UPSC Online Editorial Analysis
Editorial-1,2,3 & Explained-1 (combined)
Titles of the editorials:
- Say ‘no’ to corporate houses in Indian banking – Written by T.T. Ram Mohan (a professor at IIM
- Dangerous suggestion – Editorial by The Hindu
- Open cautiously – Editorial by The Indian express
- Corporates as banks: key issues – Explained page from The Indian express
[Some points have been added from other sources too.]
Topic in the syllabus: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment | Issues in Banking sector (GS-3)
Analysis about: All these articles analyses the recent recommendations given by internal working group of RBI for private banking sector in India.
- A recent report by an Internal Working Group of the Reserve Bank of India has attracted a lot of attention as well as criticism.
- The IWG was constituted to “review extant ownership guidelines and corporate structure for Indian private sector banks” and submitted its report last week.
- The IWG submitted several recommendations, but one, in particular, has raised a lot of concern. This had to do with allowing large corporate/industrial houses to be promoters of private banks.
About Internal Working Group of the Reserve Bank of India:
- RBI has constituted an Internal Working Group (IWG) to review the extant guidelines on ownership and corporate structure for Indian private sector banks.
- Why was the IWG constituted?
- As macroeconomic, financial market and technological developments continue to influence the future of banking and transform how the entire banking industry operates, it is felt necessary to align regulations to meet the requirements of a dynamic banking landscape.
- India needs to bolster its banking system if it wants to grow at a fast clip. In this regard, it is crucial to note that public sector banks have been steadily losing ground to private banks.
- Private banks are not only more efficient and profitable but also have more risk appetite.
- It is in this background that the IWG was asked to suggest changes that not only boost private sector banking but also make it safer.
- The Terms of Reference of the Committee are given below:
- To review the extant licensing guidelines and regulations relating to ownership and control in Indian private sector banks and suggest appropriate norms, keeping in mind the issue of excessive concentration of ownership and control, and having regard to international practices as well as domestic requirements;
- To examine and review the eligibility criteria for individuals/ entities to apply for banking license and make recommendations on all related issues;
- To study the current regulations on holding of financial subsidiaries through non-operative financial holding company (NOFHC) and suggest the manner of migrating all banks to a uniform regulation in the matter, including providing a transition path;
- To examine and review the norms for promoter shareholding at the initial/licensing stage and subsequently, along with the timelines for dilution of the shareholding; and,
- To identify any other issue germane to the subject matter and make recommendations thereon.
What were the recommendations given by Internal Working Group?
- It has recommended raising the cap on promoters’ stake in private sector banks to 26% in the long run (15 years). The holding is currently mandated at 15% of the paid-up voting equity share capital of the bank.
- Large corporate or industrial houses be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949 (to prevent connected lending and exposures between the banks and other financial and nonfinancial group entities), Strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.
- Well-run nonbanking financial companies (NBFCs), with an asset size of ₹50,000 crores and above, including those owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations.
- As regards non promoter shareholding, it has suggested a uniform cap of 15% of the paid up voting equity share capital of the bank for all types of shareholders.
- The panel also recommended that for Payments Banks intending to convert to a Small Finance Bank (SFB), their track record of three years should be considered sufficient.
- Small Finance Banks and Payments Banks may be listed within ‘6 years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations’, whichever is earlier.
- The minimum initial capital requirement for licensing new banks be enhanced from ₹500 crores to ₹1,000 crores for universal banks, and be raised to ₹300 crores from ₹200 crores for SFBs.
Why IWG recommended that corporate houses be given bank licences? (Supporting arguments)
- The Indian economy, especially the private sector, needs money (credit) to grow. Far from being able to extend credit, the government-owned banks are struggling to contain their non-performing assets.
- Government finances were already strained before the Covid crisis. With growth faltering, revenues have plummeted and the government has limited ability to push for growth through the public sector banks.
- Large corporates, with deep pockets, are the ones with the financial resources to fund India’s future growth.
- Corporate houses will bring capital and expertise to banking.
- It will usher in greater competition in banking sector.
- Moreover, not many jurisdictions worldwide bar corporate houses from banking.
Why is the recommendation to allow large corporates to float their own banks being criticised?
- Corporate houses can easily turn banks into a source of funds for their own businesses.
- In addition, they can ensure that funds are directed to their cronies.
- They can use banks to provide finance to customers and suppliers of their businesses.
- Adding a bank to a corporate house thus means an increase in concentration of economic power.
- Just as politicians have used banks to further their political interests, so also will corporate houses be tempted to use banks set up by them to enhance their clout.
- Coming at a time when many large corporates are consolidating their position in sector after sector, allowing bigger, muscular, and well-connected business houses entry into banking could lead to further extreme concentration of power.
- Banks owned by corporate houses will be exposed to the risks of the non-bank entities of the group.
- If the nonbank entities get into trouble, sentiment about the bank owned by the corporate house is bound to be impacted.
- Depositors may have to be rescued through the use of the public safety net.
- The Internal Working Group believes that before corporate houses are allowed to enter banking,
the RBI must be equipped with a legal framework to deal with interconnected lending and a mechanism to effectively supervise conglomerates that venture into banking. It is naive to suppose that any legal framework and supervisory mechanism will be adequate to deal with the risks of interconnected lending in the Indian context.
- Corporate houses are adept at routing funds through a maze of entities in India and abroad.
- Tracing interconnected lending will be a challenge.
- Monitoring of transactions of corporate houses will require the cooperation of various law enforcement agencies.
- Corporate houses can use their political clout to thwart such cooperation.
- The RBI can only react to interconnected lending ex-post, that is, after substantial exposure to the entities of the corporate house has happened. It is unlikely to be able to prevent such exposure.
- Suppose the RBI does latch on to interconnected lending. How is the RBI to react? Any action that the RBI may take in response could cause a flight of deposits from the bank concerned and precipitate its failure.
- Pitting the regulator against powerful corporate houses could end up damaging the regulator. The regulator would be under enormous pressure to compromise on regulation. Its credibility
would be dented in the process. This would indeed be a tragedy given the stature the RBI enjoys today.
- There are corporate houses that are already present in banking related activities through ownership of Non-Banking Financial Companies (NBFCs). Under the present policy, NBFCs with a successful track record of 10 years are allowed to convert themselves into banks. This promises to be an easier route for the entry of corporate houses into banking.
- The real attraction for corporate houses will be the possibility of acquiring public sector banks, whose valuations have been battered in recent years.
- The entry of corporate houses, if it happens at all, is thus likely to be a prelude to privatisation. Given what we know of governance in the Indian corporate world, any sale of public sector banks to corporate houses would raise serious concerns about financial stability.
- The dangers posed to overall financial stability by letting industrial houses have access to relatively inexpensive capital in the form of household savings through banks, howsoever legally regulated, are far too great to risk at the altar of liberalisation of ownership norms.
What are the past experiences which are lessons for us?
- For all its regulatory powers and supervisory capabilities, the RBI failed to spot the build-up of troubled exposures at Yes Bank in time.
- The collapse of IL&FS, the Nirav Modi scam at the Punjab National Bank, and the implosion of the Punjab and Maharashtra Cooperative Bank, don’t inspire confidence in the regulator’s supervisory capabilities.
- Connected lending has been happening for a long time and the RBI has been always behind the curve in spotting it. T
- The recent episodes in ICICI Bank, Yes Bank, DHFL etc. were all examples of connected lending.
- The so-called ever-greening of loans (where one loan after another is extended to enable the borrower to pay back the previous one) has been prevalent in Indian banking sector.
- Past examples of such mingling — such as Japan’s Keiretsu and Korea’s Chaebol — came unstuck during the 1998 crisis with disastrous consequences for the broader economy.
What did experts say about these recommendations?
- Former RBI Governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya severely criticised the suggestion by the IWG, describing it a “bombshell”.
- “It would be ‘penny wise pound foolish’ to replace the poor governance under the present structure of these (public sector/government-owned) banks with a highly conflicted structure of ownership by industrial houses,” Rajan and Acharya wrote.
- The former Governor and Deputy Governor of the RBI, Raghuram Rajan and Viral Acharya, have warned, doing so could lead to “connected lending”.
- Rajan and Acharya have cautioned, this could “exacerbate the concentration of economic (and political) power in certain business houses”.
- The RBI Governor was Raghuram G. Rajan. Mr. Rajan had headed the Committee on Financial Sector Reforms (2008). It had observed, “The Committee also believes it is premature to allow industrial houses to own banks. This prohibition on the ‘banking and commerce’ combine still exists in the United States today, and is certainly necessary in India till private governance and regulatory capacity improve.
- While there is a strong case for liberalising entry into the banking sector, and to encourage the creation of big private banks capable of meeting the financing needs of the economy, a system of stringent checks and balances will need to be put in place before the central bank contemplates any such step.
Titles of the editorial: Protecting Article 32
Written by – Upendra Baxi (professor of law, University of Warwick, and former vice chancellor of Universities of South Gujarat and Delhi.)
Topic in the syllabus: Polity – Fundamental rights (GS-2)
Analysis about: This article criticises the recent remark by CJI about article 32.
- The learned Chief Justice of India, Justice SA Bobde, is reported to have stated during the hearing of journalist Siddique Kappan’s bail matter, that the Court was trying to “discourage” recourse to Article 32, the fundamental right to constitutional remedies.
Past remarks of ex-CJIs related to the article 32:
- CJI M Hidayatullah in Tilokchand (1970) said that what Article 32 does is to keep open “the doors of this court” and requires the state not to “put any hindrance” to a person seeking to approach the Court.
- Justice MP Thakkar (and Justice BC Ray) in Kanubhai Brahmbhatt (1987) went even further: Speaking of the “alarming proportions” of judicial delays, they observed that “time for imposing self-discipline has already come, even if it involves shedding of some amount of institutional ego” and to “inspire confidence in the litigants that justice will be meted out to them at the High Court level, and other levels”.
Rulings of SC that will be vanished if we discourage article 32:
- As early as 1950, SC has ruled that powers under Article 32 are not limited to the exercise of prerogative writs.
- In 1987 SC ruled that it has powers to rule for compensation of violation of fundamental rights.
- In 1999 SC said that this power extended to the rectification of its own mistakes or errors.
Why is there a point in not discouraging the article 32?
- Justices swear an oath to protect the “constitution by law established” and that they inherit judicial worlds and wisdom.
- Article 32 does not merely confer wide powers on the Court but also the judicial duty to provide constitutional remedies.
- Articles 32 and 226 are the provisions of the Constitution that together provide an effective guarantee that every person has a fundamental right of access to courts. (According to Article 226 empowers High court to issue directions, orders or writs to any person, authority, government, or public officials.) High court have the discretion to act or not to; in contrast, the Supreme Court must act if there is infringement of the fundamental right.
- Article 32 is not absolute; no constitutional right is. Of course, the Supreme Court decides on what “appropriate proceedings” should be for it to be so moved. But the Court may not prescribe any process as it likes but only that process which preserves, protects and promotes the right to constitutional remedies.
- Scandalous judicial delays, measures of decongestion and diversion, and a bold resolution of “who watches the watchman” syndrome now demand urgent apex response.
- Article 32 makes the apex court into a “people’s court”. And future historians should not be able to conclude that the Court deliberately dealt deathblows to this “soul” of the Constitution, as Babasaheb Ambedkar described Article 32.
Title: Why the protests against Bru resettlement in Tripura have flared up now
Topic in the syllabus: Internal security (GS-3)
- PARTS OF North Tripura have witnessed violent protests recently over the proposed resettlement of Bru tribals.
Who are the Brus?
- Brus found in Mizoram, Tripura, Assam.
- They are also called as Reangs.
- They speak the Reang dialect of Kokborok language
- The language is of Tibeto-Burmese origin and is locally referred to as Kau Bru.
- The Hojagiri folk dance of Reang sub tribe is rather well known all over the world.
- ‘Buisu’, is the most popular festival of reang tribes. (do not be confused with ‘bihu’)
- Whenever a disputes arise in the between the member of the community, a meeting is called by the Rai (a sub tribe of Bru).
- The deities of the Reangs are similar those of other Tripuri people.
- The rituals of worship are also similar to the mainstream Tripuri.
- In Tripura, they are recognised as a Particularly Vulnerable Tribal Group.
What are the protests about?
- In 1997, 37,000 people of the Bru (or Reang) tribe fled to Tripura from Mizoram, on account of ethnic clashes there.
- Since then, 5,000 have returned to Mizoram while 32,000 remain in camps in Tripura.
- In January this year, an agreement was signed by the Centre, the two state governments and Bru representatives to allow the remaining 32,000 to permanently settle in the state.
- Bengali and Mizo groups in Tripura claim that settling thousands of migrants permanently in Kanchanpur sub-division of North Tripura district would lead to demographic imbalance, exert pressure on local resources and potentially lead to law and order problems.
- The Mizo Convention, a Tripura-based organisation, has teamed up with the Mancha on a platform called Joint Movement Committee (JMC) and announced that not more than 1,500 Bru families would be allowed to settle in Kanchanpur.
What is the resettlement plan?
- Over the last 10 months, the state has planned 12 resettlement spots across six districts with 300 families each.
- Under the agreement, the Centre has announced a special development project with funding of Rs 600 crore.
- Each resettled family will get an estimated 0.03 acres (1.5 gandas) of land for building a home, Rs 1.5 lakh as housing assistance, and Rs 4 lakh as a one-time cash benefit for sustenance, a monthly allowance of Rs 5,000 and free rations for two years from the date of resettlement.
If it was agreed, why the protests?
- JMC convener Sushanta Baruah said-
- The agitation was started to save “ancestral lands” from Bru migrants.
- “Though opposed to the whole idea of having more people permanently settle within limited resources of the area, we honoured the agreement signed by central and state governments and agreed to it. But now the district administration has proposed to set up six of 12 resettlement sites in Kanchanpur alone and settle 5,000 families here.”
- He alleged that 650 Bengali families from around Kanchanpur and 81 Mizo families from Jampui Hill range, who fled due to “atrocities” by Brus, were yet to be resettled two decades on.
What is the government stand?
- The Revenue Department has stressed that Bru migrants would be settled in various locations identified in six districts.
- There is no policy decision regarding settling 5,000 migrant families.
- The selection of families of resettlement is still in progress and no figure can be cited now.