India GDP in Trillion: A Path to Become a $30 Trillion Economy

India GDP in Trillion: A Path to Become a $30 Trillion Economy

The bold and big thinking of Indian leaders is pushing India to become a $30 trillion economy in the next 30 years.

In a short span of a year, the Indian economy has quickly expanded, from the timely action of the RBI to tame inflation to expanding consumption – India is skyrocketing towards growth and development. 

Recently, India has emerged as one of the most powerful countries, since it surpassed the UK to become the 5th largest world economy. However, a question is still being asked whether India can put itself forward as a $30 trillion economy.

Certainly, India holds the potential to become a $30 trillion economy which is clear from the fact that the nominal GDP (GDP at the current rate) has taken a big swing in the April-June quarter, i.e., Rs 64.95 lakh crores, according to the June rupee-dollar exchange rate it stands at $823 billion.

Moreover, it is also claimed that India surpassed the UK’s GDP in March itself, which was $813 billion, while India GDP was $864 billion

However, as per 2021 April’s GDP outlook report of the International Monetary Fund (IMF), India’s GDP ($3.18 trillion) was right behind UK’s GDP ($3.19 trillion) in 2021. Conversely, it has also been anticipated that India would become a $3.54 trillion economy by the end of 2022 if compared to the UK’s projected GDP which would be $3.38 trillion.

From the estimated data and India GDP growth, it can be seamlessly prognosticated that India will soon become a $3.54 trillion economy by the end of 2022 considering its present growth. 

Although, in which year it can become a $30 trillion economy will depend on many factors. 

With that, let’s see some facts, how the India GDP surpassed the GDP of the UK?

How India GDP Growth Has Surpassed the UK

The timing could not have been more auspicious when India emerged as the 5th largest world economy at midnight after the entire country celebrated Azadi ka Amrit Mahotsav, that’s its 75th Independence day. Moreover, after overtaking the UK, India is all set to skyrocket to be the third-largest world economy by 2029.

The path taken by India since 2014 reveals it is likely to get the tag of the third largest economy in 2029, a movement of seven places upward since 2014 when India was ranked 10th. India should surpass Germany in 2027 and Japan by 2029 at the current rate of growth (as per estimated figures).

From the estimated data, it can be safely projected that India has been moving in the right direction, and we can conclude that India GDP rank will surpass the world economic leaders in the coming years.  

How India pipped the UK, our colonial rulers –

How India's GDP Growth Has Surpassed the UK
  • Due to pent-up demand, the consumption in the service sector is bouncing back, as consumers are stepping out and spending (as per 2019-2020 data). One of the major reasons for the increase in demand is the “ abundance of festivals” celebrated in India.
  • While the world is on the brink of recession, our economy is growing by 7%.
  • As per the Finance Secretary, the government is on the pathway to meet the fiscal deficit target of 6.4% (Rs. 16, 61,196 crores) in the current fiscal year ending in March 2023, while currently, it is Rs. 15, 91,089 crores as per revised estimates for 2021-22.
  • The Real Gross Fixed Capital Formation of the country is expected to grow by 6.8% (2021-22), previously it was -9.8 (2020-21).

Yet, with the commendable achievement of India, one aspect which can not be ignored is, that “the per capita income of India is low, as India ranked 144 positions out of 190 countries.

It indicates a clear picture of poverty, income disparity, and our inability to account for inflation, wealth, or saving, therefore, even after achieving the milestone of being recognized as the “world’s fifth largest economy” the Indian economy is lagging behind in distinct aspects.

Whether India Will Be Able to Transform Itself Into a $30 Trillion Economy or Not | India GDP Growth

India GDP growth in the last 10 years, reflects a meritorious change, as it jumps to 8.9% in 2021 from 5.5% in 2012, especially after sinking as low as -6.6% in the previous year.

With the magnificent elevation in GDP of India, it can unequivocally be noticed that we are perfectly poised on the passageway to aspire to be a $30 trillion economy in the next 30 years. Though, it seems like a far-fetched dream, yet, beyond doubt it’s not rocket science as with our magical power of demographic dividend, youth power, and power of democracyIndia can proudly establish itself as a $30 trillion economy. 

Although, India encounters varied stumbling blocks to be finally crowned as a $30 trillion economy, such as –

The Economic Issues in India

The-Economic-Issues-in-India.

1. Low Per Capita Income

Even after 75 years of Independence, India continues to be a developing country, whose one feature is low per capita income. However, in 2020-21 low per capita income has dropped to Rs 1.27 lakh from Rs 1.32 lakh in 2019-20, while in 2021-22 it is estimated to be 1.50 lakh.

Apart from this, the problem of unequal distribution of income exists in India, which is one of the significant contributors and obstacles to economic development.

Proposed solution –

  • Increase in farmers’ income – India’s 54.6% of the population works in the agriculture sector and historically, India has always kept prices of agricultural products low. However, due to the introduction of schemes like the Farm Acts, the Indian government can allow farmers to earn high profits. Therefore, with the increase in profit of farmers, they can provide support to the other economic sectors through their consumption. For instance, products like fertilizers, working attire, and tools are a necessity for farmers, especially if they are planning to expand their business. So, this increase in expenditure will generate more job opportunities.
  • Urbanizing India’s rural population – Urbanization drives growth, due to the prominent nature of the Indian agricultural population, moving certain farmers into rural areas could allow them to generate employment and increase agricultural productivity by minimizing the working of a number of farmers on the same land. Therefore, it will help in growing India’s medium-sized cities. Moreover, the Indian government can promote migration by providing incentives to farmers, including investment in infrastructure development and urban services. Further, the new urban population will generate a resurgence of the housing market and provide more lending opportunities to banks. This in return will result in more development and urbanization, thus, would create more international investment and manufacturing export opportunities.

2. Dependence on Agriculture

Over 54.6% of the population is dependent on agriculture to earn a livelihood, which only contributes 20.2% to the national income, reflecting low productivity. Fortunately, in the Union Budget 2022-23, Rs 1.24 lakh crores have been allocated to the Department of Agriculture, Cooperation, and Farmers’ Welfare.

The measures are taken by the government, such as financial and the introduction of policies, positively solve the problem of individuals working in the agriculture sector.

Proposed solution –

  • Technological advancement – Apart from increasing the farmers’ income and urbanizing India’s rural population (earlier mentioned points), the Indian government can emphasize on the introduction of technologies in agriculture. Since, technology can assist farmers in predicting the climate, decreasing water usage, increasing yield, and their net profit margins. That in return increases India GDP growth rate.
  • Digital Credit Policy – Though the Indian government has already launched several credit policies to ensure easy access to loans with fewer legal formalities, yet, farmers could not able to avail the benefits of credit. That could be solved by combining easy access to loans with a digital credit policy, under which loan filing would become much simpler. 

3. High Population

Another factor, which is the stumbling block in economic development is heavy population pressure. Contemporary, India is the second most populous country, after China, yet, the per capita income of our country is low, which results in income disparity, and the inability to account for inflation, wealth, or saving. 

Further, in order to take care of the well-being of the population of the country, the government has to allocate high funds to fulfill basic requirements like food, shelter, medicine, schooling, electricity, hygiene, and more.

Proposed solution –

  • India can put more emphasis on programs like “AI for Youth” under which youth will be trained to be future-ready for AI development. Therefore, will commence the trend of entrepreneurship and contribute to India GDP growth.
  • To create “future entrepreneurs” the government can put more emphasis on the improvement of the soft skills of a student which are core for all professionals, rather than emphasizing on traditional studying methods.
  • Preventing the migration of India’s youth to other countries (to search for better opportunities) can be done through the creation of better jobs in all sectors.
  • The Indian government could provide subsidiaries to scientists, engineers, and other students (youth) who persist in talents but lack financial support.
  • Females/ women should be prepared to lead the fields which are considered non-fit for them, that’s how we will have another Sarla Thukral, Mithali Raj, and more.

4. Existence of Under-employment And Chronic Unemployment

Unemployment of any kind is a curse of any economy, be it developed or developing, and being a developing country, India is also encountering similar problems. Therefore, due to the abundance of labor, it is challenging for the government to generate employment opportunities for the entire population.

In addition to that, due to a deficiency of capital, secondary and tertiary occupations are inadequate, which results in under-employment and chronic unemployment.

Proposed solution –

  • Unemployment is a constant problem in the Indian economy and the Indian government has introduced several schemes to minimize unemployment such as Atmanirbhar Bharat Rojgar Yojana, Pradhan Mantri Rojgar Protsahan Yojana, etc. However, India’s world-beating growth is not creating as many jobs, considering that India should put more emphasis on improving the education system and job training.
  • Even though the employment rate has increased, employers couldn’t hire due to a lack of skills in freshers. Therefore, there is a need to give importance to the soft skills of students.
  • The Indian government can invest in the establishment of more industries and infrastructure development projects to minimize under-employment.
  • Training in the workplace, youth employment services, and career education could be a great way to improve skills, create more entrepreneurs, and allow students to choose the right career.

5. Leisurely Improvement in Rate of Capital Formation

From the beginning, one thing that pertains is a deficiency of capital in India, though, in 2021-22, the Gross Fixed Capital Formation of the country is expected to grow by 6.8%. Therefore, reflecting positive growth, yet, considering the high population growth, India could use better measures to increase the rate of gross capital formation.

Proposed solution –

  • Saving and investment from household savings or government policy need to be increased by improving the money flow, that in return increases the private investment or fixed asset acquisition. Therefore, increase in gross fixed capital formation.
  • Resident enterprises in the country can be increased to increase the gross fixed capital formation. For instance, oil extraction occurs in open seas, so the associated fixed capital is allocated to the national territory, in which the relevant enterprises are resident.

The mentioned economic issues have many potential solutions (as mentioned above) and it is no doubt that with time India has made progress in many fields. 

Certainly, from the 5 worst economies in the world to the world’s 5th largest economy, India has truly proven it’s worth and how its leaders have been working in all directions to tame the world to see India growing and expanding as a world power. 

What Are The Strengths Of The Indian Economy?

India, the fastest growing economy has to realize the strengths of demographic dividend, youth power, and the power of democracy. It is no doubt, from the year 2014 to 2022, India has witnessed tremendous growth in distinct aspects – be it science and technology, innovation, agriculture, the service sector, or digitalization.

Under the leadership of Hon’ble PM Modi Ji, India has built a modern economy, lifted millions of individuals from poverty, become a space and nuclear power, and developed robust foreign policies. 

Since 2014, India has come a long way, leaving a string of landmarks, which defines its journey. This section of the blog will trace the strengths of the Indian economy and India will become a $30 trillion economy.

Strengths of Indian economy.

1. Mixed Economy

The Indian economy is a perfect example of a mixed economy, which means private and public both sectors co-exist in India and function smoothly. On one hand, the public sector operates on heavy and fundamental industries, while on the other hand, private sectors have gained importance (due to liberalization). 

That provides a model for a “public-private partnership” where both, private and public sectors can work together through the adequate contribution of financial resources, management expertise, technology, and other resources.

2. An Emerging Market

India has emerged as a vibrant economy, which contributes to the stable the India GDP growth rate, even amidst global downstream, India continues to show positive India GDP growth trends, especially with the introduction of policies such as an automatic route for FDI in India, including measures taken by the government to attract domestic and foreign investment such as –

  • Empowered Group of Secretaries (EGoS) Project Development Cells (PDCs)
  • Production Linked Incentive (PLI) Schemes
  • PLI Scheme
  • Make in India 
  • Investment Clearance Cell (ICC)
  • One District One Product (ODOP) and more.

All the initiatives taken by the Indian government reflect the high prospect for growth.

3. Expansion in The Role of Agriculture

As mentioned, the largest part of our population is engaged in agriculture, which also contributes to the India GDP growth of the country. The introduction of the “green revolution” and other “bio-technological” improvements in agriculture has made Indian agriculture more efficient and has increased the surplus too.  

Including that, government initiatives such as PM Fasal Bima Yojana (PMFBY) (provides insurance on naturally grown crops,) Paramparagat Krishi Vikas Yojana (PKVY), and National Project on Organic Farming schemes – have pushed our agriculture sector towards growth. Moreover, PM Modi Ji’s government has also been working to incorporate AI in agriculture, which will again be an immense step towards development.

4. Service Sector

Due to liberalization and economic reforms India’s service sectors are flourishing, especially with the introduction of schemes like Make in India, and Digital India Mission, including schemes to boost the “12 champion service sectors” that are IT & ITeS, Tourism, and Hospitality, Medical Value Travel, Transport and Logistics, Accounting and Finance, Audio Visual, Legal, Communication, Construction, and Related Engineering, Environmental, Financial and Education – India is truly making immense progression in the service sector.

The service sector is the largest sector in India, estimated to grow by 8.2%.in 2021-22, after a contraction of 8.4% the previous year. 

5. Demographic Dividend

The human capital of India is young, which reflects that India is a proud owner of the maximum percentage of youth. The “youth” is not only highly motivated but also the greatest asset of a country, if skilled and trained adequately. And in order to provide diversified training to the youth, Hon’ble PM Modi Ji’s government has introduced schemes such as –

  • Pradhan Mantri Kaushal Vikas Yojana (PMKVY) 
  • Craftsman Training Scheme (CTS)
  • Pradhan Mantri Kaushal Kendras (PMKK)
  • Scheme for Higher Education Youth in Apprenticeship and Skills.
  • National Apprenticeship Promotion Scheme.
  • National Programme for Civil Services Capacity Building.
  • Green Skill Development Programme.

With the introduction of such programs and schemes, the Indian government is constantly taking measures to train and enhance the skills of youth, in order to create human capital to maximize the growth prospects of the country.

Moreover, the availability of maximum human capital in India attracts investment opportunities in India, hence, contributes India GDP growth.

6. High Purchase Price Parity (PPP)

Purchase Price Parity (PPP) refers to the rates of currency conversion, which tries to equalize the purchasing power of other currencies by obliterating the differences in price levels between countries.

The PPP of India stood at 23.14 in 2021, which reflects that India is one of the countries with the highest PPP. That means that the same product would cost less in India, than in other countries, for instance, the price of the same shoes would be high in the US, say $50 (3,982.53), however, would say Rs 2000 in India. 

This opens up the possibility of exports to other countries, since raw materials are economical in India, thereby contributing to the India GDP growth.

7. Rapid Growth of Urban Areas

Urbanization is one of the keys to improve the growth of the economy and under the leadership of Hon’ble Narendra Modi Ji several measures have been taken to provide distinct facilities in rural areas such as electricity, schools, employment, banks, and financial institutions, transportation facilities, and more. 

Along with that, more scheme has been introduced with the purpose to ensure further development, such as –

  • Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)
  • Shyama Prasad Mukherji Rurban Mission (SPMRM)
  • Aadarsh Gram Yojana (AGY) :- SAGY, VAGY & SPAGY.
  • Pradhan Mantri Adarsh Gram Yojana (PMAGY)
  • Pradhan Mantri Jan Vikas Karyakram (Center 60 : State 40)
  • Swaranjayanti Khand Utthan Yojana (100 % State

8. Digitalization

Digitalization in India, once a traditional country, is now a home of AI system designers and will soon become an AI hub, especially when the government is taking adequate measures to support digitization. India stands 4th in the largest producer of AI-relevant scholarly papers and has introduced initiatives like AI for Youth (commenced in 2020) to make the youth future ready for AI developments. 

Apart from that, our hon’ble PM also talks about making work from home a reality, which will allow more women to participate in the workforce, ensure energy saving, and will allow youth to manage studies and work conveniently.

9. Science and Technology (AI)

India is among one of the top countries in the world and in order to be successful in science and technology, the Indian government has launched schemes like INSPIRE “Innovation in Science Pursuit for Inspired Research” or Abdul Kalam Technology Innovation National Fellowship”, and other schemes with the purpose to encourage innovation in this sector.

It is no doubt that India is prosperously achieving success through launching Mission mars, or GSAT- 19.

10. Startup Hub

With the introduction of startup culture in India, India is becoming a startup hub, since due to schemes introduced by the Indian government, now startups are receiving concessions, subsidiaries, and more. 

Some of the schemes are –

  • Pradhan Mantri Mudra Yojana.
  • Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTSME).
  • Financial Support to MSMEs in ZED Certification Scheme. 
  • Credit Linked Capital Subsidy for Technology Upgradation (CLCSS).
  • Design Clinic for Design Expertise to MSMEs.

Conclusion 

India has overthrown one of the cultural, technological, and scientific leaders by conquering the position of the world’s fifth-largest economy, thereby, reflecting an increase in India GDP growth.  

India has always strived hard to adopt the best possible measures and strategies, which are in the interest of the economy as a whole and which have wider political and economic implications for the country and the world. From our track record, we envision the path of a $30 trillion economy, through a constant emphasis on fair and credible policies and measures that will eliminate unemployment issues, improve technological development and infrastructure, ensure adequate utilization of economic resources, and other aspects associated with economic development.

Moreover, under the guidance of our honorable Prime Minister Narendra Modi, India will soon become a $5 trillion economy and will head strategically on the path to becoming a $30 trillion economy.

Written & Compiled by CA Sunil Kumar Gupta

Founder Chairman, SARC Associates

sunilkumargupta.com

Contribution of Artificial Intelligence in Financial Services To Boost Economy of New India

Contribution of Artificial Intelligence in Financial Services To Boost Economy of New India

Has a chatbox ever asked you to open a savings account? Does ever a computerized assistant resolve your queries in minutes?

In this blog, we will understand how Artificial Intelligence drives Indian economy.

The world of AI is tremendously booming and it can be seamlessly seen that no industry or sector has remained untouched by its prevalence. And the world of finance and banking is also among those worlds which are also anchoring the power of kick-fast change in AI.

AI is intelligence demonstrated through machines, as opposed to natural intelligence present in humans and animals. It contains streamlined programs and procedures, including its ability to perform automated routine tasks, improve customer service, and assist businesses in achieving success, not only in the financial sector, but also in other sectors such as telecommunications, manufacturing, and more. 

Therefore, taking the economy on the path of automation. 

Undoubtedly, Artificial Intelligence has been evolving in India since 1950s, from the neonatal stage, when the idea of AI culture had coined to a complete boom state, where AI was intensively being used to store large data, VRs, ARs, and IoTsIndia is taking every possible initiative to embed AI in every nook and corner of society

India’s National Strategy for AI has been prepared by NITI Ayog (a premier policy think tank of the Indian Government through providing directional and policy inputs) to harness the power of AI in distinct fields. AI’s practical and effort approach can adequately address societal needs in distinct aspects of healthcare, agriculture, education, smart cities, infrastructure, smart mobility and transportation.

With the advent of the 21st century, due to its incredible advances in data processing, collection, and computation power, electronics has become ubiquitous in almost every sector, be it the manufacturing or the service sector. Further, AI is now deployed in distinct tasks and decision-making to allow better connectivity and productivity. 

Basic Pillars Which Contribute To The Development of AI

Basic Pillars Which Contribute To The Development of Artificial Intelligence
  1. Talent

Talent is the strongest pipeline for India to be successful and no doubt, India does have the resources for the same. Since India has the largest youth population in the world (around 66% of the population), and with the Indian government’s emphasis on continual training of a high-skilled workforce, India can soon become an AI hub. 

Moreover, India produces twice as many master-level engineering graduates as the United States, which provides it a competitive edge over other countries. And India is moving in the right direction through the introduction of initiatives like AI for Youth (commenced in 2020) to make the youth ready for future AI developments. 

Taking this initiative forward, “Responsible AI For Youth 2022”  was created by the National E-governance Division, Ministry of Electronics and Information Technology, Government of India in collaboration with Intel. It is launched by the Ministry of Electronics and IT. 

  1. Research 

India has the largest AI research community in the world and since 2010, it stands 4th in the largest producer of AI-relevant scholarly papers. It provides an edge to India’s youth population to increase their outreach, especially with their counterparts in the United States.

A two-tier integrated approach is introduced to magnify the core and applied research in AI –

  • Centers of Research Excellence in Artificial Intelligence (CORES), it will emphasize on the core research of AI.
  • International Center for Transformational Artificial Intelligence (ICTAI), this tier will help in establishing an ecosystem for the application based technological development and deployment.
  1. Patents

Since 2012, India ranks in the 10th position in the top 10 AI patent-producing countries, due to the immense increase in AI-driven inventions. Moreover, personal devices and computing, business, telecommunications, including life science are the four largest categories for AI patents in India. 

Collectively, these are associated with over 70% of India’s AI patents and reflect that Indian innovators have emphasized on applying AI to traditional strengths. In the past two decades, India has come a long way in AI patenting, since, the benefit of using patents to protect their devices is reflected. 

  1. AI Companies and Investments

More than 50% of Indian companies applying AI to their products are active in business analytics, medicine, finance, sales, retail, and customer relations.

NASSCOM has predicted that by FY 2026, industrial and automotive, healthcare, retail and CPG and BFSI will contribute 60% of possible AI-driven value to India. Moreover, AI companies and investments are continually bouncing back, considering that private companies’ investment in India has witnessed steady growth from 2015 to 2019. 

  1. Cloud Computing

India is using market cloud computing as a proxy for AI chips to support its AI computing needs since it does not have the domestic manufacturing capacity to manufacture AI chips. Also, India is lagging behind in cloud computing, yet contemporary, cloud bared markets are growing because of the rising demand for computing power. 

Be it talent, research, patents, investment in AI, or cloud computing – India has been moving in the right direction utilizing its population strength by introducing varied initiatives to promote AI in distinct fields.

In addition to that, the government has introduced “AIRAWAT”  (AI Research, Analytics, And Knowledge Assimilation Platform) which is a cloud platform for big data analytics and assimilation, with the power-optimized AI computing infrastructure using advanced AI processing. 

Apart from that, the Indian government has been investing in other schemes such as Digital India with the purpose to boost AI, IoT, big data, and robotics, including providing subsidies to startups under “Start-up India.”

From the given information, we can easily understand that the Indian government has been working on all aspects to make AI a reality in India, from establishing institutes to providing cloud support and AI research. This in return, is contributing to business growth through financial inclusions since, due to the development of AI in the financial services and sector, students can easily access the loan facility for education, training, or even to establish their business. 

How AI is Helping The Financial Services | Contribution of AI in Financial Services To Boost Indian Economy | AI in Financial Services

The field of Artificial Intelligence has enormously evolved since the introduction of revolutionary techniques and algorithms using automated tools. This revolutionized growth of AI in financial services and sectors has significantly been an impetus for the Indian economy.

The majority of banks and financial institutions use and recognize the true benefits of Artificial Intelligence. They are using it to respond to their customers at a faster pace around the clock. Not only does AI help provide a better customer experience, but it also frees up the personnel, improves the security measures of the institutions, and ensures that they are moving in the right direction when it comes to technology. 

Here are some of the ways Artificial Intelligence is helping in the financial services and sectors:

Contribution of Artificial Intelligence in Financial Services To Boost Indian Economy

1. Risk Assessment and Management

Till now, fintech, banks, and other financial institutions were using human resources to assess and manage their risks. Whether it was loan eligibility checking, trading, or banking, human resources were the way to go. 

But with the implementation of AI, these tasks have now become much easier to perform. With the advancement of data sciences and machine learning algorithms, Artificial Intelligence is becoming even smarter in risk assessment and management for financial institutions. 

2. Process Automation

One of the best things about an AI is that it can do the same thing again and again without getting tired, in other words – automation. With the help of AI, financial institutions can automate repetitive and mundane tasks with ease and efficiency. This allows valuable human resources to focus on the other important tasks and projects.

3. Reducing Human Error

Humans tend to make mistakes regardless of how experienced or gifted they are. According to recent studies, more than 90% of cloud breaches and financial frauds are caused by human errors. There have been several cases where the loss of valuable data, capital, and resources has been caused by minor human errors. 

With the implementation of artificial intelligence, these errors have dropped drastically. In other words, AI reduces human errors and saves valuable data and resources while preventing cyberattacks and frauds.

4. Better Customer Interaction

Virtual assistants (VAs) and chatbots can do what regular human resources can not, they can be available for customers 24/7 and offer relevant solutions. Thanks to the implementation of Artificial Intelligence, chatbots and VAs have become even smarter in their workings. 

Of course, the customers of any financial institution still need human interaction to solve difficult problems. Still, thanks to the help of AI, virtual assistants can respond to customer’s needs with minimal effort. 

5. Cyberattack and Fraud Detection and Prevention

Any financial institution, whether it is banks, insurance companies, or brokerage firms, they are always in danger of fraud and cyberattack. And it’s not just the business houses themselves, it’s also their customers who are prone to cyber crimes. 

However, thanks to the implementation of AI, fraud, and cyberattacks are detected and prevented regularly keeping both the financial institution and its customer safe. 

6. Compliance

AI can successfully streamline compliance alert systems to near-perfection, considering that it is built to learn from compliance officers’ data, especially in today’s data-driven compliance environment, AI technology is tremendously improving the efficiency of compliance operations by lowering expenses. 

One of the best examples of “how AI helps in ensuring compliance” could be its usage in IT solutions to address the problem of wasting time and money every day. 

Apart from that, Artificial Intelligence successfully automates the workflow, therefore, minimum time and human resources are necessary to support compliance operations. In addition to that, AI minimizes the possibility of human error which could occur due to the availability of a sheer volume of data.

7. Financial Inclusion

With AI and data analytics, financial products are seamlessly available to a large part of the population, even those with no formal bank account, payslip, or digital financial track record. 

The access to small financial loans have now become feasible, since the entire process is automated and scalable. In addition to that, fintech companies have found a pathway to monetize the regulatory stumbling blocks which have kept traditional banks from lending money to the poor. With the introduction of AI, the idea of money lending has taken a new shape that’s “data available on customer’s mobile.” Therefore, creating a mobile digital credit score, a reality, which was once a dream. 

Financial inclusion has established a new pathway, where a needy person can easily obtain a loan from the banks and financial institutions, thus pushing Indian youth on the path of “entrepreneurship” rather than seeking jobs. Therefore, fulfilling one more agenda of the Indian government that’s “employment generation.”

Such development has marked the emergence of new business models, with traditional banks parenting with fintech to provide digital credit score services, including the emergence of non-bank fintech in a digital lending space.

Apart from that, the use of AI is tremendously increasing to screen loans and select financial product sale recommendations. This is done based on historical data, therefore, eliminating the possibility of prejudice

Benefiting youth with easy access to loans, AI has become a tool for maximizing the access of financial services to farmers using data and machine learning (major components of AI) algorithms to eliminate the possibility of fraud and allow seamless access of funds to credit-worthy farmers

That can allow the government to limit farmers’ suicide in India, since easy access to loans and credit facilities will resolve farmers’ problems by ensuring direct access to equipment for irrigation, fertilizers, etc. Therefore, it will result in better cultivation and profit. 

AI not only resolves credit and funds-associated issues for farmers, youth, or entrepreneurs, but it also provides financial services/ assistance to startups, MSMEs, and emerging tech companies.

With the introduction of AI, financial inclusion has become a reality, where everyone has access to financial services since it facilitates branchless banking that not only minimizes the cost of banking but also makes financial services accessible. 

From AI-based chatbots resolving your query 24*7 to communicate through messaging apps, including educating customers about their financial health, AI has taken over the world.

India is the fastest growing economy with a significant contribution to the development of AI, considering that India has the finest AI research concentrated institutes such as IITs, IIITs, and IISc. 

And let’s not forget, that India is home to a highly skilled workforce, which matches the distinct technological market and a large start-up ecosystem that adds to over 77,000 DPIIT-recognized startups accessing 655 districts of the country as of August 2022. 

Realizing the potential, the Indian government is also taking the necessary initiatives to steer the country and position it among the top leaders in AI. 

Moreover, as per a recent study, AI is estimated to boost India’s annual growth rate by 1.3% by 2035 and has the potential to add 1 trillion to the Indian economy in 2035. 

From this data, we can conclude that AI plays an important role in the development of the Indian economy as a whole.  

However, with tremendous growth, AI also brings “privacy and data protection issues” which are far from only one. Concerns range from threats to privacy to threats to human dignity and safety.

Artificial Intelligence – Issues

Artificial Intelligence is developing at a fast pace and it seems like it could grow so immensely that it would be challenging for humans to control it. Moreover, AI systems developed by humans are working in every possible intelligence they could, now humans are themselves threatened by its development. 

  1. Threat to Privacy

An AI program recognizes speech, understands natural language, and is capable of understanding every conversation via emails and telephone calls. Therefore, the amount of data stored in AI models could impose the risk of data security and privacy violations. 

Proposed Solution –

  • The usage of “state of art encrypted methods” can be used to ensure data security and privacy violations.
  • The use of “low encrypted cloud software” must be avoided.
  1. Threat to Human Dignity

AI has replaced humans in many industries, however, there is no doubt that in the near future, it will replace humans working in dignified positions such as nurses, surgeons, etc. Therefore, the functions performed by AI systems are a substitute for us (humans) that devalues and deteriorates human flourishing.

Proposed Solution –

  • Despite massive improvements in AI technology, any minor fault can impose major risk, especially in the case of the use of AI in hospitals. Therefore, the presence of a doctor is essential to avoid such situations.
  • Software engineers or developers should come up with a hybrid model, where AI technology could assist doctors/ surgeons/ or other practitioners, rather than completely taking over the work. This will prevent the devaluation of human flourishing.
  1. Threat to Safety

AI systems are self-improving and advanced, which can become so mighty in comparison to humans that it could be challenging to prevent them from achieving their goals, which can result in unintentional consequences. 

Therefore, AI applications, which are in direct contact with humans or are integrated into the human body, impose safety risks, since they can be misused and hacked. 

Artificial intelligence is certainly a blessing, only if used for the right purpose and to minimize interference in human lives.

Proposed Solution –

  • Strong and unique passwords and two-factor authentication must be used to prevent hacking.
  • Search engines must be blocked from tracking.
  • Evict the unused applications and extensions.
  • Online browsing must be done through a secure VPN.

Conclusion

“India is all set to be an AI hub, with the right acquisition of talent (youth), research, patents, AI companies, investment, and cloud computing.”

From the introduction of metaverse to bitcoins/ cryptocurrency, indeed the world is on a rollercoaster ride of growth and development.

AI can change the financial services and sector completely, by allowing intelligent automation, labor and capital augmentation, and innovation diffusion which will help in ensuring technical feasibility, availability of structured data, regulatory barriers, and other benefits. Maybe someday, AI would be advanced enough to improve human relationships and resolve ethical issues.

India has emerged as the 3rd largest startup ecosystem globally, containing over 77,000 DPIIT-recognized startups across 656 districts of India as of 29th August 2022. As of September 2022, India had a total of 107 unicorns accounting for a valuation of $340.79 billion. The Indian unicorns (a term used to describe a privately owned startup company with a valuation of over $1 billion) are flourishing in a fast manner since these startups are not only developing or proposing innovative solutions and advanced technologies but are also contributing to the employment generation at a large scale.

Moreover, researchers have seen that AI has the potential to add 1 trillion dollars to the Indian economy in 2035. However, this is not the only factor responsible for economic growth. To know more on what are the factors that will lead to a $30 trillion economy, read it on our upcoming blog.

Something to think about!

Written & Compiled by CA Sunil Kumar Gupta

Founder Chairman, SARC Associates

sunilkumargupta.com

Master Circular On Bank Finance To Non-Banking Financial Companies (NBFCs)

Master Circular On Bank Finance To Non-Banking Financial Companies (NBFCs)

Financial activities of the Non-Banking Financial Companies (NBFCs) are regulated by Reserve Bank of India under the provisions of Chapter III B of the Reserve Bank of India Act, 1934. With the amendment of Section 45 IA of the Reserve Bank of India Act, 1934 in January 1997 and amendment of the National Housing Bank Act, 1987 in August 2019, in terms of Section 29 A of the National Housing Bank Act, 1987, all Non-Banking Financial Companies including Housing Finance Companies (HFCs) have to be mandatorily registered with the Reserve Bank of India.

Background

Consistent with the policy of giving greater operational freedom to banks in the matter of credit disbursement and in the context of mandatory registration of NBFCs with the Reserve Bank of India (RBI), most of the aspects relating to financing of NBFCs by banks have also been progressively deregulated. However, in view of the sensitivities attached to financing of certain types of activities undertaken by NBFCs, restrictions on financing of such activities continue to be in force.

Gist of the Master Circular

This Master Circular consolidates instructions on the above matter issued up to January 04, 2022 by which more autonomy have been given to NBFCs registered with RBI and is summarized hereunder:

(a.) The ceiling on bank credit linked to Net Owned Fund (NOF) of NBFCs has been withdrawn where NBFCs are engaged in principal business of asset financing, loan, factoring and investment activities. Accordingly, banks may extend need based working capital facilities and term loans to all NBFCs and engaged in infrastructure financing, equipment leasing, hire-purchase, loan, factoring and investment activities subject to provisions of para 8 of these guidelines.

(b.) Now, banks may also extend finance to NBFCs against second hand assets financed by them.

(c.) Banks may formulate suitable loan policy with the approval of their Boards of Directors within the existing/prudential guidelines and exposure norms prescribed by the Reserve Bank of India to extend various kinds of credit facilities to NBFCs.

Bank Finance to NBFCs not requiring registration

In terms of “Master Direction – Exemptions from the provisions of RBI Act, 1934” dated August 25, 2016, few categories of NBFCs are exempted from certain provisions of the RBI Act, 1934 including the need for registration with the RBI. Such NBFCs need not to register with the RBI and the banks may take their credit decisions on the basis of purpose of credit, nature, quality of underlying assets, repayment capacity of borrowers and risk perception, etc.

Activities not eligible for Bank Credit

(a.) The following activities undertaken by NBFCs are not eligible for bank credit:

(i) Bills discounted/rediscounted by NBFCs, except for rediscounting of bills discounted by NBFCs arising from sale of commercial vehicles and 2-wheeler and 3-wheeler vehicles subject to the following conditions:

  • the bills should have been drawn by the manufacturer on dealers only,
  • the bills should represent genuine sale transactions as may be ascertained from the chassis/engine number and
  • before rediscounting the bills, banks should satisfy themselves about the bonafides and track record of NBFCs which have discounted the bills.

(ii) Investments of NBFCs in any company/entity by way of shares, debentures, etc. However, need-based credit may be provided to Stock Broking Companies against shares and debentures held by them as stock-in-trade.

(iii) Unsecured loans/inter-corporate deposits by NBFCs to/in any company.

(iv) All types of loans and advances by NBFCs to their subsidiaries, group companies/entities.

(v) Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs) and for purchase of shares from secondary market.

(b.) Leased and Sub-Leased Assets

Banks can extend financial assistance to equipment leasing companies but they should not enter into lease agreements departmentally with such companies as well as other NBFCs engaged in equipment leasing.

Bank Finance to Factoring Companies

Banks can extend financial assistance to the Factoring Companies which comply with the following criteria with the restrictions mentioned at Paragraph 4.1 (i) and 4.1 (iv) above if:

(a) The companies qualify as Factoring Companies and carry out their business under the provisions of the Factoring Regulation Act, 2011 with notifications issued by RBI from time to time.

(b) They derive at least 50% of their income from factoring activity,

(c) The receivables purchased/financed, irrespective of whether on ‘with recourse’ or ‘without recourse’ basis, form at least 50% of the assets of the Factoring Company ;

(d) The assets/income referred to above would not include the assets/income relating to any bill discounting facility extended by the Factoring Company,

(e) Credit limits extended by the Factoring Companies is secured by hypothecation or assignment of receivables in their favour.

Bank Finance to NBFCs not permitted for:

  •  Bridge loans/interim finance

Banks should not grant bridge loans of any nature or interim finance against capital/debenture issues and/or in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of NBFCs.

  •  Advances against collateral security of shares to NBFCs

Shares and debentures cannot be accepted as collateral securities for secured loans granted to NBFC borrowers for any purpose.

  •  Restriction on guarantees for placement of funds with NBFCs

Banks not to execute guarantees covering inter-company deposits/loans thereby guaranteeing refund of all type of deposits/loans accepted by NBFCs/firms from other NBFCs/firms. However, banks are permitted to provide Partial Credit Enhancement (PCE) to bonds issued by NBFC-ND-SIs and Housing Finance Companies (HFCs) as per guidelines contained at para 2.4 of the Master Circular on Guarantees and co-acceptances dated November 09, 2021 as updated from time to time.

Prudential ceilings for exposure of banks to NBFCs

(a.) The definition and method of computation of exposure would be as prescribed in the circular on Large Exposures Framework dated June 03, 2019 and amendments made from time to time.

(b.) Banks’ exposures to a single NBFC (excluding gold loan companies) will be restricted to 20 percent of their eligible capital base (Tier-I capital). However, based on the risk perception, more stringent exposure limits in respect of certain categories of NBFCs may be considered by banks. Banks’ exposures to a group of connected NBFCs or group of connected counterparties having NBFCs in the group will be restricted to 25% of their Tier-I Capital.

(c.) The exposure of a bank to a single NBFC which is predominantly engaged in lending against collateral of gold jewellery (i.e., such loans comprising 50% or more of their financial assets), shall not exceed 7.5% of the bank’s capital funds (Tier-I plus Tier-II Capital). However, this exposure ceiling may go up to 12.5% of banks’ Capital Funds if the additional exposure is on account of funds already lent by such NBFCs to the infrastructure.

(d.) Banks may also consider fixing internal limits for their aggregate exposure to all NBFCs put together.

(e.) Banks should have an internal sub-limit on their aggregate exposures to all NBFCs, having gold loans to the extent of 50% or more of their total financial assets, taken together. This sub-limit should be within the internal limit fixed by the banks for their aggregate exposure to all NBFCs put together as prescribed in paragraph 7.4 above.

(f.) Infusion of eligible Capital Funds, after the published balance sheet date, may also be taken into account for computing exposure ceiling subject to obtaining an external auditor’s certificate on completion of the augmentation of capital and its onward submission to RBI (Department of Supervision) before reckoning the additions to Capital Funds.

(g.) Banks shall adhere to the intra-group limits in accordance with Guidelines on Management of Intra-Group Transactions and Exposures dated February 11, 2014.

Restrictions regarding investments made by banks in securities/instruments issued by NBFCs:

(a.) Banks not to invest in Zero Coupon Bonds (ZCBs) issued by NBFCs unless the issuer NBFC builds up sinking fund for all accrued interest and keeps it invested in Government bonds.

(b.) Banks are permitted to also invest in Non-Convertible Debentures (NCDs) with original or initial maturity up to 1-year issued by NBFCs. However, while investing in such instruments, banks should be guided by the extant prudential guidelines in force, ensuring the disclosure of the purpose for which the NCDs are being issued in the disclosure document and such purposes are eligible for bank finance.

Conclusion:

In view of policy measures to build scale and enhance NBFC’s contribution in 

Global Trade significantly, RBI has brought the master circular, efforts have been made to ease financing to needy borrowers through NBFCs while sensitivities attached to financing have simultaneously been taken care of. We hope this masterstroke would definitely accelerate the trade and economic activity as is expected by Government of India.

Please also refer to previous Master Circular DBR.BP.BC.No.5/21.04.172/2015-16 dated July 1, 2015 on the captioned subject.

For more details on the topic, you may refer to Master Circular no RBI/2021-22/149/ DOR.CRE.REC. No.77/21.04.172/2021-22 dated January 05, 2022 of RBI or access the author at https://www.sunilkumargupta.com/ to explore more on other related topics.

PM’s Deliberations On Easy Lending Norms By Commercial Banks To Fulfil The Requirements Of Needy Enterprises

PM’s Deliberations On Easy Lending Norms By Commercial Banks To Fulfil The Requirements Of Needy Enterprises

During speech at the conference on 18th November, 2021 on ‘Creating synergies for seamless credit flow and economic growth’, our Prime Minister said “Indian banks are strong enough to play a major role in imparting fresh energy to the country’s economy, for giving a big push and making India self-reliant. I consider this phase as a major milestone in the banking sector of India”.

On this great occasion I wish to congratulate the Hon’ble Prime Minister on behalf of the industry, for suggesting various measures to commercial banks for easing out loan delivery process for providing better opportunities to business enterprises and start-ups. Our country’s outlook is now to intensify and spread the economic activities by providing hassle free loans to entrepreneurs.  In the post Covid scenario, RBI’s role has to play an important role for boosting up economic activities and encouraging the banks to sanction loans at easy terms.

Prime Minister reiterated that banks have sufficient liquidity and coupled with the fact that now there is no backlog for provisioning of NPAs as NPAs in public sector banks are at the lowest compared to the five years back and this has led to upgrading of outlook for the Indian Banks by the International agencies. The Prime Minister said apart from being a milestone, this phase is also a new starting point and called upon the banking sector to support the wealth creators and job creators. The Prime Minister empathetically said “It is the need of the hour for the banks of India to work proactively to bolster the wealth sheet of the country along with their balance sheets”.

PM urged bankers to identify the productive potential of citizens and go beyond the traditional banking when it comes to nourish their business intelligence and entrepreneurial dreams with quick release of loan funds. PM further stressed upon the need to do away with the feeling that lender is approver and customer is an applicant or receiver. Instead of waiting for the customers to come and seek loans, bankers have to come forward to analyse the credit appetite of both existing and potential customers and provide consultancy services with customized solutions and unified policies. In this way, banks have to adopt the model of partnership in which both partners share the benefits.

The Prime Minister said that due to recent implementation of various schemes, a huge pool of data is now available in the country. The Prime Minister emphasized that the banking sector must take advantage of this facility. He also listed the opportunities presented by the flagship schemes like PM Awas Yojana, Svamitva and Svanidhi and asked banks to participate and play their proactive role in these schemes.

Prime Minister said the scale at which corporates and startups are coming forward today is unprecedented and it is the opportune time to strengthen, fund, invest in India’s economic aspirations. 

Reduction In NPA 

He quoted detailed reports while saying that NPA ratio of public sector banks has now come down to the lowest during last 5 years and they are flushed with liquidity. PM quoted that public sector banks have recovered around 5 lakh crores of bad loans during last years but such news did not make headlines in core media due to illegitimate activities of some defaulters. 

Need For Massive Credit Push

Inspite of the current Covid situation, it is assumed that economy will recover at growth rate of 8.7% to 10.5% during current fiscal. This study sounds good but a massive credit push is essential for businesses to remain operational without hindrance and to expand to new horizons.

Studies have also found that growth rate of non-food bank credit has increased to 6.8% in September, 2021 as compared to 5.1% during same period last year. Industrial loans however have seen the growth of only 2.5%. CARE ratings also hint that weekly average (net) liquidity surplus in banking system grew from Rs.4.5 lakh crores at the end of June, 2021 to around Rs.7.5 lakh crores as of September-end.

Time For Action To Contribute to Economy 

Bank’s participation in the growth of nation’s economy is undeniable. Banks maintain strict protocols while sanctioning loans. This exercise makes entrepreneurs to wait for long period and delay the process for unwanted reasons. Bankers must overlook traditional methods to approve loans. 

PM assures the banks with dependable words and announced to provide all possible help. It is however important for loan seekers to maintain all records and provide all necessary documents for faster disbursal of loan funds. 

Make Loan Dispensation Process Easy And Time Bound

He also appreciated the proposal to set up the web-based project funding tracker. This proposal will make all ministries and banks to work in tandem. PM also suggested adding this proposal as an interface to Gati Shakti Portal. Faster loan disbursal process will also help to effectively cope with other big challenges of unemployment and fund crunch. Access https://www.rbi.org.in/ to read more information.

Conclusion 

In view of the abovementioned facts, it may be safe to conclude that the Government is fully committed to support Indian economy by promoting businesses and providing easy availability of funds through banks. It becomes pertinent for banks to be proactive in considering genuine loan requests and make sure that the funds sanctioned are being used only for the said purpose. Misuse of bank funds may land customer and/or concerned authorities into trouble and may attract various penal actions.  In order to find more details on the given subject, you may refer to the author at https://www.sunilkumargupta.com.

Working of NBFCs in India Would Improve With Implementation of PCA Framework by RBI

Working of NBFCs in India Would Improve With Implementation of PCA Framework by RBI

Non Banking Financial Companies (NBFCs) have been growing in size and have substantial interconnectedness with other segments of the financial system. Reserve Bank of India had introduced a Prompt Corrective Action Framework (PCA) for Scheduled Commercial Banks in 2002 and the same has been reviewed from time to time based on the experience gained and developments in the banking system. Accordingly, RBI has now decided to put in place a PCA Framework for NBFCs to initiate and implement remedial measures in a timely manner, so as to restore its financial health for strengthen the supervisory tools applicable to NBFCs.

The PCA Framework for NBFCs, as summarized hereunder, comes into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022. The objective of the PCA Framework is to enable Supervisory intervention at appropriate time and  is intended to act as a tool for effective market discipline. The PCA Framework does not preclude the Reserve Bank of India from taking any other action as it deems fit at any time in addition to the corrective actions prescribed in the Framework.

  1. In terms of extant regulations, Government NBFCs have been provided time upto March 31, 2022 to adhere to the capital adequacy norms provided for NBFCs (Ref. Annex I of Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016). Accordingly, a separate circular would be issued in due course with regard to applicability of PCA Framework to Government NBFCs. This Framework will be reviewed after three years from the date of operation.

PCA Framework for NBFCs

  1. The PCA Framework is applicable to the following category of NBFCs:
  2. All Deposit Taking NBFCs [Excluding Government Companies] (NBFCs-D)
  3. All Non-Deposit Taking NBFCs in Middle, Upper and Top Layers3(NBFCs-ND);

[Including Investment and Credit Companies, Core Investment Companies (CICs), Infrastructure Debt Funds, Infrastructure Finance Companies, Micro Finance Institutions and Factors]; but [Excluding – (i) NBFCs not accepting/not intending to accept public funds4; (ii) Government Companies, (iii) Primary Dealers and (iv) Housing Finance Companies].

  1. For NBFCs-D and NBFCs-ND, Capital and Asset Quality would be the key areas for monitoring in PCA Framework. For CICs, Capital, Leverage and Asset Quality would be the key areas for monitoring in PCA Framework.
  2. For NBFCs-D and NBFCs-ND, indicators to be tracked would be Capital to Risk
    Weighted Assets Ratio (CRAR), Tier I Capital Ratio and Net NPA Ratio (NNPA).
    For CICs, indicators to be tracked would be Adjusted Net Worth/Aggregate Risk
    Weighted Assets, Leverage Ratio and NNPA.
  3. A NBFC will generally be placed under PCA Framework based on the audited Annual
    Financial Results and/or the Supervisory Assessment made by the RBI. However, the RBI may impose PCA on any NBFC during the course of a year (including migration from one threshold to another) in case the circumstances so warrant.
  4. The Reserve Bank may issue a press release when a NBFC is placed under PCA as well as when PCA is withdrawn vis-à-vis a NBFC.
  5. Breach of any risk threshold may result in invocation of PCA as detailed under:

For NBFCs-D and NBFCs-ND (excluding CICs):

Indicator

Risk
Threshold-1

Risk
Threshold-2

Risk
Threshold-3

CRAR

Upto 300 bps below the regulatory minimum
CRAR [currently, CRAR <15% but ≥12%]

More than 300 bps but upto 600 bps below regulatory minimum CRAR [currently, CRAR <12% but ≥9%]

More than 600 bps below regulatory minimum CRAR [currently, CRAR <9%

Tier I Capital Ratio

Upto 200 bps below the regulatory minimum
Tier I Capital Ratio [currently, Tier I Capital Ratio <10% but ≥8%]

More than 200 bps but upto 400 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <8% but ≥6%]

More than 400 bps below the regulatory minimum Tier I Capital Ratio [currently, Tier I Capital Ratio <6%]

NNPA Ratio (including NPIs)

>6% but ≤ 9%

>9% but ≤12%

>9% but ≤12%

For Core Investment Companies (CICs)

Indicator

Risk
Threshold-1

Risk
Threshold-2

Risk
Threshold-3

Adjusted
Net Worth / Aggregate Risk Weighted Assets

Upto 600 bps below the regulatory minimum ANW/RWA [currently, ANW/RWA <30% but ≥24%]

More than 600 bps but upto 1200bps below regulatory
minimum ANW/RWA [currently, ANW/RWA <24% but ≥18%]

More than 1200 bps below regulatory minimum ANW/RWA [currently, ANW/RWA <18%]

Leverage Ratio

≥2.5 times but <3 times

≥ 3 times but <3.5 times

≥3.5 times

NNPA Ratio (including NPIs)

>6% but ≤ 9%

>9% but ≤12%

>12%

  1. Exit from PCA and Withdrawal of Restrictions under PCA – Once a NBFC is placed under PCA, taking the NBFC out of PCA Framework and/or withdrawal of restrictions imposed under the PCA Framework will be considered: a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be Annual Audited Financial Statement (subject to assessment by RBI); and b) based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the
    NBFC.
  2. The menu of corrective actions is as below:

Mandatory and Discretionary actions

Specifications

Mandatory actions

     Discretionary actions

Risk Threshold
– 1

1. Restriction on dividend distribution/remittance of profits;

2. Promoters/shareholders
to infuse equity and reduction in leverage;

3. Restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs)

Common menu

  • Special Supervisory Actions
  • Strategy related
  • Governance related
  • Capital related
  • Credit risk related
  • Market risk related
  • HR related
  • Profitability related
  • Operations/Business related
  • Any other.

Risk
Threshold – 2

In addition to mandatory actions of Threshold: Restriction on branch expansion

Risk
Threshold – 3

In addition to mandatory actions of Threshold 1 & 2,

1.Appropriate restrictions on capital expenditure, other than for technological upgradation
within Board approved limits

2.Restrictions/reduction in variable operating costs

Common Menu for Selection of Discretionary Corrective Actions by the RBI are mentioned below:

  1. Special Supervisory Actions
  2. Strategy Related Actions
  3. Governance Related Actions
  4. Capital Related Actions
  5. Credit risk Related Actions
  6. Market risk Related Actions
  7. HR Related Actions
  8. Profitability Related Actions
  9. Operations Related Actions
  10. Any other specific action that the RBI may deem fit considering specific circumstances of the NBFC.

RBI would initiate suitable corrective actions including in particular mandatory and discretionary actions to check the wrong doings of the companies. Corrective measures are summarized in brief i.e.  may conduct Special Supervisory Monitoring Meetings  at quarterly or other identified frequency, special inspections/targeted scrutiny of the NBFC, restricted and
need based regulatory/supervisory approvals, review short-term strategy, medium-term business plans, identify achievable targets and set concrete milestones for progress and achievement, may recommend to promoters/shareholders to remove and bring in new Management/ Board, restriction in expansion of high risk-weighted assets, preparation of time bound plan and commitment for reduction of stock of NPAs, restrictions on branch expansion
plans; PCAs would prove to be a milestone in the history of NBFCs and RBI will definitely have more control over NBFCs and would protect interest of the public funds at large.

For more details on the topic, you may refer to circular no RBI/2021-22/139DoS.CO.PPG. SEC.7/ 11.01.005/2021-22 dated Dec. 14, 2021, of RBI or access the author at  www.sunilkumargupta.com/ to explore more on other topics.