The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 is listed for discussion in Rajya Sabha today.[i] The Bill aims to expeditiously resolve cases of debt recovery by making amendments to four laws, including the (i) Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and (ii) the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Recovery of Debts Due to Banks and Financial Institutions Act, 1993 The 1993 Act created Debt Recovery Tribunals (DRTS) to adjudicated debt recovery cases. This was done to move cases out of civil courts, with the idea of reducing time taken for debt recovery, and for providing technical expertise. This was aimed at assisting banks and financial institutions in recovering outstanding debt from defaulters. Over the years, it has been observed that the DRTs do not comply with the stipulated time frame of resolving disputes within six months. This has resulted in delays in disposal, and a high pendency of cases before the DRTs. Between March 2013 and December 2015, the number of pending cases before the DRTs increased from 43,000 to 70,000. With an average disposal rate of 10,000 cases per year, it is estimated that these DRTs will take about six to seven years to clear the existing backlog of cases.[ii] Experts have also observed that the DRT officers, responsible for debt recovery, lack experience in dealing with such cases. Further, these officers are not adequately trained to adjudicate debt-related matters.[iii] The 2016 Bill proposes to increase the retirement age of Presiding Officers of DRTs, and allows for their reappointment. This will allow the existing DRT officers to serve for longer periods of time. However, such a move may have limited impact in expanding the pool of officers in the DRTs. The 2016 Bill also has a provision which allows Presiding Officers of tribunals, established under other laws, to head DRTs. Currently, there are various specialised tribunals functioning in the country, like the Securities Appellate Tribunal, the National Company Law Tribunal, and theNational Green Tribunal. It remains to be seen if the skills brought in by officers of these tribunals will mirror the specialisation required for adjudicating debt-related matters. Further, the 1993 Act provides that banks and financial institutions must file cases in those DRTs that have jurisdiction over the defendant’s area of residence or business. In addition, the Bill allows cases to be filed in DRTs having jurisdiction over the bank branch where the debt is due. The Bill also provides that certain procedures, such as presentation of claims by parties and issue of summons by DRTs, can now be undertaken in electronic form (such as filing them on the DRT website). Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 The 2002 Act allows secured creditors (lenders whose loans are backed by a security) to take possession over a collateral security if the debtor defaults in repayment. This allows creditors to sell the collateral security and recover the outstanding debt without the intervention of a court or a tribunal. This takeover of collateral security is done with the assistance of the District Magistrate (DM), having jurisdiction over the security. Experts have noted that the absence of a time-limit for the DM to dispose such applications has resulted in delays.[iv] The 2016 Bill proposes to introduce a 30-day time limit within which the DM must pass an order for the takeover of a security. Under certain circumstances, this time-limit may be extended to 60 days. The 2002 Act also regulates the establishment and functioning of Asset Reconstruction Companies (ARCs). ARCs purchase Non-Performing Assets (NPAs) from banks at a discount. This allows banks to recover partial payment for an outstanding loan account, thereby helping them maintain cash flow and liquidity. The functioning of ARCs has been explained in Figure 1. 
It has been observed that the setting up of ARCs, along with the use out-of-court systems to take possession of the collateral security, has created an environment conducive to lending.[iii] However, a few concerns related to the functioning of ARCs have been expressed over the years. These concerns include a limited number of buyers and capital entering the ARC business, and high transaction costs involved in the transfer of assets in favour of these companies due to the levy of stamp duty.[iii] In this regard, the Bill proposes to exempt the payment of stamp duty on transfer of financial assets in favour of ARCs. This benefit will not be applicable if the asset has been transferred for purposes other than securitisation or reconstruction (such as for the ARCs own use or investment). Consequently, the Bill amends the Indian Stamp Act, 1899. The Bill also provides greater powers to the Reserve Bank of India to regulate ARCs. This includes the power to carry out audits and inspections either on its own, or through specialised agencies. With the passage of the Bankruptcy Code in May 2016, a complete overhaul of the debt recovery proceedings was envisaged. The Code allows creditors to collectively take action against a defaulting debtor, and complete this process within a period of 180 days. During the process, the creditors may choose to revive a company by changing the repayment schedule of outstanding loans, or decide to sell it off for recovering their dues. While the Bankruptcy Code provides for collective action of creditors, the proposed amendments to the SARFAESI and DRT Acts seek to streamline the processes of creditors individually taking action against the defaulting debtor. The impact of these changes on debt recovery scenario in the country, and the issue of rising NPAs will only become clear in due course of time. [i] Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, http://www.prsindia.org/administrator/uploads/media/Enforcement%20of%20Security/Enforcement%20of%20Security%20Bill,%202016.pdf. [ii] Unstarred Question No. 1570, Lok Sabha, Ministry of Finance, Answered on March 4, 2016. [iii] ‘A Hundred Small Steps’, Report of the Committee on Financial Sector Reforms, Planning Commission, September 2008, http://planningcommission.nic.in/reports/genrep/rep_fr/cfsr_all.pdf. [iv] Financial Sector Legislative Reforms Commission, March 2013, http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf.
Finances of the Railways were presented along with the Union Budget on February 1, 2018 (the Railways Budget was merged with the Union Budget last year). In the current Budget Session, Lok Sabha is scheduled to discuss the allocation to the Ministry of Railways. In light of this, we discuss Railways’ finances, and issues that the transporter has been facing with regard to financing.
What are the different sources of revenue for Railways?
Indian Railways has three primary sources of revenue: (i) its own internal resources (revenue from freight and passenger traffic, leasing of railway land, etc.), (ii) budgetary support from the central government, and (iii) extra budgetary resources (such as market borrowings, institutional financing).
Railways’ internal revenue for 2018-19 is estimated at Rs 2,01,090 crore which is 7% higher than the revised estimates of 2017-18. Majority of this revenue comes from traffic (both freight and passenger), and is estimated at Rs 2,00,840 crore. In the last few years, Railways has been struggling to run its transportation business, and generate its own revenue. The growth rate of Railways’ earnings from its core business of running freight and passenger trains has been declining. This is due to a decline in the growth of both freight and passenger traffic (see Figure 1). Railways is also slowly losing traffic share to other modes of transport such as roads and airlines. The share of Railways in total freight traffic has declined from 89% in 1950-51 to 30% in 2011-12.
The Committee on Restructuring Railways (2015) had observed that raising revenue for Railways is a challenge because: (i) investment is made in projects that do not have traffic and hence do not generate revenue, (ii) the efficiency improvements do not result in increasing revenue, and (iii) delays in projects results in cost escalation, which makes it difficult to recover costs. Railways also provides passenger fares that are heavily subsidised, which results in the passenger business facing losses of around Rs 33,000 crore in a year (in 2014-15). Passenger fares are also cross-subsidised by charging higher rates for freight. The consequence is that freight rates have been increasing which has resulted in freight traffic moving towards roads.
Figure 2 shows the trends in capital outlay over the last decade. A decline in internal revenue generation has meant that Railways funds its capital expenditure through budgetary support from the central government and external borrowings. While the support from central government has mostly remained consistent, Railways’ borrowings have been increasing. Various committees have noted that an increased reliance on borrowings will further exacerbate the financial situation of Railways.
The total proposed capital outlay (or capital expenditure) for 2018-19 is Rs 1,48,528 crore which is a 24% increase from the 2017-18 revised estimates (Rs 1,20,000 crore). Majority of this capital expenditure will be financed through borrowings (55%), followed by the budgetary support from the central government (37%). Railways will fund only 8% of its capital expenditure from its own internal resources.
How can Railways raise more money?
The Committee on Restructuring Railways had suggested that Railways can raise more revenue through private participation in the following ways: (i) service and management contracts, (ii) leasing to and from the private sector, (iii) joint ventures, and (iv) private ownership. However, private participation in Railways has been muted as compared to other sectors such as roads, and airports.
One of the key reasons for the failure of private participation in Railways is that policy making, the regulatory function, and operations are all vested within the same organisation, that is, the Ministry of Railways. Railways’ monopoly also discourages private sector entry into the market. The Committee on Restructuring Railways had recommended that the three roles must be separated from each other. It had also recommended setting up an independent regulator for the sector. The regulator will monitor whether tariffs are market determined and competitive.
Where does Railways spend its money?
The total expenditure for 2018-19 is projected at Rs 1,88,100 crore, which is 4% higher than 2017-18. Staff wages and pension together comprise more than half of the Railways’ expenditure. For 2018-19, the expenditure on staff is estimated at Rs 76,452 crore. Allocation to the Pension Fund is estimated at Rs 47,600 crore. These constitute about 66% of the Railways’ expenditure in 2018-19.
Railways’ primary expenditure, which is towards the payment of salaries and pension, has been gradually increasing (with a jump of around 15% each year in 2016-17 and 2017-18 due to implementation of the Seventh Pay Commission recommendations). Further, the pension bill is expected to increase further in the years to come, as about 40% of the Railways staff was above the age of 50 years in 2016-17.
The Committee on Restructuring Railways (2015) had observed that the expenditure on staff is extremely high and unmanageable. This expense is not under the control of Railways and keeps increasing with each Pay Commission revision. It has also been observed that employee costs (including pensions) is one of the key components that reduces Railways’ ability to generate surplus, and allocate resources towards operations.
What is the allocation towards depreciation of assets?
Railways maintains a Depreciation Reserve Fund (DRF) to finance the costs of new assets replacing the old ones. In 2018-19, appropriation to the DRF is estimated at Rs 500 crore, 90% lower than 2017-18 (Rs 5,000 crore). In the last few years, appropriation to the DRF has decreased significantly from Rs 7,775 crore in 2014-15 to Rs 5,000 crore last year. Provisioning Rs 500 crore towards depreciation might be an extremely small amount considering the scale of infrastructure managed by the Indian Railways, and the requirement to replace old assets to ensure safety.
The Standing Committee on Railways (2015) had observed that appropriation to the DRF is the residual amount after appropriation to the Pension Fund, instead of the actual requirement for maintenance of assets. Under-provisioning for the DRF has also been observed as one of the reasons behind the decline in track renewals, and procurement of wagons and coaches.
Is there any provision towards safety?
Last year, the Rashtriya Rail Sanraksha Kosh was created to provide for passenger safety. It was to have a corpus of one lakh crore rupees over a period of five years (Rs 20,000 crore per year). The central government was to provide a seed amount of Rs 1,000 crore, and the remaining amount would be raised by the Railways from their own revenues or other sources.
As per the revised estimates of 2017-18, no money was allocated towards this fund. In 2018-19, Rs 5,000 crore has been allocated for it. With the Railways struggling to meet its expenditure and declining internal revenues, it is unclear how Railways will fund the remaining amount of Rs 95,000 crore for the Rail Sanraksha Kosh.
What happened to the dividend that was waived off last year?
Railways used to pay a return on the budgetary support it received from the government every year, known as dividend. The rate of this dividend was about 5% in 2015-16. From 2016-17, the requirement of paying dividend was waived off. The last dividend amount paid was Rs 8,722 crore in 2015-16.
The Standing Committee on Railways (2017) had noted that part of the benefit from dividend is being utilised to meet the shortfall in the traffic earnings of Railways. This defeats the purpose of removing the dividend liabilities since they are not being utilised in creating assets or increasing the net revenue of Railways.
