The banking and finance sector saw several positive measures being taken, with a focus on stressed assets management, fraud prevention and detection and significant amendments to the Insolvency & Bankruptcy Code. This update summarises some of the key developments in the past year and gives a brief overview of what can be expected in 2019.

THE YEAR THAT WAS

India has continued its climb in the World Bank's Ease of Doing Business rankings, recording a leap from the 100th to the 77th position among 190 countries assessed by the World Bank.  The World Bank has recognised India as one of the top improvers for the second year in a row, being the first BRICS and South Asian country to be recognized as top improver consecutively.

The year also witnessed the largest alleged fraud in Indian banking history, on the state-run Punjab National Bank, with significant systemic consequences.  The Reserve Bank of India (RBI) stepped up by suggesting various checks and balances for banks to strengthen their fraud prevention and detection framework by listing out supervisory and risk management steps.

For the banking and finance sector, the year saw a significant overhaul in the process of stressed assets management.  The RBI introduced a new framework for resolution of stressed assets – aimed at bringing about a change in the approach of banks to monitoring of exposures and resolution of non-performing assets.  Significant court decisions and amendments to the Insolvency and Bankruptcy Code, 2016 (IBC) during the year have also kept promoters, borrowers and lenders on their toes.  MAJOR LEGAL DEVELOPMENTS IN 2018

1. Insolvency and Bankruptcy Code, 2016

After introduction of the IBC in 2016, several teething issues arose in its functioning and implementation, some of which were resolved through amendments to the code.  2018 also witnessed some major changes in the IBC.  Some of these include:

(a)  extending the applicability of the IBC to personal guarantors of corporate debtors;

(b)  introducing Section 29A of the IBC which prescribes the ineligibility criteria for resolution applicants;

(c)  adding of home-buyers as a new class of 'financial creditors';

(d)  lowering of the voting threshold for general decisions of the committee of creditors from 75% to 51% (and 66% for certain specific decisions); and

(e)  introducing Section 12A of the IBC, which allows for the withdrawal of an application seeking initiation of insolvency resolution after admission of such application, subject to consent of 90% of creditors. 2.  Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) (Amendment) Regulations, 2018

The existing Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 dated 7 November 2017 (FEMA 20(R)) were amended by the RBI in 2018 bringing in some much-awaited changes.  The amendments have liberalised various sectors such as single brand retail, air transport and real estate broking services and have permitted issue of capital instruments to a person resident outside India under the automatic route in certain situations (viz. swap of capital instruments, import of capital goods and against pre-operative/ pre-incorporation expenses), provided the sector is under the automatic route.  Government approval would still be required to be obtained if the sector is under the government route.  

3.  Reporting under FEMA, 1999

As a step towards improving the ease of doing business in India, the RBI has simplified and brought in uniformity in reporting requirements, by subsuming all foreign investment related reporting under a Single Master Form introduced vide a circular in June 2018.

As a precursor to the implementation of the Single Master Form, the RBI introduced an interface directing all Indian entities to provide data in respect of all foreign investment received by them in an Entity Master Form.

The RBI mandated strict compliance with the new reporting requirements by providing that non-compliance would result in a penalty of complete prohibition on receiving any form of foreign investment and amount to non-compliance with the Foreign Exchange Management Act, 1999.

4.  Resolution of Stressed Assets – Revised Framework vide circular dated 12 February 2018

The revised framework for expeditious resolution of stressed assets introduced by the RBI provides for a stressed assets resolution framework which also links with the IBC.  It lays down a framework for early identification and reporting of stressed assets.

All the existing instructions on resolution of stressed assets have been discontinued with the introduction of the revised framework.  The revised framework has laid down strict timelines for completing a resolution and imposed obligations on lenders to file an insolvency application under the IBC in certain cases upon failure to adhere to the prescribed timelines.

5.  Master Direction on Fit and Proper Criteria for Sponsors - Asset Reconstruction Companies (Reserve Bank) Directions, 2018

Bringing in transparency and clarity for existing and proposed sponsors of asset reconstruction companies (ARCs), the Master Direction on Fit and Proper Criteria for Sponsors - Asset Reconstruction Companies (Reserve Bank) Directions, 2018 lays down that each sponsor of an asset reconstruction company should meet the 'fit and proper' criteria.  The said Master Direction provides an indicative list of factors that would be considered by the RBI for determining the fulfilment of the 'fit and proper' criteria by sponsors.  The Master Direction also prescribes certain reporting requirements aimed at expediting the process of approval and ensuring continuous monitoring of sponsors of ARCs.

6.  ECB Policy- Review of Hedging Provision vide circular dated 26 November 2018

To reduce borrowing cost in case of external commercial borrowings (ECBs), the RBI issued a circular dated 26 November 2018 lowering the mandatory hedge coverage from 100% to 70% in respect of foreign currency denominated ECBs raised under Track I of the ECB framework having a maturity period of three to five years.  The circular clarifies that all Track I ECBs falling within the aforesaid scope but raised prior to the date of the aforesaid circular will be required to mandatorily roll-over their existing hedge(s) only to the extent of 70% of the outstanding ECB exposure.

LOOKING AHEAD

The Indian banking and financial system has seen significant changes over the last year and has also been plagued by the occurrence of various negative events.  In that light, 2019 is a critical year for the industry. 

There would be continued focus on the level of non-performing assets at banks, and all eyes would be on corrective measures implemented by the RBI and the consequences on banks' performance.  This year would also be the litmus test for the IBC and whether banks are able to leverage the code to maximise recoveries.  The Government has remained committed in ensuring that the IBC is a success and has been very nimble in carrying out amendments when necessary to plug any gaps.  Industry participants are hopeful that this would continue into 2019.

2018 has also seen bank lending assume significance, given the problems and credit crunch faced by NBFCs towards the latter half of the year.  The impact of this on the financial industry would run well into 2019.