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Terms Associated with Banking/Banking Sector Reforms

Terms Related to Banking System Banking Sector Reforms

Terms Associated with Banking

Planned Economic Development adopted by India required an active monetary policy. The two stated aims of this policy were:
• Boost economic development
• Control inflationary pressures
The RBI is the main agency for implementing the monetary policy. RBI has defined its monetary policy in terms of ‘adequate financing of economic growth and at the same time ensuring reasonable price stability’. The instruments which RBI employs to achieve a stable monetary policy include:
• Rate at which the central bank lends to commercial banks. In other words, it is the rate at which RBI rediscounts the bill of exchange.
• It thus acts as a signal to the economy on the direction of the monetary policy. RBI uses changes in Bank Rate to regulate fluctuations in exchange rate and domestic inflation.
• Each bank is free to decide the Base Rate below which it will not lend to borrowers. Banks should declare the benchmark based on which such Base Rates are decided. One bank can have only one Base Rate.
• At present it is 6.75%.
• Every Commercial Bank is required to keep a certain percentage of its demand and time liabilities (deposits) with the RBI (either as cash or book balance).
• The RBI varies this ratio as and when it perceives the need to increase or decrease money supply. RBI is empowered to fix the CRR at a rate ranging between 3 per cent and 15 per cent.
• RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.
• At present the CRR is 4%.
• Commercial Banks are also required to keep (in addition to CRR) a certain percentage of their net demand and time liabilities (NDTL) as liquid assets in the shape of cash, gold or approved securities.
• As most of the SLR money is kept in treasury bills, government had, in the past, been using SLR as a means to mobilize low cost resources. This abuse of SLR leads to distortion in the interest rate and credit supply.
• In order to overcome this, Narasimhan Committee recommended that SLR should be brought down to 25 per cent, which is the current rate since 1993-94.
• At present the SLR is 20.50%.
• This refers to the RBI buying and selling eligible securities to regulate money supply.
• Traditionally, RBI was not resorting to this method. However, after the large inflow of foreign funds since 1991, RBI has had to step in to sterilize the flow to avoid excess liquidity.
• Liquid Adjustment Facility is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF consists of repo and reverse repo operations.
• Repurchase Option (REPO) is the rate at which RBI lends to commercial banks. In other words, it is the rate at which our banks borrow rupees from RBI.
• Whenever, the banks have any shortage of funds they can borrow it from RBI. A reduction in the Repo Rate will help banks to get money at a cheaper rate.
• When the Repo Rate increases, borrowing from RBI becomes more expensive.
• At present the Repo Rate is 6.25%.
• The rate at which Reserve Bank of India (RBI) borrows money from banks and hence exact opposite of Repo Rate.
• RBI uses this tool when it feels there too much money floating in the banking system. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.
• An increase in Reverse Repo Rate can cause the banks to transfer more funds to RBI due its attractive interest.
• RBI resorts to the Repo Route to fine tune the liquidity position, without resorting to major policy instruments such as changes in CRR and Bank Rate. However, markets are bound to react to frequent changes in the Repo Rates and this will be reflected in corresponding changes in the deposit and lending rates of commercial banks.
• At present the Reverse Repo Rate is 5.75%
• It is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers).
• The rate is almost always the same amongst major banks.
• Some banks use the name “Reference Rate” or “Base Lending Rate” to refer to their Prime Lending Rate.
• Rates at which the Scheduled banks can borrow funds overnight from RBI against government securities.
• It is a short term borrowing scheme for scheduled commercial banks in case the banks are in severe cash shortage or acute shortage of liquidity.
• MSF has been introduced by RBI to reduce volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.
• At present the MSF rate is 6.75%.
• It is an artificial currency created by the IMF in 1969. SDRs are allocated to member countries and can be fully converted into international currencies so they serve as a supplement to the official foreign reserves of member countries.
• Its value is based on a basket of key international currencies (U.S. dollar, euro, yen and pound sterling).
• It is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances; acquisition of shares/stock/bonds/debentures/securities issued by government, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.
NBFCs are doing functions akin to that of banks; however there are a few differences:
• A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand — immediately or within a very short period — like current or savings accounts).
• It is not a part of the payment and settlement system and as such cannot issue cheques to its customers.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available for NBFC depositors unlike in case of banks.
• Concepts of White label ATMs is adopted from Canada. Since 2006, some banks have been pressing with RBI to introduce white label ATMs in India too.
• White Label ATM or White Label Automated Teller Machines in India will be owned and operated by Non-Bank entities.
• From such White Label ATM customer from any bank will be able to withdraw money, but will need to pay a fee for the services. These white label automated teller machines (ATMs) will not display logo of any particular bank and are likely to be located in non-traditional places.
• The white label automated teller machines are likely to benefit customers as well as banks. With the expansion of ATM network, customers will be able to withdraw funds at more locations, located near their home or place of work.
• After the subprime crisis of the US, the term Shadow Banks came into use in 2007.
• Shadow Banks refer to those organizations that function like banks but are outside the banking regulation.
• They help in providing quick source of credit to the public but have been criticized because they lead to a creation of a bubble and on the defaulting on loans by the borrowers it leads to a crisis at one witnessed in the US.
• Economists express concern over the functioning of shadow banks for several reasons. Shadow banks don’t enjoy powers under SARFAESI Act and therefore it is difficult for them to recover money in case of loan defaults. There are also concerns over their transparency and methods of functioning.
• Bharatiya Mahila Bank Ltd. is the first of its kind in the Banking Industry in India.
• One of the key objectives of the bank is to focus on the banking needs of women and promote economic empowerment.
• It is being looked upon as the beginning of a unique new institution that will provide financial services predominantly to women and women self-help groups to the small businesswomen and from the working women to the high net worth individual.
• It has been merged with SBI.
Some salient features of the bank are:
• Bank will offer 4.5% interest on saving deposits.
• It will not insist on collateral since most title deeds are in name of male family members.
• It will lend to micro businesses like catering, crèches & for upgrading kitchens in households.
• The bank aims to have Rs. 60,000 crore business and 775 branches by 2020.
• It will provide loans primarily to women, and will give low-cost education loans for girls.
• Key positions, including treasury head and security head, held by women.
• Banking Ombudsman is a quasi-judicial authority functioning under India’s Banking Ombudsman Scheme 2006, and the authority was created pursuant to a decision by the Government of India to enable resolution of complaints of customers of banks relating to certain services rendered by the banks.
• The Reserve Bank of India in 2006 announced the revised Banking Ombudsman Scheme with enlarged scope to include customer complaints on certain new areas, such as, credit card complaints, deficiencies in providing the promised services even by banks’ sales agents, levying service charges without prior notice to the customer and non-adherence to the fair practices code as adopted by individual banks.
• Applicable to all commercial banks, regional rural banks and scheduled primary cooperative banks having business in India, the revised scheme came into effect from January 1, 2006.
• Introduced by Dr. K S KrishnaswamyCommitteein 1972, aimed to provide institutional credit to those sectors and segments for whom it is difficult to get credit.
• According to this, SCB have to give 40% of loans (measured in terms of Adjusted Net Bank Credit or ANBC) to the identified priority sectors in accordance with the RBI Regulations.
Objective of Priority Sector Targets
• The overall objective of priority sector lending programme is to ensure that adequate institutional credit flows into some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability.
• If these targets are not realized, banks have to finance the development programme implemented by the government for the concerned sectors.
New PSL Norms:
New PSL rules have been laid down by the RBI following the recommendations of internal working group in 2015.
Categories under PSL
• Agriculture 18%: Within the 18 percent target for agriculture, a target of 8 percent of ANBC is prescribed for Small and Marginal Farmers.
• Micro, Small and Medium Enterprises 7.5 percent.
• Export Credit: Incremental export credit up to 2 percent for domestic banks and foreign banks with 20 branches and above.
• Education: Loans to individuals for educational purposes including vocational courses upto Rs  10 lakh.
• Housing: Loans to individuals up to Rs 28 lakh in metropolitan centres (with population of ten lakh and above) and loans up to Rs 20 lakh in other centres for purchase/construction of a dwelling unit per family.
• Social Infrastructure: Bank loans up to a limit of Rs 5 crore per borrower for building social infrastructure for activities namely schools, health care facilities, drinking water facilities and sanitation facilities in Tier II to Tier VI centres.
• Renewable Energy: Bank loans up to a limit of Rs 15 crore to borrowers (individual households- Rs 10 lakh) including for public utilities viz. street lighting systems, and remote village electrification.
• Others: SHG, JLG etc.
The new regulation also stipulates that banks should give 10% of their loans to the
• Weaker sections which include Small Marginal Farmers, Artisans, village and cottage industries with a credit limit uptoRs 1 lakh
• Beneficiary of certain govt. sponsored schemes,
• SCs/STs,
• SHGs,
• Person with disabilities etc.
Foreign Banks with 20 branches and above already have priority sector targets of 40% and sub-targets for Agriculture and Weaker Sections. These targets are to be achieved by March 31, 2018 as per the action plans approved by RBI.
Foreign banks with less than 20 branches will move to total Priority Sector target of 40 percent by 2019-20. The sub-target for MSME sector will be made in 2018.
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank and is overdue for a period of 90 days.Banks are required to classify NPAs further into
Substandard, Doubtful and Loss Assets.
• Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
• Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
• Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
Status of NPAs in India
Banks have been asked by the RBI to clean up their account statement and their asset book by March 2017 following the huge NPAs pending with these banks.
Resultantly this led to 29 public sector banks writing off Rs1.14 Lakh Crore of bad debts between 2013 -2015, much more than what they had done in the preceding 9 years.
• The gross bad loans of 39 listed Indian banks, in absolute term, rose 92% in fiscal year 2016 to Rs.5.79 trillion even as after provisioning, the net bad loans more than doubled to Rs.3.38 trillion.
• In percentage terms, the average gross non-performing assets (NPAs) of this group of banks rose from 4.41% of loans in 2015 to 7.91% in 2016; net NPAs in the past one year rose from 2.45% to 4.63%.
• Public sector banks, which have close to 70% market share of loans, are more affected than their private sector peers. Two of them have over 15% gross NPAs and an additional eight close to 10% and more.
Impact of NPAs on Banks:
• Rising of NPAs will lead to a crisis of confidence in the market.
• The price of loans, i.e. the interest rates will shoot up.
• Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
• It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan.
• This will hurt the overall demand in the Indian economy which will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
• The trend may continue in a vicious circle and deepen the crisis.
Laws related to NPAs and Bankruptcy
• SARFAESI Act – It empowers Banks/Financial Institutions to recover their NPAs without the intervention of the court, through acquiring and disposing secured assets in case of outstanding amounts greater than 1 lakh. SARFAESI has been used only against the small borrowers primarily from MSME sectors.
• Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA accounts with outstanding amount of Rs. 10 lac and above. DRTs are overburdened leading to slow disposal of cases.
• Lok Adalats:  Section 89 of the Civil Procedure Code provides resolution of disputes through ADR methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalats mechanism offers expeditious, in-expensive and mutually acceptable way of settlement of dispute.
• Under banking regulation act 1949, RBI is empowered to monitor the asset quality of banks by inspecting record books.
• Implementing the Narsimham Committee recommendations, RBI prescribed that banks should make 100 per cent provision for all loss assets or non-performing assets (NPAs) over a period of 2 years, as prudential norms.
• Capital Adequacy Norms required the banks to achieve a capital to risk weighted asset ratio of 8 per cent. A bank’s real capital is assessed after taking into account the riskiness of its assets. Providing a cushion for the riskiness of the asset is necessary to guarantee against insolvency.
• The international norm for Capital Adequacy Ratio was set by Basel Committee on Banking Supervision under the aegis of the Bank of International Settlements (BIS) Basle, Switzerland, after the failure of the German Bank Herstatt in 1974.
• It is a committee of Bank Supervisors consisting of members from each of the G10 countries. The committee is a forum for discussion of the handling of specific supervisory problems.
• It came up with the first set of recommendations which are called Basel I. These included a minimum capital adequacy of 8 per cent of the total risk weighted assets of a bank.
• Many Indian Banks had to go in for public issues to satisfy capital adequacy norms. It was later realized that Basel I norms addressed only financial risk.
• Accordingly, a revised set of norms called Basel II was brought out in June 2004. These are more complex norms and are based on the three pillars of Capital Requirement, Supervisory Review and Market Discipline.
• Despite Basel II norms, the financial market crisis of 2008 revealed the need for further stringency.
• Basel III was proposed in Dec 2010 in order to improve the banking sector’s ability to absorb shocks arising from financial and economic stress.
• RBI has issued instructions for the adoption of Basel III norms from Jan 2013 in a phased manner to be completed by March 31, 2018.
• This will require fresh infusion of capital for which dilution of PSU bank capital has been decided without diluting govt. control.

Economic Survey Chapter – 5

Fiscal Framework: The World is Changing, Should India Change Too?

Fiscal Framework: The World is Changing, Should India Change Too?(Economic Survey Chapter – 5)

Advanced countries have embraced fiscal activism, giving a greater role to counter-cyclical policies during crisis. But India’s experience has taught the opposite lessons increase spending  and deficit during accelerating growth lead to financial crisis during 1990’s and vulnerability during 2013.On primary deficit front India has been a outlier with high primary deficit vis-à-vis other countries. This means government is dependent on growth and favourable interest rates to contain debt to GDP ratio. Events have reaffirmed the need for rules to contain activism, so as to rein in excessive spending during booms and inordinate deficits during downturns.
Technical Terms
A. Procyclical and Counter Cyclical fiscal Policies – A ‘procyclical fiscal policy’ can be summarised simply as governments choosing to increase public spending and reduce taxes during an economic boom, but reduce spending and increase taxes during a recession. A ‘countercyclical’ fiscal policy refers to the opposite approach: reducing spending and raising taxes during a boom period, and increasing spending/cutting taxes during a recession.

B. Fiscal activism: fiscal policies of a government which believes in active participation in the national economy to affect its economic agenda and objectives.
C. Quantitative easing – One of the main tools they have to control growth is raising or lowering interest rates. Lower interest rates encourage people or companies to spend money, rather than save. But when interest rates are at almost zero, central banks need to adopt different tactics – such as pumping money directly into the financial system. Central Bank prints money and then uses this money to buy bonds from investors such as banks or pension funds. This increases the overall amount of useable funds in the financial system. Making more money available is supposed to encourage financial institutions to lend more to businesses and individuals. It can also push interest rates lower across the economy, even when the central bank’s own rates are just about as low as they can go. This in turn should allow businesses to invest and consumers to spend more, giving a knock-on boost to the economy.
Gist of Economic Survey Chapter
The Chapter compare Indian response on fiscal policies of flow (deficit) and stock (debt) compared to other world economies over the period and during time of crisis especially during global financial crisis and what should be India’s future fiscal policy framework toward these ends.
In this time of pessimism the advance countries followed fiscal expansionary policies, however even after cyclic conditions are changing, advance economies may favour activist fiscal policies especially in case of USA. In current times, the new view of fiscal policy shifts the emphasis from stocks to flows, arguing for greater activism in flows (deficits) and minimizing concerns about the sustainability of the stocks (debt). Should India follow the same path? This is imperative at a time when India is reviewing the fiscal policy framework enshrined in the FRBM Act of 2003.
India and the World: Flows
As Advanced Economies (AEs) are taking path of activist fiscal policies considering challenges of weak economic activity and the inability to address this problem through monetary policy, India may have the need for counter-cyclic policy due to twine deficit problem and debt overhang.
However India’s situation differs from that of the AEs in some important ways which run counter to taking path of activist counter-cyclical policy. This include High growth rate along with substantially high inflation rate,As a result, monetary policy is nowhere close to the zero lower bound.
Apart from it India, India’s fiscal stance has an in-built bias toward higher deficits, because spending rises pro-cyclically during growth surges, while revenue and spending are deployed counter-cyclically during slowdowns. The inability to rein in these deficits played a key role in undermining India’s external situation which resulted in full blown crisis of 1991 and later crisis of 2013. This pattern creates fiscal fragility. Fiscal rules, insofar as they can be effective and binding, must therefore aim to prevent spending surge during booms and constrain counter-cyclicality during downturns.
India and the World: Stocks
India has stock problem which include high debt-to-GDP ratio compared to many other emerging markets. However its fiscal strength can be accessed by taking fiscal commitment and debt dynamics into consideration.
Regarding fiscal commitment,if fiscal and debt sustainability is about confidence and trust as revealed in the ability and willingness of governments to limit their debt levels and pay them off without disruption than India has a very good record of keeping its debt commitment both internally and externally.
On debt dynamics, the implications for the growth interest rate differential are stark. India would have a favourable growth interest rate differential compared to AEs because of its high growth rate for next 15 years. This is favourable for debt sustainability, however challenge lies in quite high primary deficit that is the shortfall between its receipts and its non-interest expenditures, compared to its peers. As a result of running a primary deficit, the government is dependent on growth and favourable interest rates to contain the debt ratio. This could result in upward spiral of debt ratio if growth rate and interest rates are faltered.
Back in 2003 there was common agreement that fiscal rules were better than discretion, that fiscal policy should be aimed at medium-term objectives such as reducing the stock of debt rather than shorter-term cyclical considerations. Now, advanced countries have moved away from these principles toward greater fiscal activism, giving counter-cyclical policies much more of a role and giving correspondingly less weight toward curbing the debt stock. But India’s experience has taught the opposite lessons. It has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns. It has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction.
In short, it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM. Even as these basic tenets of the FRBM remain valid, the operational framework designed in 2003 will need to be modifiedto reflect the India of today, and even more importantly the India of tomorrow. This, then, will be the task of the FRBM Review Committee: to set out a new vision, an FRBM for the 21st century.
Supplementary Readings
A. Fiscal Responsibility and Budget Management (FRBM) Act
Indian economy faced with the problem of large fiscal deficit and its monetization spilled over to external sector in the late 1980s and early 1990s. The large borrowings of the government led to such a precarious situation that government was unable to pay even for two weeks of imports resulting in economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms. After a good start in the early nineties, the fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98. The Government introduced FRBM Act,2003 to check the deteriorating fiscal situation.
FRBM Act provides a legal institutional framework for fiscal consolidation. Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is
• To ensure inter-generational equity in fiscal management
• Long run macroeconomic stability
• Better coordination between fiscal and monetary policy, and
• Transparency in fiscal operation of the Government
The Government notified FRBM rules in July 2004 to specify the annual reduction targets for fiscal indicators. The FRBM rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09. Similarly, revenue deficit has to be reduced with complete elimination to be achieved by 2008-09. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach.
The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit. The Act also requires the government to lay before the parliament three policy statements in each financial year namely
• Medium Term Fiscal Policy Statement
• Fiscal Policy Strategy Statement and
• Macroeconomic Framework Policy Statement.
To impart fiscal discipline at the state level, the Twelfth Finance Commission gave incentives to states through conditional debt restructuring and interest rate relief for introducing Fiscal Responsibility Legislations (FRLs). All the states have implemented their own FRLs.
The implementation of FRBM Act/FRLs improved the fiscal performance of both centre and states. The States have achieved the targets much ahead the prescribed timeline. Government of India was on the path of achieving this objective right in time. However, due to the global financial crisis, this was suspended and the fiscal consolidation as mandated in the FRBM Act was put on hold in 2007-08.The crisis period called for increase in expenditure by the government to boost demand in the economy. As a result of fiscal stimulus, the government has moved away from the path of fiscal consolidation. However, it should be noted that strict adherence to the path of fiscal consolidation during pre crisis period created enough fiscal space for pursuing counter cyclical fiscal policy.
Amendments to FRBM Act
Through Finance Act 2012, amendments were made to the Fiscal Responsibility and Budget Management Act, 2003 through which it was decided that in addition to the existing three documents, Central Government shall lay another document – the Medium Term Expenditure Framework Statement (MTEF) – before both Houses of Parliament in the Session immediately following the Session of Parliament in which Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement are laid.
Concept of “Effective Revenue Deficit” and “Medium Term Expenditure Framework” statement are the two important features of amendment to FRBM Act in the direction of expenditure reforms. Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. This will help in reducing consumptive component of revenue deficit and create space for increased capital spending. Effective revenue deficit has now become a new fiscal parameter. “Medium-term Expenditure Framework” statement will set forth a three-year rolling target for expenditure indicators.
As per the amendments in 2012, the Central Government has to take appropriate measures to reduce the fiscal deficit, revenue deficit and effective revenue deficit to eliminate the effective revenue deficit by the 31st March, 2015 and thereafter build up adequate effective revenue surplus and also to reach revenue deficit of not more than 2 % of Gross Domestic Product by the 31st March, 2015.
Vide the Finance Act 2015, the target dates for achieving the prescribed rates of effective deficit and fiscal deficit were further extended. The effective revenue deficit which had to be eliminated by March 2015 will now need to be eliminated only after 3 years i.e., by March 2018. The 3% target of fiscal deficit to be achieved by 2016-17 has now been shifted by one more year to March 2018.
Committee to Review the Implementation of the FRBM Act
In the Union Budget 2016-17 it was proposed to constitute a Committee to review the implementation of the FRBM Act and give its recommendations on the way forward. This was in view of the new school of thought which believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the Government to deal with dynamic situations. A time has come to review the working of the FRBM Act, especially in the context of the uncertainty and volatility which have become the new norms of global economy.
The FRBM Review Committee has given its report recently. The Committee has done an elaborate exercise and has recommended that a sustainable debt path must be the principal macro-economic anchor of our fiscal policy. The Committee has favoured Debt to GDP of 60% for the General Government by 2023, consisting of 40% for Central Government and 20% for State Governments. Within this framework, the Committee has derived and recommended 3% fiscal deficit for the next three years.
The Committee has also provided for ‘Escape Clauses’, for deviations upto 0.5% of GDP, from the stipulated fiscal deficit target. Among the triggers for taking recourse to these Escape Clauses, the Committee has included “far-reaching structural reforms in the economy with unanticipated fiscal implications” as one of the factors. Considering all these aspects, budget 2017-18 has pegged the fiscal deficit for 2017-18 at 3.2% of GDP and 3% in the following year.

Unified Payment Interface

Unified Payment Interface

Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.
The key objective of a unified system is to offer an architecture to facilitate next generation online immediate payments leveraging trends such as increasing smartphone adoption, Indian language interfaces, and universal access to Internet and data.
UPI is expected to further propel easy instant payments via mobile, web, and other applications. The payments can be both sender (payer) and receiver (payee) initiated and will be carried out in a secure, convenient, and integrated fashion. Virtual payment addresses, 1-click 2-factor authentication, Aadhaar integration, use of payer’s smartphone for secure credential capture, etc. are some of the core features. It supports the growth of e-commerce, while simultaneously meeting the target of financial inclusion.
UPI is important for implementation of the JAM (Jhan Dhan Yojana, Aadhar and Mobile) trinity.

National Company Law Tribunal

National Company Law Tribunal

The Central Government has constituted National Company Law Tribunal (NCLT) under section 408 of the Companies Act, 2013.
The National Company Law Tribunal NCLT is a quasi-judicial body, exercising equitable jurisdiction, which was earlier being exercised by the High Court or the Central Government. The Tribunal has powers to regulate its own procedures.
The establishment of the National Company Law Tribunal (NCLT) consolidates the corporate jurisdiction of the following authorities:
1. Company Law Board
2. Board for Industrial and Financial Reconstruction.
3. The Appellate Authority for Industrial and Financial Reconstruction.
4. Jurisdiction and powers relating to winding up restructuring and other such provisions, vested in the High Courts.
In the first phase the Ministry of Corporate Affairs have set up eleven Benches, one Principal Bench at New Delhi. These Benches will be headed by the President and 16 Judicial Members and 09 Technical Members at different locations.
Powers of NCLT
The NCLT has been empowered to exercise the following powers:
1. Most of the powers of the Company Law Board under the Companies Act, 1956.
2. All the powers of BIFR for revival and rehabilitation of sick industrial companies;
3. Power of High Court in the matters of mergers, demergers, amalgamations, winding up, etc.;
4. Power to order repayment of deposits accepted by Non-Banking Financial Companies as provided in section 45QA of the Reserve Bank of India Act, 1934;
5. Power to wind up companies;
6. Power to Review its own orders.
The NCLT shall have powers and jurisdiction of the Board for Industrial and Financial Reconstruction (BIFR), the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), Company Law Board, High Courts relating to compromises, arrangements, mergers, amalgamations and reconstruction of companies, winding up etc. Thus, multiplicity of litigation before various courts or quasi-judicial bodies or forums have been sought to be avoided. The powers of the NCLT shall be exercised by the Benches constituted by its President.

Investor-State Dispute Settlement (ISDS)

Investor-State Dispute Settlement (ISDS)

• ISDS or investment court system (ICS) is a system through which individual companies can sue countries for alleged discriminatory practices.
• If an investor from one country (the “home state”) invests in another country (the “host state”), both of which have agreed to ISDS, and the host state violates the rights granted to the investor under public international law, then that investor may bring the matter before an arbitral tribunal.
• Foreign investors alone (including their subsidiaries and shareholders) are able to initiate claims against the government; the government cannot initiate an ISDS proceeding.
• The decision-makers in these ISDS proceedings are private arbitrators appointed on a case by-case basis to decide the investors’ claims against the host government.
• When deciding the case, the substantive law the arbitrators apply is not the domestic law of the “host” state that normally governs the investment. Rather, it is the law of the treaty, as interpreted by the arbitrators.
• If the arbitrators find that the government violated the treaty, they can order the government to pay the investor substantial damages. If a tribunal issues an award against the government, courts of most countries are required to enforce it.
• ISDS is an instrument of international public law and provisions are contained in a number of bilateral investment treaties, in certain international trade treaties, such as NAFTA
Why it has been established?
• Firstly, the investor may not want to bring an action against the host country in that country’s courts because it might think they are biased or lack independence.
• Secondly, investors might not be able to access the local courts in the host country. There are examples of cases where countries have expropriated foreign investors, not paid compensation and denied them access to local courts. In such situations, investors have nowhere to bring a claim, unless there is an ISDS provision in the investment agreement.
• Thirdly, countries do not always incorporate the rules they sign up to in an investment agreement into their national laws. When this happens, even if investors have access to local courts, they may not be able to rely on the obligations the government has committed itself to in the agreement.
Criticisms of ISDS
• ISDS provides an additional channel for investors to sue governments, including a belief that all disputes (even international law disputes) should be resolved in domestic courts.
• ISDS could put strains on national treasuries or that ISDS cases are frivolous.
• It decreases the potential impact of ISDS rulings on the ability of governments to regulate.


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