CII’s Pre-Budget Memorandum 2021-22 Explores How To Make India’s Financial Sector Future Ready

For India to move on an upward growth curve, its essential to get support from the financial sector.

India’s financial sector, especially the lending side, is a vital artery of the economy and its lively operations are a key pillar in India’s journey to a $ 5 trillion economy.

It is time to review India’s financial structure in a way that is comprehensive and can support the economic needs of India’s real sector.

Industry body Confederation of Indian Industry (CII) Pre-Budget Memorandum 2021-22 said for India to move on an upward facing growth curve, it is essential to get support from the financial sector. “Credit flows are the lubricant for the real sector of the economy. The current state of the Indian banking sector however is acting as a constraint to India’s aspiration to become a $ 5 trillion economy, ”CII says.

The Indian banking sector has different segments – public sector banks (PSBs), private sector banks – non-banking finance companies (NBFCs), and cooperative banks are facing different challenges. PSBs operate under three key areas of constraints – governance autonomy (from parliament – for strategic moves like acquisition, CEO and board appointments, responsiveness to competitive dynamics), and HR autonomy, adds CII.

The CII memo says the Union government should accelerate its financial reforms further by:

  • Create multiple bad banks by allowing alternative investment funds (AIFs) to buy bad loans. As of now, non-performing assets (NPAs) have been largely sold to asset reconstruction companies (ARCs) only and mostly not for cash consideration. That means that the sale price was not a “true sale” since ARCs could pay through Security receipts (SRs). SR is an instrument where the payment is made only upon recovery of some money – a kind of participatory note.

Based on recent Reserve Bank of India (RBI) data on outstanding SRs, industry estimates the net recovery to be at only around 10-12 per cent. The outstanding SRs is Rs 1.46 lakh crore.


This represents the “non-cash” consideration received by banks against loan sales. “The urgency is to increase avenues for ‘cash’ realization against sale of loans and to increase avenues for capital to compete for such loans to maximize realization for banks. The best way to achieve this is to open up the buy side and enable a clear path for capital to flow for purchase of NPAs. AIFs and foreign portfolio investors (FPIs) may be permitted to purchase NPAs and compete with ARCs, ”the CII memo states.

RBI has already contemplated this in a consultative paper wherein, it has been proposed that regulated entities may be allowed to purchase NPAs.


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