Banks have requested the RBI for one more year's time to implement the system of Expected Credit Loss (ECL) for provisioning of loans.

Ø  In January 2023, the RBI came out with a draft guideline proposing adoption of expected credit loss approach for credit impairment.

Ø  It said the banks will be given a one-year period after the final guidelines are released for implementation of new framework.

Ø  RBI is yet to announce the final guidelines on ECL norms.

Ø  However, some of the rating agencies have said that final norms on this may be notified by FY2024 for implementation from April 1, 2025.

What is loan-loss provision?

Ø  The RBI defines a loan loss provision as an expense that banks set aside for defaulted loans.

Ø  In other words, a loan loss provision is a cash reserve that banks set aside to cover losses incurred from defaulted loans.

Ø  Basically, it is an income statement expense banks can tap into when borrowers are unlikely to repay their loans.

Ø  In the event of a loss, instead of taking a loss in its cash flows, the bank can use its loan loss reserves to cover the loss.

Ø  For example: Let!s say a bank has issued $100,000 total in loans and has a loan loss provision of $10,000.

Ø  On one of their defaulted loans, the borrower repaid only $500 of the outstanding $1,000.

Ø  To cover the $500 loss from the defaulted loan, the bank would deduct $500 from the loan loss provision.

Ø  The level of loan loss provision is determined based on the level expected to protect the safety and soundness of the bank.

Present approach –

Ø  Banks in India are currently required to make loan loss provisions based on incurred loss model.

Ø  This model assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified.

Ø  Only at that point is the impaired loan (or portfolio of loans) written down to a lower value.

What is the problem with the incurred loss-based approach?

Ø  The incurred loss approach requires banks to provide for losses that have already occurred or been incurred.

Ø  The delay in recognising expected losses under this approach was found to exacerbate the downswing during the financial crisis of 2007-09.

Ø  Faced with a systemic increase in defaults, the delay in recognising loan losses resulted in banks having to make higher levels of provisions.

Ø  This ate into the capital maintained by the bank which in turn affected banks!"resilience and posed systemic risks.

Ø  Further, the delays in recognising loan losses overstated the income generated by the banks.

Ø  This, coupled with dividend payouts, impacted their capital base because of reduced internal accruals — which too, affected the resilience of banks.

What has been proposed by the RBI?

Ø  RBI has proposed a framework for adopting an expected loss (EL)-based approach for provisioning by banks in case of loan defaults.

Ø  Under this practice, a bank is required to estimate expected credit losses based on forwardlooking estimations.

Ø  Under this, banks will need to classify financial assets into one of three categories — Stage 1, Stage 2, or Stage 3 — depending upon the assessed credit losses on them, at the time of initial recognition as well as on each subsequent reporting date, and make necessary provisions.

Different stages proposed under the expected loss (EL)-based approach 

Stage 1 assets —

Ø  Financial assets that have not had a significant increase in credit risk since initial recognition or that have low credit risk at the reporting date.

Ø  For these assets, 12-month expected credit losses are recognised and interest revenue is calculated on the gross carrying amount of the asset.

Stage 2 assets —

Ø  Financial instruments that have had a significant increase in credit risk since initial recognition, but there is no objective evidence of impairment.

Ø  For these assets, lifetime expected credit losses are recognised, but interest revenue is still calculated on the gross carrying amount of the asset.

Stage 3 assets —

Ø  Financial assets that have objective evidence of impairment at the reporting date.

Ø  For these assets, lifetime expected credit loss is recognised, and interest revenue is calculated on the net carrying amount.

What are the benefits of this new approach?

The expected credit losses approach will further enhance the resilience of the banking system in line with globally accepted norms.

It is likely to result in excess provisions as compared to shortfall in provisions as seen in the incurred loss approach.

Upon the insistence of the Solicitor-General of India (SG) that central investigation agencies were ‘facing difficulties', the SC passed an order seeking to recall its own decision in Ritu Chhabaria vs Union of India’. The apex court’s clarification that courts could grant default bail independent of and without relying on the Ritu Chhabaria judgment has caused concern among legal professionals.

Right to default/statutory bail -

Ø  This is a right to bail that accrues when the police fail to complete investigation within a specified period in respect of a person in judicial custody.

Ø  This is enshrined in [Section 167(2)] the Code of Criminal Procedure (CrPC)where it is not possible for the police to complete an investigation in 24 hours, the police produce the suspect in court and seek orders for either police or judicial custody.

Ø  A Magistrate can order an accused person to be detained in the custody of the police for 15 days.

Ø  Beyond the police custody period of 15 days, the Magistrate can authorize the detention of the accused person in judicial custody i.e., jail if necessary.

However, the accused cannot be detained for more than —

Ø  90 days, when an authority is investigating an offence punishable with death, life imprisonment or imprisonment for at least ten years; or

Ø  60 days, when the authority is investigating any other offence.

Ø  In some other special laws like Narcotic Drugs and Psychotropic Substances Act, this period may vary. For example, in Narcotic Drugs and Psychotropic Substances Act, the period is 180 days.

Ø  At the end of this period, if the investigation is not complete, the court shall release the person “if he is prepared to and does furnish bail”.

Ø  The right to default bail has been characterised by the court in multiple judgements as an indefeasible right flowing from the Article 21 of the constitution which guarantees right to life and personal liberty.

SC Judgement in Ritu Chhabaria vs The Union of India -

Ø  The CBI, which had arrested Ritu Chhabaria’s husband in April 2022, got his custody renewed from time to time by filing multiple supplementary chargesheets. He was never released on default bail.

Ø  Ritu Chhabaria’s petition asked the SC to consider whether this practice of filing supplementary chargesheets defeats the right of accused to default bail under Section 167(2) of CrPC.

Ø  A division bench of the SC held that an accused is entitled to default bail if the chargesheet is incomplete and requires further investigation.

Significance of judgement -

Ø  The judgement had upheld default bail as a fundamental right of accused persons against the arbitrary powers of the State.

Ø  The court in this decision delegitimised practices by investigating agencies wherein investigating authorities would file the chargesheets incomplete or otherwise after 60/90 days period before the accused could file the bail plea.

Some other Judgements -

Ø  Achpal vs State of Rajasthan (2018) — The Court held that an investigation report, even if it’s complete, if filed by an unauthorised investigating officer, would not bar the accused from availing default bail.

Ø  S.Kasi vs State (2020) — The Court further said that even during the COVID-19 pandemic, the investigating agencies would not be allowed any relaxation towards computing the maximum stipulated period of investigation, which could lead to additional detention of the accused.

What led the Supreme Court to “Recall its own decision”?

Arguments by the Union —

Ø  The judgment contradicted the SC’s own past verdicts and it would not apply to special laws like the Prevention of Money Laundering Act (PMLA).

Ø  The ED represented by SG backed the recall application by separately filing an appeal against the default bail granted by the Delhi HCto Manpreet Singh Talwar, an accused in a money laundering case who relied on the Ritu Chhabaria verdict.

Ø  Many accused have filed bail applications across the country relying on Ritu Chhabra Judgement.

The SC’s verdict —

Ø  A Division Bench led by CJI directed courts to “defer” any decision on default bail pleas filed on the strength of the Ritu Chhabaria judgment.

Ø  Later, the SC made it clear that its interim order does not prevent any trial court or HC from considering a request for default bail under the CrPC without relying on the Ritu Chhabaria case verd.

Implications of Supreme Court order to recall its previous judgement -

Ø  This order would impact the rights of the accused to be released from custody.

Ø  It would lead to further erosion of the constitutional rights of the accused and deviate from fundamental principles of criminal procedure.

Ø  The right to default bail which has been interpreted from Article 21 could be bypassed by investigating agencies citing “facing difficulties in investigation”.

Conclusion -

The Supreme Court's recent judgments on the anti-defection law have raised serious concerns about the accountability of legislators to their voters.

Ø  The anti-defection law was enacted in 1985 to prevent legislators from switching parties and thereby destabilising governments. However, the law has been criticised for stifling dissent and preventing legislators from representing the interests of their constituents.

Ø  In its recent judgments, the Supreme Court has upheld the constitutional validity of the antidefection law. However, the Court has also made some important rulings that could have a significant impact on the accountability of legislators to their voters.

Ø  For example, the Court has ruled that legislators who defect from their party can be disqualified even if they have the support of a majority of their constituents. This ruling could make it more difficult for legislators to vote their conscience and could lead to a situation where legislators are more beholden to their party leaders than to their constituents.

Problem with anti-defection law -

Ø  Problem lies in the anti-defection law, which contradicts the democratic principle of accountability.

Ø  Anti-defection law assumes any vote against party direction is a betrayal of the electoral mandate, which is an incorrect interpretation of representative democracy.

Implications of the Supreme Court's recent judgments on the anti-defection law -

Ø  The Court's rulings could make it more difficult for legislators to vote their conscience. This is because the Court has ruled that legislators who defect from their party can be disqualified even if they have the support of a majority of their constituents. This ruling could make legislators more hesitant to vote against the party line, even if they believe that it is in the best interests of their constituents.

Ø  The Court's rulings could lead to a situation where legislators are more beholden to their party leaders than to their constituents. This is because the Court has ruled that the party leadership has the power to issue binding directions to legislators on how to vote. This means that legislators who want to remain in good standing with their party leaders will be more likely to vote the party line, even if they disagree with it.

Ø  The Supreme Court's recent judgments on the anti-defection law are a cause for concern for those who believe that legislators should be accountable to their voters. The Court's rulings could make it more difficult for legislators to vote their conscience and could lead to a situation where legislators are more beholden to their party leaders than to their constituents.

Ø  This is a serious threat to the democratic principle of accountability of legislators to their voters.

Arguments supporting the anti-defection law —

Ø  The anti-defection law helps to prevent political instability. By making it difficult for legislators to defect from their parties, the law helps to ensure that governments have a stable majority in the legislature. This is important for the smooth functioning of government.

Ø  The anti-defection law helps to protect the interests of the voters. By ensuring that legislators are loyal to their parties, the law helps to ensure that the voters' interests are represented in the legislature. This is important for democracy.

Arguments opposing the anti-defection law —

Ø  The anti-defection law stifles dissent. By making it difficult for legislators to vote against their parties, the law discourages legislators from speaking out against the government. This is harmful to democracy.

Ø  The anti-defection law makes legislators beholden to their party leaders. By giving party leaders the power to issue binding directions to legislators, the law makes legislators less accountable to their constituents. This is harmful to democracy.

Conclusion -

The Supreme Court's recent judgments on the anti-defection law have raised important questions about the balance between the need for political stability and the need for accountability of legislators to their voters. It is important to continue to debate these issues and to find a way to ensure that both of these important principles are upheld.

The Government has amended rules under the Foreign Exchange Management Act to bring in international credit card spends outside India under the Liberalised Remittance Scheme (LRS). As a result, the spending by international credit cards will also attract a higher rate of Tax Collected at Source at 20 per cent effective July 1.

Ø  Central government has brought transactions through credit cards outside India under the ambit of the LRS with immediate effect.

Ø  This will enable the higher levy of Tax (collected at Source), as announced in the Budget for 2022-23, from July 1.

Key highlights —

Existing mechanism —

Ø  The usage of an international credit card to make payments towards meeting expenses during a trip abroad was not covered under the LRS.

Ø  These spendings were excluded by way of Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.

Changes made —

Ø  Rule 7 has now been omitted, paving way for the inclusion of such spendings under LRS.

Ø  Not only foreign tour packages but 20 per cent TCS rule also applies on credit cards on international transactions. This means even direct booking would come under the ambit of 20 per cent TCS.

Ø  It will not apply on the payments for purchase of foreign goods/services from India.

Budget 2023-24 and provisions related to Tax Collected at Source (TCS) —

Ø  The government had changed the limits for TCS for foreign remittances in the Budget for 2023-24.

Ø  TCS is a direct tax levy, which is collected by the seller of specified goods from the buyer and deposited to the government.

Ø  Taxpayers can then claim refunds on the TCS levy at the time of filing tax returns

Ø  The Budget had stated that on foreign outward remittance under LRS, other than for education and medical purposes, a TCS of 20 per cent will be applicable from July 1, 2023.

Ø  Before this proposal, the TCS of 5 per cent was applicable on foreign outward remittances above Rs 7 lakh and 5 per cent without any threshold for overseas tour package.

About the ‘Liberalised Remittance Scheme’ -

Ø  Liberalised Remittance Scheme (LRS) was brought out by the RBI in 2004.

Ø  It allows resident individuals to remit a certain amount of money during a financial year to another country for investment and expenditure.

Ø  According to the prevailing regulations, resident individuals may remit up to $250,000 per financial year.

Ø  This money can be used to pay expenses related to travelling (private or for business), medical treatment, studying, gifts and donations, maintenance of close relatives and so on.

Ø  Apart from this, the remitted amount can also be invested in shares, debt instruments, and be used to buy immovable properties in overseas market. Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.

Restrictions -

LRS restricts -

Ø  Buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweep stakes, proscribed magazines and so on,

Ø  Any items that is restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.

Ø  Also, one cannot make remittances directly or indirectly to countries identified by the Financial Action Task Force as non-co-operative countries and territories.

Against the backdrop of five states announcing a reversion from the New Pension Scheme (NPS) to the defined-benefit (DB) Old Pension Scheme (OPS), the Government of India has constituted a committee to “improve” the NPS. The issue of government employees’ pension has become a serious political issue.

The Old Pension Scheme (OPS) -

Ø  OPS offers pensions to government employees based on their last drawn salary; 50% of the last drawn salary.

Ø  The attraction of the OPS lay in its promise of an assured or ‘defined’ benefit’ to the retiree. It was hence described as a ‘Defined Benefit Scheme’.

Ø  Moreover, like the salaries of government employees, the monthly pay-outs of pensioners also increased with hikes in dearness allowance or DA announced by the government for serving employees.

Ø  The OPS was discontinued by the Central government in 2003.

Concerns associated with the OPS -

Ø  The main problem was that the pension liability remained unfunded- there was no corpus specifically for pension, which would grow continuously.

Ø  The Government of India’s budget provided for pensions every year; there was no clear plan on how to pay year after year in the future.

Ø  The scheme created inter-generational equity issues-the present generation had to bear the continuously rising burden of pensioners.

Ø  The pension increases twice a year with a DA to account for inflation and fitment awarded in Pay Revision Commissions which happen every five years - burden on exchequer.

Impact of the reversal to OPS -

Ø  Increase in typical support period — According to UN’s population pyramid for India, there will be fivefold increase in dependency ratio between 2020-2100.Hence the typical pension support period will go up by 55%.

Ø  Accumulated stress on exchequer will increase: Pensions as a share of states’ revenue receipts and own revenues are already 13.2% and 29.2% respectively. Also, pension liabilities of states have risen annually by 15-20% in the last decade.

Ø  In states like HP and Punjab, pensions as percentage of development spending already account for 37 per cent and 31 per cent and are among the highest anywhere.

Ø  Reallocation of resources — Away from the state’s development expenditure which benefits the poor, and towards a much smaller group of people who have benefitted from a secured and privileged job throughout their working life.

Ø  Catastrophic impact on poor populations — The reversal will cause a debt trap depriving the poor of essential services such as health and education, lower economic growth in the states and worsen inequality.

What is the New Pension Scheme?

Ø  As a substitute of OPS, the NPS was introduced by the Central government in April, 2004.

Ø  Under NPS, the employee contributes 10% and the government 10-14% of the salary to a pension fund.

Ø  The fund invests in securities; therefore, its returns are market linked.

Ø  At retirement, pensioners must buy a fixed annuity from the market whose value depends on the accumulated corpus and expected future returns.

Ø  The money invested in NPS is managed by PFRDA-registered Pension Fund Managers. Currently, there are eight pension fund managers.

Ø  Any Indian citizen between 18 and 60 years can join NPS.NRIs (Non-Residential Indians) are also eligible to apply for NPS.

Ø  The subscriber must contribute a minimum of 6,000 in a financial year. If the subscriber fails to contribute the minimum amount, their account is frozen by the PFRDA.

Suggestions to make NPS more attractive and adequate -

Ø  For a start, any sustainable pension reform should retain the contributions and the NPS fund management.

Ø  It should avoid periodic increases in the annuity. The government could then guarantee a certain percentage of the last drawn salary as a fixed annuity pension.

Ø  The pensioner would purchase the annuity at retirement, and the government could bridge the gap, if any, between the guaranteed pension and the purchased annuity.

Ø  The guaranteed pension could be topped with additional benefits, currently unavailable to NPS pensioners.

Ø  They include extending pension to the spouse, albeit with a lower annuity, health and life insurance benefits, and a minimum pension to cover for those with lower service tenures.

 Conclusion -

Ø  The governments must see beyond OPS’ fiscal burden and financial viability and focus on the  economic trade-offs and how it will affect the poor and development of the state. NPS is one of the most far-sighted reforms in India with respect to the pension reforms.

Ø  There might be some disadvantages of NPS and the government should focus on incorporating new provision to the NPS. This too will strain the budget but it may be the best that can be offered without irreparably burdening future generations.