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RBI’s Monetary Policy Conundrum

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RBI’s Monetary Policy

The RBI’s monetary policy Conundrum: It is no news that the central bank’s responsibilities pile up whenever a disaster struck a market. This scenario is especially true for pandemics like the covid. The problem of being economically destitute is something that the public in India and around the world is emphatically facing. With policy measures trying to restore normalcy in the market, consumer and producer confidence aren’t actively inspiring confidence in the economic recovery.

Not only has consumer confidence affected trade severely but also the crippled global supply chains are adding to the detestable attribute of the pandemic. This has led the RBI to maintain an accommodative stance in the economy, so as to infuse enough liquidity in the market.

This is being done to revamp the business and the financial sector of the economy. Since crippling lockdowns were placed in the economy, manufacturing and economic activity had contracted at an unprecedented level, so much so, that the economy had contracted by 23.4 percent in decades.

rbi's monetary policyBut such easy credit necessarily isn’t helping the economy. As a simple rule of economics, banks usually face two short-term tradeoffs. These are trade-offs between growth and inflation in the economy.

Given that the RBI has maintained an accommodative stance, supporting the growth for quite some time, inflation signs in the economy are starting to appear. These have been more persistent and significant in the consumer price index due to the burgeoning crude prices in the economy. Given, that OPEC has yet again decided to restrict the supply of crude, stating that demand is not robust, such woes are bound to be exacerbated.

RBI, in fact, has recently deciphered that inflation had hovered above its tolerance limit. The inflation of 6 percent was obliviously an uncomfortable range for the RBI given it tends to keep inflation in the 2-4 percent range (+- 2percent). Thus, the RBI now faces a conundrum, whether to prioritize the growth or inflation monitoring in the economy.

The Conundrum

The RBI right now faces a tough challenge between growth and inflation monitoring. This is due to the very crucial fact that the economic recovery is still in its nascent stage of recovery. The impetus or momentum that is needed to bring it on track can only be provided through excess liquidity in the economy.

As unemployment is on the rise, the manufacturing sector needs its engine oil to revamp in order to take on the world demand and to increase exports.

But, it is to be noted that this excess liquidity does not only pose a threat to inflation but also to bad debt in the economy. Given that the financial standing of many has been crippled by the pandemic, there are effectively high chances of default of repayment on loans. On the other hand, the USA is robustly considering and signaling toward the tightening of the monetary policy. This can lead to a taper tantrum and reversal of FDI in India. Thus, growth prospects can seem bleak for the country.

It is no news that when India had gone into lockdown back in the month of March last year, inflation was not even a blip on our anxiety radar. But in comparison to last year, today, the fiscal and monetary policymakers need to give serious attention to the concept of “stagflation”. This effectively means that the government will have to decipher early odious signs that signify any odd rise in prices amid economic stagnancy.

rbi monetary policy todayAccording to the reports, Retail inflation had effectively broken away from the Reserve Bank of India’s tolerance limit of 6% in the month of June. Consequently, it had risen to just above 6.73% for the month of July. But, for the month of August, it had taken a dip to 6.69%, which emphatically points towards its persistence in the economy. A closer look at the data shows that the immense contributor to inflation is the increasing food prices. Of these, protein-rich items are especially getting dearer.

Though to point down one reason is not feasible, it can be rightfully stated that an obvious culprit can be the snapped-off supplies. Though most of the restrictions have been eased, however not all supply chains have been fully restored.

Lastly, it is to be noted that as long as the inflation stays above the 6% mark, which marks the uncomfortable range for the RBI, it would face the policy conundrum and will be definitely wary of easing money any further. But if the rate cuts might actually stoke prices, so could a fiscal stimulus by the Central authorities, which can be a sagacious alternative. With the economy in a dire state of need of funds and state spending, the expansionary policy of the RBI is important.

Thus, this effectively means that the government will have to make important and crucial decisions now. An alternative could be that RBI can swerve to control the rupee’s internal rather than external value. With India largely acting open to capital flows, it can attract investments. Thus, what stance the Indian authorities will take will depend on what RBI perceives as a priority.

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delhi boutiques

Dior Couture 2021’s Byculla Roots: How Better Fashion Laws Can Attract More Revenues

By Economy, Others No Comments

Dior Couture 2021

Dior Couture 2021: India is known for its passion for craft and robust sense of artistic culture. The recent Dior Couture Autumn Winter 2021-22 show was a similar buzzing collaboration between the French luxury fashion house and a Mumbai-based embroidery export house.

It is no secret that the fashion industry generates massive revenues and employment in the country, but the dismal quality of legal protection offered to this industry is quite a revelation. It is common for counterfeit products to be sold in the market and plaguing the fashion industry. Hence, in terms of designs and prints, fashion houses and fashion creatives are often toiling due to the paucity of suitable protection.

Crimes such as fashion forgeries, counterfeiting, lifting, and knockoffs are just the tip of the iceberg as the lack of protection for safeguarding the rights and interests of designers, artisans, craftsmen, and others involved therein is currently emerging to be an alarming concern. In India, there are no laws that govern the fashion industry per se. 

However, there are a comprehensive set of laws that protect and regulate the fashion industry. For instance, design and artistic ideas can be protected under the ambit of IPR laws i.e. The Designs Act 2000, The Patents Act 1970, Trade Marks Act 1999, The Geographical Indications of Goods (Registration & Protection) Act 1999, and The Copyright Act 1957. Likewise, labor laws regulate the manufacturing processes, corporate laws oversee company-related issues and banking laws govern the financial aspect of the same.

As an intellectual property right, the value of Copyright, Trademark, Geographical Indication, or Design Rights is to generate more value and surplus in the economy. IPR as commonly known is introduced to protect the creativity of human beings. On the one hand, it encourages human beings to be creative and innovative in the development of new and novel products, thereby, enhancing competition in the market.

On the other, it attempts to indicate the source of the good for confirming the integrity of the marketplace. Therefore, it is evident that IPR laws and fashion are interdependent. Having said that, considering the boom in the fashion industry post-globalization and the competition that is intensifying exponentially therein, it is crucial that some protectionist measures are established to encourage innovation and ensure the inflow of revenues.

Economic development of countries and IPR are intertwined as registration copyright, trademark, geographical indication or design rights can help fashion communities and houses to develop a corporate image, brand value, and reputation in the national and international marketplace. Registration of the same adds value to the companies as it acts as provides a competitive edge to the fashion houses which reflects upon the sales, profits, and the brand value of the product and company.

Also, registration of an IPR would also avoid any probability of an offense. The purpose of IPR laws is to ensure that the origin is clearly indicated, the creative ideas of a human are protected and at the same time, it also assesses the implications of the natural, utilitarian and aesthetic features on market competition. Therefore, it has two-fold benefits which enable consumers to enrich their purchase decisions and provides perpetual protection to the owner of the creative idea. 

Theoretically, the aim of the law is to ensure that the potential and contribution of the traditional fashion community are protected and recognized. However, owing to its strenuous registration procedures, the same often causes a lot of hassle to the traditional fashion community, thereby, leaving their potential goes unnoticed.  Moreover, the various expenditures associated with these registrations and the process of renewing the same in various countries drastically demotivates the aspirations of our traditional fashion segment.

Nevertheless, IPR laws can be a vehicle to augment the economic potential of our country as the fashion industry can play a dynamic role in encouraging and supporting innovation and creativity. Also, with the widespread influence of IPR at a domestic and international level, it provides an opportunity for Indian fashion brands and traditional communities to establish and protect their brand value in the global marketplace by generating revenue.


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crypto landscape

Changing Crypto Landscape Across The World

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Changing Crypto Landscape

Crypto landscape: When the idea of cryptocurrency had descended on the world, it was quite clear that it was not the favorite innovation of the government or regulatory authorities. This has various reasons, much of which include cryptocurrency’s detestable attributes that make it less appealing to the regulatory authorities. But given, given how the contentious digital asset has taken over the world’s investors right now, it can be rightly stated that regulators cannot afford to miss the cryptocurrency bus.

If it is scrutinized, it can be known that the most valuable digital currencies today are unconventional Ether, Bitcoin, Ripple, etc., the craze for which will not go away anytime soon.

But the possibility of its endangerment isn’t nil, this is due to the fact that the world can see the emphatic rise of government-backed digital currencies. These can definitely over-weight or outrun today’s heavyweights called cryptocurrency as it will have the government’s backing.

Though, it would be quite contradictory to state that something that will be closely regulated by the authorities should be enticing for the investors. But here it is to be noted that government backing provides assurance and feasibility of investments that unregulated markets can never offer. Moreover, cautious investors love stability, short-term profits are enticing but can never outdo the long-term stability that the government regulation will provide.

Such government efforts have been evident in various nations like China and India. India is all set to release its amendment to the crypto law. Though at the moment, it is quite unclear whether the government’s stance will be liberating or authoritative for the investors, there are reportedly high chances of adoption of an accommodative stance by the authorities. On the other hand, China, which currently has unveiled its highly crippling wealth distribution plan has also developed a robust framework called the Digital Currency Electronic Payment.

This significant payment system will emphatically allow its central bank to effectively issue a digital currency to other commercial banks in the economy. This payment system will also involve third-party payments networks like China’s payment giants like WeChat Pay and Alipay.

Given the regulatory framework that is all set to be launched, it can be stated that China can start using its centrally regulating digital currency in the next 2-3 months.

But how will China’s altered stance change the tune of other countries around the world? It is to be noted that China has come a long way from its detestable, antagonistic relationship with the digital currency to finally embracing it under its authoritative regime. It is worthy of mentioning here that if the country significantly succeeds in its Lucrative and crucial initiative, then other countries will definitely follow suit.

This will lead various other nations to launch their own state-backed digital currencies. However, if such measures will be adopted by various other countries, this will lead to a significant paradigm shift in the cryptocurrency landscape from being unregulated to being thoroughly regulated. Thus this will emphatically contradict with non-controlled nature of the cryptocurrencies that we witness today.

But this gives rise to a pertinent question why will profit-mongering investors embrace the regulated crypto? As a matter of fact, cryptocurrency is so enticing for investors due to its unregulated and clandestine attribute that facilitates incurring high profits and carrying out clandestine affairs of money laundering.

It is to be noted that it wouldn’t be an easy feat for the central bank that will have to blend the regulatory and liberal techniques to entice more investors to the crypto market. Excessive revenue collection on gains will definitely be a canker for the deal. As a matter of fact, easy and mild monitoring will lead a long way.

It is to be noted that China is solely not the country that has been emphatically working on issuing digital currencies but Switzerland too is planning on rolling out the same framework. According to the reports, the Swiss National Bank of Switzerland is effectively working with the country’s stock exchange to significantly and effectively scrutinize and examine the high possible use of such currencies in various kinds of trading in a safe manner.

Though the world is still wary of the contentious digital asset, 4El Salvador’s bold approach to granting the digital currency the legal tender has already paved the way for an opportunistic future of the digital currency. On the other hand, with the invariable endorsement by Tesla’s CEO Elon Musk and Jack Dorsey, much credibility is being added to the contentious digital asset. However, similarly, on the other hand, US ex-President Mr. Donald Trump is not too subtle in attacking the contentious digital asset or hiding his hostility.

Thus, it can be stated that no matter what controversy surrounds the crypto, it only adds to its popularity. This emphatically points toward the fact that the crypto landscape is changing around the world. The paradigm shift can definitely lead to a rise in the regulated state-backed cryptocurrency and the fall of the conventional cryptocurrency we see today. This will help bring a radical change in the valued acceptance or burgeoning popularity of major cryptocurrencies in the following years.

Thus, one can emphatically maintain that while many countries around the world are thinking of introducing crypto-based transactions, several states like the UK and Turkey are planning on banning them for good, as discrepancies plague the road to its acceptance. However, lastly, it should be remembered that the regulatory landscape will definitely change the game for this sector.


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bitcoin technology and legality

Crypto Space Too Large Now to Ignore

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Crypto Space Too Large Now To Ignore

Crypto space: With the advent of cryptocurrency, its battle with the authorities and rising popularity amongst the masses cannot be ignored. The contentious digital asset though is of contentious currency and of questionable character, cryptocurrency debate amongst various nations rages on. Since the advent of the contentious digital currency, its surge has been so undeniable that authorities cannot ignore it any longer.

On August 17, even as Bitcoin prices had strategically and significantly recovered, Finance Minister Nirmala Sitharaman had pointed toward the cryptocurrency bill that is invariably waiting for the Union Cabinet’s clearance.

As aforementioned, the crypto craze around the world, at the moment, is at its zenith. In this, India too is an enthusiastic participant. According to the reports, given the stern and formidable attitude of the authorities, $6.6 billion by Indians have been invested in cryptocurrencies already.

This effectively means that around 1.5 crore Indians have emphatically invested in the virtual contentious digital currency, even if it means putting them on the wrong side of the law. On the other hand, the extent of the spread of the contentious asset can also be seen as currently, 350 startups are quite diligently and arduously working in the blockchain and cryptocurrency space.

This just goes on to show the larger extent of cryptocurrency admirers in the economy. This also emphatically points toward the fact that the Indian administration can no longer deny the legitimate rise of the same and need to look for an accommodative policy that elevates the market and is also safe.

Indian administration for decades now has taken a hostile stance against the currency due to its volatile and anonymous nature. Given the odious character of the same, the Indian administration finds it difficult to regulate the asset and this does not spark much faith in the digital currency. But given the apprehensive stance of the government, why are people so drawn toward the volatile asset?

The reason for the same can be because of a new wave of excitement that is whirling around decentralized finance. This will lead to a humungous asset appreciation, which provides robust profits that can be incurred by the investors. Grabbing small positions by the Institutional investors too leads to the endorsement or further excitement.

The popularity of the asset was in fact sealed when the bull market had emphatically picked up during the pandemic. Thus, this effectively shows that the crypto space has now become too large to ignore. Some other reason that might lead to the burgeoning popularity of the same is the clarity of no regulations.

The finance market usually rallies behind the finance industry’s regulations but the clarity the market provides the investors is something that is definitely enticing to the investors. Thus, given the crypto rise, it will definitely take time for the government to reach a viable solution that will effectively work for everyone.

According to the reports, an effective uptick in India’s crypto market invariably matches the same globally. In fact, after March 2020, when the Supreme Court had set aside the RBI circular, it had significantly acted as an enabler for the Indian ecosystem.

Though it is not quite well known what the recent amendment will bring for the Indian crypto setup, it is to be noted that there have been certain rumors that RBI can be experimenting with the crypto by launching its very own, with alterations. What has actually baffled the market is that consumerization of the same that has happened, has taken place at a waltzing speed. Such a claim can even be corroborated by the legal tender that has been provided by El Salvador.

With even the global wave turning positive towards the contentious asset, India sure can reap some benefits too. Thus, RBI’s accommodative though a bit alerted stance will prove quite beneficial for the market. This is due to a very pressing fact that in the last year or two, the crypto market trading has effectively become very entrenched in regular legitimate activity.

Although, it is to be noted that crypto is a borderless, broad phenomenon, thus, India’s exchange control regime is facing some real-time friction between FEMA and crypto. Thus, in order to make its stance more accommodative, urgent clarity is swiftly required from FEMA. This can effectively lead many people, who can plan better for the future.

The government also needs to scrutinize the fact that the companies are usually comfortable with investing in a market that is extremely global in nature. On the other hand, the regulatory challenges and clarity are some of the best drivers of the market. Thus, in order to attract or be accommodative, it is quite crucial that the Indian authorities keep an open mind.

Thus, the rise of the currency amidst all the uncertainty certainly guarantees the popularity of the market. If the government wants to effectively escape clandestine and illegal crypto trading in India, it is quite essential that the authorities alter their detestable, apprehensive stance and be more accommodative. Thus, what path the authorities travel, is still a mystery and will be only clearer once the amendment bill is passed.


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operational creditors

No Equality Among Equals : Treatment of Secured Creditors Under IBC

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Treatment of Secured Creditors Under IBC

Creditors Under IBC: It is no secret that the Indian economy is beset by a never-ending bad credit issue. It would be an exaggeration to say that such poor loans are destroying India’s financial and banking systems. IBC was introduced in India to combat the bad credit situation.

The law was critical in averting the catastrophe since it addressed the root of the problem. The IBC is a quick-response tool that addresses the NPA situation right away. However, it should be recognized that every coin has two sides. This practically suggests that IBC has flaws of its own and may not be as foolproof as one might think.

Given the IBC’s flaws and inconsistencies, it is imperative that the government reform the IBC regulation. The government must acknowledge and accept that different sorts of debtors may have different needs. This reclassification must be completed as quickly as possible so that the Code’s ultimate goal can be realized.
The topic of contention

The treatment of inter-creditor and subordinate agreements under the IBC is the major point of disagreement. It should be emphasized that, since the Code’s inception, a furious debate has erupted over the years about the difficult matter. It is worth noting that such inconsistencies have raised a number of key concerns in both the corporate litigation and insolvency resolution processes.

It should be emphasized that in 2019, only CIRP-related clarity was provided. In CIRP, the government had strategically and efficiently clarified the discriminatory treatment of secured creditors. The rationale for this clarification of differentiated treatment was the priority of charge.

While approving the resolution proceeds offered under a resolution plan, the “priority” of a secured creditor’s security interest can be effectively and strategically addressed, according to the clarification. As a result, it can be safely asserted that it will be investigated as a consideration when the committee of creditors approves the distribution of resolution funds. However, establishing clarity on CIRP did not successfully address the issue, as there remained ambiguity in the context of liquidation.

Certain issues surrounding liquidations, such as whether senior (in terms of the amount owed) secured creditors would have any strategic precedence over junior charge holders, remained woefully unclear, causing confusion. It’s worth noting that the Code’s liquidation waterfall, Section 53, states unequivocally that all secured creditors will be paid in proportion to their recognized claims.

However, there is ambiguity in the topic because no regulations or statements were made to differentiate between secured creditors based on inter-creditor or subordinate agreements.

However, in 2018, the Insolvency Law Committee took notice of the situation and determined that several valid inter-creditor and subordination regulations must be followed. It must be done in a courteous and polite manner in the liquidation cascade established by Section 53 of the Code. It should be noted, however, that the Insolvency and Bankruptcy Board of India reported in 2019 that the subject was still being debated.

the creditors under ibcThe question of whether a senior creditor has a better right than a junior creditor was discussed. This is directly in the Code’s section 53 waterfall. As a result, the Insolvency Law Committee addressed this ambiguity once more in 2020.

It was proposed in its report that a clarification be provided invariably by inserting an Explanation under Section 53. (2). this was done to ensure that subordinate agreements and inter-creditor agreements were legal.
But did this result in the resolution of a long-standing and difficult issue?

No, there isn’t an answer to that question. This was owing to the government’s refusal to embrace the ILC’s 2020 recommendations. As a result, no changes were made to Section 53 to add an explanation (2).

However, it is worth noting that a number of liquidators have begun to assert that agreements between secured creditors and inter creditors, as well as subordinate agreements, should be respected. Because of ICL’s 2020 decision, this huge step was taken. This effectively gave senior secured creditors preferential treatment.

In the context of the liquidation distribution, senior secured creditors were given preferential treatment. However, it is worth noting that, when the relevant matter of inter-creditor validity was ultimately put to the NCLAT, it rejected this judgment and, as a result, disagreed with the ILC’s interpretation.

Furthermore, according to the TDB Judgment, rights created through an inter-creditor or subordinate arrangement expire once the charge holders over an asset opt to engage in the liquidation procedure.

Though the aforementioned decision clarifies the legal issue, it also creates several undesirable situations. Charge holders are recommended to keep out of the liquidation process in certain cases. This could drive kids to choose and pursue some of their own independent actions. This could lead to severe outcomes in the future.

In the end, even the Supreme Court stated in its Swiss Ribbons decision that the Code’s overall goal is to avoid corporate death by liquidation as much as possible. This is to say that if inter-creditor relationships are recognized under CLP, there may be liquidation scenarios in which senior secured lenders would wish to avoid paying other creditors. Furthermore, such decisions can be made based on the corporate debtor’s liquidation value.

As a result, the legislature must update the Code in a decisive and effective manner. The modification must be written in such a way that it recognizes the various types of creditors. This should be done based on the security interest’s priority and value. Another requirement to remember is that when amendments are being made, the ultimate goal of the Code should not be obfuscated.


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ecb policy

Changes To ECB Policy: A Bane or A Boon?

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Changes To ECB Policy

ECB Policy: Given the current market conditions in India, Indian corporations have had difficulty obtaining overseas finance. Credit from debt capital markets and onshore lending markets has been tough to come by given the current situation. The Securities and Exchange Board of India’s recent policies has effectively attempted to increase India’s debt capital market. This was also started in order to reduce corporate India’s reliance on loans from the Indian banking industry.

This is due to the fact that certain Indian corporations must absolutely, without exception, fund a specific percentage of their debt by effectively issuing bonds in order to obtain loans from the Indian banking sector.
The upcoming SEBI new standards for the Indian banking sector on single and group exposures have effectively driven some of the larger corporations to look at other choices. For satisfying their debt funding needs, these choices will look beyond their normal, conventional, favored relationship with onshore banks.

Significant sources of onshore debt in India, such as the mutual fund business and the non-banking sector, are apparently dealing with their own set of problems, which doesn’t help the situation. Given the current state of the onshore debt market, the proposed changes to the External Commercial Borrowing framework have been greeted with optimism.

The moves have been applauded since they will enable Indian enterprises to explore. This has also been done to ensure that Indian businesses are able to meet their financing requirements successfully.

This will go a long way toward easing the resolution of stressed assets in the Indian banking system, which is currently under strain. It should also be emphasized that the bad debt financing in India will ease off during the peak of the country’s crisis, with enormous potential to grow in the future. Due to the epidemic that has destroyed the financial situation of many people and businesses, numerous debt financing techniques and channels are required.

The Reserve Bank of India liberalized the framework that had previously governed ECBs in 2019. End-use restrictions were relaxed, and domestic lenders were allowed to transfer and assign their existing INR loans offshore.

What has changed with ECB revenues is that they can now be used to repay onshore INR loans and meet working capital requirements as needed. Non-banking financial companies that are registered with the RBI, on the other hand, will now be able to raise ECBs.

Companies in the infrastructure and manufacturing sectors, for example, can successfully raise ECBs to pay back INR loans. These can be used to fund INR targets that were obtained onshore and when the revenues of such loans were used to fund capital expenditure. Companies that are currently classed as SMA-2 or NPA (according to RBI rules) as a result of a settlement or agreement reached with the company’s lenders.

However, international branches and subsidiaries of Indian banks are not permitted to offer ECBs. The SEBI’s relaxations are expected to become more relevant for higher-rated Indian firms. Those who can get the best ratings. ECBs will be allowed to access offshore markets at a set price.

The RBI treats ECB funds that are utilized by borrowers in the infrastructure and manufacturing sectors to repay onshore loans, including stressed assets and NPA loans, more positively. Because the RBI’s latest move is designed to help resolve stressed assets. As a result, this is the most significant development in the Indian NPA market. This is because it allows Indian banks to sell nonperforming loans. The loans can be offered directly to ECB-approved offshore lenders.

Notably, this will very definitely lead to increased foreign direct engagement in the Indian distressed credit market. However, this is a major paradigm shift from the previous method. The current framework restricts investments to onshore vehicles and security receipts.

As a result, this innovative idea should enable onshore banks to allocate troubled loans to eligible offshore lenders. However, these foreign lenders should be immune from the RBI’s securitization rules. Resolving stressed assets in this creative way reduces the possibility of certain difficulties. Concerns emerge from the securitization procedure according to the RBI’s securitization requirements.

Notably, SEBI and RBI’s creative measures will allow troubled Indian firms to access foreign financial markets. To refinance their existing INR debt or to meet their specific working capital needs. The option will only be offered to higher-rated Indian firms. Using this approach, other Indian corporations will be able to receive considerable debt finance from the domestic debt markets.

The changes, on the other hand, are quite progressive, allowing direct assignment or transfer of current INR loans to foreign lenders. This will help to struggle Indian enterprises since it will help resolve stressed loan assets in India.


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balance sheet

Securitization of Financial Assets: A Potent Panacea to Non-Performing Assets

By Economy, Banking, Others One Comment

Securitization of Financial Assets

With the burgeoning of globalization & liberalization, there has been a paradigmatic shift in the role of the banking and financial sector in monetized economies. There is an important reason to believe that a large number of non-performing assets in financial institutions is an important reason for the causation and deterioration of financial crisis. But is the NPA crisis an invincible enemy which cannot be mitigated? Thankfully, Asset securitization is the answer to the detestable NPA problem in the economy which can significantly help to bring the NPA crisis to its knees.

Asset securitization is considered an effective way to deal with NPA. The key issue in restricting securitization is the selection of NPA. It is to be noted, that many NPAs are significantly caused by a short-term cash flow shortage. But an opportunity can be presented to a bank if a significant quantity of funds can be committed to asset securitization which can emphatically have a good chance to covert NPAs into quality assets.

In financing terms, the advantages of asset securitization are tremendous. First and foremost, the financing costs are low. It is no news that disposing of NPAs requires huge cash flows, additionally, management of the same incurs humungous costs. Alternatively, in asset securitization, the user costs of the financing proceeds are relatively low. Compared to bank loans, relatively high-interest rates can be significantly avoided.

Additionally, compared to equity financing, the financing costs can be reduced while the enterprise’s organizational structure is maintained. Further, through asset securitization, the limit imposed by the credit rating of the NPAs themselves may be overcome through credit enhancement, to issue securities of a higher rating.

One of the biggest problems with lending out loans is the high risks associated with it. Consequently, NPAs too pose a huge risk to a banking structure. In contrast, an asset portfolio can reduce the risks of a single NPA. According to the investment portfolio theory, without reducing the anticipated return rates, combining negatively correlated securities can cause the risks of the securities portfolio to be less than the risks of any one type of security held.

As aforementioned, the credit rating of NPAs is relatively poor and the risks of default are quite high, but due to securitization, assets are of different risk levels which can be combined into an asset pool. Securitization allows different types of NPAs to enter one asset pool to achieve risk hedging; and, through accelerated transfer, separation, and centralized disposal of the NPAs by the capital market, the percentage of non-performing loans can be directly reduced.

Additionally, Risk remoteness emphatically eliminates the risks of the payment of the returns associated with the financed party. This leads to the major development in the design of an asset securitization structure i.e. establishment of a special purpose vehicle (SPV). This particular financed party removes the underlying assets from its hands by transferring the same to the SPV through a “genuine sale”. Subsequently, the SPV can use these as security to issue the securities. This emphatically helps in raising additional capital and a chance to gain profit through its gains.

Securitization, can additionally also allow the rapid removal of NPAs from the balance sheet. It allows quick sanitization of the on-balance-sheet assets and digestion of the accumulated risks from the sliding economy. This in turn leads to optimization of the asset-to-liability structure and strengthening of business operation capabilities, risk management capabilities, and core competitiveness.

Additionally, the market-based and mass disposal method has a scaling effect, reducing the economic and time costs of disposing of NPAs. As it is known, a huge percentage of NPA on the balance sheet of the bank speaks ill of its management and mitigation policy and in return hurts its credibility. Thus, asset securitization provides an ideal and profitable way of clearing the bad bank books.

NPA securitization can also increase an organization’s capital sources. Asset securitization can provide enterprises with a new means of financing. This effectively allows enterprises to break their current over-reliance on bank borrowing. Thus, Securitization effectively expands enterprises’ revenue sources. Through NPA securitization, an enterprise generally can revitalize existing funds, without in general increasing liabilities. Additionally, mitigating liabilities, it helps secure a low-cost fund source, increasing asset liquidity for a bank.

Is asset securitization a potent solution solely for the banking sector? Certainly not. Asset management companies too can profit from such lucrative ventures. Thus, specializing in the disposal of NPAs can present asset management companies with even greater opportunities.

Through NPA securitization, asset management companies can earn asset management fees, handling fees, and other such intermediary service fee income. This will deeply satisfy capital regulations and leverage the regulatory requirements of an asset management company.

Unlike in some countries where Assets Reconstruction Companies have been set up for the purpose of the bailout, in India, the Government has proactively initiated certain measures to control its burgeoning Non-Performing Assets crisis. In order to mitigate the Non-Performing Assets and quicken recovery, the Government of India in 1985 had set up SICA/BIFR, Debt Recovery Tribunals, and Debt Appellate Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

In an environment where market risks are relatively huge, currently, a pandemic struck the economy presents such a picture, that non-performing loan securitization products can provide new investment products for the capital markets.

In addition to capital markets, it emphatically can also provide products like open investment channels and increased product choice. While helping enterprises in effectively resolving non-performing loans, such products can satisfy different investors’ risk appetites and their ever-diversifying investment demands.

Top Real Estate Law Firm Mumbai

Tags: financial assets, non performing assets, financial asset management, real assets and financial assets, liquid financial assets, npa non performing assets, non performing assets of banks, securitization of financial assets, non performing assets in banking sector, npa in banking

the indian authorities

How Indian Authorities, Yet Again, Failed to Make a Difference in Its NPA Crisis Approach

By Economy, Banking, Others No Comments

Indian Authorities Failed to Make a Difference in NPA Crisis

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 to 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 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 regarding the insolvency proceedings of financial service providers to enable the insolvency process of DHFL, which had defaulted on payment obligations, comes across as 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 what exactly is the question? Given, the DHFL’s 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 the monetary and political goals of the Indian authorities with the DHFL precedent.


Tags: dewan housing finance limited, nclt full form, dewan housing finance corporation ltd, income tax authorities in india, nclt hearing, nclt case laws, constitution of nclt, dhfl housing finance limited, indian authorities, indian tax authorities

debt collections financial planning

Humanising Debt Collections: A Fair Practices Code For ARCs

By Economy, Banking, Others No Comments

Humanising Debt Collections – A Fair Practices Code For ARCs

While the depiction of the Indian stressed asset market is often painted to look dismal, global globalization has put the screws on government and regulators to take decisive action. In a similar vein, India’s bad debt headache was alleviated with the inception of the SARFAESI Act, allowing banks to recover monies without judicial intervention. Despite that, the problem of mounting non-performing assets grew multi-fold thereby enhancing the prominence and aggression of Asset Reconstruction Companies (ARC) in financial circles.

Need for Fair Practice Codes

In wake of the mounting NPAs, the banking sector is under immense pressure to get its house in order. Realizing this, banks resorted to offloading bad debts from their loan books onto ARCs thereby leading to a massive reduction in their distressed assets. However, during this exercise banks made no provisions for these bad loans in their books, and bore no losses in case of defaults. This issue led to the intervention by RBI in form of the Fair Practice Code to ensure transparency in form of cash transactions.

Maintaining Transparency

Another reason for the need for the Code was that the sale of assets conducted by ARCs-in spirit-emerged to be no different from the sale of assets by state finance corporations or others vested with similar special powers of recovery. There have been many instances wherein ARCs sold assets through ‘private auctions’, and simply served a notice to the borrower. In this procedure, no account of the sale proceeds, description of the buyer or competing bidders, information on how the asset was sold, or expenses on the sale was provided to borrowers.

At this juncture, the RBIs notification will ensure transparent and non-discriminatory practices in terms of the acquisition of assets. To curb the issues and unclear process of assets being sold to bidders where there is no trace of information of who these individuals are, the invitation to participate in the auction will be made public.

This will also provide transparency in the way how many assets were being sold. The Boards involvement to make sure these rules are being held up is of utmost importance. When dealing with buyers Section 29A of the IBC must guide the process. The inclusion of Section 29A rendered persons contributing to defaults of the corporate debtor or other incapacities or are a related party, declares such parties as ineligible for submission of resolution plan and thereby preventing such persons from gaining control of the corporate debtor under the Code.

Simply put, the provision safeguards creditors of the company against unscrupulous persons whose aim is not a revival of the corporate debtor, but to reward themselves by undermining the objective of the Code. 

Thus, the notification aims to address issues of transparency and borrowers being kept in the dark during such sale of assets while keeping a check on the aggressive sale of assets by the banks and easy purchase by the ARCs. On contrarian grounds, FPC under the new regime would inadvertently restrict the enforcement action taken by ARCs.

Maintaining the spirits of Section 29A of the IBC or delving into investor control diminishes the powers conferred upon the ARC drastically. Moreover, it is pertinent to note that a regulatory directive from the central bank perhaps cannot have an overriding effect on legislations enacted to facilitate debt recovery, under the SARFAESI Act or the RDDB Act. 

Also, the sale of assets was not transparent and was far too commonly done at prices that do not represent fair values. Thus, these malpractices by the ARCs forced the RBI to come up with Fair Practice Codes to ensure transparency in transactions and keep a check on their practices. Under the notification, ARCs are entitled to release all securities on the repayment of dues.

If the right of set-off is exercised, then a notice to the buyer must be sent with information regarding the full particulars of the remaining claim and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled or paid.

Ethical Recovery Processes

Hereafter, ARCs must ensure adequate training to staff to deal with customer matters appropriately. This will prevent or mitigate unlawful and uncivilized harassment inflicted upon debtors in the name of debt recovery processes. In the spirit of this Code, ARCsmust establishes a code of conduct for Recovery Agents and also holds the company accountable in case of breaches by their Agents.

A compulsory set up of a proper Grievance Redressal within the company should be constituted by ARC. The officer’s name designated for that redressal must be mentioned during the process. Such machinery will prove to be a step towards settlement of issues subsisting between the ARCs and the borrowers or the banks.

In addition to this, initiatives to address the absence of a poor secondary market have been taken up. In the intention to outsource an activity, a suitable outsourcing policy needs to be established, a delegation of authority depending on risks and materiality, and systems to monitor and review the operations of these activities.


Overall, the RBI’s guidelines reward assertive steps yet ethical recovery practices are strides in the right direction. This move will rationalize recent trends in the industry and prove advantageous to various stakeholders in the stressed asset sector, including defaulting borrowers. In light of the new guidelines, ARCs are likely to change their bidding strategy and cherry-pick deals backed by ‘hard’ assets reducing the number of deals.

At the heart of the ‘Fair Practices Code guidelines is the protection of debtors by humanizing the recovery process while striking an optimum balance between lender-borrower interests in the recovery framework. With an emphasis on compliances, transparent and non-discriminatory practices in the acquisition of assets, and the required release of securities upon repayment of dues, the FPC guidelines may collectively help insulate debtors from the clutches of the sale process.

Adherence to these guidelines will place these bad bank sponges on a game-changing pathway leading to reduced NPAs thereby reviving stressed assets in the banking sector and the Indian economy one step at a time, however not without some enforcement hiccups. 


Tags: fair practices, arc code, the debt collector, debt collections, commercial debt collection, credit collection services, debt recovery, debt management and collections system, debt collection services, commercial debt, credit collection

franklin templeton fiasco

Why Franklin-Type Fiasco Might Repeat- Mutual Funds And The Emerging Indian Economy

By Economy, Others No Comments

Franklin Templeton Fiasco

One of the recent announcements that shook D-street was the winding up of 6 debt schemes by Franklin Templeton, one of India’s top 10 mutual fund houses. The move has resulted in about ₹30,000 Crore of investor money being locked up, nowadays better known as Quarantined! The novel Franklin Templeton crisis, as some experts state has resulted in a state of flux being experienced by the mutual fund industry, the repercussions of which could be a systemic crisis for investors around the world. From a domestic standpoint, there are various concerns regarding a possible ripple effect across domestic financial markets.

As in the case of Franklin Templeton, the redemption of investments and purchases were barred by the fund house which is likely to be emulated by other fund houses in light of eroding the value of mutual funds viciously interlinked with the virus-induced liquidity crisis. Realizing the catastrophic consequences of the downturn, ₹50,000 crores was assigned by RBI exclusively to all commercial banks for lending to mutual fund houses.

RBI’s rationale for this move was the containment of a liquidity crunch that may give further shocks to the mutual fund market. The Franklin Templeton fiasco is an indication of the probable extent of its impact on MF Houses and the central bank’s move is a step in the right direction for preserving the financial stability in such unprecedented times.

However, the most taxing question is whether the Franklin Templeton fiasco can strike again, the answer to which is unfortunately affirmative. When the COVID-19 pandemic struck, Franklin Templeton (FT) faced redemptions which, is not an issue if redemptions are matched with inflows. As redemptions rose, FT borrowed funds to meet redemption requests but it kept increasing at an unfathomable pace ultimately shattering the Fund.

Similarly, with mass unemployment and a global liquidity crisis, Mutual Funds are likely to see redemption requests higher than ever before. On the other hand, Mutual Funds may fail to raise money through the sale of investments due to the rising illiquid investment portfolio leading to the FT fiasco.

The repetition of such as fiasco is attributable to several factors. At the outset, the Mutual Fund industry is riddled with systemic flaws. While some believe the problem is external (propelled by the COVID-19 outbreak), it cannot be denied that FT undertook high risks which pushed them off the ledge when the outbreak struck.

Besides, several other Mutual Funds have been trying to swing for the fences with recent news confirming that Mutual Funds have acted like reckless lenders and not as prudent investors, which underscores the systemic flaws of the industry.

Clearly, “investments are subject to market risk” and one must read the offer document carefully to learn what happens to your investment in worst-case scenarios. The menace of misinformation in the market coupled with financial illiterate investors looking to make a quick buck fall prey to a mis-spelling of Mutual Funds. SEBI’s role has been primarily in the form of disclosure-based regulation, which requires listed securities to reveal all associated risks. But these disclosures are dense, full of jargon, and voluminous, which often is beyond the understanding of an average investor.

For seasoned investors, high YTM returns raise a red flag of credit risks lurking in the scheme emphasizing the principle of “Caveat Emptor” (buyer beware). Clearly, buyers should have conducted due diligence before investing, but it is shocking to watch how quickly FT’s schemes have gone down the tube. 

What’s worse is FT’s CEO pointing fingers at SEBI rather than implicating the company’s own greed and mismanagement, which was an appalling move. Zeroing in on investors who had parked their money in FT funds, are eagerly waiting for FT to lift the lockdown on their hard-earned money! In addition to this, the lack of accountability of credit rating agencies is appalling.

However, investments are made based on the ratings of assets done by such agencies. Customarily, when Funds blow up, it breaks down investor confidence and goodwill of the industry at large. However, Funds abdicate their responsibility to rating agencies who have no accountability to them. This perverse flaw is indicative that some responsibility must be assigned to rating agencies for ratings, such as FT that blow up without warning.  

Presently, it is neither realistic nor desirable for SEBI to micro-monitor transactions. But the heart of the problem can be fixed. The Mutual Fund industry’s income is a percentage of funds it collects, however with a change to the incentive, the problem could be resolved. Adoption of a system that disincentivizes or makes the objective of asset gathering less attractive, and encourages the Mutual Funds fiduciary role as a trustee of other people’s money.

For instance, if fees earned by Mutual Funds were linked to the returns on investment or other outcomes, then it could change the behavior towards one that is investor-centric. The current legislative and policy frameworks and regulatory practices in India are leading to all kinds of circuitous forms of lending through inter-corporate debt, MFs, and multiple layers of intermediation.

Therefore, this is a good time to revisit these legislative and institutional frameworks and reform them. While legislators and regulators attempt to address these issues, retail investors are eagerly awaiting the return of their hard-earned money, as their funds remain quarantined with FT making us wonder if Mutual Funds Sahi Hai?


India Law Services Mumbai

Tags: emerging indian economy, mutual fund industry, domestic financial markets, franklin templeton, franklin templeton mutual fund, franklin templeton investments, franklin templeton funds, franklin templeton stock, franklin templeton growth fund, franklin templeton fiasco