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Subject: Economics

  • 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/

  • 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.

  • 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.

  • PM Fasal Bima Yojana (PMFBY) completes 5 Years of operations

    The Pradhan Mantri Fasal Bima Yojana (PMFBY) has completed 5 Years of successful operations.

    It has become vital these days to remember and recognize every detail of government schemes.

    What is PMFBY?

    • 5 years ago, on 13th January 2016, the GoI took a historic step towards strengthening risk coverage of crops for farmers of India and approved the flagship crop insurance scheme – the PMFBY.
    • The scheme was conceived as a milestone initiative to provide a comprehensive risk solution at the lowest uniform premium across the country for farmers.
    • Premium cost over and above the farmer share is equally subsidized by States and GoI.
    • However, GoI shares 90% of the premium subsidy for the North Eastern States to promote the uptake in the region.
    • The average sum insured per hectare has increased from ₹15,100 during the pre-PMFBY Schemes to ₹40,700 under PMFBY.

    Coverage of Risks and Exclusions:

    Following stages of the crop and risks leading to crop loss are covered under the scheme.

    • Prevented Sowing/ Planting Risk: The insured area is prevented from sowing/ planting due to deficit rainfall or adverse seasonal conditions
    • Standing Crop (Sowing to Harvesting): Comprehensive risk insurance is provided to cover yield losses due to non-preventable risks, viz. Drought, Dry spells, Flood, Inundation, Pests and Diseases, Landslides, Natural Fire and Lightening, Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane and Tornado.
    • Post-Harvest Losses: Coverage is available only up to a maximum period of two weeks from harvesting for those crops which are allowed to dry in cut and spread condition in the field after harvesting against specific perils of a cyclone and cyclonic rains and unseasonal rains.
    • Localized Calamities: Loss/ damage resulting from the occurrence of identified localized risks of hailstorm, landslide, and Inundation affecting isolated farms in the notified area.

    Try this question from CSP 2020:

    Q.Under the Kisan Credit Card Scheme, short-term credit support is given to farmers for which of the following purposes? (CSP 2020)

    1. Working capital for maintenance of farm assets
    2. Purchase of combine harvesters, tractors and mini trucks
    3. Consumption requirements of farm households
    4. Construction of family house and setting up of village cold storage facility
    5. Construction of family house and setting up of village cold storage facility

    Select the correct answer using the code given below:

    (a) 1,2 and 5 only

    (b) 1,3 and 4 only

    (c) 2,3,4 and 5 only

    (d) 1, 2, 3 and 4

    Progress till date

    • The Scheme covers over 5.5 crore farmer applications year on year.
    • Till date, claims worth Rs 90,000 crores have already been paid out under the Scheme.
    • Aadhar seeding has helped in speedy claim settlement directly into the farmer accounts.
    • Even during COVID lockdown period, nearly 70 lakh farmers benefitted and claims worth Rs. 8741.30 crores were transferred to the beneficiaries.

  • [pib] Khadi Prakritik Paint – India’s first cow dung paint

    Union Minister for MSMEs has launched an innovative new paint called Khadi Prakritik Paint – India’s first cow dung paint

    It is very unlikely that an MCQ will be asked in Prelims. However one must know this from mains perspective.

    Khadi Prakritik Paint

    • It is developed by Khadi and Village Industries Commission at his residence.
    • The eco-friendly, non-toxic paint, called “Khadi Prakritik Paint” is a first-of-its-kind product, with anti-fungal, anti-bacterial properties.
    • Khadi Prakritik Paint is available in two forms – distemper paint and plastic emulsion paint.
    • The project was conceptualized by Chairman KVIC in March 2020 and later developed by Kumarappa National Handmade Paper Institute, Jaipur (a KVIC unit).
    • The paint is priced at only Rs. 120 per litre for the distemper, and Rs.225 per litre for the emulsion, almost half the price charged by big paint companies.

    A no lesser brand

    • Khadi Prakritik Emulsion paint meets BIS 15489:2013 standards; whereas Khadi Prakritik Distemper paint meets BIS 428:2013 standards.
    • The paint has successfully passed various test parameters such as application of paint, thinning properties, drying time and finish, among others.
    • It dries in less than 4 hours and has a smooth and uniform finish.

    Why makes it competent?

    • Based on cow dung as its main ingredient, the paint is cost-effective and odourless and has been certified by the Bureau of Indian Standards.
    • The paint is free from heavy metals like lead, mercury, chromium, arsenic, cadmium and others.
    • It will be a boost to local manufacturing and will create sustainable local employment through technology transfer.
    • This technology will increase the consumption of cow dung as a raw material for eco-friendly products and will generate additional revenue to farmers and gaushalas.
    • Utilization of cow dung will also clean the environment and prevent clogging of drains.

  • PM-KISAN payout wrongly made to ineligible beneficiaries

    PM-KISAN payments worth ₹1,364 crores have been wrongly made to more than 20 lakh ineligible beneficiaries and income tax payer farmers.

    Try this PYQ:

    Q.Under the Kisan Credit Card Scheme, short-term credit support is given to farmers for which of the following purposes? (CSP 2020)

    1. Working capital for maintenance of farm assets
    2. Purchase of combine harvesters, tractors and mini trucks
    3. Consumption requirements of farm households
    4. Construction of family house and setting up of village cold storage facility
    5. Construction of family house and setting up of village cold storage facility

    Select the correct answer using the code given below:

    (a) 1,2 and 5 only

    (b) 1,3 and 4 only

    (c) 2,3,4 and 5 only

    (d) 1, 2, 3 and 4

    PM-KISAN

    • The Pradhan Mantri Kisan Samman Nidhi Yojana (PM-Kisan Yojana) is a government scheme through which, all small and marginal farmers will get up to Rs 6,000 per year as minimum income support.
    • Under the PM-KISAN scheme, all landholding farmers’ families shall be provided with the financial benefit of Rs. 6000 per annum per family payable in three equal instalments of Rs. 2000 each, every four months.
    • The definition of the family for the scheme is husband, wife, and minor children.
    • State Government and UT administration will identify the farmer families which are eligible for support as per scheme guidelines.
    • The fund will be directly transferred to the bank accounts of the beneficiaries.

    Why in news?

    • When it was launched just before the general election in 2019, it was meant to cover only small and marginal farmers who owned less than two hectares.
    • Later that year, large farmers were included in the scheme as the government removed land size criteria.

    Certain exclusions

    • However, certain exclusions remained.
    • If any member of a farming family paid income tax, received a monthly pension above ₹10,000, held a constitutional position, or was a serving or retired government employee, they were not eligible for the scheme.
    • Professionals and institutional landholders were also excluded.

    Who are NOT eligible for PM-KISAN?

    The following categories of beneficiaries of higher economic status shall not be eligible for benefit under the scheme.

    • All Institutional Landholders.

    Farmer families that belong to one or more of the following categories:

    • Former and present holders of constitutional posts
    • Former and present Ministers/ State Ministers and former/present Members of Lok Sabha/ Rajya Sabha/ State Legislative Assemblies/ State Legislative Councils, former and present Mayors of Municipal Corporations, former and present Chairpersons of District Panchayats.
    • All serving or retired officers and employees of Central/ State Government Ministries
    • All superannuated/retired pensioners whose monthly pension is Rs.10,000/-or more. (Excluding Multi-Tasking Staff / Class IV/Group D employees) of the above category
    • All Persons who paid Income Tax in the last assessment year
    • Professionals like Doctors, Engineers, Lawyers, Chartered Accountants, and Architects registered with Professional bodies and carrying out the profession by undertaking practices.

    Note: It is not so easy to remember all such exclusions. But one must be able to recognize them by applying pure logic and thumb rule. This can be well understood from the PYQ given.

  • New Single-window Clearance for Coal Mines

    The Union government has announced a new online single window clearance portal for the coal sector to speed up the operationalization of coal mines.

    Try this PYQ:

    Q.Consider the following statements:

    1. In India, State Governments do not have the power to auction non -coal mines.
    2. Andhra Pradesh and Jharkhand do not have goldmines.
    3. Rajasthan has iron ore mines.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 2 only

    (c) 1 and 3 only

    (d) 3 only

    What is a single-window clearance portal?

    • A single window clearance portal is aimed at allowing successful bidders for coal blocks to be able to obtain all required clearances.
    • It includes environmental and forest clearances, from a single portal with progress monitoring, instead of having to go to multiple authorities.
    • The portal should allow successful bidders to operationalize coal mines more quickly.
    • The Parivesh mechanism for forest and environment-related clearances would likely be merged into this mechanism.

    Why need such a portal?

    • Presently, about 19 major approvals or clearances are required before starting the coal mine in the country.
    • In the absence of a unified platform for grant of clearances, companies were required to approach different departments, leading to delay in operationalization.

    How will the portal help?

    • Industry sources said that the sector has long sought a single-window clearance system to help with quicker operationalization.
    • Obtaining the requisite clearances was taking over 2-3 years for successful bidders in many cases.
    • Some coal blocks auctioned as far back as 2015 has still not been operationalised due to delays in obtaining required clearances.

    Must read:

    [Burning Issue] The Mineral Laws (Amendment) Bill, 2020