The Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code (IBC) 2016

In 2016, as non-performing assets and debt defaults in India increased, and it became apparent that traditional loan recovery methods like the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), Lok Adalats, and Debt Recovery Tribunals were underperforming, the Insolvency and Bankruptcy Code (IBC) was introduced. The purpose of the IBC code was to restructure India’s corporate distress resolution framework and combine existing laws to establish a time-bound mechanism that prioritizes creditor-in-control over debtor- in-possession.

When the IBC triggers insolvency, there are two possible outcomes: resolution or liquidation. If resolution attempts are unsuccessful, the company’s assets are liquidated. Initially, efforts are made to resolve the insolvency by either developing a new ownership plan or restructuring.

What is the process followed under the IBC?

• Section 6 of the Insolvency and Bankruptcy Code (IBC) permits a bank or other entity that has lent money for operational purposes to initiate a Corporate Insolvency Resolution Process (CIRP) in the case that a firm that has borrowed money to operate its business, known as a corporate debtor (CD), defaults payments on its loans.

• Prior to the pandemic, a creditor or debtor had to file

for bankruptcy if there was a minimum amount of delinquency of ₹1 lakh. However, the government raised this level to ₹1 crore in order to alleviate the burden on businesses.

• In order to file for bankruptcy, a person has to go via a designated adjudicating authority (AA) as per the Indian Bankruptcy Code (IBC); these AAs are the several National Company Law Tribunal (NCLT) benches spread throughout India.

• The Tribunal has to provide a reason if the admission is delayed, and it has 14 days to accept or deny the application.

• After an application is accepted by the AA, the CIRP, or resolution procedure, starts. The resolution process must be completed within the revised, obligatory timeframe of 330 days.

• Following admission of the application, the AA designates an Interim Resolution Professional (IRP) who is enrolled with an insolvency professional agency (IPA). IRPs may include lawyers, corporate secretaries, experienced qualified chartered accountants, and so on.

• Following the Tribunal’s appointment, the IRP seizes control of the defaulter’s assets and business affairs, gathers data from Information Utilities (repositories that monitor the debtor’s credit history), and then arranges for the formation of a Committee of Creditors, or CoC.

• The most significant corporate decision-making body in any CIRP is the Committee of Creditors (CoC), which consists of all unrelated financial creditors of a defaulting company. Its role is to determine whether the defaulting company is viable enough to be liquidated or reformed and given a fresh start.

• Additionally, it designates an insolvency professional (IP) to oversee the company’s operations throughout the CIRP. This IP may be the same as the IRP or a different expert.

• The Intellectual Property Office (IP) invites and examines recommendations for a firm’s resolution plan, which may involve debt restructuring, mergers, or company demergers.

• It sends qualifying plans to the Committee on Continuities (CoC), which has the authority to adopt a plan provided it receives 66% of committee members’ vote share. The business goes into liquidation if the CoC rejects any settlement proposal.

• If a plan is accepted, the debtor is required to carry out the plan after it is submitted by the CoC to the Tribunal (before the maximum 330-day deadline). A plan may also be rejected by AA.

• Pre-packs, or the pre-pack insolvency resolution procedure (PIRP), were recently added to the IBC for Micro, Small, and Medium-Sized Enterprises (MSMEs).

• In a pre-pack resolution, a company’s owners and

creditors reach an out-of-court agreement to sell the company to a bidder who expresses interest. A third party or a business associate could be the buyer. The pre- pack settlement process can only be used for defaults up to Rs. 1 crore, according to the present law.

What are the challenges for the IBC? Time taken

• The IBC was touted as a time-bound mechanism in the face of the often-laggard states of older mechanisms.

• Here, timeliness is essential to prevent additional declines in the business’s viability or asset worth. The initial timeline for the resolution procedure was 180 days, with a 90-day extension allowed by the IBC.

• Following that, the IBC was amended to further extend the deadline for completion to 330 days, or nearly a year.

• In 2018, despite the 180+90 day timeline, the majority

of cases (ranging from corporations owing less than

₹50 crore to those owing more than ₹1000 core) were settled in less than 300 days. But in FY22, cases involving businesses that owed more than ₹1,000 crore took 772 days to be resolved. Over the previous five years, the average number of days required to resolve such cases increased significantly.

Haircuts

• The debt that the lender forgoes as a portion of the outstanding claim is known as a haircut.

• In 2021, the Parliamentary Standing Committee on Finance noted that over the five years of the IBC, creditors were required to pay an average of 80% in damages in over 70% of cases.

Other challenges

• There exist additional obstacles to the IBC, a few of which were identified by the Standing Committee. These had to do with how the IPs and CoCs conducted themselves. The Committee recommended for greater openness and the creation of a professional code of conduct for the Committee of Creditors, stating that the committee of creditors had substantial discretion in adopting resolution plans and selecting IPs.

• As for insolvency professionals, the Standing Committee pointed out that 61% of the 203 professionals inspected since 2016 had disciplinary action taken against them by the Insolvency Professional Agencies (IPAs) and the IBBI. It also added that, given the significant role that IPs play, there should to be a single regulator for them in order to guarantee best practices and transparency.

5:25 Rule (2014)

• Also known as, Flexible Structuring of Long-Term Project Loans to Infrastructure and Core Industries.

• Refinancing for long-term projects is necessary since the project timeframe is lengthy and the firms do not receive the money back into their books for a long time. Therefore, it was suggested to preserve the cash flow of these organizations, as loans are required every 5-7 years.

• The 5:25 scheme allows banks to extend long-term loans of 20-25 years to match the cash flow of projects.

Joint Lenders Forum – 2014

• The Joint Lender’s Forum is a dedicated body of lender banks that is formed to speed up decisions when an asset of Rs 100 crore or more turns out to be a stressed asset.

• RBI has issued guidelines for the formation of JLF in 2014 for the effective management of stressed assets.

• Instructions for the formation of JLF is mentioned in the RBI guideline titled ‘Framework for Revitalizing Distressed Economy’ (2014).

• All PSBs whose loans have experienced stress were included in its creation.

• Its purpose is to prevent loans from many banks being given to the same person or business.

• It is designed to avoid situations in which someone takes out a loan from one bank and gives out a loan from another.

Mission Indradhanush (2015)

Components of Mission Indradhanush

• A seven-point plan called Mission Indradhanush aims to solve the problems that public sector banks (PSBs) face. As mentioned, the P J Nayak Committee on Banking Sector Reforms recommended many of the actions that were implemented.

• Appointments, Banks Board Bureau, Capitalization, De- stressing, Empowerment, Framework of Accountability, and Governance Reforms are among the seven components (ABCDEFG).

• Appointments - separation of posts of CEO and MD to check excess concentration of power and smoothen the functioning of banks; also, induction of talent from private sector (recommendation of P J Nayak Committee)

• Bank Boards Bureau - will replace the appointments board of PSBs.

• It will advise the banks on how to raise funds and how to go ahead with mergers and acquisitions.

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Capitalisation

• Capitalisation of the banks by inducing Rs 70,000 crore into the banks in the next 4 years

• Banks are in need of capitalisation due to high NPAs and due to need to meet the new BASEL- III norms

• De-stressing

• Solve issues in the infrastructure sector to check the problem of stressed assets in banks

• Empowerment

• More independence for banks and more leeway in hiring staff.

• Framework of accountability

• The new key performance indicators will serve as the foundation for the banks’ assessment. In addition to these qualitative factors, such human resource initiatives and calculated actions to enhance asset quality, these quantitative characteristics include NPA management, return on capital, company growth and diversification and financial inclusion.

• Governance Reforms

• GyanSangam conferences are held between bankers and government representatives to resolve problems in the banking industry and develop future policies.

Strategic Debt Restructuring (SDR)Scheme

• Under SDR, banks who have given loans to a corporate borrower gets the right to convert the full or part of their loans into equity shares in the loan taken company.

• The SDR scheme which was introduced by the RBI in June 2015.

• The SDR an initiative can be taken by the group of banks or JLF that have given loans to the particular defaulted entity.

• Its basic purpose is to ensure that more stake of promoters in reviving stressed accounts and providing banks with enhanced capabilities for initiating a change of ownership in appropriate cases.

Asset Quality Review – 2015

• AQR is the result of asset quality inspection by the RBI

on commercial banks.

• Main feature of AQR is that it may not be periodic and rather it is random check.

• AQR is an exercise conducted by the Reserve Bank of India (RBI) to assess the actual level of bad loans in the industry

S4A (2016)

• The RBI introduced the Scheme for Sustainable Structuring of Stressed Assets as an optional framework.

• The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi- equity instruments.

• When this borrower makes a full recovery, the lenders are expected to benefit.

Comprehensive 4R’s strategy

• The government has put in place a comprehensive plan known as the “4Rs,” which includes recapitalizing PSBs, resolving and recovering value from stressed accounts, publicly identifying non-performing assets (NPAs), and reforming PSBs and the larger financial ecosystem to create a clean and responsible system. Under the 4R’s policy, extensive measures have been implemented to lower PSB NPAs, including, among other things, the following:

• The Insolvency and Bankruptcy Code (IBC) has had a significant impact on the shift in credit culture. It has altered the relationship between creditors and borrowers, removing promoters and owners’ control over the defaulting company and prohibiting willful defaulters from participating in the resolution process or buying capital from the market.

• In order to enable PSBs to seek prompt resolution of NPAs, the government has invested Rs. 2.46 lakh crore in recapitalization of PSBs during the last four fiscal years, while PSBs have raised an additional Rs. 0.66 lakh crore on their own.

• The PSBs Reforms Agenda has resulted in the implementation of several significant reforms, such as the following:

• Board-approved PSB Loan Policies now require project finance to tie up all required permissions, approvals, and linkages prior to disbursement; to closely examine the group balance sheet and ring- fence cash flows; and to assess non-fund and tail risk.

• In order to reduce the risk of fraud and deception, the use of third-party data sources for comprehensive due diligence across data sources has been used.

• With high-value loans, monitoring has been strictly separated from sanctioning functions. To ensure effective monitoring of loans exceeding Rs. 250 crores, specialized monitoring companies that combine financial and subject knowledge have been deployed.

• Online end-to-end OTS platforms have been established in order to guarantee prompt and improved realisation of one-time settlements (OTSs).

Enhanced Access and Service Excellence (EASE) Program

• The EASE Reforms Agenda, written by the Boston Consulting Group and commissioned by the Indian Banks’ Association, was introduced by the Indian government and Public Sector Banks (PSBs).

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With the use of more than 120 objective indicators, the EASE Reforms Index assesses each PSB’s performance and offers banks a clear grading system that helps them pinpoint their areas of strength and growth.

• By putting a strong emphasis on data analytics, automation, and digitization, the goal is to promote healthy competition among PSBs and advance modernization initiatives. Since its launch, the EASE initiative has given PSBs access to a shared set of reform goals with the goal of implementing cutting-edge changes that will improve profitability, asset quality, customer service and digital capabilities.

Phases of EASE Reforms EASE 1.0

The EASE 1.0 report states that Public Sector Banks’ (PSBs’)

performance in resolving non-performing assets (NPAs) in a transparent way has significantly improved.

EASE 2.0

• EASE 2.0, an expansion of EASE 1.0, included further changes in six areas to guarantee that PSBs undergo an irreversible transition, enhance their methods and procedures, and provide superior outcomes.

• Based on over 120 objective parameters in areas including customer service, ethical banking, and financial inclusion, the EASE index evaluates the performance of PSBs.

EASE 3.0

• It is an initiative of the Indian government to give young India access to innovative financial services.

• The objective is to enhance and elevate the client experience in public sector banks through the use of digital features including mobile banking, palm banking, and dial-a-loan.

• EASE 3.0 encompasses several themes, such as outcome- centric HR, institutionalized prudent banking, tech- enabled banking, smart lending, governance and client protection.

EASE 4.0

• EASE 4.0 is a set of reforms introduced by the Indian finance minister for Public Sector Banks (PSBs) to enable smarter banking. Co-lending with non-banking businesses, digital projects, funding for agriculture, and technological resilience are the key areas of emphasis. Data analytics, automation and digitization are highlighted in the reforms.

EASE 5.0

Each PSB will also develop a bank-specific three-year strategic roadmap that covers various topics, including business growth, profitability, risk customer service, operations and capability development

Asset Reconstruction Company

• An asset reconstruction business is a unique kind of financial institution that purchases the bank’s debtors at a mutually agreed upon price and makes independent efforts to collect the debts or related securities.

Asset Reconstruction

• It is the purchase of any bank or financial institution’s right or interest in advances, loans, bonds, debentures, guarantees, or any other credit facility that banks offer with the intention of realizing its value. The phrase “financial assistance” refers to these loans, advances, bonds, guarantees and other credit facilities collectively.

Securitisation

• The acquisition of financial assets can be accomplished by any method, including the issuance of security receipts to qualified buyers. The financial assets would be represented by such security receipts as an undivided interest.

Working of the ARC

Bad Bank

• A bad bank is an organization that deals in assets that are unstable and high risk. A collection of banks, financial institutions, or banks themselves own these assets. Its establishment was to help banks eliminate problematic debt from their balance sheets. It lets them concentrate on their primary responsibilities, which are approval of credit and deposit processing. This structure usually results in stockholders and bondholders losing money, not depositors. The procedure may lead to bank insolvency, at which point the banks may be recapitalized, liquidated, or nationalized.

• Usually, the primary objective of a bad bank is not to generate profits, but to free up banks from the weight of holding a large quantity of stressed assets and stimulate them to make more aggressive loans.

• National Asset Reconstruction Ltd. (NARCL) would be the name of India’s bad bank. This NARC will operate as a company that rebuilds assets. It will buy bank loans that

have fallen into default, freeing the banks from their non- performing asset (NPA) liabilities. Subsequently, NARC will attempt to sell the stressed loans to distressed debt buyers.

• An attempt would be made to market and sell them by India Debt Resolution Company Ltd. (IDRCL). The involved bank will get a portion of the proceeds after the stressed asset is sold. In the event that the Indian bad bank is unable to sell the stressed debt at all or for a profit, the government guarantee will be invoked.

National Asset Reconstruction Company Limited (NARCL)

• Setting up of the NARCL was announced in the Union Budget 2021-22. The objective was to construct a bad bank› which would house bad loans of US$ 62.63 million (Rs.500crores) and above.

• NARCL will have two distinct organizational structures: an asset reconstruction company (ARC) and an asset management business (AMC) will work together to manage and recover stressed assets. The partnership involves both public and private sector banks (PSBs), with PSBs keeping a 51 percent stake in NARCL.

• Equity from banks and non-banking financial corporations (NBFCs) would be used to capitalize NARCL. It will also issue fresh debt if needed. The Government of India’s guarantee will reduce the amount of upfront money required. The India Debt Resolution Company Ltd. (IDRCL) would provide support to the NARCL.

• The NARCL made an offer to purchase five companies’ impaired loan accounts in August 2022, including Future Retail.

India Debt Resolution Company Ltd. (IDRCL)

• The IDRCL is an operational entity and service firm that was created to handle the NARCL’s assets with the assistance of turnaround specialists and market experts. After NARCL’s offer is accepted, IDRCL will be included for management and value addition. By submitting an offer to the main bank, NARCL will buy assets. Private Banks will own the remaining 49% of IDRCL, with public FIs and PSBs holding the remaining 49%.

Challenges Associated with Bad Banks

• Changing the issue: A bad bank is expected to take up the debts owing by the commercial banks. The extent to which it will aid in resolving the NPA situation is unknown, though. The reason for this is that the commercial banks that exist today have tried almost every effective remedy. As such, it is only reasonable to assume that the bad bank will make matters worse rather than better.

• Losses incurred by banks: Similar to the previous argument, the banks’ haircuts would impact their profit

and loss account and profitability. This can raise questions about the bank’s management and the decisions it has made about haircuts in the past and present.

• Concern over Unethical Behaviour: Employees at the bad bank might use unethical methods to increase the recovery on a bad loan because they would be under pressure to succeed. This problem has remained in the past due to reports of harassing bank customers who were unable to make their payments.

• Not addressing the root problem: If governance reforms are not made, the public sector banks, which accounted for 86% of the total NPAs, may continue operating as they have in the past and wind up piling up bad debts once more. Furthermore, the notion of a bad bank is akin to shifting debt from one government pocket the public sector banks to another the bad bank.

Prompt Corrective Action (PCA) Framework

• According to the RBI itself, “The PCA framework’s goal is to enable supervisory intervention at the appropriate moment and mandate that the supervised entity initiate and carry out corrective measures in a timely manner in order to restore its financial health.” It is also the goal of the PCA framework to serve as an efficient instrument for market discipline. The Reserve Bank of India is free to take further steps at any moment, as long as they are appropriate, in addition to the remedial actions outlined in the PCA framework. Several banks have been placed within the framework and had their operations restricted over the course of the last nearly two decades (the PCA was first informed in December 2002).

What are banks measured on?

• In accordance with the 2017 revisions to the PCA standards, banks were to be assessed based on capital, profitability, asset quality, and leverage. The capital that a bank should retain as a percentage of its total assets is determined by the capital adequacy ratio.

• The adequacy measure contains buffers, such the 2.5% capital conservation buffer, that can be loosened to promote more lending during economic downturns but can also be utilized to shore up capital during prosperous times.

• Asset quality indicates the percentage of loans that are unlikely to be repaid. This is shown in the net non- performing asset ratio, which is the amount of all advances that are designated as “non-performing” after bad loans have been provisioned for.

• Profitability is determined by dividing net income (profit) by total assets to get return on assets (RoA).

• A lender’s level of borrowing to create income is indicated by their leverage ratio. As the leverage increases, Risk for Lender also inclreases accordingle.

What curbs do banks face under the PCA?

• If banks are unable to stop the decline, they proceed with more stringent measures.

• The first is restrictions on banks’ ability to distribute dividends and remit profits. Promoter capital is supposed to be brought in by foreign banks.

• Banks in the second group also encounter restrictions on branch expansion.

• The bank is additionally subject to capital expenditure constraints, with some exceptions, in the last category.

• Additionally, in the areas of strategy, governance, credit risk, market risk and human resources, the RBI is able to take discretionary steps.

What has changed?

• The notification no longer uses return on assets as a PCA qualifying factor. Furthermore, the 2021 notification also excludes Small Finance Banks and Payment Banks from its jurisdiction, whereas the 2017 notification only pertained to scheduled commercial banks and excluded Regional Rural Banks.

• In the most recent set of guidelines, the RBI made it very clear that leaving the PCA would depend on four ongoing quarterly results, one of which would be the audited annual financial statement in accordance with the new framework in addition to the supervisory comfort of the RBI and the profitability sustainability evaluation.

• The Reserve Bank of India (RBI) had also brought non- banking finance companies (NBFCs) under the ambit of the prompt corrective action (PCA) framework.

• It will cover all non-deposit taking NBFCs in the middle, higher, and top levels as well as all deposit-taking NBFCs, with the exception of government, primary dealer, and home finance businesses.

Basel Accords

• The Basel Committee on Bank Supervision (BCBS) established the Basel Accords, which are a collection of three consecutive accords pertaining to banking regulation. The 1980s saw the start of the multi-year development of the Basel Accords. The BCBS was established in 1974 to provide a venue for frequent cooperation on banking supervisory issues among its member nations. Since the BCBS is located at the Basel, Switzerland offices of the Bank for International Settlements (BIS), the meetings are known as the “Basel Accords”.

Basel I

• Basel I, the initial Basel Accord, was released in 1988 and addressed the sufficiency of capital for financial establishments. The five risk categories of financial institution assets are 0%, 10%, 20%, 50%, and 100%. The capital adequacy risk is the possibility that an unforeseen loss may harm a financial organization.

• Banks that conduct business overseas are required by Basel I to maintain capital (Tier 1 and Tier 2) equivalent to a minimum of 8% of their risk-weighted assets. This guarantees banks have sufficient capital to cover their responsibilities.

• In 1999, India embraced the Basel I rules. Basel I mandates that all Scheduled Commercial Banks maintain a Capital Adequacy Ratio (CAR) or Capital to Risk Assets Ratio (CRAR) of 9%. The RBI published guidelines to this effect.

Basel II

• The second Basel Accord, often known as Basel II or the Revised Capital Framework, was a modification to the first accord.

• It concentrated on three primary areas: the appropriate use of disclosure as a lever to reinforce market discipline and promote sound banking practices, including supervisory review; minimum capital requirements; and supervisory examination of an institution’s capital adequacy and internal assessment process. The three pillars refer to these areas of concentration taken together.

• The RBI used a phased strategy to implement Basel-II standards in India. As per RBI, all SCBs were bound to comply with Basel-II norms.

Basel III

• Following the 2008 financial crisis and the failure of Lehman Brothers, the BCBS made the decision to revise and reinforce the Accords. Regarding the general layout of the capital and liquidity reform package, a consensus was achieved in November 2010. Basel III is the current name for this accord.

• The three pillars are continued under Basel III, which also includes new specifications and security measures.

• The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters- Capital, Leverage, Funding and Liquidity.

• A bank’s Tier 1 and Tier 2 minimum capital adequacy ratio (including the capital conservation buffer) must be at least 10.5% of its Risk-weighted Assets (RWAs). That combines the total capital requirement of 8% with the 2.5% capital conservation buffer.

• Minimum 3% is the required leverage rate. The ratio of a bank’s tier 1 capital to its average total consolidated assets is known as its leverage rate.

• Basel III created two liquidity ratios: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

• The Liquidity Coverage Ratio (LCR) will require banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash flows encountered in an acute short term stress scenario as specified by supervisors. This is to avoid circumstances similar to a “bank run.” The intention is to guarantee that banks have sufficient liquidity in case of a 30-day stress scenario.

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In accordance with the Net Stable Funding Ratio (NSFR), banks have to maintain a consistent funding profile concerning the makeup of their assets and their off- balance-sheet operations. A minimum of 100% NSFR is needed. Thus, medium-term (1 year) resilience is measured by NSFR, while short-term (30 days) resilience is measured by LCR.

• Additional criteria are included in Basel III for what the Accord refers to as “systemically important banks,” or financial organizations that are deemed “too big to fail.”

• The Base III capital regulations have been implemented in India since 1st April 2013 in a phased manner.

Interest Coverage Ratio

• A debt and profitability statistic used to assess a company’s capacity to pay interest on its outstanding debt is the interest coverage ratio. It is computed by dividing the profits before interest and taxes (EBIT) of a business by the interest that it paid on loans during the specified time period. It is commonly used by lenders, investors, and creditors to assess a company’s riskiness for future borrowing.

EBIT        

at 1.5 or less, it could not be able to pay its interest costs. To survive future financial hardships, companies need sufficient earnings to cover interest payments. Meeting interest obligations is an essential aspect of a company’s solvency and returns.

CAMELS RATING

• To assess the relative financial strength of a bank and to suggest necessary measures to improve weaknesses of a bank, the Padmanabham Working Group (1995) committee recommended CAMEL which RBI adopted in 1996.

• A supervisory rating system called CAMELS ratings is used to categorize banks and non-baking financial companies (NBFCs) according to their general state. A nominated supervisory regulator combines on-site inspections with ratio analysis of the financial statements to determine the ratings. The ratings are only used by the senior management to stop a bank run, which occurs when customers begin to withdraw money from a bank because they think it may soon fail. The ratings are not available to the general public.

The following are the components of CAMELS:

Interest Coverage Ratio =

Interest Expenses

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C - Capital Adequacy

Where, EBIT=Earnings before interest and taxes

• The lower the ratio, the more debt-related expenses the corporation must pay off and the less cash it has available for other uses. If a company’s interest coverage ratio is

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A - Asset Quality

• M - Management efficiency

• E - Earnings Quality

• L - Liquidity

• S – Systems and Controls

Systemically Important Financial Institutions

• The Financial Stability Board (FSB) defines Systemically Important Financial Institutions (SIFIs) as financial institutions “whose distress or disorderly failure, because of their size, complexity, and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.” Identification and management of SIFIs are therefore crucial to systemic risk management. The cross-sectional component of systemic risk, or SIFIs, actually shows how hazards are distributed across the financial system at any particular time.

• FSB is leading the global effort to develop a framework for evaluating and regulating SIFIs, following the lead of G-20 Leaders at the Pittsburgh summit in 2009.

SIFIs as ‘Too Big to Fail’ Institutions

• Systemically Important Financial Institutions (SIFIs) are perceived as institutions that are Too Big to Fail (TBTF).

• Based on the Basel Committee of Banking Supervision (BCBS) methodology, FSB publishes the list of Global Systemically Important Banks (G-SIBs) annually. Similarly, the FSB, in consultation with the International Association of Insurance Supervisors (IAIS) and national authorities, identifies Global Systemically Important Insurers (G-SIIs) as part of its annual identification process of global SIFIs.

• A sizable sample of banks forms the foundation of the strategy. Five elements of G-SIBs are represented by the indicators chosen: (i) scale; (ii) interconnection; (iii) substitutability; (iv) cross-jurisdictional activity; and

complexity.

• Consequently, these banks are divided into five buckets of similar size based on their aggregate rankings. Systemically, G-SIBs in bucket 5 are more significant than those in the lower bucket.

• As a result, G-SIBs placed in each of the buckets must maintain a higher level of capital, or “higher loss absorbency.” Basel III defines Common Equity Tier 1 (CET1) capital as being utilized for this purpose.

Systemically Important Financial Institution in India

• The Reserve Bank of India (RBI) has been overseeing systemically significant institutions among non-banking financial firms (NBFCs) since April 2007 even prior to creating a framework specifically for SIFIs.

• Important Systemic Non-Deposit Taking A non-banking financial corporation (NBFC) is defined as one that has total assets of at least Rs. 500 crore and does not accept or hold public deposits.

• India’s financial system, which is dominated by financial system, started with the designation of SIFIs as Domestic Systemically Important Banks (D-SIBs) based on their evaluation of the banking system.

• D-SIBs are recognized in India according to a Framework that was established by the RBI in July 2015 for dealing with domestic systemically important banks.

• With minor adjustments to accommodate domestic conditions, RBI has largely adopted the BCBS methodology.

• The evaluation sample comprised banks with a value exceeding 2 percent of the gross domestic product.

• In contrast to the BCBS methodology, D-SIBs are evaluated based on just four factors. Size is given 40% weight and the other three aspects complexity, substitutability, interconnectivity, and size receive 20% each since size is deemed to be more significant than the other three.

• Beginning in 2015, the names of the banks designated as D-SIBs are revealed annually in the month of August.

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At present, SBI, ICICI Bank, and HDFC Bank are recognized as Domestic Systemically Important Banks (D-SIBs).

Systemically Important Financial Market Infrastructures (S-FMI)

• Financial Market Infrastructures that are systemically important are a concept that is more similar to SIFI. Instead than referring to individual mutual funds, banks, or other individual service providers, like SIFIs would, the notion of S-FMIs concentrates on infrastructure service providers such as stock exchanges, depositories or clearing firms.

S-FMIs in India

• Although the Payment and Settlement Systems (PSS) Act does not define “Financial Market Infrastructure” specifically, it does define “payment systems” to include all FMI categories listed in the Principles for Financial Market Infrastructures (PFMIs) report, with the exception of the Trade Repository.

• When an authorized payment system reaches systemic importance, it is classified as a financial market infrastructure (FMI). This classification can be based on a number of factors, including:

• Transaction volume and value;

• Share in the overall payment systems;

• Operating markets;

• Degree of interdependencies and connectivity; and

• Criticality in terms of concentration of payment activities.

Financial Market Infrastructures regulated by RBI

• Real Time Gross Settlement System (RTGS): In March 2004, the RTGS system was put into place. The RBI is the one who owns and runs the RTGS system. The interbank payments settle on ‘real’ time and on a gross basis in the RBI’s accounts under this Systemically Important Payment System (SIPS).

• Securities Settlement Systems (SSS): Government securities’ securities settlement systems, including those for outright and repo transactions carried out in the secondary market, are managed and operated by the RBI’s Public Debt Office (PDO) in Mumbai.

• Clearing Corporation of India Ltd (CCIL): Established in April 2001, CCI is a Central Counterparty (CCP) that facilitates clearing and settlement of transactions involving government securities, foreign exchange and money markets within the nation.

• Negotiated Dealing System- Order Matching (NDS- OM): CCIL operates NDS-OM on behalf of the RBI, which owns the technology. Designed to facilitate trade in government securities, NDS-OM is an order-driven, electronic, screen-based, anonymous trading system from 2005.

• In a September 4, 2013, circular, SEBI made it clear that, as a member of the International Organization of Securities Commissions (IOSCO), it is dedicated to adopting and implementing the new Committee on Payment and Settlement Systems (CPSS)-IOSCO standards of Principal Financial Market Infrastructures (PFMIs) in its regulatory functions of oversight, supervision and governance of the major financial market infrastructures that fall under its jurisdiction.

• The following Depositories and Clearing Corporations under SEBI regulation have been made clear by SEBI to be FMIs, and they must abide by the PFMIs listed by CPSS-IOSCO as relevant to them.

Clearing Corporations

• Indian Clearing Corporation Ltd. (ICCL)

• MCX-SX Clearing Corporation Ltd. (MCX-SXCCL)

• National Securities Clearing Corporation Ltd. (NSCCL)

Depositories

• Central Depository Services Ltd. (CDSL)

• National Securities Depository Ltd (NSDL)

Among stock exchanges, the SEBI lists seven, including the BSE, the NSE, the Multi Commodity Exchange of India and the Metropolitan Stock Exchange of India as systemically important market infrastructure institutions

Important Committees Related to Banking Sectors

Core Banking Solutions

• A core banking solution (CBS) is a software system banks use to conduct and manage their primary operations. Customers are no longer restricted to the branch where they started their accounts; instead, they can conduct transactions from any branch.

• Numerous banking operations, such as deposit accounts, loans, mortgages, payments, and client data, are managed by CBS systems. Additionally, they make real-time updates possible, guaranteeing that a customer’s account balance and other data are always accurate and up to date.

• The E-kuber is the Reserve Bank of India’s (RBI) primary banking solution. It makes it possible for commercial banks to access their RBI current account from anywhere at any time.

Inter-Creditor Agreement

An intercreditor agreement, or ICA, is a contractual and legally enforceable contract between the various lenders within the same capital structure.

As there are often different creditors in a single capital structure, the lenders need to agree on the key issues of collateral, payment, lien subordination, debt caps and remedies if the debtor defaults or seeks bankruptcy protections.

An Intercreditor Agreement documents the rights and obligations of two or more creditors when working with a shared borrower; these include priority of claims on loans and collateral.

Creditors use the Agreement to reduce risks and provide certainty whenever they work with a common borrower.

It builds a foundation of creditor rights and priorities in case a borrower’s financial position erodes and the borrower triggers an event of default.

Merchant Discount Rate

• MDR (Merchant Discount Rate) is basically a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.

• MDR compensates the bank issuing the card, the bank which installs the PoS (Point of Sale) terminal and network providers (MasterCard and Visa) and payment gateways for their services.

• MDR charges are proportionally shared between the merchant and the bank, and the charges are expressed as a

percentage of the transaction amount.

National Pension System

• The Pension Fund Regulatory and Development Authority (PFRDA), established by the PFRDA Act of 2013, oversees and manages the National Pension System (NPS).

• NPS is a market-linked voluntary contribution program that aids with retirement savings. This plan is one of the most effective strategies to increase your retirement income since it is straightforward, methodical, portable and adaptable.

• All Indian citizens between the ages of 18 and 65 are eligible to voluntarily join the NPS under the All- Citizens Model.

• For Central Government workers recruited on or after January 1, 2004, NPS is mandatory (with the exception of the armed forces). NPS has since been implemented for staff members by every State Government, with the exception of West Bengal. In addition to the government matching employee contributions, government employees make a monthly 10% salary contribution. With effect from April 1, 2019, the employer’s contribution rate for central government employees has increased to 14%.

Business Correspondent

• Bank representatives serve as business correspondents. They assist the people with bank account opening. Business Correspondents receive commissions from banks for each new account they open, transaction they handle, loan application they complete, and so forth.

• While assisting villagers with banking transactions, the

Business Correspondent is always carrying a mobile

device. (Move money into or out of savings accounts, take out loans, etc.). After providing his thumb impression or electronic signature, the villager receives the money.

• Banks are permitted to utilize NGOs/SHGs, Micro Finance Institutions (MFIs), and other Civil Society Organizations (CSOs) as intermediaries when offering banking and financial services by utilizing the Business Correspondent Model. This approach aims to enhance financial inclusion and broaden the banking industry’s reach.

A business correspondent is a branch of a bank that serves consumers in underbanked and unbanked areas by offering banking and financial services

Currency Crisis

A currency crisis occurs when there is an abrupt and sharp decrease in the value of a country’s currency, leading to adverse consequences for the entire economy.

A currency crisis is unintentional and is to be avoided, in contrast to a currency devaluation as part of a trade war.

Governments and central banks may step in to assist in currency stabilization by buying back gold or foreign exchange reserves, or by making purchases in the foreign exchange markets.

In contemporary history, there have been numerous currency crises; the most notable ones happened in Asia and Latin America in the 1990s.