The consequences of criminalising cheque bouncing

by Shubho Roy and Ajay Shah

Many countries (e.g. New Zealand, Poland, Germany, Norway) have discontinued paper cheques. In other countries (e.g. the U.K., the U.S.), the use of cheques is declining. But in India, the use of paper cheques in India has stabilised in terms of value and number over the last five years. This is despite the extent to which digital and instantaneous payments are now feasible. Why might this be the case?

Prior to 1988, cheques were primarily used as a tool of payment. In that age, there were delays in clearing. Paper cheques had to be transported to the bank branch where the cheque issuer had an account. In that branch, the issuer's signature would be verified against a sample. If the signatures matched, the balance would be cleared (assuming the issuer had adequate funds). This process took seven working days, even when the issuer and recipient had banks in the same city. If the parties were in different cities, the process would take 15 working days, on average.

Today, a cheque issuer can send a secure document showing that the issuer's bank account has adequate funds to honour the cheque. However, in 1988, there was no such system, and the cheque recipient faced the risk that the issuer was writing a cheque that her account could not honour.

Some technical mistakes can always happen, where a person fails to anticipate the date on which funds are required and there are unpredictable delays in the money moving in and out of the account. Alongside this, many unscrupulous people knowingly wrote bad cheques. This made sellers mistrust cheques and prefer cash. While cash as a payment mechanism has the virtues of instantaneity and privacy, it comes with difficulties on physical security.

The 1988 change of the law

In this setting, the Parliament criminalised the bouncing of cheques in 1988. Now, the cheque writer could be sent to jail if the cheque did not clear. The law also stated that every cheque is presumed to be written to clear a debt. This change helped the recipient of cheques because the recipients did not have to prove any underlying transaction. The recipient only had to demonstrate that the cheque was not honoured.

In 2016, the Supreme Court ratified the practice of using cheques as collateral in the case of Sampelly Satyanarayana Rao v Indian Renewable Energy Development Agency Limited. Sampelly Satyanarana Rao (Mr. Rao) had written post-dated cheques as security for a loan from the Indian Renewable Energy Development Agency (IREDA). Mr. Rao did not take the loan personally but wrote the cheques as a director in the company that borrowed the money. The borrower company failed to pay the instalments when they became due. In response, IREDA (the creditor) initiated criminal proceedings against Mr. Rao under the 1988 law. Mr. Rao defended the claim by stating that the cheques were written before the creditor (IRDEA) disbursed the loan amount. IREDA pointed out that the cheques were deposited after the borrower (the company) had failed to pay the instalments, and therefore, the penal provisions of the 1988 Act applied. The Supreme Court agreed with the creditor and allowed for the criminal prosecution of Mr. Rao. This judgement provides legal certainty to the use of post-dated cheques as security. This date, i.e. 2016, is an important milestone in the journey, over and beyond the amendment of the N. I. Act in 1988.

The role of cheques in India today

The threat of imprisonment restored some faith in cheques. Anecdotally, it seems to have worked well in the initial years after the amendment. Cheques became more acceptable in commercial transactions and helped reduce frictions in economic activity. Many a cheque recipient was willing to take the risk of delivering goods without waiting one or two weeks for a cheque to clear.

These considerations do not exist in the present landscape. Instantaneous payment systems are ubiquitous in India, ranging from small value payments to the largest amounts possible. Any problem of trust between buyers and sellers can be readily solved by resorting to NEFT or RTGS. By this reasoning, the number of cheques written in India should have declined sharply. It has not.

People responded to incentives

Alongide this, the rest of the Indian legal system which enforces contracts works poorly. Ordinarily, a loan dispute would be resolved as a contract dispute through civil law, and, in some cases, bankruptcy law may be involved in situations where the debtor is insolvent. In 2020, in enforcing contracts, India ranked 163 out of 190 countries, while its overall rank was 63 (a difference of 100 ranks). India's rank in resolving insolvency was 52. Hence, creditors are unconfident about ordinary credit enforcement mechanisms.

One strand of credit enforcement systems is seizing assets that are pledged as collateral. This tends to work poorly in India. While the SARFAESI Act of 2002 is reasonably effective in getting collateral into the hands of the lender, many assets are hard to sell. Many land titles have encumbrances, and the land market works poorly, which hinders the recovery rate.

These weaknesses of the ordinary (civil) credit enforcement systems made criminal proceedings under S.138 attractive to creditors. Under S.138, a debtor faces up to two years of imprisonment if the debtor is convicted. In reality, the creditor does not even have to wait for the end of the litigation to get the debtor imprisoned. The debtor can be arrested at the beginning of the litigation so that the debtor can be produced before the court. In some cases, the debtor can also be imprisoned for the duration of trial under S.138. In contrast, a civil case proceeds without the debtor, if the debtor chooses not to appear. Most people will pay up to avoid being imprisoned, which gives heart to creditors.

When faced with legal difficulties around land title, it is better for the creditor to threaten imprisonment, and have the borrower solve the problem of selling the land, instead of seizing collateral and then facing legal difficulties in liquidating them.

As a consequence, after the new law was established in 1988, creditors started using cheques as a security. Creditors frequently demand that the debtor provide post-dated cheques for loan amounts. These cheques are payable deep into the future -- sometimes extending to multiple years. In such cases, both parties are aware that the cheque drawer does not have the money in the bank account at the point in time when the cheque was signed. Creditors sometimes demand a separate cheque for each instalment of loan repayment. Consequently, a debtor for a five-year loan may write 60 post-dated cheques. On a similar note, landlords sometimes asked for post-dated cheques for the payment of rent at multiple time points in the future.

Modern economies do not have a debtors prison: the choice of filing for bankruptcy is always there, in which case the creditor gets a low recovery rate. On one hand, in India, there is no legal framework for personal bankruptcy. When threatened with jail time, the borrower may reach into her web of relationships, and borrow from the community. This increases the resources available to the lender.

Weighing the pros and cons

The introduction of S.138 has thus exerted many complex impacts upon the working of the economy.

An increased level of violence in society

More people go jail, and more threats of incarceration are bandied about. This is a less civilised society.

Increased interest in lending

When lenders are given greater certainty about recoveries, they are likely to be more willing to lend to persons that might otherwise be excluded from the credit market.

Diminished interest in borrowing

When borrowers are shown the possibility of jail time, they will be more cautious and avoid borrowing. That has its own welfare consequences.

Conditions for state failure

The prospect of jail time is a `high stakes' situation where the policing system gets to make decisions which have a high impact upon the life of a citizen. This increases the incentives for corruption.

Hindering the emergence of a modern economy

All advanced economies have moved away from debtor's prison, and evolved civil mechanisms around borrowing, collateral and bankruptcy. These pathways reduce the extent of violence in society and increases user confidence in borrowing.

The threat versus the cash

Jail time is indeed a potent threat and creates strong incentives for the borrower to obtain cash, either by borrowing from someone else or by liquidating opaque assets. But once a person goes to jail, all future payments to the lender are stopped. With more civil processes of collatoral and bankruptcy, there is the strategy of keeping the delinquent active in economic life, and obtaining a stream of cashflows to the lender.

Incentives for policy makers

Lenders that got comfortable with the use of S.138 were less inclined to persuade policy makers of the need for the institutional apparatus of the credit market.

Conclusion

The introduction of S.138 into the N.I. Act in 1988 was a response to a problem of the time. Some other countries, like Taiwan, had also criminalised cheque bouncing. However, most countries have walked back since then because credit systems have improved and the use of cheques have declined. In those countries, cheques are not used as collateral for loans.

There is a strong argument for repealing this section. The consequences of such a repeal will, however, also be far reaching, particularly in the context where the institutional apparatus for contract enforcement remain weak. It is interesting to look at the list, presented above, of the consequences of criminalising cheque bouncing. We can then ask: Which of these would flip around and arise, in reverse, when cheque bouncing is de-criminalised.

Shubho Roy and Ajay Shah are researchers at XKDR Forum.

Who is litigating cheque bounce cases?

by Siddarth Raman.

Cheque bounce cases under Section 138 of the Negotiable Instruments Act are an important source of case load at the Indian judiciary. This has inspired many attempts at modifying laws and court procedures so as to reduce the burden. In this journey, empirical evidence about the nature of the litigants is required. In this article, we establish a dataset about these matters, and measure the shares of financial firms, non-financial firms and individuals. We find that in Mumbai, financial firms filed 52% of cases, and that 83% of cases were against individuals. Cases filed by financial firms are likely to be disposed quicker than those filed by individuals. We explore how the cheque is used as a means of credit, and why financial firms accept them as collateral / security. It appears that financial firms are using cheques and Section 138 as a coping mechanism for poor civil remedies. While there is a need for legal system reform in the context of S.138 of the N.I. Act, it would also be useful to find solutions in banking regulation and personal bankruptcy law. We conclude with a recommendation of caution. Just as the amendment in 1988 has led to certain behaviours and industry practices, new solutions will alter the equilibrium, creating new incentives and new behaviours. The patterns seen in Mumbai are not present in regions of lower economic activity like Jhabua-Nimar. We need to be aware of the wide differences across different districts and states of India, and be mindful of complexity, as we proceed on the path to legal system reform.

Introduction

Section 138 of the Negotiable Instruments Act, which was introduced in 1988, creates the possibility of imprisonment for upto two years, a fine upto twice the amount of the cheque, or both, in response to cheque bouncing. The Act prescribes a six month time horizon for disposing these cases. This 1988 amendment is widely used as an example of the need for judicial impact assessment: The legislative action substantially enhanced the load upon the judicial branch, but there was a lack of commensurate operational planning and resourcing to deal with the enhanced case load.

What fraction of the pending cases or the flow of new cases emanates from this? A precise answer to this is not feasible under the present state of legal system data in India, but it is likely to be about 15 per cent (Chapter 3, Law Commission of India, 2014 ^[1] ; Supreme Court in Makwana Mangaldas Tulsidas vs The State Of Gujarat, 2018 ^[2] ; Mahadik D, 2018 ^[3] ). An important paper in this literature, Damle and Gulati, 2022 ^[4] examines 363,720 cases across 8 States and 2 Union Territories and estimates that cheque dishonour cases represent 13.2% of the courts' workload and take 395 days for disposal.

One pathway to legal system reform lies in an 80:20 analysis, in a vertical approach of finding solutions that are specific to certain classes of matters. Many thinkers have proposed making progress on S.138 of the N.I. Act as a component of legal system reform (Law Commission of India, 2008 ^[5] ; Law Commission of India, 2009 ^[6] ). Alongside this is the proposal for decriminalisation of cheque bouncing, broadly drawing on the concept that debtors prisons are not how modern economies operate. All these discussions require more knowledge about the nature of litigants in these matters, which is presently lacking.

This article seeks to fill this gap. In their paper, Damle and Gulati, 2022 ^[4] establish that the impact of Section 138 cases on caseload, pendency and time to disposal varies by State. We ask the questions: Who are the litigants in Section 138 cases? Does the nature of cases vary based on who the participants are? Do these characteristics vary based on location?

Methodology

The e-courts database for district courts was used to build a dataset about pending and disposed cases relating to Section 138 of the Negotiable Instruments Act. This was done for India's most advanced region (Bombay). For a comparison, this was also done for the group of districts (termed "homogeneous region" by CMIE) with the highest share of households in agriculture. This is the "Jhabua-Nimar" homogeneous region, which comprises six districts in Madhya Pradesh - Alirajpur, Barwani, Burhanpur, Dhar, East Nimar (Khandwa), Jhabua, West Nimar (Khargone). These two datasets thus show the full range from the old India to the new India.

Litigants were classified into three groups:

• Financial Firms
• Non-Financial Firms
• Individuals

This was done through a process of looking for keywords in the name:

1. Financial Firms typically have the terms bank, finance, invest, loan, and related keywords and variations.
2. Non Financial Firms have terms like ltd, pvt, corporation.
3. Non Financial Firms may contain common nouns from the English Language.
4. Litigants with the term proprietor in the name were categorised as individuals.
5. Those that did not fit these criteria were categorised as individuals.

This classification heuristic requires a standard corpus of English words. We used the NLTK Wordnet corpus and identified all words in the names of litigants that overlapped. A manual cleanup was required as the corpus contained some proper nouns. We assessed the words which made up 95% of the instances of overlap with the corpus and eliminated names and common nouns that could be Indian names ("Rout", "Harsh", "Baby", etc.). In Mumbai, we found 8133 unique words appearing 763,593 times. The 95% filter resulted in 1,165 unique words in Mumbai. For Jhabua-Nimar, we found 1,006 unique words appearing 19,974 times. The 95% filter resulted in 345 unique words.

These heuristics will of course engage in a small rate of misclassification. Some names like Banku and Chitra containing the terms Bank and Chit could be classified incorrectly. We do not account for firms that have common nouns in their name from languages other than English. In many cases, an individual proprietorship may have the term company or finance in their name. The methodology does not take into account spelling errors.

In order to assess the accuracy of the work, it is important to estimate the defect rates associated with these heuristics. We manually analysed a random sample of 100 cases (and 200 litigants) in each district, in order to measure the error rate. We found two errors in our Mumbai analysis. They are:

1. Ms M. D. Vora Co. is a non-financial firm categorized as an individual.
2. Alexander Xavier Dsouza is an individual categorized as a non-financial firm. Alexander is present in the wordnet corpus, and appears 16 time in the dataset which puts it in the bottom 3% of words by frequency, which is why it was excluded in the manual cleanup.

Similarly, we found seven errors in our Jhabua-Nimar analysis. They are:

    Two cases where non-financial firms with names in Hindi were misclassified as individuals:

1. Shri Krishna Prajapati Sakh Sahkari Sanstha Maryadit.
2. Shubhalakshmi Sakh Sahkari Sastha Mrya. Dhamnod By Nitesh Bhawsar.

    Two cases where financial firms with typos were misclassified as individuals:

3. EEASVAM KREDIT KO DVARA VIJAY.
4. BHARATEEY STET BAIANK MUKHY SHANABAG BURAHANAPUR.

    One case of an individual misclassified as a financial firm:

5. Kashish Finance H.U.F Propriter Vijay Rathore.

    Two cases where the State was a party. The State was misclassified as a non-financial firm.

This suggests a defect rate of 1% for Mumbai and 3.5% for Jhabua-Nimar. This gives us a sense of the extent to which the estimates presented ahead should be treated with caution.

Results

In Mumbai, we have a dataset of 417,437 cases. Of these, 317,225 are disposed, and 99,712 cases are pending.

Table 1: Section 138, NI Act cases in Mumbai district courts classified by Type of Litigant

Respondents → Petitioners ↓	Financial firm	Non-financial firm	Individual	Total
Financial firm	0.2%	6.5%	46.2%	52.8%
Non-financial firm	0.1%	7.0%	21.3%	28.4%
Individual	0.2%	4.8%	13.8%	18.8%
Grand Total	0.5%	18.3%	81.2%	100.0%

This yields the facts:

• Finance firms filed 53% of cases, non-financial firms 28%, and individuals 19%.
• 81% of cases were filed against individuals, 18% against non-financial firms and less than 0.5% against financial firms.
• The biggest chunk of cases are financial firms vs individuals - 46%, followed by non-financial vs individuals - 21%.

In Jhabua-Nimar, we have a dataset of 22,564 cases. Of these, 14,130 are disposed, and 8,434 cases are pending.

Table 2: Section 138, NI Act cases in Jhabua-Nimar district courts classified by Type of Litigant

Respondents → Petitioners ↓	Financial firm	Non-financial firm	Individual	Total
Financial firm	0.0%	0.2%	12.3%	12.5%
Non-financial firm	0.0%	0.6%	5.2%	5.8%
Individual	0.1%	2.1%	79.5%	81.2%
Grand Total	0.1%	2.9%	97.0%	100.0%

• Individuals filed 82% of cases, finance firms 12%, and non-financial firms 6%.
• 97% of cases were filed against individuals, 3% against non-financial firms.
• The biggest chunk of cases are individuals vs individuals - 80%, followed by finance firms vs individuals - 12%.

At an overall level, disposal rates in Mumbai are close to 90%+ for years before 2015, from where we see a steady decline in share of cases disposed. Thus today's pending cases are largely those that began after 2015.

Figure 1: Total Cases by Year and % of Cases disposed as of April 2023

In Figure 1 above, the blue bars on the chart are the total number of cases filed. The orange line depicts the % of the cases filed in that year which stand disposed as of April 2023 when the data was analysed.

In Mumbai, we see an interesting pattern when we compare the disposal rates of cases filed by financial firms, non-financial firms and cases filed by individuals.

Table 3: Share of cases filed in a specific year that stand disposed as of 2023

Year	Financial Firms	Non-Financial Firms	Individuals
2015	74.0%	65.9%	66.9%
2016	61.1%	60.7%	66.4%
2017	77.8%	50.8%	51.1%
2018	75.9%	47.9%	41.1%
2019	48.8%	42.8%	28.9%
2020	75.3%	35.0%	27.6%
2021	42.2%	25.5%	19.6%

This table shows the share of cases that were filed in Mumbai in a certain year that are now disposed. An important finding here is that cases filed by financial firms have a much higher likelihood of getting disposed in 2-3 years compared with cases filed by individuals.

Figure 2: Cases filed between 2015-2021 by Status and Type of Litigant

In Figure 2 above, we see that Financial Firms account for 60% of the total cases filed, but constitute ~70% of the cases that have been disposed, and account for only 50% of the pending cases.

We see no such patterns in Jhabua-Nimar with disposal rates not being dependent on the nature litigant filing the case.

Discussion

We now have new facts about litigation associated with the S.138 of the NI Act. What have we learned? How does this change our mind? What are the downstream implications of this new knowledge?

Most attempts at reforming Section 138 have focused on on improving the processing speed within courts. Little has been done towards preventing cases emerging in the first place. Our data shows that financial firms are the main petitioners in Mumbai, with a higher disposal rate than individual litigants or non-financial firms. This may reflect greater organisational capability in financial firms. Cases filed by individuals or non-financial firms vary based on the nature of contract entered into by the two parties. We speculate that cases filed by financial firms are mostly related to loans.

Financial firms often use cheques as an alternative form of collateral. This can help individuals with poor credit ratings to access loans. Should there be a loan default, there is the choice of filing a criminal case. This process is expedited by Section 138 that requires petitioners to file a case within 45 days of the cheque bounce. Banking regulations may also be a contributor. In December 2016, the Supreme Court ruled that officers of private banks are to be treated as public servants under the Prevention of Corruption Act. Financial firms have practices to ensure that a debt is indeed irrecoverable before they can classify it as bad debt. The large volume of cases from banks may be a mechanism to check against petty corruption from branch officials and comply with regulatory requirements.

Filing a Section 138, NI Act case not only allows a bank official to demonstrate effort and intent, it also allows the lender access to the coercive power of the State. The police arriving with a non-bailable warrant at your doorstep is a persuasive means of negotiating with a borrower. Petitioners in a Section 138 case are using this to recover dues. Are there better civil alternatives to debt recovery? How does their efficiency in terms of time to disposal compare with those in Section 138 cases? As we think of improving processes, we should consider the possibility that making Section 138 cases more efficient may prevent litigants from considering civil recourse. The combination of slow civil courts and under-developed credit markets make Section 138 cases an attractive proposition for financial firms. Accepting cheques as security may have developed as an industry practice because it allows financial firms to be less diligent when making loans as they can now rely on the criminal justice system to coerce settlement. In addition to court processes and legislative changes, remedies to the burden of Section 138 on the Indian courts may also lie in the realm of banking regulation, credit practices, and personal bankruptcy law.

The introduction of Section 138 has resulted in some discernable behaviors from financial firms. Future changes to the status quo will invariably alter incentives resulting in different behavioral patterns among litigants. The variation in litigant composition between different regions illustrates that litigation patterns are shaped by local context. The patterns observed in a metro like Mumbai, largely influenced by financial firms, don't find a parallel in areas such as Jhabua-Nimar. Attempts at legal system reform must account for the disparities across the various states and districts of India. We caution against one-size-fits-all solutions and suggest that solutions be crafted keeping in mind the local context.

References

[1] 245th Report On Arrears And Backlog - Law Commission of India, 2014 . Retrieved from 20th Law Commission of India.

[2] Makwana Mangaldas Tulsidas vs The State Of Gujarat , Order dated 5 March, 2020. Retrieved from Supreme Court of India.

[3] Mahadik D, 2018. Analyses of Causes for Pendency in High Courts and Subordinate Courts in Maharashtra. Retrieved from Department of Justice.

[4] Damle D, Gulati K et al. 2022. Characterizing Cheque Dishonor Cases in India: Causes for Delays and Policy Implications. SSRN.

[5] 213th Report on Fast Track Magisterial Courts for Dishonoured Cheque Cases, 2008. Retrieved from 18th Law Commission of India.

[6] 230th Report on Reforms in the Indian Judiciary - Some Suggestions, 2009. Retrieved from 18th Law Commission of India.

Siddarth Raman is a researcher at XKDR Forum.

Free press and criminal defamation: Inspiration from Africa

by Pratik Datta.

One of the biggest threats to the freedom of speech in India is criminal defamation law. There is a shortfall of criticism in society, and we must always support and protect the critic.

Like the law which criminalised unnatural sex, we inherited the concepts of criminal defamation from the British. Criminal defamation was abolished in the UK in 2009, but it continues to survive in the statute books of many former British colonies. However, as Gautam Bhatia points out, judges in some African countries are increasingly taking a progressive stand against criminal defamation to achieve freedom of speech.

Lesotho

Last week, the Constitutional Court of Lesotho struck down the criminal defamation law as unconstitutional. The petition was filed by the owner and publisher of the Lesotho Times. In 2016, the newspaper had published an article in the satirical section ridiculing the then Commander of the Lesotho Defence Force. A week later, criminal defamation charges were brought against the petitioner. The petitioner in turn challenged the constitutionality of section 104 of the Penal Code that proscribed defamation.

In a concise and succinct judgment, the Court struck down the section broadly on three grounds. First, the court found that the section was broader than necessary to achieve the statutory objective of protecting individual reputation. Second, the court observed that the vagueness of the statutory language could potentially be abused by political powers to silence legitimate criticism. Third, the court reasoned that merely because satire distorts reality, it does not necessarily imply that satire does not serve any useful purpose in a democracy. Accordingly, the court concluded that criminalising satire is an excessive infringement of freedom of expression in a democratic society.

Kenya

Last year, the High Court of Kenya at Nairobi also struck down criminal defamation as unconstitutional. In this case, the petitioners were charged with criminal defamation for their Facebook posts. The petitioners in turn challenged section 194 of the Penal Code that criminalised defamation.

The Court gave two broad reasons while striking down the section as unconstitutional. First, the court argued that criminal defamation law aims to protect individual interest and therefore, cannot be protected as a 'reasonable restriction' exception to freedom of expression which is meant to protect only public interest. Second, the court found that criminalising defamation is not absolutely necessary to achieve the statutory objective of protecting individual reputation. Instead, there are alternative civil remedies available to achieve the same objective. On the other hand, criminalising defamation has serious chilling effects on free speech, making it a disproportionate policy response. Based on these reasoning, the Kenyan High Court struck down criminal defamation law as unconstitutional.

African Court of Human and Peoples' Rights (ACHR)

In 2014, the ACHR overruled the conviction of a journalist by Burkina Faso following charges of defamation for publishing newspaper articles that alleged corruption by a state prosecutor. The primary legal issue was whether the criminal defamation law violated international treaties that Burkina Faso has entered into. The Court reasoned that monetary penalties imposed on the journalist and suspension of his newspaper under defamation laws were disproportionate measures to achieve the statutory objective - to protect the honour of a prosecutor. Instead, civil remedies would have been a more proportionate response. Further, the court held that the threshold for defamation of public figures should be higher. Accordingly, the court found the criminal defamation law violated Burkina Faso's international obligations to protect freedom of expression.

Zimbabwe

In 2014, the Constitutional Court of Zimbabwe declared criminal defamation to be unconstitutional. This case arose out of an article published in the The Standard newspaper which claimed that the Green Card Medical Aid Society was unable to pay its employees and was on the verge of collapse. The Society claimed that these were false allegations and subsequently the journalist as well as the editor of the newspaper were arrested and charged for defamation under section 96 of the Criminal Law Code.

The Court struck down this criminal defamation provision as unconstitutional on the ground that it was disproportionate and was unnecessary to accomplish the statutory objective of protecting individual reputation. Instead, monetary damages in civil law could have achieved the same objective. Further, the judge also observed that such a law could adversely silence free flow of information on public matters. Accordingly, the criminal defamation law was struck down.

Conclusion

It is quite remarkable to see that while judges in African countries have taken progressive steps to weed out a vicious colonial legacy to institutionalise free press, the Indian Supreme Court has dismissed challenges to the constitutionality of criminal defamation in the Indian Penal Code. Indian journalists should take inspiration from the jurisprudential developments in Africa and advocate the removal of this barbaric colonial legacy.

 

Pratik Datta is a Chevening Weidenfeld Hoffmann scholar at University of Oxford.

Concerns about the SC on the Atrocity Act

by Devendra Nath Goburdhun.

The problem

On March 20, 2018, a two-judge bench of the Supreme Court of India issued directions under The Scheduled Castes and the Scheduled Tribes (Prevention of Atrocities) Act, 1989 (The Act). This judgment was met with nation-wide protests from the members of the marginalised communities, resulting in violence. Over a dozen dalits lost their lives in the Bharat Bandh on April 2, 2018. The judgment had tinkered with protections of the dalits which they had under special laws which the Parliament has enacted during V. P. Singh’s government.

The parliamentary debate on the Atrocity Act, when it was first adopted, emphasised that despite various measures adopted to improve the socio economic conditions of the SC/STs, they have remained vulnerable. Even though our Constitution specifically states that untouchability stands abolished, the facts on the ground had not changed adequately. Dalits are denied basic civil rights and are subject to various indignities. Serious crimes are committed against them for various historical, social and economic reasons. Dr. Rajendra Kumar Bajpai, while introducing the bill in the Rajya Sabha said:

"Although many of these offences could probably be covered under the normal law of the land, we are witnessing today a difference in degree which calls for differentiation in kind in respect of these offences."

We should recognise the discrimination that they are subject to: Equal pay for equal work is denied to them. It was felt that a special legislation is necessary to check the atrocities that are conducted with impunity. As part of this, the Parliament felt that the grant of anticipatory bail was an area of concern: under this special law, the concept of bail before arrest shall not be applicable.

In some parts of India, there is increasing integration between castes. But, ironically, in some parts of the India, the socio-economic development of dalits is giving increased conflict. When dalits assert their rights, resist practices of untouchability, refuse to do bonded work, etc., this irritates their oppressors. The problems are alive and well. As a consequence, the Parliament has repeatedly amended the Act, including punishments for interfering with voting by dalits, intimidation from performing official duties in panchayats, economic boycott, filing malicious cases, denial of access, obstruction in the use of common property, etc. As part of this approach, the Modi administration did not modify the treatment of anticipatory bail by an alleged wrongdoer.

To summarise, this is not an oversight on the part of the Parliament. The Parliament consciously and deliberately, expressly excluded the grant of pre-arrest bail for alleged offenders, in S. 18 of the Act.

Recent developments in the Supreme Court

The Supreme Court recently has reversed this. I would like to humbly suggest that the august Supreme Court has not only erred in law, but chosen to not follow its own previous judgements, and thus breached judicial discipline.

In the present judgment, the petitioner contended that the provisions in the Act are being abused and the FIR registered against him should be quashed. Quashing the case against the petitioner, the court acknowledged the abuse of law of arrest and clarified that there is no absolute bar against grant of anticipatory bail under the Act. It then directed that no arrest can be made under the Act before approval of designated authorities. A provision of preliminary enquiry to be conducted by a Deputy Superintendent of Police (DSP) to ensure the allegations are not frivolous or motivated has also been introduced through the judgment. The government has asked for a review.

Pre-arrest bail and Art. 21 of the Constitution

In this case, there was no challenge to the constitutionality or validity of S.18. Yet, the Supreme Court gave a judgment that a dominant member of the community shall not be arrested unless a senior police officer (DSP) or senior government officer states in writing that his arrest be made. Dr. Mahajan’s case concerned quashing an FIR only; he stated that he had passed an administrative order which did not constitute any offence.

The Supreme Court has given sweeping directions on pre-arrest bail, and how arrest shall be made, using arguments based on Art. 21 (right to life). These directions, however, expressly conflict with the statute. They are contrary to the earlier judgments in Ram Krisnna, Manju Devi and a five judge bench decision in Kartar Singh, popularly known as the TADA case. In these cases, the Supreme Court has clearly stated that anticipatory bail is not a guaranteed right under Art. 21, and that denial of it in the atrocity act is not arbitrary and violative of Art. 14 (equal treatment), as this is a special law and forms a different class which protects the meekest of the meek.

The importance of precedents

​Faced with this set of precedents, the Supreme Court should have observed the judicial discipline of `Binding Precedents'. This yields consistency and stability in the administration of Law. Without this, if each Court is left free to pursue its views regardless of previous judgments of their own peers in an hierarchal system, the result will be chaotic. The doctrine of precedent is thus an indispensable foundation of the system of common law, and should be scrupulously followed.

In interpreting the Law, Courts cannot add, alter or subtract a single word, especially when the literal reading of the same produces an Intelligible result. If this principle is not followed, then Courts run the risk of veering into legislation. This golden rule of interpretation of statutes, right from Maxwell’s times, has been followed in all common law countries. The Supreme Court should then bow to the text of the law that the Parliament has laid down. In the past, all superior courts have held that the legislature knew exactly what they said, and even if it is badly drafted, their Lordships will not carry out any amendments.

 

Devendra Nath Goburdhun is a practising lawyer in the Supreme Court of India

India needs drones

by Shefali Malhotra and Shubho Roy.

The two vital raw materials that went into the Indian software miracle was access to computer hardware and access to data communications. The first became possible when customs tariffs were removed, and the second became possible by opening up to private and foreign telecom companies. When thinking about another new industry, drones, it's useful to imagine: What would have happened to the Indian software industry if the coercive power of the State was deployed to ban computer usage by civilians? Registering to fly a drone in Nigeria costs \$4,000 and \$5 in the US. So far,  India has banned all civilian use of drones, i.e. the cost of registration to fly a drone in India is much higher than that in Nigeria.

Drones have a variety of civil/commercial applications. In areas like crop insurance, soil mapping, disaster, conservation, traffic management, crowd management, photography and filming, drones may be a game changer. All these applications are hobbled by the ban.

The DGCA has come up with draft regulations which is designed to allow civilians to use drones. These draft regulations are not accompanied by an analysis of the costs of complying with the regulations. Moreover, these regulations do not seem to consider the needs of a nascent industry. Consequently, drone applications will remain extremely expensive in India. Capabilities in technology flow from a vibrant user community which demands increased sophistication; as long as India does not avidly use drones, we will not become designers and makers of drones. India's expertise in software and technology gives India an edge in this important emerging area. However, if the regulatory regime is hostile to the development of technology; India will soon fall behind.

One example of an application of drones: Crop insurance

Insurance depends on verifying two facts. Did the insured event actually occur? And how much was the damage (monetary terms) to the insured? Today, when a Haryanvi farmers' crop gets ruined by hail, there are two problems for the insurance company and the farmer. First, did the hail storm actually take place? India does not have accurate village/taluka level weather data. Second, how much of the crop was actually damaged by the hail storm and not removed by the farmer to inflate the insurance claim? Answering these questions in rural Haryana is not easy.

While these facts could be ascertained by sending persons called "claim verifiers/processors" to farms, it is very costly to send individuals to each insured farm on repeated visits to verify claims. As farm sizes are small, the transaction costs of settling insurance claims become very high. This in turn makes insurance commercially unviable for insurers or the premium is too high for farmers to pay.

Drones can change this industry for the better and make crop insurance much cheaper for the insurance company and the farmer. Here is the arrangement that can be used.

When the farmer makes the initial purchase of insurance, an agent of the insurance company would map the latitude-longitude of borders of the farm. The insurance company can charter high altitude drones to collect accurate weather data. Lower flying drones can take high resolution pictures of the farm right after an insured event (hail storm) takes places. These photographs can allow an insurance company to establish if the hail storm actually damaged the crops and also the extent of damage.

Drones will be substantially faster, cheaper and probably more accurate than human verifiers. Drones can also cover much larger areas in much lesser time than individual human claim verifiers. The high quality aerial images can be processed by computers to determine whether the damage was by hail (rather than being a false claim where the crop had been harvested) and even the extent of damage. The insurance company can process the information and transmit the insurance payout directly to the farmers account. No human intervention. In future disputes about insurance claims, these high quality images can form the best evidence to determine the truth.

This is not just a hypothetical illustration. It is coming about in India.

Some other application areas

Farmers in other countries are already using drones to identify soil conditions, health of crops, watering needs, etc. Some of these drones cost less than Rs.5000 [link].

Farmer in China spraying crops using a drone

India has one of the lowest police to citizens ratio. Drones can increase the effectiveness of the few policemen. Common policing work like crowd management, traffic, security in large events can be helped by drones. In such areas drones are force multipliers where the Indian state can provide basic public goods like security to more citizens at lower costs. The Andhra Pradesh police has begun moving in this direction.

The need for regulation

Any proposal to regulate must be backed by a full articulation of the underlying market failure. In the case of drones, there are two dimensions. One element of the market failure is the possibility of negative externalities in the form of harm to innocent bystanders. The other element is the possibility that drones are new weapons for committing old (IPC) crimes.

Drones are aircraft without pilots and passengers. Therefore, regulations governing certification of safety for pilots and passengers are not applicable for drones. However, just like an aircraft, drones can fly over properties and persons without their consent. Badly made or badly flown drones crashing into people or property is a concern. This justifies basic safety/quality standards for drones, and some level of competence for the drone operator.

Drones can now enable a class of crimes which were previously hard to organise. Drones have fundamentally changed the nature of privacy in ones home. High walls and thick screens are no protection against snooping by a drone which could be operated by a media company, government agency or a personal enemy. Drones can also be used to carry out attacks by dispersing chemicals or mounting weapons. Drones can be used to spy on military establishments or carry out attacks on industrial/nuclear installations. While the easy answer for a lazy government is to ban drones, this is a very intrusive intervention. A better tradeoff in security would be to create checks and balances which permit society to gain from applications of drone technology while avoiding the problems. A natural point of departure is the registration system for cars.

India should develop the regulatory framework for drones now. Other countries are already doing this. Delaying the process will impede innovation in drones and derail development of the drone market. India will fall behind in the global drone market. One day, when India wakes up to civilian applications, we will then be a mere importer of drone technology as this knowledge will not have spread deeply in the country.

Approach to regulation

There are three approaches to regulating drones:

1. Banning them: Prohibit the civilian use of drones. This is where we are today.
2. Regulating them: Regulate civilian use of drones to minimise the harm to others and prevent the potential misuse of drones.
3. Regulating and encouraging them: Positive interventions by the government to facilitate innovation.  

Regulating drones

This approach requires drone operators to comply with safety and security standards. At the same time, the cost of compliance should be borne in mind so as to not make investment in the drone industry unviable. Other jurisdictions are balancing these two competing interests through a multi-pronged approach.

Risk based regulation

The riskier the drone operation, the greater propensity it has to cause harm to others. It follows that risky drone operations must have higher standards of compliance with safety and security requirements. For example, the US law creates a distinction between drone operations conducted for research or recreational purpose (in demarcated areas) and drone operations conducted for non-recreational/commercial purpose; which may fly over strangers who did not consent to drone over-flight. In the former case, the drone operator does not require US Federal Aviation Authority (FAA) approval, but must operate safely and in accordance with law. In the latter case, the drone operator requires specific authorisation from the FAA. The EU and UK categorise drone operations depending on the level of risk. For example, a drone operating over the open sea is less risky than a drone operating over spectators in a stadium. In the former case, a drone operation may not require any approval but may have operational limitations, such as, the drone operator should maintain visual line of sight with the drone and the drone operation should not be conducted above 400 feet. In the latter case, the drone operation may require multiple approvals, such as, design and production approval, air worthiness approval, operational approval and proof of pilot competency.

No-fly zones

Certain areas, like nuclear installations and ammo-dumps, are sensitive. Drone accidents in such areas may cause widespread devastation. There are other sensitive areas where any breach of the security protocol may cause a national security threat, like the border of a country. Hence, there is a need for airspace restrictions to minimise the perceived harm in sensitive areas. For example, the US FAA prescribes fly and no-fly zones based on airspace-centric security requirements. These airspace restrictions are used to protect special security events, sensitive operations, high-risk areas, etc. As an example, Raisina Hill may be classified as a restricted airspace area.

Drones as weapons

Drones may be used for criminal activity, such as a terrorist attack. Developing some standards of compliance will help minimise the risk of such criminal use. For example, drone operators in the US are mandated to display the registration number of the drone, on the drone. This enables easy identification of the drone operator in the event of a criminal activity. Singapore criminalises carriage of prohibited items, like a weapon, on a drone and discharging anything, whether gaseous, liquid or solid, from a flying drone.

Privacy

Drones have been used to track unsuspecting individuals and trespass into private property or a restricted area. To prevent this, Singapore has criminalised taking photographs of a protected area (as declared by the Singapore Government) using drones. In the US, any government operated drone operation is required to comply with the provisions of the US Constitution, Federal law and other applicable regulations and policies on privacy, like the Privacy Act, 1974. The US FAA has also formulated guidelines to encourage private parties to advance privacy, transparency and accountability during commercial and non-commercial drone operations and prevent unintentional violation of the privacy of others. For example, a drone operator is encouraged to provide prior notice to individuals of the time frame and area where the drone is intentionally collecting data and develop a privacy policy for the collected data. The UK CAA has also framed similar guidelines.

Encouraging drones

Alongside these enforcement perspectives, there is a need for positive interventions by the government to facilitate drone innovation. This approach recognises that the drone industry is in a nascent stage. The quality and pace of innovation in drones will not only depend on the players involved, but also the regulatory framework within which the innovation is taking place. These interventions may not be in the form of fiscal incentives (the most commonly used in India) but more in the nature of creating an enabling environment for the private sector to innovate and operate.

This may require a change in laws that discourage the suppliers and users of the drone industry. For example, drones actively interact with other users of airspace and should operate without causing harm to these users. To ensure this, the US FAA carries out safety studies to support safe integration of drones in the national airspace system. It may also require some institutional changes to facilitate the development of the drone industry. For example, the US FAA allocates research and test sites within the US to allow drone testing and enable development of drone technology in a safe environment.

The UK Civil Aviation Authority (CAA) supports the research and development process in the drone industry by facilitating full and open consultation with the developers of drone technology so that the CAA can provide guidance on the applicable rules and regulations. The US FAA coordinates with other Federal Agencies and the international community to designate permanent areas in the Arctic where small drones can operate 24 hours for research and commercial purposes. The US FAA has recently entered into a partnership with the drone industry to explore next steps in drone operations beyong the scope of the applicable law.

Next steps

The DGCA draft guidelines is a step in the right direction. However, the guidelines leave much to be desired. India needs to move on to formulating a regulatory framework which regulates and encourages the drone industry. It has some natural advantage (expertise in software technology and IT) which may allow it to be a key player in the global drone market. However, if India squanders away the lead by not creating a conducive environment for drones, it will end up lagging behind other nations.

Minimising the regulatory burden

There is a need to regulate the drone industry to minimise the risk of harm that it may cause to third parties. On the other hand the cost of compliance should not be higher than the profits/benefits. High regulatory cost will discourage players (especially small firms) from entering the market and will nip the industry in the bud. The draft regulations (in some places) have very high costs of compliance, without any attendant benefit to the society. This is a result of the vague language used in the draft regulations.

An example of vague language increasing the cost of the compliance is the requirement of permission for low drone flights. Regulation 5.3 of the draft regulation states:

the operator shall obtain permission from local administration, the concerned ADC.

The guidelines are silent on what is 'local administration'. Is it the district magistrate, local police station, local court? No one knows. It is also not clear whether you need permission from "local authorities" and "the concerned ADC" or "the concerned ADC" is the "local authority". The abbreviated term ADC is not expanded or explained anywhere in the guidelines.

Such vagueness drives up the cost of technology adoption by small firms. These firms would have to  run from pillar to post to get the above "permission". Since these local authorities will also not know whether they are the right "local authorities", and lack a guidance document based on which they can to analyse applications, they will probably take inordinately long or refuse.

The draft guidelines is peppered with other technical terms, like "Temporary Segregated Areas (TSA)" and "Temporary Reserved Areas (TRA)", which are also referred to but not defined. There is also no cross-reference in the guidelines allowing a reader to find what they mean and which areas they apply to. They may be the terms of art for airlines, but such opacity hampers the large technology community who must tinker with drones.

Making regulations user-friendly

Till now, the airspace was used by a niche population, pilots. Hence, if airspace regulations were not easily available and were technical, it was not a problem. With the coming of drones, airspace will become accessible to a large section of the population from a 16 year old kid to hobbyists, researchers, companies large and small, government, etc. Airspace regulations must now become comprehensible and reader-friendly. For example, it is crucial for a drone operator to know areas where a drone can be used and areas where it cannot. The draft guidelines state that drone operations cannot be carried out in notified prohibited area, restricted area, danger area, TSA and TRA.

However, the draft guidelines do not provide much guidance on what constitutes these areas or even where one can find these areas. Although, the regulations refer to the Aeronautical Information Publication (AIP) regarding details of these terms, the AIP is not readily accessible to the general public. In contrast, the US FAA has developed an app (B4UFLY) illustrating the fly and no-fly areas for ready reference of drone operators. Using this app, a 12 year old child can understand where to fly a drone.

Screen showing no fly zones in the US

Conclusion

Induction of drone technology into India is, at present, very costly. When authorities, processes and systems are unclear in a law, the potential cost of getting a drone permission can literally be infinite. There is no way to know which authority to apply and the authority itself does not know whether he/she has the power to grant an application. We need clearer regulations, and we need a regulatory framework to support the industry.

References

Subtitle B, Title III of the US FAA Modernisation and Reform Act, 2012.

EASA Proposal to Create Common Rules for Operating Drones in Europe (September 2015).

CAA CAP 722: Unmanned Aircraft System Operations in UK Airspace: Guidance (March 2015).

Singapore Unmanned Aircraft (Public Safety and Security) Act 2015 (No. 16 of 2015).

Johan Hauknes and Lennart Nordgren, Economic rationale of government involvement in innovation and the supply of innovation-related services, STEP Report Series R-08 (1999).


The authors are researchers at the National Institute for Public Finance and Policy. They thank Sumant Prashant, Bhargavi Zaveri and Pratik Datta for discussions.

Survey-based measurement of the Criminal Justice System

by Renuka Sane.

In India, we all seem to agree that we have a dysfunctional criminal justice system. This, has however, not yet translated into large scale attempt at reform. Perhaps the reason for the inaction is our inability to quantify the nature and extent of the problem. For example, we don't really have good quality data on crime or actions by the police . We don't have good quality data on the extent and causes of delays in our courts. Our court systems inhibit measurement. Since we don't have this data, we cannot estimate the cost of badly run police and courts on the economy, and on the satisfaction of our citizens. Evidence has not been marshaled in a systematic way about the extent and nature of under-performance. What gets measured, gets managed. This post describes two new survey based initiatives on measuring the problems in our criminal justice system.

Crime victimisation and safety perceptions

We helped initiate a first Crime Victimisation and Safety Perceptions Survey, with Commonwealth Human Rights Initiative (CHRI). This survey asks 5850 households in Mumbai and 4950 households in Delhi three broad questions:

1. Were they a victim of a crime in the last one year? (such as theft, house break-in, sexual harassment, assault, criminal intimidation, unnatural death, and missing persons)
   
2. Did the households report this to the police? Did the police respond appropriately? If the households chose to not report to the police, what were their reasons?
   
3. Do households feel safe in their neighbourhoods? Or in public transport? At different times of the day?
   

The survey has given some important new facts. A full 13% of households in Delhi and 15% in Mumbai report being victims of one of the crimes, with theft being the most commonly experienced crime. Reporting of crime is low in both cities, at less than 50%. The lowest reporting percentage is for sexual harassment - only 11.1% cases were reported in Mumbai, and 7.5% in Delhi. In both cities, the reporting was on the passing of lewd or unwelcome sexual comments. Incidents of groping were not reported.

The most important reason for non-reporting was that people just didn't want to get caught up in police or court matters. Not having enough evidence was cited as the second reason for not going forward with the reporting. Households felt that the police would just not be able to do anything about their complaint. The anticipation of households is perhaps not misplaced, for less than half of the cases reported to the police by the respondents had an FIR registered. This is particularly the case for sexual harassment cases. None of the cases reported in Delhi and 40% of cases in Mumbai led to an FIR filing. Similarly, none of the missing persons complaints in Mumbai lead to a FIR registration. Low initial reporting by households, and low registration of FIRs by the police implies that official crime statistics perhaps only report one-quarter of the crime experienced. This under-reporting gap is significant.

Of those households who reported crime, roughly 36% in Delhi and 51% in Mumbai said they were satisfied with the first police response. The largest satisfaction is with the police response on assault cases, both in Delhi and Mumbai. The lowest satisfaction is on police response on house break-in (in Mumbai), and on sexual-harassment (in Delhi). It is likely that the record of the police on investigations and actual completion of a case is even lower.

Households in Delhi begin feeling unsafe, even in their own neighbourhoods, earlier in the evening than those in Mumbai. People's fear of crime is correlated with what is experienced in their neighbourhoods. The crime people are most fearful of is theft in both cities. Households in Delhi are more fearful of sexual harassment, while in Mumbai are fearful of assault. Residents of Mumbai generally perceived the police in a more positive light, and felt safer than those in Delhi.

Access to justice survey

It is instructive that the biggest cause of under-reporting is not that the police will not take the complaint, but that people feared getting caught up in police and court matters. This is where the results of the Access to Justice Survey by the Daksh Foundation becomes important. This survey is undertaken across 300 district courts all over India, and maps 9329 litigants' perceptions on issues relevant to their experiences with the judicial system. The survey focuses on questions like:

1. Who is accessing the judicial system? This includes information on the socio-economic profile of citizens who seek remedy from courts.
   
2. What are litigants using the judicial system for? What is the subject matter of the civil cases?
   
3. What is the litigants perception of delay in courts? Why do the litigants think the delay occurs?
   
4. What is the cost to litigants of access courts?
   

The survey finds that 84.3% of the litigants were male. Women accounted for only 15% of the litigants, suggesting that women in India don't really access courts. 80% were Hindus, with 45% belonging to the "General" caste category. Most cases are between people of the same religion, that is, 74% of the cases by Hindu survey respondents are against other Hindu respondents, 43% of the cases by Muslim respondents and 75% cases by Christian respondents are against members of their own religious communities. This is similar across caste as well. 15.6% of all litigants had traveled between 50 km and 300 km to reach the courts for hearings.

Those engaged in agriculture accounted for 38% of the litigants, followed by those in private service at 24%. What is interesting is that a large majority of these litigants (almost 80%) are in the less than Rs.3 lakh annual income category. Almost 50% of the litigants have only studied till Class XII. This suggests that it is the low-income individuals that are choosing to access courts. Land and property matters dominate civil litigation across the country, followed by litigation on family matters. This correlates with those in agriculture being the largest category of litigants, and with cases being fought against members of one's own religious communities.

The survey finds that 10% of accused were handcuffed within the court premises. This goes against Supreme court guidelines that guarantee a minimum freedom of movement. Only 63.5% of the accused who were granted bail were in jail in less than one month - this means that almost 40% of accused who were granted bail, had to stay in jail for longer than a month.

The surveyed litigants felt that the two causes of delay were the inability of judges to pass orders quickly, and the non-appearance of opposite parties on the dates fixed for trial. This is costly -- civil litigants spend Rs.497 per day on average for court hearings. They incur a loss of Rs.844 per day due to loss of pay. Criminal litigants spend Rs.542 per day for court hearings on average and incurred a cost of Rs.902 per day due to loss of pay. Their analysis indicates that log-jammed courts are wiping almost 0.5% off India's GDP, and this is likely to be an underestimate because it doesn't measure the cost of cases that never even came to courts.

The way forward

Core public goods like safety are the responsibility of the government. In India, substantial outlays on the criminal justice system are being made, but there is no measurement of the outcome. We are at the early stages of figuring out how to reform courts [link, link] and more generally the criminal justice system. Surveys such as those above are the one of the first few attempts at building a systematic database about the outcomes obtained in the field of the police and courts. This can shape policy thinking in the future, about reforms of the existing criminal justice system, and about the resourcing of this core public good.

Delays at the police

by Renuka Sane and Neha Sinha.

The Chief Justice of India's recent emotional outburst over judicial delays has reignited the discussion on India's criminal justice system. The focus of much of this discussion has been on judicial delays. Policy reform discussions range from increasing the number of judges, and improving the basic infrastructure in courts, to deeper reforms in the form of separating out the administrative function from the judicial function. These discussions are important.

Our ultimate objective, however, is to create deterrence against crime. The criminal justice system is the interlocking institutional infrastructure of laws, police, courts, public prosecutors and prisons. We must, therefore, look at all delays from the date of the crime to the date of the conviction. Judicial delays are one part of this. Delays at the police are an equally important problem.

After a crime takes place, the very ability to conduct an investigation and identify the criminal degrades with time. Witnesses forget, evidence is lost. Delays in investigation drive up the probability of a failed investigation. The urgency of reducing delays here is, in some sense, even greater than the problem of delays at courts.

What do we wish to measure?

In an ideal world, we should see the delays associated with all the steps from the date of the crime to the date of the conviction. The units for this measurement are in days. Fine-grained data is required, at the level of a sample of cases or the population of cases, in order to make statements such as `On average, when a complaint is filed under IPC S.300 (murder), there is a conviction with $x$% probability, and this takes place with a lag of $y$ days.' Two useful metrics are:

1. The age of the case: measured from the date of the FIR registration.
   
   
2. The amount of time devoted to each process: measured as the start and end date for each step from crime to conviction. For ongoing cases, many elements of this pipeline would be NA, and one would be censored.
   
   

Such measurement will help understand where delays occur, what kinds of cases take more time, how lags in the process vary based on the crime involved, and how police resourcing can change various elements of the lag. Answers to such questions can be the basis for improved management of the police.

The current state of measurement on police pendency

Data on reported crime and response by the police is published by the National Crime Records Bureau (NCRB). Information from individual police stations registered as the First Information Report (FIR) is reported to the District Crime Records Bureaus, flowing up to the State Crime Record Bureau which is finally consolidated by the NCRB. The consolidated data processed by the NCRB is published in their annual publication "Crime in India" providing consolidated numbers for crime registered and status of police as well as judiciary responses at the state and national level. Within this, "Disposal of IPC cases by Police" for the states and union territories provide data on cases reported to the police, pending cases, and cases charge sheeted during the year.

Police pendency in year $t$ in the NCRB is defined as the number of cases pending investigation at the end of year $t$ divided by the sum of cases pending investigation from the previous year and cases reported during the year. This pendency rate was 28.10 per cent at an all-India level in 2014 (Table 4.1). As the previous discussion suggests, this is a pretty bad way to measure pendency at the police.

The North Eastern states of Manipur, Meghalaya, Arunachal Pradesh and Assam reported highest pendency rates amongst all states at 84.75 per cent, 69.91 per cent, 57.91 per cent and 55.29 per cent respectively. On the lowest end of reported pendency were Rajasthan, Madhya Pradesh and Chhattisgarh with pendency rates of 7.13 per cent, 7.27 per cent and 9.88 per cent. Does this mean the latter states have a better functioning police force? When data is so aggregated, it is hard to make such inferences.

Conclusion

What you measure is what you can manage. In India, we do not do a good job of collecting and disseminating facts about the criminal justice system, down the full pipeline from the crime that citizens experience through all the steps of government systems going all the way to convictions. What data is available is highly aggregated, and therefore not very useful in studying police actions. For a contrast, consider the data portal of the police in UK. This provides detailed information on each crime that took place in each county in each month, and the latest outcome on the crime. We need to move towards better data collection and dissemination as we embark on the reform of our criminal justice system.


Renuka Sane is a researcher at the Indian Statistical Institute, Delhi. Neha Sinha is a researcher at IDFC Institute in Bombay. We thank Rithika Kumar for valuable discussions.

Reporting information about individuals in self help groups

by Karuna Krishnaswamy.

The problem

On 14th January 2016, RBI issued a circular for banks to report the financial and non-financial data of the individual members of the Self Help Groups (SHG) that they lend to starting July 2016 to credit bureaus. However, while bank know their groups' credit performance, data on the individual members and internal loans reside, if at all, on paper-based registers maintained by SHGs and cannot be readily accessed. This RBI circular is a reiteration of an earlier one dated 27 June 2014 since banks did not make much progress the first time around. There is a chasm to cross between thinking about one group at a time and thinking about one individual at a time.

In March 2014, there were 74 lakh SHGs, with 42 lakh active borrowers, with loans outstanding of INR 43,000 crore (0.3% of the GDP) and savings of INR 9,900 crore (source). However, there are sector-wide concerns about the quality of the groups. With better data we will know how many groups are active and functioning well, and if loans are being disbursed democratically and not captured by the group leaders. RBI's stated intention is for banks, and MFIs to make an informed decision on lending to SHGs after considering their members' indebtedness and past performance through a credit bureau, monitoring NPAs and for research purposes. NABARD and DFS would like to link SHG members to Aadhaar-based programs like PMJDY to offer a wider range of financial services and for direct benefits transfers. Indeed, this is a first step for banks to graduate SHG members to individual services.

Separately, NABARD's e-Shakti program supports the Digital India program through SHG MIS digitisation as does the National Rural Livelihoods Mission. However, past SHG digitisation efforts have not succeeded because they were expensive and/or operationally difficult to implement. The RBI circular further states that banks may incentivise SHGs to adopt digitisation but that they cannot set any pre-conditions (including opening individual saving accounts) to giving them new loans. This makes it an even more difficult task.

The penalty for not complying with RBI's circular is that the loans to the unreported SHGs will not count as Priority Sector Lending (PSL). Given that the SHG portfolio represents a small fraction of the PSL portfolio of most banks, this penalty may not be high enough.

Gramin Bank of Aryavart (GBA), a large Regional Rural Bank, has successfully piloted a novel agent banking model to, inter alia, service SHGs, that promises to overcome these challenges while offering many other benefits. This article discusses the challenges and how this model that could address them.

Past challenges

Past efforts since 2006 have used a bookkeeping software for SHGs for digitising their information such as a laptop-based MIS by SERP for self-entry, groups paying a computer munshi by Pradan, and NABARD's tablet based software. These efforts have not taken off in a big way due to the following challenges:

1. Funds to finance the hardware and software capital expenditure.
   
2. Hiring and training a computer literate operator who can do the data entry for a large number of groups to make the user fees affordable for the groups without sempiternal support of the SHPI; finding people to do the training, and servicing of the hardware and software.
   
3. Getting SHGs to adopt the MIS and to pay for it.
   
4. Given the low data quality, ensuring data correctness, aggregating, verifying and transmitting (especially in areas without GPRS connectivity) to the bank.
   
5. Securing the cooperation of the banks when it is a low priority for them.

The Bank Sakhi model with dual authentication

Based on a successful demonstration project by GBA, supported by the Rural Financial Institutions Programme (a cooperation program of NABARD and GIZ), NABARD issued a circular on 14 January 2016 encouraging banks to appoint SHG members as their Business Correspondents Agents (BCA) for financial inclusion. An indirect benefit of this approach, that is discussed below, is that individual group member data can be collected at low extra cost.

In this project, SHG members, were trained and appointed as BCAs, popularly called Bank Sakhis, to provide doorstep individual financial services as well as to conduct SHG transactions such as savings deposits, loan disbursements and repayments using a conventional PoS device. They were contracted by Bartronics Pvt. Ltd., the Corporate Business Correspondent (CBC) of the bank. The Bank Sakhis were supported by the SHPI, the Rajiv Gandhi Mahila Vikas Pariyojana and their Block Level Federations who were contracted as a sub-BC to Bartronics.

The key innovation of this model is the use of a dual authentication software that resides on the PoS (NABARD and GIZ have a video explaining this). This software enables BCAs to conduct SHG transactions that require two members' approval to be authenticated. Previously, SHG loan disbursements and loan repayments required two leaders from each group to come to the bank branch, fill in the forms along with two signatures. However, now, SHG transactions are conducted like any other BSBDA transaction by a BCA. An electronic debit to the SHG's group account is authorised using fingerprint-based authentication of the two group leaders by the PoS device. These transactions are recorded in real-time at the bank's core banking system (CBS). The Bank Sakhi does cash-in /cash-out to the group account and its individual members and later squares off at the bank branch. Each Bank Sakhi in UP has a service area of 3.5 villages on average and has five SHGs in her command area due to the low SHG penetrations there.

Banks can now have accurate information in their CBS of the loan disbursal, utilisation and repayment performance of individual members along with their Aadhaar IDs obtained through the KYC process of opening the individual and group accounts. Hence, the information to be collected by banks and reported to RBI can be accomplished through this model at low extra cost.

Assessment of the approach

This approach can mitigate the challenges previously identified with the bookkeeping software approach.

Community adoption : An evaluation of the pilot project revealed that although voluntary, all SHGs leaders reported preferring to transact with the Bank Sakhi. This is because the doorstep service saves two members of each group a (bi) monthly visit to the bank branch which otherwise would cost them a day's time in addition to transportation and incidentals. They do not report unacceptable delays to the group meetings due to the technology.

The CBC has the operational experience in servicing PoS technology issues in the field, while the Block Level Associations of the SHG federations are well-positioned to train Bank Sakhis.
This service is more likely to be adopted widely than a bookkeeping software since it solves a specific pain-point of SHGs and their leaders and the incentives of the bank, BCA, group leader and members are well-aligned.

In any case, banks can strongly encourage SHG transactions to be routed through Bank Sakhis since dual authentication ensures that the BCA cannot de-fraud the members. Banks simply need to open an individual saving account (as envisaged by PMJDY) for their loans to land in and for repayments, since only transfers from individual accounts to the group account can be recorded by the PoS and not bulk cash deposits for the entire group, into the group account.

Being group members themselves, Bank Sakhis are very familiar with SHG processes whereas BCAs who are not members are less likely to be embraced by other SHGs. In terms of reliability of the service, in our project after two years, only three Bank Sakhis had quit out of 78 (despite low wages).

Costs and benefits to stakeholders: Banks would have access to SHG transactions data at a low cost. Consider a stylised SHG that has 12 members that deposit mandatory savings twice a month, and of which 6 members have a running loan that they repay once a month. At a fee of INR 3 per transaction payable to the CBC, this costs the bank a reasonable INR 96 per group per month, while the INR 7 lakh for developing the dual authentication software is the only additional capital expenditure. The other costs of device, training and servicing are part of the BCA expenses which are incurred anyway by the bank as part of its FI mandates. Furthermore, NABARD's DFIBT department offers subsidies to encourage use of Bank Sakhis; it will reimburse INR 20,000 to the banks for each PoS device and the wages of a block level coordinator to support the Bank Sakhi. Costs could be further reduced by using smart phones instead of PoS devices.

But the larger benefit to banks is moving the SHG transactions out of their branches and to the Bank Sakhi.

GBA found that migrating SHG transactions from its branch to the Bank Sakhi freed up considerable branch staff time, which could be repurposed for originating and monitoring more profitable credit customers. GBA also reports that the delinquency rates of their SHG portfolios have dropped after the Bank Sakhis were introduced. Financial inclusion through CBCs has not been an attractive business proposition for banks. Enabling Bank Sakhis to service the SHGs' credit portfolio will improve the viability of the BC channel per se.

For members, the INR 96 would be lower than the cost of two leaders going to the bank twice a month. Currently there are no user fees but it is likely that the willingness to pay to not go to the bank branch is higher than to pay for entering SHG transactions into a computer. In the past, there have been concerns that SHG federations may not encourage individual accounts fearing that it may lead to disunity and that the group may fall apart. The Bank Sakhi model has been successfully piloted by two RRBs in two states. The federations in these two sites support the model in spirit and in operations.

In our pilot areas, the number of SHGs per village was very low. In other states such as AP, the number of groups per village is much higher, contributing to a much higher fraction of the Bank Sakhi's income and make it worth her while.

Cooperation by banks: The downside to the banks is low. They are required to fulfil FI, PMJDY and PSL mandates in any case; they only need to appoint Bank Sakhis instead of their conventional BCAs. Bank Sakhis have proven to be more effective in servicing FI customers compared to men and are more tied to the village and are less likely to quit. The main challenge for them is to find qualified SHG members, though this restriction could be relaxed in future to scale faster.

Data quality and reliability: Accuracy of the data is expected to be close to perfect since money is changing hands and both parties will ensure that the amounts entered are correct. Challenges to real-time uploads are in those areas where internet reception is poor.

Human resources and training: This approach reduces the need for the eco-system to hire a separate computer munshi in addition to a BCA and hence the entailing hiring and training costs are reduced as well.

Challenges

One limitation of a PoS device is that it is too unwieldy to install an SHG accounting software on it. This may possibly be addressed by using a tablet PC or even a smart phone, instead, with an accounting software in it and the Bank Sakhi could further play the role of computer munshi if she wants to augment her income.

For this model to work at scale, most of a bank's SHGs should regularly use the Bank Sakhi. Hence, the challenges to this are the same as the challenges to the BC model and to technology such as - availability of internet connectivity; the bank branch should not be too far away for the Bank Sakhi to visit for cash management; competent SHG members should be available in each Gram Panchayat; the Block Level Association or an SHPI should be available for hand-holding support in the early days; and a CBC should be operative in the SHG villages. In our early, experience, none of these have been showstoppers.

However, challenges may crop up in future; a scale-up will not have the abundant project management and oversight that the pilot did; identifying and training Bank Sakhis may take longer than the RBI deadlines; Bank Sakhis may get dissatisfied with their low incomes; the required support from the bank branch managers may not be universally available; funds to conduct campaigns to build awareness and trust in the Bank Sakhis may not be available. However, many of these challenges also apply to the accounting software approach.

Conclusion

In sum, the benefits of this approach are too many to be ignored especially if the banks consider their various mandates in toto and in states with large SHG outreach. Stakeholders are better incentivised to support this model than the bookkeeping model. RBI could support this effort by relaxing its instruction that opening a BSBDA cannot be a pre-condition to loan disbursements, since voluntary community participation is a challenge. However, as with large scale-up of any government program, careful design, and ongoing monitoring and evaluation feeding into design improvements, will maximize the likelihood of effectiveness.


Karuna Krishnaswamy is an evaluation specialist with GIZ, Delhi.

Recessions uncover what auditors do not

On 14 December 2008, I was nervously looking around at the world and wrote a blog post Goodbye great moderation, hello financial fraud?  Almost on cue, we got the Satyam scandal: 21 December, 24 December, and then 7 January. We also got a few other problems in India which (I think) surfaced owing to the Great Recession : NSEL, a rash of ponzi schemes, Sahara, Saradha.

In China, unprecedented times are bringing forth revelations on an unprecedented scale [link, link]. Some of the rackets that are described in China appear quite familiar to us in India, but the magnitudes seen there are astonishingly large. We had such problems in developed markets also -- Madoff and MF Global.

Institutional reform: Consumer protection

One part of addressing this problem is the familiar machinery of the Indian Financial Code (IFC) version 1.1. As an example, see this analysis of ponzi schemes. As an IFC quality law is not found in either China or India, we have a rash of such problems in both countries.

Institutional reform: Criminal justice system

An important subset of financial crime is about plain criminal law. While the main track of financial policy has been along the Indian Financial Code, we need to develop a work program on improvements of the criminal justice system also. Put together, these will create an enforcement machinery that will generate deterrence against big financial scandals.

Procyclicality of trust?

Watching China unfold in recent weeks, I wonder if there's a general proposition of the following nature. Recessions will uncover what auditors could not, but under conditions of low institutional quality, this will happen on a bigger scale. Conversely, when institutional quality is low, business and finance will be hampered at all times by low trust. But in good times, when it's easier for the crooks to keep things under wraps, fewer scandals will burst into the public consciousness, and trust will go up. Procyclicality of trust may be heightened in places with low institutional quality.