Wednesday, November 21, 2018

Credit stress in large Indian firms

by Ajay Shah and Pramod Sinha.

We in India are used to thinking about banks and NPAs. We infer the state of difficulty of the banks, and indirectly of their borrowers, by using data from banks. There are many advantages in looking directly at the state of credit stress in the large non-financial firms, and identifying the firms where there is high credit stress:

  1. Do not rely on bank information. This evidence is not filtered through the difficulties of banking regulation. Whether a bank classified Kingfisher Airlines as an NPA or not, we can see credit stress in the financial statements of Kingfisher Airlines.
  2. Look beyond banks. Banks are not the only financial lenders to the non-financial firms. As an example, bank-centric thinking is not useful in understanding runs on mutual funds. When there is stress in a borrower, this impacts not just on banks but on all lenders. Pulling together information about stressed borrowers helps us see the difficulties of lenders, on a financial system scale, and not just in banks.
  3. Micro-prudential considerations. The stressed firms face likely defaults. The debt of such firms is likely to be worth less than book value. Under sound micro-prudential regulation, banks and other lenders should mark down these assets, even if no default has taken place. The extent of stress, as seen here, gives us insights into the fragility of banks and other lenders.
  4. The bankruptcy process, the distressed debt industry. There is a new world opening up in India, of distressed firm transactions and the bankruptcy process. We will see the empirical contours of this industry, and the bankruptcy process, by examining the state of credit stress in the non-financial firms.
  5. A drag on growth. A firm that is in a state of credit stress is likely to face difficulties meeting payments to creditors. It might often be liquidity constrained, and may struggle to obtain cash to pay its suppliers. The mind space of the leadership of such a firm is likely to be absorbed in the struggle for survival. Such firms are unlikely to fare well on growth through increasing the resources utilised or through increased productivity. To understand what is coming in Indian macroeconomics, we should look at the non-financial firms and their balance sheet difficulties.

Identifying stressed firms

The interest cover ratio is defined as PBIT/interest. If a firm has to make interest payments of 100, and if its profit before interest and taxes is 150, then its interest cover ratio ("ICR") is 1.5. Such a firm has the 100 required to pay interest in the year, but there may be a task in terms of juggling the dates on which interest has to be paid versus the dates on which the business produces cash. And, such a firm is left with just 50 after paying interest, which can be used for debt repayment and the regular capital expenditures required for the upkeep of the business.

A good thumb rule which identifies a firm in a state of stress at time $t$ is: The firm has ICR$ < 1.5$ in year $t$ and in year $t-1$. This avoids the false positive of a firm which only hits ICR$<1.5$ for one year.

A `stressed firm', by this definition, is not necessarily one that has defaulted (and is thus eligible for the bankruptcy code), and it is not necessarily one that is classified as a non-performing asset by RBI's rules of recognition. We would, however, suggest that a firm with two consecutive years at an ICR of below 1.5 is under stress, has an enlarged risk of default, and has a management team that is absorbed in dealing with this stress.


We study all the non-financial firms in the CMIE database. At each year, we isolate the firms which are observed for two consecutive years. Some additional sanity checks are applied. Through this, we are able to construct two sets at each point in time: The set of all firms observed and the subset of this, which is the stressed firms.

Here are some counts of the firms in the two sets.

2014-15 9,289 3,674
2015-16 9,208 3,702
2016-17 6,687 2,573

In the table above, the total number of firms (9,289) for 2014-15 is the number
of non-financial firms that are observed, and pass some sanity checks, in both 2013-14 and 2014-15. Of these, 3,674 were stressed. The last year that we utilise here -- 2016-17 -- has fewer firms when compared with the years prior to
it, where information for a larger number of firms has trickled into the CMIE database. In this last year, we see 2,573 non-financial firms in the database, where the ICR was worse than 1.5 in both 2015-16 and 2016-17.

Conditions in 2016-17

Parameter Value (Rs. Tln)
Balance sheet size
   Stressed firms 29.79
   All firms 77.24
Bank borrowing
   Stressed firms 8.87
   All firms 14.94
Total borrowing
   Stressed firms 15.58
   All firms 27.59

This shows that the sum of the balance sheet size for all the 6,687 firms for 2016-17 was Rs.77.24 trillion. Of this, Rs.29.79 trillion was in the 2,573 stressed firms.

Totally, borrowing of Rs.27.59 trillion was visible. This is small when compared with the total assets of these firms of Rs.77.24 trillion. Of this borrowing, Rs.15.58 trillion was in the stressed firms.

Finally, we are able to see Rs.14.94 trillion of borrowing from banks, in this sample of 6,687 firms, in 2016-17. Of this, Rs.8.87 trillion was in the stressed firms.

How has credit stress evolved over time?

We are able to do these calculations for all years from 1998-99 onwards. We will express the time-series evidence using confusingly similar graphs, all of which produce important stylised facts for our understanding of the economy.

The share of bank debt to stressed firms, in the total bank debt seen in the sample firms

The health of banks is related to the health of their borrowers. Hence, in the graph above, we compare the sum of bank credit to stressed firms (in our sample) against the sum of bank credit to all firms (in our sample).

The business cycle is clearly visible here. In the last tough downturn, 2000-2003, this ratio was at about 50%. That is, about half of the bank borrowing seen in the CMIE database was in stressed firms.

This ratio dropped all the way to about 15% in 2007. It climbed steadily thereafter and is now at about 60%. There is a tiny gain in 2016-17 when compared with the previous year.

In the last recession, this measure improved through the recovery of the economy. Firm exit took place through the sluggish traditional ways. When the bankruptcy reform resolves or liquidates a large volume of stressed firms, this will deliver improvements in this measure. To the extent that the bankruptcy reform works, we may expect the next recovery to proceed faster than the last one, where it took five years of a powerful expansion to get from about 50% to about 15%.

We apply this same thinking to total borrowing -- instead of just bank borrowing:

The share of total borrowing by stressed firms, in the sum of borrowing seen by all sample firms

The last business cycle downturn got to values of above 50%, there was a great decline to about 20%, and then it has risen to about 55%, with a slight improvement in 2016-17.


There is considerable balance sheet stress. In the latest year, the aggregate balance sheet size of the stressed firms -- observed in the CMIE database -- was Rs.30 trillion. The stressed firms had Rs.15.6 trillion in borrowings of which Rs.9 trillion was from banks. This has implications in other parts of finance, beyond banking.

Bank debt in stressed firms is about 60% of total bank debt seen in the sample. Similarly, the borrowing by stressed firms is about 55% of all borrowing in the sample. Under sound micro-prudential regulation, asset-based lenders would mark down these assets based on the price at which the loan/bond could be sold on the market.

In the conventional wisdom, there is about Rs.10 trillion of bad debt on the balance sheet of banks. Our analysis shows that in the 6,687 large non-financial firms, where Rs.15 trillion of bank debt is located, we see 2,573 stressed firms with Rs.9 trillion of bank debt. The 2,573 stressed firms that we see in this sample, alone, account for 11.4% of the overall bank debt ("non-food credit") in the economy.

The stressed firms are about 40% of the overall corporate balance sheet. These firms are likely to fare poorly in investing or in productivity growth, and are thus a drag upon overall economic growth.

It is likely that many of these stressed firms will be sold, or go into the bankruptcy process. There is a substantial task ahead, in terms of resolving these firms and paying for the losses experienced. These 2,573 firms are the happy hunting ground for this new industry. This process of resolution is central to India's economic recovery.

There is much value in understanding the balance sheet stress in the economy using such methods. We obtain insights into difficulties of the financial system going beyond a bank-centric view, we get a view of the new distressed debt industry, and we get insights into the drag on GDP growth that the stressed firms represent.

The authors are researchers at NIPFP.

Tuesday, November 13, 2018

There be dragons: Off-balance-sheet liabilities of the Indian State

by Ila Patnaik and Ajay Shah.

Conventional fiscal stability analysis looks at the stock of debt and wonders whether a country can pay off this debt, under reasonable scenarios for future interest rates and fiscal surpluses. In many countries, though, the fiscal sustainability story has turned on promises made by a government which were not explicitly counted in the debt. There are obvious liabilities that are kept off the books - such as debt in public sector companies or state electricity boards. In this article we look deeper, at less obvious ways in which off-balance-sheet liabilities have arisen, and the checks and balances that can contain them.

Off balance sheet liabilities of the government

Off balance sheet items come in two kinds.

  1. A promise that looks like the cashflows on a bond. Example: A pension promise to a person is no different from a series of coupons that are paid out every year. Promising a pension is exactly like issuing that comparable bond.
  2. A promise that looks like an option payoff. Example: If a government is in hock to pay the lenders of a firm when it goes bankrupt, it is much like being the seller of an option. When governments write guarantees, this changes the risk profile of the exchequer and generates possibilities of large payouts when those options mature in the money.
    It should be noted that organisations backed by statute are not automatically backed by a government guarantee. As an example, in the UTI crisis of 2001, the government had no legal obligation to make good the losses of investors, but a political decision was made to use fiscal resources to pay half the loss. There is a mixture of financial risk ("Will X get into trouble?") and political risk ("Will the government backstop X?").

A correct reckoning of the liabilities of a government should add in these off-balance-sheet liabilities of both kinds. The FRBM Act brought control on one kind of off-balance-sheet liability of the Indian State: explicit guarantees given by the government. But there is more to the problem of off-balance-sheet liabilities than explicit guarantees.

Differences in cost versus differences in transparency

In the field of pensions, an interesting distinction is made between an unfunded defined benefit program vs. a funded defined benefit program that has assets invested in government bonds. In the conventional wisdom, a funded DB program is always superior to a pay-as-you-go unfunded program.

However, these two approaches are exactly the same in terms of the cashflows: both involve a highly predictable set of claims on the exchequer at future dates. To promise a pension is to implicitly issue a bond. This equivalence, between the cashflows of a bond and the cashflows of a pension, has an interesting implication. Consider a funded DB public pension program that invests in government bonds. The two streams of cashflows cancel out.

This approach to funding (holding government bonds) does not make things cheaper: it is only superior in that it is transparent and connects into the fiscal planning process. Cost savings only come about when a funded DB program invests in higher return assets, such as equities, through which the claims upon the exchequer at future dates are reduced on expectation.

What are the important off-balance-sheet liabilities of the Indian State?

Some important components of the off-balance-sheet liabilities are:

  • Promises made for defined benefit pensions of civil servants, in particular the new `one rank one pension' (i.e. wage indexed) pensions for uniformed folk, and the underfunded `Employee Pension Scheme' (EPS) that is run by the EPFO. For the civil servants recruited after 1/1/2004, there is no such problem, as these new recruits are in the New Pension System.
  • Promises made in a variety of health-related entitlement programs (Patnaik et. al., 2018).
  • The temptation to make good the promises made by public sector financial firms, that experience distress in the future, even when there is no explicit guarantee. Of these, LIC has a balance sheet of Rs.28 trillion.
  • The temptation to make good the promises made by private financial firms that experience distress in the future, even when there is no explicit guarantee. As an example, will the failure of IL&FS -- a private financial firm -- induce a direct or indirect fiscal impact upon the exchequer? So far, the government has not put money on the table, but could this change?
  • The use of fiscal resources in responding to a full blown financial crisis, that may occur at a future date.
  • The Parliament has enacted many laws, which could potentially evolve into large inflexible expenditures. These include `Right to education', `Right to food' and NREGS. On a similar note, the promises which are being made under `minimum support price' (MSP) could turn into large expenditures if the future brings together a certain combination of political pressures, jurisprudence and development of State capacity. Until repeal, these laws are a genotype that could, under the right combination of events at future dates, get expressed in a way that involves major fiscal risk.

These liabilities add up to large sums of money, of the same order of magnitude as the overt stock of public debt. Hence, off-balance-sheet liabilities should become more prominent in the Indian fiscal discourse.

How do the incentives of politicians and officials change?

At present, there is no check-and-balance influencing these opaque promises and risks. Each party in power looks to enter into greater off-balance-sheet obligations so as to get re-elected. How might this change?

The key thing that shapes these incentives is financial repression. At present, government debt is mostly sent into involuntary lenders. When the fiscal system graduates from financial repression to voluntary lenders, off-balance sheet liabilities would matter. There are numerous gains from removing financial repression: voluntary borrowing is more efficient than forced borrowing, the magnitude of resources available in a crisis would become greater, etc. But this requires a government that faces a skeptical bond buyer who demands a risk premium based on the extent to which the Indian State may engineer inflation or default.

In India today, there are many loose ends, which periodically induce fiscal surprises. This creates an adverse risk profile of Indian government bonds, and would drive up the required interest rate for borrowing when faced with voluntary buyers of bonds. In such a world of market discipline, when a government dips into LIC's resources, this would induce a higher cost of borrowing.

In India today, most of the attention in fiscal reforms lies upon tax policy reforms, such as the GST and the Direct Tax Code, and there is some interest in FRBM. There is much more to a mature fiscal system, including the issues of tax administration, debt management, the bond-currency-derivatives nexus, off-balance-sheet liabilities, accrual-based accounting, and the budget process. We need to broaden our research and policy work to address this full range of problems.

Tracking and understanding off-balance-sheet liabilities, communicating them to lenders, and communicating these concerns back into the budget process, is part of the work program of the future Public Debt Management Agency (PDMA) (Pandey and Patnaik, 2017). A Fiscal Council will help. Accrual based accounting will help.

Once we start paying attention to off-balance-sheet obligations, this creates fresh impetus for economic reform in many areas. As an example, if a monsoon failure induces a farm loan waiver paid for by the government, this is like a monsoon derivative that has (maybe) been written by the government. When reforms of personal insolvency and reforms of agriculture remove this possibility, the risk profile of the Indian exchequer will improve, and the cost of borrowing will go down.

Off-balance-sheet liabilities and financial reform

There is a close connection between public finance and finance, centering around the government bond market and the PDMA. For public finance, PDMA and the government bond market are the source of debt. For finance, the PDMA is the biggest investment banker of the country and the government bond market is the tool for low risk transfers of resources across time. What is less widely noticed is the intimate connection, between public finance and finance, through the question of off-balance-sheet liabilities.

How will off-balance-sheet liabilities change when micro-prudential regulation improves and the resolution corporation is setup? Financial firms will face distress less often, we will discern that distress early, and we will have an institutional mechanism to put the distressed firm down. Conversely, under present conditions, we get surprised by the difficulties in an IL&FS or in a UTI. These crises lead to a political question being thrust upon the leadership: Will you make liability-holders happy by using taxpayer money? We should, of course, have a mature political system which is able to turn down such requests most of the time, but we should have a mature financial regulatory system so that these situations do not arise in the first place.

Governments worldwide have faced claims on fiscal resources when dealing with full blown financial crises. The probability of occurrence of such crises, and the severity of such crises, is shaped by the institutional capacity in systemic risk regulation. The FSLRC apparatus for systemic risk regulation -- the Financial Stability and Development Council (FSDC) and its information system, the Financial Data Management Centre (FDMC) -- will reduce fiscal risk and thus the cost of government borrowing. As an example of the work program which should take place through FSDC/FDMC: At present, we have the possibility of runs on mutual funds (Sane et. al., 2018), which can lead to a full blown financial crisis, which requires policy thinking and reforms on a financial system scale.

Our objective in financial economic policy should be: to be as sparing as possible in ever asking for resources from public finance policy. For a sound fiscal system, we require financial sector reform. This will have a beneficial impact upon contingent off-balance-sheet liabilities and thus the cost of borrowing.

The need for a research community and a research literature

A remarkable feature of the existing Indian policy process is that no fiscal estimation was done in the policy process that led up to the announcements  about one rank one pension, or the various health insurance programs.

Even if policy makers had tried to reach into the research community to obtain such estimates, the state of data and knowledge is weak, and it is difficult for policy makers to obtain policy support from researchers. Some early work on the civil servant's defined benefit pension (Bhardwaj and Dave, 2005), one rank one pension (Sane and Shah, 2015) and banking (Shah and Thomas, 2000) is available. Much more needs to be done in this important field.

In an ideal world, record level data would be available from the government which would permit estimation of the value of the implicit debt or the implicit derivatives that the government has issued. The state of information systems and transparency of government is often a bottleneck, and creative research strategies have to be employed. As an example, Bhardwaj and Dave, 2005, utilise data from a national scale household survey to identify present and future beneficiaries of the traditional DB civil servants pension, and extrapolate the sample estimates to an estimate of the implicit pension debt associated with the traditional civil servant's DB pension. Similarly, Shah and Thomas, 2000, exploit information in stock prices to estimate the equity capital gap in banks, which helps overcome the opacity of banks and banking regulation.

A research community is required, which will build a research literature in estimating these expenditures based on exploiting diverse datasets. There will, of course, be multiple different estimates, as different researchers search for useful approximations through different assumptions and modelling strategies. A coherent picture will emerge from these debates. The PDMA, and buyers of government bonds, will be important users of this research community.

Off balance sheet liabilities and GDP growth volatility: A conjecture

There is a big gap between short spurts of GDP growth and sustained GDP growth. A mature market economy is a turtle, it plods along for a century, obtaining a low rate of growth on average, and harnessing the power of compounding. Poor countries fail to get sustained growth. The striking fact in cross-country comparisons is how volatile the GDP growth of poor countries is.

What might be going on? An analogy from a different field is useful. A well known problem in financial portfolio management is the returns that can be obtained, in the short term, by selling out-of-the-money options. For some time, the option seller seems to make a lot of money. But in time, some of those options get exercised and the portfolio gets into a lot of trouble. In similar fashion, for some time, a government that takes on option-like off-balance-sheet liabilities can gain votes and possibly accelerate economic activity, at the cost of sustainability.

Perhaps one element of the high GDP growth volatility of poor countries runs as follows. Mature fiscal systems create checks-and-balances which reduce the extent to which debt or off-balance-sheet liabilities can surge. Perhaps less developed countries have weak institutions, and then the political leadership sees a different optimisation. Short bursts of GDP growth can then be achieved in many bad ways, such as a surge in debt, piling up off-balance-sheet liabilities, etc. But this is not sustained growth: We get a spurt of high growth, and then things go wrong. This yields one more element of the translation of bad institutions into high GDP growth volatility.


Bhardwaj, Gautam and Surendra A. Dave, 2005. Towards estimating India's implicit pension debt, Working paper.

Pandey, Radhika and Ila Patnaik, 2017. Legislative strategy for setting up an independent debt management agency. NUJS Law Review, 10(3).

Patnaik, Ila, Shubho Roy and Ajay Shah, 2018. The rise of government-funded health insurance in India. NIPFP Working paper.

Sane, Renuka and Ajay Shah, 2015. What is the cost of one-rank-one-pension? The Leap Blog.

Sane, Renuka, Ajay Shah, Bhargavi Zaveri, 2018. Runs on mutual funds, The Leap Blog.

Shah, Ajay and Susan Thomas, 2000. Systemic fragility in Indian banking: Harnessing information from the equity market. IGIDR Working Paper.

The authors are researchers at the NIPFP in New Delhi. We are grateful to Shubho Roy, M. Govinda Rao and Arbind Modi for useful discussions.

Tuesday, November 06, 2018

RBI's alternative route for foreign debt inflows

by Radhika Pandey, Rajeswari Sengupta and Bhargavi Zaveri.


On 13th October, 2018, the Reserve Bank of India released a discussion paper that proposes an alternative route for foreign investors to invest in onshore debt in India. It is a likely response to the large scale capital outflows from the Indian debt market and the continuing depreciation of the Rupee. The proposal seems to have a two-fold objective:

  • To attract foreign investment in onshore Rupee-denominated debt, and
  • To keep the foreign investment in India for the medium to long term.

While the proposal may have been motivated by concerns around large debt outflows, the timing of its issuance is important for another reason. The short term debt market in India has been facing liquidity problems in the wake of a series of defaults by the non-banking finance company, Infrastructure Leasing & Financial Services Limited (IL&FS). The presence of FPIs in the market is an additional source of liquidity. At such a time, it is important to carefully consider measures for liberalising FPI flows in the short term onshore debt market.

The RBI's proposal to conditionally liberalise FPI flows into the Indian debt market raises several questions, which we elaborate upon in this article.

Uncertainty in regulatory framework governing foreign debt inflows

The regulatory framework governing foreign inflows in the onshore debt market has undergone several changes in the recent past. Prior to February 2015, FPIs were subject to an aggregate equivalent of USD 51 billion cap when investing in the onshore debt market. Sub-limits were allocated to debt instruments of various tenure (such as commercial paper, other short-term bonds and longer-tenure instruments).

In February 2015, RBI prohibited FPIs from investing in onshore debt with less than 3 years maturity. Dutt, Pattanaik and Zaveri (2016) conducted an impact analysis of the debt-portfolios of FPIs in the post-intervention period. Their study did not find any evidence of the FPIs increasing their participation in long term bond holdings after the intervention, or any change in the average period for which FPIs hold the debt.

In June 2018, RBI relaxed this requirement for FPI investment in government securities (G-secs). For corporate bonds, RBI diluted the requirements by allowing FPI investment with a maturity period of less than 3 years but more than 1 year.

In the October 2018 discussion paper, RBI has proposed to create a new route of investment called the Voluntary Retention Route ("VRR") to attract long term FPI flows into onshore Rupee denominated debt. The new proposal dispenses with the June 2018 prohibition on investing in corporate bonds of less than 1 year maturity. In doing so, the new proposal seems to suggest that the existing regulatory prescriptions governing FPI investment in onshore debt are onerous. Easing them would incentivise foreign investors to retain investments in India.

Foreign investors look at financial returns when deciding to invest in a country. They also look at the extent of clarity and certainty in the regulatory and macroprudential framework of the host country. The frequent changes in the regulatory framework governing FPI investment in debt over the last 3 years create uncertainty.

The new proposal

The VRR framework proposed by the RBI imposes the following restrictions on FPI investment:

  1. Cap on investment: The total amount to be invested will be decided by the RBI from time to time based on macroprudential considerations.

  2. Cap per FPI: The limits decided by the RBI under item 1 will be allocated to each FPI on the basis of an auction. The amount that each FPI bids in each auction is referred to as the "Committed Portfolio Size, or CPS".

  3. Lock-in or retention period: For all investments made under this route, there will be a minimum retention period of 3 years or any other lock-in period as decided by the RBI. This may vary each time fresh investment limits are auctioned. In every auction, the bidding FPI must propose a "retention period" and the minimum amount it proposes to invest. The retention period must not be less than the retention period prescribed by RBI for that specific auction. Bids will be accepted in descending order of the retention period proposed in a bid - that is, the bid with the least retention period will get the last preference. During the retention period, the FPI must retain atleast 67% of its investment, on an end-of-day basis.

  4. Minimum investment: Each FPI will be required to invest 67% of the CPS within one month of the announcement of the auction result.

The objective of the VRR scheme seems to be to provide operational flexibility to foreign investors in terms of instrument choices. The scheme also provides exemptions from regulatory prescriptions if the investors commit to retain a part of their investments in debt securities in India.

Cost of borrowing

The proposal may disincentivise FPIs from investing in India and raise the cost of borrowing for Indian firms that seek to access the debt market.

A foreign investor will prefer an investment option which gives him liquidity i.e. the ability to cash out when he needs to. If, on the other hand, the investment option is such that the investor will be locked in even when he has compelling reasons to exit (such as a change in his India-outlook or his own need for liquidity), then he will have less incentive to consider such an illiquid investment. In order to do so, he will demand an 'illiquidity premium'. The required rate of return in an illiquid asset is higher.

FPIs form a significantly large percentage of institutional investors in corporate bonds. The demand for a liquidity premium will raise the overall cost of borrowing in an already illiquid fixed income market. This would be equally applicable to G-secs.

Economic rationale

The economic rationale for imposing restrictions on foreign debt flows into local currency denominated instruments is not clear. It is possible that this new route has been proposed to arrest the sharp depreciation of the Rupee that has accompanied the capital outflows from Indian debt market in recent months. However, Pandey, Pasricha, Patnaik and Shah (2016) show that capital flow measures on debt used previously in India have not had a significant impact on exchange rate.

The Report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets (also known as the Sahoo Committee Report on External Commercial Borrowings) explains that systemic risk is limited to situations where the currency risk is borne by the resident and remains unhedged. This risk arises due to currency mismatches at the time of repayment. This is not the kind of risk associated with foreign investment in Rupee debt.

The discussion paper does not provide the rationale for the specific conditions imposed on the investments made in the VRR route. For instance, the requirement that 67% of the committed investment amount must be locked-in during the retention period, may come across as arbitrary. There is no clarification as to why this percentage, and not any other, has been specified, or why a 3-year lock-in period has been chosen. The condition that the FPI may choose to exit during the lock-in period by selling only to another FPI (and not to any domestic buyer) has also not been explained either.

Utility of the scheme

The utility of the proposed VRR scheme is not clear for the following reasons:

  1. The proposal states that "investments through the Route will be free of the macro-prudential and other regulatory prescriptions applicable to FPI investments in debt markets". It is not clear what macroprudential prescriptions the investments in the VRR route will be exempt from. In some cases, the exemptions from the regulatory prescriptions may be redundant.

    For example, the existing minimum maturity restriction (i.e. the condition that an FPI must invest in securities having a minimum maturity period of atleast one year) is relaxed for investments under the VRR route. This relaxation may not be meaningful because under the VRR scheme, the foreign capital will, in any case, be locked in for the period mandated for that specific auction. There could be a scenario where an FPI uses this route to invest in instruments with a maturity period of less than one year. Since 67% of its CPS is locked in, it will be compelled to reinvest a significant part of its committed portfolio in short-term instruments. This may dilute the intent of the proposed VRR scheme.

  2. The limits for investment in G-secs usually get exhausted as can be seen from older data on debt utilisation status for Government and corporate debt. However, the latest debt utilisation data by NSDL shows that only 68% of the existing limit of corporate debt investment is utilised by foreign investors. In the absence of any evidence of a surge in demand for Rupee denominated debt among FPIs that the existing framework is unable to meet, the usefulness of an alternative and arguably more complex route for foreign debt investment is debatable.

    There is also no evidence of a growth in demand for longer-term debt among FPIs. On the contrary, there is evidence that prior to the restrictions introduced from 2015 onwards, there was significant FPI interest in the debt market with a maturity profile of less than three years. Pandey and Zaveri (2016) argue that prior to February 2015 when FPI investment in short-term debt was allowed, the utilisation by FPIs of the debt limits for commercial papers (CP) was about 95 per cent, while the utilisation of the debt limits for corporate bonds was about 69 per cent. The demand for commercial papers reflects the interest of FPIs in short-term Rupee-denominated debt.

  3. Bidding for the general limits as specified by the RBI for corporate bonds and G-secs, is a relatively simpler process as they do not have the additional complexity of indicating a retention period.

Costs of monitoring and enforcement

There are potential operational issues in the VRR proposal that can hinder monitoring and enforcement of the caps and limits stipulated under it.

For example, the proposal states that the FPIs eligible and opting for the VRR scheme will be exempt from the existing restrictions such as the restrictions on investment in short-term debt. Given that the minimum retention period will be three years, it is not clear how this exemption will be implemented in practice. It is also unclear how the retention of 67% of CPS during the lock-in period will be enforced and monitored. India has already had experiences in the recent past where monitoring lapses have resulted in reversal of trades on exchanges, thereby eroding the sanctity of exchange-traded contracts (see here).

Rule of law

The VRR proposal is ambiguous on important aspects that potentially feed into the decision making process of a foreign investor. A foreign fund seeking to invest in an emerging economy looks at the contours of the regulatory framework that will govern its entry, exit and its investment during the holding period. Clarity of the law, certainty and a rule-based (as opposed to a discretion-driven) system are critical elements of rule of law that would matter to the foreign fund. The VRR proposal on the contrary, leaves critical terms and conditions to the discretion of the RBI.

For example, the proposal does not offer clarity about whether this is a one-time route or a new permanent feature of the regulatory framework governing foreign debt inflows in India. The quantum of limits and the intervals at which the limits will be auctioned are not clear. The proposal states that the lock-in period is three years, or as decided by RBI for each auction. In other words, critical aspects of the framework, such as the aggregate limits, the per-auction limit, the intervals with which the auctions will be conducted and the lock-in period for each auction, have been left to the discretion of the RBI.

The proposal seems to implicitly suggest that once the terms and conditions of a specific auction are announced, FPIs will plan their affairs to make themselves eligible for such auction. This approach may not be consistent with the manner in which foreign funds decide to invest in an economy. It is possible that dedicated funds do not have the flexibility to modify their investment horizon at the time of the auction to meet RBI's requirements.

Structural reforms are the way forward

A stable foreign exchange regulatory framework based on sound economic principles, will help the country attract more and longer-duration foreign investment inflows. Investors are willing to make long-term bets on stable economies where they are assured of clarity, certainty and the rule of law. Reaction by the authorities to sudden capital outflows and currency volatility may complicate an already fragmented landscape.

The proposal of the VRR route of investment seems symptomatic of the central planning approach that has long pervaded the regulatory policy governing capital flows into and from India. Despite being described as `voluntary', the proposal leaves all decisions to the discretion of the regulator.

In the last decade, India had taken some decisive steps towards structurally reforming its capital controls framework. For example, a big milestone was the shift from absolute quantitative caps to phased percentage-based relaxation of limits for FPI participation in G-secs (see here). Such a phased approach gives clarity to FPIs on the future capital account opennness of the onshore debt market, and allows them to plan their affairs with greater certainty. Similarly, considerable work was done at the Ministry of Finance in thinking about and recommending structural reforms to the framework governing capital controls (see here and here).

Subsequently, several steps taken by the policy makers to respond to immediate circumstances as highlighted at the start of this article, have further complicated an already prescriptive and fragmented legal framework for foreign participation in Indian debt. The latest proposal of the VRR route of investment may have a similar regressive effect.

The strategy towards foreign investor participation in debt securities needs to be fundamentally modified to overcome home bias. In the literature on international finance, greater capital account openness aids in overcoming home bias. Micro-management of the capital account framework deters foreign investors from engaging long term with the host country. Country experiences suggest that the impact of capital flow measures is ambiguous and at best temporary (see here and here). The need of the hour is to resume the path of deeper structural reforms and abandon quick-fix proposals.


Dutt, Anurag, Pattanaik, Arpita and Bhargavi Zaveri (2016), Measuring outputs v. outcomes: Did the restriction on foreign investment in Rupee-debt work?, The Leap Blog, 6 January 2016.

Pandey, Radhika, Pasricha, Gurnain, Patnaik, Ila and Ajay Shah (2016), Motivations for capital controls and their effectiveness, NIPFP Working Paper 168, April 2016.

Pandey, Radhika and Bhargavi Zaveri (2016), Time to inflate economy's spare tyre, Business Standard, 16 April 2016.

Patnaik, Ila, Malik, Sarat, Pandey, Radhika and Prateek (2013), Foreign investment in the Indian Government bond market, SEBI DRG Study No. 1.


Radhika Pandey is researcher at National Institute of Public Finance and Policy, New Delhi. Rajeswari Sengupta and Bhargavi Zaveri are researchers at Indira Gandhi Institute of Development Research, Mumbai.

Thursday, November 01, 2018

Rethinking urban land records: A case study of Mumbai

by Gausia Shaikh and Diya Uday.


A well functioning market is identified by the ease of doing business. This connotes both the ease in conducting transactions as well as low transaction costs. Ease of doing business in any market is inhibited by the lack of adequate information about the traded good. Land markets are no different.

In fact, they pose unique challenges that contribute to information asymmetry. Firstly, land is not a homogeneous product. Each parcel is unique with a particular set of locational and physical attributes (Catherine Farvacque, 1992). In addition to this, each land parcel also carries with it unique rights and obligations of which a typical buyer has little knowledge. Secondly, in India, land is a State subject under the Constitution. From a governance perspective, it means that the legal and organisational framework pertaining to land is determined by each State. For instance, land records in Maharashtra are maintained under the Maharashtra Land Revenue Code, 1966 while the equivalent legislation in Rajasthan is the Rajasthan Land Revenue Act, 1956. Therefore, the range of information on land parcels maintained by each State is not necessarily uniform.

A purchaser is therefore compelled to bear high transaction costs both in terms of money and time to obtain information about the land parcel. This is done by conducting a due diligence of the title to the land parcel. It involves the painstaking process of first obtaining all relevant records pertaining to a parcel of land from various government departments and then reviewing the information to ascertain the rights and obligations that flow from it. Often these records are missing crucial information that will affect a purchaser's buy decision. Even when information is available, the insufficiency of information related to a land parcel in a consolidated manner is a cause for concern. Buyers therefore tend to rely on information contained in contracts pertaining to the land as a source of information. Further, purchasers also feel the need to publish a notification of their intent to buy the land parcel in local newspapers, for good measure.

In this article, we first set out the various types of cadastres. We then highlight the policy of countries to move away from maintaining fiscal cadastres. We analyse the position in India and highlight the need to move towards multi-purpose cadastres. We support this with a case study on urban cadastres in Mumbai.

The shift away from fiscal cadastres

The contents of cadastres are motivated by the purpose for which they are created. Globally, there are three types of cadastres:

  • Fiscal: These are designed for property tax purposes and contain information like the identification of the land owner(s), value of the land and description of the land parcel.
  • Legal or juridical: These are designed to record ownership, legal interests in land and conveyancing matters.
  • Multi-purpose: Apart from the information mentioned in the fiscal and legal cadastres, these include a wide range of spatial and non-spatial information that support land registration, land markets, socio-economic activities and land use management (Mukarage, 2016).

Historically, in countries governed by feudal agrarian systems such as India, political, economic and social success was largely judged by the extent of land and the effectiveness of revenue collection. Land taxes were an important source of revenue of the State (Powell, 1892). Therefore, the earliest forms of land records or cadastres were fiscal records.

With increased complexity of the land market, countries such as Switzerland have tended to shift from fiscal to multi-purpose cadastres. In fact a cadastre itself is now defined as "A parcel based, and up-to-date land information system containing a record of interests in land (e.g. rights, restrictions and responsibilities). It usually includes a geometric description of land parcels linked to other records describing the nature of the interests, the ownership or control of those interests, and often the value of the parcel and its improvements." (International Federation of Surveyors (FIG)). Simply, this means a multi-purpose cadastre.

In India, land record reform has been central to policy discourse. Centrally Sponsored Schemes such as the Computerisation of Land Records (CLR) & the Strengthening of Revenue Administration and Updating of Land Records (SRA&ULR) were issued as an attempt at curing information asymmetry as a means to maintaining better land records. In 2008, these schemes were modified into the Digital India Land Record Modernisation Programme (DI-LRMP) the three major components of which are (i) computerisation of land record (ii) survey/re-survey and (iii) computerisation of registration.

While these initiatives are steps towards ensuring the accuracy of the information contained in existing records and ease of access to the records, there has been a lack of focus on the adequacy of the information captured in existing records. This could be attributed to the fact that even today, the primary purpose of recording information about land parcels is land revenue collection. In the following section we make a case for moving towards a multi-purpose cadastres. We do this by analysing existing urban records in Mumbai.

A case study of urban cadastres in Mumbai

The cadastral system in Maharashtra consists of two major elements: a Cadastral Map (CM) and a Record of Rights (ROR) linked to each land parcel. There are two types of RORs in Maharashtra: the 7/12 extract, which is used in peri-urban and rural areas and a property rights card (PRC), which is used in urban areas.

For revenue purposes, urban areas in Mumbai are divided into two regions: Mumbai City and Mumbai Suburban regions. Each of these regions consists of multiple divisions. All land parcels in these divisions are identified by survey numbers. Information about the land parcel represented by each survey number is recorded in an urban cadastre or PRC. We conducted a case study of these urban cadastres in Mumbai. We do so with two main objectives. First, to verify if the existing cadastres are in line with the legal framework governing such cadastres. Second, to analyse whether the information being recorded is sufficient to enable a sound buy-sell decision.

Methodology - We first randomly picked five area divisions from each Mumbai City and Mumbai Suburban (sample divisions). This was done from the drop down list of divisions available on the website of the Mumbai City Collectorate (MCC) and the website of the Mumbai Suburban District, respectively. The five divisions we selected from Mumbai City were (i) Colaba, (ii) Byculla, (iii) Girgaon and (iv) Mazgoan (v) Sion. The five divisions selected from Mumbai Suburban were (i) Mulund, (ii) Kurla, (iii) Bandra, (iv) Andheri and (v) Malad.We then selected one of our sample divisions from the drop down list on each of these websites. After this, we entered a random survey number to generate a PRC for a parcel of land. This was repeated thrice for each sample division, in both Mumbai City and Mumbai Suburban in order to access PRCs for three separate land parcels within each sample division. Our total number of observations were therefore 30 PRCs (15 for Mumbai City and 15 for Mumbai Suburban). Our findings are set out below.

Findings - In each case above, we examined the heads of information to be entered in the PRC under the following themes:

  1. Information to be maintained under the Maharashtra Land Revenue (Village, Town and City Survey) Rules, 1969 (Rules) - The Rules set out the fields of information required to be recorded in the PRC. This information can be classified into three main themes. First, property identification which includes details such as the cadastral survey number, location of the property and the name of the division in which the property is situated. Second, assessment information which includes information such as the collector's number, the collector's rent roll number and ground rent due to the government. Third, holder's history which has details of the holders of the property.

    We find that not all the fields of information required to be recorded in the PRC by law are in fact recorded. In addition to not recording this information, the template of a PRC does not even have allocated sections to record this information. A summary of our findings is set out in Table 1. Table 1 sets out our findings on whether PRCs have a provision/place holder to record all information mandated to be recorded under the Rules.

    Table 1: Information to be compulsorily recorded
    S.No. Information to be recorded Whether provision to record (Mumbai City) Whether provision to record (Mumbai Suburban)
    1. Survey number Yes
    2. Area Yes
    3. Tenure Yes
    4. Particulars of assessment or rent paid to the government No
    5. Particulars of when the assessment or rent paid to the
    government is due for revision
    6. Easements No
    7. Holder in origin of the title, so far as traced Yes
    8. Other remarks No
    9. Date No
    10. Transaction volume number No
    11. New holder Yes
    12. Attesting lessee No
    13. Encumbrances No

  2. Information which would aid a sound buy-sell decision - To ascertain the ideal fields of information which should be recorded to aid an efficient buy-sell decision, we have relied on the definition of a cadastre set out by the FIG, referred to above. We have accordingly classified the information into three broad heads:

    1. Recording of interests in the land: Under this head, the FIG includes recording of rights, responsibilities and restrictions. Under each head we list relevant fields of information in the context of the Indian market. For example there is no provision to record possession rights in the PRC.
    2. Map and description of boundaries: Currently, the boundaries of the parcel are not recorded in the PRC. A person looking at a PRC has no way of knowing where the parcel of land is in fact situated. In modern cadastres, the boundaries are set and described using the latitude and longitude description of the land parcel. Further, in Mumbai, the CM in respect of a parcel of land is not available as part of the PRC. Neither is a copy of the CM available online. In order to obtain a copy at present, a purchaser or parcel holder is required to make a physical application to the Survey and Settlement Department.
    3. Valuation and improvements: Currently, property rates are available in the ready reckoner, which is a government issued booklet on area wise property prices. For the purpose of determining the fair market value of the land, the ready reckoner takes into consideration not only the location of the land but also the buildings on the land. This information is currently not recorded in the PRC. Similarly, the other factors that affect the valuation of the land such as development potential or the floor space index (FSI) available in respect of the parcel of land and its proximity to roads are also not recorded. This information is important as it directly affects the economic value of the land and is likely to affect a decision to transact in a parcel of land.

    In Table 2 we set out a list of desired fields of information and analyse whether or not these are captured in the PRCs for sample divisions.

    Table 2: Information required to aid a sound buy-sell decision
    S.No. Information Whether provision to record (Mumbai City) Whether provision to record (Mumbai Suburban)
    A. Record of interest in the land
    1. Rights
    (i) Ownership Yes
    (ii) Possession No
    (iii) Easement No
    2. Responsibilities
    (i) Payment of taxes Yes
    3. Restrictions
    (i) Charges No
    (ii) Disputes No
    (iii) Restrictive covenants No
    B. Maps and boundaries No
    C. Valuation and improvements
    (i) Structures on the land No
    (ii) FSI No
    (iii) Transferable development rights No

Miscellaneous observations

Our case study also revealed several inconsistencies and deficiencies in the information recorded in the PRC. Some of our observations are as follows:

  1. Lack of uniformity: We have observed that the templates of PRCs in Mumbai Suburban and Mumbai City differ. This means that even the fields of information captured in PRCs within Mumbai differ based on where the parcel of land is located. For instance, the PRC of a parcel of land in Mumbai City does not have a provision to record easements on the land whereas the PRC for a parcel of land located in Mumbai Suburban does.
  2. Poor recording: The PRCs in Mumbai Suburban region revealed that, even though there is a provision for recording the information mandated under the Rules, such information was not always recorded under the specific provision. For instance, in 7 out of 15 cases, we observed that easementary rights were not recorded. Similarly in case of encumbrances and attesting lessees we observed that in 6 cases, respectively, this information was not recorded. In fact the PRC of one parcel of land only recorded 2 out of 13 fields of information i.e. survey number and particulars of rent.

    In addition to not having the required fields, the PRCs in Mumbai City did not even record information for the existing fields.
  3. Ambiguity in recorded information: We observed that there is lack of uniformity in the manner in which information is recorded. For instance where there is no information to be recorded in a given field, this is recored as "nil" in Mumbai City and a "-" in Mumbai Suburban. For instance the sample revealed that in Mumbai Suburban 8 out of 15 PRCs recorded "-" in the field for easements. Further in some cases the field is left empty leaving it to the reader to infer whether this is a mistake on the part of the recording officer or a there is no information to record.

    We also observed that in some cases of PRCs in Mumbai City, where there is no specific field for recording certain information, the information is recorded under a different head. For instance, "attestting lessees" are recorded in the ownership column in PRCs (with the mention that they are attesting lessees). The problem with this is that where there is no lessee, there is no information stating clearly that there is no lessee on the land. Again, it is left to the interpretation of the reader to decide whether there is no lessee or there is in fact a lessee and this information has not been recorded.


Our study reveals that the PRC as a cadastre in Mumbai, is far from being an ideal record. The new policy objective ought to be the creation of greater information symmetry in the land market to enable informed and intelligent buy or sell decisions. Based on our case study, we suggest the following:

  1. Recording information mandated under the law: Our findings (Table 1) reveal that the current format of PRCs in Mumbai City does not have the provision to record certain heads of information that are mandated under the law. As a first step, authorities must ensure that the format of the PRC is in consonance with that set out under the law.
  2. Increasing the scope of information recorded in a PRC: Our analysis of the PRC has revealed that the information recorded in the PRC is far from adequate for making an informed buy or sell decision. The scope of information recorded in the PRC must be increased to include relevant information such as disputes in relation to the land, mortgages and the development potential of the land as set out in Table 2.
  3. Adopting uniformity in recording information: It is recommended that uniform practices of recording information be adopted. For instance, where there is no information to be recorded, it must be depicted by "nil" only and must not be left empty or be represented wth "-". Similarly, information must be recorded under the appropriate head in the template.
  4. Moving towards a multi-purpose cadastre: The State of Maharashtra still maintains PRCs for the primary purpose of collection of revenue, as is evident from the property details currently recorded in the PRC. The growth of investment in real estate has led to a point where maintenance of a multi-purpose cadastre is the need of the hour for two reasons. First to ensure that all information pertaining to a land parcel is available in a consolidated manner at a single source. Second, to ensure that buyers are presented with all relevant information about the land parcel. This maybe achieved through the integration of databases maintained by relevant authorities. For instance, orders passed by civil courts, tribunals and other quasi-judicial institutions affect interests in a land parcel. For a complete, accurate and up-to-date picture of the interests appurtenant to the land parcel, it is essential that the outcome of such orders is immediately notified to the City Survey office. Further, pendency of proceedings before judicial and quasi-judicial bodies or lis pendens also has ramifications on the rights and interests to a land parcel. It is therefore advisable that such judicial and quasi-judicial bodies automatically update PRCs to reflect such encumbrances.
  5. Integrating textual and spatial records: As a step towards achieving multi-purpose cadastres, we recommend that CMs and PRCs be integrated to form a single record. As of today, the CMs and PRCs are maintained by different offices. The aim again is to consolidate all relevant information about a land parcel in one document. For instance, this would mean that every time a land is sub-divided and a new map is drawn for the land parcel, it must become part of the PRC.


  1. Badarinza, Balasubramaniam and Ramadorai, The Indian Household Savings Landscape, 2017.
  2. Farvacque and McAuslan, Reforming urban land policies and institutions in developing countries, 1992.
  3. Constitution of India, 1950.
  4. Dale and Mclaughlin, Land Information Management, An introduction with special reference to cadastral problems in Third World countries, 2000.
  5. Department of Land Resources, The National Land Records Modernisation Programme (NLRMP) Guidelines, Technical Manuals and MIS, 2008-2009.
  6. Ministry of Urban Development, Draft model guidelines for urban land policy, 2007.
  7. Expert Committee, Government of India, Land titling - A road map, 2014.
  8. Federation Internationale des Geometres, FIG Statement on the Cadastre, 1995.
  9. Mukarage, Investigating the contribution of land records on property taxation: a case study of Huye District, Rwanda, 2016.
  10. Powell, Land systems of British India, 1892.

Gausia Shaikh and Diya Uday are researchers at IGIDR.