Applications for the LAMP Fellowship 2025-26 will open soon. Sign up here to be notified when the dates are announced.
Yesterday, the Supreme Court delivered its first verdict in a series of legal challenges that have been made against the Aadhaar project.[1] In the present matter, the court was examining whether a provision of the Finance Act, 2017 that made Aadhaar mandatory for filing of income tax returns and applying for Permanent Account Number (PAN) cards was constitutionally valid. The court has upheld the validity of this provision, subject to a few qualifications. Below, we discuss the background of the Aadhaar project, why the courts have stepped in to examine its legality, and some aspects of the recent judgement.
What is Aadhaar about, and how is it being used?
Earlier, various identity proofs were required for access to governments benefits, subsidies and services, such as a ration card, driving license or voter id. However, as these proofs could be easily duplicated or forged, there was leakage of benefits and subsidies to ineligible beneficiaries. The Aadhaar project was initiated in 2009 to address these problems. It was envisaged as a biometric-based unique identity number that could help identify eligible persons. It was thought to be a more reliable identity proof, because it sought to authenticate a person’s identity based on their unique biometrics, like fingerprints and iris scans.1
In 2016, Parliament enacted the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 to provide legislative backing to the project. This Act allowed Aadhaar to be used for authentication purposes by the central and state government, as well as by private bodies and persons.[2]
Under its provisions, government has been issuing various notifications making Aadhaar mandatory for government projects, such as LPG subsidies and Mid-Day Meal scheme.[3] In addition, in 2017, Parliament passed the Finance Act to amend the Income Tax Act, 1961, and made Aadhaar mandatory for filing of income tax returns, and applying for PAN.[4]
What is the information collected under Aadhaar?
To obtain an Aadhaar number, a person is required to submit their : (i) biometric information (photograph, 10 fingerprints, scans of both irises), and (ii) demographic information (name, date of birth, gender, residential address) to the Unique Identification Authority of India (UIDAI).[5] The Aadhaar number, the demographic and biometric information (called identity information) is together stored in the Central Identities Data Repository. In addition, every time a person’s identity is authenticated using Aadhaar, information related to the authentication request is recorded as well.
How is this information protected?
While India does not have a comprehensive law on privacy and data security, the Aadhaar Act, 2016 has some protections. For example, it prohibits UIDAI and its officers from sharing a person’s identity information and authentication records with anyone. It also forbids a person authenticating another person’s identity from collecting or using their information without their consent. Other protections include prohibitions against publicly displaying a person’s Aadhaar number and sharing of a person’s fingerprints and iris scans with anyone. Note that there are penalties prescribed for violation of these provisions as well.[6]
However, the Act permits information be disclosed in the interest of national security and on the order of a court.[7]
The UIDAI authority has been made responsible for the operation and maintenance of the Aadhaar database, and for laying down the security protocols for its protection.[8]
Why did the courts step in?
Even as Aadhaar is being rolled out, with about 111 crore of the 125 crore population already on the database, there are several important constitutional and legal questions around the unique identity project.[9][10] While yesterday’s judgement addresses one of these issues, other questions remain unresolved. A description of the key legal questions is provided below.
Privacy: It has been argued that the collection of identity data without adequate safeguards interferes with the fundamental right to privacy protected under Article 21 of the Constitution. Article 21 guarantees right to life and personal liberty. In August 2015, a three judge bench of the Supreme Court passed an order stating that a larger bench must be formed to decide the questions of: (i) whether right to privacy is a fundamental right, and (ii) whether Aadhaar violates this right.[11] However, the court has not set up a larger bench to hear these petitions till June 2017.[12]
Mandatory vs voluntary: Another question before the court is whether Aadhaar can be made mandatory for those government benefits and services, that citizens are entitled to under law. In 2015, the Supreme Court passed some interim orders stating that: (i) Aadhaar cannot be made mandatory for providing citizens with benefits and entitlements, and (ii) it can only be used for seven schemes including PDS distribution of foodgrains and kerosene, LPG distribution scheme, MGNREGA wage payments, and Prime Minister’s Jan Dhan Yojana.11
Subsequently, Parliament enacted the Aadhaar Act, 2016, and the government has been issuing notifications under it to make Aadhaar mandatory for various schemes.3 In light of this, more petitions have been filed challenging these notifications.[13] Judgements on these petitions are awaited as well.
Linking Aadhaar with PAN: In 2017, after Parliament made Aadhaar mandatory for filing of tax returns and applying for PAN under the Income Tax Act, 1961, fresh petitions were filed in the Supreme Court. The new provision stated that if a person failed to link their PAN with the Aadhaar number by a date notified by the central government, their PAN will be invalidated. The government said this will decrease the problem of multiple PAN cards obtained under fictitious names and consequent tax fraud and tax evasion, because Aadhaar will ensure proper identification.1,[14] However, the petitioners argued that this may interfere with a person’s fundamental rights, such as their right to practice any profession, trade or business and right to equality. It is this question that has been addressed in the new judgement.1
Money Bill: The fourth question is related to the manner in which the Aadhaar Act, 2016 was passed by Parliament. The Act was passed as a Money Bill. A Money Bill only needs to be passed by Lok Sabha, while Rajya Sabha may make non-binding recommendations on it. In case of the Aadhaar Act, Rajya Sabha made some recommendations that were rejected by Lok Sabha. It has been argued before the courts that the Aadhaar Act does not qualify as a Money Bill because it contains provisions unrelated to government taxation and expenditure.13,[15]
What has the judgement held?
The Supreme Court has held that the new provision of the Income Tax Act that makes Aadhaar mandatory for income tax assessees is not in violation of the fundamental right to equality, or the fundamental right to practice one’s profession or trade. The petitioners had argued that the new provision discriminates between individual and non-individual assessees (e.g. companies or firms), because it only seeks to address tax fraud by individuals. They had also contended that Aadhaar could not address the problem of tax fraud through duplicate PANs because there was evidence to show that people had multiple Aadhaar numbers as well. The court rejected these arguments (as well as arguments related to freedom to carry on business), stating that Aadhaar is perceived as the best method of eliminating duplicate PANs, and therefore there is reasonable rationale behind linking the PAN database with Aadhaar.1
The court decided not to examine questions related to human dignity and privacy, on the ground that issues affecting Article 21 will be examined by a larger bench to be set up by the court. However, it granted relief to people, who have not enrolled for Aadhaar, by stating that their PAN cards cannot be invalidated till the time when the matter is finally decided by such a bench.
This, in effect, means that the debate around constitutionality and legality of the Aadhaar project will remain ongoing till a judgement is finally pronounced on whether Aadhaar is in violation of right to privacy under Article 21.
[1] Binoy Viswam vs Union of India, Supreme Court, Writ Petition (Civil) No. 247 of 2017, http://www.sci.gov.in/pdf/jud/wc24717_Sign.pdf.
[2] Sections 7, 8 and 57, Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016.
[3] Unstarred Question No. 4126, Lok Sabha, March 27, 2017; Unstarred Question No. 1209, Lok Sabha, February 9, 2017; S.O. 371 (E), Ministry of Consumer Affairs, Food and Public Distribution, February 8, 2017, http://dfpd.nic.in/writereaddata/Portal/Magazine/Document/1_211_1_aadhaar-notification.pdf; S.O. 369 (E), Ministry of Agriculture and Farmers Welfare, February 8, 2017, http://www.egazette.nic.in/WriteReadData/2017/174076.pdf.
[4] The Finance Bill, 2017, http://www.prsindia.org/billtrack/the-finance-bill-2017-4681/.
[5] Regulations 3 and 4, Aadhaar (Enrolment and Update) Regulations, 2016.
[6] Sections 28-47, Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016.
[7] Section 33, Section 23, Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016.
[8] Section 23, Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016.
[9] “UIDAI achieves 111 crore mark on Aadhaar generation; Unique identity covers over 99 percent adult residents of India”, Press Information Bureau, January 27, 2017.
[10] Justice K. Puttaswamy (Retd) and Another vs Union of India and Others, Supreme Court, Writ Petition (Civil) No. 494 of 2012; Jairam Ramesh vs Union of India, Writ Petition (Civil) 231 of 2016; S.G. Vombatkere and Another vs Union of India and Others, Supreme Court, Writ Petition (Civil) 797/ 2016; “Aadhaar: What are the pending cases before the Supreme Court”, Indian Express, May 31, 2017, http://indianexpress.com/article/india/aadhaar-what-are-the-pending-cases-before-the-supreme-court/.
[11] Justice K. Puttaswamy (Retd) and Another vs Union of India and Others, Supreme Court, Writ Petition (Civil) No. 494 of 2012, September 23, 2013, August 11, 2015, October 15, 2015.
[12] “The Aadhaar/ PAN Judgement”, Indian Constitutional Law and Philosophy Blog, https://indconlawphil.wordpress.com/2017/06/09/the-aadhaarpan-judgment/.
[13] “Aadhaar: What are the pending cases before the Supreme Court”, Indian Express, May 31, 2017, http://indianexpress.com/article/india/aadhaar-what-are-the-pending-cases-before-the-supreme-court/.
[14] Uncorrected Lok Sabha Debates, March 22, 2017, Pg. 240, http://164.100.47.193/newdebate/16/11/22032017/Fullday.pdf.
The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much discussion and scrutiny. The Standing Committee on Finance recently released a report on the banking sector in India, where it observed that banks’ capacity to lend has been severely affected because of mounting NPAs. The Estimates Committee of Lok Sabha is also currently examining the performance of public sector banks with respect to their burgeoning problem of NPAs, and loan recovery mechanisms available.
Additionally, guidelines for banks released by the Reserve Bank of India (RBI) in February 2018 regarding timely resolution of stressed assets have come under scrutiny, with multiple cases being filed in courts against the same. In this context, we examine the recent rise of NPAs in the country, some of their underlying causes, and steps taken so far to address the issue.
What is the extent and effect of the NPA problem in India?
Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorized as: (i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped making interest or principal repayments for over 90 days.
As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.
In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 (Figure 1). This indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.
Escalating NPAs require a bank to make higher provisions for losses in their books. The banks set aside more funds to pay for anticipated future losses; and this, along with several structural issues, leads to low profitability. Profitability of a bank is measured by its Return on Assets (RoA), which is the ratio of the bank’s net profits to its net assets. Banks have witnessed a decline in their profitability in the last few years (Figure 2), making them vulnerable to adverse economic shocks and consequently putting consumer deposits at risk.
What led to the rise in NPAs?
Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector.
A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the economy was booming and business outlook was very positive. Large corporations were granted loans for projects based on extrapolation of their recent growth and performance. With loans being available more easily than before, corporations grew highly leveraged, implying that most financing was through external borrowings rather than internal promoter equity. But as economic growth stagnated following the global financial crisis of 2008, the repayment capability of these corporations decreased. This contributed to what is now known as India’s Twin Balance Sheet problem, where both the banking sector (that gives loans) and the corporate sector (that takes and has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their capability of paying back the bank. The banks at this time took to the practice of ‘evergreening’, where fresh loans were given to some promoters to enable them to pay off their interest. This effectively pushed the recognition of these loans as non-performing to a later date, but did not address the root causes of their unprofitability.
Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although the size of frauds relative to the total volume of NPAs is relatively small, these frauds have been increasing, and there have been no instances of high profile fraudsters being penalised.
What is being done to address the problem of growing NPAs?
The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, regulatory means of resolving NPAs per various laws (like the Insolvency and Bankruptcy Code), and second, remedial measures for banks prescribed and regulated by the RBI for internal restructuring of stressed assets.
The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts (where the borrowers are unable to pay their dues). Under the IBC, the creditors of these insolvent accounts, presided over by an insolvency professional, decide whether to restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount. If a timely decision is not arrived at, the defaulter’s assets are liquidated. Proceedings under the IBC are adjudicated by the Debt Recovery Tribunal for personal insolvencies, and the National Company Law Tribunal (NCLT) for corporate insolvencies. 701 cases have been registered and 176 cases have been resolved as of March 2018 under the IBC.
What changed recently in the RBI’s guidelines to banks?
Over the years, the RBI has issued various guidelines aimed at the resolution of stressed assets of banks. These included introduction of certain schemes such as: (i) Strategic Debt Restructuring (which allowed banks to change the management of the defaulting company), and (ii) Joint Lenders’ Forum (where lenders evolved a resolution plan and voted on its implementation). In line with the enactment of the IBC, the RBI, through a circular in February 2018, substituted all the specific pre-existing guidelines with a simplified, generic, time-bound framework for the resolution of stressed assets.
In the revised framework which replaced the earlier schemes, the RBI put in place a strict deadline of 180 days during which a resolution plan must be implemented, failing which stressed assets must be referred to the NCLT under IBC within 15 days. The framework also introduced a provision for monitoring of one-day defaults, where incipient stress is identified and flagged immediately when repayments are overdue by a day.
Borrowers whose loans were tagged as NPAs before the release of the circular recently crossed the 180-day deadline for internal resolution by banks. Some of these borrowers, including various power producers and sugar mills, had appealed against the RBI guidelines in various High Courts. A two-judge bench of the Allahabad High Court had recently ruled in favour of the RBI’s powers to issue these guidelines, and refused to grant interim relief to power producers from being taken to the NCLT for bankruptcy. All lawsuits against the circular have currently been transferred to the Supreme Court, which has now issued an order to maintain status quo on the same. This means that these cases cannot be referred to the NCLT until the Supreme Court’s decision on the circular, although the RBI’s 180-day deadline has passed. This effectively provides interim relief to the errant borrowers who had moved to court till the next hearing of the apex court on this matter, which is scheduled for November 2018.
