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GS Paper: GS3

  • Dostarlimab: The New Wonder Cancer Drug

    A trial on 18 colorectal cancer patients in the US found that cancer could be treated without chemotherapy or surgery. The world is sitting up and taking note of Dostarlimab, which has been called a wonder drug.

    What is Dostarlimab?

    • Dostarlimab is an experimental drug. It contains laboratory-produced molecules.
    • It acts as substitute antibodies. It is sold under the brand name Jemperli.
    • It was approved for medical use in the United States and the European Union in 2021.
    • Its side-effects include vomiting, joint pain, itching, rash, fever etc.

    What are the findings?

    • The trial showed that immunotherapy alone – without any chemotherapy, radiotherapy, or surgery that have been staples of cancer treatment.
    • It could completely cure the patients with a particular kind of rectal cancer called ‘mismatch repair deficient’ cancer”.
    • All 12 patients had completed the treatment and were followed for six to 25 months after.
    • No cases of progression or recurrence had been reported during the follow-up.
    • The response too was rapid, with symptoms resolving in 81% of the patients within nine weeks of starting the therapy.

    Is Dostarlimab actually very effective?

    • Dostarlimab is not a new drug but a combination of drugs that are already approved for use in immunotherapy.
    • There is a possibility that Dostarlimab may improve the outcome and survival rate in rectal cancer patients but to say it as a magic drug for cancer is completely going overboard.

    How does this drug cure?

    • PD1 is a protein that regulates immune function and can sometimes keep T cells from killing cancer cells.
    • The therapy in the trial used PD1 blockades, allowing T cells to kill cancer cells.
    • ‘Mismatch repair deficient’ cancer is most common among colorectal, gastrointestinal, and endometrial cancers.
    • Patients suffering from this condition lack the genes to correct typos in the DNA that occur naturally while cells make copies.
    • Immunotherapy belongs to a category called PD1 blockades that are now recommended for the treatment of such cancers rather than chemotherapy or radiotherapy.

    Will Indian patients get access to the drug?

    • At present, Indian doctors seem to be generally wary of prescribing Dostarlimab for their patients.
    • Experts have termed as optimistic the findings of an ongoing trial—a group of rectal cancer patients showed no signs of a tumour after taking the drug for six months.
    • None of the participants reported any severe side-effects either.
    • Yet, doctors say they want to assess the duration of the response.

    What do we know about the clinical trial?

    • Cancer was treated in all the patients and could not be detected by physical examination, endoscopy, positron emission tomography, or magnetic resonance imaging.
    • Thus, there is a thought that cancer can be treated without chemotherapy or surgery.

    Is it too early to celebrate?

    • Cancer specialists said initial signals show how precision medicine is building the future but they need to test more patients from different areas and other types of cancers.
    • The combination of drugs was administered to a small number of patients and for a specific type of cancer.

     

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  • RBI plans to link Credit Cards with UPI

    The RBI has proposed to allow the linking of credit cards with the Unified Payments Interface (UPI).

    Integrating Credit Cards to UPI

    • The integration will first begin with the indigenous RuPay credit cards.
    • Both the RuPay network and UPI are managed by the same organisation – the National Payments Corporation of India (NPCI).

    What is UPI?

    • UPI is an instant real-time payment system developed by National Payments Corporation of India (NPCI) facilitating inter-bank transactions.
    • The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform.

    Why such move?

    • The linkage of UPI and credit cards could possibly result in credit card usage zooming up in India given UPI’s widespread adoption.
    • The integration also opens up avenues to build credit on UPI through credit cards in India, where in the last few years, a number of startups like Slice, Uni, One etc. have emerged.
    • The move could also be a push to increase adoption by banking on UPI’s large user base.
    • So far, UPI could only be linked to debit cards and bank accounts.
    • This will provide additional convenience to the users and enhance the scope of digital payments.

    What could be the hurdles?

    • There are some regulatory areas that would have to be addressed before the linkage happens.
    • For instance, it is not clear how the Merchant Discount Rate (MDR) will be applied to UPI transactions done through credit cards.
    • UPI and RuPay attract zero-MDR, meaning that no charges are applied to these transactions, which is a key reason behind the prolific adoption of UPI both by users and merchants.
    • The norm has faced pushback from the payments industry.
    • It has argued that it limits the aggregators’ ability to invest in and maintain the financial infrastructure of the payment ecosystem that they have built.
    • Applicability of zero-MDR on UPI could also be a reason why other card networks such as Visa and Mastercard may not have been onboarded to UPI for credit cards yet.

    Note: MDR is a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.

    What is the big picture?

    • UPI has become the most inclusive mode of payment in India with over 26 crore unique users and five crore merchants on the platform.
    • The progress of UPI in recent years has been unparalleled.
    • Many other countries are engaged with us in adopting similar methods in their countries.
    • In May, UPI processed 5.95 billion transactions worth over Rs 10 trillion, a record high since its launch in 2016.
    • NPCI is looking to soon process a billion transactions a day.

     

    Try this PYQ from CSP 2017:

    Q.Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?

     

    (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank

    (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services

    (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards

    (d) The incentive is given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards

     

    [wpdiscuz-feedback id=”jap9mp9zh2″ question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

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  • Monetary tightening and its impact on growth

    Context

    A rate hike in the monetary policy committee’s June meeting was a foregone conclusion after the spike in inflation and an off-cycle surprise interest rate hike on May 4.

    Reasons fast forwarding of interest rate hike

    • 1] Broad based inflation: A confluence of factors has pushed inflation higher and made it persistent and broad-based. 
    • 2] Policy rates are still negative: Even with this hike, the repo rate, the signalling tool for bank interest rates, is still below pre-pandemic levels.
    • The real policy rate (repo rate less expected inflation) remains negative and has some distance to cover before it reaches positive territory — where the RBI would like to see it.
    • 3] Lag in effect: Monetary policy impacts growth, and thereafter, inflation with a lag.
    • To control inflation, the RBI needed to act faster by front loading rate hikes.
    • 4] Elevated inflation expectations: The risk of inflation expectations getting unmoored had risen.
    • Household and business inflation expectations remain elevated, as indicated by the RBI’s inflation expectations survey of households.
    • 5] Interest rate hike in the US: The aggressive stance of the US Federal Reserve and ensuing tightening financial conditions.
    • India is better placed today than in 2013 to face the Fed’s actions with a stronger forex shield.

    How US Fed’s actions affect India?

    • India is not insulated.
    • Capital outflow: The headwinds now are stronger than in 2013 and we have seen net capital outflows since October 2021.
    • S&P Global expects the US federal funds rate to be hiked to 3-3.25 per cent in 2023, higher than the pre-pandemic level, and highest since early 2008.
    • Despite a strong forex hoard, the RBI has had to deploy monetary policy to mute the impact of the Fed’s actions.

    Inflation and its impact

    • Upward pressure on food inflation: The pressure on food inflation has increased owing to the impact of the freak heatwave on wheat, tomatoes and mangoes, which is driving prices higher.
    • This is on top of rising input costs for agricultural production, the global surge in food prices and the expected sharper than usual rise in minimum support price.
    • Fuel inflation will remain high, duty cuts notwithstanding, as global crude prices remain volatile at elevated levels.
    • Core inflation, the barometer of demand, is a complex story.
    • Goods (despite only partial pass-through of input costs) are witnessing higher inflation than services.
    • That’s because services faced tighter restrictions during the Covid-19 waves, restricting their consumption and the pricing power of providers as well.
    • Service categories that are mostly regulated, such as public transport, railways, water and education, have over 50 per cent weight in core services.
    • However, prices of discretionary services such as airlines, cinema, lodging and other entertainment are rising.
    • Transportation-related services have seen the sharpest rise in the past six months due to fuel price increases.
    • Impact on the poor: For those at the bottom of the pyramid, high inflation hits harder because energy and food are a big chunk of their consumption basket.

    Growth prospects

    • S&P Global has recently cut the growth outlook for major economies for 2022 — that of the US to 2.4 per cent from 3.2 per cent, for Eurozone to 2.7 per cent from 3.3 per cent earlier, and for China to 4.2 per cent from 4.9 per cent.
    • This will hurt exports which are very sensitive to global demand.

    Monetary policy actions

    • Not all aspects of supply-driven inflation can be addressed via monetary policy.
    • So the authorities are complementing monetary policy actions by using the limited fiscal space to cut duties and extend subsidies to the vulnerable.

    Conclusion

    Monetary tightening impacts growth with a lag of at least 3-4 quarters and the fact that real interest rates are negative and borrowing rates still below pre-pandemic levels, implies monetary policy is unlikely to be growth-restrictive for this year.

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  • Challenges in global growth recovery

    Context

    The global economy was well on its path to recovery until the invasion of Ukraine by Russia.

    Uncertainties in global growth prospects

    • Divergent economic recoveries: Economic prospects have worsened since the Ukraine crisis, worsening the divergence between the economic recoveries of advanced economies and those of the developing ones.
    • The prevailing uncertainties in global growth prospects come in the aftermath of frequent disruptions to worldwide supply chains in the last two years.
    • Against this background, two key macroeconomic variables have a persistent effect on growth rebound.
    • 1] Price pressure: There is tenacious price pressure, leading to policy trade-offs especially in developing economies.
    • 2] Capital outflow: There have been capital outflows and a tightening of financial conditions, affecting investment and growth in the medium and long term.

    1] Price pressure

    • Global concern: In some of the advanced economies, inflation has reached its highest level in the last 40 years.
    • The major contributors to high inflation are energy and food prices.
    • A spike in oil and gas prices due to a tight fossil fuel supply and geopolitical uncertainty have led to substantial increases in energy costs worldwide.
    • In developing economies, rising food prices have had cascading effects, culminating in higher overall inflation.
    • This gets intensified if poor weather hits harvests and rising oil prices drive up the cost of producing and transporting fertilizers.
    • In developing economies, higher prices for food impacts different sections of the population differently, depending on the types of food consumed and the share of food expenditure in a household’s consumption basket.
    • Persistent short supply and increases in food and fuel prices could significantly increase the risk of social unrest as the poorer sections are pushed to the edge of heightened deprivation.

    2] Capital outflow

    • Emerging markets suffered their first portfolio outflows in a year in March 2022.
    • The Institute of International Finance (IIF) says “foreign net portfolio outflows for emerging markets came to $9.8 billion in March.
    • Investors have become more selective, as higher risk sensitivity mounts due to tighter monetary conditions and rising inflation.
    • Reasons for capital outflow: Interest rates tightening in the United States is associated with capital flow reversals from emerging markets.
    • Impact on developing economies: For developing economies, the result of sudden large capital outflows is currency depreciation and tighter external sector conditions, leading to growth fluctuations.

    Way forward

    • Monitor the pass-through of international prices: Though the factors contributing to high inflation (global supply shocks) are beyond the control of central banks, they need to carefully monitor the pass-through of rising international prices to domestic inflation to calibrate their responses.
    • Calibrate the pace of policy tightening: The pace of policy tightening needs to be attuned to prevailing economic situations and activity levels.
    • Communicate the importance of inflation targeting: Central banks could also signal a readiness to shift the monetary stance to maintain the credibility of their inflation-targeting frameworks by clearly communicating the importance of inflation stabilisation in their objectives and backing it with policy actions.
    • Foreign exchange interventions: As sudden capital flow reversals can threaten financial stability, foreign exchange interventions could address market imbalances.
    • Fiscal consolidation: There exists an imperative to prune expenditure and get back to the road of fiscal consolidation.
    • However, a push for consolidation should not prevent governments from prioritising spending to protect and help vulnerable populations affected by price increases and the pandemic.
    • Income support policies: In the post-pandemic global economy, there will be a likely cross-sectoral labour reallocation.
    •  These transitions require labour market and income support policies that are designed to provide safety nets for workers without hindering employment growth.

    Conclusion

    The message from the current phase of global growth is clear. Policymakers in the developing economies have to prepare for tighter financial conditions and spillovers from geopolitical volatility.

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  • Understanding SEBI Rules on Passive Funds

    The Securities and Exchange Board of India (SEBI) recently issued a circular on passive funds covering matters related to transparency, liquidity and operational aspects of exchange-traded funds (ETFs) and index funds.

    What are Passive Funds?

    • A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in.
    • Unlike with an active fund, the fund manager does not decide what securities the fund takes on.
    • This normally makes passive funds cheaper to invest in than active funds, which require the fund manager to spend time researching and analysing opportunities to invest in.
    • Tracker funds, such as ETFs (exchange traded funds) and index funds fall under the banner of passive funds.

    What is a passive ELSS scheme?

    • Passive funds mimic an underlying index. By contrast active funds are actively managed by fund managers.
    • The SEBI has now introduced a passive equity-linked saving schemes (ELSS) category, which will give taxpayers another investment option to avail of tax benefits.
    • According to the circular, the passive ELSS scheme will be based on any index comprising equity shares from the top 250 companies in terms of market capitalization.
    • Beginning 1 July, a fund house will be able to either have an active ELSS scheme or a passive ELSS scheme, but not both.

    What are the norms for debt ETFs?

    • Passive debt funds are now divided into three categories:
    1. Corporate debt funds with exposure to corporate bonds
    2. G-Sec funds investing in government securities, and
    3. Hybrid funds where allocation is a combination of corporate bonds and government securities
    • Currently, debt funds in the passive category invest only in AAA-rated instruments.
    • The Sebi circular introduces norms for each debt fund category, including portfolio exposure limits to each sector, the issuer (based on rating) and group.
    • Application of these provisions should help mitigate concentration risk in debt ETFs/ index funds.

    What about tracking error?

    • As per Sebi’s circular, passive funds must disclose ‘tracking error’ and ‘tracking difference’ in their monthly fact sheets.
    • These metrics indicate how different the performance of the fund is compared to its underlying index—an effort to keep investors better informed.
    • The circular specifies limits for tracking error and tracking difference, which passive funds must follow.

    What is the mandate on disclosing NAVs?

    • Because of poor liquidity for ETFs in the secondary market in India, ETF prices could differ widely from the net asset value (NAV) of the fund.
    • The NAV of the fund represents the value of the underlying asset of the ETF.
    • The Sebi circular mandates disclosure of NAV (indicative) on a continuous basis throughout the day on the stock exchange.
    • While the practice is already in existence, Sebi rules institutionalize it.
    • Checking the NAV can help one avoid making a transaction at a significant premium or discount.

    Can one execute ETF transactions directly?

    • Investors can buy or sell units of ETFs only on stock exchanges.
    • But, large buy or sell transactions can also be directly placed with the fund house.
    • Sebi now says orders greater than ₹25 crore alone can be placed for redemption or subscription directly with the asset management company (AMC).

     

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  • What is a Not-for-Profit Company?

    The Enforcement Directorate (ED) has summoned Rahul Gandhi and Sonia Gandhi following a trial court order in a tax assessment case of his not-for-profit company.

    What is the case?

    • A case alleged cheating and misappropriation of funds on part of the leaders in acquiring the newspaper.
    • The alleged persons acquired it through a Section 25 company — in which they have 86% stake.

    What is a Section 25 company?

    • It is defined under the Companies Act, 1956.
    • It is a not-for-profit charitable company.
    • It is formed with the sole object of promoting commerce, art, science, religion, charity, or any other useful object.
    • It intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members
    • Section 8 of the Companies Act, 2013 includes other objects such as sports, education, research, social welfare and protection of the environment among others.

    Fiscal activities allowed

    • While it could be a public or a private company, a Section 25 company is prohibited from payment of any dividend to its members.
    • Section 25 states that by its constitution the company is required/ intends to apply its profits, if any, or other income in promoting its objects and is prohibited from paying any dividend to its members.

    What are prominent examples of such companies?

    • According to details available with the Ministry of Corporate Affairs, a large number of companies have been formed under the Section.
    • Among these are Reliance Foundation, Reliance Research Institute, Azim Premji Foundation, Coca Cola India Foundation, and Amazon Academic Foundation.

    Why are such companies formed?

    • Most people looking to form a charitable entity go for forming a company under Section 25, now Section 8, rather than a Trust structure.
    • This is because most foreign donors like to contribute to a company rather than Trust because they are more transparent and provide more disclosures.
    • If a company has to be converted into a not-for-profit company, they can’t be converted into a Trust, however, they can be converted into a Section 25/ Section 8 company.

     

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  • Chief of Defence Staff (CDS)

    Setting the stage for appointment of the next Chief of Defence Staff (CDS), the government has amended Service Rules of the Army, Navy and Air Force.

    The post of CDS has also been lying vacant since the demise of Late. Gen. Bipin Rawat.

    What is the update in rules?

    • The govt has allowed retired Service Chiefs and three-star officers eligible for consideration for the country’s top military post.
    • However, with an age limit that the retired officer should not have attained 62 years on the date of appointment.
    • Retired Service chiefs are largely ruled out, especially so for the present consideration.

    Office of the Chief of Defence Staff (CDS)

    • The CDS is a high military office that oversees and coordinates the working of the three Services, and offers seamless tri-service views and single-point advice to the Executive.
    • On long-term it provides for defence planning and management, including manpower, equipment and strategy, and above all, “joint manship” in operations.
    • In most democracies, the CDS is seen as being above inter-Service rivalries and the immediate operational preoccupations of the individual military chiefs.
    • The role of the CDS becomes critical in times of conflict.

    Duties and Functions of the CDS

    The Ministry of Defence has outlined various functions and duties for the post of CDS:

    • To head the Department of Military Affairs in Ministry of Defence and function as its Secretary.
    • To act as the Principal Military Advisor to Raksha Mantri on all Tri-Service matters.
    • To function as the Permanent Chairman of the Chiefs of Staff Committee
    • To administer the Tri-Service organizations/agencies/commands.
    • To be a member of Defence Acquisition Council chaired by Raksha Mantri.
    • To function as the Military Advisor to the Nuclear Command Authority.
    • To bring about jointness in operation, logistics, transport, training, support services, communications, repairs and maintenance, etc of the three Services.
    • To implement Five-Year Defence Capital Acquisition Plan and Two-Year roll-on Annual Acquisition Plans, as a follow up of Integrated Capability Development Plan.
    • To bring about reforms in the functioning of three Services with the aim to augment combat capabilities of the Armed Forces by reducing wasteful expenditure.

    Why need CDS?

    • Tri-services coordination: The creation of the CDS will eventually lead to the formation of tri-service theatre commands intended to create vertical integration of the three forces.
    • Single-point military advisory: The CDS will be a single-point military adviser to the government and synergise long term planning, procurements, training and logistics of the three Services.
    • Efforts saving: This is expected to save money by avoiding duplication between the Services, at a time of shrinking capital expenditure within the defence budget.
    • Military diplomacy: This is today supporting conventional diplomacy. That can’t be done by different Services.

     

     

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  • What are ‘Green Jobs’, mentioned by PM in his Environment Day speech?

    At an event to mark World Environment Day recently, PM mentioned India’s efforts to create ‘green jobs’.

    What are ‘Green Jobs’?

    • ‘Green jobs’ refer to a class of jobs that directly have a positive impact on the planet, and contribute to the overall environmental welfare.
    • Jobs involving renewable energy, conservation of resources, ensuring energy efficient means are categorised under the same.
    • In all, they are aimed at reducing the negative environmental impact of economic sectors and furthering the process of creating a low-carbon economy.
    • The idea behind a low-carbon economy or decarbonisation is fairly simple — it is about maintaining a sustainable economy.

    India and ‘green jobs’

    • The Skill Council for Green Jobs was launched by the Union government on October 1, 2015.
    • Aligned to the National Skill Development Missions, it was set up to be a not-for-profit, independent, industry-led initiative.

    Why need Green Jobs?

    • The UNEP’s 2019 Emissions Gap report dictates that it is essential for greenhouse gas emissions to reduce by 7.6% per annum between the years 2020 to 2030.
    • This is necessary to reach the target that was set during the Paris Agreement.
    • Failing to meet the same would consequently result in a failure to effectively combat global warming.
    • Consequently, a decarbonized economy plays a key role in ensuring a greener, safer, healthier and more sustainable planet to inhabit.

    Way forward

    • According to the ILO, India moving to a green economy by the next decade would alone create about 3 million jobs in the renewable energy sector.
    • The renewable energy sector created about 47,000 new jobs in 2017 accounting for a 12% increase in just the span of a year.
    • For India ‘green jobs’ can prove immensely useful to the country with sectors like renewable energy, waste management, green transport and urban farming.
    • An integrated, systematic approach is crucial to ensuring this.

     

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  • Tamil Nadu tops State Food Safety Index (SFSI)

    Tamil Nadu topped the State Food Safety Index (SFSI) this year.

    Food safety has been in news this year quite frequent. Do make a note of following – Recommended Dietary Allowance (RDA), Red Octagon, Eat Right Movement, Food Safety Mitra etc.

    State Food Safety Index (SFSI)

    • FSSAI has developed State Food Safety Index to measure the performance of states on various parameters of Food Safety.
    • This index is based on the performance of State/ UT on five significant parameters set by the Health Ministry, namely
    1. Human Resources and Institutional Data
    2. Compliance
    3. Food Testing – Infrastructure and Surveillance
    4. Training & Capacity Building and
    5. Consumer Empowerment
    • The Index is a dynamic quantitative and qualitative benchmarking model that provides an objective framework for evaluating food safety across all States/UTs.

    Highlights of the 2022 Report

    • Tamil Nadu is followed by Gujarat and Maharashtra. Among the smaller States, Goa stood first, followed by Manipur and Sikkim.
    • Among the Union Territories, Jammu and Kashmir, Delhi and Chandigarh secured the first, second and third ranks.

    Back2Basics: Food Safety and Standards Authority of India (FSSAI)

    • The FSSAI is an autonomous body established under the Ministry of Health & Family Welfare, Government of India.
    • It has been established under the Food Safety and Standards Act, 2006 which is a consolidating statute related to food safety and regulation in India.
    • It is responsible for protecting and promoting public health through the regulation and supervision of food safety.
    • It is headed by a non-executive Chairperson, appointed by the Central Government, either holding or has held the position of not below the rank of Secretary to the Government of India.

     

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  • What are Bad Banks?

    The finance ministry said the Rs 6,000-crore National Asset Reconstruction Company (NARCL) or bad bank is expected to take over the first set of non-performing accounts of banks next month.

    What is a Bad Bank?

    • A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
    • Technically, it is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
    • Such a bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
    • The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

    Bad Banks to be established

    • The NARCL-IDRCL structure is the new bad bank.
    • The National Asset Reconstruction Company Limited (NARCL) has already been incorporated under the Companies Act.
    • It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
    • Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market.

    How will the NARCL-IDRCL work?

    • The NARCL will first purchase bad loans from banks.
    • It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
    • When the assets are sold, with the help of IDRCL, , the commercial banks will be paid back the rest.
    • If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
    • The difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.

    Will a bad bank resolve matters?

    • From the perspective of a commercial bank saddled with high NPA levels, it will help.
    • That’s because such a bank will get rid of all its toxic assets, which were eating up its profits, in one quick move.
    • When the recovery money is paid back, it will further improve the bank’s position.
    • Meanwhile, it can start lending again.

    Why do we need a bad bank?

    • The idea gained currency during Rajan’s tenure as RBI Governor.
    • The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
    • However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
    • ARCs have not made any impact in resolving bad loans due to many procedural issues.
    • While commercial banks resume lending, the so-called bad bank, or a bank of bad loans, would try to sell these “assets” in the market.

    Good about the bad banks

    • The problem of NPAs continues in the banking sector, especially among the weaker banks.
    • The bad bank concept is in some ways similar to an ARC but is funded by the government initially, with banks and other investors co-investing in due course.
    • The presence of the government is seen as a means to speed up the clean-up process.
    • Many other countries had set up institutional mechanisms such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system.

    Back2Basics: NARCL

    • NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC).
    • NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution.
    • Public Sector Banks will maintain 51% ownership in NARCL.
    • The NARCL will acquire assets by making an offer to the lead bank.
    • Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.

     

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