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September 2021

Banking Sector Reforms

Our banks are mispricing capital


From UPSC perspective, the following things are important :

Prelims level : SLR and CRR

Mains level : Paper 3- Mispricing of capital


We have a situation in India today where the policy repo rate has been kept low. Banks are just about managing their non-performing assets (NPAs) and there is uncertainty in the air.

Mispricing of capital by banks

  • There are different components of the cost of funds for banks, which are captured by the MCLR or marginal cost of funds-based lending rate.
  • For every 100 deposits that enter the banking system, there are different accompanying costs for the system.
  • These are deposit costs, provisioning for NPAs, return on assets (ROA or minimum profit), and the regulatory cost of cash reserve and statutory liquidity ratio balances (CRR and SLR) that perforce have to be held.
  • Adding these components, the basic cost works out to be 8.9%, which should be the rate at which incremental lending should take place.
  • By offering loans at a much lower rate of 7.23%, the system is actually mispricing capital.
  • It may be noted that deposit rates have been compressed to a very large degree and so this cost of 4% is very low.
  • Banks do have the advantage of getting free demand deposits and the right to offer differential rates on saving accounts.
  • Clearly, deposit-holders are subsidizing borrowers quite significantly.

Issue of NPA provisioning in India

  • In the past couple of years, provisions as a proportion of NPAs have averaged 30-40%.
  • As NPAs increase, ideally, banks should load this cost onto their borrowers.
  • But that rarely happens in India. Instead, it is taken on banks’ books and gets reflected in their balance sheets.
  • If NPAs were kept in the region of, say, 4-5% of assets, it would have been possible to bring the cost down to 1.5% (from 3%), which would then have justified the present MCLR.

Low return on assets (ROA)

  • The ideal return norm is 1%, which should be derived from all assets.
  • This does not happen for banks’ investment portfolios, and the value imputed here is only for loans.
  • The ROA for banks is abysmally low, as this aspect does not go into the pricing of products on the asset side.
  • Deposit costs have been driven down as savers don’t have a choice.
  • But a commensurate return does not materialize in the loan books of banks.

Cost of regulations

  • The CRR component gets no compensation, while the SLR part earns around 6%, which is the average cost of fresh borrowing for the Union government.
  • While these numbers vary across banks, the minimum rate of 8.9% would hold for the system, which will vary by the level of NPAs.
  • The concept of linking benchmarks to certain loans further misprices fresh lending, as those loans are not ideal anchors to use, for they are being manually driven downwards by a deluge of liquidity in the system after the pandemic.
  • Excess liquidity of 4-7 trillion a day since April 2020 has meant banks have been placing funds costing them 8.9% with the central bank which gives them just 3.35%.
  • This is eventually borne by bank shareholders.


  • With rather rigid policies on corporate lending to avert possible NPAs, banks have preferred lending to the retail segment, which is less risky, and small businesses, backed by the Centre’s credit guarantee.
  • The central bank’s government-bond buying programme to provide liquidity has been successful.
  • But in the absence of fructification of lending and a continuous rollover of funds at the reverse-repo window, Indian banks are bearing a negative carry trade, with a 6% return traded for just 3.35%.


Banks must price capital appropriately and not get overly influenced by arguments in favor of cheap credit or the fact that loans are cheaper in the West. We need to get practical on this issue.

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Back2Basics: CRR and SLR

  • Cash Reserve Ratio, or popularly known as CRR is a compulsory reserve that must be maintained with the Reserve Bank of India.
  • Every bank is required to maintain a specific percentage of their net demand and time liabilities as cash balance with the RBI.
  •  The banks are not allowed to use that money, kept with RBI, for economic and commercial purposes.
  • It is a tool used by the apex bank to regulate the liquidity in the economy and control the flow of money in the country.
  • Statutory Liquidity Ratio, shortly called as SLR also an obligatory reserve to be kept by the banks, as prescribed securities, based on a certain percentage of net demand and time liabilities.
  •  It is used to maintain the stability of banks by limiting the credit facility offered to its customers.
  • CRR is maintained in the form of cash while the SLR is to be maintained in the form of gold, cash, and government-approved securities.

Climate Change Impact on India and World – International Reports, Key Observations, etc.

India must commit to net zero emissions


From UPSC perspective, the following things are important :

Prelims level : Net zero emission issue

Mains level : Paper 3- Net zero emission commitment


The United Nations Climate Change Conference (COP26) in November in Glasgow is shaping up to be the most important climate meeting since the Paris Agreement in 2015.

What are net-zero emissions?

Carbon neutrality refers to achieving net-zero carbon dioxide emissions. This can be done by balancing emissions of carbon dioxide with its removal or by eliminating emissions from society.

Increase in pace and scale of climate action

  • Over 50% of the global economy is already committed to net zero emissions by 2050.
  • Over 100 countries have already committed to net zero emissions by 2050, with more expected at COP26.
  • The pace and scale of climate action are only set to increase, with the recent IPCC report unequivocal on the need for urgent and stronger responses.
  • It is not only governments that are increasing climate action. The business world is too, not just to protect themselves against the risks of climate change but also to take advantage of the massive opportunities arising as the global economy shifts to net-zero emissions.

Why India should commit to a net-zero target

  • National interest due to vulnerability: India itself has a national interest in ambitious global and national climate action.
  • It is among the most vulnerable countries to climate change and, therefore, should be among the more active against the threats.
  • Influence as a rising power: Second, as a rising power, India naturally seeks stronger influence globally.
  • Being an outlier on the global challenge facing our generation does not support this aim.
  • Drag on international diplomacy: India’s reluctance to commit to net-zero will become a significant drag on India’s international diplomacy.
  • This applies not just to key relationships like with the U.S., but also with much of the Group of 77 (G77) states, who are increasingly concerned to see climate action, and in multilateral groupings such as the United Nations and ASEAN-APEC.
  • Interconnected with the economy: There is no longer a trade-off between reducing emissions and economic growth.
  • For example, the U.K. has reduced emissions by over 40% and grown its economy by over 70% since 1990.
  • Solar energy costs have fallen 90% in recent years, providing the cheapest electricity in India ever seen.
  • Also, given the negative impacts, addressing climate change in India’s economic development is now central to success, not an added luxury to consider.
  • The transition of the global economy to net zero emissions is the biggest commercial opportunity in history.
  • In just the energy sector alone, an estimated $1.6 to $3.8 trillion of investment is required every year until 2050.

India’s climate actions

  • India is set to significantly exceed its Paris Agreement commitment of reducing the emissions intensity of its GDP by 33-35% below 2005 levels by 2030.
  • Emphasis on renewable: India is impressing the world with its leading roll-out of renewable energy and target for 450GW by 2030, linked to its leadership on the International Solar Alliance and recent national hydrogen strategy.
  • Corporates: Indian corporates are also stepping up, with the Tata Group winning awards on sustainability, Mahindra committing to net-zero by 2040, and Reliance by 2035.
  • Notwithstanding reasonable arguments about historical responsibility, per capita emissions, and equity, India’s national interests in climate action are now engaged in ways that go significantly beyond waiting for donor support to drive ambition.

The way forward: International cooperation

  • The world needs to work together for success in the form of stronger political engagement, policy support in areas of mutual challenge such as energy policy, carbon markets, and economic recovery.
  • Practical support and cooperation in areas like renewable energy and integrating it with the national grid, zero-emissions transport, decarbonising hard to abate sectors like steel, cement, and chemicals, and decarbonising agriculture offer significant scope to raise ambition.
  • As does working with India on innovative green financing for decarbonizing investment.


India’s tryst with destiny rests in its own remarkable hands, as it always has been. In a land where the earth is called mother, and Mahatma Gandhi, major religions, and the Constitution enshrine environmental care, commitment to net zero emissions by 2050 should almost be foretold.

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Microfinance Story of India

Gauging household income key for microfinance clients


From UPSC perspective, the following things are important :

Prelims level : Definition of microfinance

Mains level : Paper 3- Making household income critical variable for loan assessment


The Reserve Bank of India’s (RBI) recently released a Consultative Document on Regulation of Microfinance in June 2021.

Consultative document makes household income a critical variable

  • Following the Malegam Committee Report, which is a decade old now, the current document looks to reassess and realign the priorities of the sector.
  • Some of the key regulatory changes proposed in the document take household income as a critical variable for loan assessment
  • Definition of microfinance: The definition of microfinance itself is proposed to mean collateral-free loans to households with annual household incomes of up to ₹1,25,000 and ₹2,00,000 for rural and urban areas respectively.
  • Household income assessment: The document requires all Regulated Entities to have a board-approved policy for household income assessment.
  • Cap on repayment: It caps loan repayment (principal and interest) for all outstanding loans of the household at 50% of household income.
  • Therefore, measuring household income accurately becomes critical for the effective implementation of these norms.

Challenges in measuring the income of Low-Income-Household (LIH)

  • Seasonal and volatile: Low-Income Households (LIHs), who typically form the customer base for Microfinance Institutions (MFIs), often also have seasonal and volatile income flows. 
  • Measuring expenditure doesn’t reflect their income: Since income for LIHs is seasonal and volatile, there have been attempts to understand their inflows by measuring their expenditure.
  • But, given the rotational debts they avail to fund a consumption expenditure here and a loan repayment obligation there, expenditure also does not truly reflect the household’s income.
  • Not separate personal expenditure: Moreover, for most LIHs, their expenditure on income-related activity is not separate from their personal expenses.
  • Therefore, it is difficult to separate the household’s personal expenses from that of their occupational pursuits.
  • Given these complexities, we need to understand and accept that for the bulk of LIHs, household finance is not just personal family finance, but their business finance as well.

3 ways to measure household income for microfinance client

  • Structured survey approach: A structured survey-based approach could be used by Financial Service Providers (FSPs) to assess a household’s expenses, debt position and income from various sources of occupation and seasonality of income.
  • Template-based approach: A template-based approach could be used wherein FSPs could create various templates for different categories of households (as per location, occupation type, family characteristics, etc.).
  • These templates could then be used to gauge the household income of a client matching a particular template.
  • Centralised database: FSPs could also form a consortium to collect and maintain household income data through a centralised database.
  • This would allow for uniformity in data collection across all FSPs and, over time, can be used to validate the credibility of any new client’s reported income.
  • Such a database would also enable FSPs to track the changes in household income over time.

Way forward

  • Use technology: Finding cost-effective yet accurate ways of capturing this information becomes crucial.
  • Creating new technology to document and analyze cash flows of LIHs would not only facilitate credit underwriting but also innovation in the standard microcredit contracts through customized repayment schedules and risk-based pricing, depending on a household’s cash flows.


Eventually, an accurate assessment of household-level incomes would avoid instances of over-indebtedness and ensure the long-term stability of the ecosystem.

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Foreign Policy Watch: India-Sri Lanka

Sri Lanka declares Economic Emergency


From UPSC perspective, the following things are important :

Prelims level : Financial Emergency

Mains level : Forex crisis in Sri Lanka

Sri Lankan President has declared an economic emergency to contain soaring inflation after a steep fall in the value of the country’s currency caused a spike in food prices.

Sri Lankan Economic Emergency

  • President Rajapaksa declared the state of emergency under the public security ordinance to prevent the hoarding of essential items, including rice and sugar.
  • The government has appointed a former army general as commissioner of essential services, who will have the power to seize food stocks held by traders and retailers and regulate their prices.
  • The military will oversee the action which gives power to officials to ensure that essential items, including rice and sugar, are sold at government-guaranteed prices or prices based on import costs at customs and prevent hiding of stocks.
  • The emergency move followed sharp price rises for sugar, rice, onions and potatoes, while long queues have formed outside stores because of shortages of milk powder, kerosene oil and cooking gas.
  • The wide-ranging measure is also aimed at recovering credit owed to State banks by importers.

Why came such an emergency?

  • Sri Lanka, a net importer of food and other commodities, is witnessing a surge in COVID-19 cases and deaths which has hit tourism, one of its main foreign currency earners.
  • Partly as a result of the slump in tourist numbers, Sri Lanka’s economy shrank by a record 3.6% last year.
  • The Sri Lankan rupee has fallen by 7.5% against the US dollar this year.
  • The Central Bank of Sri Lanka recently increased interest rates in a bid to shore up the local currency.
  • According to bank data, Sri Lanka’s foreign reserves fell to $2.8 billion at the end of July, from $7.5 billion in November 2019.

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Back2Basics: Financial Emergency in India

  • The President of India can declare the Financial Emergency on the aid and advise of the Council of Ministers.
  • She/ He has to be satisfied that a situation has arisen due to which the financial stability or credit of India or any part of its territory is threatened.
  • Article 360 gives authority to the President of India to declare a financial emergency.
  • However, the 44th Constitutional Amendment Act of 1978 says that the President’s ‘satisfaction’ is not beyond judicial review.
  • It means the Supreme Court can review the declaration of a Financial Emergency.

Parliamentary Approval and Duration

  • A proclamation of financial emergency must be approved by both the Houses of Parliament within two months from the date of its issue.
  • A resolution approving the proclamation of financial emergency can be passed by either House of Parliament (Lok Sabha or Rajya Sabha) only by a simple majority.
  • Once approved by both the Houses of Parliament, the Financial Emergency continues indefinitely till it is revoked.
  • It may be revoked by the President anytime without any Parliamentary approval (but with the usual aid and advice).

Effects of Financial Emergency

  • During the financial emergency, the executive authority of the Center expands and it can give financial orders to any state according to its own.
  • All money bills or other financial bills, that come up for the President’s consideration after being passed by the state legislature, can be reserved.
  • Salaries and allowances of all or any class of persons serving in the state can be reduced.
  • The President may issue directions for the reduction of salaries and allowances of: (i) All or any class of persons serving the Union and the judges of the Supreme Court and the High Court.

Try this PYQ:

With reference to the Constitution of India, prohibitions or limitations or provisions contained in ordinary laws cannot act as prohibitions or limitations on the constitutional powers under Article 142. It could mean which one of the following?


(a) The decisions taken by the Election Commission of India while discharging its duties cannot be challenged in any court of law.

(b) The Supreme Court of India is not constrained in the exercise of its powers by laws made by the Parliament.

(c) In the event of grave financial crisis in the country, the President of India can declare Financial Emergency without the counsel from the Cabinet.

(d) State Legislatures cannot make laws on certain matters without the concurrence of the Union Legislature.


Post your answers here.

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Contention over South China Sea

China’s new Maritime Law


From UPSC perspective, the following things are important :

Prelims level : South China Sea

Mains level : South China Sea Dispute

China’s new maritime rules designed to control the entry of foreign vessels in what Beijing calls “Chinese territorial waters” take effect.

What is the new Maritime Law?

  • Foreign vessels, both military and commercial, will be henceforth required to submit to Chinese supervision in “Chinese territorial waters,” as per the new law.
  • Operators of submersibles, nuclear vessels, ships carrying radioactive materials, and ships carrying bulk oil, chemicals, liquefied gas, and other toxic and harmful substances are required to report their detailed information upon their visits to Chinese territorial waters.
  • Vessels that “endanger the maritime traffic safety of China” will be required to report their name, call sign, current position and next port of call, and estimated time of arrival.
  • The name of shipborne dangerous goods and cargo deadweight will also be required.

Impact of the move

  • The move is expected to have far-reaching consequences for the passage of vessels, both commercial and military, in the disputed South China Sea, East China Sea, and Taiwan Strait.
  • It is likely to escalate the existing tension with the US and its neighbors in the region.

Why is this important?

  • South China Sea: The South China Sea, which lies between China, Taiwan, the Philippines, Brunei, Malaysia, Indonesia, and Vietnam, is of great economic importance globally.
  • Shipping: Nearly one-third of the world’s shipping passes through its lanes, and the waters house numerous important fisheries.

Significance for India

  • The South China Sea is a critical route for India, both militarily and commercially.
  • It plays a vital role in facilitating India’s trade with Japan, South Korea, and ASEAN countries, and assists in the efficient procurement of energy supplies.
  • More than 55% of India’s trade passes through the South China Sea and Malacca Straits.
  • India is also involved in oil and gas exploration in offshore blocks in the margins of the Sea, which has led to standoffs with Chinese authorities.

The actual row

  • The waters around China are hotly contested.
  • Under a “nine-dash line” map, China claims most of the South China Sea as its sovereign territory.
  • This claim is contested by its neighbors in the region and by the United States, which, though it has no claim in the Sea, backs the smaller nations in the fight against Chinese overreach.

International position

  • Currently, international maritime activities are governed by an international agreement called the United Nations Convention on the Law of the Sea (UNCLOS).
  • China, India, and over a hundred other countries are signatories of UNCLOS (the US, significantly, is not).
  • Accordingly, states have the right to implement territorial rights up to 12 nautical miles into the sea.
  • The UNCLOS also states that all vessels have the right of “innocent passage” through this region – China’s new law violates this.

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Coal and Mining Sector

Govt. tells utilities to ship in coal as demand surges


From UPSC perspective, the following things are important :

Prelims level : Coal mining in India

Mains level : Need for coal imports

The govt. has urged utilities to import coal despite having the world’s fourth-largest reserves, with several power plants on the verge of running out of fuel due to a surge in power demand.

Coal Mining in India

  • Coal in India has been mined since 1774 and is now the second fastest mined in the world, producing 716 million metric tons (789 million short tons) in 2018.
  • Due to high demand and poor average quality, India imports coking coal to meet the requirements of its steel plants.
  • Dhanbad city is the largest coal-producing city and is called the Coal Capital of India.
  • State-owned Coal India had a monopoly on coal mining between its nationalization in 1973 and 2018.


  • Coal-fired power accounts for more than 70% of India’s electricity generation. Electricity generation makes up three-fourths of India’s coal consumption.

Quality of coal

  • The ash chemistry of Indian coal is such that it is high in silica and alumina.
  • The ash is also highly abrasive because of its high quartz content, which can lead to erosion of the syngas cooling system when it gets fused.
  • Indian coal’s sulfur content is low, about 0.5 percent.
  • So, from a gas clean-up perspective, the flue gas desulphurization (removal of SOx gases) and NOx removal system is not economically justifiable and, therefore, not important.
  • Also, in the Indian context, this is unnecessary to meet emission norms.

Coal reserves

  • India has the fourth-largest coal reserves in the world. It is the second-largest producer of coal in the world, after China.
  • Coal deposits are primarily found in eastern and south-central India.
  • Jharkhand, Odisha, Chhattisgarh, West Bengal, Madhya Pradesh, Telangana, and Maharashtra accounted for 98.09% of the total known coal reserves in India.
  • As of 31 March 2019, Jharkhand and Odisha had the largest coal deposits of 25.88% and 24.76% respectively.


  • Coking Coal is being imported by the Steel Authority of India Limited (SAIL) and other Steel manufacturing units mainly to bridge the gap between the requirement and indigenous availability and to improve the quality.
  • Coal-based power plants, cement plants, captive power plants, sponge iron plants, industrial consumers, and coal traders are importing non-coking coal.
  • Coke is imported mainly by Pig-Iron manufacturers and Iron & Steel sector consumers using mini-blast furnaces.

Try answering this PYQ:

Which of the following is/are the characteristics/ characteristics of Indian coal?

  1. High ash content
  2. Low Sulphur content
  3. Low ash fusion temperature

Select the correct option using the codes given below:

(a) 1 and 2 only

(b) 2 only

(c) 1 and 3 only

(d) 1, 2 and 3


Post your answers here.

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Wildlife Conservation Efforts

Ladakh adopts State Animal and Bird


From UPSC perspective, the following things are important :

Prelims level : Snow leopard, black-necked crane

Mains level : Not Much

Ladakh has adopted two endangered species, snow leopard and black-necked crane, as State animal and State bird, two years after it was carved out as a separate Union Territory (UT) from the erstwhile State of J&K.

Snow Leopard

  • The snow leopard (Panther unica) and black-necked crane (Grus nicricollis).
  • Snow leopard, whose numbers are dwindling worldwide, has been categorized as “vulnerable” in the International Union for Conservation of Nature Red List.
  • In total, there are about 7,500 snow leopards left in the world, out of which 500 are in India.
  • However, experts state that the population of snow leopards is between 200-300 in Ladakh alone.

Black-necked Crane

  • The black-necked crane is found in eastern Ladakh’s high-altitude wetlands and marshes.
  • It is mostly listed as Near Threatened on the International Union for Conservation of Nature (IUCN) red list.
  • Considered loyal couples, they are only found in Ladakh’s Changthang region. They arrive in March for breeding and migrate by October end or early November.
  • It was the State bird of J&K before August 5, 2019.

About Ladakh

  • Ladakh was established as a union territory of India on 31 October 2019, following the passage of the Jammu and Kashmir Reorganization Act.
  • Prior to that, it was part of the Jammu and Kashmir state. Ladakh is the largest and the second least populous union territory of India.
  • It extends from the Siachen Glacier in the Karakoram range to the north to the main Great Himalayas to the south.
  • The eastern end, consisting of the uninhabited Aksai Chin plains, is claimed by the Indian Government as part of Ladakh and has been under Chinese control since 1962.
  • The largest town in Ladakh is Leh, followed by Kargil, each of which headquarters is a district.
  • The Leh district contains the Indus, Shyok and Nubra river valleys. The Kargil district contains the Suru, Dras and Zanskar river valleys.

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Indian Army Updates

Exercise ZAPAD 2021


From UPSC perspective, the following things are important :

Prelims level : ZAPAD 2021

Mains level : Not Much

A contingent of 200 Army personnel will participate in the multinational Exercise ZAPAD 2021 being held at Nizhniy, Russia.

ZAPAD 2021

  • ZAPAD is one of the theatre-level exercises of Russian armed forces and will focus primarily on operations against terrorists.
  • The NAGA Battalion group participating in the exercise will feature an all arms combined task force.
  • The exercise aims to enhance military and strategic ties amongst the participating nations while they plan and execute this exercise.
  • In all, 17 countries have been invited by Russia for the exercise. Of these nine are Participating countries which include Mongolia, Armenia, Kazakhstan, Tajikistan, Kyrgyzstan, Serbia, Russia, India, and Belarus.
  • The other eight countries are Observers which include Pakistan, China, Vietnam, Malaysia, Bangladesh, Myanmar, Uzbekistan, and Sri Lanka.

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