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Top 5 Game changers for the Indian Financial System in 2018

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As 2018 draws to a close we look back at some of the top developments in the financial sector and summarise the dominant trends that have emerged from the year gone by. 

Aadhaar Verdict

In September 2018, a five-bench Constitution Bench headed by Chief Justice Dipak Misra passed the landmark verdict on a batch of petitions challenging the constitutional validity of Aadhaar. In a 4-1 judgement delivered by the Constitution Bench, the Supreme Court upheld the constitutional validity of Aadhaar but laid out its new limitations. The court ruled that Aadhaar can be used for payment of government benefits and taxation records, remaining compulsory for the filing of Income Tax (IT) returns and allotment of Permanent Account Number (PAN). It also ruled that it will not be required for obtaining SIM cards and opening bank accounts.

One of the highlights of the judgment was the striking down of Section 57 of the Aadhaar Act. The bench said in its judgement “That portion of Section 57 of the Aadhaar Act which enables body corporate and individual to seek authentication is held to be unconstitutional”, thus ruling that private companies can no longer ask for a consumer’s Aadhaar details. This aspect of the ruling has come as a blow to fintech players that have modelled their business on using Aadhaar based KYC for customer authentication, making them scramble for viable alternatives and has made them seek clarity from the Government on this aspect.

A few days ago the Government paved the way for usage of Aadhaar to obtain mobile numbers or opening bank accounts if customers voluntarily choose to opt for it. This is being brought about by amendments introduced to the Telegraph Act and the Prevention of Money Laundering Act (PMLA), that are to be tabled in Parliament in the ongoing winter session for approval.

RBI v/s Government

Becoming the first RBI Governor to resign in 43 years and one with the shortest tenure since 1992, Dr. Urjit Patel resigned as the 24th Governor of the Reserve Bank of India earlier this month. His resignation preceded months of a complicated relationship with the Government that kept the headlines buzzing. The tussle between the Government and RBI became very public in late October when RBI Deputy Governor Dr. Viral Acharya warned in a speech that undermining a central bank’s autonomy could be “catastrophic”. With serious differences cropping up over various issues related to liquidity, credit flow, the controls governing weak banks, it is anybody’s guess about what prompted Dr. Patel’s decision.

A few days after Dr. Patel’s departure, the Government appointed career-bureaucrat and former economic affairs secretary, Mr. Shaktikanta Das for a 3-year tenure.

Data Protection Bill

After months of deliberations and shifting timelines, on July 27th, 2018, the Justice Srikrishna Committee on Data Protection released its final report along with the draft Personal Data Protection Bill, 2018. The Committee, appointed by the Ministry of Electronics and Information Technology (MeitY), was set-up with the mandate of drafting a data protection law for the country. The draft bill, though a welcome attempt to erect a much-needed data protection law for India, leaves significant room for further development before it becomes a genuinely useful user-protecting framework. Earlier, in response to MeitY’s call for comments, we had raised eleven significant concerns that need to be addressed in the current version of the draft Bill.

One of the aspects of the draft bill is the proposed data localisation requirement that warrants storing of personal data of Indian users locally. A recent report in TOI indicated that the Government moots a ban on the transfer of sensitive personal information abroad, making it a task for global giants to comply with. The report also mentions setting up of the Data Protection Authority that would oversee the rules and regulation that would be notified. The draft bill needs parliamentary approval before it becomes an act.

Financial frauds and Liquidity Crisis

The year witnessed some of the biggest frauds in the financial sector. It started with the biggest fraud in Indian banking history with the Rs 14,500 crore scam on state-run Punjab National Bank (PNB) committed over many years. This came to light in early 2018 and was committed from 2011 till 2017 by illegally issuing letters of undertaking and rolling over foreign letters of credit to diamantaire Mr. Nirav Modi and his uncle Mr. Mehul Choksi from PNB’s Brady House branch in Mumbai. Both accused fled India before they could be arrested.

The next big blow came from the Non-Banking Financial Company (NBFC) sector when IL&FS or the Infrastructure Leasing & Financial Services, a leading infrastructure financing firm, missed a payment in the commercial-paper market. The group has a combined debt of Rs 91,000 crore and a complex structure that involves a web of 169 subsidiaries, associates and joint ventures. The default triggered a panic that was compared to India’s mini-Lehman moment and had rating agencies downgrade the parent and its subsidiaries significantly from investment grade to junk. The firm is currently being investigated by the Serious Fraud Investigation Office (SFIO) with early reports suggesting accounting and financial irregularities.

The default by IL&FS had a ripple effect on other NBFCs, with yields on their commercial paper and bonds rising significantly. The overall availability of credit to the NBFCs also dried up with banks reluctant to lend to these entities and mutual funds reducing their exposure to the sector. While RBI did step in with some measures to ease the liquidity constraints to the sector, there are calls for RBI to open a liquidity window for NBFCs. This has been a major point of friction between RBI and the government.

At IL&FS, the fact that state-owned LIC is the largest shareholder in the firm and the sheer size of the exposure prompted the Government to seize control of the debt-trapped company and supersede its existing board and appoint a new one led by banker Mr. Uday Kotak. The new board under Mr. Kotak has been tasked with submitting a revival plan to turn around the situation, and as per the new board’s latest report, it has stated that the “group” resolution, which would involve significant capital infusion from credible and financially strong investors, was not feasible, and the only option was to consider hiving-off businesses.

Public Credit Registry

Acting on the recommendations of a committee, headed by Mr. Y.M. Deosthalee, the RBI in June this year put out the final report of the committee and announced its intent to set up a Public Credit Registry (PCR) for India to capture details of all borrowers and wilful defaulters. Including data from entities like SEBI, the corporate affairs ministry, Goods and Service Tax Network (GSTN) and the Insolvency and Bankruptcy Board of India (IBBI), the registry will enable banks and financial institutions to get a 360-degree profile of existing and prospective borrowers on a real-time basis. The registry is likely to address information asymmetry, ensure access to credit and strengthen the credit culture in the economy. Currently, RBI has shortlisted six major IT firms to implement the same.

On behalf of everyone at Dvara, we would like to wish you a very happy new year and look forward to your continued readership in the coming year.

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