This blog post is in continuation of the previous blog posts on Raghuram Rajan's report titled "A Hundred Small Steps" written in 2008 whilst he was with the Planning Commission of India.
The third section of the report focuses on "Creating a robust infrastructure for credit."
Proposal 29: Expedite the process of creating a unique national ID number with biometric identification.
The AADHAR Unique Identification number brings us one step closer to this ideal. However there are serious concerns over the integrity and confidentiality of the data in the AADHAR database as is highlighted in this story from CIO.IN: Reduce your risk by refusing to link AADHAR to any databases.
Proposal 30: The Committee recommends movement from a system where information is shared primarily amongst institutional credit providers on the basis of reciprocity to a system of subscription, where information is collected from more sources and a subscriber gets access to data subject to verification of ‘need to know and authorization to use’ of the subscriber by the credit bureau.
We could introduce a FICO style credit rating system found in USA with access to credit scores provided to businessess on consent of the individuals' consent. FICO scores are used for setting interest rates on home and car loans for individuals in USA.
Proposal 31: Ongoing efforts to improve land registration and titling—including full cadastral mapping of land, reconciling various registries, forcing compulsory registration of all land transactions, computerizing land records, and providing easy remote access to land records—should be expedited, with the Centre playing a role in facilitating pilots and sharing experience of best practices. The Committee also suggests the possibility of special law courts to clear the backlog of land disputes be examined.
Here I would like to mention an article by Dr. Anupam Saraph in MONEYLIFE on 10 digital solutions that can make India the best governed nation. One of the 10 ideas is to protect the country from land mafia. The suggestion is as follows:
"There is no public directory or map of all the survey numbers of the 32.87 lakh square km across the 595 districts in the country. There is no account of the changes happening in land use across the country. Land records and property records are not standardized across the country. Requiring that all survey maps be geo-tagged, or their exact location on the district map be shown based on latitude and longitude, and display the survey land-use, ownership details, and any legal issues on a single website survey.gov.in will change the way land use happens across the country. Requiring that the North East point of every property have an official GPS device on it will alert a land use information system of any movement of this point."
Proposal 32: Restrictions on tenancy should be re-examined so that tenancy can be formalized in contracts, which can then serve as the basis for borrowing.
The GPS markers suggested above could be used for unique identification of land plots and these could be coupled unique identities for individuals to generate unique land contracts.
Proposal 33: The powers of SRFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) that are currently conferred only on banks, public financial institutions, and housing finance companies should be extended to all institutional lenders.
ARCs have additional powers such as step-in rights and the ability to change management, and the right to sell or lease the business. Given these additional powers, it is important that a number of ARCs flourish so that no single ARC has excessive power. There is really no sensible case to keep foreign
direct investment out of ARCs. The kind of risk capital as well as the kind of expertise foreign investors bring is useful in the economy, and can help provide a valuable buffer. From an economic perspective, capital that comes into the country when the banking sector is distressed and a flood of assets are sold to ARCs, is particularly valuable, and foreign investors, not domestic financial institutions, are most likely to be flush with capital at those times.
There are venture capital firms such as Bain Capital that specialize in leveraged buyouts of debt ridden sick companies and turn them around, selling them subsequently for a good profit. Asset Reconstruction Companies should follow a similar business model and there could be potential for growth here.
Proposal 34: Encourage the entry of more well-capitalized ARCs, including ones with foreign backing.
This could lead to better results since a new management model might be what is needed to turn around some these companies and NPAs.
Proposal 35: The Committee outlines a number of desirable attributes of a bankruptcy code in the Indian context, many of which are aligned with the recommendations of the Irani Committee. It suggests an expedited move to legislate the needed amendments to company law.
There is a need for a consolidated bankruptcy law in India, in line with the Chapter 11 in USA. The National Company Law Tribunal has laid certain conditions on bankruptcy proceedings for sick companies.
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