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By:

Sagari Gupta

24 March 2026 at 2:16:04 pm

The Friction in India’s Credit Machine

While better digital evidence can strengthen recovery, Indian lenders still face the deeper costs of slow adjudication and enforcement. AI generated image India has become remarkably adept at moving money, but far less efficient at dealing with what happens when a financial promise is broken. For a lender, the risk of default does not end with assessing whether a borrower will repay. It also lies in what follows: how easily a claim can be established, how quickly records can be produced, how...

The Friction in India’s Credit Machine

While better digital evidence can strengthen recovery, Indian lenders still face the deeper costs of slow adjudication and enforcement. AI generated image India has become remarkably adept at moving money, but far less efficient at dealing with what happens when a financial promise is broken. For a lender, the risk of default does not end with assessing whether a borrower will repay. It also lies in what follows: how easily a claim can be established, how quickly records can be produced, how long a dispute may take and how much value can ultimately be recovered. This hidden cost of credit - the friction between default and enforcement - remains one of the less visible constraints on India’s financial economy. The Bankers’ Books Evidence Bill, 2026, passed by Parliament on August 10, is therefore more than an update to a 135-year-old banking law. The Bill replaces the Bankers’ Books Evidence Act, 1891, and brings the evidentiary framework closer to the way banking operates today. It expands the definition of bankers’ books to include records maintained in physical, electronic, digital, virtual and cloud-based formats, while providing for their certification and production as evidence. Economic Significance Other than the legal implications, its economic significance is broader. A loan creates a financial claim. When the borrower repays, that claim requires little intervention from the legal system. When the borrower defaults, the claim has to be established, documented, adjudicated and recovered. Every delay or uncertainty along that chain can impose a cost on the creditor. That cost can appear through legal expenses, management time, provisions against stressed assets, capital tied up in disputed claims and uncertainty over eventual recovery. Over time, these costs can influence where lenders are willing to extend credit and on what terms. This is why enforcement institutions belong in any serious discussion about financial intermediation. India’s banking system has made considerable progress in repairing its balance sheets. The Reserve Bank of India’s June 2026 Financial Stability Report placed the gross non-performing asset ratio of scheduled commercial banks at 1.8 per cent in March 2026. The report also assessed the banking sector as resilient under its stress-test scenarios. That is a major improvement. But a lower stock of bad loans does not mean the cost of recovering a bad loan has disappeared. The experience of the Insolvency and Bankruptcy Code makes the distinction clear. The IBC was designed to provide a time-bound process for resolving insolvency and improving the value realised by creditors. Subsequent amendments have continued to address procedural delays and interpretational problems in the resolution process. The economic reason is straightforward: distressed assets lose value with time. The 1891 legislation was created for a banking system in which records were largely physical. Contemporary banking is different. A single financial relationship can generate records across core banking systems, electronic statements, payment platforms, automated mandates and cloud infrastructure. Reflecting Reality The legal framework has to reflect that reality. The new Bill does so by recognising a wider range of digital and electronic records as bankers’ books and establishing provisions governing their evidentiary use. The legislation also provides for certification of electronic records, an important issue when digital documents are relied upon in legal proceedings. But digital evidence does not automatically mean faster enforcement. A record can be electronically available and still generate questions about authenticity, integrity, certification or relevance. A court may have access to a document and still lack the capacity to resolve the underlying dispute quickly. The reform therefore works on only part of the enforcement chain: record -authentication – adjudication- recovery - realisation. The Bill primarily strengthens the first two stages. Its economic payoff depends on whether the remaining stages function efficiently. That matters because India’s judicial system continues to carry a substantial backlog. The Department of Justice maintains national data on case pendency across the subordinate judiciary and High Courts, illustrating the scale of the adjudicatory capacity constraint. For financial markets, the implication is straightforward. If evidence can be produced more efficiently but the underlying dispute still takes years to resolve, only part of the enforcement cost has been reduced. The Bill can reduce one source of uncertainty in the recovery process. If a bank can establish the authenticity and evidentiary status of its digital records more efficiently, the procedural cost of pursuing a legitimate claim can fall. If that improvement is combined with faster commercial adjudication, effective insolvency proceedings and stronger recovery institutions, the cumulative effect can improve the functioning of credit markets. This matters particularly for smaller businesses. A large corporation can generally absorb legal costs and prolonged disputes more easily than an MSME. For a small enterprise, delayed payment from a customer can become a working-capital problem. A lender financing that enterprise must then account for both the operating risk of the borrower and the institutional risk associated with recovery. Credit decisions are made with those risks in mind. A bank considering a small-business loan is not asking only whether the borrower is likely to repay. It is also assessing what happens if the borrower does not. How transparent are the financial records? What collateral is available? Can the lender establish its claim? How quickly can the dispute be resolved? What proportion of the outstanding amount is likely to be recovered? These questions influence lending decisions before a loan is sanctioned. This is where ‘enforcement friction’ becomes a financial variable. A lender facing greater uncertainty around recovery may demand stronger collateral, impose tighter lending conditions or avoid some borrowers altogether. The effect can be particularly important at the edges of formal credit, where borrowers have limited collateral and less established financial histories. Reducing enforcement friction, therefore, is not the same as making credit artificially cheaper. It is about improving the institutional conditions under which credit is allocated. Banking Records Digital bank records contain much more than evidence of a particular loan. They can reveal transactions, counterparties, income flows and patterns of financial activity. As the law makes such records easier to produce and use, safeguards around access become more important. A modern financial system needs legitimate investigations and legal proceedings to obtain relevant evidence. But efficiency cannot mean unrestricted access to financial information. The credibility of digital financial infrastructure depends on both evidentiary reliability and institutional restraint. That requires clear authorisation, targeted access, proper audit trails and accountability over who accessed records and for what purpose. India’s digital finance story has largely been measured through transaction speed and scale. But financial infrastructure is broader than payment infrastructure. A functioning credit market also requires reliable records, credible contracts, predictable insolvency processes, effective recovery mechanisms and courts capable of resolving disputes within reasonable time. The Bankers’ Books Evidence Bill belongs to that wider infrastructure. While it does not solve India’s enforcement problem or eliminate credit risk, it can remove an increasingly outdated evidentiary constraint from a financial system that has moved far beyond the assumptions of 1891. The cost of enforcement rarely appears as a separate line on a loan agreement. It is embedded in risk assessments, legal expenditure, recovery timelines and lending decisions. It is, in effect, a hidden tax on credit. Reducing that tax will require more than the new law. It will require courts that can process commercial disputes faster, insolvency mechanisms that preserve value, digital systems that generate reliable audit trails and safeguards that prevent unnecessary access to sensitive financial information. The Bankers’ Books Evidence Bill is one component of that larger institutional architecture. India has built financial rails that can move money in seconds. It now needs equally credible institutional rails for establishing claims, resolving disputes and recovering value. (The writer is an independent public policy researcher. Views personal.)

Why is Mamata Seeing Ghost of Bangladesh?

Updated: Oct 21, 2024

Why is Mamata Seeing Ghost of Bangladesh?

Mamata is seeing a ghost of Bangladesh behind the massive outrage and waves of protest over rape and murder of the trainee doctor. And the reasons are many.

It’s been over a fortnight. Yet with each passing day the voice of protest is getting louder and stronger. From the streets of Kolkata it’s pouring into roads of hinterland. The cry for justice for a rape victim has consolidated into a wail of demands to set a lot of wrongdoings right. Here in lies the fear and trepidation. Wasn’t the issue that brought the youth of Bangladesh out on the thoroughfares a simple, innocent one of quota reform?

The chief minister of Bengal, known for understanding the pulse of people better than many, was quick to read the signages floating in the political horizon.

The most obvious reason for her to be tensed is that both the regime change in Bangladesh and the mass protest in Bengal, were student-driven to begin with. The two incidents---end of 15 year old Sheikh Hasina government and turbulence in West Bengal, over the heinous crime, falling back to back, the first on August 5th and the latter from August 9th onwards, give natural scope for comparisons. More so, because in both the cases the movement strayed beyond an affected constituency to include aggrieved people at large, cutting across socio-economic demography. If the quota reform protest started by students in Bangladesh became a mass uprising against an autocratic regime, the campaign demanding justice for the rape victim and overall safety and security of women in Mamata Banerjee’s Bengal soon snowballed into a movement of no-confidence against the government. Slogans--”Mamata must resign” also got floated in social media much in line with the call for ouster of Sheikh Hasina. In fact “Resignation of Hasina” became the single point agenda into which all other fringe demands coalesced.

Incidentally, even before people started drawing parallels, that there could be a thread of commonality in the way the upheaval in Bangladesh and Bengal played out, Mamata was quick to point out that the Opposition were trying to pull off a Bangladesh by politicizing the tragic incident: “A coordinated approach has been executed by the BJP and the CPIM with support from the Centre to defame Bengal and exploit the situation....They want to make a Bangladesh here. They are taking cues from student unrest in Bangladesh and are attempting to capture similarly. I have no longing for the chair. I came here to serve people.”

Not only Mamata, her political lieutenants are consistently equating the turmoil in Bengal with the mayhem in Bangladesh. Cabinet minister for North Bengal development Udayan Guha threatened to take stern action against those, who would be trying to exploit the situation by emulating a Bangladesh like movement. “ Even after the hospital was vandalised, the police did not open fire on anyone. The police will not allow a Bangladesh type situation. We will not allow Bengal to turn into Bangladesh, Guha thundered.

Is the government’s fear unfounded?

Apart from the similarities on ground zero, as to how and where the future course of events are heading to, there are ample reasons for Bengal to mull on-- as to what led to a Bangladesh like boiling point. To begin with, it’ll be appropriate to talk of Bangladesh and the prevailing situation, that made the students’ protest become big in magnitude. The students were out on the streets because of a high reservation in public jobs. Unemployment and stagnant job market in private sector coupled with a high rate of inflation drove the educated youth to rebel against the government.

But soon the students found enormous number of sympathisers, who were equally at the receiving end. According to Bangladesh citizens, the last two terms of the Sheikh Hasina government were a mockery of democracy. Even elections would be compromised. As Hasina grew from strength to strength, she politicized institutions. The rank and file of police owed allegiance to the ruling dispensation. Extortion, harrassment and raids by police and people in power became rampant. An atmosphere of fear and repression reigned and people got restless to overthrow the government.

Politicization of institutions has been happening in Mamata government too. Allegations are quite strong that police in Bengal functions at the beck and call of political bosses. The lapses and alleged loopholes on the part of police in handling the rape and murder of the young doctor have yet again revealed a sense of confused or misplaced loyalty.

But above everything else both Hasina and Mamata governments allegedly seem to have twined in accepting corruption as a way of life. In Bangladesh jobs of primary and secondary teachers got sold at premium, Rs 10-12 lakh in the Hasina regime. Even police had to pay up for prized postings and transfers. In Bengal busting of the teacher’s recruitment scam has revealed how unsuccessful and ineligible candidates got government jobs in schools in exchange of bribes.

Similarities are multiple and inescapable. Mamata has good reasons to be apprehensive. It’s not only she, who can see and connect the dots. People, out on the streets, clamoring for justice, can see a providential pattern somewhere in the unfolding of future events in these two places-- Bangladesh and Bengal. True, they share more than 2,217 odd km of border. They share the same umbilical cord, other than language, culture, ethos, icons. Even emotions are the same. So she cannot take any risk.

(The writer is a senior jounalist based in Kolkata. Views personal)

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