competition, thus enhancing exploitation.

Consider two examples:

Politicians are rightfully concerned about the poor beingcharged usurious rates. So they often ask regulators toset interest rate ceilings. Of course, a clever regulatedlender can avoid interest rate ceilings through hiddenand not-so-hidden fees for making the loan. But let usassume the even cleverer regulator can ferret out suchpractices (not always a valid assumption). Nevertheless,there is still a problem. The lender has to recoup notjust the credit risk margin which compensates him forthe higher default risk of lending to those on theeconomic edge, but also the fixed costs of making,monitoring, and recovering small loans. If the interestrate ceiling is set too low, the regulated lender will notbother to lend since it is not worth his while. Withcompetition from the regulated stifled, the poor borroweris left to the tender mercies of the rapacious unregulatedmoneylender. So interest rate ceilings have to have aGoldilocks quality – not so high that they allow theuninformed poor to be exploited, and not so low thatthey kill any incentive the regulated might have to lend.This is the very thin line that the RBI has been followingin setting interest rate ceilings for micro finance firms.As institutional frameworks develop to reduce risk inlending, and as competition amongst lenders increases,we can lower the maximum chargeable rate.

In a similar vein, our regulations sometime prohibit thetaking of collateral for loans below a certain size tocertain borrowers such as students or small businesses.However, if lenders are not forced to lend, theprohibition on taking collateral may lead to borrowers

who can indeed offer collateral being denied a loan.The impossible trinity suggests that you cannot limitinterest rates, prohibit the taking of collateral, and stillexpect the borrower to have the same level of accessto loans. Put differently, unless a regulation mandateslending, which they rarely do, there is always a

risk that ceilings on interest rates or prohibitions ontaking collateral will cut off institutional lending to someof the eligible. Our regulations must be set bearing thisin mind.

One reasonable compromise between protecting thepoor and ensuring they have access is to allow onlyunsecured or collateral-free loans to qualify for prioritysector treatment or interest subventions, but to alsoallow institutions to take collateral if offered on ordinaryloans, provided they have a policy of charging lowerrates on such secured loans. While this may force somewho have collateral to pledge it even if they would nothave to do so under current regulations (albeit withsome compensation in terms of a lower borrowingrate), it mitigates the greater evil of those who havecollateral to offer being denied credit altogether. Thisis certainly an issue we have to reflect on.

Flexibility and Forgiveness

When people complain about the high cost of credit tosmall businesses, they do not realise the biggestcomponent of interest costs is the credit risk margin,not the real policy rate. The credit risk margin is notunder the control of the central bank, it has to be broughtdown by focusing on improving the lending institutionalinfrastructure, as I have argued earlier. However, eventhough a system that allows for strong enforcement ofrepayment reduces the credit risk margin lenderscharge, it also imposes larger costs on unfortunateborrowers. So, for example, should a student whochose the wrong college for studies and ended up havingto pay back huge loans with only a mediocre job bepenalised for life? We need a system that has someflexibility in repayment, so that those who make badchoices or have bad luck can get some relief. At thesame time, they should not escape all responsibility,else we will see people borrowing excessively andmisusing the proceeds, knowing they can get away scotfree.

Keeping this in mind, our master circular on naturalcalamities allows banks to restructure agricultural loanswithout classifying them NPA, provided there arewidespread crop losses in the local area. This preventsindividuals from exploiting the system, while givingcollective relief when


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the area is hit. Similarly, we have advocated that studentloans be structured with an optional moratorium period,so that a borrower can survive periods of unemploymentwithout being permanently labeled a defaulter. Goingforward, we should accept the possibility of individuals,including farmers, declaring bankruptcy and beingrelieved of their debts, provided this remedy is usedsparingly, and the individual chooses bankruptcy as alast choice, knowing he will lose assets and be excludedfrom borrowing for a period.

Skilling and Support

There is a widely perpetuated myth that access tofinancial services is all that is necessary to set a poorfarm worker on her way to riches. This is simply nottrue. Clearly, access to institutional credit can help herpay back a money lender, and thus give her some relief.Access to a bank account can allow her to put asidesome savings, which protects them from the demandsof needy relatives. But to generate income in asustainable way, she needs help – in acquiring the skillsnecessary to raise chicken or cows or grow flowers, inmarketing that product, and in learning how to managefunds. Often, credit offered without such support simplydrives her further into debt.

Sometimes, people learn from neighbours as clustersstart undertaking an activity. Sometimes people alreadyknow a marketable skill and only lack credit to buy thenecessary raw material to produce or expand. Morecommonly, however, those who want to encouragemicro- entrepreneurship have to work on a variety ofsupporting actions other than just credit, especiallyskilling. Fortunately, in India we have a flourishing NGOmovement that often works with the government toprovide the necessary support – as in the Jivika rurallivelihoods program in Bihar. Increasingly, some bankshave adopted a holistic approach to support as theyencourage micro- entrepreneurship. As theGovernment’s Skill India program expands, it willproduce more people who can use credit well. Strongerlinkages between the program and financial institutionswill have to be built.

Financial Literacy and Consumer Protection

Finally, as the excluded are drawn into formal financialservices, they will encounter aggressive selling and insome cases, outright mis-selling. At the Reserve Bank,we are conscious of our need to expand financial literacyso that the consumer is more aware. In the comingweeks, we will be launching a nationwide campaigntrying to impart some basic messages on sound financialpractice. We are also looking to have financial

education included in the school curriculum across thecountry. We need to make a special effort in rural areas.RBI, in June 2012, advised banks to set up FinancialLiteracy centres (FLC) in all the districts of the country.Banks have been further advised to scale up financialliteracy efforts through conduct of outdoor FinancialLiteracy Camps, at least once a month, both by theFLCs and also by all the rural branches. Banks haveso far set up 1,329 FLCs as at the end of December2015.

In 2015, RBI came out with 5 principles that bankshad to follow in dealing with customers. We asked banksto implement this Charter of Consumer Rights, andasked them to appoint an internal ombudsman to monitorthe grievance redressal process. We now will examinehow banks are faring, and whether further regulationsare needed to strengthen consumer protection. We willespecially focus on mis-selling of third party productssuch as insurance, as well as the extension of adequategrievance redressal to rural areas, including throughRBI’s ombudsman scheme.

Conclusion

The country has come a long way in the process offinancial inclusion, but still has a way to go. Weare steadily moving from mandates, subsidies, andreliance on the public sector banks for inclusionto creating enabling frameworks that make itattractive for all financial institutions to target theexcluded, even while the interests of the excludedare protected through education, competition andregulation. I am confident that in the foreseeablefuture, we will bring formal financial services toevery Indian who wants them. Financial inclusionwill be an important element in ensuring access andequity, necessary building blocks for thesustainable growth of our country. Thank you.

* Speech by Dr. Raghuram Rajan, Governor,Reserve Bank of India, on July 18, 2016, at the

National Seminar on Equity, Access, andInclusion - Transforming Rural India through

Financial Inclusion organised by NationalInstitute of Rural Development and Panchayat

Raj in Hyderabad.


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Recent Changes to the Debt Recovery Regime in India

The recent amendments to the SARFAESI Actdemonstrate the Indian government’s commitment toput in place an efficacious system for dealing with baddebts and making debt recovery easier and effective.

INTRODUCTION

With increasing levels of non-performing or stressedassets in the Indian financial services sector, reformingthe debt recovery and bankruptcy framework has beena key focus area for the Indian government. Followingthe recent enactment of the Insolvency and BankruptcyCode, 2016 (Bankruptcy Code), the Indian parliamenthas now passed the Enforcement of Security Interestsand Recovery of Debt Laws and MiscellaneousProvisions (Amendment) Act, 2016 to improve theefficacy of Indian debt recovery laws.

The amendment act introduces a number of changesto the Securitization and Reconstruction of FinancialAssets and Enforcement of Security Interests Act, 2002(SARFAESI Act) and the Recovery of Debts Due toBanks and Financial Institutions Act, 1993 (DRT Act).These changes will however come into effect as andwhen the government issues appropriate notificationsin the Official Gazette to implement the relevantprovisions of the amendment.

KEY CHANGES INTRODUCED

A. Changes to the ARC Framework

(i) Ownership and Control of ARCs: Till now, ownershipand control of an asset reconstruction company (ARC)had to be diversified and no sponsor could hold acontrolling interest (more than 49%) in an ARC orappoint a majority of its board of directors. Theserestrictions have been removed and sponsors are nowallowed to hold up to 100% equity in an ARC as wellas exercise majority control over its board.Correspondingly, the Reserve Bank of India (RBI) hasalso been given greater powers of oversight over anARC’s operations including, the right to appoint RBIofficers as observers to the board of directors of anARC and if required, change/ replace its directors.

(ii) Eligible Purchasers of Security Receipts: Until now,only ‘qualified institution buyers’ (i.e. banks, financialinstitutions, insurance companies, state financecorporations, mutual funds and foreign portfolioinvestors) were permitted to purchase security receiptsissued by ARCs. With the amendment, the scope ofeligible investors has been widened to include non-

institutional investors as identified by RBI from time totime.

With non-performing assets (NPAs) and stressed assetsof Indian banks exceeding INR 8 trillion (approx. USD125 billion), these changes to the ARC framework couldhelp remove distressed assets from the balance sheetsof Indian banks by developing a robust secondarymarket for distressed debt in India. Removal of thesponsor ownership restrictions could incentivize moreplayers to set up ARCs and allow existing ARCs toraise necessary capital to expand their portfolios.Further, the widening of the investor base for securityreceipts may possibly generate more interest in theseinstruments and allow banks to off-load their NPAs onan arms’ length basis, as opposed to self-fundingsecuritization transactions to restructure their exposure.

B. Wider group of SARFAESI Eligible Lenders

Until recently, the benefits under the SARFAESI Actand the DRT Act were available to a limited group oflenders – i.e. scheduled commercial banks,International Finance Corporation, Asian DevelopmentBank and identified Housing Finance Companies. Thegovernment has made two significant additions to thisgroup:

i. NBFCs: On 5 August, 2016, the Ministry ofFinance has specifically notified and named those non-banking financial companies (NBFCs) with an assetsize of more than Rs. 500 crores, as SARFAESI eligiblelenders.

ii. Listed Debt Securities: The benefits of theSARFAESI Act and the DRT Act have been extendedto the listed bond market in India. Debenture trusteesappointed in respect of debt securities listed inaccordance with applicable SEBI regulations have beenspecifically included as ‘secured creditors’ under theSARFAESI Act, and corresponding changes have beenmade to various provisions of both the SARFAESI Actand the DRT Act. These changes potentially allowlenders that do not independently have rights under theSARFAESI Act or the DRT Act (such as domesticfunds, mutual funds, insurance companies, foreignportfolio investors and other investors in the corporatedebt market) to benefit from such rights when actingthrough a debenture trustee in respect of listed bonds.

C.Central Registry for Security Interests

Once the amendments are notified, all secured creditors(including creditors who do not have enforcement


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privileges under the SARFAESI Act) will be requiredto register their security interests with the CentralRegistry of Securitization Asset Reconstruction andSecurity Interests of India (Central Registry). This willfacilitate implementation of the Bankruptcy Code andwill increase overall transparency in respect of securityinterests over a debtor’s assets.

D.Increasing efficacy of SARFAESI and DRTProceedings

While the SARFAESI Act and DRT Act are intendedto expedite recovery of secured debt, there have beenvarious procedural issues which have limited theefficacy of these legislations. Accordingly, variousmodifications have been made to both the legislationsto deal with this problem. For instance:

i. timelines for various steps in the adjudication processbefore the debt recovery tribunals such as filing ofwritten statements, passing of orders, appeals, etc. havebeen reduced; and

ii. the cost on a borrower to delay recovery timelinesthrough protracted appeals and proceedings has beenincreased. Borrowers will now be required to depositat least 25% of the outstanding amounts with the debtrecovery appellate tribunal (DRAT) under the DRT Actto prefer an appeal. Previously, (a) this floor of 25%on the deposit obligation applied only to appeals madeunder the SARFAESI Act, and (b) borrowers couldrequest the DRAT for a waiver of the entire depositobligation under the DRT Act.

CONCLUSION

The amendments are perhaps the most significant setof changes to the SARFAESI Act since its enactment

in 2002. The Bankruptcy Code and the amendments tothe SARFAESI Act together reflect a clear legislativeintent to shift the needle in a distressed situation towardsthe creditors by plugging various loopholes available toborrowers.

We believe that the inclusion of listed bonds within theSARFAESI Act could significantly deepen the listeddebt market in India by generating interest from a widervariety of investors – including retail investors,insurance companies, domestic funds and foreignportfolio investors. If sufficient liquidity is generated inthe market, traditional lenders could also exploresubscribing to listed debt in light of the simpler processand cheaper transaction costs associated with a transferof these instruments.

While the amendments are a welcome move, they fallshort of creating a level playing field for all participantsin the Indian debt market. The entire externalcommercial borrowing (ECB) framework, which iscomparatively more regulated than the listed bondframework, continues to remain outside the scope ofthe SARFAESI Act. In an environment where foreigncompanies, individuals and retail investors holding listedbonds would ultimately benefit from the self-helpremedies under SARFAESI Act, it is unclear whyregulated foreign banks, bilateral or multilateral financialinstitutions and other eligible ECB lenders should haveto resort to traditional court-proceedings to recover theirdues.

Article by Trilegal

http://www.mondaq.com/india/x/522196/

securitization+structured+finance/

Recent+Changes+To+The+Debt+Recovery+Regime+In+India

Trade Enquiry

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Why we need to worry about Indian banking

Recognising and writing off bad assets may not resolvethe banking problem as the new financial order requiresbanks to lend to the default-prone, aggravating the woes

While recognising that risks to India’s banking sectorare rising due to deterioration in asset quality and lowprofitability, the government and RBI spokespersonsperiodically declare that there is no cause for alarm.But there is much evidence (for example in the RBI’sFinancial Stability Report of June 2016) that the problem

is serious and the health of banks may deterioratefurther, as changes in the nature of bank exposure havesignificantly increased systemic risk.

The indicator most often cited as reflecting the healthof the banking system is the ratio of non-performingassets (NPAs) to total advances. The restructuring andrecapitalisation process associated with the post-1991‘reforms’ had resulted in a sharp decline in the ratio ofgross NPAs to gross advances from 15.7 per cent atthe end of 1996-97 to 2.3 per cent at the end of 2008-09, the year of the global financial crisis.

However, since then there has been a reversal in trend,with the ratio rising to 3.4 per cent in 2012-13, 4.6 percent in 2014-15 and 7.6 per cent in 2015-16 (Chart 1).The Financial Stability Report of the RBI provides anumber of explanations for this trend.

One is the possibility that “boom period credit disbursalwas associated with less stringent credit appraisal.”The other is accelerated credit growth, resulting fromcompetitive credit disbursal encouraged by the sharpdecline in the statutory liquidity ratio (SLR) from 30.5per cent of total assets at end March 2005 to 22.6 percent at end March 2008 and “the push for infrastructureprojects, many of which later got into a logjam.”

The missing fear

But these do not explain the sharp spike in the NPAratio in 2015-16. Two other developments during thelast decade are important. The first was the creationof a corporate debt restructuring mechanism, whichenabled the revival of large loans that were under threatof default. The mechanism involved measures such asextending the maturity of the loan, reducing the interestrate charged, converting a part of the loan into equity,providing additional financing, or some combination ofthese.

This was clearly intended to mitigate the risk of lendinglarge sums, especially to capital-intensive projects withlong gestation lags, as in infrastructure. If banks had tomake provisions for likely losses on such loans at thefirst sign of them turning non-performing, the impactthis would have on their finances would dissuade themfrom undertaking such lending. Restructuring was away of allaying the fears of bankers, who had in thepast avoided lending to capital-intensive projects forfear of being overexposed in long-maturing, illiquid loanassets.

CP CHANDRASEKHAR JAYATI GHOSH


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With the decline of development banks post-liberalisation, public commercial banks were requiredto take on this new role, in which they did indeed financecapital intensive projects with greater liquidity risks.

Change in status

Secondly, in keeping with this policy inclination, inJanuary 2009, to counter the adverse impact of theglobal financial crisis on the Indian economy, the RBIissued guidelines that allowed such restructured assetsto be treated as standard assets. It hardly bears statingthat restructuring is no guarantee that the assetconcerned will ‘perform’ in future. Economic conditionsthat affected the repayment of the loan coulddeteriorate further, the project could prove to bestructurally unviable for a host of reasons, or theborrower could just be a “wilful defaulter”.

So keeping these assets out of the NPAbasket made the NPA ratio aninadequate indicator of bank stress. Ifbanks resorted more often to therestructuring option, the volume ofstressed assets in the system would risemuch faster than the NPA numberssuggested.

This is exactly what happened in Indiaafter 2008. Banks used the opportunityoffered by these two policy initiativesto paper over the problems created by their new roleas financiers of large projects. As a result, restructuredassets as a percentage of gross advances rose from3.5 per cent at the end of March 2011 to 6.5 per cent atthe end of March 2015. This 3 percentage points risewas higher than the 2.2 percentage points rise in thegross NPA ratio.

Realising that postponing bad debt recognition in thismanner could result in the accumulation of stressedassets in bank balance sheets sufficient to create asystemic problem, the Reserve Bank in 2015 institutedan asset quality review to reclassify assets and reversethe practice of treating all restructured assets asstandard assets. As a result, many “restructuredstandard assets” were reclassified as non-performing.

Simultaneously, the RBI seems to have put on hold thecorporate debt restructuring process, with approvalsof such restructuring initiatives falling to zero in 2015-16, as compared with 54 cases involving debt totalling ¹72,560 crore in 2014-15 (Chart 2).

In the event, most restructured assets were reclassifiedas non-performing. The spike in the NPA ratio in from

end March 2015 to end March 2016 is largely explainedby the decline in the ratio of restructured assets to grossadvances from 6.5 per cent to 3.9 per cent over thatperiod.

Overall stressed assets (including both NPAs andrestructured assets) had increased from 5.9 per centof gross advances at end March 2011to 11.1 per centat end March 2015; but rose only marginally to 11.5per cent by end March 2016. This is one reason theRBI is satisfied with the current position. In its view,once stressed assets are formally recognised as non-performing, the requisite provisions are set aside at theexpense of short term profitability, and the banks arerecapitalised, credit growth will see a revival, but withina more monitored framework.

The real problem

This, however, sidesteps the problem ofmanaging the role handed over tocommercial banks, of providing thelong-term financing earlier undertakenby development banks. They are evenrequired to make up for the shortfall inpublic capital formation within a low-tax and restricted fiscal deficit regime.

This has at least two implications. First,two sectors that account for high sharesin total industrial credit advance,infrastructure (32.8 per cent) and basic

metals and products (essentially iron and steel) (13.6per cent), show very high ratios of stressed advancesto gross advances (Chart 3). These are among the newareas into which neoliberal reform has taken the banks.

Second, as of March 2016, large borrowers (withliabilities of ¹ 5 crore and above) accounted for 58 percent of scheduled commercial bank advances and 86.4per cent of gross NPAs.

Thus, NPAs were concentrated with these largeborrowers. The top 100 borrowers accounted 16 percent of total advances and 22.3 per cent of gross NPAs.

Indeed, the gross NPA ratio of the top 100 borrowersrose from just 3.4 per cent in September 2015 to 22.3per cent in March 2016, with the reclassification ofrestructured assets. Thus, the fragility of the bankingsystem is due to the large borrowers who have benefitedfrom the restructuring route to concealing NPAs. Ifthis proves to be unviable, growth itself is under threat.This provides the government with new grounds to adopteven more pro-business policies than it has in the past.

Source: Hindu BusinessLine


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ABCD of MSME Credit* Shri S. S. Mundra

Thank you for inviting me to deliver the keynote addressat this second edition of the Conference on MSMEFunding. I compliment the CII for having chosen a veryrelevant theme for the Conference ‘Propelling MSMEGrowth through Enhanced Financial Access andSupport’. The theme lays emphasis on two crucial pillarsthat are pertinent for thesector

i.e. enhancing financialaccess and ensuringadequate support to enableMSMEs to attain fastergrowth.

2. It is universallyrecognized that smallbusinesses are the bestvehicles for generate jobs.A IFC /Mckinsey Studyhas estimated worldwideMSME population at 420to 510 million, of which 360to 440 million alone, are inemerging markets. Thereport also estimates thatthe formal SMEs contribute up to 45 percent of totalemployment and up to 33 percent of national income(GDP) in emerging economies and these numbers couldbe significantly higher when informal SMEs areincluded. The Asia SME Finance Monitor 2014 publishedby the Asian Development Bank has estimated that96% of all enterprises in the Asian region fall under theMSME category, absorb close to 2/3rd of the workingforce and contribute to about 42 % of GDP.

3. According to MSME Ministry’s Annual Report for2015-16, MSME sector in India today is a network of51 million enterprises providing employment to 117.1million persons and contributing 37.5 per cent of India’sGDP2. The development of this sector is, therefore,crucial in generating significant levels of employmentacross the country, more so since we have a large youngand educated population which is on lookout foremployment.

MSME – Significance beyond job creation

4. While job creation is certainly critical, smallbusinesses play a far greater role than just providingemployment. Let me state two key contributions ofMSME sector here.

5. One, the MSME sector is a nursery forentrepreneurship and a school for innovation. Countlessmedium and large corporates in India have evolvedout of being micro and small sometime in not so distantpast. I am sure many in the audience here, who ownfairly large businesses today, would have cut their teeth

in business through theroute of micro and smallenterprises.

2. Secondly, MSMEsector is crucial for thesuccess of the nationalagenda of FinancialInclusion. Let meexplain. Normally, whenwe talk about financialinclusion, we do solargely from theperspective of anindividual or at best ahousehold. However, tomy mind, universalfinancial inclusion cannotbe considered to have

been achieved unless it is ensured that the micro andsmall businesses are financially included. Credits tothese small family run or individual run entities fromthe formal financial channels would make thesebusinesses sustainable and help them move out ofpoverty and propel them to a better quality of life.

3. The surmise that I am trying to drive at is that ifthis is the sector that is the bulwark for such criticaldevelopmental paradigms, there are compelling enoughreasons for all stakeholders- be they the Associations,the Financial Institutions, the regulators or theGovernment, to put all their might together in aconvergent fashion so that the right environment iscreated to propel growth of MSMEs in our country.

4. For achieving this objective, there is a need tocreate an ecosystem which can facilitate handholdingand nurturing of MSME units particularly at the nascentstages. Also, there is a need to eliminate a host ofimpediments – of permits, of inspections, of red tapeand provide a set of enablers – skill development,infrastructure, markets, technology etc. However, ofall the enablers, probably none is more important thanCredit. The IFC/Mckinsey has estimated the credit gap


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for formal and informal MSMEs worldwide at around$ 3.9 trillion globally, of which $2.1 to 2.6 trillion is inemerging markets.

The ABCD of Credit

5. As I said, credit is perhaps the most criticalcomponent for MSME entrepreneurs. Provision forCredit is essentially dependent on four pivotal issueswhich I would call ‘ABCD’ of credit. Let me take youthrough each of them and also explain what we aredoing to iron out these issues.

a) The Á of Credit –Access/Availability

6. The 4th All India survey of MSMEs states thatclose to 90 per cent of MSMEs are dependent oninformal sources, which by any standards is a worrisomefigure. Since that survey, some headway must havebeen made in improving MSMEs’ access to formalfinancial channels; however, it still remains a challenge.The public sector banks today have close to 3000specialized branches which specialize in lending toMSME units. Private sector banks have built upproducts and processes, which enable quick disbursalof loans. Most banks have switched over to centralizedcredit sanctioning, which enables better turnaround time.Many others have increased the credit limits to the fieldlevel functionaries. While these steps have improvedaccess, there is still a huge unmet demand for creditfor

MSMEs3. (There is a total finance requirement of INR32.5 trillion ($650 billion) in the MSME sector, whichcomprises of INR 26 trillion ($ 520 Billion) of debtdemand and INR 6.5 trillion ($130 Billion) of equitydemand).As per provisional data for period endedMarch 2016, total outstanding loan of the bankingsystem to MSME sector stood at around 11.1 trillionrupees in 20.6 million loan accounts. Contrast this tothe estimated need of INR 26 trillion and number ofMSMEs at 51 million.

7. An important piece of the problem is adequacyof banking outlets. Small entrepreneurs are spreadacross remote locations in the country where physicalbank branches are not available. Also, the bankingcorrespondent mechanism is yet to mature to a levelwhere they can play a key role in credit disbursal.Second and perhaps a more import dimension isavailability of credit at a time when it is required by theentrepreneur. Ability of small entrepreneurs to withstandlife cycle shocks is extremely limited and henceavailability of timely credit becomes critical for theirsurvival. The formal financial system, due to a varietyof reasons, which may include cumbersome

procedures, lack of understanding of the businessmodel, inability of the entrepreneur to meet therequirements of the banks etc., is unable to meet thisimmediate need of the entrepreneur.

a) ‘B’- Banks and Business

2. ‘B’ in the ‘ABCD’ paradigm of creditfundamentally refers to the information asymmetrybetween the two Bs – Banks and Business.

The United States Agency for InternationalDevelopment (2009) defines a financially literate SMEowner/manager as “someone who knows what are themost suitable financing and financial managementoptions for his/her business at the various growth stagesof his/her business; knows where to obtain the mostsuitable products and services; and interacts withconfidence with the suppliers of these products andservices. He/she is familiar with the legal and regulatoryframework and his/her rights and recourse options.”

3. I don’t think that majority of the MSMEentrepreneurs in the country today meet the criterion.Financial literacy in the context of a MSME focuseson an individual’s ability to translate financial literacyconcepts to business needs. Financial literacy isessential for effective money management and lowlevels of financial literacy hinder the understanding ofavailable financial products and services. MSEentrepreneurs are also constrained by lack ofoperational skills, accounting and finance acumen,business planning etc. which underscores a need forfacilitation by banks/other agencies.

2. However, it is not a one way street. Large-scaleretirements in banks in recent years have also adverselyimpacted the collective skill-sets available at the fieldlevel in understanding, appraising and monitoring theMSME loan portfolio. The poor underwriting skills leadsto avoidable under or over financing, which can have atelling effect on the health of the MSME units,particularly in adverse life cycle situations.

a) ‘C’- Collateral Requirements

3. The formal financial institutions particularly banksconsider lending to MSMEs as highly risky since theentrepreneurs often do not possess adequate collateralto support the credit. Very often, the loans are rejected,despite the project prima facie, being feasible. Whilethere are several dispensations to tide over the problem,the credit culture has not matured enough to a levelexisting in developed economies where lending is doneagainst the assets of the firm including its movableassets. This also necessitates that we build up strong


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financial infrastructure, which would support the banksin lending to these sectors without worries and usingall types of assets available to secure the loan. It isalso pertinent for banks to realise that though the loanto the individual entities in the sector may be riskier ona solo basis, overall on a portfolio level, these are lessvulnerable than loans to corporate.

b) ‘D’- Documentation

4. Many of the MSMEs, particularly the Micro units,do not have adequate documentation to match therigours of a formal financial system. Absence ofdocumentation drives the small entrepreneurs toinformal sources that are willing to provide credit withminimum documentation. Further, a vast majority of theMSMEs are informal, which brings down the creditscore of the entrepreneur and hinders the ability of theformal financial system to lend to them. Banks, on theirpart will need to leverage on modern technologyalgorithms and Big data so that they can differentiatebetween a good borrower and a not so good one evenin the absence of conventional documentation.

5. Having analysed various impediments in financeto the sector let me dwell on some of the steps takenby RBI, Government of India and other Apexinstitutions in bridging these gaps.

(i) Access/ Availability

RBI has initiated several measures to improve theavailability of banking services, especially in the ruraland far-flung areas where access to formal finance isarduous.

6. New institutions: As you are aware, two newuniversal banks have started operations while in-principle approval has been granted to 10 entities to setup Small Finance Banks that would primarily focus onlending to unserved and underserved sections includingsmall business units, small and marginal farmers, microand small industries and unorganized

sector entities. These small finance banks have beenmandated to extend 75 per cent of its Adjusted NetBank Credit (ANBC) to the sectors eligible forclassification as priority sector lending (PSL) by theReserve Bank. At least 50 per cent of its loan portfolioshould constitute loans and advances of up to Rs. 25lakh. Many of the SFBs have prior experience ofworking with small businesses as MFIs/NBFCs andwe believe that they will be able to bring in technologybacked innovative last mile practices to serve theircustomers.

7. Increased branch penetration/ Specialized

branches: RBI has advised banks to set up ‘brick andmortar’ branches in villages with population of morethan 5000 in a phased manner. Coupled with a moremature Banking Correspondent mechanism, this wouldgive considerable fillip in meeting the banking needs ofthe MSMEs particularly in rural areas. Besides, creatingpresence of physical branch, there is also a need tohave large number of bank officials with appropriateskill sets and knowledge to handle the life cycle needsof the small businesses. Already, Public Sector bankshave established specialized MSME branches in everydistrict to cater to the needs of the small businesses.We are already working towards improving the skillsets and entrepreneurial sensitivity of the field levelfunctionaries.

8. P2P lending: New players have entered theMSME lending landscape in form of P2P companies.These entities use an online platform to match lenderswith borrowers to provide unsecured loans and mostlyfor receivables financing. P2P lending has greatpotential as an alternative form of low-cost finance asit can reach to the needy where formal sources areunable to reach or unwilling to lend. RBI has beenmindful of a need to regulate these entities withoutstifling their ability to innovate and is currently in theprocess of issuing final guidelines on P2P lending.

9. Policy intervention for Life Cycle Issues: Wehave advised the banks to keep a provision foradditional credit limits (Standby Credit Facility for termloans and an additional provision within the overallworking capital limits) in order to provide timelyfinancial support to Micro and Small enterprises facingfinancial difficulties during their lifecycle. Banks havealso been advised to carry out mid-term review ofregular working capital limits and fix up timelines forcredit decisions. I am happy to say that most bankshave put in place similar provisions in the last one yearor so.

10. Co-origination of loans: While several stepshave been taken to address the problems related toaccessibility, there are certain structural problemswhich would take their own sweet time in getting sortedout. One of this is the issue of reaching the last mile.Much as we have encouraged the banks to establishbrick and mortar branches across remote villages, wemust be conscious that they would always be drivenby viability assessments/

cost considerations. One possible solution for thisproblem could be convergence of efforts betweenbanks on one hand and the NBFCs, MFIs on the other,


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who have ‘feet on the ground’ in such locations, betterunderstanding of the local conditions and businessviability, better knowledge about the credit worthinessof individuals, their repayment capabilities etc. Couldwe envisage a framework for co-origination of loansby banks and the NBFCs/MFIs with risk participation?While it would ensure skin in the game for both parties,it would benefit the entrepreneurs in terms of cost ofcredit, which on account of blending could besubstantially lower. This could probably be the mostideal structure to serve the micro enterprises who arethe most deprived in terms of availability of credit.

(i) Banks and Business

2. Let me now turn my focus to steps for bridgingthe information asymmetry between the banks and thebusinesses. As I mentioned earlier, this is not a one-way street. Not only are the small entrepreneurs oftenignorant about banking products and practices, severalbankers have little understanding of the lifecycle creditneeds of small businesses. Towards covering this base,RBI has started a capacity building initiative called theNational Mission for Capacity Building of Bankers forfinancing MSME Sector (NAMCABS) in a missionmode. The field level functionaries must appreciate theimportance of two critical pillars of financing MSMEsector viz., timeliness and adequacy of credit. I amhappy to state that close to 3300 officials of the bankshave undergone this programme in the last one year.

3. Credit Counsellors : For bridging theinformation asymmetry on the MSME borrowers side,RBI is initiating a process for putting in place aframework for accreditation of credit counsellors whoare expected to serve as facilitators and enablers formicro and small entrepreneurs. Since MSMEs aretypically enterprises with little credit histories and withinadequate expertise in preparing financial statements,credit counsellors will assist the borrowers in preparingtheir project reports and also help banks make betterinformed credit decisions.

4. Revival and Rehabilitation of MSMEs:Another key step in the direction of supporting the firmsin distress is the issuance of guidelines on theFramework on Revival and Rehabilitation of MSMEs,which provides an institutionalized framework forrehabilitation of enterprises which are potentially viable,but are under temporary duress. The Frameworkprovides for a structured mechanism, which could betriggered either by the banker or by the entrepreneurat the first signs of stress. The problem resolution isscaled up to a committee with a time bound schedule. I

see this as a very powerful tool and urge upon thebankers to get this process rolling at the earliest.

(ii) The difficult ‘C’s -Credit and Collateral

5. The issue of finding the right balance in securinga loan without pushing the borrower to informal sectorhas been a bugbear for the banking system. This issought to be addressed through creation anddevelopment of right institutional structures. Let medelve upon some of these efforts:

6. Movable Asset Registry: Movable assets, asopposed to fixed assets such as land or buildings, oftenaccount for most of the capital stock of private firmsand comprise an especially large share for micro, smalland medium-size enterprises. Hence, movable assetsare the main type of securities that firms can pledge toobtain bank financing. I am happy to state thatCERSAI, in active coordination with Government ofIndia and Reserve Bank has established the movableasset registry, which when mature would have amultiplier effect in lending to the sector.

7. TReDS: In order to solve the problem of delayedpayment to MSMEs, RBI has licensed three entitiesfor operating the Trade Receivables DiscountingSystem (TReDS). The system would facilitate thefinancing of trade receivables of MSME enterprisesfrom corporate and other buyers, including governmentdepartments and public sector undertakings (PSUs)through multiple financiers. The objective is to createElectronic Bill Factoring Exchanges which couldelectronically accept and settle bills so that MSMEscould encash their receivables without delay. It isexpected that the TReDS will commence operationswithin this current fiscal. It would be important thatthe use of TReDS is made mandatory for, to beginwith corporate and PSUs and later for the Governmentdepartments. I would urge the Chambers and theMSME Ministry to proactively examine this aspect assuccess of TReDS initiative can be a game changerfor the sector.

8. Utility of the Credit Guarantee Scheme:Realizing the problems of small borrowers in postingcollaterals, RBI has asked the banks not to insist oncollateral in case of loans up to Rs 10 lakh extended tounits in the MSE sector. Also, Credit Guarantee FundTrust for Micro and Small Enterprises (CGTMSE) hasbeen set up to encourage the Member LendingInstitutions to extend credit based on the viability ofthe proposal rather than insisting on security or surety.Based on practical experience however, I tend to believethat these provisions have not led to desired outcomes.


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consumer protection measures.

12. Role of Associations: The entrepreneur andIndustry bodies have a significant role to play in linking,maintaining and sustaining the borrower-bankerrelationship. This could be in handholding, enabling andcapacity building of the new entrepreneurs. As you areaware, the BCSBI has formulated a Code of Bank’sCommitment to Micro and Small Enterprises forvoluntary adherence by the banks. The industryassociations must also spread awareness about variousfacilities available/guidelines issued by the regulatorsto bridge the information asymmetry.

Conclusion

13. Let me conclude by going back to the theme ofpropelling growth of MSMEs. In using the term ‘propel’you have underlined the sense of urgency that is requiredin this area. Our demographics compel us to pushforward this agenda and make quantum jumps so thatentrepreneur can start and drive businesses withoutworrying about finance. We are committed to thisparadigm shift and the slew of measures that are beingtaken by the RBI,

other apex institutions and stakeholders signify this. Icall upon CII and other industry bodies to also join thiseffort as enablers.

* Keynote address delivered by Shri S. S. Mundra,Deputy Governor, Reserve Bank of India

at the 2nd CII National Conference on MSME Funding heldin New Delhi on August 23, 2016.

Assistance provided by Shri Jose Kattoor,Ms. Sudha Vishwanathan and

Shri Sanjeev Prakash is gratefully acknowledged.2

Annual Report, Ministry of MSME 2015-16

Let me elaborate.

9. On one hand, the guideline on collateral-free loanshas led banks to at times devise ways of denying creditto the MSMEs borrowers, while on the other extreme,the provision for credit guarantee has potential to causedeterioration in quality of credit appraisal and due

http://blogs.worldbank.org/allaboutfinance/does-introduction-

movable-collateral-registries-increase-firms- access-finance

diligence, consequently straining the resources of theCGTMSE. Clearly, both outcomes are undesirable. Iwould rather advocate that borrower is compensatedby way of a better pricing in loan for the availability ofcollateral. Further, I would also like to see the CGTMSEto evolve a framework for making the pricing risk-basedrather than having a uniform risk premium related tothe past performance and quality of individual portfolios.Eventually, this activity should also move to an openmarket system.

(iii) The Cumbersome ‘D’- Documentation

10. The absence of credit history and the need fordocumentation often pushes the micro entrepreneuraway from conventional banking channels to the moreinformal sectors. This has to be addressed through aconstant process of simplification of procedures andmore importantly by leveraging technology.

11. Udyami Mitra portal set up by SIDBI leveragesIT architecture of Stand-Up Mitra portal and aims atinstilling ease of access to MSMEs’ financial and non-financial service needs. The Portal, as a virtual marketplace endeavours to provide ‘End to End’ solutions notonly for credit delivery but also for the host of credit-plus services by way of hand holding support, applicationtracking, multiple interface with stakeholders (i.e. banks,service providers, applicants).We could see developmentof more such technological interfaces in the comingdays making it easier for MSME entrepreneurs toborrow from the banking system. RBI is committed tosupport such initiatives with appropriate safeguards and


FTAPCCI

FTAPCCI Events

FTAPCCI in association with U.S. Consulate Generalorganized a Meeting with Dr. Tony Boccanfuso,President, University Industry DemonstrationPartnership, USA on 18th August, 2016 at FederationHouse, Hyderabad.

Mr. Ravindra Modi, President, FTAPCCI informed thatFTAPCCI is working closely with Universities/Educational Institutions by bonding strong linkages withindustry and academic institutions for the benefit of both.The industry can utilize the knowledge hub by givingthe industry centric projects to the students & in turnstudents & academician understand the present needof the industry. FTAPCCI will act as a bridge betweenGovt. & academic institutions for various surveys &research.

Mr. Anil Agarwal, Chairman, International TradeCommittee, FTAPCCI mentioned that India-U.S.bilateral cooperation is broad-based and multi-sectoral,covering trade and investment, defence and security,education, science and technology, cyber security, high-technology, civil nuclear energy, space technology andapplications, clean energy, environment, agriculture andhealth. Vibrant people-to-people interaction and supportacross the political spectrum in both countries nurtureour bilateral relationship. Cooperation in education

Meeting with Dr. Tony Boccanfuso,President, University Industry DemonstrationPartnership, USA

sector has been made an integral part of the strategicpartnership between the two countries. India is learningfrom the U.S. experience in community colleges inorder to meet our demands for skill-development.

Dr. Tony Boccanfuso, President, University IndustryDemonstration Partnership, USA stated that there is aneed to develop Innovative Models in University-Industry Partnerships, to build strong Partnerships. He said that the academic-corporate engagementimproves the living standards of people through thedevelopment of transformational products, newmedicines and creation of new information andapproaches that lead to better life style. The UIDP isa project-oriented organization where members identifyissues impacting university-industry relations andopportunities to develop new approaches to workingtogether. The UIDP supports mutually beneficialuniversity-industry collaborations by developing anddisseminating strategies for addressing common issuesbetween the two sectors.

Mr. Arun Luharuka, Vice President, FTAPCCIpresented FTAPCCI Literature and a Memento.

Mr. Gowra Srinivas, Senior Vice President, FTAPCCIproposed a vote of thanks.

Mr. Arun Luharuka, Vice President, FTAPCCI presenting Memento to Dr. Tony Boccanfuso,President, University Industry Demonstration Partnership, USA


FTAPCCI

Business Seminar ‘Brussels - Gateway of Investments to Europe’

FTAPCCI in association with BrusselsInvest & Export and SAS PartnersCorporate Advisors organized aBusiness Seminar on ‘Brussels -Gateway of Investments to Europe’ on24th August, 2016 at Federation House,Hyderabad.

Mr.Ravindra Modi, President,FTAPCCI informed that the Seminar isintended to brief about the opportunitiesin Brussels and inform more about theBrussels - Gateway of expansion toEurope and related formalities andinvestment opportunities. The visitingdignitaries will be presenting anoverview of growing trade andinvestment opportunities with Europeand using Brussels as a gateway invarious Sectors and will also bediscussing on the assistance / guidancebeing provided for foreign investors aswell as incentives for Indian companies,who intend to set up their operationsin Brussels or enter into Joint Ventureswith their counterpart in Brussels.

Mr. Anil Agarwal, Chairman,International Trade Committee,FTAPCCI said that European Union isIndia’s largest trading partner —accounts for nearly 11 percent of theAsian nation’s imports and 16 percentof its exports. The major exports fromIndia to Belgium are gems & jewellery,chemicals and chemical products andtextiles. The major imports fromBelgium are gems & jewellery,chemicals and chemical products,machinery and engineering products,plastic and articles. Several Indiancompanies, particularly in the IT andsoftware sectors have established theirbase in Belgium to cater to the Belgiumas well as European markets. Belgiumhas a sizeable Indian diaspora of about20,000 people.

Mr. Laurent Verbiest, Area ManagerAsia-Inward Investment, Brussels

Invest & Export, Brussels Ministry said that said despite economicslowdown in Europe, Belgium is making efforts to step up businesswith India. Belgium is working on diversifying business with Indiaand looking beyond trade in diamonds. Belgium is now the secondlargest trade partner of India in the European Union after Germanyand most of it is in the high-value diamond trade. It now hopes to forgenew business partnerships in information and communication technology,research and development in healthcare and pharma, medical devicesand chemicals. He spoke about Britain’s exit from the EU membership(BREXIT), as it has created flurry of diverse thoughts among theinvestor community, who considered London/UK for EU market accessfor trade and investment. In the wake of events, which is shaping thesocio-economic- political future of EU as a strategic market bloc,Brussels is playing a significant role.

Ms. Kathlijn Fruithof, First Secretary - Trade & Investment, BrusselsInvest & Export, Ministry of Brussels Capital Region said that Brusselshas advantages in terms of its geographical position and connectivityto Paris, London and other major European cities. Brussels is at thecrossroads of three cultures and provide a gateway to investments inEurope. She informed that Brussels hosts most of the EU institutions,as well as representation offices and economic decision-making centresfor the Member States. Brussels is one of the world’s largest centresfor international organizations, NGOs, industry associations, interestgroups and diplomatic missions. The presence of those institutions hasattracted many international and interregional agencies, which largelyexceed the European framework.

Mr. Alex T Koshy, Director, SAS Partners Corporate Advisors Pvt.Ltd. & Consultant to Brussels Invest & Export in India briefed aboutthe Tax incentives that are being offered for Indian companies intendingto invest in Belgium. They are allowed to claim a notional interestreduction (of up to about 3 per cent) on equity investments reflectingthe economic cost of capital deployed.

Mr. Gowra Srinivas, Senior Vice President, FTAPCCI proposed avote of thanks.

Mr. Gowra Srinivas, Senior Vice President, FTAPCCI presenting memento toMs. Kathlijn Fruithof, First Secretary - Trade & Investment, Brussels Invest &

Export, Ministry of Brussels Capital Region


FTAPCCI

FTAPCCI in association with Indian Energy Exchange(IEX) organized a workshop on Open Access inTelangana and Andhra Pradesh on 26th August, 2016at FTAPCCI Auditorium, Federation House,Hyderabad.

Mr. Suresh Kumar Singhal, Chairman of EnergyCommittee, FTAPCCI in his address said that it is amatter of concern that even after more than a decadethe purpose of introducing Open Access is not serveddue to various artificial constraints put by the regulatorycommissions of the states. It is clearly stated in theNTP that the computation of cross subsidy surchargeneeds to be done in a manner that while it compensatesthe distribution licensee it does not constrain introductionof competition through open access. He said that therecent filings on CSS by the APDISCOMs andTelangana DISCOMs seem to be not going in thedirection as envisaged in the Electricity Act. They arecreating artificial barriers for the consumers to availthe open access there by defeating the very purpose ofintroducing open access in the power sector. Mr. ArunLuharuka , Vice President, FTAPCCI, mentioned that

“Workshop onOpen Access in Telangana & Andhra Pradesh”

Open access allows large users of power — typicallyhaving connected load of 1 megawatt (Mw) andabove — to buy cheaper power from the open market.The idea is that the customers should be able to chooseamong a large number of competing power companies–instead of being forced to buy electricity from theirexisting electric utility monopoly. He said that theseminar has significant importance, as today the bulkconsumers are facing problem with the high crosssubsidy surcharge in both the States.

Mr. Rohit Bajaj, Vice President of IEX, had given adetailed presentation about the Open Access inTelangana & Andhra Pradesh, and also he explainedwhy cost of power through Open Access in Southernregion is higher than the other states.

Mr Adithya Eranki explained the potential for savingby going to open access and given a detailed cost –benefit analysis of power consumption through OpenAccess. Finally the entire team of IEX has givenanswers to queries of participants in the workshop.

Mr. Suresh Kumar Singhal proposed vote of thanks.

SIDBI CREDIT Advisory Services

at FTAPCCI Every Tuesday from 14.00 hrs to 16.00 hrs.Sri M.S. Nagarajababa, has been appointed by SIDBI to act as knowledge partner for the

Credit Advisory Centre of SIDBI.

Members are requested to avail the advisory services of Sri M.S. NagarajababaMobile: 9440229229, e-mail: [email protected].


FTAPCCI

Forthcoming Event

Objective

* To provide an insight into major aspects of an E-Commerce industry and gain an understanding on theend to end of order to delivery and the value chain.* To provide an Overview of E-Commerce and in-sights into Operations, Logistics, Customer service,Analytics, Tax implications, Policies and Legal aspects.* To provide a unique opportunity for entrepreneursand other stakeholders to explore business opportuni-ties, gain awareness of E-Commerce technologies andundertake initiatives in order to enhance their business& network for better success.

Overview - Topics

* Overview of E-Commerce* E-Commerce & Implications on MSMEs* How Analytics is changing the landscape of

e- Commerce* Contribution of Social Media for E-Commerce and

Future Trends* Leveraging digital media for your business* Manufacturers: Is E-Commerce a Strategy? or

an Additional Distribution Channel?* E-Commerce, Fulfillment and Logistics &

Implications on SMEs* Importance of localization in E-Commerce* E-Regulations – Tax & Legal implications* Transformational role of Fintech in E-Commerce* The Future of E-Commerce in India

Speakers include* Mr. Sekhar Boddu, Director of Technology,

Amazon* Mr. Janardhan Rao Belpu, PwC, Director –

Mergers & Acquisition - Tax &

Seminar on E-COMMERCEDaspalla, Vizag (September, 2016)

RegulatoryService* Dr. Ravi Kumar Jain, Director, Symbiosis

Institute of Business Management, Hyderabad* Dr. Sridhar Vaithianathan, Associate Professor &

Area Chairperson (IT & Analytics), Chairperson– Analytics Centre of Excellence (ACE),Institute of Management Technology (IMT),Hyderabad, India

* Mr. Harish Kotra, Cofounder, Fests.info andTechnology Lead at Deep Red Ink Consulting Pvt.Ltd

* Mr. Shankar Vaddadi, CEO and Founder, i-lend.in* Mr. Manikanta Rachala, CEO, Shoptab

Who should AttendAnyone in business and anyone who aspires to be inbusiness; especially Retailers, App developers, Paymentgateways, E-Commerce solution providers, companiesinvolved in digital marketing, webhosting, insurance,courier and logistics, auditors, private equity investors,venture capitalists, bankers, entrepreneurs, governmentagencies and students

Delegate Fee· Corporate Fee : INR 1250/-· FTAPCCI Member : INR 1000/-· Student : INR 500/-

Registration starts at 9.30 AM@ Dasapalla, Vizag(September, 2016)

For details contactProgram Manager

[email protected] 40 23395515 to 24 (8 lines)

Help Us... Grow your Chamber...Refer a Member

The Member Referral program is a great opportunity to help FTAPCCI and your business grow. Pleaseshare with others business the ways that your company values your Chamber membership. To refer a

potential member, please send the details to email : [email protected].

Let the company you are referring knwo that we will be touch with them, and we willtake care of the rest !


FTAPCCI

FTAPCCI Expert Committees

Nominations RequestedFTAPCCI has reconstituted the following ExpertCommittees for the year 2016-17 to discuss, debate andconcretize the expert views on various issues broughtto its notice of State/National importance. Also theCommittees will hold various brainstorming sessions /workshops / conferences to interact with policy makers

1. Industrial Development including HR & IR

2. Environment

3. Tourism, Hospitality, Health Care and Entertainment

4. Direct Taxes

5. Indirect Taxes

6. FTAPCCI Ladies Wing

7. Trade and Commerce & civil supplies

8. Banking, Finance & Insurance

9. Corporate Laws and Legal

10. Agriculture, Food Processing & Dairy

11. Infrastructure & Real Estate

12. Information Technology, E-Commerce & Start-ups

13. International Trade

14. Energy

15. Youth Affairs

16. Event Coordination

17. Pharma

18. Alternative Dispute Resolution (ADR) &Intellectual property Rights (IPR)

Members interested to serve on the committees asmembers may send their applications in the prescribedformat, printed on or before August 20, 2016

Note :

1) Member should be on the Rolls of FTAPCCI as onApril 30, 2016

2) One person from an organization may opt for notmore than two committees

3) Two or more persons belonging to a memberorganization should not apply for membership ofthe same Committee. More than one person froma member organization can apply for membershipof different Committees.

4) A separate application from should be sent for eachCommittee.

Application for Membership ofExpert Committees 2016-17

Applicant Full Name : ......................................….

............................................................................

............................................................................

Designation : ..................................................…..

Name of the member Firm / Company:………….....

............................................................................

............................................................................

Mailing address : …………......................................

............................................................................

............................................................................

PIN Code : …………................................................

FTAPCCI Membership No. ……………......................

Panel :…………………..............................................

e-mail : …………………….........................................

website : ……………...............................................

Fax : ………….........................................................

Telephones (with STD code) :……….......................

............................................................................

Cell No :……….......................................................

............................................................................

Name of the Committees interested

(in order of priority):…......................................…

1) .............................................................………..

2) ............................................................…………

I hereby assure that I will attend the expert

committee meetings regularly and actively

participate in its programs and projects.

Date : ................…. Signature of the

Applicant


FTAPCCI

Reserve Bank of India Department of Non-Banking RegulationCentral Office, Centre I, World Trade Centre

Cuffe Parade, Colaba, Mumbai - 400 005.

RBI/DNBR/2016-17/40Master Direction DNBR.PD. 001/03.10.119/2016-17 August 25, 2016

The Reserve Bank of India (the Bank), being satisfiedthat, in the public interest, and to enable the Bank toregulate the financial system of the country to itsadvantage, in exercise of the powers conferred bysection 45NC of the Reserve Bank of India Act, 1934(Act 2 of 1934) and of all the powers enabling it in thisbehalf exempts the categories of non-banking financialcompanies as given below from certain provisions ofthe Reserve Bank of India Act, 1934 (the RBI Act,1934) as specified hereunder.

1. Exemption from provisions of Chapter III Bof the RBI Act, 1934 to the following:

(i) Housing Finance Institutions i.e. a non-bankingfinancial company which is a housing finance institutionas defined in section 2(d) of the National Housing BankAct, 1987.

(ii) A Non-Banking institution which is authorized tooperate a payment system and to issue prepaid paymentinstruments under the Payment and Settlement SystemsAct, 2007 (Act 51 of 2007).This exemption shall belimited and restricted to money received by such non-banking institution for issue of prepaid paymentinstruments.

2. Exemption from sections 45-IA, 45-IB and45-IC of the RBI Act, 1934 to the following:

(i) Micro Finance Companies i.e. any non-bankingfinancial company which is

a. engaged in micro financing activities, providingcredit not exceeding ¹ 50,000 for a business enterpriseand ¹ 1,25,000 for meeting the cost of a dwelling unit

to any poor person for enabling him to raise his level ofincome and standard of living; and

b. licensed under section 25 of the Companies Act,1956; and

c. not accepting public deposits as defined in sub-paragraph (xv) of paragraph 3 of Non-BankingFinancial Companies Acceptance of Public Deposits(Reserve Bank) Directions, 2016.

(ii) Securitisation and Reconstruction Companies

i.e. a non-banking institution which is a Securitisationcompany or Reconstruction company registered withthe Bank under section 3 of the Securitisation andReconstruction of Financial Assets and Enforcementof Security Interest Act, 2002.

(iii) Nidhi Companies i.e. a non-banking financialcompany -notified under section 620A of the CompaniesAct, 1956 (Act 1 of 1956), as Nidhi Company.

(iv) Mutual Benefit Companies i.e. a non-bankingfinancial company being a mutual benefit company asdefined in sub-paragraph (xii) of paragraph 3 of Non-Banking Financial Companies Acceptance of PublicDeposits (Reserve Bank) Directions, 2016.

(v) Chit Companies i.e. a non-banking financialcompany doing the business of chits, as defined inclause (b) of section 2 of the Chit Funds Act, 1982(Act 40 of 1982).

(vi) Mortgage Guarantee Companies i.e. notifiedas non-banking financial company in terms of section45 I (f)(iii) of the RBI Act, 1934 with the prior approvalof the Central Government, and a company registeredwith the Bank under the scheme for registration ofMortgage Guarantee Companies.

(vii) Merchant Banking Companies i.e. a non-banking financial company subject to compliance withthe following conditions:

a. It is registered with the Securities and ExchangeBoard of India as a Merchant Banker under section 12of the Securities and Exchange Board of India Act,1992 and is carrying on the business of merchant bankerin accordance with the Securities and Exchange Boardof India Merchant Banking (Rules) 1992

and Securities and Exchange Board of India MerchantBanking (Regulations) 1992;

b. acquires securities only as a part of its merchantbanking business;

c. does not carry on any other financial activityreferred to in section 45I(c) of the RBI Act, 1934; and

d. does not accept or hold public deposits as defined

Master Direction - Exemptions from the provisions of RBI Act, 1934


FTAPCCI

in sub-paragraph (xv) of paragraph 3 of Non-BankingFinancial Companies Acceptance of Public Deposits(Reserve Bank) Directions, 2016

Further the entities at sub paragraph (i) to (vii) aboveshall be exempt from the applicability of the provisionsof Non-Banking Financial Companies Acceptance ofPublic Deposits (Reserve Bank) Directions, 2016, Non-Banking Financial Company - Systemically ImportantNon-Deposit taking Company and Deposit takingCompany (Reserve Bank) Directions, 2016 and Non-Banking Financial Company – Non- SystemicallyImportant Non-Deposit taking Company (ReserveBank) Directions, 2016.

3. Exemption from sections 45-IB and 45-IC ofthe RBI Act, 1934 to the following:

Government Companies i.e. a non-banking financialcompany as defined in section 45-I(f) of the RBI Actbeing a Government company as defined in section 617of the Companies Act, 1956.

4. Exemption from sections 45-IA, 45-IB, 45-IC, 45-MB and 45-MC of the RBI Act, 1934 tothe following:

(i) Insurance Companies i.e. a non-bankingfinancial company doing the business of insurance,holding a valid certificate of registration issued undersection 3 of the Insurance Act, 1938 (IV of 1938); andnot holding or accepting public deposit as defined insub-paragraph (xv) of paragraph 3 of Non-BankingFinancial Companies Acceptance of Public Deposits(Reserve Bank) Directions, 2016.

(ii) Stock Exchanges i.e. a non-banking financialcompany being a stock exchange, recognised undersection 4 of the Securities Contracts (Regulation) Act,1956 (42 of 1956) and not holding or accepting publicdeposit as defined in sub-paragraph (xv) of

paragraph 3 of Non-Banking Financial CompaniesAcceptance of Public Deposits (Reserve Bank)Directions, 2016.

(iii) Stock brokers or sub-brokers i.e. a non-banking financial company doing the business of astock-broker or sub-broker holding a valid certificateof registration obtained under section 12 of the Securitiesand Exchange Board of India Act, 1992 (Act 15 of1992) and not holding or accepting public deposit asdefined in sub- paragraph (xv) of paragraph 3 of Non-Banking Financial Companies Acceptance of PublicDeposits (Reserve Bank) Directions, 2016.

Further, the entities at sub-paragraph (i) to (iii) above

shall be exempt from the provisions of Non-BankingFinancial Companies Acceptance of Public Deposits(Reserve Bank) Directions, 2016, Non-BankingFinancial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company(Reserve Bank) Directions, 2016 and Non-BankingFinancial Company – Non- Systemically ImportantNon-Deposit taking Company (Reserve Bank)Directions, 2016.

5. Exemption from sections 45-IA and 45-IC ofthe RBI Act, 1934 to the following:

Venture Capital Fund Companies i.e. a non-bankingfinancial company, which is a venture capital fundcompany holding a certificate of registration obtainedunder section 12 of the Securities and Exchange Boardof India Act, 1992 (Act 15 of 1992) and not holding oraccepting public deposit as defined in sub-paragraph(xv) of paragraph 3 of Non-Banking FinancialCompanies Acceptance of Public Deposits (ReserveBank) Directions, 2016.

Further, such companies shall be exempt from theprovisions of Non-Banking Financial CompaniesAcceptance of Public Deposits (Reserve Bank)Directions, 2016, Non-Banking Financial Company -Systemically Important Non-Deposit taking Companyand Deposit taking Company (Reserve Bank)Directions, 2016 and Non- Banking Financial Company– Non- Systemically Important Non-Deposit takingCompany (Reserve Bank) Directions, 2016.

6. Exemption from section 45-IA of the RBI Act,1934 to the following:

Core Investment Companies i.e. a non-bankingfinancial company being a Core Investment Companyreferred to in the Core Investment Companies (ReserveBank) Directions, 2016, which is not a SystemicallyImportant Core Investment Company, as defined in sub-paragraph (xxiv) of paragraph 3 of the Core InvestmentCompanies (Reserve Bank) Directions, 2016.

7. Exemption from section 45-IA(1)(b) of theRBI Act, 1934 to the following:

Core Investment Companies i.e. a non-bankingfinancial company being a Systemically Important CoreInvestment Company as defined in sub-paragraph(xxiv) of paragraph 3 of the Core InvestmentCompanies (Reserve Bank) Directions, 2016, subjectto the condition that it meets with the capitalrequirements and leverage ratio as specified in the saiddirections.

(C. D. Srinivasan)Chief General Manager


FTAPCCI

The Income Declaration Scheme, 2016 (hereinafter re-ferred to as ‘the Scheme’) came into effect on 1st June,2016. To address doubts and concerns raised by the stake-holders, the Board has issued three sets of FAQs videCircular Nos. 17, 24, 25 & 27 of 2016. In order to ad-dress further queries received from the public relating tothe Scheme, following clarifications are issued.-

Question No.1: In certain cases, the undisclosedincome might be reflected in creditors or otherliability which may be fictitious. Whether in suchcases, the assessee can disclose only such fictitiousliability as it may not be possible to link it to anyspecific asset or investment?

Answer: In a situation where loans, creditors, advancesreceived, share capital, payables etc. are disclosed in theaudited balance sheet but are fictitious in nature, and suchliabilities cannot be directly linked to acquisition of aparticular asset in the balance sheet, then such fictitiousliabilities can be disclosed under the Scheme as suchwithout linking the same with the investment in anyspecific asset. However, in cases where there is a directlink between the fictitious liability and the asset acquiredthen the amount to be declared shall be the fair marketvalue of the acquired asset as on 01.06.2016.

Question No.2: Whether the amount declared underthe Scheme for an earlier assessment year can betaken into account to explain the transaction(s) inthe assessment proceedings for subsequentassessment year(s)?

Answer: As per section 189 of the Finance Act, 2016,any declaration made under the Scheme shall not affectfinality of completed assessments. However, in anassessment proceeding before the Assessing Officer foran assessment year subsequent to the year for which theincome is declared under the Scheme, the income declaredfor an earlier assessment year can be taken into accountto explain the transactions provided there is a nexusbetween the income declared and the transactions of thesubsequent assessment year.

Question No.3: Whether the valuation report ofassets declared under the Scheme shall be called forby the department for any enquiry at any time?

Answer: The valuation report from a registered valuershall not be questioned by the department. However, thevaluer is expected to furnish a true and correct valuationreport in accordance with the accepted principles ofvaluation. In case of any misrepresentation, appropriateaction as per law shall be taken against the registeredvaluer.

Question No.4: Though the fair market value as on1st June, 2016 is taxed under IDS, and such amountwill be treated as cost of acquisition at the time offuture sale of concerned asset, whether suchtreatment shall affect the character of the asset aslong term or short term?Answer: The issue was earlier considered and it wasclarified vide Circular No.17 dated 20.05.2016 that insuch cases period of holding shall be deemed to beginfrom 01.06.2016 as the asset has been revalued on suchdate. However, considering the representation receivedfrom various stakeholders and the fact that this may leadto complications in calculation of capital gain at the timeof sale of asset which was partly funded fromundisclosed income now declared under the Scheme,the matter has been reconsidered. Accordingly, insupersession to the earlier clarification as referred above,it is clarified that the period of holding of asset declaredunder the Scheme shall be based on the actual date ofacquisition of such asset. However, the indexation benefitin respect of the amount declared under the Scheme shallbe available from 01.06.2016 only. The said situation isillustrated as below:- Suppose Mr. ‘A’ purchased a houseon 01.10.2011 for Rs.10 lakh and declares fair marketvalue of the same as on 01.06.2016 under the Scheme atRs.20 lakh. If the said house is sold on 01.10.2017 forRs.30 lakh, the holding period for the house for purposesof computation of capital gain shall be six years i.e. from01.10.2011 to 01.10.2017. As the holding period exceedsthree years, the gains arising from such transfer shall betreated as long term capital gain. Further, the indexationbenefit in this case shall be available on Rs.20 lakh from01.06.2016 to 01.10.2017.Question No.5: What will be the value of immovableproperty to be declared under the Scheme in a casewhere the cost of immovable property is only partly

Circular No.29 of 2016

F.No.142/8/2016-TPLGovernment of IndiaMinistry of Finance

Department of Revenue Central Board of Direct Taxes(TPL Division)

Dated 18th August, 2016

Clarifications on the Income Declaration Scheme, 2016


FTAPCCI

evidenced by a registered deed and partly otherwise?

Answer: In such a case, the option of calculating the fairmarket value of the immovable property based on applyingthe cost inflation index to stamp duty value shall be availableonly in respect of that part of the property the cost ofwhich is evidenced by a registered deed. With regard tothe remaining part the fair market value of the propertyshall be determined based on the provisions of rule 3(1)(d)of the Rules without taking into effect the proviso to thesaid rule. The said situation is illustrated as below:-Suppose, Mr. ‘X’ purchased a piece of land in year 2004-05 for Rs.10 lakh, however the stamp duty value wasRs.15 lakh. Thereafter, in the period 2005-06 to 2007-08, Mr. ‘X’ constructed a two storeyed house on thesaid land. The amount to be declared in respect of thesaid property shall be (A + B) whereA= Value of land (if the assessee opts for valuation onthe basis ofindexation) shall beRs.15 lakh x cost inflation index of 2016-17cost inflation index of 2004-05B= Fair market value of the house (excluding value ofthe land) as on 01.06.2016 as determined by the registeredvaluer or the cost of construction whichever is higher.

Question No.6: A declarant has already filed adeclaration under the Scheme determining the valueof immovable property on the basis of IncomeDeclaration Scheme Rules, 2016 prior to theiramendment vide the Income Declaration Scheme(Third Amendment) Rule notified vide CBDTNotification No. 74 dated 17.8.2016. In such a casewhether the declarant can revise the declarationbased on such amended rules?Answer: Yes, the declarant can revise the fair marketvalue of immovable property declared in the declarationalready filed on account of the amended provisions ofthe Income Declaration Scheme Rules, 2016 even in acase where such revision may result in downward revisionof the declared amount in respect of the immovableproperty.

Question No.7: Whether the payment of amountpayable under the Scheme can be made in cash tothe Banks? Further, whether the amount disclosedunder the Scheme can be deposited in the bankaccount in cash?

Answer: Reserve Bank of India (RBI) has been requestedto issue instructions to banks to allow payment of taxunder the Scheme in cash. RBI has also been requestedto instruct the banks to allow deposit of cash over thecounter in accordance with its existing master circularNo. DBOD No.Leg.BC.21/09.07.006/2014-15 dated01.07.2014.

Question No.8: Whether the information of cashdeposits made in bank as a consequent to declarationmade under the Scheme shall be picked up by FIUor reported to the income-tax department?

Answer: It is clarified that no adverse action shall betaken against the declarant by FIU or the income-taxdepartment solely on the basis of the informationregarding cash deposit made consequent to thedeclaration under the Scheme.

Question No.9: In case a trust or institutionregistered under section 12A of the Income-tax Actfiles declaration under the Scheme, whether theregistration under section 12A shall be cancelled onthe basis of such declaration?

Answer: No, the registration under section 12A of theIncome-tax Act shall not be cancelled solely on the basisof the information furnished in the declaration filed underthe Scheme.

Question No.10: Where a person has claimedweighted deduction, say 175%, on account of makingbogus donation then what should be the amount ofdeclaration under the Scheme?

Answer: The declarant has to declare the amount ofweighted deduction claimed in respect of bogus donationi.e. 175% of the bogus donation in this case.

Question No.11: In a case where the return of incomehas not been filed for an assessment year but thetime limit for filing the same has not expired undersection 139 of the Income-tax Act, whether thedeclaration under the Scheme can be filed for suchassessment year?

Answer: The declaration for the assessment year forwhich the return of income has not been filed can bemade under the Scheme even though the time limit forfiling the return under section 139 of the Income-taxAct has not expired.

Question No.12: In answer (b) to question No.6 ofCircular No.17 of 2016 dated 20.05.2016, it has beenstated that “person is barred from making adeclaration under the Scheme in respect of anundisclosed income in which the survey wasconducted”. Please clarify?

Answer: The clause (b) of answer 6 may be read as “Incase of survey operation, the person is barred for makinga declaration under the Scheme in respect of the previousyear in which the survey was conducted. The person is,however, eligible to make declaration in respect of anundisclosed income of any other previous year”.

(Abhishek Gautam)Under Secretary to the Government of India


FTAPCCIC

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Documents

FTAPCCI 2016/FR 2016 08 31... · 2019. 9. 10. · equity, respectively. So far, IOCL has planted jatropha in 8,000 hectares—for biofuel production in the states of Chhattisgarh,