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GS Paper: GS3

  • True empowerment of the electricity consumer

    The article examines the various provisions of the Electricity (Rights of Consumers) Rules, 2020 and analyses whether or not these Rules will empower the consumers. 

    Empowering electricity consumers

    • The Electricity (Rights of Consumers) Rules, 2020 was promulgated in December to deal with the problems faced by the consumers.
    • The enactment of consumer-centric rules does spark public debate that brings the rights of consumers to the fore.
    • the Rules lay an emphasis on national minimum standards for the performance parameters of DISCOMs. without urban-rural distinction.
    • They also reiterate the need for automatically compensating consumers.

    Let’s analyse the changes introduced by the new Rule and issues with them

    Supply quality issue

    • Many States have not been able to provide quality supply, especially to rural and small electricity consumers.
    • Provisions similar to made in the new Rule already exist in the Standards of Performance (SoP) regulations of various State Electricity Regulatory Commissions (SERCs).
    • It is not because of a lack of rules or regulations that quality supply is not provided; rather, it is on account of a lack of accountability systems to enforce them.
    • Unfortunately, neither these rules nor past efforts address these accountability concerns.
    • Guarantee of round the clock supply is a provision that the Rules emphasise, which might be missing in State regulations.
    • It is difficult to enforce since the availability of power supply is inadequately monitored even at 11 kV feeders, let alone at the consumer location.
    • This highlights not only the need for implementation of existing provisions in letter and spirit but also amending them with strong accountability provisions.

    Weakening of existing provision

    • The Rules, in few cases, dilute progressive mechanisms that exist in State regulations.
    • For example, the Rules say that faulty meters should be tested within 30 days of receipt of a complaint.
    • Compared to this, regulations t in Andhra Pradesh, Bihar, and Madhya Pradesh, respectively, say that such testing needs to be conducted within seven days.
    • A similar observation can be drawn from the suggested composition of the Consumer Grievance Redressal Forum. 
    •  The Rules say that the forum — constituted to remedy complaints against DISCOMs should be headed by a senior officer of the company.
    • This is a regressive provision that would reduce the number of cases that are decided in favour of consumers.

    Lack of clarity on net-metering

    • The Rules guarantee net metering for a solar rooftop unit less than 10 kW.
    • However, there is no clarity if those above 10 kW can also avail net metering.
    • This could lead to a change in regulations in many States based on their own interpretations.
    •  The possible litigation that follows would be detrimental to investments in rooftop solar units, and would discourage medium and large consumers to opt for an environment-friendly, cost-effective option.

    Way forward

    • SERCs should assess the SoP reports of DISCOMs and revise their regulations more frequently.
    • SERCs should organise public processes to help consumers raise their concerns.
    • DISCOMs could be directed to ensure automatic metering at least at the 11 kV feeder level, making this data available online.
    • The Forum of Regulators — a central collective of SERCs — could come up with updated model SoP regulations.
    • Central agencies have taken proactive efforts to ensure regular tariff revision.
    • They could also support independent surveys and nudge State agencies to enforce existing SoP regulations.
    • The central government could disburse funds for financial assistance programmes based on audited SoP reports.

    Consider the question”What are the problems faced by the electricity consumers in India? Will the Electricity (Rights of Consumers) Rules, 2020 help consumers to deal with the existing issues?”

    Conclusion

    The governments, DISCOMs and regulators need to work jointly and demonstrate the commitment and the will power to implement existing regulations. It is not yet late to recognise this and initiate concerted efforts to truly empower consumers.

  • Digital Service Tax could be an interim solution to cyber tax conundrum

    Business models of digital companies challenge the conventional basis of taxation in which the fixed place of business formed the basis. Digital Service Tax could provide a basis to deal with the challenge. The article deals with this issue.

    Equalisation levy and issues with it

    • Equalisation levy seeks to tax payments made for online advertising services to a non-resident business by residents in India.
    • India is amongst the first to have implemented such levy.
    • It is predominantly applicable to US companies since the market for digital services is dominated by US-based firms.
    • Any company that has a permanent residence in India is excluded since it is already subject to tax in India.
    •  In March 2020, India expanded the scope of the existing equalisation levy to a range of digital services that includes e-commerce platforms.
    • Such levy can result in over-taxation since the company will not be able to claim any credit for tax paid on Indian sales.
    • Such an approach is often viewed as contrary to the ethos of international agreements.

    Issue of taxation of digital companies

    • The agenda to reform international tax law so that digital companies are taxed where economic activities are carried out was formally framed within the OECD’s base erosion and profit shifting programme.
    • Worried they might cede their right to tax incomes, many countries have either proposed or implemented a digital services tax (DST).
    • However, the proliferation of digital service taxes (DSTs) is a symptom of the changing international economic order.
    • Countries such as India which provide large markets for digital corporations seek a greater right to tax incomes.
    • The core problem that the international tax reform seeks to address is that digital corporations, unlike their brick-and-mortar counterparts, can operate in a market without a physical presence.
    • The current basis for taxing in a particular jurisdiction is a notion of fixed place of business.

    Way forward

    • To overcome the challenge, countries suggested that a new basis to tax, say, the number of users in a country.
    • The EU and India were among the advocates of this approach.
    • In 2018, India introduced the test for significant economic presence in the Income Tax Act.
    • However, the proposal of a revised nexus was not supported widely.
    • Moreover, to give effect to a new system would require bilateral renegotiation of tax treaties that supersede domestic tax laws.
    • Meanwhile, the OECD continued to work to find commonalities among a range of solutions.
    • In its current form, the solution is too complex to administer and proposes to allocate residual profit — a term that has no economic definition.
    • It would also require political consensus on multiple issues, including sensitive matters such as setting up of an alternative dispute resolution process comparable to arbitration.
    • This can increase the compliance burden.
    • The US has expressed its preference to apply this measure on a safe harbour basis, which can limit the companies to which it may be applicable.

    Consider the question “Digital corporations can operate in a market without a physical presence. The current basis for taxing in a particular jurisdiction is a notion of fixed place of business. In light of this, examine the challenges in taxing the digital companies and how India is dealing with such a challenge?” 

    Conclusion

    As countries calibrate their response to competing demands for sovereignty to tax, DST is an interim alternative outside tax treaties. It possesses the advantage of taxing incomes that currently escape tax and creates space to negotiate a final, overarching solution to this conundrum.

  • What is Section 32A of IBC?

    The Supreme Court has held that the bidders for a corporate debtor under the Insolvency and Bankruptcy Code (IBC) would be immune from any investigations being conducted either by any investigating agencies.

    Q.Examine the impact of various amendments to the Insolvency and Bankruptcy Code (IBC) and suggest further improvements in the IBC.

    Backgrounder: IBC

    • IBC was enacted on May 28, 2016, to effectively deal with insolvency and bankruptcy of corporate persons, partnership firms and individuals, in a time-bound manner.
    • It has brought about a paradigm shift in laws aimed to maximize the value of assets, providing a robust insolvency resolution framework and differentiating between impropriety and business debacle.
    • The predominant object of the Code is the resolution of the Corporate Debtor.
    • It has been amended four times to resolve problems hindering the objectives of the Code.

    What is Section 32A?

    • In cases involving property of a corporate debtor, Section 32A covers any action involving attachment, seizure, retention, or confiscation of the property of the corporate debtor as a result of such Proceedings.
    • It provides immunity to the corporate debtor and its property when there is the approval of the resolution plan resulting in the change of management of control of the corporate debtor.
    • This is subject to the successful resolution applicant being not involved in the commission of the offense.

    What were the challenges?

    • Since the IBC came into being in 2016, the implementation of the resolution plan of several big cases has been delayed because of various challenges mounted by its own agencies and regulators.
    • For example, a debt-laden company, admitted into insolvency in 2017, owes more than Rs 47,000 crore to banks and other financial institutions.
    • After a prolonged bidding battle, another won the rights to take over it with a bid of Rs 19,700 crore.
    • However, before it could move to take over, the ED/SEBI swooped in, and attached assets worth Rs 4,000 crore citing alleged fraud in a bank loan under the Prevention of Money Laundering Act (PMLA).

    Observations made by the SC

    • In its judgment, the apex court upheld the validity of Section 32.
    • It said it was important for the IBC to attract bidders who would offer reasonable and fair value for the corporate debtor to ensure the timely completion of the corporate insolvency resolution process (CIRP).
    • Such bidders, however, must also be granted protection from any misdeeds of the past since they had nothing to do with it.
    • Such protection, the court said, must also extend to the assets of a corporate debtor which will help banks clean up their books of bad loans.
    • The apex court has, however, also said that such immunity would be applicable only if there are an approved resolution plan and a change in the management control of the corporate debtor.

    Significance of SC’s intervention

    • With the Supreme Court upholding the validity of Section 32 A will give confidence to other bidders to proceed with confidence while bidding on such disputed companies and their assets.

    Must read

    [Burning Issue] Insolvency and Bankruptcy Code

  • Secured Overnight Financing Rate (SOFR)

    State Bank of India (SBI) has executed two inter-bank short term money market deals with pricing linked to SOFR (Secured Overnight Financing Rate).

    Try this PYQ:

    Q.The money multiplier in an economy increases with which one of the following?

    (a) Increase in the cash reserve ratio

    (b) Increase in the banking habit of the population

    (c) Increase in the statutory liquidity ratio

    (d) Increase in the population of the country

    What is SOFR?

    • Secured Overnight Financing Rate (SOFR) is a secured interbank overnight interest rate.
    • It is a replacement for USD LIBOR (London Inter-bank Offered Rate) that may be phased out end-2021.
    • The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.

    Why SOFR?

    • Global regulators decided to move away from the Libor, a vital part of the financial system after it was revealed in 2012 that banks around the world manipulated it.
    • It also didn’t help that volume underlying the benchmark dried up.
    • U.K regulators set the deadline at 2021 for financial firms and investors to transition away from the Libor.

  • The threat of deepfakes

    Deepfakes creates media in which it challenges our ability to detect real from fake, it blurs the line between two. This article explains the threat associated with it.

    What are deepfakes and threat associated with it

    • Deepfakes are synthetic media (including images, audio and video) that are either manipulated or wholly generated by Artificial Intelligence.
    • AI is used for fabricating audios, videos and texts to show real people saying and doing things they never did, or creating new images and videos.
    • These are done so convincingly that it is hard to detect what is fake and what is real.
    • They are used to tarnish reputations, create mistrust, question facts, and spread propaganda.

    Legal provision in India

    • Deepfakes even have the power to threaten the electoral outcome.
    • So far, India has not enacted any specific legislation to deal with deepfakes.
    • However, there are some provisions in the Indian Penal Code that criminalise certain forms of online/social media content manipulation.
    • The Information Technology Act, 2000 covers certain cybercrimes.
    • But this law and the Information Technology Intermediary Guidelines (Amendment) Rules, 2018 are inadequate to deal with content manipulation on digital platforms.
    • The guidelines stipulate that due diligence must be observed by the intermediate companies for removal of illegal content.
    • In 2018, the government proposed rules to curtail the misuse of social networks.
    • Social media companies voluntarily agreed to take action to prevent violations during the 2019 general election.
    • The Election Commission issued instructions on social media use during election campaigns.

    How to deal with the problem of deepfakes

    • Only AI-generated tools can be effective in detection.
    • Blockchains are robust against many security threats and can be used to digitally sign and affirm the validity of a video or document.
    • Educating media users about the capabilities of AI algorithms could help.
    • Six themes identified in the workshop convened by the University of Washington and Microsoft are to dela with the deepfakes
    • 1) Deepfakes must be contextualised within the broader framework of malicious manipulated media, computational propaganda and disinformation campaigns.
    • 2) Deepfakes cause multidimensional issues which require a collaborative, multi-stakeholder response that require experts in every sector to find solutions.
    • 3) Detecting deepfakes is hard.
    • 4) Journalists need tools to scrutinise images, video and audio recordings for which they need training and resources;
    • 5) Policymakers must understand how deepfakes can threaten polity, society, economy, culture, individuals and communities.
    • 6) Any true evidence can be dismissed as fake is a major concern that needs to be addressed.

    Consider the question “What are the deepfakes and threats associated with it? How these threats can be tackled?”

    Conclusion

    In today’s world, disinformation comes in varied forms, so no single technology can resolve the problem. As deepfakes evolve, AI-backed technological tools to detect and prevent them must also evolve.

  • [pib] Exercise Desert Knight-21

    Indian Air Force and French Air and Space Force will conduct a bilateral Air exercise, Ex Desert Knight-21 at Air Force Station Jodhpur.

    All-time generic question seeking ‘match the pairs’ can be asked from the news as such.  Click here for more exercises.

    Ex. Desert Knight-21

    • The French side will participate with Rafale, Airbus A-330 Multi-Role Tanker Transport (MRTT), A-400M Tactical Transport aircraft and approximately 175 personnel.
    • The IAF aircraft participating in the exercise will include Mirage 2000, Su-30 MKI, Rafale, IL-78 Flight Refuelling Aircraft, AWACS and AEW&C aircraft.
    • The exercise marks an important milestone in the series of engagements between the two Air forces.
    • As part of Indo-French defence cooperation, Indian Air Force and French Air and Space Force have held six editions of Air Exercises named ‘Garuda’, the latest being in 2019.
    • Presently, the French detachment for Ex Desert Knight-21 is deployed in Asia as part of their ‘Skyros Deployment’ and will ferry in forces to Air Force Station Jodhpur.

    Why it is special?

    • The exercise is unique as it includes fielding of Rafale aircraft by both sides and is indicative of the growing interaction between the two premiers Air Forces.
    • It will put into practice operational experience gained across terrains and spectrums and endeavour to exchange ideas and best practices to enhance interoperability.

  • It’s better to stop the creation of bad debt than set up a bad bank

    The article argues that instead of creating the Bad Bank, several steps taken by the government and the bank regulator could deal with the problem of NPAs and also improve the performance of the banks.

    Challenge of NPA: Is Bad Bank and answer to it?

    • Recently, RBI governor said that the RBI was open to considering setting up of a “bad bank”.
    • India’s economic growth, unless pandemic risks resurface, should be good enough to largely take care of its non-performing assets (NPAs) in the coming years.
    • It was the high economic and credit growth of the 2003-08 period that whittled down the NPA ratio.
    • The provision coverage ratio at banks had gone up from 42% in 2016 to 72.4% in September 2020, and that net NPAs were down to 2.8% in March 2020.
    • The bad loan legacy is almost done with.
    • Consequently, the bad bank is a right idea at the wrong time.

    Steps the government and RBI should take

    1) Resume the operation of IBC

    • The government should reinstate the operation of the Insolvency and Bankruptcy Code (IBC).
    • The code had improved the recovery rate from NPAs in the banking system.
    •  There is a need to create disincentives for deliberate delaying tactics, so that the original timeline of 270 days is honoured more in its observance than in breach.

    2) Recapitalisation of banks

    • The government should provide more than adequate capital to the strong banks it owns, and adequate capital to the not-so-strong ones, with well-defined performance criteria for them to receive more.
    • If they don’t deliver, then the government should consolidate them or begin diluting its stake below 51% in such banks.

    3) Level playing field improvement in compliance culture

    • The government should level the regulatory playing field between private-sector and government-owned banks.
    • The risk management and compliance culture in public-sector banks must improve.
    • However,  public sector banks should not be subject to excessive oversight by government investigative and audit agencies.

    4) Plug the sources of NPAs through policy changes

    • More than these, there are two other important things that constitute the fountainheads of NPAs.
    • The government should evolve a framework for passing on explicit development goals of the state for banks to achieve through the credit mechanism.
    • The government should provide for them in the budget and compensate banks rather than direct credit by diktat.
    • The cost of directed lending is not just the creation of NPAs, but morale and market-value erosion as well.
    • In any case, recapitalization needs mean that the fiscal costs are not avoided. It is self-defeating.
    • Then, governments (Union and states) should plug the other underlying sources of NPAs.
    • Among things, they should ensure economic pricing of utilities, honour power purchase contracts and raw material purchase agreements, pay arrears to private counterparties, and stop being reflexive litigants.

    Consider the question ” What is the Bad Bank? Do you agree with the view that India needs Bad Bank?”

    Conclusion

    The above measures would greatly help the country achieve high growth and sustain it. Setting up a bad bank may be unnecessary.

    Back2Basics: Provisioning Coverage Ratio (PCR)

    • Banks usually set aside a portion of their profits as a provision against bad loans.
    • Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets (NPA) and indicates the extent of funds a bank has kept aside to cover loan losses.
    • A high PCR ratio (ideally above 70%) means most asset quality issues have been taken care of and the bank is not vulnerable.

  • Good economics must also make good politics

    The article suggests the reforms that should be included in the next budget to boost the Indian economy.

    Need for further reforms

    • Government has leveraged the Covid-19 slowdown as an opportunity for introducing transformative reforms.
    • The recently introduced reforms include liberalising agricultural markets, diluting the onslaught of labour laws, credit guarantees for SME loans, and a liberal PLI to stimulate manufacturing.
    • These reforms have created a cautious optimism among investors worldwide awaiting the forthcoming Budget.
    • India’s reforms require further acceleration, and a consensus that good economics makes good politics.

    Reforms required to attract investment

    • Cost of acquiring land has increased substantially, which needs to be reduced.
    • The government must categorise 44 central laws into compensation, social security, industrial relations, and health and safety—and draft a unified model labour law to replace archaic laws for adoption by states.
    • India’s trade-to-GDP ratio must improve.
    • Having turned away from the RCEP, India needs to conclude trade agreements with the UK and other major economies. Announcing such intent would be welcome.
    • Effective corporate tax rate for domestic companies is 25.17%, while that for foreign firms is 43.68%, India should maintain tax parity across domestic and foreign companies.
    • With such parity, India will enhance investment attractiveness.
    • In view of the recent international arbitration rulings, India should discontinue retrospective taxation.
    • Defence FDI could be raised from 74% to 100% under automatic route.
    • The rationale to maintain FDI in the insurance sector at 49% now holds limited logic, India could increase it to a majority stake or even 100%.
    • Bottled-in-origin and bulk spirits attract a high basic customs duty (150%), deterring companies eyeing the Indian market, and depriving India of the corresponding FDI.
    • Phased reduction of duty on these products to 75% and finally to 30% is advisable.

    Areas that need increased spending

    • Spending on public healthcare needs to rise from 1.3% to 3% of GDP with Covid-19 exposing glaring inadequacies.
    • Revising the National List of Essential Medicines to exempt inexpensively-priced medicines from price controls would help investments in innovation and API manufacturing.
    • If the New Education Policy is to be implemented properly, public spend on education and skill development must rise from 3% to 4.5% of GDP.
    • The government must raise defence allocations to over 2.5% of GDP given India’s new threat perceptions and increase capital component of total fiscal allocations for defence could be increased from 34% to 40%.

    Other measures to boost the economy

    • Developing data adequacy agreements with the UK and other key countries would facilitate cross-border movement of personal data based on a mutual adequacy basis.
    • The online gaming industry should be supported by a model law, tax regime and self-regulation so that the government accrues tax revenues estimated at Rs 15,000 crore.
    • Most countries tax domestic corporate dividends at lower rates and, therefore, FPIs’ dividend income should be taxed at 10%.
    • Foreign banks must be brought at par with Indian banks with 8.5% deduction for NPA provisioning.
    • Excluding financial services from the e-commerce equalisation levy would be appropriate.
    • PSU disinvestments have slowed, and the Budget needs to announce measures for their acceleration as a privatisation push would be transformative for India in the long run.

    Consider the question”What are the hurdles in making India the more attractive to the investors? Discuss the measures to make India more attractive for investors.” 

    Conclusion

    As developed countries contemplate relocating their manufacturing supply chains to destinations besides China, a progressive Budget would send positive signals to overseas investors and would propel India’s rightful ambition to be the world’s next manufacturing workshop, in consonance with the Atmanirbhar Bharat vision.

    Source:

    https://www.financialexpress.com/opinion/union-budget-fy22-good-economics-must-make-good-politics/2173553/

  • Issues with treating mineral sale proceeds as revenue or income

    The rate at which we are extracting mineral and spending the proceeds from it without consideration for the future generation needs a rethink. The article deals with this issue.

    The principle of Intergenerational Equity

    • We cannot compromise the ability of future generations to meet their needs, and this is reflected in the aim for the sustainable economy.
    • The principle of Intergenerational Equity would make it imperative for us to ensure future generations inherit at least as much as we did.
    • If we are successful in abiding by intergenerational equity, our children will be at least as well off as we are.

    Issues with our mineral policy

    • India’s National Mineral Policy 2019 states: “natural resources, including minerals, are a shared inheritance where the state is the trustee on behalf of the people to ensure that future generations receive the benefit of inheritance.”
    • The extraction of oil, gas, and minerals is effectively the sale of this inheritance.
    • Unfortunately, governments everywhere treat the mineral sale proceeds as revenue or income which is basically a sale of inherited wealth.
    • This results in governments selling minerals at prices significantly lower than what they are worth, driven by lobbying, political donations, and corruption.

    Error in accounting

    • Proceeds received by the government are treated as “revenue” and spent.
    • This is just not sustainable.
    • There is growing empirical evidence of large losses in mining from around the world.
    • There is also growing evidence from the International Monetary Fund that many governments of resource-rich nations face declining public sector net worth, i.e., their governments are becoming poorer.
    • Due to the high profits involved, the extractors are keen to extract as quickly as possible and move on.
    • More mining would make a bad situation significantly worse.
    • The Government Accounting Standards Advisory Board needs to correct this error in the standards for public sector accounting and reporting for mineral wealth.

    Way forward

    • If we extract and sell our mineral wealth, the explicit objective must be to achieve zero loss in value; the state as trustee must capture the full economic rent.
    • Any loss is a loss to all of us and our future generations, and makes some rich; that is patently unfair.
    • India’s National Mineral Policy 2019 says: “State Governments will endeavor to ensure that the full value of the extracted minerals is received by the State.”
    • Like Norway, the entire mineral sale proceeds must be saved in a Future Generations Fund.
    • The Future Generations Fund could be passively invested through the National Pension Scheme framework.
    • The real income of a fund of this nature may be distributed only as a citizens’ dividend, equally to all as owners.
    • For the Indian economy, this is sustainable — capital has been maintained; the savings rate would rise, making available more long-term domestic capital; it diversifies risk while likely improving returns.

    Consider the question “What are the issues with our mining policies? Suggest the changes to make it more sustainable.”

    Conclusion

    Through these changes, let us be the generation that changes the course of history for the better, not the one that consumed the planet.

  • Balance sheet of a Bad Bank

    The idea of setting up a bad bank to resolve the growing problem of non-performing assets (NPAs), or loans on which borrowers have defaulted, is back on the table.

    Q.What is Bad Bank? Discuss how it is different from an Asset Reconstruction Company (ARC)?

    Why in news?

    • Commercial banks are set to witness a spike in NPAs, or bad loans, in the wake of the contraction in the economy as a result of the pandemic.
    • Hence the RBI recently agreed to look at the proposal for the creation of a bad bank.
    • This is in the response to a six-month moratorium it has announced to tackle the economic slowdown.

    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 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.

    Key suggestions

    Former RBI Dy. Governor Acharya suggested two models to solve the problem of stressed assets.

    1. The first is a private asset management company (PAMC), which is said to be suitable for stressed sectors where the assets are likely to have an economic value in the short run, with moderate levels of debt forgiveness.
    2. The second model is the National Asset Management Company (NAMC), which would be necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short to medium terms.

    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.

    Pandemic and the NPAs

    • Bad loans in the system are expected to balloon in the wake of contraction in the economy and the problems being faced by many sectors.
    • The RBI noted in its recent Financial Stability Report that the gross NPAs of the banking sector is expected to shoot up to 13.5% of advances by September 2021, from 7.5% in September 2020.
    • The report warned that if the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8%.