View of MODERN BANKING IN INDIA WITH CONTEXT OF NON PERFORMING ASSETS – SPECIAL STUDY WITH REFERENCE BANKS OF HADOTI DIVISION : LEGISLATIVE AND JUDICIAL TRENDS

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Vol.04,Special Issue 04, 2^nd Conference (ICIRSTM) April 2019, Available Online: www.ajeee.co.in/index.php/AJEEE

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MODERN BANKING IN INDIA WITH CONTEXT OF NON PERFORMING ASSETS – SPECIAL STUDY WITH REFERENCE BANKS OF HADOTI DIVISION : LEGISLATIVE AND

JUDICIAL TRENDS Mr. Chandra Mohan Bairwa

Ph.D. Scholar at Carrier Point University, Kota (Rajasthan)

Abstract - This Paper is based on Modern Banking system i.e. Non performing assets (NPA) of Indian banks. at present large amount of normal loans and advances being converted into non performing assets in Indian banks and by this activity the assets quality of the banks deteriorating fastly. According to the Reserve Bank of India the Gross non performing assets (NPA) in Indian banks, specifically in public sector banks are valued at around Rs 4,00,000 crore which represents 90% of the total NPA in India with private sector banks accounting for the remainder. What are Non Performing Assets (NPA): Non performing asset refers to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest. In most cases debt is classified as non performing assets when loan payments have not been made for a period of 90 days. On the other way, money or assets provided by banks to companies as loans sometimes remain unpaid by borrowers. This late or non payment of loans is defined as non performing assets. They are also termed as bad assets. Recent Developments and ways to Tackle NPA:

Insolvency and bankruptcy code (IBC),Credit Risk Management, Tightening Credit Monitoring, Amendments to Banking Law to give RBI more power, Stricter NPA recovery, Corporate Governance Issues-Banks especially the public sector ones, need to come up with proper guidance and framework for appointments to senior level position.

Accountability- Lower level executives are often made accountable today however major decisions are made by senior executives accountable if Indian banks are to tackle the problem of NPAs.

1 IMPORTANCE

The financial stability report published recently by the reserve bank of India has indicated that the non performing assets (NPA) problem in Indian banking may be getting worse. This clearly is the worst crisis facing Indian banking since liberalization in 1991.Now days non performing assets are getting increased attention as the trend of deteriorating assets quality has emerged as a big economic risk for the Indian banking system.Non performing assets is a powerfull indicator of the health of the banking system in india.The non performing assets problem turned into a crisis when the banks exhibited their tendency to hide them and also overlooking recognition of non performing assets at the appropriate time.The non performing assets are the outcome of credit activity of the bank which is their most important function to earn profit. The credit is associated with risk and therefore the bank can not avoid non performing assets. The banks is back bone of Indian economy and non performing assets is main problem of Indian banks.Reducing of non performing assets will increase financial input of Indian bank from whom availability of funds will be increased in banks. Such type of recovered non performing assets funds banks can use in national developments activities.Constitutional mandates: The economic development of india is a associated with the economic justice in india. The Indian constitution laid down social, economic and political justice to every citizen in the country. thus as per preamble of Indian constitution the economic,social and political justice is a main object of Indian Constitution.There are ideas which are to inspire the state to work for the common good of the people and establish social and economic democracy in the country.some valuable provisions of Indian constitution as:

The state shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice social, economic and political, shall inform all the institutions of the national life.²The operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.³This article confers a fundamental right on citizens to carry on trade, business etc.The economic importance of directive principles of state policy is:

1. To provide adequate means of livelihood for all the citizens.

2. To secure equal pay for work to both men and women

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3. To make provision for securing right to work, to education and to public assistance in case of unemployment. Old age, sickness and similar other cases.

4. To ensure a decent standard of living and facilities of leisure for all workers.

All the above provisions of directive principles of state policy guide the government policies towards the economic and social activities. The framers of the Indian constitution were fully conscious of the importance of maintaining the economic justice of union of India. In all federation an attempt is made through constitutional provisions to create and preserve a national economic fabric to remove and prevent barriers to economic activity. The overwhelming role of finance in the economic development of a country is well recognized and hence forms the core of money market in economy. Normally, banks collect money from those who have spare money or who are saving it out of their income and lend this money to those who need it. In developing countries, the mechanism of providing finance is highly valuable and necessary in any community.

But the role of commercial banks is not only confined to savings and its transmission to those who are in a position to invest it in a profitable enterprise but also an instrument of credit creation. The role of bank has been transformed as prime mover of economic change. It is necessarily more complex in view of dynamic contribution expected from time to time in the challenging task of optimum economic growth.

Historical background: On the recommendations of the Hilton Young Commission in 1926,Government passed the Reserve Bank of India Act, 1934 to establish a central bank in the country as a shareholder‟s bank. Reserve Bank of India was established in 1935. In 1949 the Banking Regulation Act was passed.This Act gave extensive controlling powers to the Reserve Bank of India and the Government over the commercial banks. Nationalisation is defined as government taking control over assets and over a corporation, usually by acquiring the majority or the whole stake in the corporation.In 1949, during the early years of the country‟s independence, India‟s central bank, the RBI (Reserve Bank of India) became the first bank to be nationalised. This was an important move since the RBI would soon become the regulatory authority for banking in India. Most Indian banks at that time were privately owned. Thus, the Indian government then recognized the need to bring them under some form of government control to be able to finance India‟s growing financial needs.

Non Performing Assets (NPAs) as a problem: The banking sector has been facing the severe problems of the rising Non Performing Assets (NPAs). A nonperforming asset refers to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as non performing assets when loan payments have not been made for a period of 90 days.

2 IMPACT OF NON PERFORMING ASSETS ON THE GROWTH OF THE COUNTRY

The day to day operations in the account becomes difficult as bank starts adjusting money deposited against the dues. The approach of the banker towards the borrower is more of lender borrower rather than financer customer relation. the borrower is in a helpless situation and at the mercy of the lender bank, demoralizing the borrower. Now days banking sector has a big problem of mass number of accounts converted into non performing assets. By what way reduce to non performing assets. This is a main problem in modern banking system reason being the banks in India plays the main roll of economy towards development of the country. Solution of reducing to non performing assets will be beneficial for banking system, it helps to recover of loans and bed debts which is exist in form of non performing assets. On the other hand this it must help full to the banking sector to collect fund which was turned into non performing assets. funding is a main element of banking system. Availability of fund in banking and other financial institution in tremendous amount is a good sign for the economic growth. Recovered NPAs improves payment and settlement system of Non performing Assets. Non performing assets in present time exist in tremendous amount in India. recovery of non performing assets is more helpful to grow up of the banking sector. It may loop holes in banking system. This loopholes may be in legislative and judicial both perspectives. What short of Loopholes does exist in Modern Banking System? At present banking sector has been need to stop increasing of non performing assets which is still continuously rising of higher level. This is

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the point that how can be stopped the increasing of non performing Assets and how can convert back from existing non performing assets to normal accounts. This discussion thrust will most likely result by what way reduce to Non performing assets which will enhance the capital investment in India needed for its recovery and investments in right ways.

2.1 Rules and Regulation to Secure Non performing Assets in Banking System :

Insolvency and bankruptcy code,2016 (IBC) : An act to consolidate and ament the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such person to promote entrepreneurship, availability of credit and balance the interests of all the stake holders including alteration in the order of priority of payment of government dues and to establish an insolvency and bankruptcy board of India and for matters connected there with or incidental thereto. Key aspects of the insolvency and bankruptcy code:

 IBC proposes paradigm shift from the existing debtor in possession to a creditor in control regime.

 IBC aims at consolidating all existing insolvency related laws as well as amending multiple legislation including the companies act.

 The code would have an overriding effect on all other laws relating to insolvency and bankruptcy.

 The code aims to resolve insolvencies in a strict time bound manner the evaluation and viability determination must be completed within 180 days.

 Moratorium period of 180days (extendable up to 270 days) for the company.

Insolvency professional to take over the management of the company.

 It imposes stay not just on debt recovery action but also any claims one expected claims from suits, recovery from institute. the moratorium period will be active for the period over which the insolvency resolution process is active.Banks are now pinning their hopes on the Insolvency and Bankruptcy Code, 2016 for effective loan recovery.

SARFAESI Act,2002: (The securitization and reconstruction of financial assets and enforcement of security interest act)It allows banks and other financial institution to auction residential or commercial properties to recover loans. Under this act secured creditors (banks of financial institution)have many right for enforcement of security interest under section 13 of SARFAESI Act,2002.if borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as non performing assets by secured creditor, then secured creditors may require before expiry of period of limitation by written notice to the borrower for repayment of due in full with In 60 days by clearly stationing amount due and intention for enforcement. where he does not discharge dues in full with in 60 days, then secured creditor may take possession of the mortgaged assets under section 13(4) of SARFAESI act without intervention of any court or tribunal but with a prior notice to the borrower.

Power of Reserve Bank to determine policy and issue directions :— If the Reserve Bank is satisfied that in the public interest or to regulate financial system of the country to its advantage or to prevent the affairs of any securitisation company or reconstruction company from being conducted in a manner detrimental to the interest of investors or in any manner prejudicial to the interest of such securitisation company or reconstruction company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any securitization company or reconstruction company in matters relating to income recognition, accounting standards, making provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and also relating to deployment of funds by the securitisation company or reconstruction company, as the case may be, and such company shall be bound to follow the policy so determined and the directions so issued.

Power of Reserve Bank to Call for Statements and information. --The Reserve Bank may at any time direct a securitisation company or reconstruction company to furnish it within such time as may be specified by the Reserve Bank, with such statements and information

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relating to the business or affairs of such securitisation company or reconstruction company ( including any business or affairs with which such company is concerned) as the Reserve Bank may consider necessary or expedient to obtain for the purpose of this Act.

DRT (Debt Recovery Tribunal) The debts recovery tribunal (DRT) and debts recovery appellate tribunal (DRATs) where established under the recovery of debts due to banks and financial institution (RDDBFI )act,1993 with the specific objective of providing expeditious adjudication and recovery o f debts due to banks and financial institution. the DRTs are empowered to adjudicate claims of banks and Financial Institutions involving rupees ten lakh and above.Whereas a bank of financial institution has to recover any debt from any person, it makes an application called original application to the tribunal against such person. after adjudication, the DRT issues order and recover certificate, certifying the amount payable by the borrower to the bank or financial institution. this recovery certificate is thereafter executed by recovery officers attached to the DRTs as per the procedure for recovery of tax under second schedule of income tax act,1961.

Legal Service Authority act,1987 The Authority was constituted under the Legal Services Authorities Act, 1987. This Legislation provides free legal services to the weaker sections of the society and allows organisation of Lok Adalats for amicable settlement of disputes.Objective of lok adalat is to settle the disputes which are pending before the courts, by negotiations,conciliation and by adopting persuasive common sense and humane approach to the problems of the disputants.The lok adalat monvements is no more an experiment in india. It is now a success and needs to be replicated in certain matters.The lok adalat decid the matters on a consent and compromise basis. The lok adalat passes the award after the parties have agreed on the settlement and have given consent over it.

Fugitive Economic Offenders Act, 2017: A Bill to provide for measures to deter economic offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts, thereby preserving the sanctity of the rule of law in India. After the recent financial frauds came to fore in India, especially the Rs 13,000 crore PNB scam where diamantaire Nirav Modi and Mehul Choksi fled the country, it became apparent that the existing civil and criminal provisions are not entirely adequate to deal with the severiy of the problem.The absence of offenders during investigations poses problems for the probing agencies apart from undermining the law of the country. The ordinance will come into effect after the assent of the President.

The impact of the ordinance: It is expected that the creation of a special forum for a speedy confiscation of the proceeds of crime, in India or abroad, would force the fugitive to return to India to submit to the jurisdiction of courts in India to face the law in respect of scheduled offences.

Strategy for implementation and targets: The ordinance makes provisions for a court („Special Court‟ under the Prevention of Money-laundering Act, 2002) to declare a person as a „Fugitive Economic Offender.‟ A Fugitive Economic Offender is a person against whom an arrest warrant has been issued in respect of a scheduled offence and who has left India so as to avoid criminal prosecution, or being abroad, refuses to return to India to face criminal prosecution.

The Payment And Settlement Systems Act, 2007 An Act to provide for the regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority for that purpose and for matters connected therewith or incidental thereto.

The Companies Act, 2013 The company act,2013 without strictly defining the term explain the concept. A merger is a combination of two or more entities into one.the desire effect being not just the accumulation of assets and liabilities of the distinct entities,but organization of such entity into business. The companies compromises, arrangements and amalgamation rule,2016- these rules will be as where a compromise or arrangement is proposed for the purpose of or in connection with scheme for the reconstruction of any company or companies or for the amalgamation of any two or more companies, the petition

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shall for appropriate orders and directions under section 230 read with section 232 of the act.

National company law tribunal (NCLT): The central government has constituted national company law tribunal (NCLT) under section 408 of the companies act,2013 w.e.f.1st june,2016.with the constitution of NCLT.the company law board constituted under the companies act,1956 now stands dissolved. In the first phase the ministry of corporate affairs have set up eleven benches, one principal bench at new delhi and ten benches newdelhi,ahamadabad,allahbad,bengaluru,Chandigarh,Chennai,Guahati,Hyderabad,Koltak a and Mumbai.these benches will be headed by the president and 16 judicial members and 09 technical members as different location.The National company law tribunal (NCLT) is a quasi – judicial body in india that adjudicates issues relating to companies in india. the NCLT was established under the companies act, 2013ans was constituted on 1 june,2016, Reserve bank of India act,1934 : Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. And Whereas it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy. And Whereas the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth. And Whereas the monetary policy framework in India shall be operated by the Reserve Bank of India.

3 CONCLUSIONS

The Indian banking system is beleaguered with non-performing assets (NPAs). According to the Reserve Bank of India‟s Financial Stability Report , they currently stand at 10.2 per cent of all assets, while stressed assets, which are believed to be NPAs in effect, stand at 12.8 per cent. Related frauds amount to INR 612.6 billion in the last five financial years and governance failures on account of integrity and competence issues plague the banking system. Public sector banks suffer from a severe identity crisis and require business, not just financial, restructuring.The RBI as a regulator has had qualified success in the face of structural impediments, including limited control over PSBs. RBI‟s internal governance as well as its regulation of NPAs needs improvement. Subsidiarisation: The RBI may consider the Bank of England model of subsidiarising its prudential regulatory and supervision functions (the Prudential Regulatory Authourity and the Financial Conduct Authority).

However, the recognition that lost synergies from such separation contributed to the global financial crisis demands caution. Strengthening supervisory capacity: RBI lacks supervisory capacity to conduct forensic audits and this must be strengthened with human as well as technological resources.Preventing Evergreening: RBI regulations have permitted banks to “ever-green” and in effect delay the recognition and therefore resolution of NPAs. RBI regulations must take away incentives of banks to kick the can down the road and “extend and pretend”. This has led to a seizure of new lending and the caving in of credit culture. The recent RBI circular does remove such incentives by ending all other schemes such as CDR that allowed evergreening, which would lead to fewer delays in provisioning. This in turn, would require the 5ecapitalization of PSBs, which must not be carried out without the reforms set out above.Secondary Market: A vibrant secondary market for NPAs is crucial. The lack of transparency in price of the assets is holding this back, as is the lack of autonomy in PSBs and the fear of vigilance action.Concurrent Audit: There is a real rot in the internal and concurrent audit systems of banks. The latter is intended to red flag risks in real time, but has failed and must be shored up.

Diagnostics for willful default: Banks need better permanent diagnostics to get to the bottom of willful defaults. This can happen though (a) market intelligence; (b) funds flow analysis; and (c) financial analysis. Most promoters do not have sufficient “skin in the game” and rely entirely on bank borrowing.Using technology for maker- checker: Currently, the maker-checker systems require human intervention and are therefore prone to capture and corruption. The use of Artificial Intelligence for the supervision of financial transactions could prevent financial fraud. In addition, linking Core Banking Systems (CBS) with Finacle technology (as recently required by RBI) is crucial.

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Combine with low tech – ears on the ground: Business intelligence must use traditional means- speaking to people in the industry supplier and customers can be an invaluable source of financial information. Bright Spots Amidst the gloom, the functioning of the Insolvency and Bankruptcy Code (Code) is cause for optimism. The Code was passed an implemented in 13 months, which is faster even when compared to Singapore‟s amendments to its insolvency law. The Code is also being implemented in full speed- 50 per cent of all NPAs are currently being resolved through the Code, another 25 per cent will soon be. The judiciary has been following the (very tight) timelines prescribed by the Code.