SECTOR ANALYSIS: BANKING

The Finance Club, JBIMS

Contents
A. Banks and their Classification ......................................................................................................2
1. Current Scenario in Banking Industry ............................................................................................... 3
a. Asset Growth................................................................................................................................. 3
b. Lending and Deposits Growth ....................................................................................................... 3
c. ATM Penetration ........................................................................................................................... 3
B. Recent News ..............................................................................................................................4
1. Monetary Policy Committee (MPC) Report ...................................................................................... 4
a. MPC Report December’19 ............................................................................................................ 4
b. MPC Report October’19 ................................................................................................................ 4
c. MPC Report June’19...................................................................................................................... 5
d. MPC Report April’19 ..................................................................................................................... 6
2. RBI Financial Stability Report (FSR), June 2019 - Summary .............................................................. 7
a. Major Global and Domestic Macro-Financial Risks ...................................................................... 7
b. Financial Institutions: Performance and Risks .............................................................................. 7
c. Provision Coverage Ratio (PCR)..................................................................................................... 7
d. Financial Sector: Regulation and Developments .......................................................................... 7
3. Bank Mergers .................................................................................................................................... 8
a. Benefits of Merger ........................................................................................................................ 8
b. Concerns associated with merger................................................................................................. 9
4. PMC Fraud ......................................................................................................................................... 9
C. Recent Committees .................................................................................................................. 10
1. Bimal Jalan Committee (Union Govt.) – Economic Capital framework – Report on RBI surplus
funds ....................................................................................................................................................... 10
2. Janak Raj Committee (RBI) - To review working of MCLR system and to bring about external
benchmarking of the retail, vehicle, home loans ................................................................................... 11
3. Nandan Nilekani Committee (RBI) – To strengthen the safety and security of digital payments in
India ........................................................................................................................................................ 12
4. UK Sinha Committee (RBI) – To investigate challenges faced by MSMEs ...................................... 13

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A. Banks and their Classification
Various banks are broadly classified in the following types:

Banks

Commercial Co-operative

Public Private Urban State

Differenial
Foreign (RRB,LAB,SFB,PB) Central PACS

RRB - Regional Rural Banks LAB - Local Area Banks

SFB - Small Finance Banks PB - Payment Banks
PACS - Primary Agricultural Credit Society

Banks

Central Scheduled
Bank Banks
Scheduled
Scheduled Co-
Commercial
operative Banks
Banks

Non-
Scheduled
Banks

Non-scheduled
Local Area Bank co-operative
Banks

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1. Current Scenario in Banking Industry
a. Asset Growth - Value of public sector bank assets increased to US$ 1.56 trillion in FY18 from US$
1.52 trillion in FY17.

b. Lending and Deposits Growth - Total lending has increased at a CAGR of 10.94 per cent during
FY07-18 and total deposits have increased at a CAGR of 11.66 per cent, during FY07-18 and are
further poised for growth, backed by demand for housing and personal finance.

c. ATM Penetration - As on March 31, 2019, the total number of ATMs in India increased to 2,21,703
and is further expected to increase to 407,000 by 2021.

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B. Recent News
1. Monetary Policy Committee (MPC) Report
a. MPC Report December’19
The RBI took an unexpected decision to keep the repo and the reverse repo rate unchanged. The
decision is significant because RBI has cut the policy rate consecutively in preceding five monetary policy
reviews cutting 135 basis points since February 2019. The banks have cut the interest rates by mere 29-
35 basis points which has resulted in poor monetary policy transmission. However, due to increasing
food inflation the RBI has strategically decided to pause this trend.
RBI’s Rationale
i. With the GDP growth dropping to 4.5% in the June-August Quarter, FY20, the economic growth
concerns are paramount and called for a rate cut. At the same time, inflation is on upward trend
reaching 5.54% in November’19. A rate cut would have posed the risk of breaching the inflation
targeted by the GoI i.e. 4+/-2% and would have proved disadvantageous.
ii. Moreover, the effect of rate cut which come with a lag also need to percolate down through the
system. MPC has thus been cautious to keep the enough fiscal space for future action and has
resorted to accommodative stance.
iii. Macro numbers also indicate a considerable fiscal slippage in the fiscal deficit target of 3.3% as
said in the Budget FY20. In addition to it, MPC wants to watch the government’s moves in the
budget before easing rates again.
Latest Growth Projections
i. GDP growth for 2019-20 has been revised downwards sharply to 5% from the 6.1% which was
projected in October 2019 policy.
ii. The RBI has projected a significant rise in inflation in the second half of the 2019-20 fiscal,
however there is optimism that the spike is temporary which is largely driven by rising food
prices due to unseasonal rains that destroyed the kharif crops.

b. MPC Report October’19

In its third bi-monthly policy statement of the current financial year (FY- 2019-20), the Reserve Bank
of India's Monetary Policy Committee (MPC) has cut the repo rate for the fourth time in a row by 35
basis points to 5.40%, the lowest in over nine years.
i. The MPC also revised downwards the GDP growth for FY20 from 7% in the June policy to 6.9% in
August in the range of 5.8-6.6% for the first half of FY20 and 7.3-7.5% for the second half–with
risks somewhat tilted to the downside.
Other Decisions
i. The RBI has decided to allow round-the-clock fund transfers through NEFT from December 2019
in order to promote digital transactions. Currently, the National Electronic Funds Transfer (NEFT)
(fund transfer upto ₹2 lakh) operated by the RBI as a retail payment system is available for
customers from 8 a.m. to 7 p.m. on all working days except for the second and fourth Saturdays
of the month.
ii. It has allowed the National Payments Corporation of India (NPCI) operated Bharat Bill Payment
Service (BBPS) hub to enable payments for all recurrent billers (except prepaid recharges). At
present, it is available only for DTH services, electricity, gas, telecom and water bills. Allowing all

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 billers to plug into BBPS would mean that all payment providers will be able to offer customers
anytime, anywhere payment services for every biller from their own sites or locations.
a. The Bharat bill payment system is a Reserve Bank of India (RBI) conceptualized system
driven by National Payments Corporation of India (NPCI). It is a one-stop ecosystem for
payment of all bills providing an interoperable and accessible “Anytime Anywhere” bill
payment service to all customers across India with certainty, reliability and safety of
transactions.
b. It has multiple modes of payment and provides instant confirmation of payment via an
SMS or receipt.
iii. The RBI also proposed creation of a central payment fraud registry that will track banking fraud.
At present, there is a Central Fraud Monitoring Cell of the central bank.
a. Currently, RBI has a mechanism in place for banks to report all banking frauds to the
Central Fraud Monitoring Cell of the Reserve Bank. The proposed registry extends the
platform to all payment’s operators.
b. Payment system companies will be provided access to the registry for near-real time
fraud monitoring and the aggregated fraud data will be published to educate customers
on emerging risks. A detailed framework in this regard will be put in place by the end of
October.
iv. For Non-Banking Financial Companies (NBFCs): The central bank has decided to raise a bank’s
exposure limit to a single NBFC to 20% of its Tier-I capital from 15% earlier. The hike will enable
banks to increase the credit flow to big NBFCs. The measure is pertinent at a time when lending
activity by many NBFCs have declined significantly, resulting in demand slowdown for a range of
items including cars, tractors, white goods among others.

All this has been done to support the sluggish economic growth and to stimulate aggregate demand.

c. MPC Report June’19

In its second bi-monthly monetary policy statement for 2019-20, the Reserve Bank of India’s Monetary
Policy Committee (MPC) has unanimously decided to cut the policy repo rate by 25 basis points for the
third time consecutively to 5.75% and changed the monetary policy stance from ‘neutral’ to
‘accommodative’. The GDP growth estimate for 2019-20 has been revised downwards from 7.2% in the
April policy to 7%.
Reasons for rate cut
i. To spur economic activity, which decelerated sharply in the January-March quarter and
weakening of growth, as reflected in a further widening of the output gap (the difference
between the actual output of an economy and its potential output) compared to the April 2019
policy.
ii. The Rate cut will ensure that adequate liquidity is available in the system for all productive
purposes.
iii. The headline inflation trajectory remains below the target mandated to the MPC even after
considering the expected transmission of the past two policy rate cuts.
iv. Additionally, the RBI said that it has decided to do away with charges levied on Real-time gross
settlement (RTGS) and National Electronic Funds Transfer (NEFT) transactions, banks will be
required to pass this benefit to their customers.

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 a) The RBI has also decided to set up a committee involving all stakeholders, under the
chairmanship of CEO Indian Banks' Association (IBA), to examine the entire gamut of
ATM charges and fees.

d. MPC Report April’19

The Reserve Bank of India has announced first bi-monthly Monetary Policy Statement for the financial
year 2019-20. The Monetary Policy Committee (MPC) of the RBI has reduced policy repo rate under the
Liquidity Adjustment Facility (LAF) by 25 basis points to 6.0% from 6.25% with immediate effect, the
reverse repo rate under the LAF is adjusted to 5.75%, and the marginal standing facility (MSF) rate and
the Bank Rate to 6.25%. The decided stance of the MPC is ‘neutral’.
i. This is the second consecutive rate cut (last one in February 2019) in the year 2019 and
under new RBI Governor Shaktikanta Das.
i. A rate cut by RBI injects liquidity in the economy. It also acts as a sentiment booster and aid
companies that must service large debts. Top sectors which are likely to benefit the most from a
rate cut are banking, NBFC, infrastructure and real estate.
Inflation Targeting
i. The decision of MPC is in consonance with the objective of achieving the target for consumer
price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
a) This inflation range (4% within a band of +/- 2%) was recommended by the committee
headed by Urjit Patel in 2014. The same committee also recommended the formation of
MPC.
b) In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a
statutory basis for the implementation of the flexible inflation targeting framework.
c) The amended RBI Act also provides for the inflation target to be set by the Government
of India, in consultation with the Reserve Bank, once in every five years.
d) Before the constitution of the MPC, a Technical Advisory Committee (TAC) on monetary
policy advised the Reserve Bank on the stance of monetary policy. With the formation of
MPC, the TAC on Monetary Policy ceased to exist.
GDP Growth
i. The MPC has lowered the GDP growth for 2019-20 to 7.2% from 7.4% which was projected in
February policy meet. Reasons being:
Linking Loan rate to external benchmark
i. The Reserve Bank of India (RBI) also decided to hold further consultation on the proposal to link
retail loans with an external benchmark (like: RBI’s policy repo rate, 91-day treasury bill yield,
182-day treasury bill yield or any other benchmark market interest rate) for improving monetary
transmission.
a. During the December review of monetary policy, the RBI had proposed to implement
the system of linking floating rate personal or retail loans, and floating rate loans to
Micro and Small Enterprises, to an external benchmark from April 1, 2019.
b. At present, all loans are linked to the Marginal Cost of Fund based Lending Rate (MCLR).
For the smooth transmission of policy rates and to make this process transparent, RBI
has, over the years, directed banks to price their loans against their benchmark prime
lending rate, base rate, and, finally, MCLR.

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2. RBI Financial Stability Report (FSR), June 2019 - Summary
The Reserve Bank of India has released the 19th issue of the Financial Stability Report (FSR). The report
assessed that India’s financial system remains stable in the backdrop of improving resilience of the
banking sector. However, the emerging trends in the global economy and geopolitical environment pose
challenges.

a. Major Global and Domestic Macro-Financial Risks

i. Lower global growth forecast by international institutions like World Bank and IMF.
ii. Adverse geopolitical developments and trade tensions.
iii. Eased monetary policy stance undertaken by the central banks of Advanced economies’ (AEs)
and the need for emerging and developing economies to adjust to it.
iv. Subdued new investment.
v. A widening current account deficit.
vi. The challenge of reviving private investment demand while being vigilant about the spillover
from global financial markets.
b. Financial Institutions: Performance and Risks
i. Credit growth of scheduled commercial banks (SCBs) picked up, with public sector banks (PSBs)
registering near double digit growth.
ii. Capital adequacy of the SCBs improved after the recapitalization of PSBs. The non-performing
asset (NPA) cycle seems to have turned around.
iii. Provision coverage ratio (PCR) of all SCBs rose sharply to 60.6% in March 2019 from 52.4% in
September 2018, increasing the resilience of the banking sector.
c. Provision Coverage Ratio (PCR)
It is the percentage of bad assets that the bank must provide for from their own funds. In other
words, it is the ability of the banks to service its debt and meet is financial obligations such as
interest payments or dividends.
i. The higher the coverage ratio, the easier it is to make the interest payments on debt or pay
dividends.
ii. Recent developments in the Non-banking financial companies (NBFC) sector have brought the
sector under greater market discipline.
iii. There is need for greater surveillance over large Housing Finance Companies (HFCs) or NBFCs, as
the failure of such companies can cause losses comparable to those caused by the big banks.
d. Financial Sector: Regulation and Developments
i. In order to finetune the supervisory mechanism for the banks, the Reserve Bank has recently
reviewed the structure of supervision in the context of the growing diversity, complexities and
interconnectedness within the Indian financial sector.
ii. The revised prudential framework on stressed assets issued by the Reserve Bank further
incentivize early adoption of a resolution plan.
iii. To further enhance the quality of disclosures made by Credit Rating Agencies (CRAs) and
strengthen the rating framework, the Securities and Exchange Board of India (SEBI) has
introduced Guidelines for Enhanced Disclosures by CRAs.
iv. To provide flexibility to pension funds to improve fund performance depending on market
conditions, the Pension Fund Regulatory and Development Authority (PFRDA) amended the
investment guidelines.
v. The Insolvency and Bankruptcy Board of India (IBBI) is showing steady progress in the resolution
of stressed assets.

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3. Bank Mergers
The GoI has planned to merge public sector banks which would take the number of banks in the country
from 27 in 2017 to 12.

PSB Rank by Size Bank Name

1 State Bank of India (SBI + 5 associate banks + Bharatiya Mahila Bank)
2 Punjab National Bank (PNB + Oriental Bank + United Bank)
3 Bank of Baroda (Bank of Baroda + Vijaya Bank + Dena Bank)
4 Canara Bank (Canara Bank + Syndicate Bank)
5 Union Bank of India (Union Bank + Andhra Bank + Corporation Bank)
6 Bank of India
7 Indian Bank (Indian Bank + Allahabad Bank)
8 Central Bank of India
9 Indian Overseas Bank
10 UCO Bank
11 Bank of Maharashtra
12 Punjab & Sind Bank

a. Benefits of Merger
For Banks
i. Geographical and Technological synergies of the banks would help them to expand the coverage
beyond their outreach.
ii. A better size of the organization would help banks offer more and better products and services
to help them grow in an integrated manner.
iii. Increased professional standards with healthy competition will help Indian banks gain greater
recognition and higher rating.
iv. Volume of inter-bank transactions will come down, resulting in saving of considerable time in
clearing and reconciliation of accounts.
v. The wide disparities between the staff of various banks in their service conditions and monetary
benefits will narrow down.
vi. A greater number of posts of CMD, ED, GM will be abolished resulting in savings for the banks.
For Economy
i. Reduction in cost of doing business and improved efficiency of the banks.
ii. Indian banks would be better placed to manage their liquidity comfortably.
iii. Synergy of operations and economies of scale in the new entity will result in savings of crores of
Rupees.
iv. Mergers will diversify risk management.
For Government
i. The burden on central government to regulate, monitor and control large number of banks will
come down.
ii. This will help in meeting stringent norms under BASEL III especially capital adequacy.

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b. Concerns associated with merger
i. It will be tough to adjust top leadership in institutions and the unions.
ii. It will result in shifting/closure of many ATMs, Branches, etc causing inconvenience to the
customers.
iii. It may result in job losses in forward as well as backward linkage and could further worsen
unemployment situation.
iv. Failure of bigger bank would have bigger spillover effect on the economy as a whole.
v. Customer intelligence of potential/willful defaulters would reduce with the transfer of local
bank employees.

Overall, the merger is a good idea which must be carried out with right measures in order to reduce the
risks associated and make smooth transition.

4. PMC Fraud
i. The crux of this bank fraud is that the higher management of the PMC bank has given huge loan to
the Housing Development and Infrastructure Ltd (HDIL) and its group entities. This fraud case is
related to transfer of 70% of the total credit facilities of the PMC bank to HDIL and its associated
companies. If i talk about the total amount of the bank fraud, then it was Rs 4,355 cr. Now the total
NPA of the bank has grown to 73%.
ii. The PMC bank allegedly favored to the promoters of Housing Development and Infrastructure Ltd
(HDIL) and allowed them to operate password protected ‘masked account’. It is found that around
21,049 bank accounts were opened by bogus names to conceal 44 loan accounts. The bank's
software was also tampered to conceal these loan accounts.
iii. This bank fraud case is busted by a bunch of women employees of the credit department of the PMC
bank. These employees told to the RBI that they were aware of the ghost accounts. When this case
came in the light; then customers of the PMC bank rushed to the PMC bank to withdraw their hard-
earned money, but they were refused to give their deposited money and withdrawal limit is set by
the bank.
Now the Enforcement Directorate (ED) has sealed the assets of Rs 3,500 cr of the HDIL group and the
HDIL chief Rakesh Wadhawan and his son Sarang Wadhawan have been arrested by the Mumbai Police.
The way forward could be stringent norms for banking frauds and immediate redressal to the
customers.

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C. Recent Committees
1. Bimal Jalan Committee (Union Govt.) – Economic Capital framework – Report on RBI
surplus funds
The Expert Committee constituted to review the RBI’s extant ECF, was guided by the principle that the
alignment of the objectives of the Government and the RBI is important. As a central bank is a part of
the Sovereign, ensuring the credibility of the RBI is as important, if not more, to the Government as it is
to the RBI itself. The Committee also noted that while there may occasionally arise a difference of views
in the conduct of the central bank’s operations, there always needs to be harmony in the objectives of
the Government and the RBI.

Recently, the Reserve Bank of India (RBI) has decided to transfer Rs 1.76 lakh crore to the Central
government, which may help the government in dealing with the direct tax shortfall due to reduction in
corporate tax cut and maintain its budgetary obligations

i. The Rs 1.76 lakh crore includes the central bank’s 2018-19 surplus of ₹1.23 lakh crore and Rs
52,637 crore of excess provisions identified as per the revised Economic Capital Framework.
ii. The government already had revised downward the fiscal deficit target to 3.4% from 3.3% and
initiated a slew of measures that are being dubbed as mini-budget.
Economic Capital Framework
i. The RBI had formed a committee chaired by former Governor Bimal Jalan to review its economic
capital framework and suggest the quantum of excess provision to be transferred to the
government.
ii. The panel recommended a clear distinction between the two components of the economic capital
of RBI i.e. Realized equity and Revaluation balances.
a. Revaluation reserves comprise of periodic marked-to-market unrealized/notional gains/losses
in values of foreign currencies and gold, foreign securities and rupee securities, and a
contingency fund.
b. Realized equity, which is a form of a contingency fund for meeting all risks/losses primarily
built up from retained earnings. It is also called the Contingent Risk Buffer (CBR).
iii. The Surplus Distribution Policy of RBI that was finalized is in line with the recommendations of
the Bimal Jalan committee.
a. The Jalan committee has given a range of 5.5-6.5% of RBI's balance sheet for Contingent Risk
Buffer.
b. Adhering to the recommendations, the RBI has decided to set the CBR level at 5.5% of the
balance sheet, while transferring the remaining excess reserves worth ₹52,637 crore to the
government.
c. If CBR is below the lower bound of requirement, risk provisioning will be made to the extent
necessary and only the residual net income (if any) transferred to the Government.
d. However, keeping CBR at a lower range of 5.5%, will reduce RBI's space to maneuver
monetary policy.

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2. Janak Raj Committee (RBI) - To review working of MCLR system and to bring about
external benchmarking of the retail, vehicle, home loans
The system of using internal benchmarks such as the base rate and the marginal cost of funds-based
lending rate (MCLR) for pricing of loans in the banking system in India has not resulted in satisfactory
monetary transmission so far. Hence, the Internal Study Group constituted by the Reserve Bank to
review the working of the MCLR system in its report recommended switchover to one of the three
external benchmarks, viz., the treasury bill rate, the CD rate and the Reserve Bank’s policy repo rate.

The amended Reserve Bank of India Act, 2016 has mandated the RBI to conduct monetary policy for
achieving price stability as its primary objective while being mindful of growth. This mandated objective
is difficult to achieve unless supported by a robust transmission mechanism (Acharya, 2017). The policy
rate adjustments by the monetary policy committee (MPC) are intended to percolate to the entire
spectrum of interest rates, especially bank lending rates, so that the economy stays close to its “steady
state”, i.e., inflation close to the target and growth close to its potential path; and, in case of any shock,
the economy can be brought back to the steady state by adjusting policy rates. If lending rates of banks
do not rise in response to rise in the policy repo rate by the MPC, consumption and investment by
households and firms will continue to rise and credit demand of firms and households will continue to
grow. As a result, the corresponding aggregate demand conditions in the economy would not allow
inflation to drop. Conversely, in an easing cycle of monetary policy, if lower policy repo rate is not
followed by reduction in bank lending rates, consumption and investment demand will not pick up to
help bring the growth back to the steady state.

For more than 20 years after the RBI deregulated banks’ lending rates, the absence of smooth
transmission has remained a matter of concern. The first regime of Prime Lending Rate (PLR)1 was
introduced in 1994. However, both the PLR and the spread were seen to vary widely across banks and
bank-groups. Moreover, PLR continued to be rigid and inflexible in relation to the overall direction of
interest rates in the economy.

With the aim of introducing transparency and ensuring appropriate pricing of loans – wherein the PLRs
truly reflected the actual borrowing costs – the PLR was converted into a reference benchmark rate and
banks were advised in 2003 to introduce the Benchmark Prime Lending Rate (BPLR) system. While
lending below the BPLR was expected to be at the margin, in practice about 77 per cent of banks’ loan
portfolio in March 2007 was at sub-BPLR2. Both PLR and BPLR did not produce adequate monetary
transmission to the real economy. This defeated the very purpose for which these benchmarks were
introduced.

In July 2010, the Reserve Bank replaced the BPLR system with the base rate system. The actual lending
rate was the base rate (for which an indicative formula was also prescribed) along with the spread.
However, the flexibility accorded to banks in the determination of cost of funds – average, marginal or
blended cost – which was a key component of base rate calculation – resulted in opacity in the base rate
computed by banks. In particular, the average cost of funds did not move much with monetary policy
changes due to the term nature of deposits. Moreover, banks often changed over time the spread over
the base rate for some borrowers, even without any change in credit quality of borrowers, while leaving
the base rate unchanged.

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Given these deficiencies, the RBI introduced a new lending rate system for banks in the form of the
marginal cost of funds-based lending rate (MCLR) in April 2016. Unlike the BPLR and the base rate, the
formula for computing the MCLR was prescribed. While some discretion remained with banks, the MCLR
has continued to suffer from the same flaw in that transmission to the existing borrowers has remained
muted as banks adjust, in many cases in an arbitrary manner, the MCLR and/or spread over MCLR,
which has kept overall lending rates high in spite of the monetary policy being accommodative since
January 2015.
Recommendations of the Internal Study Group
Each of the above mentioned four benchmarks can be considered as “internal” in that banks set it
themselves or choose at their discretion many of the factors that get into the prescribed formulae. The
task of the Study Group was to evaluate the MCLR system and suggest changes in the lending interest
rate system for improving monetary transmission. The key recommendations of the Study Group are
summed up below:
i. There is a need to move to one of the three external benchmarks, viz., the treasury bill rate, the
certificate of deposit (CD) rate and the RBI’s policy repo rate, which is outside the control of an
individual bank, from April 1, 2018.
ii. The decision on the spread over the external benchmark should be left entirely to the commercial
judgment of banks, with the spread remaining fixed all through the term of the loan, unless there is
a contractually pre-defined credit event.
iii. The periodicity of resetting the interest rates by banks on all floating rate loans, retail as well as
corporate, be reduced from once in a year to once in a quarter to expedite the pass-through from
the monetary policy signals to actual lending rates.
iv. Quite a sizeable part of the bank loan portfolio continues to be at the base rate and some even at
BPLR, which has also hampered monetary transmission. To address this concern, the Study Group
recommended that banks be advised to migrate all existing loans linked to the BPLR/base rate to the
MCLR if the borrowers so choose to do without any conversion fee or any other charges for
switchover and on mutually agreed terms. However, after the adoption of an external benchmark,
starting from April 1, 2018 as recommended by the Study Group, banks may be advised to migrate
all existing BPLR/base rate/MCLR borrowers to the new benchmark without any conversion fee on
mutually agreed terms between borrowers and lenders within one year from the introduction of the
external benchmark, i.e., by end-March 2019.
v. Finally, in order to enhance flexibility on the liability side, the Study Group recommended that banks
be encouraged to accept deposits, especially bulk deposits, at floating rates linked directly to one of
the recommended external benchmarks.

3. Nandan Nilekani Committee (RBI) – To strengthen the safety and security of digital
payments in India
India with its uniquely rich payment ecosystem is now emerging as a global leader in innovative
population scale payment systems. The Reserve Bank of India, and the Government have articulated a
vision of a less cash society and guided its evolution with feet firmly on the ground.

Pivoting the ecosystem from issuance to acceptance is the key to deepening digital payments in the
country. The committee approached this pivot from the perspective of the user to reach the outcome of
continuous voluntary use of digital payments.

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The committee noted the recent growth in volume of digital payments by a factor of 10 over five years
and has set a target for additional growth of 10x in three years. This growth will be driven by a shift from
high value, low volume, high cost transactions to low value, high volume, low cost transactions. Over a
longer period, this will eventually lead to a decline in cash requirements.

The committee also recommends that the BPSS conduct a periodic review of each payment system, to
ensure that the market mechanisms are working well.

This will be a time of significant change and will require orchestrated actions by diverse players across
the ecosystem. The committee recommends that the RBI and the Government put in place an
appropriate mechanism to monitor the digital payment systems and make aggregated information
based on blocks, and PIN code, available to all players on a monthly basis, so that they can make the
necessary adjustments.

4. UK Sinha Committee (RBI) – To investigate challenges faced by MSMEs

A Reserve Bank of India (RBI) expert committee on micro, small and medium enterprises (MSMEs) has
recommended doubling the cap on collateral-free loans to Rs 20 lakh from the current Rs 10 lakh.
i. This will be extended to borrowers falling under the Mudra scheme, self-help groups, and MSMEs.
ii. The current limit of Rs 10 lakh on collateral-free loans was prescribed by RBI in June 2010.
iii. The committee has also suggested various long-term solutions for the economic and financial
sustainability of MSMEs.
iv. The report has also recommended the mainstreaming the restructuring of stressed loans,
considering the central bank had given a one-year window to banks to do so in January 2019.
v. The proposal is part of a report prepared by the eight-member RBI committee tasked with reviewing
the current framework for the MSME sector.
The Micro Small & Medium Enterprises (MSMEs) are defined under the Micro, Small & Medium
Enterprises Development (MSMED) Act, 2006 based on capital investment made in plant and machinery,
excluding investments in land and building.
i. Manufacturing units having investment:
a. below Rs 25 lakh are termed as Micro,
b. those between Rs 25 lakh and Rs 5 crore as Small
c. and from Rs 5 crore to Rs 10 crore as Medium.
ii. Service units, corresponding investment thresholds are:
a. up to Rs 10 lakh are termed as Micro,
b. between Rs 10 lakh to Rs 2 crore as Small
c. and between Rs 2 crore to Rs 5 crore as Medium
iii. However, the government is contemplating to change the definition of MSMEs.
a. The proposed change under a new draft is that annual turnover, rather than investment size,
should be the criterion for such units.
b. Under the draft, there would be no difference between a manufacturing and service unit.
c. Micro can be up to Rs 5 crore of turnover, small up to Rs 75 crore, and medium up to Rs 250
crore of turnover should be considered.

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