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GS Paper: GS3

  • Microplastics Pollution in Ganga

     

    The Ganga is heavily polluted with microplastics at Varanasi, Haridwar, and Kanpur, Delhi-based non-profit Toxics Link claimed.

    What are Microplastics?

    • Microplastics are plastics that are less than 5 mm in size but are a major source of marine pollution.
    • Untreated sewage from many cities along the river’s course, industrial waste, and religious offerings wrapped in non-degradable plastics pile pollutants into the river as it flows through several densely populated cities.
    • The plastic products and waste materials released or dumped in the river break down and are eventually broken down into microparticles.
    • The rivers finally transport significantly large quantities downstream into the ocean, which is the ultimate sink of all plastics being used by humans.

    Microplastics in Ganga

    • They are non-degradable plastics that often entered the Ganga through industrial waste or packaging of religious offerings, its research found.
    • The density of population in the three cities also added to the problem because a large chunk of pollutants got directly discharged into the river by people living on the banks.
    • Among the three cities, the Toxics Link’s study found that sites at Varanasi showed the maximum load of microplastics in the water of the Ganga, as compared to the other two cities.
    • This might be due to cumulative downstream pollution as well as industrial and human activities.

    On a global high

    • The researchers tried to compare the microplastics concentration in Ganga water with similar studies on other rivers across the globe.
    • It included the Rhine in Europe, the Patapsco, Magothy, Rhode in North America, and the Elqui, Maipo, Biobio, and Maule in South America.
    • They found the Ganga microplastics pollution was much higher.
    • This was in spite of a higher per capita consumption of plastic in the European countries, North and South America, as compared to India.

    How does it impact people?

    • The Ganga is a source of water for not just drinking and bathing purposes but also for irrigation to a large extent.
    • Microplastics in river water, if ingested in humans or other organisms, can cause toxicity through various means.
    • Not only are these microplastics toxic themselves, they also have a tendency to absorb various toxins present in water, including harmful chemicals.
    • Although some of the effects of microplastics on public health are understood, a lot still needs to be done.

    Answer this PYQ in the comment box:

    Q. Why is there a great concern about the ‘microbeads’ that are released into the environment? (CSP 2019)

    (a) They are considered harmful to marine ecosystems.

    (b) They are considered to cause skin cancer in children.

    (c) They are small enough to be absorbed by crop plants in irrigated fields.

    (d) They are often found to be used as food adulterants.

  • [pib] India improves score in Ease of Cross-Border Trade

    As per the latest UN Global Survey on Digital and Sustainable Trade Facilitation, India’s rank moved up from 78.49% in 2019 to 90.32% in 2021.

    About the Survey

    • The Global Survey on Digital and Sustainable Trade Facilitation is conducted every two years by UNESCAP.
    • The 2021 Survey includes an assessment of 58 trade facilitation measures covered by the WTO’s Trade Facilitation Agreement.
    • The Survey is keenly awaited globally as it evidences whether or not the trade facilitation measures being taken have the desired impact and helps draw comparison amongst countries.
    • A higher score for a country also helps businesses in their investment decisions.

    Global performance

    • Among developed countries, Australia, New Zealand, Netherlands, Japan, and Belgium have scored more than 93%.
    • In South Asia, Bangladesh and Sri Lanka were behind India with a score of 64.5% and 60.2%, the survey showed.

    India’s improvement

    • India has scored 90.32% in United Nation’s Economic and Social Commission for Asia Pacific’s (UNESCAP) latest Global Survey on Digital and Sustainable Trade Facilitation.
    • The Survey hails this as a remarkable jump from 78.49% in 2019.

    India’s significant improvement in the scores on all 5 key indicators, as follows:

    1. Transparency:100% in 2021 (from 93.33% in 2019)
    2. Formalities: 95.83% in 2021 (from 87.5% in 2019)
    3. Institutional Arrangement and Cooperation: 88.89% in 2021 (from 66.67% in 2019)
    4. Paperless Trade: 96.3% in 2021 (from 81.48% in 2019)
    5. Cross-Border Paperless Trade: 66.67% in 2021 (from 55.56% in 2019)
    • The Survey notes that India is the best-performing country when compared to the South and southwest Asia region (63.12%) and the Asia Pacific region (65.85%).
    • The overall score of India has also been found to be greater than many OECD countries including France, UK, Canada, Norway, Finland etc. and the overall score is greater than the average score of EU.
    • India has achieved a 100% score for the Transparency index and 66% in the “Women in trade” component.

  • [pib] Bhartiya Prakritik Krishi Padhati (BPKP)

    The Union Minister of Agriculture has provided useful information regarding the Bhartiya Prakritik Krishi Padhati (BPKP).

    Bhartiya Prakritik Krishi Padhati (BPKP)

    • Natural farming is promoted as BPKP under a centrally sponsored scheme- Paramparagat Krishi Vikas Yojana (PKVY).
    • The scheme mainly emphasizes the exclusion of all synthetic chemical inputs and promotes on-farm biomass recycling.
    • It stresses biomass mulching; use of cow dung-urine formulations; plant-based preparations and time to time working of soil for aeration.
    • Under BPKP, financial assistance of Rs 12200/ha for 3 years is provided for cluster formation, capacity building, and continuous handholding by trained personnel, certification, and residue analysis.

    About Paramparagat Krishi Vikas Yojana

    • “PKVY” is an elaborated component of Soil Health Management (SHM) of the major project National Mission of Sustainable Agriculture (NMSA).
    • Under PKVY Organic farming is promoted through the adoption of the organic village by cluster approach and PGS certification.

    The Scheme envisages:

    • Promotion of commercial organic production through certified organic farming.
    • It will raise farmer’s income and create a potential market for traders.

    Program implementation

    • Fifty or more farmers will form a cluster having 50 acres of land to take up the organic farming under the scheme.
    • In this way, during three years 10,000 clusters will be formed covering a 5.0 lakh acre area under organic farming.
    • There will be no liability on the farmers for expenditure on certification.
    • Every farmer will be provided Rs. 20,000 per acre in three years for the seed to harvesting crops and to transport produce to the market.
    • Organic farming will be promoted by using traditional resources and organic products will be linked with the market.
    • It will increase domestic production and certification of organic produce by involving farmers.

    Answer this PYQ in the comment box:

    Q.With reference to organic farming in India, consider the following statements:

    1. ‘The National Programme for Organic Production (NPOP) is operated under the guidelines and directions of the Union Ministry of Rural Development.
    2. ‘The Agricultural and Processed Food Products Export Development Authority (APEDA) functions as the Secretariat for the implementation of NPOP.
    3. Sikkim has become India’s first fully organic State.

    Which of the above statements is/are correct? (CSP 2018)

    (a) 1 and 2 only

    (b) 2 and 3 only

    (c) 3 only

    (d) 1, 2 and 3

  • Open Network for Digital Commerce could disrupt India’s e-commerce space

    Context

    The Department for Promotion of Industry and Internal Trade (DPIIT) recently issued orders appointing an advisory committee for its Open Network for Digital Commerce (ONDC) project.

    About ONDC project

    • The Open Network for Digital Commerce (ONDC) project aims to make e-commerce processes open-source.
    • In simple terms, it aims at creating a platform that can be utilised by all online retailers.
    • This is another effort by the government to facilitate the creation of shared digital infrastructure, as it has previously done for identity (Aadhaar) and payments (Unified Payments Interface).
    • It will digitise e-commerce value chains, standardise operations, promote inclusion of suppliers, and derive efficiencies in logistics.

    What are its advantages?

    • Level playing field: When done well, this approach can level the playing field and create value for users. 
    • Curb monopoly: The market is dominated by a few players who are facing investigations for unfair trade practices in many countries.
    • Prevent market failure: The sector is characterised by many small players who individually do not have the muscle to have an equitable bargain with e-commerce companies.
    • Economists call this a “market failure”, and it presents a legitimate case for intervention.

    The three layers of an open digital ecosystem and their conceptual framework for adoption and safeguards

    1) Tech layer

    • The “tech layer” should be designed for minimalism and decentralisation.
    • The government should restrict its role to facilitating standards and protocols that provide open access, and in getting them adopted organically.
    • Building an entire tech platform should happen only if a standards-based approach doesn’t suffice.
    • If built, the platform should be built on “privacy by design” principles.
    • It should collect minimal amounts of data (especially personal data) and store it in a decentralised manner.
    • Tools like blockchain could be used to build technical safeguards that cannot be overridden without active consent.

    2) Governance layer

    • Avoid excessive government intervention: The “governance layer” around this should allay business fears of excessive state intervention in e-commerce.
    • Legal provision: Any deployment of standards or tech should be accompanied by law or regulation that lays out the scope of the project.
    • Independent regulator for personal data: If collection of any personal data is required, passing the data protection bill and creating an independent regulator should be a precondition.
    • Handling by independent society: To assure the industry of fairness, the government could hand over the stewardship of the standards or platform to an independent society or non-profit.

    3) Community layer

    • A community layer can foster a truly inclusive and participatory process.
    • This may be achieved by making civil society and the public active contributors and seeking wide feedback on drafts of the proposal.
    • Once the framework is implemented, ensuring quick and time-bound redressal of grievances will help build trust in the system.

    Concerns with government creating shared digital infrastructure

    • This approach also comes with risks and we should tread with caution.
    • In general, governments should intervene in markets only when there is a clearly identifiable market failure or massive societal benefits from creating shared infrastructure.

    Way forward

    • The government’s championing of open-source technology for digital commerce is commendable.
    • It should also push the envelope on the other principles of the open-source movement — transparency, collaboration, release early and often, inclusive meritocracy, and community.
    • Even if we do all things right, an infrastructure-led approach may not be sufficient.
    • Therefore, we need to supplement infrastructure with tightly-tailored regulation.
    • We need to explore the concept of interoperability, that is, mandating that private digital platforms like e-commerce firms enable their users and suppliers to solicit business on other platforms.
    • To drive the adoption of an open e-commerce platform in a sector with entrenched incumbents we need to create “reference applications”, and financial or non-financial incentives.
    • Useful learnings can be drawn from the adoption of UPI: The government supported the rollout of BHIM as a reference app, and offered incentives.

    Consider the question “How the Open Network for Digital Commerce project can help deal with the issues with the e-commerce sector? Suggest the approach the project should adopt to make it a success.”

    Conclusion

    It is timely that India is exploring innovative ways to bridge the gaps in e-commerce markets. But the boldness of this vision must be matched by the thoughtfulness of the approach.

    Back2Basics: What is ‘Privacy by Design?

    • Privacy by design is a concept that integrates privacy into the creation and operation of new devices, IT systems, networked infrastructure, and even corporate policies.
    • Developing and integrating privacy solutions in the early phases of a project identifies any potential problems at an early stage to prevent them in the long run.

  • For Cairns dispute, international arbitration is not the way forward

    Context

    The recent move by Cairn to seize India’s sovereign assets in order to enforce its arbitration award has brought into focus the dispute and the related issues.

    Utility of Bilateral Investment Treaties (BIT)

    • After the World Wars, as more countries gained sovereignty, they tended to look at foreign investments as a form of neo-colonialism.
    • Bilateral investment treaties became the primary tool to forge relationships between developed and developing countries.
    • The BITs help to adopt standards for prompt, adequate and effective compensation in case of expropriation.
    • With the advent of globalisation, BITs became the means for foreign investment in developing countries.
    • Although the impact of investment agreements on foreign investments remains highly contextualised and inconclusive, these came to govern international investment relations.
    • The BITs retained the old-world construct that allowed international arbitration.
    • However, many developing countries view arbitration of tax matters as a breach of their sovereign right to tax.

    The Cairn Energy case

    • In 2012, explanations were added to the Income Tax Act 1961 — these provisions were deemed as having a retrospective effect.
    • This was more in response to the Supreme Court’s decision in the Vodafone case which denied the income tax department’s assertion of tax claims arising from the offshore transfer of interest that substantially derived their value from India.
    • The 2012 explanations to the IT Act indeed sought to fix tax avoidance. 
    • Looking into the details of the Cairn case, one can see the series of reorganisations that tip-toed around tax laws of multiple jurisdictions, resulting in the non-payment of tax. 
    • Taxing offshore indirect transfers — a structuring device to gain tax advantage from the indirect sale of assets — is not unique to India (336 tax treaties contain such an article).
    • It is also possible to see that the underlying assets of the subsidiaries were immovable assets in India.
    • The UK-India tax treaty allowed for taxation of capital gains as per Indian law.
    • India challenged the admissibility of the case before the arbitration tribunal.
    • However, the case rests on a distinction between tax and tax-related investment.
    • Surely, all investments have tax implications and the acceptance of such a distinction could create problems even where tax is explicitly carved out from the bilateral investment treaties.
    • The option of arbitration upon an unsuccessful Mutual Agreement Procedure (MAP) resolution is not available in India.
    •  For this reason, over the years, there has been a rising trend in tax disputes involving BITs.
    • The Cairn case is one such instance where arbitration was invoked especially since MAP was not an option.

    Way forward

    • The case raises many questions that administrators must address through reform.
    • India’s model BIT introduced in 2016 rectifies the issue of the distinction between tax dispute and investment-related taxation dispute through the specific exclusion of taxation.
    •  The recognition of a tax-related investment dispute, distinct from a tax dispute, should not undermine such a carve-out.

    Conclusion

    It is also important to note even if the award is enforced, the matter of tax avoidance stands pending before the High Court. Given the complexity, the only reasonable solution would be a negotiated settlement. Even if there’s a resolution in the Cairns case, questions of law would remain.

  • India’s equity market bubble

    Context

    Even as the real economy returns to the doldrums after being hit by the second wave of COVID-19 infections, the continuing bull run in India’s equity market in the April-June quarter has baffled many observers.

    V-shaped recovery of equity market

    • The benchmark BSE Sensex had nosedived to below 28,000 in March-April 2020, following the nationwide lockdown.
    • The equity market posted a sharp V-shaped recovery in 2020-21.
    • The Sensex surged beyond 50,000 in February 2021 and is currently closing on the 53,000 level.

    Factors suggesting bubble in equity market

    • There was an 81%-plus growth in the Sensex between April 2020 and March 2021 in the backdrop of real GDP growth plummeting to -7.3% during the same period.
    • While output contraction had reversed from the third quarter of 2020-21, the inflation rate also rose and remained way ahead of the real GDP growth rate in the last two quarters (Chart 1).
    • It is difficult to find any rationality behind the skyrocketing BSE Sensex in the context of such stagflation in the real economy.
    • Just like the fall in the equity prices was driven by the exit of foreign portfolio investors (FPI), the return of massive FPI inflows has driven the Indian equity bubble since then (Chart 2).
    • Net FPI inflows clocked an unprecedented ₹2.74 lakh crore in 2020-21, the previous high being ₹1.4 lakh crore in 2012-13.
    • The Reserve Bank of India (RBI)’s annual report (2020-21) to state stated that: “This order of asset price inflation in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble.”

    Global factors

    • The global liquidity glut, following the expansionary, easy money policies adopted by the fiscal and monetary authorities of the OECD and G20 countries, has led to equity price inflation in several markets driven by FPIs, especially in Asia.
    • Following cues from the U.S. and the U.K., Asian equity markets in Singapore, India, Thailand, Malaysia and Hong Kong are currently witnessing price-earnings (P/E) ratios significantly above their historic means.
    • The BSE Sensex’s P/E ratio of 32 in end-June 2021 is way above its historic mean of around 20.

    What could burst the bubble?

    • Change in monetary policy: With COVID-19 vaccination and economic recovery proceeding apace in the U.S., the U.K. and Europe, fiscal and monetary policy stances will change soon.
    • Exit of FPIs: Once the U.S. Federal Reserve and other central banks start raising interest rates, the direction of FPI flows will invariably change bringing about corrections in equity markets across Asia.
    • India remains particularly vulnerable to a major correction in the equity market because of two reasons.
    • Low pace of vaccination: The pace of COVID-19 vaccination in India, given the vast population, lags behind most large countries.
    • In the absence of a substantial increase in the vaccination budget and procurement, large segments of the Indian population will remain vulnerable to a potential third wave of COVID-19, with its attendant deleterious impact on the real economy.
    • Weak fiscal stimulus: India’s economic recovery from the recession will remain constrained by the weak fiscal stimulus that has been delivered by the Central government.
    • Data from the IMF clearly show that while the total global stimulus consisted of additional public spending or revenue foregone measures amounting to 7.4% of global GDP, India’s fiscal measures amounted to 3.3% of GDP only.

    Consider the question “What are the factors driving equity market boom globally? What are the factors that could threaten such boom with a major correction?” 

    Conclusion

    With all agencies, including the RBI, downsizing India’s growth projections for 2021-22, it remains to be seen how long India’s equity bubble lasts.

    Back2Basics: P/E ratio

    • The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).
    • The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
    • To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS).

    P/E Ratio=Earnings per share / Market value per share

     

  • Why rooftop solar and storage offers a viable future for India

    The Union government’s target of producing 40 gigawatts of rooftop solar power by 2022 is unrealistic: The country could produce only 4.4 GW rooftop solar energy till March 31, 2021, according to the Union Ministry of New and Renewable Energy.

    What is Solar Rooftop?

    • A solar photovoltaic (PV) system mounted on a rooftop of a building is a mini-power requirement or feed into the grid.
    • The size of the installation varies significantly depending on the availability of space, amount of electricity consumed by the property and the ability or willingness of the owner to invest the capital required.

    Why rooftop?

    • Rooftop solar with a storage system is a benefit for both, end consumers as well as discoms (power distribution companies).
    • A one-kilowatt (kW) rooftop system can produce three to five units of electricity a day.
    • The combination increasingly becomes cost-effective for electricity generation compared to the traditional grid supply and diesel generators.
    • In 2021, solar and storage will be cheaper than grid supply for most commercial and industrial (C&I) customers.
    • The increase in penetration of rooftop solar in the distribution grid will have a significant impact on the stability of the grid.

    A viable alternative

    • Most housing societies in urban India rely on diesel generators for power backup. However, as power availability improves in the country, diesel generators will become redundant.
    • The operational cost of diesel generators is quite high— R16-18 per unit against Rs 5-6 a unit for solar rooftop systems. So rooftop solar power makes financial sense.Solar rooftop is also a perfect solution for commercial and institutional buildings that operate mostly during the day.
    • Their rooftops can be utilized to generate electricity, and they can, partially or completely, replace diesel generators. This would also help them reduce their electricity bills.

    Question of energy storage

    • In order to integrate rooftop solar and electric vehicles, the grid needs to be flexible and smart.
    • Energy storage systems will play a key role in providing this flexibility by acting as a load when there is a surplus generation, as well as generating sources when there is a supply shortage.
    • There are two major methods of integrating battery storage into the electric grid:
    1. Front-of-the-meter (FTM): It is implemented at the utility-scale, wherein the battery system is connected to the transmission or distribution network that ensures grid reliability. This happens on a considerably large scale (~MWh scale).
    2. Behind-the-meter (BTM): The other method is implemented at the residential and commercial/industrial level, mainly to provide backup during a power failure or to store excess locally generated energy from solar rooftop photovoltaic (PV) systems.

    India’s storage capacity

    • About 34 GW / 136 GWh of battery storage is expected to be installed by 2030, according to the Central Electricity Authority of India.
    • This capacity would be used for RE integration, demand-side and peak load management services.

    Storage challenges

    • The solar segment offers a huge market opportunity for advanced battery technologies.
    • However, manufacturers have some ground to cover in addressing technical limitations of batteries, such as charging characteristics, thermal performance and requirement of boost current to charge deep cycle batteries.
    • Since solar companies may directly procure batteries from manufacturers and require after-sale services and technical support, battery companies should have wider a presence to address these expectations.

    Other key challenges

    • Rooftop solar source doesn’t match the rise in renewable energy in India.
    • While industrial and commercial consumers account for 70% of total installed capacity residential consumers remain a big untapped potential to give the boost
    • Solar rooftops also face several challenges such as little consumer awareness, lack of innovative government policies or attention, bureaucratic hassles, and limited support from discoms.

    Way forward

    • Supportive policies and innovative technological approaches are needed for the sector to achieve its potential.
    • Indian policymakers need to plan for rooftop solar plus storage, rather than rooftop solar alone with the grid as storage (net / gross metering).
    • The declining cost of storage solutions, along with that of rooftop solar solutions, is likely to change the future of the Indian power sector.
    • Several countries such as Australia, the United States, Germany, among others have already endorsed solar power with battery storage.
    • Energy storage, therefore, represents a huge economic opportunity for India.
    • The creation of a conducive battery manufacturing ecosystem on a fast track could cement India’s opportunity for radical economic and industrial transformation in a critical and fast-growing global market.

  • What is Monkey B virus?

    China has reported the first human death case with the Monkey B virus (BV).

    What is Monkey B virus?

    • The virus, initially isolated in 1932, is an alphaherpesvirus enzootic in macaques of the genus Macaca.
    • B virus is the only identified old-world-monkey herpes virus that displays severe pathogenicity in humans.

    Answer this question from our AWE initiative:

    There is been an increase in occurance of zoonotic human infectious diseases are zoonotic . Give reasons for this. Also suggest ways to contain and decrease the frequency of such events.(250 Words)

    How is it transmitted?

    • The infection can be transmitted via direct contact and exchange of bodily secretions of monkeys and has a fatality rate of 70 per cent to 80 per cent.
    • According to the Centre for Disease Control and Prevention, Macaque monkeys commonly have this virus, and it can be found in their saliva, feces, urine, or brain or spinal cord tissue.
    • The virus may also be found in cells coming from an infected monkey in a lab. B virus can survive for hours on surfaces, particularly when moist.

    When can a human get infected with B virus?

    • Humans can get infected if they are bitten or scratched by an infected monkey.

    Symptoms

    • Symptoms typically start within one month of being exposed to B virus but could appear in as little as three to seven days.
    • The first indications of B virus infection are typically flu-like symptoms such as fever and chills, muscle ache, fatigue and headache.
    • Following this, a person may develop small blisters in the wound or area on the body that came in contact with the monkey.
    • Some other symptoms of the infection include shortness of breath, nausea and vomiting, abdominal pain and hiccups.
    • As the disease progresses, the virus spreads to and causes inflammation (swelling) of the brain and spinal cord, leading to neurologic and inflammatory symptoms.

    Is there a vaccine against B virus?

    • Currently, there are no vaccines that can protect against B virus infection.

    Who are at higher risk for infection?

    • The virus might pose a potential threat to laboratory workers, veterinarians, and others who may be exposed to monkeys or their specimens.
    • To date, only one case has been documented of an infected person spreading the B virus to another person.

  • [pib] One District One Focus Product Scheme

    ODOFP programme

    • The ODOFP programme cover products of agriculture and allied sectors for 728 districts of the country.
    • The products have been identified from agricultural, horticultural, animal, poultry, milk, fisheries, aquaculture, marine sectors across the country.
    • These identified products will be supported under the PM-FME scheme of the Ministry of Food Processing Industries, which provides incentives to promoters and micro-enterprises
    • This scheme is being implemented for a period of five years from 2020-21 to 2024-25.
    • The scheme adopts One District One Product (ODOP) approach to reap the benefits of scale in terms of procurement of inputs, availing common services and marketing of products.

    About ODOP

    • The ODOP scheme aims to identify one product per district based on the potential and strength of a district and national priorities.
    • A cluster for that product will be developed in the district and market linkage will be provided for that.
    • It is operationally merged with the ‘Districts as Export Hub’ initiative implemented by the Director-General of Foreign Trade (DGFT), Department of Commerce.
    • Under the initial phase of the ODOP programme, 106 Products have been identified from 103 districts across 27 States.

    Back2Basics: PMFME Scheme

    • A centrally sponsored scheme that aims to enhance the competitiveness of existing individual micro-enterprises in the unorganized segment of the food processing industry.
    • It aims to enhance the competitiveness of existing individual micro-enterprises in the unorganized segment of the food processing industry and promote formalization of the sector,
    • It further aims to promote formalization of the sector and provide support to Farmer Producer Organizations, Self Help Groups, and Producers Cooperatives along their entire value chain.
    • The scheme envisions directly assist the 2,00,000 micro food processing units in providing financial, technical, and business support for the up-gradation of existing micro food processing enterprises.

  • [pib] Bad Bank launched for stressed assets

    The Government has launched a Bad Bank with all the regulatory approvals in place.

    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.

    Global examples of Bad Bank

    • US-based BNY Mellon Bank created the first bad bank in 1988, after which the concept has been implemented in other countries including Sweden, Finland, France and Germany.
    • However, resolution agencies or ARCs set up as banks, which originate or guarantee to lend, have ended up turning into reckless lenders in some countries.

    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.

    What is the stand of the RBI and government?

    • While the RBI did not show much enthusiasm about a bad bank all these years, there are signs that it can look at the idea now.
    • Experts, however, argue that it would be better to limit the objective of these asset management companies to the orderly resolution of stressed assets, followed by a graceful exit.

    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.