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GS Paper: GS3

  • Bank Investment Company (BIC)

    Banks, especially the Public Sector Banks have to play an important role in the pandemic afflicted economy. With that aim, the government has been envisaging the Bank Investment Company (BIC) for the improvement of PSB governance. The article discusses the issues with the BIC.

    Background of the BIC

    • Recent reports suggest that the upcoming budget may include proposals for a Bank Investment Company (BIC), anchoring the government’s shareholding in its banks.
    • The BIC was proposed by the P J Nayak Committee constituted by the RBI in 2014 to examine governance at public and private sector banks.
    • The committee had offered two options — privatisation or a complete overhaul of bank governance.
    • The overhaul of bank governance is envisaged in the form of a gradual disassociation of the government from the operations, management and governance of PSBs.
    • The BIC is a welcome step in as much as it signals the government’s intent to pursue reforms to improve the governance and performance of PSBs.

    Concerns with the BIC

    • The ownership and governance of the BIC itself will be crucial.
    • BIC will need to be allowed to garner the requisite talent and expertise and operate with freedom.
    • In the absence of this, it would merely add another layer while preserving the status quo.
    • The less than encouraging experience of the Banks Board Bureau (BBB) that was to precede the BIC is instructive.

    Why BBB failed to achieve its objectives

    • The BBB was set up in 2016 to advise on the selection and appointment of senior board members and management.
    • However, in practice, the BBB’s advice has not always been heeded to, and appointments have not always been made on time.
    • The BBB, as originally conceived, was to consist of three senior bankers.
    • However, it was expanded to include representatives from the RBI and the government.
    • The BBB was also originally envisaged by the committee as a temporary arrangement.
    • However, no further steps have been forthcoming after its establishment.

    Way forward for BIC

    • The government would need to ensure the necessary freedom for the BIC to operate while circumscribing its own role.
    • The ultimate success of these reforms will depend on how the government disassociates itself and empowers the BIC.
    • The objectives of the BIC would have to be clearly defined too.
    • If capital raising is one of the goals, the structure of a holding company — with a portfolio of comparatively better performing and non-performing banks — to attract investments must be assessed.
    • In this regard, the RBI has reportedly, in the past, expressed reservations on the BIC structure being a potential challenge for investors to assess the relative risks, returns and performance of the banks.
    • This raises the question of whether privatisation would not be a better alternative, particularly as the transition of the government from an owner to a pure financial investor in its banks is likely to take time.

    Conclusion

    Given these concerns, privatisation may be a better alternative. The budget could signal this intent by announcing the first step — the repeal of the Bank Nationalisation Acts and the State Bank of India Act.

  • India’s trade with China falls at five-year low

    India’s trade with China last year fell to the lowest since 2017, with the trade imbalance declining to a five-year low on the back of a slump in India’s imports from China.

    Try this PYQ:

    Q.Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    India-China Trade

    • Two-way trade in 2020 reached $87.6 billion, down by 5.6%, according to new figures from China’s General Administration of Customs (GAC).
    • India’s imports from China accounted for $66.7 billion, declining by 10.8% year-on-year and the lowest figure since 2016.
    • It, however, rose to the highest figure on record, for the first time crossing the $20 billion-mark and growing 16% last year to $20.86 billion.

    What constitutes India’s import from China?

    • While there was no immediate break-up of the data in 2020, India’s biggest import in 2019 was electrical machinery and equipment, worth $20.17 billion.
    • Other major imports in 2019 were organic chemicals ($8.39 billion) and fertilizers ($1.67 billion), while India’s top exports were iron ore, organic chemicals, cotton and unfinished diamonds.

    India’s exports to China

    • The past 12 months saw a surge in demand for iron ore in China with a slew of new infrastructure projects aimed at reviving growth after the COVID-19 slump.
    • China’s total iron ore imports were up 9.5 per cent in 2020.

    A friction-induced low

    • The trade deficit, a source of friction between India and China, declined to a five year-low of $45.8 billion, the lowest since 2015.
    • Whether 2020 is an exception or marks a turn away from the recent pattern of India’s trade with China remains to be seen.
    • While India’s imports from China declined, so did India’s imports overall with a slump in domestic demand last year.
    • There is, as yet, no evidence to suggest India has replaced its import dependence on China by either sourcing those goods elsewhere or manufacturing them at home.

  • Recapitalization of state-owned banks: Privatization should do it

    The article suggest the approach to deal with the problems banking in India faces.

    Banking sector under stress

    • Along with the other sectors, pandemic dealt a severe blow to the banking sector.
    • Stress tests reported in the Financial Stability Report (FSR) indicate that the low ratio of capital to risk-adjusted-assets (CRAR) is likely to decline further.
    • To revive the economy and resume sustained high growth, bold structural reforms will have to be combined with strong fiscal and monetary measures.

    Declining credit growth: monetary challenge

    • India’s credit-to-gross domestic product ratio is around 51%.
    • 51% not too low compared to other countries at comparable levels of per capita income.
    • However, the worry is that credit growth is declining rapidly.
    • It is mainly attributable to rising risk aversion among lenders, reflecting the high and rising level of NPAs.
    • Risk aversion spiked during the economic contraction.

    Rising NPA of Public Sector Banks

    • The FSR stress tests now indicate that the gross NPA ratio is likely to go up to as much as 13.5% by September 2021 in the report’s baseline case and 14.8% in the ‘severe stress’ case.
    • Within the banking sector, conditions are much worse in public sector banks (PSBs) compared to private banks (PBs) or foreign banks (FBs).
    • The gross NPA figure is forecast to rise to 16.2% for PSBs as compared to 7.9% and 5.4% for PBs and FBs in the baseline case.
    • Clearly, high NPAs are primarily a problem for PSBs, which still account for 60% of India’s total bank credit.

    Expanding banking sector: bypass PSBs and give a big push to private banking

    • The recent report on Ownership and Corporate Structure for Indian Private Sector Banks submitted by an RBI internal working group (IWG) espouses this approach.
    • The IWG’s main  recommendation is to enable large corporations and industrial houses to acquire banking licences.
    • The proposal has been strongly opposed by former governors and deputy governors of RBI, several former chief economic advisers, a former finance secretary, and, most significantly, all save one of the many experts the IWG consulted.

    Four issues with the push to private banking

    • 1) With an industry CRAR of only 12%, the proposed raising of the promoter share cap to 26% could potentially leverage the promoter’s investment by 32 times.
    • The very high risk appetite generated by such leveraging would subject depositors to a high level of systemic risk, given the limited deposit insurance provided in India.
    • 2) Excessive risk appetite would lead to imprudent lending, especially connected lending to group companies. Conglomerates always find ways around regulatory restrictions against such connected lending.
    • 3) Three, a conglomerate’s bank would have access to insider information on borrower companies that compete with its group companies.
    • 4) Conglomerate banks would lead to massive concentration of economic power and political influence against not just competing companies, but even the regulator.

    Way forward

    • A safer and cleaner option would be to help the country’s banking sector grow through simultaneous privatization and recapitalization of PSBs.
    • However, these options do not change the ownership and governance structure of PSBs, which is what primarily is to blame for their poor performance.
    • A better option is for PSBs to recapitalize themselves by raising fresh equity.
    • It would be more prudent financially and also more acceptable politically to test this approach with one or two small PSBs.

    Conclusion

    Government should try to adopt the approach which reduces the risks associated with giving push to private players in the banking sector while making the PSBs more efficient.

    Back2Basics: CRAR-Capital to risk-adjusted-assets

    •  The CRAR is the capital needed for a bank measured in terms of the assets (mostly loans) disbursed by the banks.
    • Higher the assets, higher should be the capital by the bank.
    • A notable feature of CRAR is that it measures capital adequacy in terms of the riskiness of the assets or loans given.

  • Hybrid Annuity Model(HAM) for the benefit of the road sector

    The article explains the working of Hybrid Annuity Model in the road construction and the risks involved in the model.

    Investment in road sector

    • The central government has set a target of increasing the investment in infrastructure to over Rs 111 lakh crore over the period FY20-FY25.
    • Within the transportation segment, projects worth Rs 36.7 lakh crore, constituting 55% of transportation infra, are for the road sector.
    • The large investments planned in the road sector signifies its importance—it has a multiplier effect on the economy and provides large employment opportunities.

    Models for the road sector

    • Out of HAM (Hybrid Annuity Model) and BOT (Build, Operate and Transfer)—toll developers prefer the relatively lower risk HAM model.
    • This is due to its various positives like lower equity requirements, provision for mobilisation advances, better right of way availability, inflation-linked adjustments for bid project cost, termination payments during the construction period and de-linking construction and operations.
    • These HAM features have garnered a favourable response and mix of HAM awards has increased from 10% in FY16 to 48% in H1FY2021.

    How HAM works and risks involved

    • During the operations period for a HAM project, the recovery from authority is in the form of fixed annuity payments along with interest on balance accumulated annuity payments (calculated @300 bps over prevailing bank rate)
    • The only major risk for HAM is the prevailing low bank rates adversely affecting the overall project viability and returns.
    •  Such interest receipts account for around 45% of total inflows.
    • Low bank rate would thus reduce the overall inflows for a HAM project, thereby adversely affecting its debt coverage metrics and returns to the investors.
    • The second problem is related to delayed and inadequate interest rate transmission—there is a transmission lag for the project loan (linked to MCLR of banks).

    Changes in model concession agreement

    • As per revised concession agreement dated November 10, 2020, interest rate on annuities will be equal to the average MCLR of top 5 scheduled commercial banks plus 1.25% instead of bank rate.
    • With the average MCLR replacing the bank rate, there will be a natural hedge between the annuity inflows and interest costs,
    • This will reduce the interest rate risks to a large extent, and that too without any delay.
    • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
    • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
    • Thus, the spacing between the payment milestones is reduced.
    • This will improve the cash conversion cycle for the contractors executing the HAM projects as their payments are back to back in nature.
    • However, these changes will be applicable for new awards, and the fate of the existing HAM projects is hanging in the balance.

    Conclusion

    With improved attractiveness, HAM is expected to remain the mainstay for public-private partnership projects in the road sector.

    Source:-

    https://www.financialexpress.com/opinion/hamsome-gains/2171329/

  • NASA’s Curiosity Rover celebrates 3000 days on Mars

    The Mars rover ‘Curiosity’ has completed 3,000 Martian days.

    Try this PYQ:

    Q.Which region of Mars has a densely packed river deposit indicating this planet had water 3.5 billion years ago?

    (a) Aeolis Dorsa

    (b) Tharsis

    (c) Olympus Mons

    (d) Hellas

    Curiosity Rover

    • Curiosity is an SUV-sized Mars rover designed to explore the Gale crater on Mars as part of NASA’s Mars Science Laboratory (MSL) mission
    • The main mission of Curiosity was “to search areas of Mars for past or present conditions favourable for life, and conditions capable of preserving a record of life.”
    • It has a suite of instruments:
    1. A gas chromatograph, a mass spectrometer, a tunable laser spectrometer, X-ray diffraction, fluorescence instrument help study the rocks
    2. The Mars Hand Lens Imager (for close-up pictures) and a Mast Camera (to take photos of the surroundings)
    3. An instrument named ChemCam to vaporize thin layers of Martian rocks.
    4. Radiation Assessment Detector to study the radiation environment at the surface of Mars
    5. Rover Environmental Monitoring Station to measure atmospheric pressure, temperature, humidity, winds, plus ultraviolet radiation levels
    6. Dynamic Albedo of Neutrons instrument to measure subsurface hydrogen

    Back2Basics: Martian Day/ Sol

    • Coincidentally, the duration of a Martian day aka ‘Sol’ is within a few per cent of that of an Earth day, which has led to the use of analogous time units.
    • A sol is slightly longer than an Earth day. It is approximately 24 hours, 39 minutes, 35 seconds long.
    • A Martian year is approximately 668 sols, equivalent to approximately 687 Earth days.
    • Mars has an axial tilt and a rotation period similar to those of Earth.
    • Thus, it experiences seasons of spring, summer, autumn and winter much like Earth.

  • Improving fiscal situation through budget

    The budget could be an opportunity to increase the consumption which has been impacted by the pandemic and still continues to show the declining trends.

    Continuing decline in consumption

    • The first advance estimates of GDP for 2020-21 are much better than the earlier market consensus.
    • The demand side, however, continues to be in a decline with private consumption falling by 9.5 per cent and its share in the overall GDP reducing by full 100 basis points.
    • Per capita private consumption has contracted by 10.4 per cent, while capital formation has contracted by 14.5 per cent, with imports and exports also contracting.
    • Only government consumption remains in positive territory.

    What should be the growth in nominal GDP for 2021-22?

    • In terms of specific numbers, the average growth in nominal GDP for the decade ending in 2013-14 was 15 per cent, but the average GDP deflator at 7.6 per cent far outpaced average real GDP at 6.8 per cent.
    • For the six year period ending in 2019-20, average nominal GDP growth was 10.4 per cent, with real GDP growth of 6.8 per cent far outpacing the GDP deflator at 3.6 per cent.
    • It is thus extremely important that we ensure that the current inflation trajectory is kept under control through policy interventions.

    Policy recommendations for the farmers

    1) Changing condition for renewal of loan on Kisan Credit Cards

    • Out of the outstanding bank credit of about Rs 12 lakh crore to the agriculture and allied activities sector, Rs 7 lakh crore is for Kisan Credit Cards.
    • The KCC portfolio of banks is under stress over the years due to a variety of factors like crop losses, unremunerated prices, debt waivers and the rigidity of the KCC product.
    • Currently, the renewal of KCC loans with payment of both principal and interest ensures interest subvention.
    • It is proposed that for renewal of KCC loans of small and marginal farmers and for loans of other categories of farmers for amounts up to Rs 3 lakh, the payment of interest must be a sufficient condition for renewal as with other loans.
    • The above measure has the potential to reduce the credit cost for banks considerably on KCCs as NPAs can be prevented more easily and the interest rate on KCC loans can be further reduced.

    2) Formalise tenancy and provide credit to tenant farmers

    • There are 11.5 crore farmers who are PM-KISAN beneficiaries — 6.5 crore farmers have KCC.
    • Thus, the remaining 4-5 crore could be land owning cultivators and at least 3-4 crore of such could be tenants/lessees/landless.
    • Currently, such tenant farmers are not formalised into the credit deliveries of scheduled commercial banks.
    • As of now, it requires state interventions for tenancy certificates which is only available in Andhra Pradesh.
    • Formation of a SHG model under the Deen Dayal Antodoya Yojana will formalise tenancy even without formal documentation of tenancy.
    • This will enable formal lending to take place to three crore landless farmers.

    3) Increasing investment in health and education

    • For health, it government could introduce medical savings account with a defined scheme to deduct interest from the savings account and pay towards a Mediclaim policy.
    • For the record, the size of the health insurance is Rs 32,000 crore and the savings bank interest is Rs 1.15 lakh crore.
    • The government should also consider exempting all retail and health insurance products from GST.

    Three suggestions on the fiscal situation

    • First,Withdraw all tax appeals.
    • Second, accept all domestic arbitration decisions against government departments/agencies.
    • Third, clear all outstanding dues to all parastatal agencies within a stipulated time.
    • This will be a milestone structural administrative change that could be even thought of as a one-time balance sheet entry recognising liabilities and paying them off.
    • As a consequence, we could jump multiple positions on the Ease of Doing Business rankings.

    Conclusion

    By implementing these steps in the budget the government could use this opportnity to stimulate the economy and aid the economic recovery.

  • Digital Lending

    The Reserve Bank of India (RBI) has constituted a working group on digital lending to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players.

    NPAs are rising in India. And one may find some irritating ads and texts on our smartphones, which desperately wants to disburse easy loans (that too in a limited offer period)!

    Digital Lending

    • Digital lending is the process of offering loans that are applied for, disbursed, and managed through digital channels, in which lenders use digitized data to inform credit decisions and build customer engagement.
    • It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.

    Why in news?

    • The move comes in the backdrop of the three borrowers in Telangana committing suicide over alleged harassment by personnel of such digital lenders.
    • There were many more complaining of being subjected to coercive methods after defaulting on repayments.

    Why regulate Digital Lending?

    • Digital lending has the potential to make access to financial products and services more fair, efficient and inclusive.
    • From a peripheral supporting role a few years ago, FinTech-led innovation is now at the core of the design, pricing and delivery of financial products and services.
    • While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven.
    • A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy, confidentiality and consumer protection.

    Risks associated

    • A growing number of unauthorized digital lending platforms and mobile applications are threats to consumers.
    • Such lenders charge excessive rates of interest and additional hidden charges.
    • They adopt unacceptable and high-handed recovery methods and in turn misuse agreements to access data on mobile phones of borrowers.

    What will the working group do?

    • The RBI working group will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities.
    • They would thus identify the risks posed by unregulated digital lending to financial stability, regulated entities and consumers; and suggest regulatory changes to promote orderly growth of digital lending.
    • It will also recommend measures for expansion of specific regulatory or statutory perimeter and suggest the role of various regulatory and government agencies.
    • It will also recommend a robust fair practices code for digital lending players.

  • Great Green Wall (GGW) Project

    The Great Green Wall (GGW) Project to address desertification, land degradation and climate change in the Sahel region of Africa has hit a new low due to funds crunch.

    Note the countries swept by the GGW project on the African map.

    GGW Project

    • The Great Green Wall project is conceived by 11 countries located along the southern border of the Sahara and their international partners, is aimed at limiting the desertification of the Sahel zone.
    • Led by the African Union, the initiative aims to transform the lives of millions of people by creating a mosaic of green and productive landscapes across North Africa.
    • The initial idea of the GGW was to develop a line of trees from east to the west bordering the Saharan Desert.
    • Its vision has evolved into that of a mosaic of interventions addressing the challenges facing the people in the Sahel and the Sahara.

    Why was such project incepted?

    • The project is a response to the combined effect of natural resources degradation and drought in rural areas.
    • It aimed to restore 100 million hectares of degraded land by 2030; only four million hectares had been restored between 2007 and 2019.
    • It is a partnership that supports communities working towards sustainable management and use of forests, rangelands and other natural resources.
    • It seeks to help communities mitigate and adapt to climate change, as well as improve food security.

  • Gujarat’s MICE Tourism Policy

    Gujarat CM has announced the tourism policy for 2021-25, seeking to position the state as the country’s foremost tourist destination, with a focus on investment and livelihood opportunities.

    The policy seeks to make Gujarat a hub of “MICE” tourism.

    Q. Given the vital importance of the tourism industry in the Indian economy, there is a need to address underneath challenges and adopt a suitable policy for overall growth. Discuss the need for a comprehensive National Tourism Policy.

    What is MICE tourism?

    • The acronym “MICE” stands for “Meetings, Incentives, Conferences and Exhibitions”, and is essentially a version of business tourism that draws domestic and international tourists to a destination.
    • The policy aims to make Gujarat one of the top five MICE tourism destinations in the country.

    How does the policy proposals to attract MICE tourism?

    • To incentivise international events, the government has announced an assistance of Rs 5,000 to the event organizer per foreign participant staying overnight, subject to an upper limit of Rs 5 lakh.
    • For domestic events, the policy promises financial assistance of Rs 2 lakh per event, capped at three events per organizer per year.
    • For Gujarat to emerge as a venue of big national and international conferences, large convention centres are required.
    • The policy promises special incentives for building big convention centres, including 15% capital subsidy on the eligible capital investment.
    • The government has also promised land on the lease if required.
    • A precondition to avail the incentive is that the convention centre should have at least one hall that can seat a minimum of 2,500 persons.

    Why is there a specific focus on MICE tourism?

    • MICE events are major tourism generators, and there is significant scope to tap into it.
    • By incentivizing the organising of MICE events and construction of convention centres in Gujarat, we are trying to plug the gaps.
    • The organizer of an international event can prolong the stay of guests by one or two days, and visitors can visit tourist attractions, of which Gujarat has many.

  • Mutual Funds Risk-o-Meter

    The capital markets regulator Securities and Exchange Board of India (SEBI) has made it mandatory for mutual funds to assign a risk level to schemes, based on certain parameters.

    Try this PYQ:

    Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    What are Mutual Funds?

    • A Mutual Fund is a trust that collects money from a number of investors who share a common investment objective.
    • Then, it invests the money in equities, bonds, money market instruments and/or other securities.
    • Each investor owns units, which represent a portion of the holdings of the fund.
    • The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
    • It is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
    • All funds carry some level of risk. With mutual funds, one may lose some or all of the money invested because the securities held by a fund can go down in value.

    What is the risk-o-meter?

    • All mutual funds shall beginning January 1, assign a risk level to their schemes at the time of launch, based on the scheme’s characteristics.
    • SEBI’s decision on the “risk-o-meter”, characterizes the risk level of the schemes on a six-stage scale from “Low” to “Very High”.
    • The risk-o-meter must be evaluated on a monthly basis.

    A compulsory mandate

    • Fund houses are required to disclose the risk-o-meter risk level along with the portfolio disclosure for all their schemes on their own websites as well as the website of the Association of Mutual Funds in India (AMFI) within 10 days of the close of each month.
    • Any change in the risk-o-meter reading with regard to a scheme shall be communicated to the unit-holders of that scheme.

    How will the level of risk be assigned?

    • Which one of the six risk levels — low, low to moderate, moderate, moderately high, high, and very high — would apply, would depend upon the risk value (less than 1 for low risk to more than 5 for very high risk) calculated for the scheme.
    • So if the risk value of a scheme is less than 1, its risk level would be low, and if it is more than 5, the risk will be very high on the risk-o-meter.