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Banking Regulation (Amendment) Ordinance, 2020 – RBI’s Increasing Powers and Legislative Competence

The Focus of the Ordinance:

On 26th June, 2020, the Government of India promulgated the Banking Regulation (Amendment) Ordinance, 2020 to amend the Banking Regulation Act, 1949, which largely regulates the licensing, management and functioning of banks in India. The notification deems that the objective of the ordinance has been ‘to ensure better management & sound regulation of Cooperative banks’, and the ‘making of reconstruction/amalgamation Scheme in the interest of public/depositors/banking/proper banking company management’. In the notification, it is interesting to note the reasons given for the ordinance:

(i) to protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to co-operative banks as well for sound banking regulation, and 

(ii) to ensure professionalism and enable their access to capital. 

The notification also clarified that the amendments did not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws, nor do they affect co-operative societies that do not use the word “bank” or “banker” or “banking” and do not act as drawees of cheques. Most importantly, the ordinance amends section 45 of the Banking Regulation Act (Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstitution of amalgamation), ‘even without making an order of moratorium, so as to avoid disruption of the financial system’.

Ostensibly, the purpose of the ordinance is three-fold. One, to improve the governance of co-operative banks which perform banking functions of some kind. Two, to enable professionalism in their functioning; and three, to avoid disruption of the wider financial system during reconstruction and amalgamation. It is important to remember that these goals have been present in co-operative bank literature for a while in India. The Vaidyanathan Committee (2004-05), the K.Madhava Rao Committee (2000) etc have noted the public interest argument in maintaining RBI supervision over co-operative banks to ensure depositor protection including the provisioning of deposit insurance. Section 45 (4) of the Banking Regulation Act, 1945 also explicitly provides for certain powers of the RBI during a period of moratorium, when the conditions and processes under the section are satisfied . However, the present Ordinance tries to expand RBI’s powers by increasing the ambit of its powers to beyond periods of moratorium. This means that the RBI will have significantly more powers than before. Without going into the question of duality of regulation over co-operative banks in India, it is important to ask if a central regulatory authority will in fact prove beneficial for depositors, and improve governance of these banks. This question has been explored in two somewhat dissimilar ways – one, on the prudence of expanding RBI’s regulatory powers itself, and two, on the legislative competency question of doing so. 

  1. RBI’s Increasing Powers and Structural Issues :

In the past few years, RBI’s powers have steadily increased, with growing ambit of regulation over NBFCs and co-operative banks. It seems likely that this Ordinance will be succeeded by another legislation to cover the entirety of all state banking co-operatives, in an effort to regularise the sector. Even with this ordinance, the RBI will have to regulate over 1500 urban co-operative banks. If the RBI’s powers are subsequently increased to cover state co-operatives (Constitutional challenge aside), this number will increase many fold. The object of the extending control of RBI to more banking institutions may be noble, with an aim to provide wider protection to deposit holders and insure their deposits. However, in India, this automatically mandates a higher regulation by the central banking authority, which would now have to get embroiled in daily operational issues of these banks, a task that can be left to smaller prudential regulators of some kind. The RBI, functioning today as a central bank regulator, supervisor, deposit insurance agency and a macroprudential regulator is steadily assuming more responsibilities without perhaps a reasonable expansion of the organisation itself. Further, the question of improving the governance of co-operatives in India is a complex one. State Governments exercise considerable power, elections are frequently delayed, audit and accounting is not updated, and technology uptake is slow. On the other hand, local needs and contexts are adequately addressed only when the regulatory architecture is decentralised. The question of what is important to depositors (banking and otherwise), what local purpose these co-operatives serve and how they are different from scheduled commercial banks are important questions mired both in the history of banking in India, consequent political economy questions, and the development of modern day regulators, that won’t be solved by simply legislating more power into the hands of an already overburdened and increasingly unwieldy regulatory authority. In fact, some of these banking issues are structural in nature. For instance, distancing the deposit insurance function from the larger regulatory function of the RBI has been a long standing recommendation of many financial sector regulatory committees, starting from the Raghuram Rajan Report of 2009. Other evergreen demands of clarifying NABARD’s continuing role in this regulatory mesh, strengthening information systems to deposit insurance agencies to enable them to understand risk and price insurance accordingly, and increasing context specific governance reforms are going to be more important than simply increasing RBI’s footprint. 

  1. High Court Petitions and Legislative Competence:

Consequent to the promulgation of the Ordinance (2020), two co-operative banks in Tamil Nadu (Big Kanchipuram Co-operative Town Bank Ltd and Velur Co-operative Urban Bank Ltd) have filed petitions before the Madras High Court, arguing that the ordinance is ultra vires and unconstitutional for being without legislative competence. They filed petitions “praying for issue of Writ of Declaring Sections 4(A), 4(F), 4(G), 4(J), 4(L), 4(M) and 4(Q) of the Banking Regulation amendment Ordinance 2020 as ultra vires and unconstitutional for being without legislative competence and violative of Article 123 (3) r/w Article 246 and Entry 32, List II, Schedule VII of the Constitution of India.” From the arguments made in the court, and the text of the ordinance themselves (since the copy of the petitions was not available), it seems that the question of legislative competence of the Union Parliament has been argued to be a non-issue, because the subject matter was ‘banking’. The counsel for the respondents (RBI) argued that a cooperative society might be a state subject when it does other activities, but comes under the purview of the Union Parliament when it is involved in banking activities. This betrays a rather simplistic argument of the Government that regulating the banking sector should be done by the RBI, irrespective of the kind, name or nature of the institution offering banking services. This argument is not new, and may be practically difficult to initiate real change in governance of co-operative banks in India for the reasons stated above. However, a more direct challenge to this argument may lie on challenging the move on grounds of legislative competence. 

One of the landmark cases on legislative competence, that is, deciding on the question of who gets to decide on ‘banking’ is the Rustom Cavasjee Cooper vs Union Of India 1970 (more famously the bank nationalisation case). The background to this case was that on  July  19,  1964, the then Acting President of India promulgated an ordinance to transfer and vest the 14 commercial banks which held  deposits of not less than rupees fifty crores, in the corresponding new  banks  set up  under the Ordinance. This move was almost immediately challenged in the Supreme Court. In the meanwhile, before the petitions could be even heard by the Court, the Government brought forth a Bill to enact provisions relating to acquisition and transfer of undertakings of the existing banks in the Parliament. Subsequently, the Bill was enacted bearing an almost identical long title to the ordinance, and was called “The Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969″. The ordinance was hence repealed, and petitions were filed in the Court, challenging the validity of this new legislation, most notably on the constitutionality of the Act, stating that the Act was outside the legislative competency of the Parliament (Parliament having encroached upon the State List in the Seventh Schedule of the Constitution), and the violation of Articles 14, 19 (1) (f) & (g) and 31(2) and 301 of the Constitution. The Supreme Court ultimately held that the Union Parliament possessed the legislative competence to legislate in the matters of “banking” as defined in the Section 5(b)of Banking Regulation Act, 1949 by the virtue of Entry 45 of List I. 

However, it is important to note that the petitioner had argued that by enacting the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, the Parliament had encroached upon the State List in the Seventh Schedule of the Constitution, and to that extent the Act is outside the legislative competence of the Parliament. To this extent, the Supreme Court made an important observation in the judgement- that the meaning of the word ‘banking’ is expansive, and noted that “The word ‘banking’ has never had any static meaning and the only meaning will be the common understanding of men and the established practice in relation to banking. That is why all these disputed forms of business come within the legitimate business of a bank.” This is an important observation for suggesting a centralised regulatory approach towards banking in India, although the issue of co-operative banking was never dealt with in this case.

The question of legislative competence of course has more recently cropped up in Rajendra N Shah v Union of India & Anr (2013), where the Gujarat High Court declared the 97th Constitution Amendment Act inserting Part IX-B (Article 243ZH to Article 243ZT) to the Constitution as ultra vires to the Constitution for not taking recourse to an established provision in the Constitution- Article 368(2). The Court explicitly stated “that only the State Legislature is authorized to enact law relating to Co-Operative Societies as would appear from the fact that it is placed at item No. 32 in List II-STATE LIST in the Seventh Schedule of the Constitution.” This petition is currently under challenge. Nevertheless, there  it is an important decision, placing emphasis on past decisions of the Supreme Court like the D.C. Wadhwa v. State of Bihar, (1987) where it was held that the Governor by promulgating ordinances from time to time on a massive scale in a routine manner under Article 213 and without replacing them by an Act of Legislature, was aiding in the infringement of constitutional provisions. In this regard Justice Bhagawati, CJI had held that “a constitutional authority cannot do indirectly what it is not permitted to directly.” It was held that if there was a constitutional provision inhibiting the constitutional authority from doing an act, such provision could not be allowed to be defeated by adoption of any subterfuge and that it would be clearly a fraud on the constitutional provision. As such, the Gujarat High Court hed the 97th Constitutional Amendment to affect one of the basic structures of the Constitution which are the principles of federalism – “Once the subject of Co-Operative Societies is in the List II of the 7th Schedule, by depriving the State Legislatures of their free exercise of right to enact on the said subject and by curtailment of their right over the subject matter to abide by the newly enacted provision of the Constitution without following the requirement of ratification as provided in Article 368(2), the doctrine of federalism which is one of the basic features of the Constitution has been infringed.”

The ultimate decision on the challenge to this judgement will be an important jurisprudential moment, bearing significant influence on the issue of dual regulation of the co-operative banking system in India. However, for the moment, the prudence of expanding RBI’s powers on both practical grounds, and without express consultation with state authorities will prove to be a challenge for both the Government and the RBI.

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Comments on Draft Social Security Code, 2019

Response to Draft Social Security Code, 2019

Ministry of Labour and Employment

This submission is drafted by Joyjayanti Chatterjee and Shohini Sengupta, in response to the draft Code on Social Security, 2019 (hereinafter “Draft Code”) prepared by the Government of India’s Ministry of Labour and Employment.

Joyjayanti is a lawyer and public policy consultant based out of New Delhi, with a keen interest in financial regulation and competition law. She has a degree in law from the Symbiosis Law School, Pune, and a Masters in Law from the Columbia Law School. Shohini is a lawyer and public policy consultant based out of New Delhi, with a keen interest in financial and technology regulation. She has a degree in law from the National Law Institute University, Bhopal and a MSc in Law and Finance from the University of Oxford.

The views of the author are personal, and do not reflect any institutional opinion.

The comments are presented in the prescribed format below:

Section/Sub-section/Clause/Proviso of the Code Issue/Problem Identified in the Section/Sub-section/Clause/Proviso of the Code Proposed Change that should be made Reasons for the proposed change
Chapter I – Preliminary  
Clause 2(i) – Definition of Agent Definition is not comprehensive We recommend an examination  of the possible uses of the term “agent”, and re-wording the definition so as to include other instances of agent as well. The term “agent” has been used in other contexts than merely “establishment”. “Agent” is also a commonly used term in the realm of pensions, and other social security measures. These “agents” are often in a fiduciary position with respect to financial consumers. This narrow definition may unintentionally leave out “agents” in other contexts.  
Clause 2(ia) – Definition of Aggregator Definition is unclear We recommend providing clearer definitions of terms like platform, intermediary, and aggregator, and cross referencing to other specific laws like the IT Act, 2000, which are the parent legislation for defining certain technical terms. Given the technical and evolving nature of these terms, we also recommend supplementing these with suitable examples and explanations. The definition of aggregator is insufficient and leaves the scope for confusion between terms like aggregator, platform, and intermediary.
Clause 2(xx) – Definition of Employee Definition is restrictive We recommend including all workers, including those in the unorganised sector in the definition of employees, and by extension, in the formal social security net. The term “employee” is very restrictively defined in the Code. The Statement of Objects and Reasons to the 2018 Draft provided that the Social Security Code was intended to “cover all kinds of employment including part-time workers, casual workers, fixed term workers, piece rate, commission rated workers, home-based workers, domestic workers, own account workers etc.” The legislative intent is to clearly recognise all conventional and non-conventional forms of employment. However, the present draft leaves the position of some categories of employees, especially those in the unorganised sector unclear.   While the draft includes another definition of “wage workers”, this distinction between the organised and unorganised sector is problematic. An overwhelming majority of the workforce is engaged in the informal sector.  While the output of the unorganised sector is not formally included in GDP calculations, estimates indicate that, this sector contributes close to 50% to the national GDP. Additionally, a vast majority of this cohort lives below the poverty line. Combined with the rapidly growing elder population, this is a sector which is in need of comprehensive social security measures. 
Clause 2(xxvii) – Definition of Gig Workers Definition is unclear We recommend using explanations and examples to better illustrate and capture all possible models of work that may be brought under the ambit of this definition. The definition of gig workers is unclear. It refers to “traditional employer-employee” relationship, which itself has not been explained in the Code, and given the structural discrimination that has been noticed around the world when it comes to gig workers, a more empathetic and wider connotation of the term may be beneficial.  
Clause 2 (xxxxiii), and 2 (xxxxxvii) – Definition of Enterprise Definition is unclear We recommend providing a clearer explanation of “enterprise” The meaning of “enterprise” is unclear, especially the difference between “enterprise” and “establishment”. This is especially important as the very important definitions of organised and unorganised sector hinge on the term “enterprise”. The term “enterprise” has not been defined anywhere in the Code.
Clause 2 (xxxviii) – Definition of Miscarriage Definition is not comprehensive We recommend providing a more modern and sensitive definition in line with international best practices, and a possible use of another term. The definition of miscarriage in the Code is paternalistic and places the women as a subject, secondary to her uterus.
Clause 2(xxxxiii) and Clause 2(xxxxxviii) – Definition of organised and unorganised sector Definition is not comprehensive We recommend a more comprehensive definition, such that all kinds of employment, especially in light of the fact that a vast majority of workers in India are in the unorganised sector. The definitions of these two terms, in their present form, may unintentionally leave out a number of people from the social security blanket.
Clause 2 (xxxxvia) and Clause 2 (xxxxvib) – Definition of platform work and platform worker Definition is not comprehensive Similar to the comment on “aggregator”, we recommend providing clearer explanations, supplemented by examples as required for technical terms like “platform”, and “platform worker” The definitions for these terms are not comprehensive. It is also important to provide the distinction between aggregator and platform.
Clause 2 (xxxxxxi) – Definition of wage worker Definition is not comprehensive We recommend modifying the definition to include all forms of remuneration, and not just monthly. The definition is restrictive as it only includes monthly remuneration. However, a number of workers get paid on a weekly or fortnightly basis, or other time intervals as well.
Clause 2 (xxxxxxii) – Definition of woman Definition is not comprehensive We recommend revising the definition to clarify the intent, and to ensure that no classes of women are inadvertently omitted from coverage under social security.  The purpose of using a definition of “woman” is unclear. Firstly, the Code uses the term “woman” in a number of contexts,  such as laying down that at least one member of a Building Workers’ Welfare Board shall be a woman.  Secondly , if the intention is to use the term “woman” for specific purpose of coverage under social security, the definition should be broader; in its current form, it only includes woman employed for “wages” in an “establishment”
Clause 2 (xxxxxviii) – Definition of self- employed worker Definition is not comprehensive We recommend removing the “monthly” from the definition and suitably modifying to include all other frequencies of remuneration. The definition includes only the workers who receive monthly remuneration. However, a number of self-employed workers get paid at different frequencies, including weekly, or on a project-basis.
CHAPTER II – Social Security Organisations  
General The Code does not specify any qualifications and disqualifications for members of the various social security organisations. Given the technical nature of the responsibilities, the Code should specify areas of expertise, numbers of years of experience, etc. This is also the norm for other Indian laws, especially in the financial sector.   
Clause 3(1) – Central Board of Trustees Provision lacks specificity We recommend adding more clarity in this provision The functions of this board of trustees are unclear. Moreover, it does not give any indication of the “funds” which shall be administered by this Board, leaving this to the Central Government’s rule making powers, without any direction to that effect is arbitrary. It is also unclear whether the Board under this section is the same as the “Board” referred to in Clause 14.  
Clause 4(5) – Composition of the Medical Benefit Committee   Provision lacks specificity We recommend specifying the composition of the Medical Benefit Committee. The Composition of the Medical Benefit Committee is not specified. This is at odds which other bodies under this chapter, for which the composition has been laid out in detail.
Clause 5 – National Social Security Board Provision lacks specificity We recommend providing at least the broad contours of the functions of the National Social Security Board, especially because it is a body for the unorganised sector, which is vulnerable and in most need of social security measures.   The purpose and the functions of the National Social Security Board have not been specified. Leaving such a critical aspect to the rule making power of the government is arbitrary.
Clause 9 – Advisory Committees Provision lacks specificity We recommend the different roles of the committee and Board are clearly specified in the provision.   The delineation of roles between the advisory committee and the National Social Security Board is unclear
CHAPTER VI – Maternity Benefit  
Clause 61 – Employment of, or work by, women prohibited during certain period.   We recommend modifying the clause to vest the choice with the woman in question. If the woman is physically, emotionally, and mentally capable of working, there is no reason to exclude her from employment. This provision makes the employer a co-decision maker, and prioritising the medical risk of termination over other considerations, including the woman’s choice. This clause has been taken from the Maternity Benefit Act, which is almost 60 years old. The clause reflects the paternalistic language of the Maternity Benefit Act, 1961, and also goes further to include “medical termination of pregnancy” within its ambit. This clause should respect the choice and autonomy of the woman, subject to medical fitness, for the purposes of engaging her as an employee in an establishment.
CHAPTER IX – Social Security for Unorganised Workers  
Clause 106(1) Power of the Central Government is relegated to that of a ‘notification’ instead of being specific and safeguarded by clear provisions in the law This clause should detail responsibility of specific authorities (instead of using broad terms like the Central Government), with clearly identified scope, instead of relegating it to an executive action, formalised by a mere notification.  The scope of the scheme, authority to implement the scheme, beneficiaries of the scheme, resources of the scheme, agency or agencies that will implement the scheme, redressal of grievances; and any other relevant matter will be “notified” in the relevant scheme. The identification of named authorities in the Code will lead to increased accountability, and ensure that trust in the system. Beneficiaries will also stand to gain more insight into the specific welfare schemes planned for them by the Government.
Clause 106 (6) Details on management and administration of the welfare schemes are non-specific The proposed clause should be revised to provide details on the management and administration of the schemes – for eg., through a trust like the NPS, or through a Sovereign Wealth Fund as is done in New Zealand. Further, it might also be helpful for the Code to delineate the functions of operational day to day management of the schemes from the regulatory function. It would be helpful to have separate agencies with clearly specified functions to address these issues. Providing clarity on the specific roles of agencies and specifics on the administration of welfare schemes will be critical in allocating due responsibility and ensuring the efficient working of the schemes.
Clause 110 Power of prescription is over-broad and lacks clarity; registration clause lacks safeguards and exceptions The conditions for fulfillment of the registration criteria should be clearly laid out in law, and be as broad as possible, to encapsulate the widest category of unorganised workers. In particular, the power to prescribe socio-economic criteria is very wide and vague, and should be made more specific. Further, the process to determine such criteria in this clause should also be specified in the Code. Lastly, the provision should encapsulate suitable exceptions to registration – that is, cases in which registration may not have happened, to make sure that the beneficiaries are not denied access to welfare schemes on a procedural infraction. To this extent, clause 110 should be revised to specifically state that non-registration shall not lead to a denial of services under this Code.   Specifying more details in the process and substance of the conditions necessary for the registration of unorganised workers will add both specificity and accountability to the provision, benefitting the widest set of beneficiaries.   This is particularly important for unorganised workers, who depend considerably on welfare schemes, and may lose access to benefits on account of not being registered. For example, in the case of the Indira Gandhi National Old Age Pension Scheme and the Indira Gandhi National Widow Pension Scheme, some of the major problems identified have been- irregular pension payments, high collection costs, discontinuation of pensions due to Aadhaar-related issues and inadequate pension amounts.[1] For the huge costs of exclusion, the registration clause should contain safeguards and exceptions, and at the very least, make Aadhaar related registrations a non-mandated requirement.  
Clause 110A Provision is non-mandatory, non-specific, and does not engender particular responsibilities for authorities. This provision specifically for gig economy workers in the Code, while being almost identical to the previous clauses in its scope, is unclear on the specific measures/schemes that the Government may float for such workers, keeping in mind the power structures inherent in the specific circumstances of their work. Further, it makes the provision non-mandatory in its application by using the word “may”, opposed to the word “shall” used in the previous clauses of this Chapter. Further, it would be helpful to delineate the specific roles of the aggregators and the Government in funding/scope of responsibility in the scheme, and also provide a timeline for the  formulation of the said measures under the provision.   Regulatory best practices from around the world must be studied to critically examine the specific circumstances and oppressive structures in which gig economy workers operate. In this context, it may also be useful to consider if gig economy workers can be classified as “employees”, with specified rights and benefits, as has been recently done in California, under the Assembly 5 Bill.[2]   Further, this clause does not prescribe any time frame for the formulation of social security measures for the gig workers. The clause also needs to recognize the peculiar features of gig-work such as working for multiple employees, seasonal work, etc.
CHAPTER XIII – Miscellaneous  
Clause 138 Aadhaar linkage The inconsistency between clause 110(2) and clause 138 of the Code must be removed, because the former makes Aadhaar a voluntary option for obtaining registration, whereas the later does not imply that Aadhar registration may be voluntary (nor does clause 138 refer to clause 110 in the provision itself.   Further, the provision of mandatorily applying Aadhaar to benefits (clause 138(b) and payments (clause 138 © may need to pass the muster of the Puttaswamy v. Union of India, 2019.                                                   Due to the documented cases of both breach of privacy and exclusionary impact of Aadhaar, it may be prudent to use Aadhaar, if at all, with due regard to privacy concerns and use it only in a non-mandated manner.
GENERAL COMMENTS  
Need for harmonised regulation One of the primary concerns in India has been the multiplicity of laws and regulators governing social security. If we take the example of pensions specifically, at a glance, these include the Employees’ Provident Fund Organisation (‘EPFO’), the Pension Fund Regulatory and Development Authority (‘PFRDA’), the Ministry of Finance and the Ministry of Labour and Employment, with wide variations in the way such pension schemes are managed, as well as the way they generate returns. This inhibits the development of an inclusive and equitable regulatory framework, which provides equal opportunities and rights to all citizens, regardless of their employment status. To this effect, this Code, in so far as it provides for welfare schemes for unorganised workers, makes no mention of other national schemes like the Atal Pension Yojana and how the various schemes will be harmonised, in both their scope and application. Further, there is wide disparity in the way most welfare schemes are managed, some being through the Central Government, some through regulators and trustees like the National Pension System. It must be noted here that barely 14% of India’s workforce is covered by a formal pension program.[3] At least for the workers in the informal sector, it is hoped that the Code will be revised to harmonise the disparate retiral security provisions.[4]                                                            
Need for consumer protection and grievance redressal The Code lacks provisions on providing adequate consumer protection and a redressal grievance mechanism to all beneficiaries. By encoding these in the Code, consumer protection will become a regulatory obligation, leading to more efficacious adjudication of complaints. It is also essential to acknowledge that India does not have any uniform and specalised legislation governing consumers of financial products. This is particularly important in the context of the draft Code, because a number of schemes in the Code, including those on securing retiral security and pensions are in fact long term financial contracts which are often complicated and inaccessible to beneficiaries. Therefore, it is hoped that the Code will be revised to ensure that adequate consumer protection regulation is addressed, including provisions of inter-operability, portability and exit options in retirement financing plans, and mandating the provision of suitability analysis and advice, particularly to unorganised workers, who have to make contributions.        
Need for greater protection for the unorganised sector The protection provided to the unorgnised sector within the Code needs to be bolstered. Since an overwhelming majority of the Indian workforce is engaged in the unorganised sector, we recommend incorporating the following features in the Code:   1. Increasing awareness and enhancing consumer grievance mechanism- as mentioned above   2. Incorporating features that incentivize people to enroll and contribute for long periods. Unlike most other financial products, pension products may need to be actively ‘pushed’ or marketed to households, especially since the target audience includes low income households in the unorganised sector, who would most likely lack access to formal financial services, and be less likely to invest their money readily, for a faraway future.  This will also reduce the number of exclusion errors.   The Code should also provide a basic minimum social security, and standard of conduct when it comes to the unorganised sector.  
Need for adequate education and customer awareness Social Security, because of its very nature, mandates a heightened degree of scrutiny and adequate safeguarding of consumer interests, including both consumer protection as well as consumer education. Consumer protection is a critical part of any financial product, especially a pension product. A holistic consumer protection framework extends to stages before and after the mere transaction of buying a financial product. Be it adequate disclosures before the transaction, or continued consumer support after, it covers a gamut of responsibilities on part of the financial service provider. This is especially critical for the unorganised sector, considering the pervasive lack of both education and financial sophistication of this group. As has been pointed out by reports such as the Indian Financial Code and the Bose Committee Report, a fundamental shift from caveat emptor (buyer beware) to seller beware for financial services is required, because of the peculiar situation of vulnerability and dependence of financial consumers. Therefore, we recommend including similar education and customer awareness provisions in this Code as well.   As regards best practices within the Indian regulatory framework, reference can be made to SEBI’s Office of Investor Assistance and Education (OIAE), which is a single point interface for handling subscriber complaints as well as education outreach efforts.  

[1] Sambhavna Biswas, ‘In Jharkhand, the elderly struggle for meagre pensions’, 18 April, 2017, The Wire, available at <https://thewire.in/government/jharkhand-pensions-aadhar&gt;

[2] More information on the California Assembly 5 Bill, also known as the Gig Economy Rights Bill is available at <https://www.bbc.com/news/business-49659775>

[3] Dr Shashank Saksena, ‘Towards Comprehensive Pension Coverage’ in India in Parul Seth Khanna, William Price and Gautam Bhardwaj (eds.), Saving the Next Billion from Old Age Poverty: Global Lessons for Local Action, (Pinbox Solutions, 2018) 31.        

[4] A report published in 2019 details the various ways in which an exercise to harmonize the regulatory framework might be undertaken. It is available at <https://vidhilegalpolicy.in/wp-content/uploads/2019/05/PensionsReportFinal-29March2019-1.pdf&gt;

COVID-19- Regulatory Response Tracker

It is a difficult task to write objectively about a crisis, particularly one that is continuing to spread, and is exposing the ugly strains of inequity around the world. As I write this, COVID-19 has claimed around 48,000 lives worldwide, with over 9,00,000 confirmed cases across 203 countries, areas, and territories[1]. COVID-19, like most other pandemics and public health crisis in the past, has had a debilitating impact on human life. At times like these, it becomes paramount for Governments and regulatory authorities to maintain essential service, control panic, mobilise resources, and affect stimulus efforts. A major fallout of the pandemic, like other pandemics in the past is the impact on financial services, markets, businesses, and individual savings. COVID-19 is arguably ushering a global recession, coupled with job losses, a complete halt to production, and a disruption of supply chains, marked by a growing environment of uncertainty, reduced demand, and income inequality. 

As such, this blog post, and subsequent ones in the future will aim to track financial regulatory responses from across the world. While regulators and Governments will continue to issue advisories and release relief packages, there needs to be sustained effort to build more comprehensive data sets around key policy reforms being announced around the world. As such, the fundamental objective of the Covid-19 tracker will be to provide continuous data, available freely to other researchers and interested parties; and to enable subsequent analysis on global financial regulatory practice. The tracker will encapsulate two kinds of regulatory interventions.

  • Global macro-prudential regulation focused on systemic risk – focused around bank regulation, but also cross-sectoral regulatory responses in the insurance sector, capital markets, pension, housing finance, and other allied sectors;
  •  Social security regulatory responses in India – focused around pension, provident fund, marginalized sectors including women, the transgender community, elderly, persons with disability, targeted caste groups, food, migrant workers and refugees, and the informal sector workers including those employed in the gig economy. 

The subsequent posts will delve into the language of the crisis – the terminology of regulations and their impact, the objectives of different interventions, and the responses to changes in the way we imagine our world. This blog post has deliberately stayed away from fixating on the quantification of economic losses, both because it is not the core competency of the author to estimate and quantify, and because numbers often do not fully capture human suffering – the lost opportunities, and the abuse and impact of a crisis inflicted and borne by the most vulnerable of communities, societies, and countries, the deaths that happen both directly because of the crisis, and so much more because of the underlying inequities that propel the crisis further.

Given the nature of the pandemic, this tracker, and subsequent piece of analysis will be of an evolving nature. However, the ultimate aim of this exercise will be to examine global best practices around key regulatory responses to Covid-19, and examine the vision and objectives of different regulatory interventions, the terminology of regulations and their impact, the flexibility afforded to stakeholders, and the impact on people and business.

The tracker is live and available here – https://docs.google.com/spreadsheets/d/1xhokvwrcCTi8-7Iffd3WpvkmLrmBrsCcrXfaoQj5xe8/edit?usp=sharing

Please note that the global financial regulatory tracker is available on sheet 1, and the social security welfare measures tracker is available on sheet 2. 

The Yale Program on Financial Stability is doing a live tracker as well, albeit slightly different in perspective. You can follow them here.

[1] https://www.who.int/emergencies/diseases/novel-coronavirus-2019

The History of Bank Mergers in India and the key takeaway

In September 1937, the TNQ Bank was constituted by the amalgamation of two other banks, the Travancore National Bank and the Quilon Bank. The merger was acclaimed locally as the ‘greatest banking amalgamation in South Indian history’. In April 1938, within six months of the amalgamation coming into effect, there was an unprecedented run on the bank. The failure of the TNQ Bank and the banking crisis in South India eventually led to the realisation that the RBI could not simply amalgamate to solve problems. The central bank needed more powers of investigation and supervision. It soon dawned that amalgamation of banks without structural fixes of bank governance would inhibit the central bank to act soundly in times of emergencies.

Last week, the government carried out four big bank mergers with the total number of public sector banks (PSB) coming down to 12. In India, bank mergers have been a common last-minute approach to tackling financial distress. This is facilitated by an absence of a clear, consolidated resolution framework and vague provisions in existing laws. Nearly 80 years after the failure of the TNQ bank, which revealed that bank mergers without tackling the core reasons for bank failures, were bound to reveal less than satisfactory results, it seems like we have learnt nothing.

The inability to evolve modern resolution mechanisms in India has been consistently noted by international standard-setting bodies for years. Consider the ‘Thematic Review on Bank Resolution Planning’ published earlier this year by the Financial Stability Board, which noted that out of the 25-member jurisdictions, India and Argentina were the only two countries reportedly without any plans to introduce resolution frameworks.

Why resolution frameworks are important

Resolution frameworks, particularly for large banks and financial institutions are important for several reasons. First, they clarify the mechanisms needed to harness the system from being fixed without severe systemic disruption, or exposing tax-paying citizens to financial loss. Effective resolution frameworks will, therefore, consist of robust monitoring and reporting requirements separate from regular regulatory mandates, public accountability and timely action without compromising on the critical services provided by such institutions.

Second, effective resolution mechanisms separate regulatory function from resolution function.

Typically, regulators behave like parents, giving initial licenses to institutions to function, nurturing and monitoring their growth, providing due impetus when they fail. However, once a firm crosses a specified threshold of viability and this is typically at a point where recovery is no longer possible, resolution authorities take over, whose primary job had been, up to that point, to prepare for effective dissolution of the firm, while shielding the economy and taxpayers from further shocks. In short, it allows an independent expert authority, separate from the regulator and the government, in being adequately prepared for the worst-case scenario, such as a financial crisis.

Third, it allows for modern contingency options to be included within the governance framework. This includes a whole basket of mechanisms – protection of deposit insurance during bank resolutions, maintenance of a contingency/resolution fund – paid for by the financial institutions themselves and used for their dissolution, and the judicious use of resolution tools in consultation with the regulator. The reason why resolution frameworks, distinct in mandate and function from regular regulatory frameworks, are important is that they help in the preservation of trust in the system, and allow for a dedicated resolution perspective to be developed. Once a bank or insurance company fails to be viable, the framework kicks in and leads the firm to a respectable and timely death.

Why ad-hoc measures of the Central government undermine the independence

India’s resolution framework can be found within certain omnibus provisions, nestled within various different legislations. However, a closer reading of these statutes reveals that the lack of a dedicated resolution framework is further complicated by over-broad provisions giving undue authority to the Central government, over matters of the regulator. Consider for example section 35 AA of the Banking Regulation Act, which gives the Central government the power to authorise the RBI to issue directions to banks to initiate insolvency resolution processes. Section 19 of the IRDA Act, 1999 gives the Central government the authority to supersede the insurance regulator by virtue of a mere notification.

Similar provisions also exist in the PFRDA Act governing the pensions regulator, and the RBI Act. Section 57 of the RBI Act, for instance, states that the Central government can place the RBI under liquidation by executive order. These provisions, reminiscent of colonial times when the Union government assumed a superior position vis-à-vis a regulator, fail to pass the muster of a functioning democracy today and do not embody the fundamental principle of upholding legislative independence of the regulator in a robust democracy. The matter gets further complicated when these powers are exercised in times of financial distress and general economic upheaval. The government’s call to invoke section 7 of the RBI Act last year, again a colonial-era provision that had never been used before, is a recent and upsetting example. It is interesting to note that the history of section 7 documents it to be an amalgamation of provisions from the Bank of England Act, 1946 and the Commonwealth Bank of Australia Act, 1945. This was done specifically to prevent the government from acting against the wishes of the governor of the RBI. It was hoped that the use of the provision against the wishes of the governor would be a rare occurrence, and the responsibility of the action would vest solely with the government. The now oft used section 47 of the RBI Act, which governs the allocation of surplus profits to the government, lacks procedural clarity and safeguards.

The lessons learnt

The recent developments in the banking sector – the mergers, the transfer of surplus profits and the invocation of section 7 demonstrate two very crucial things.

One, we need a structural separation of resolution and supervisory functions now more than ever, governing all financial institutions, particularly those that are large and systemic – housed either within the regulator or in a separate institution.

Two, there is a requirement to critically analyse the laws governing our financial regulators. There is an urgent requirement to redraft these laws to make them unambiguous and build guardrails of accountability and transparency in the dealings of regulators with the State. In this regard, the separation of resolution functions from supervisory functions will allow regulators to concentrate on micro-prudential regulations, and vest the case of unviable firms in the hands of a separate functionary, that can act with preparedness and accountability, distinct from both the regulator and the government. This will ensure that bank resolution tools are not restricted to last-minute mergers, and even in such cases, there is public accountability on why the resolution was done, and how, questions that are difficult to ask of the government.

It is important to remember that in 1926, when the Hilton Young Commission recommended the establishment of a central bank – the RBI, in spite of the many controversies on proposals, a unanimous view was taken over the desire to have an independent regulator, free of political influence, to safeguard the interests of the country. It is hoped we don’t lose sight of this history, and of our past learning.

The PMC Bank Debacle and the lessons to be learnt from the history of deposit insurance in India

In September this year, the RBI placed the Punjab and Maharashtra Co-operative Bank (PMC), a ‘multi-state scheduled urban co-operative bank’ operating in multiple states including Maharashtra, Delhi, Karnataka, Goa, Gujarat, Andhra Pradesh and Madhya Pradesh, under direction.

The bank has been curbed from granting or renewing loans or advances, accepting deposits or disbursing payments without due approval, even though the RBI’s direction itself did not specify the exact reasons why the bank was in crisis. The worst hit are perhaps depositors, who had been allowed to withdraw a maximum sum of Rs 1,000 of the total balance every bank, which has now been increased to Rs 10,000. (Please note that as of November, 2019, this has been increased to Rs. 50,000)

Perhaps the most controversial news around the ‘demise’ of PMC has been over the scant deposit insurance money that has been promised to people.

To understand this completely, it is crucial to dip into the history of co-operative banks, a species somewhat different from general commercial banks. In fact, the history of the governance of co-operative banks (which are regulated by the RBI in case of multi-state co-operatives and by state governments in case of single state co-operatives respectively) is rooted in the start of the Deposit Insurance and Credit Guarantee Corporation (DICGC) in the 1960s.

In this context, there are two very important policy issues to be addressed: one on the adequacy of the deposit insurance protection being offered, and the second on the governance of co-operative banks, inextricably linked to the history of deposit insurance in India.

The origins of deposit insurance

On the first issue of deposit insurance, it is important to remember that the concept was a rather late admission in the scope of banking regulations. It was preceded by a banking crisis in India, most notably the banking crisis in Bengal. The controversy was precipitated by a bank run through four entities in 1950 – the Bengal Central Bank, the Comilla Union Bank, the Comilla Banking Corporation, and the Hooghly Bank and more generally thanks to the liquidation of at least 50 banking concerns between 1947 and 1950.

The crisis was compounded significantly by the inability of these banks to pay depositors. Of the 82 banks that suspended payments in Bengal, only 13 banks made ‘small payments’ to their depositors, fuelling public resentment and provoking people to write letters to Nehru, famously stating that the central bank was ‘only meant for the big pandas who … only know how to squeeze’ the poor. People also wrote that a loss of public faith in the government and its institutions would force those in the region to court their ‘worst fate’ and ‘join…hands’ with the communists.

After a number of committee deliberations, in 1956, K.N.R. Ramanujan, who was the director of banking research drew up a tentative scheme of deposit insurance covering upto Rs 500 per account, which would extend full protection to an estimated 61% of all accounts of all banks and partial protection to the rest.

This was followed by the crash of the Palai Central Bank, the largest bank to fail in independent India and the second major bank to suffer that fate in the Travancore-Cochin region within a quarter of a century.

The idea of deposit insurance again saw a resurgence and a Working Group proposed in its report a maximum cover of Rs 1,000 per depositor which would fully protect nearly 80% of account holders and secure 15% of deposits.

In 1962, when the DICGC Act was passed, India as it happened, was only the second country in the world after the US, to provide insurance cover to bank deposits. Thanks to the introduction of deposit insurance in 1962, by 1967 the phenomenon of large-scale bank failures and of the public losing the larger part of its deposits was largely relegated to the past.

The insurance amount was increased to Rs 1,500 or the total amount deposited, whichever was lower. In 1968, this amount was further raised to Rs 5,000, fully insuring over 91% of all deposit accounts.

In 1993, the amount was set at Rs 1 lakh. In this historical context, offering Rs 1,000 to depositors now at the failure of PMC seems woefully inadequate. More importantly, it is to be remembered that deposit insurance was never meant to be an end in itself, precisely because it came about as a direct response to multiple banking crises in India. The success of deposit insurance as was noted in 1951, depended ultimately on the soundness of individual banks, and therefore, deposit insurance would have to be accompanied, as in the US, by ‘rigorous control and comprehensive supervision’ of banks’ affairs.

As such, a conversation just about the adequacy of deposit insurance without talking about the governance of co-operative banks would be antithetical to its original purpose and intent.

Deposit insurance, co-operative banks and state autonomy

In this regard, it is also important to consider the particular legislative history of deposit insurance in the context of cooperative banks. It must be remembered that when the DICGC Act was originally passed in parliament, cooperative banks were excluded from its ambit, a fact that did not go unnoticed. In fact, certain state governments including the Madras government, a pioneer in this respect, decided in December 1961 to guarantee, up to some limit, three-year and longer fixed deposits of state and central cooperative banks.

A number of states including Orissa, Mysore and Bihar wanted to follow suit. Finally in 1968, the DICGC Act was amended to give RBI limited powers of reconstruction, amalgamation and winding up, and extend deposit insurance to cooperative banks. Even now, most co-operative banks are rarely governed with the same rigour as most commercial banks. These are either governed by the lesser-known Multi State Cooperative Societies Act, 2002, or individual state Acts which bestow the central or state registrar with most powers of administration and operational management, keeping limited powers vested with the Reserve Bank.

This issue of duality of control is a continuation of a post-Independence legacy of co-operative fiscal federalism, meant to give state governments more autonomy. Of course state co-operative banks in India today are riddled with corruption and concentration of local political power, and fail on a consistent basis. An important question to be asked is whether this is the best way to further fiscal state autonomy.

Consider this, DICGC notes in its latest annual report, that it settled aggregate claims of Rs 434.7 million during 2017-18 alone, in lieu of 18 co-operative banks, the highest claims coming out of Maharashtra and West Bengal. This is deeply symptomatic of the governance rot that has crept up in the co-operative banking system.

The governor of the RBI at the time of passing the DICGC Act in 1962, P.C. Bhattacharya, when the issue of state government power vis-à-vis the power of the central bank played out for many years, had attempted to break the impasse by placing the issue of cooperative banking regulation itself in a wider context, and commenting on the ‘important bearing’ operations of cooperative banks had on the ‘currency and credit situation’, because they played a prominent role in financing certain sensitive sectors of the economy.

However, in the current context, whether co-operative banks with dual management and regulatory systems are desirable to be continued in their present form, and if they indeed continue to have an important bearing on credit, currency and financial inclusion are tough questions that need to be asked. Further, if indeed the regulatory structure is to be streamlined and brought under a single regulator, an important issue to consider would be RBI’s ability to regulate and resolve the thousands of co-operative banks that lie scattered across rural and urban India.

Questions we need to ask 

The fall of the PMC Bank should trigger alarming governance questions, and with good reason.

Questions should be asked of the RBI and its regulatory forbearance in acknowledging its failure, and on the efficacy of continuing to separate co-operative banks from regular commercial banks even though modern wisdom tells us to regulate function over form.

Politicisation of banks, failing governance mechanisms and depositor concerns in cooperative banks were raised almost a decade ago in the Rangarajan Committee. It remains to be seen if the recommendations were completely followed.

Further, deposit insurance itself needs to re-hauled. As recommended in 2016, risk-based premia need to replace the flat rate of premium that is currently deployed to reduce cross subsidisation of bank failures. This is perhaps the only way to build up a healthy corpus of deposit insurance fund.

The DICGC Act and all attendant state and Union laws need to be harmonised, at least for bank resolution and deposit insurance – timely, and higher payouts.

In this context it is important to acknowledge that the now withdrawn Financial Resolution and Deposit Insurance Bill (FRDI) attempted to bring all insured banks – commercial and co-operative banks under a uniform resolution regime, with resolution powers shifting from the RBI to the ‘Resolution Corporation’. 

The Bill also called for a revamp of the deposit insurance framework, specifically asking for a reconsideration of the Rs 1 lakh deposit insurance amount, a strict payout timeline, higher protection levels for depositors, and a shift to a risk based insurance premia. 

Most importantly, the Bill anticipated regulatory forbearance and asked for widespread banking regulation reform, with higher supervisory focus on riskier, bigger and more interconnected financial institutions, irrespective of whether they were commercial or co-operative or state owned banks. Special amendments were also demanded of state co-operative banks with the specific promise of deposit insurance protection to bring them into the resolution framework. 

With the withdrawal of the Bill in 2018, India’s conversation on harmonised banking regulation and resolution abruptly stopped. 

The discourse around the demise of PMC Bank should trigger some of these older and larger questions on the way co-operative banks are governed, and the way we handle their failure, because the history of banking in India shows that the deposit insurance emerged as a direct consequence of banking crisis. It is perhaps time to examine our current crisis and reimagine how to protect depositors again, particularly in the macro context of bank regulation, and resolution. 

Reasons for starting the blog

What is this blog for

  • To encourage more critical (public) writing, engage in independent interdisciplinary research, and provide support to evolving ideas of financial policy-making and jurisprudence.
  • To provide a platform to those who want to engage in more rigorous public writing, and help create an archive of financial policy developments in India.
  • To create a repository of contemporary legal-financial research.
  • If you want to submit a piece for publication, please email me at sho.sengpta@gmail.com

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