Sovereign Debt: Liability in Perpetuity

The announcement – made by Nirmala Sitharaman, Finance Minister of India in her maiden budget speech – that India will look for options to raise funds from external markets in foreign currencies, has been criticised by several economists, including former governors of the Reserve Bank of India. India has never issued sovereign bonds in foreign currency and this sudden change in borrowing policy has surprised many. This move comes at a time when India is facing lack of options to raise funds. Raghuram Rajan has termedthis an unviable option as it would expose the domestic market to the uncertainties of external market, investors and currency rate. Rajan suggested that instead of issuing sovereign bonds in foreign currency, India should ease the regulations for foreign portfolio investors and increase the limit of investment in government rupee bonds.

Y V Reddy has termedthe sovereign debt as a liability in perpetuity and said that the debtor will be “vulnerable to hostile creditor legal action.” Countries like Greece, Turkey and Argentina have faced the brunt of it. In absence of any legal debt restructuring mechanism for the sovereign debt, these countries had no option but to agree to the terms given by the lenders. He emphasised that the policymakers do not have many options left to tackle the sovereign debt crisis as it is always accompanied by banking, political and market crisis.

The Government of India, in its defense, has argued that the dollar/yen interest rate is lower than rupee interest rate. But the fall in rupee value will counter that with increased principal repayments. And it comes with all the vulnerabilities due to uncertain and unstable global market.

RBI removes charges for non-cash transactions at own bank’s ATM and
also asks banks to NOT charge for failed transactions

Banks allow certain number of free ATM transactions, both financial and non-financial, in a month, 8 in metro cities and 10 in non-metros. After continuous demands from people to remove various charges on banking services for saving account holders, RBI, on August 14, 2019,  issued a notification removing the charges for non-cash withdrawal transactions performed at own bank’s ATM. The non-cash withdrawal transactions include balance inquiry, cheque book request, payment of taxes and fund transfer.

RBI has also asked banks to not count failed ATM transactions as valid transactions. Transaction failure due to technical reasons such as hardware or software issues, non-availability of currency notes and invalid PIN will not be counted in allowed free transactions and banks cannot charge for these transactions.

Between FY April 2015 – September 2018, the Public Sector Banks earned Rs 4144.99 crores as charge for transacting beyond the allowed free transactions.

RBI allows banks to sell NPA abroad

RBI has relaxed the norms for External Commercial Borrowing and allowed the banks to sell their NPAs to foreign investors. It has allowed Indian corporates to raise loans through ECB to repay the domestic loans. Corporate borrowers can avail ECB for the repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector, under any one-time settlement with lenders. Banks can also sell their bad loans to eligible ECB lenders except foreign branches of Indian banks.

This move will help banks to clear their bad loans. Instead of Insolvency and Bankruptcy Code (IBC), banks and companies might go for one-time settlement, funds for which can be raised from outside. However, earlier RBI had opposed the idea of raising funds through ECBs to repay domestic loans as the source of the money from abroad is unknown. It will also increase India’s external liability and build up risks in long run.

IBC Amendment Bill passed by Parliament

Keeping in mind the ongoing issues in the resolution processes under IBC framework, both houses of the Parliament passed the IBC Amendment Bill 2019.

Some of the resolutions were taking time due to appeals filed in courts. However, the new deadline of 330 days to complete the resolution process also include litigation time. Another major change in the Amendment is that it gave higher priority to secured creditors over operational creditors after a recent ruling by the National Company Law Appellate Tribunal, which ensured that the financial creditor and operational creditor are on par in settling claims.

The new amendment made the resolution arrived under IBC binding for all authorities, including the central, state and local governments. The amendment also changed the voting required to approve the plan. As per the amendment, if majority of the present creditors approve a plan, it will be considered as approved by all creditors. This amendment was done keeping in mind the cases from the real-estate sector.

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