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Good show by the banks, but can they sustain it?

By Banking No Comments

The ongoing COVID-19 pandemic is causing unprecedented disruptions to economic activities across countries, and India is no exception. The pandemic has severely affected and continues to disrupt global value chains, production, trade, services and MSMEs thereby affecting overall growth and welfare. India, due to its stringent lockdown, lost much of its economic output, so much so that its economy had contracted by 23.4% in the first quarter and by 7.3% in the overall financial year 2020-21. With the economy crippled to such an extent, how has the financial sector in the third-largest economy still fared a question of deliberation?
In its lowest growth since 1965, the loan portfolio of the banking system this year grew by just 5.6 per cent. Given the circumstances that had been thrust upon the economy, RBI had introduced a moratorium on repayment of loans and had allowed banks to restructure loans to ease debts. It is due to this reason; we saw sluggish growth in the loan portfolios of different banks. On top of it, the government had guaranteed an Rs. 3 trillion emergency credit line to the troubled sectors.
Despite the existing challenges, some banks did record growth in bank credit but however, that was driven by personal loans and credit to agriculture and allied activities. The loans to the MSMEs segment too grew due to the government’s guaranteed schemes. Thus, the net profit of some listed Indian banks during the financial year 2021 has more than doubled, growing from Rs 41,038 crore to Rs 1.03 trillion. But is this a façade or has the Indian financial system actually, finally cracked the solution to its archaic detestable problem of the NPAs?
With soaring profits at the moment, many might presume that India has finally cracked a solution to its draconian problem, but is such a trend sustainable? In January, the RBI’s last Financial Stability Report (FSR) had estimated that banks’ gross NPAs may rise to a humungous 13.5 per cent by September 2021, from 7.5 per cent in September 2020, under the baseline scenario. Additionally, in a severe stress scenario, these can rise to 14.8 per cent. Thus, till March, the banks could hold on to such a façade but not all of them will be in a position to stomach the impact of the second wave of the pandemic.
To mitigate the effects of the second wave, a sound banking system is a sine qua non for maintaining financial stability, which can be achieved by lifting off the dead weight of non-performing assets from its balance sheets. While there is no universally acknowledged official ‘acceptable’ limit for NPAs, bad loans within 3% are considered manageable.
Merely aiming to reduce NPAs is no solution. Realizing that better NPA recognition has become the need of the hour, RBI has begun conducting asset quality reviews across banks to ensure that the problem is addressed well in time rather than stretched or swept under the carpet. However, the extent of bad loans is yet to surface. Loan moratoriums and rescheduling have kept NPAs at bay. Many corporates have suffered severely, but nobody knows what exactly is happening. The real damage shall bring to the surface over the next few quarters, as vaccine campaigns have ramped up and with COVID (hopefully) gone away, corporates shall begin to disclose their annual results and banks compelled to label their problem loans as NPAs.
Besides RBIs vigilance, Indian Public Sector Banks have entered a full-fledged consolidation mode wherein 27-odd public sector banks (PSBs) amalgamated into 10 large banks. The anchor banks such as Union Bank of India, Punjab National Bank, Indian Bank and Canara Bank are in the process of the branch and people rationalization, technology integration and stressed loan strategy etc. Although PSBs took the blame for poor corporate governance and leadership, the private sector’s weak links are also exposed with Chanda Kochhar and Rana Kapoor coming under the radar for corruption charges or violating the service rules. Similarly, the mounting NPAs in their balance sheets indicate bad lending practices.
Investor sentiments are at an all-time low and it is also becoming evident how difficult it is going to be for banks all over the world to maintain good assets and good earnings. Additionally, despite banks provisioning of bad debts recovery is a long road ahead. This delay can be expected due to logjams in courtrooms and Tribunals thereby leading to ineffective recovery legislation at the grassroots level. Due to the shutdowns and income slowdown, many repayments of loans, especially in Europe, United States, may cease leaving the banks dry. However, banking institutions are under immense pressure to ensure a business-as-usual amidst the lockdown and health crises. What were earlier their assets now would become a big risk and therefore necessitating the need to go beyond traditional modes of business vigilance to rise from the ashes left behind by the pandemic.

Bad Loans Insurmountable Burden on Investment and Savings

By Banking No Comments

A sound banking system is a sine qua non for maintaining financial stability in any country, which can be achieved by lifting off the dead weight of non-performing assets from its balance sheets. However, it is common knowledge that Indian banks are saddled with bad debts thereby ranking them as one of the worst in the world. In fact, it wouldn’t be wrong to state that India is definitely the worst in the BRICS bloc when it comes to its NPA management programme.
While there is no universally acknowledged official ‘acceptable’ limit for NPAs, bad loans within 3% are considered manageable. As aforementioned, compared with most BRICS members, India fares quite poorly compared to China’s, as its NPA stands at 1.75% while India’s NPA stands at a whopping 9.85%. In the recent case of PMC Bank, the bank’s last available numbers for March 31, 2019, showed a large deposit base of Rs 11,600 crore, a Gross NPA ratio of 3.76% and a net NPA ratio of 2.19%, which did not seem out of the ordinary. However, its capital adequacy ratio was higher than the regulatory requirement of 12% and its advances were growing in the double digits.
From a macro-economic standpoint, countries with high NPAs typically do not have high economic growth, investment and savings in the economy. Additionally, if loan non-recovery balloons, the bank’s net interest margin (NIM), profitability, return on assets, dividend payout, etc. all get severely affected, which in many cases does not spell well for the Bank’s credibility. Moreover, credit inflow is also jeopardized as its very financial soundness comes under scrutiny.
Despite its conspicuous impact on the economy, NPAs have an insurmountable burden on the investment and savings of investors like you and me. A high NPA ratio usually suggests that a bank’s management and recovery programs are flawed and hence an individual’s money isn’t safe in its mighty, hollow vaults. This emphatically leads to a low rate of savings for the people. Thus, due to burgeoning bad loan books, investment in the economy usually plummets.
Depositing money in a bank with a recent history of stress, a dicey reputation for governance, known problems in the loan book or a precarious GNPA and capital adequacy position exposes you to the risk of RBI directions, which can deprive you of access to your money for temporary periods.
What is the main thrust on which a sound financial institution is built? It certainly is on in its safe asset keeping credibility. However, with the mounting NPAs, investor trust and confidence has drastically eroded. This increase in the systemic level in India’s banking sector (and the debt market) is certainly causing increased stress, and investors may find their money wiped out for no fault of their own.
Talking about liability management, high NPAs frequently provide an impetus to the banks to lower their interest rates on deposits thereby lowering the rate at which your investment in Fixed Deposits grows. Thus, in order to maintain their NPAs, the interest rates on loans and advances rise. This invariably increases the cost of borrowing thereby discouraging people from taking out loans and thus reducing the flow of money in the market. This way, investors are not only deprived of their expected returns but also find the value of their investments eroded. Thus, the high burgeoning NPA crisis of a country can rattle its financial banking system and it can certainly prove to be a hurdle to its growth.
With the RBI conducting asset quality reviews across banks, better NPA recognition has become the need of the hour to ensure that the problem is addressed well in time rather than stretched or swept under the carpet. The extent of bad loans is yet to surface. Loan moratoriums and rescheduling have kept NPAs at bay. Many corporates have suffered severely, but nobody knows what exactly is happening. The real damage shall being to surface over the next few quarters, as vaccine campaigns have ramped up and with COVID (hopefully) gone away, corporates shall begin to disclose their annual results and banks compelled to label their problem loans as NPAs.
With the growth of loans in the economy, once the moratorium is lifted and repayments start coming to banks, NPAs would significantly rise. In this aspect, RBI has asked banks to do provisioning, buffers and raise capital, in order to be a resilient organization. Such a conservative approach coupled with a strong legal framework is likely to pass on the benefits to investors like you and me.

 

 

 

 

The Rise Of New Age Banks: Marrying NBFC’s with Fintech Companies

By Banking No Comments

Consolidation in the banking industry is inevitable. Leading up to 2020, radically transformed Bank models have emerged. A glimpse ahead shows an emphasis on innovative technologies to vastly facilitate banking – inclusive banking through new types of Bank models, non-traditional alliances to make banking affordable, Fintech capabilities to make banking customer-centric. Banking in the future will leverage the geographic reach and financial know-how of NBFCs by joining hands with Fintech companies disrupting services with AI, Blockchain and cybersecurity tools.

The bad loans history of Indian banks goes long back. In a recent development, another bank will be rescued due to its bad management programme, but interestingly, not by the government this time, but by the NBFC sector. In recent developments uncovered, BharatPe and Centrum would rescue the significantly distressed PMC bank. As SFB would acquire assets and liabilities of PMC bank, both the promoters are now permitted to start a small finance bank (SFB) in an equal ownership joint venture. RBI’s in-principle approval is a validation of Centrum’s experience in financial services and BharatPe’s digital expertise essential for setting up a new age bank. If this succeeds, it will be the first SFB in 6 years.

The bank’s gross NPA of 3.76% and net NPA of 2.19% was discovered by 2019. The reason for default in payments and bankruptcy, yet again, remains the same: financial irregularities and misreporting of loans. History bears testimony to the fact that the majority of Indian banks have treaded on the road of bankruptcy with their ill-suited loans that are handed out without thorough inspection of the credibility of the borrower. 

In the case of PMC, the bank had erroneously handed out loans to bankrupt real estate developer HDIL. Despite restrictions on withdrawals of cash and investigation of accounting lapses, RBI’s recent approval demonstrates an open runway for growth for institutions that adhere to regulations and rise out of ashes like a phoenix. However, like all the other times, this time to RBI used its underperforming problem-solving mechanism to counter the problem and dissolved the board and took the administration of the bank under its purview. The quantum of loans to a single borrower was against banking guidelines. 

Amidst all the other rhetoric, what will acquisition mean for different stakeholders? At the outset, the acquisition will revamp the structure. PMC bank would change from a cooperative bank to a small finance bank. Though, it is to be noted that the existing loan and deposit accounts of PMC shall continue as it is, additionally the existing staff and branches shall be retained. However, some existing assets, loans portfolio of around 1000 crore, of Centrum would be part of the proposed small finance bank.

Talking about the Shareholders and members of the PMC Bank, according to reports there are more than 50,000 members of PMC bank. Since this transition is part of a rescue operation by RBI and the bank has a significant negative net-worth, post this transition, members are expected to lose their invested money. Having talked about shareholders, one cannot leave behind the depositors of the PMC Bank. Given the present circumstances, the bigger and humungous amounts would get their principal amount back. However, it is to be noted that there might be some haircut in interest earned or some cap on withdrawal limits to defer complete withdrawal. Given the present credit crunch, the RBI shall truly work to safeguard the interest of depositors.

With NBFCs growing twice the speed of banks, RBI increased its vigilance over the NBFC segment in light of the IL&FS and DHFL fiasco. In times where NBFCs can become banks, thanks to Section 22(1) of the Banking Regulation Act, 1949, a prudential regulatory framework for NBFCs looking to transform into banks should be implemented. This would help mitigate spill-over of systemic risks inflicting NBFCs from further rupturing the banking system. Access to public deposits is a salivating factor for NBFCs hit by a liquidity crunch during the pandemic, however, serious fine-tuning and deliberation is required for the treatment of PMC’s depositors, mostly consisting of individuals, religious trusts and institutions, in the absence of a final revival plan.

From a macro-economic standpoint, it goes without saying that NBFCs looking to convert into banks will be required to maintain a higher Cash Reserve Ratio and Statutory Liquidity Ratio pursuant to RBI’s conversion guidelines. Post conversion, NBFCs will also enjoy some decline in the benefits of regulating in an unregulated field with focused disclosures, however, from a shareholder’s perspective, higher transparency and accountability is likely to instil a sense of confidence in such new-age banks. From a macro-economic standpoint, share prices of such newly formed banks will bear the brunt of changes in banking regulations, RBI circulars and underlying risks directly applicable to banks.

With NBFCs like Centrum looking to tie up Fintechs is aiming to tap a large consumer segment that doesn’t have access to credit or can’t access credit at a good interest rate. Given the boundary that banks operate within, Fintechs and the shadow financing institutions are filling the gap by innovating and using multiple data points to lend by exploiting the digital potential. While some classes believe that Fintechs are parasites riding on the network of the banking system and gaining valuations, however it goes without saying that inter alia, RBI must ramp up its monitoring game as marriages of convenience between NBFCs and Fin-techs are expected to witness a notable rise.

Twitter and Government’s Ultimate Battle to Uphold Freedom of Expression

By Others No Comments

Social Media – a buzzword in millennial circles and often the recipient of government’s fury. Although the use of social media platforms such as Twitter and Facebook is undeniable for human conversations, all these developments have also contributed to the advancement of democracy and fundamental rights like freedom of expression, movement, trade and profession. However, a single platform cannot become the sole arbiter on fundamentals like freedom of speech, expression and the likes.

As India cracks down on microblogging sites for their noncompliance with India’s newest pursuit to mitigate false information, Twitter finds itself caught in the crossfires. In recent developments in the case, microblogging platform Twitter lost its status as an intermediary platform along with its coveted legal shield for 3rd party content for failure to comply with new IT rules. India’s wrath has been specifically directed towards Twitter as it is the only social media platform among the mainstream platforms that have not adhered to the new laws.

However, it remains to be seen whether this development will leave a permanent scar or be lifted once Twitter adheres to the new digital rules. The government and Twitter have been at loggerheads owing to the latter’s compliance issues pertaining to rules that mandate platforms to increase due diligence and vigilance with respect to objectionable content and be held accountable for the same.

Pursuant to Section 79 of the Information Technology (IT) Act, an intermediary shall not be held legally or otherwise liable for any third party information, data, or communication link made available or hosted on its platform. Simply put, this means that a platform is safe from any legal prosecution brought upon due to the message being transmitted from point A to point B as long as a platform acts just as the messenger and without interfering with its content in any manner.

According to the Indian government, Twitter’s act of defiance has been astounding and the platform which portrays itself as the flag bearer of free speech, choose the path of deliberate defiance when it came to the Intermediary Guidelines. This selective adherence of laws didn’t fit well with the government about its, inter alia, fake news mitigation efforts. In addition to this, Twitter collects data, influences public perception and opinions through algorithms that decide what people will see and listen to. Thus, the platform is known to selectively push content on the basis of user activity, profile, demographic attributes, etc. This has been construed by many as a deliberate manipulation of information flow, albeit under the guise of better user experience, and is considered nothing but colonisation of digital space.

It is common knowledge that several social media platforms may have violated governing legislation under the guise of freedom of speech and expression, thus necessitating a dire need for laws that address the evolving problems pertaining to questionable third-party content on social media platforms. While the Information Technology (Guidelines for Intermediaries and Digital Media Ethics Code) Rules, 2021’ is a “soft-touch oversight” mechanism to deal with issues such as the persistent spread of fake news, abuse of these platforms to share morphed images of women and contents related to revenge porn or to settle corporate rivalries. Evidently, these Rules are neither fool-proof in curbing the root cause of the problem nor keeping up with the changing shades of offences being committed thereon.

The IT Act and Rules, although well-intentioned, do not bring adequate clarity on the responsibilities of intermediaries along with third parties and users. The policy guidelines were introduced to address content that goes directly against guidance on COVID-19 from authoritative sources of global and local public health information. Thus, Twitter was quite emphatically trying to curb misinformation that is too prevalent on microblogging these days. But misinformation labelling isn’t the only topic that has been the Achilles’ heel of the entire matter. The new rules dictate that a company like WhatsApp and Twitter should be able to track down the ‘first originator’ of any objectionable article that the Indian government deems threatening to internal security. It goes without saying that striking a balance between Freedom of speech and penalizing intermediaries for overlooking their responsibilities is the need of the hour!

Who’ll blink first in India’s crypto standoff?

By Economy, Others No Comments

RBI, the Central Bank of India has been in a cold war with the Indian crypto industry. It can be best described as antagonistic and aversive. Being concerned with India’s ability to absorb financial shocks, RBI has time and again tried to unfurl the disadvantages of using cryptocurrencies, however, the industry construed RBIs reaction as hyperbolic! India, among other nations, has been particularly belligerent towards cryptocurrency, so much so, that it had constituted a high-level intermediate committee to report on various issues pertaining to cryptocurrency. The committee had subsequently in 2019, recommended a blanket ban on private cryptocurrencies in India hurling many crypto investors on the wrong side of the law.
The belligerent attitude of Indian authorities towards digital currency has led to banks emphatically distancing themselves from the crypto community, apparently egged on by the RBI. Working along the same lines as the government, in May, the HDFC Bank had sent a rather threatening email to their customers, warning them against virtual currency transactions. It is to be noted that the email had cited an RBI circular that was published on April 6, 2018. The circular had reportedly instructed all of the businesses it regulates to cease any involvement with cryptocurrencies. Additionally, such a stringent activity was also conducted by the State Bank of India. Similarly, several large banks, namely ICICI Bank, the country’s largest private lender too stopped providing services to crypto exchanges. It is to be noted that due to the government’s stringent stand on the contentious matter, several cryptocurrency exchanges have reported difficulties with bank deposits and transfers.

Investors’ Woes 

As it can be anticipated, the banks’ nefarious emails had prompted an uproar among their customers and crypto investors, with many taking to social media to express their discontent. But why are investors raging with anger? Fear of missing out on high, unpalpable profits that crypto trading offers them. According to a research report by Bloomberg, the technical outlook for Bitcoin remains strong with the price of the cryptocurrency all set to surge around 600% to hit the $400,000 level in 2021.
The government’s repugnant attitude throws a question that in contrast to the Indian government are all authorities in India wary of the digital currency? Apparently, not. Recently, the RBI’s circular was struck down by the Supreme Court. The Court contended in its March 2020 ruling that the RBI had failed to provide sufficient proof, and to detail instances of losses arising from crypto transactions, that might merit such a drastic measure as its de facto ban on banks’ involvement with cryptos. Therefore, it can be rightly stated, that to some extent, pressure is being built on the authorities to at least lift its temporary ban on crypto services.

Crypto Endorsers

It is no news that Elon Musk has been an ardent endorser of the cryptocurrency. Where many might presume him to be the crypto guru, many can’t help garb their aversion towards him due to his cryptocurrency manipulation charades that onsets great volatility in the market. It is to be noted, it is due to this very reason, Indian authorities are so averse to the idea of cryptocurrency. The digital currency granting anonymity to criminals for nefarious crimes is considered a safe haven for digital criminals. But more importantly, it is the inefficiency or the inability to track the real perpetrator of the crime that is the sole reason for India debunking the crypto supremacy. Interesting enough, loss of revenue is also a big challenge that the government faces. As it is known, the crypto market is unregulated, thus it is often quite arduous or rather impossible to track payments and hence to generate revenue through transactions.
Additionally, cryptocurrency being a highly volatile market, which might not be running rationally poses a big risk of a financial bubble that is doomed to burst. As it is known, during the pandemic, when consumer and investor confidence was at an all-time low, the crypto market was booming, rather skyrocketing.
In contrast to individuals, various cities like Miami have also tried to pursue cryptocurrency by conducting state-wise crypto fares in order to court crypto investors to the town. With El Salvador becoming the first country in the world to grant legal tender to the contentious digital currency, pressure to flip the coin in favour of crypto is rising. But with irrational behaviour associated with the market and various comments like “Crypto isn’t the real economy” by Elon Musk and not-so endorsing statements by the former US President Donald Trump, who at best, considers Crypto a farce, both the sides of crypto, at the current moment, are evenly balanced.
While countries like South Korea are implementing a legislative framework to regulate Cryptocurrencies and Crypto exchanges, India, on the flip side, is considering imposing an effective ban on “private” digital assets and digital currencies. Further, the Indian government has indicated to table The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 which will effectively ban “private‟ Cryptocurrencies and introduce its own digital currency called Central Bank Digital Currency. Although India’s stance of regulating cryptocurrencies through state-backed CBDCs regulated by the RBI is worrisome, it doesn’t come as a surprise. Going forward, it is imperative to have a dialogue on stakeholder concerns or risk getting smeared in the litigation quicksand thereby leaving crypto traders in dire straits, resulting in uneasiness in the sector which is destined to accelerate to greater heights in India.
The Achilles’ heel in RBI’s approach is the delusion towards the fact that it is possible to ban cryptocurrencies whereas looking at all the other nations’, it is wise to regulate it and mitigate systemic risks vis-à-vis a blanket, yet ineffective ban. A bill regarding banning cryptocurrencies is still in parliament which if approved, will suffice the RBI’s objective however, it will be interesting to see who wins this battle of the contentious crypto war.      

How Indian authorities, yet again, failed to make a difference in its NPA crisis approach?

By Banking No Comments

The second wave of the COVID-19 pandemic ushered in an era of disintegrating companies, arduous acquisition battles, and heated arguments in courtrooms. While most companies struggled to stay afloat, those with deep pockets jumped onto the acquisition and organic growth bandwagon. A giant that swore by this mindset was the Piramal Group whose resolution plan for Rs 37,250 for debt-ridden Dewan Housing Finance Limited (DHFL) received a conditional nod from the Nation Company Law Tribunal (NCLT), which subsequently received pompous and overwhelming approval from 94% creditors.
Despite being one of India’s largest mortgage lenders, DHFL’s tainted history of unwise financial handlings led towards it being the first financial services company to be notified for insolvency resolution under Section 227 of the Insolvency and Bankruptcy Code, 2016 by the Reserve Bank of India. The case itself poses as an exception, as the corporate insolvency resolution process under the Insolvency and Bankruptcy Code by the Reserve Bank of India is not applicable to financial service providers or banks. Therefore, the government’s action for the insolvency proceedings of financial service providers to enable the insolvency process of DHFL, which had defaulted on payment obligations, comes across an exception to the Code.
The NPA crisis in India is an archaic evil eating into the mighty edifice of India’s banking sector. However, the government’s sheepishly reluctant attitude to deal with the burgeoning crisis is indeed one of the factors that have led to the digging of the grave of the mighty financial sector of India. Statistically, India’s bad debts amount to 11% of the total lending, whereas corporate bad debts constitute 56% of the total bad debts of nationalized banks.
With another financial unit succumbing to the NPA crisis owing to governance concerns and payment defaults, India’s financial monitoring framework is ripe for reform and to nurse its post-pandemic financial system to health. The official perspective seems to maintain that the government looked after the vulnerable small and midsize firms during the pandemic. This, according to the official authorities, has been done by guaranteeing fresh bank loans and mortgages under RBI. Consequently, this belligerent view has been supported by the low take-up rate for the RBI’s one-time restructuring offer. Given low consumer confidence and crippled economic growth due to partial lockdowns, the NPA crisis is doomed to materialize sooner or later. According to the authorities, the NPA crisis can be dealt with later but how exactly is the question? Given, the DHFL insolvency, the financial system is doomed to fail given its failure to combat the NPA crisis.
Papering over an economy-wide solvency problem by flooding the financial system with high liquidity is not only risky but also fatal for financial stability. It is to be noted, that the same strategy of incessant capitalization of the financial sector by the Indian authorities has time and again proved to be a concocted measure in vain, as NPAs of the financial sectors have never plummeted in recent history. Even if they have, it is due to the practice of writing off loans from the accounting books in order to clean the financial records of the organization. But it is also something that the monetary authorities want to continue indefinitely which does little to help the bankrupt organizations. Alternatives, however, in the case of India are scarce. This is due to the fact that India doesn’t have good tools to deal with insolvency. The 2016 bankruptcy law, had been reeling under the pressure even before the pandemic had struck. Liquidation, the outcome in most bankruptcy cases, has led to creditors recovering only 15%. This gross inefficiency can be scrutinized when compared with the global average of 80%.
Given all the detestable conditionalities against the government’s liquidity approach, the government extended the same regime to failing shadow banks. Dewan Housing Finance Corp., as aforementioned, is a mortgage lender whose controlling shareholders are currently in judicial custody on charges of accounting fraud and misappropriation of funds. Talking about the archaic process adopted by the Indian authorities to settle DHFL, has left the suitors groaning about how shabbily the process was being run. With how the acrimonious contest shaped up, it’s certain that when the buyers control the reins, it will have to go through a lengthy legal challenge and will turn out expensive for creditors.
Clearly, due to all the aforementioned reasons, the task at hand is much more than filling the hole left by the $2.5 billion alleged fraud by Dewan’s former owners. With the government’s pro spending budget and increase in expenditure due to the vaccination campaign, bankruptcy in the financial sector is likely to wreak havoc on monetary and political goals of the Indian authorities with the DHFL precedent.

Bad banks: India’s pursuit to mitigate its NPA crisis

By Banking No Comments

With the banking sector crippling in the wake of COVID-19 induced depressionary forces, plans to place toxic assets in one or more bad banks has gained steam in recent weeks. Fundamentally, a Bad Bank purchases distressed assets from banks to eliminate toxic assets in their balance sheets and restore liquidity in the market. On account of the pandemic, India’s NPA crisis is all set to be exacerbated, where millions might not be able to uphold their end of the bargain. Taking into consideration, the need to restructure the financial sector in India, Budget 2021-22 announced that the Centre will set up an ARC, commonly referred to as a bad bank, to resolve the issue.
Make no mistake, the Insolvency and Bankruptcy Code (IBC) and Asset Reconstruction Company (ARC) are two differentiable concepts. IBC aims towards the resolution and reorganization of insolvent companies, whereas ARCs are set up for clearing up NPAs. Thus, ARCs primarily deal with recovery, while the IBC seeks a resolution. Thus, ARC serves as a damage control policy rather than a damage prevention mechanism.
Given India’s deteriorating financial health, a preventive mechanism is the need of the hour. Given, Vijay Mallya’s felony to 17 banks, owing them 90 billion, which had sent shock waves throughout the market, Indian authorities should be cracking down on “bad boy billionaires” in order to restore financial discipline in the economy. Consequently, a preventive mechanism presents itself as an unadorned opportunity to usher India out of its bad bank crisis.
Shell companies, which are emphatically used by the corporate leaders to garb their revenues and clandestine corporate affairs, need to be rooted out from their core. The inefficiency to track such shell companies is what renders the government’s pursuit to counter defaulting banks, useless. It is to be noted that operating a shell company in India is not illegal. With the shell company as a front, all transactions are shown on paper as legitimate business transactions, thereby turning black money into white. In this process, the business person also avoids paying tax on the laundered money.
It might come as a shock to many, but India does not have a concrete definition of shell companies. Shell companies are not defined in any law or act. This emphatically shows India’s reluctant attitude towards reviving its economy’s financial health. 

Have all the countries not defined shell companies in any law or act? No, the US has defined shell companies under their Securities Act. The US Securities Act defines shell companies as – “Securities Act Rule 405 and Exchange Act Rule 12b-2 define a Shell Company as a company, other than an asset-backed issuer, with no or nominal operations; and either: >no or nominal assets>assets consisting of cash and cash equivalents; or >assets consisting of any amount of cash and cash equivalents and nominal other assets.”

How ARCs or Bad banks won’t solve India’s burgeoning NPA problem?

It is no news that one of the worst victims of the ongoing economic crisis in India is the country’s already wounded financial sector. As per various reports, with businesses struggling to survive, bad loans are expected to rise, denting Indian banks’ health. But as a law of nature, someone’s loss is another’s gain. Here the only organization smelling opportunity is ARCs. As it can be expected, given the current state of the Indian economy, ARCs demand in India going forward is all set to rise as the economic slump will eventually lead to a surge in non-performing assets (NPAs).
Even the global players are smelling an opportunity. Canada-based asset management firm Brookfield is reportedly going to set an ARC in India. But does that imply that ARCs are devoid of problems? Certainly not. The economic crisis, which provides them with a huge opportunity, has also adversely impacted their business of raising capital to recover money.
As aforementioned, raising capital for acquiring more assets is one of the biggest challenges faced by ARCs. Initially, ARCs had a fee-based business model. Banks had to pay ARCs a fee to handle their bad loans, but with the introduction of the 5:95 rule by the Reserve Bank of India (RBI), the easy business became difficult. Under the 5:95 rule, if ARC was buying a stressed asset, it had to invest a minimum of 5% of the acquisition price. Later, the woes of ARCs were exacerbated under Raghuram Rajan, when this ratio was increased to 15%. This certainly led to ARCs having more skin in the game.
Secondly, given the current economic slump, ARCs probability to recover bad loans has plummeted adversely as people are unable to pay back their liability. The ability to pay has also been adversely impacted by the operational difficulties that are being faced by the borrowers due to the lockdown. Thus, more time is being asked to repay their dues. Additionally, some of the asset sales, which were in the process of getting completed, have been postponed due to the pandemic. Similarly, IBC cases have been delayed as the National Company Law Tribunals (NCLTs) are not fully functional. Thus, raising capital for acquiring more assets is one of the biggest drawbacks and challenges for bad loans.
As the financial crisis continues, the need to remove troubled assets from financial institutions’ balance sheets has become critical. Confidence in our banking and the financial system requires confidence in our financial institutions and the ongoing reporting of losses and write-downs continuously hampers progress. Therefore, it is imperative to see the situation as-is wherein ARCs and Bad Banks may provide incremental improvements but is unlikely to dramatically restore balance sheets. Indian financial structure additionally needs the option of restructuring of stressed assets and IBC and a preventive measure to treat the root cause of the problem, which is segregation of troubled assets and timely risk management.

Revival in home sales: Affordable housing & middle-class buyers hold the key

By Real Estate No Comments

The overall gloom cast over the real estate industry on account of the COVID-19 pandemic has brought to light several unconventional methods to keep the dreams of homebuyers alive as developers strive to stay afloat. In fact, the pandemic has proven to give the necessary impetus and stimulus for people to invest.
India’s real estate market can be regarded as the second-highest employment generator in the country after agriculture. By 2025, this number is expected to rise, and the sector is predicted to account for 13% of the Indian economy. It could become a major wealth creator in the forthcoming decades, with the boom in the housing requirements; provided that all required reforms are executed in a timely manner. Since the COVID-19 pandemic struck in March last year, just like several other industries, the construction sector was also badly hit by the nationwide lockdown. The unavailability of workers due to the migrant exodus, and disruption in the supply chain of materials all over the world, there resulted in many delayed projects and extended delivery dates. The plans of buyers to purchase homes was also postponed, fueled by this and by income contraction due to the pandemic.

However, the relaxation of the lockdown in the Second Quarter of FY21, resumption of economic activities, return of the migrant workers, and economic stimulus packages, gave the much-coveted push on its way towards recovery in 2021.
Currently, there exist numerous signs of recovery of the sector which could revive the industry at a slow but steady pace in the future. At the outset, with the unprecedented amount of time spent indoors for the sake of life safety, a multitude of alternatives have opened up for activities that would have normally been done offline i.e., online classes, professional and informal events, etc. It is apparent that for a considerable amount of time, especially with the second wave of COVID, our lives are going to revolve around our houses for a considerable amount of time.
This paradigm shift has increased the importance of having real estate as an asset in one’s investment portfolio and has heightened the sense of security that owning a home brings. The ‘Work from Home’ culture has strongly contributed to this phenomenon as well. With home offices being the common trend, this phenomenon is predicted to pave the way to the ‘Work from anywhere’ trend. This holds especially true for cities and technology hubs across the country, such as Mumbai, Delhi, Pune, Bangalore, Hyderabad, etc.
From the legislative standpoint, with homebuyers gaining more and more confidence in the real estate facilitation and recovery mechanisms such as RERA, Insolvency and Bankruptcy Code, etc. the erstwhile issues surrounding possession and delivery and enforcement of the lack thereof, while still subsisting, doesn’t plague the potential investment in the avenues. Moreover, with the tax exemptions and caps being put in force by the Central government to lure investors into owning part of leisurely properties, i.e. fractional ownership incentives, is also an indicator of the dynamic nature of the real estate sector, with alternatives in force to ensure that sector in question does not succumb to market collapses.
In addition to this, government incentives are offered under the Zero GST scheme, i.e. nil-GST provisioning for pending and underway construction projects so as to not hamper the foundation of real estate projects. The Zero-GST scheme puts on a decent show of faith of the government and RBI in the potential of the real estate sector to yield handsomely in the upcoming years, therefore considering it essential to provide such a boost as it requires. The erstwhile moratorium put in force by the RBI to protect personal loans has also gone a long way in securing their positions as credit-worthy loan-payers. The much sought after relief has enabled the average taxpayers to be able to secure a position, amid the economic collapse, to be able to pay such mortgages, loans. etc. off, in a fashion that doesn’t render them crippled financially.
These incentives put forward by the government are nothing short of unwavering dedication towards the revival of the real estate sector and its allied avenues. While these ventures might affect the central and state coffers in the short run, the economists and jurists of renown claim these incentives to be of the utmost urgency and prudence in order for the Indian economy to function as a whole again. Therefore, it goes without saying that affordable housing and middle-class buyers hold the key for the revival of a sector losing its sheen due to tot the pandemic. Given the correct legal framework and taxation incentives, the recent boom should be further encouraged to revive the sector in view of the prevailing ‘Work from Home’ and ‘Work-action culture to gauge the much-needed buoyancy in the market. 

The Second Wave in Need of a Second Economic Stimulus

By Others No Comments

A second wave is creeping back in India and is poised to rage across the country through 2021. This wave constitutes an imminent threat to society, with a potentially immense toll in terms of human lives and catastrophic economic impact, exacerbating the financial woes of millions of Indians. With the peak of the second wave yet to come in the coming months, its impact on all spheres of life across the country could be of varying magnitudes.

In theory, the economy should be the last thing on one’s mind in the wake of such a crisis, however, this health crisis quickly snowballed into a catastrophic economic crisis. It goes without saying that our economic performance is largely dependent on the performance of the health sector and the inoculation programme. 

Some experts believe that businesses are better equipped to deal with the economic repercussions of the second wave. When evaluating the long-term impacts on the economy, it is predicted that the impact should be minimised due to government intervention through several steps to check production loss, especially by MSMEs. Also, companies and consumers have rapidly adjusted to the new normal and the relationship between lower mobility and weak economic activity has been weakening over time, with data ultra-high frequency data for March and early April, released since the renewed lockdowns were announced, corroborating for the same.

How did a health crisis translate to an economic crisis? Why did the spread of the coronavirus bring the global economy to its knees? The answer lies in two methods by which coronavirus stifled economic activities. First, the spread of the virus encouraged social distancing which led to the shutdown of financial markets, corporate offices, businesses and events. Second, the exponential rate at which the virus was spreading, and the heightened uncertainty about how bad the situation could get, led to a flight to safety in consumption and investment among consumers, investors and international trade partners.

Despite fundamental aspects being in order the clutches of the pandemic remain uncharted to a large extent. As a result, many experts believe that the worst is yet to come. Interestingly, the economic decline itself has an adverse effect on health; a reduction in economic activity reduces the circulation of money and, with it, tax revenues. This then results in a reduction of the finances available for the public-health countermeasures which are needed to control the pandemic. It also hits individuals and families, who may see their income plummet catastrophically and thus may not be able to afford the required healthcare. Depleting financial reserves may also make companies close, with consequences for their owners, employees, and suppliers. In all obviousness, this setting would have developed very differently in a setting in which there is a workforce with access to free healthcare and income protection, then in one in which much employment is casual and people must choose whether to go to work when ill or to starve. The increasingly integrated global economy increases the fragility of this situation. 

In order to tide over the second wave, an introduction of additional economic measures is imperative. As a result, such a stimulus must be tailor-made for the most impacted people and businesses. For instance, states with high COVID cases such as Maharashtra, NCR region, Tamil Nadu and Gujarat also account for nearly 45 per cent of employment in MSMEs and 41 per cent of overall MSME credit. Notably, stringent lockdowns in the aforementioned states have pushed thousands of MSMEs on the brink of a closedown or have already shut down. In view of this, the Tamil Nadu government announced a special incentive package to promote MSME investments. Other pandemic-hit states should also follow suit and announce incentives for MSME investments to build supply chains under the Centre’s PLI scheme.

An adverse impact can be seen on retail loans disbursed by banks and NBFCs, wherein a large number of informal loans are disbursed by shadow financers. Hence, an economic package tailor-made for the needs of vendors and small ticket personal loans can be implemented by state governments in conjunction with RBI and the Centre. In addition to this, the RBI window of one-time restructuring of MSME advances should be extended until 31 March 2022. It has been found that MSMEs benefited most from the Centre’s sovereign credit guarantee scheme and so a similar scheme should be announced by states to provide the much-needed liquidity shot to MSMEs.

Furthermore, Maharashtra temporarily reduced stamp duty on real estate to push the demand side upward leading to a marginal revival of the sector. A similar scheme can be announced by states which will revive the real estate sector—one of the largest employers of informal jobs. 

Measures and relaxations offered by the government can be magnanimous, but their effectiveness will be washed out if the inoculation programme remains sluggish. With international financial crises and recessions; unsustainable inequality in income, wealth and across regions; the climate emergency; and the threat of future pandemics, the need has never been greater for balanced economics and systemic change. Therefore, a speedy vaccination programme coupled with balanced measures introduced by the government will be the best antidote to revive demand and restore our national treasury.

Understanding Copyright Law in Real Estate

By Real Estate No Comments

Intellectual Property Law can be best described as a safeguard for the creations of one’s intellect. It aids the interests of the innovators and creators by providing them with the rights and safeguards over their creations and preventing their appropriation and misuse by other individuals. Many diverse rights can be included within the ambit of IP rights, such as literary, artistic and scientific works; performances of performing artists, phonograms and broadcasts; inventions in all fields of human endeavour; scientific discoveries; industrial designs; trademarks, service marks, and commercial names and designations; protection against unfair competition; and “all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields”. Popular examples of intellectual properties include logos, copyrights, trademarks, patents, trade secrets and so on.

This article will attempt to focus on the importance and essence of Copyright Law in Real Estate, and the measures that may prove to be useful in protecting the requisite intellectual property. This article also aims to evaluate the safeguards that can be taken to protect such intellectual property, both in Indian and American law.

Copyright primarily relates to literary and artistic creations, such as books, music, paintings and sculptures, films and technology-based works, such as computer programs and electronic databases. The expression copyright refers to the act of copying an original work which, in respect of literary and artistic creations, may be done only by the author or with the author’s permission. “Authors’ rights” refers to the creator of an artistic work, thus emphasising that authors have certain specific rights in their creations that only they can exercise such as the right to prevent distorted reproductions of the work. Such rights are often referred to as moral rights and can be observed across legal systems. 

Other rights, such as the right to make copies among many other such rights, can be exercised by third parties with the author’s permission, for example, by a publisher who obtains a license to this effect from the author. It is possible for authors and creators to create, have rights in and exploit a work very similar to the creation of another author or creator without infringing copyright, as long as the work of another author or creator was not copied.

Indian Copyright Law, on the other hand, is governed by the (Indian) Copyright Act, 1957. The Indian law is at parity with the international standards contained in TRIPS, and pursuant to the amendments in 1999, 2002 and 2012, fully reflects the Berne Convention for Protection of Literary and Artistic Works, 1886 and the Universal Copyrights Convention.

Under the Act, the term “work” primarily includes an original artistic work which could comprise of a painting, a sculpture, a drawing (including a diagram, a map, a chart or plan), an engraving, a photograph, a work of architecture or artistic craftsmanship, dramatic work, literary work (including computer programmes, tables, compilations and computer databases), musical work (including music as well as graphical notations), sound recording and cinematographic film. The Act was also amended to bring the law in line with recent developments in the information technology (IT) industry, be it satellite broadcasting or digital technology. Provisions were also made to enhance the performer’s rights, in line with the Rome Convention.

The importance of copyright law in this ever-evolving digital world becomes more and more imperative, especially with the popularity and easy access to the internet. In the real estate industry, such copyright issues can often be observed in connection with listing photographs. Listing photographs can be generally defined as the photographs of the property that are presented to potential buyers so that they could make an informed choice. This becomes more pertinent when taking into account online listings, or organisations that might send across such images online to potential buyers.

Improper use of such photographs can create copyright infringement liability for agents, brokerages, and other people involved; and implementing copyright risk-management strategies may help real estate professionals avoid liability. It’s crucial for real estate professionals to know and fully understand the rights they own in listing photographs, and should strive to own their listing photographs. When ownership is not possible, an effort must be made by real estate professionals to gather other legal safeguards and rights involving the photographs, and how they permit others to use the same.

Signing agreements that govern the use of such photographs, along with certain limitations and restrictions, can be one way of safeguarding one’s rights. The real estate professionals should make sure that they review such agreements, audit the photographs to ensure that compliance with the agreement, decide on how such photographs are to be used and maintain records of all such photography agreements they enter into.

In the US Legal system, Compliance with the Digital Millennium Copyright Act of 1998 (DMCA) will help real estate professionals avoid liability when infringing content appears through an IDX (Internet Data Exchange) feed. Under federal copyright law, online service providers are protected from liability for copyright infringement when those online service providers comply with certain procedural requirements. One such exemption is for website owners who allow third parties to post user-generated content, for example, a brokerage website that includes an IDX feed of third-party listings.

In India, photographs are protected under copyright law as artistic work (as was discussed earlier) under Section 2(c) of the Copyright Act. The essential element in photography, and similarly in all other artistic works, requires that the photograph must be an original work where some degree of skill and effort must have been expended on it. As per section 25 of the Copyright Act, photographs are provided copyright protection for a period of 60 years from the date of publication, that from the day it came into existence. Such safeguards can be utilised by real estate professionals when trying to safeguard their listing photographs, provided that the photographs are clicked by their own selves. Even if this is not the case, an agreement concerning its proper usage and rights can always be utilised. 

Lastly, the role of copyright law in real estate can be essential and provides a lot of scope for future research. With the increasing digitization and flouting of copyright norms in the online sphere, such concerns will be better heard and resolved with stricter copyright laws, and even strict implementation. In the end, it is in the best interest of real estate professionals to be aware of the rights that they possess in relation to their intellectual property, and take appropriate safeguards in accordance with the law.

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