Editorial 1: A fair settlement: On defaulters, RBI prioritises public interest
Recent Context:
- Recently, Reserve Bank of India set out a framework for bank settlements with defaulters.
- This circular has attracted widespread criticism because it covers settlements with fraudulent and wilful defaulters implying to some that the RBI is condoning their crimes
- However, this interpretation is not correct. On the contrary, the point of the circular is to establish safeguards so that public interest is protected when banks make such settlements
Why this issue has even arisen. Why should banks settle with defaulters?
- When there is a default, the primary objective of a bank is to recover as much of the loan as possible. Various options might be available to the bank for recovering the loan. The bank decides which strategy would work best, based purely on commercial judgement.
- For instance, the bank may want to trigger the Insolvency and Bankruptcy Code (IBC, 2016) against the borrower.
- Alternatively, in some other cases, it may decide to pursue a “compromise settlement” wherein the bank and the borrower negotiate a settlement amount.
- Hence, it is wrong to think that under the current circulation the RBI has permitted something unusual. One-time settlements are part and parcel of the business of banking. The RBI has simply given a formal regulatory structure to a standard banking practice.
Some of these settlements can indeed be with wilful and fraudulent defaulters.
- When trying to recover a loan, a bank should not make any distinction between whether the default is wilful, fraudulent or otherwise.
- Irrespective of the nature of the default, it is up to the bank to decide whether a settlement is a better and quicker option instead of triggering the IBC or pursuing some other strategy.
- The sole motivation behind such a decision should be to maximise recovery, as speedily as possible. This will help unlock banking capital that is stuck in the wilful default or fraud categories.
What about the crimes that these defaulters may have committed?
- The RBI circular makes it clear that banks should feel free to file cases against fraudulent or wilful defaulters.
- It states that banks will undertake settlements “without prejudice to the criminal proceeding underway against such debtors”. This separates the criminality of a particular default case from the commercial aspect of it.
- In other words, the circular does not condone any crime. But the pursuit of criminal action against a defaulter should not necessitate suspending commercial judgement. This distinction is vital.
Certain concern over banking system related to current circular:
- Government control over the boards of public sector banks.
- This creates a concern that the settlement process might be misused to favour politically connected defaulters at the cost of the banks’ commercial interests.
- This concern may not be without merits, and it is, therefore, incumbent upon the RBI to allow commercially prudent decisions and prevent politically motivated ones
- In addition, some broader issues need to be highlighted.
- There is ample anecdotal evidence that private sector banks have been settling with wilful defaulters for a while now
- If banks have already been reaching such settlements and various instructions to this effect have already been issued by the RBI to them over the years, one might ask: What was the need for this circular?
What should have been done to avoid criticisms:
- As two-thirds of the Indian banking system is owned by the government and public sector banks are more likely to come under the scrutiny of investigative agencies for any action they take.
- The RBI circular gives these banks regulatory cover for settlement-related decisions
- In a narrow sense, therefore, the circular merely levels the playing field. But from a wider perspective, the fact that a circular needed to be issued underscores the distortions that the Indian banking system suffers from owing to the government ownership of banks.
- In a fully privately-owned banking system there would be no need for such a circular and the ensuing controversy could have been avoided.
- The second broad issue concerns regulatory governance.
- A year ago, the RBI’s Regulations Review Authority 2.0 recommended that the RBI place all draft instructions on its website for stakeholder comments and finalise them after considering the feedback. Exceptions should be made only in special circumstances.
- There were no issues related to financial stability, or fiduciary duty, or confidentiality but this circular is of great public interest since it applies to entities against whom criminal proceedings are underway.
- Hence, the draft circular could and should have been placed on the RBI’s website for public consultation along with a discussion paper clearly explaining its rationale.
- Concerned stakeholders could have expressed their concerns and the RBI would have had the opportunity to assuage their misgivings by making suitable clarifications to the draft circular before notifying it
Conclusion:
- Banks are commercial enterprises and should be allowed to operate accordingly. In principle, separating a commercial decision such as loan recovery from criminal proceedings against wilful defaulters is a step in the right direction.
- However, the situation in India is unduly complicated because of government ownership of commercial enterprises and gaps in regulatory governance.
- Future public discourse should focus on these fundamental problems, and not on how banks or the RBI could play the role of moral police.
Editorial 2: India-US Trade and strategy
Recent Context:
- India-U.S. bilateral relations have developed into a "global strategic partnership", based on shared democratic values and increasing convergence of interests on bilateral, regional and global issues.
- Recently, Indian prime minister has official state visit to on the invitation of President Joe Biden and strength of bilateral relationship is exemplified by the invitation extended to the Prime Minister by the leaders of the two chambers of the US Congress to address a joint meeting of Congress for a second time
India-USA economic engagement
- At the heart of the Indo-US strategic partnership is deepening economic engagement and both sides to elevate the bilateral relationship to a “global strategic partnership”.
- While the relationship is founded in shared democratic values and an increasing convergence of interests on regional and global issues, There is significant rise in India-USA relation
- Modi’s visit comes at a time when the value of trade between the two countries has touched a record $191 billion, making the US India’s largest trading partner.
- For India, the favourable balance of trade position with the US is comforting, given that it has an adverse balance of trade equation with the majority of its other major trading partners. For the US, India is the ninth largest trading partner
- American companies have invested around $60 billion in India in sectors ranging from manufacturing to telecommunications and consumer goods to aerospace. And Indian companies have put in more than $40 billion in sectors such as IT, pharmaceuticals, and green energy
Strategic engagement of India-USA
- Strategic relation between both the nation are significant to counter China’s growing influence in the Indian Ocean rim, and as a forum for redoubling focus on the Indo-Pacific region.
- Central to this cooperation is also the post-pandemic consensus on diversifying and deepening supply chains with trusted countries, while reducing strategic dependencies.
- Quadrilateral Security Dialogue. The Quad began as a broad partnership after the 2004 Indian Ocean tsunami, but gained strategic heft after the four-country grouping, which has Australia and Japan alongside
- The I2U2, a grouping of India, Israel, the US and the United Arab Emirates, is focused on joint investments and new initiatives in water, energy, transportation, space, health, and food security.
- This January, National Security Advisor Ajit Doval and his US counterpart Jake Sullivan launched a new US-India initiative on Critical and Emerging Technologies.
- During Secretary of Commerce Gina Raimondo’s visit in March, the two countries established a partnership to make the semiconductor supply chain more resilient through private sector cooperation.
The semiconductor manufacturing agreement could have three main upsides for India
- India getting aligned for a more central role in the global electronics supply chain especially the possibility of potential convergence among the chip manufacturing incentive scheme launched by India and other governments around the world.
- There is a commitment to mainstream India’s $10 billion incentives for component manufacturing projects from established foreign chip firms and industry leaders, as opposed to just marginal players that have shown interest in India’s scheme so far.
- There is also the possibility of India benefiting from a further realignment of the regional collaborative effort being fostered by the US, which aims to diversify the sourcing supply base for semiconductor chips and avoid duplication of effort.
- As The US is already pursuing the ‘Chip 4’ alliance initiative with three other top semiconductor makers, Taiwan, Japan, and South Korea.
- In September 2021, India, Japan, and Australia had announced plans to establish a semiconductor supply chain initiative “to secure access to semiconductors and their components
India-USA relation in Defence sector
- The defence sector is likely to see multiple pacts, building on the bilateral cooperation framework that is already in place.
- Cooperation in areas such as armoured vehicles, ammunition, and air combat could include a deal for India, the world’s largest arms importer, to manufacture under licence GE’s F414 turbofan jet engine to power the indigenous Tejas Mk2 light combat aircraft that is under development.
Certain areas of concern between both the nation:
- The US still has significant export controls on India (instituted after the 1998 nuclear test), which inhibits the free transfer of technology. And the GE deal, if it goes through, will require clearance by Congress.
- Among the outstanding trade issues that require resolution are visa delays and the revoking of India’s trade benefits under the Generalised System of Preferences (GSP) programme in 2019.
- The US has complained about India’s trade policy being overly protectionist, especially with regard to entry barriers for foreign investment and unsteady legal rules.
- India has been raising tariffs over the last few years, reversing an earlier policy of lowering tariffs that endured for decades.
- India will likely be nudged to join the trade pillar of the US-led Indo-Pacific Economic Framework (IPEF). From Washington’s perspective, there is no political appetite for a full-scale free trade agreement (FTA) with India in Congress at this moment, and it sees the IPEF as a more practical substitute for bilateral deals.
- India has signed up for three pillars of the IPEF committed to building more resilient supply chains, tapping clean energy opportunities, and combating corruption —but has opted out of the fourth pillar (trade) citing reservations about the commitments required on environment, labour, digital trade, and public procurement.
- Concern of entry of India into Minerals Security Partnership (MSP), a US-led partnership to secure supply chains of critical minerals that is aimed at reducing dependency on China.
- The partnership, which was floated last year, has now been expanded to include a new member, Italy (along with the 11 founding countries and the European Union)
Conclusion:
- The relationship between India and the US are significant for shaping world order in the 21st century.
- Therefore, both the nations need to address the areas of concern and strengthen its relation for the political, economics and social development of both nations and its people.