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Subject: Economics

  • Balancing the interest of lenders and borrowers

    The article suggests the 5 point strategy to balance the interest of borrowers and lenders. Banks hold the special significance for the country and so require special and stricter regulation.

    Context

    •  COVID creates deep pain but we must resist consistently choosing borrowers over lenders.
    • We should persist with our multi-year five-pillar strategy to sustainably raise our Credit to GDP ratio from 50 per cent to 100 per cent.

    Issue of lending

    • A modern economy grows by lending.
    •  But fiscal constraints or natural disasters often create temptations to disguise spending as lending.
    • The last 20 years have given three lessons:
    • 1) Giving loans is easier than getting them back.
    • Corporate credit growing from Rs 18 lakh crore in 2008 to Rs 54 lakh crore in 2014 created a Rs 12 lakh crore bad loan problem.
    • 2) Accounting fudging and restructuring would not help.
    • 3) Government banks need more than capital.
    • Government banks’ risk-weighted assets are lower than two years ago despite a Rs 2 lakh crore capital infusion.

    History recommends patiently balancing financial inclusion and stability by persisting with our five-pillar strategy.

    1) Bank competition

    • Raising credit availability and lowering its price needs competition-driven innovation.
    • Capital should be chasing Indian banking given its high net interest margins, high market cap to book value ratios, and massive addressable market.
    • Yet, the RBI’s on-tap licencing has few applications pending.
    • We need many more banks.

    2) Private bank governance

    • Private banks are only 30 per cent of deposits but 80 per cent of bank market capitalisation.
    • Private banks are a special species with 20 times leverage, but this makes privatised gains and socialised losses possible.
    • Recent failures suggest problems with public shareholder collective action and the attention, skill, and courage of board directors.
    • Private bank governance must move from a perpetual private fiefdom to trustees that hand over in better condition to the next generation.

    3) Government bank governance

    • Over 10 years, government companies have sunk from 30 per cent of India’s market capitalisation to 6 per cent.
    • Government banks mirror this decline — their 70 per cent bank deposit share translates to only 20 per cent bank market capitalisation share.
    • Many have irrational employee costs to market capitalisation ratios ex- Bank of India with 58 per cent.
    • We need only four government banks with strong governance and no tax access for capital.

    4) RBI’s regulation and supervision

    • Recent failures in financial institutions reinforce the importance of statutory auditors, ethical conduct, shareholder self-interest, and risk management.
    • They also suggest a first-principles review that raises the RBI’s regulation and supervision.
    • Zero failure is impossible, but the RBI should boldly re-imagine its current mandate, structure and technology.

    5) Non-bank regulatory space

    • Regulatory differences traditionally existed between banks and non-banks.
    • But progress in payments, MSME lending, and consumer credit suggest that non-banks are as important for financial inclusion.
    • They need more regulatory space and supervision.

    Conclusion

    We won’t test the RBI’s COVID worst-case scenario of 14.7 per cent bad loans but handling the inevitable COVID bank pain needs resisting short-termism. In the long run, we are not all dead.

    Original article: https://indianexpress.com/article/opinion/columns/rbi-bank-and-the-covid-pain-india-gdp-6543101/

  • How are inflation rate and interest rate linked?

    The Monetary Policy Committee of the RBI has decided to keep the benchmark interest rates of the economy unchanged.

    Try this PYQ:

    Q.Which one of the following is not the most likely measures the Government/RBI takes to stop the slide of Indian rupee? (CSP 2019)

    (a) Curbing imports of non-essential goods and promoting exports

    (b) Encouraging Indian borrowers to issue rupee-denominated Masala Bonds

    (c) Easing conditions relating to external commercial borrowing

    (d) Following an expansionary monetary policy

    What is the link between growth, inflation and interest rates?

    • In a fast-growing economy, incomes go up quickly and more and more people have the money to buy the existing bunch of goods.
    • As more and more money chases the existing set of goods, prices of such goods rise.
    • In other words, inflation (which is nothing but the rate of increase in prices) spikes.

    How interest rates dominate?

    • To contain inflation, a country’s central bank typically increases the interest rates in the economy.
    • By doing so, it incentivizes people to spend less and save more because saving becomes more profitable as interest rates go up.
    • As more and more people choose to save, money is sucked out of the market and inflation rate moderates.

    What happens when growth rate decelerates or contracts?

    • When growth contracts or when its growth rate decelerates, people’s incomes also get hit.
    • As a result, less and less money is chasing the same quantity of goods.
    • These results in either the inflation rate decline.
    • In such situations, a central bank cuts down the interest rates so as to incentivise spending and by that route boost economic activity in the economy.
    • Lower interest rates imply that it is less profitable to keep one’s money in the bank or any similar saving instrument.
    • As a result, more and more money comes into the market, thus boosting growth and inflation.

    Why has RBI not raised interest rates this quarter?

    • RBI is facing an odd situation at present: GDP is contracting even as inflation is rising.
    • This is happening because the pandemic has reduced demand, on the one hand, and disrupted supply on the other.
    • As a result, both things are happening — falling growth and rising inflation.
    • It is true that for containing inflation, RBI should raise interest rates.
    • And under normal circumstances, it would have done just that. But raising interest rates at this stage would be catastrophic for India’s GDP growth.

    Risks of altering interest rates

    • If the RBI cuts the interest rate, it may be fuelling retail inflation further. It must be remembered that inflation hits the poor the hardest.
    • So, the RBI has chosen to do what many expected it to do: stay put and waits for another couple of months to figure out how growth and inflation are shaping up.

    Back2Basics: Monetary Policy Committee (MPC)

    • The RBI Act, 1934 (RBI Act) was amended by the Finance Act, 2016,  to provide for a statutory and institutionalized framework for an MPC, for maintaining price stability, while keeping in mind the objective of growth.
    • The MPC is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
    • The meetings of the MPC are held at least 4 times a year and it publishes its decisions after each such meeting.
    • As per the provisions of the RBI Act, out of the six members of the committee, three members are from the RBI and the other three Members of MPC are appointed by the Central Government.
    • Governor of the RBI is ex officio Chairman of the committee.

    Economics | Monetary Policy Explained with Examples

  • Drug pricing and dependence on China

    Whether or not the drug pricing system in India resulted in the growing dependence on China for APIs is analysed in this article. 

    Incentives for domestic production of APIs

    • The department of pharmaceuticals (DoP) has recently notified the Production-Linked Incentive (PLI) scheme.
    • The scheme aims to encourage domestic production of 41 active pharmaceutical ingredients (APIs), key starting materials (KSMs) and drug intermediaries (DIs).
    • A Drug Security Committee constituted by the DoP had identified 53 APIs with high dependence on China.

    Did drug price control policy increase dependence on China?

    • India was self-reliant on APIs until the mid-1990s.
    • Liberalisation in import restrictions led to a gradual influx of APIs from China.
    • India had a more stringent price control policy before the 1990s.
    • If price control system were the culprit, India would not have been self-sufficient in APIs until the mid-1990s.
    • A cost-based price control system that existed until 2013 regulated the prices of both APIs and formulations.
    • The approach to price control shifted from a cost-based to a market-based one since 2013.
    • The new price control policy does not regulate the price of APIs.
    • New price control policy regulates the prices of formulations of those APIs, which figure in the National List of Essential Medicines (NLEM).
    • There are many APIs which do not fall under DPCO but are still imported in a significant way from China.

    Understanding the growing dependence on China from the past perspective

    • Even though India now has a less stringent drug price control policy, the dependence on Chinese imports has been growing.
    • The share of China in India’s total import of APIs has increased from 61% in 2011 to 69% in 2019.
    • The experience in India was that firms would tend to rely on imported APIs if they have an option.
    • The Hathi Committee (1975), which had looked into why Indian firms were not engaging in the production of APIs, found that the capital invested to turnover ratio of APIs was much lower as compared to formulations.
    • This ratio was 1:1 for APIs at best and 1:2.6 for formulations on average, and in some cases, as high as 1:7.2.
    • Subsequently, various measures were adopted.
    • The ‘ratio parameter’ mandatorily required the producers of formulations to produce a certain quantity of APIs.
    • It was the government interventions to overcome the market failure that resulted in India attaining self-sufficiency in APIs.

    Consider the question “What are the APIs? Examine the implications of India’s dependence on imports for API and suggest the measures to reduce such dependence.”

    Conclusion

    An enquiry into the causes of dependence on China needs to go much beyond price control policy and look into whether the state continued to play a proactive role during the post-1991 period to maintain an ecosystem to enhance the competence of Indian API industry.

    Source-

    https://www.financialexpress.com/opinion/drug-pricing-is-certainly-not-the-issue-in-growing-dependence-on-china/2046086/

  • How to pay for the stimulus package

    The article addresses the issue of apprehensions over money financing. It also compares the option of borrowing from international institutions.

    Issues with public spending

    • Greater public spending will increase the fiscal deficit and this expansion has to be financed.
    • Theoretically, it can be financed by higher taxes.
    • But when the economy is in a recession, this option cannot be explored even though the balanced-budget multiplier is one.
    • When the multiplier is one, output expands by exactly the same amount as the increase in government spending.

    So, what are the options?

    There are two options

    1) Issuing debt to the public (Debt financing)

    2) Borrowing from the RBI (Money financing)

    Borrowing from World Bank and IMF?

    This borrowing has 4 issues with it-

    • 1) This borrowing will have to be paid back in hard currency.
    • This would involve India having to earn hard currency by stepping up exports.
    • If a stimulus of approximately 10% of the GDP is envisaged, with exports at 25% of the GDP, it would imply stepping up exports by close to 50%.
    • This would be a herculean task under present circumstances.
    • 2) There is the issue of conditionalities.
    •  It is not obvious what conditionalities will come along with the loan.
    • 3) The loan is bound to take some time to be negotiated, taxing the energies of a government that ought to be engaged in the day to day battle with COVID-19.
    • 4) The external debt is truly national which, arguably, government bonds held by the country’s private sector are not.

    Issues with money financing

    • The standard economic argument against money financing is that it is inflationary.
    • However, whether a fiscal expansion is inflationary or not is related more to the state of the economy than the medium of its financing.
    • When resources are unemployed, output may be expected to expand without inflation.

    Consider the question “Examine the issues with the money financing of the fiscal deficit.”

    Conclusion

    There is no reasoned case for denying ourselves the option of money financing to take us back to pre-COVID-19 levels of output and employment.

  • Reforms driven agenda for the modernisation of railways

    Adoption of the PPP model by the Indian Railways will help it get rid of the many issues it suffers from. This article analyses the two initiative by the railways in this regard and spells out their advantages and challenges.

    Significance of railways

    • Its route spans about 68000 km.
    • It employs over 1.2 mn people and generates approximately Rs 2 lakh cr annually.
    • So, a major contributor to jobs, GDP, and mobility.
    • Efficient and optimal use of the railways could further add up to 1% to GDP.

    Adopting PPP model

    • The time has come to modernise the Indian Railways, make it world-class, and a key driver of the country’s growth.
    • To do so, India must involve the best resources via PPP to bring in the latest technology, leading practices, and efficiencies.
    • PPP has been actively deployed as a mechanism in Europe and Japan.

    Two initiatives of Indian Railways involving PPP model

    1. Operation of trains on selected route

    • Indian Railways’ proposal features a list of 109 pairs of routes through 151 trains to private operators.
    • Proposed routes include Delhi–Mumbai, Delhi–Chennai, Mumbai–Chennai, and others.
    • PPP operators are expected to finance, procure, operate, and maintain the allocated trains.
    •  The concession period will be for 35 years.

    Advantages

    • The initiative will bring in cutting-edge, technologically advanced rolling stock, shorter journey times, enhanced job growth, better safety, and best-in-class service standards.
    • It will bridge the demand-and-supply deficit for passengers.
    • The PPP investment is expected to be in the range of Rs 30,000 cr—in a Make in India–led growth strategy.
    • Encouraging domestic manufacturing of rolling stock, these projects will also create direct and indirect employment.

    2. Redevelopment of railway stations

    • Initially, 50 stations will be bid out and funded through land monetisation as well as user charges.
    • The modernisation and redevelopment of stations will be conducted primarily through Indian Railway Stations Development Corporation Limited, Rail Land Development Authority and other central government entities.
    • The PPP basis is under the Design, Build, Finance, Operate and Transfer model.
    • It entails utilising the potential of real estate for excess land and air space in and around the stations for development through PPP.
    • The 50 big stations have been planned to be bid out through the PPP route aimed at bringing in investments exceeding Rs 50,000–60,000 crores.

    Challenges involved in the adoption of PPP model

    • One of the primary challenges will be independence of adjudication in disputes.
    • Other issues will be the pricing strategy to remain competitive yet stay profitable, given the competition through air, road, and to some extent, water transport.
    • An independent regulator could go a long way towards allaying concerns of equitable treatment of PPP operators and ought to be considered strongly.

    Consider the question “Examine the opportunities and challenges in the adoption PPP model by the Indian Railways.”

    Conclusion

    The introduction of PPP in Railways is a welcome step and can lead to the kind of reforms that can help transform India and make it a global leader.

    Source

    https://www.financialexpress.com/infrastructure/railways/reforms-driven-agenda-why-its-time-to-modernise-the-indian-railways-make-it-world-class/2044774/

  • NPA issue in India:Complete analysis

    The Financial Stability Report (FSR) released by RBI recently has once again underlined the vulnerability of the Indian public sector banks (PSBs). They have been under a severe balance sheet crisis even before the pandemic, and the crisis created by the pandemic, and the moratorium offered, will explode when the chickens come to roost.

    Current banking scenario in India

    According to the FSR

    • The gross non-performing assets would go up from 11.3% in March 2020 to 15.2% in March 2021, and to 16.3% under a very severe stress scenario. 
    • The CRAR is estimated to deteriorate from 14.6% in March to 13.3% in the baseline scenario, and to 11.8% under a very severe stress scenario. 
    • The volume of recapitalisation required is humongous.

    What is a Non-Performing Asset (NPA)?

    • You may note that for a bank, the loans given by the bank is considered as its assets. So if the principle or the interest or both the components of a loan is not being serviced to the lender (bank), then it would be considered as a Non-Performing Asset (NPA).
    • Any asset which stops giving returns to its investors for a specified period of time is known as Non-Performing Asset (NPA).
    • Generally, that specified period of time is 90 days in most of the countries and across the various lending institutions. However, it is not a thumb rule and it may vary with the terms and conditions agreed upon by the financial institution and the borrower.

    Reasons for rise in NPA in India

    • Historical factors -Between early 2000’s and 2008 Indian economy were in the boom phase. During this period Banks especially Public sector banks lent extensively to corporate. However, the profits of most of the corporate dwindled due to slowdown in the global economy, the ban in mining projects, and delay in environmental related permits affecting power, iron and steel sector, volatility in prices of raw material and the shortage in availability of. This has affected their ability to pay back loans and is the most important reason behind increase in NPA of public sector banks.
    • Relaxed lending norms : One of the main reasons of rising NPA is the relaxed lending norms especially for corporate honchos when their financial status and credit rating is not analyzed properly. Also, to face competition banks are hugely selling unsecured loans which attributes to the level of NPAs.
    • Lack of contigency planning: Banks did not conducted adequate contingency planning, especially for mitigating project risk. They did not factor eventualities like failure of gas projects to ensure supply of gas or failure of land acquisition process for highways.
    • Restructuring of loan facility was extended to companies that were facing larger problems of over-leverage& inadequate profitability. This problem was more in the Public sector banks.
    • Unforseen economic shocks like Demonetization and Covid 19

    What is the impact of NPAs?

    • Lenders suffer a lowering of profit margins.
    • Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.
    • Higher interest rates by the banks to maintain the profit margin.
    • Redirecting funds from the good projects to the bad ones.
    • As investments got stuck, it may result in it may result in unemployment.
    • In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that the government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost.
    • Investors do not get rightful returns.
    • Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.
    • NPAs related cases add more pressure to already pending cases with the judiciary.

    What are the various steps taken to tackle NPAs?

    1.Corporate Debt Restructuring – 2005

    It is for reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.

    2.5:25 rule – 2014

    • Also known as, Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries.
    • It was proposed to maintain the cash flow of such companies since the project timeline is long and they do not get the money back into their books for a long time, therefore, the requirement of loans at every 5-7 years and thus refinancing for long term projects.

    3.Joint Lenders Forum – 2014

    • It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loans to the same individual or company from different banks.
    • It is formulated to prevent instances where one person takes a loan from one bank to give a loan of the other bank.

    4.Mission Indradhanush – 2015

    The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and improve their overall performance by ABCDEFG.

    • A-Appointments: Based upon global best practices and as per the guidelines in the companies act, separate post of Chairman and Managing Director and the CEO will get the designation of MD & CEO and there would be another person who would be appointed as non-Executive Chairman of PSBs.
    • B-Bank Board Bureau: The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for the appointment of Whole-time Directors as well as non-Executive Chairman of PSBs
    • C-Capitalization: As per finance ministry, the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore out of which 70000 crores will be provided by the GOI and the rest PSBs will have to raise from the market.
    Financial Year Total Amount
    FY15-16 25,000 Crore
    FY16-17 25,000 Crore
    FY17-18 10,000 Crore
    FY18-19 10,000 Crore
    Total 70,000 Crore
    • D-DEstressing: PSBs and strengthening risk control measures and NPAs disclosure.
    • E-Employment: GOI has said there will be no interference from Government and Banks are encouraged to take independent decisions keeping in mind the commercial the organizational interests.
    • F-Framework of Accountability: New KPI(key performance indicators) which would be linked with performance and also the consideration of ESOPs for top management PSBs.
    • G-Governance Reforms: For Example, Gyan Sangam, a conclave of PSBs and financial institutions. Bank board Bureau for transparent and meritorious appointments in PSBs.

    5.Strategic debt restructuring (SDR) – 2015

    • Under this scheme banks who have given loans to a corporate borrower gets the right to convert the complete or part of their loans into equity shares in the loan taken company. Its basic purpose is to ensure that more stake of promoters in reviving stressed accounts and providing banks with enhanced capabilities for initiating a change of ownership in appropriate cases.

    6.Asset Quality Review – 2015

    • Classify stressed assets and provision for them so as to secure the future of the banks and further early identification of the assets and prevent them from becoming stressed by appropriate action.

    7.Sustainable structuring of stressed assets (S4A) – 2016

    • It has been formulated as an optional framework for the resolution of largely stressed accounts. 
    • It involves the determination of sustainable debt level for a stressed borrower and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around.

    8.Insolvency and Bankruptcy code Act-2016

    • It has been formulated to tackle the Chakravyuha Challenge (Economic Survey) of the exit problem in India.
    • The aim of this law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.

    9.Pubic ARC vs. Private ARC – 2017

    • This debate is recently in the news which is about the idea of a Public Asset Reconstruction Companies (ARC) fully funded and administered by the government as mooted by this year’s Economic Survey Vs. the private ARC as advocated by the deputy governor of RBI Mr. Viral Acharya.
    • Economic survey calls it as PARA (Public Asset Rehabilitation Agency) and the recommendation is based on a similar agency being used during the East Asian crisis of 1997 which was a success.

    10.Bad Banks – 2017

    • Economic survey 16-17, also talks about the formation of a bad bank which will take all the stressed loans and it will tackle it according to flexible rules and mechanism. It will ease the balance sheet of PSBs giving them the space to fund new projects and continue the funding of development projects.

    11.Prompt corrective action

    • PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
    • The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.
    • It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.

    12.RBI’s revised stressed asset resolution norms

    • The RBI in June 2019 released a revised set of norms on stressed asset resolution which are substantially less stringent from the previous one.

    About the February 2018 RBI circular

    • Through a notification issued on Feb 12, 2018 the RBI laid down a revised framework for the resolution of stressed assets, which replaced all its earlier instructions on the subject.
    • Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days.
    • In the case of non-implementation, lenders were required to file an insolvency application.
    • RBI termed it necessary to substitute the existing guidelines with a harmonized and simplified generic framework for resolution of stressed assets.
    • Also, banks have to recognise loans as non-performing even if the repayment was delayed by just one day.
    • Not adhering to the timelines in the circular would attract stringent supervisory and enforcement actions.

    What did the revised framework replace?

    • The circular went into effect on the same day that it was issued, and all existing schemes for stressed asset resolution were withdrawn with immediate effect.
    • The circular was ostensibly intended to stop the “evergreening” of bad loans the practice of banks providing fresh loans to enable timely repayment by borrowers on existing loans.
    • The RBI warned banks that not adhering to the timelines laid down in the circular, or attempting to evergreen stressed accounts, would attract stringent supervisory and enforcement actions.

    New circular of the RBI

    • The new framework gives lenders a breather from the one-day default rule whereby they had to draw up a resolution plan (RP) for implementation within 180 days of the first default.
    • It gives lenders (scheduled commercial banks, all-India financial institutions and small finance banks) 30 days to review the borrower account on default.
    • During this review period, lenders may decide on the resolution strategy, including the nature of the RP and the approach for its implementation.
    • Lenders may also choose to initiate legal proceedings for insolvency or recovery.
    • The new circular is also applicable to small finance banks and systemically important non-deposit taking non-banking financial companies (NBFCs) and deposit-taking NBFCs.
    • In cases where the RP is to be implemented, all lenders have to enter into an intercreditor agreement (ICA)for the resolution of stressed assets during the review period to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilities from more than one lender.
    • Under the ICA, any decision agreed to by the lenders representing 75 per cent of total outstanding credit facilities by value and 60 per cent by number will be binding upon all the lenders. In particular, the RPs will provide for payment which will not be less than the liquidation value due to the dissenting lenders.
    • In cases where the aggregate exposure of a borrower to lenders (scheduled commercial banks, all-India financial institutions and small finance banks) is â‚č2,000 crore and above, the RP has to be implemented within 180 days from the end of the review period, and the reference date has been set as June 7, 2019.
    • In the case of borrowers in the â‚č1,500 crore and above but less than â‚č2,000 crore category, January 1, 2020 has been set as the reference date for implementing the RP. In the less than â‚č1,500 crore category, the RBI will announce the reference date in due course.

     What if the Resolution Plan is delayed?

    • There is a disincentive for banks if they delay implementing a viable resolution plan.
    • In case the plan is not implemented within 180 days from the end of the review period, banks have to make additional provision of 20% and another 15% if the plan is not implemented within 365 days from the start of the review period.
    • The additional provisions would be reversed if resolution is pursued under Insolvency and Bankruptcy Code (IBC).

    Further reforms needed

    • Banks have to accept losses on loans (or ‘haircuts’).
    • They should be able to do so without any fear of harassment by the investigative agencies.
    • The Indian Banks’ Association has set up a six-member panel to oversee resolution plans of lead lenders. To expedite resolution, more such panels may be required.
    • An alternative is to set up a Loan Resolution Authority, if necessary through an Act of Parliament.
    • Also, the government must infuse at one go whatever additional capital is needed to recapitalise banks — providing such capital in multiple instalments is not helpful
    • The quality of lending by PSB must be improved in future so that the same problem does not arise again.
    • To provide Public sector banks with greater autonomy the shareholding of the government can be reduced to less than 50 percent or 33 percent.
    • A second requirement is that public sector banks should become board-managed institutions, with the board responsible for all appointments, including that of the chief executive officer (CEO). If the shares of the government are actually transferred to a holding company, then decisions regarding appointments could be taken by the board of the new company on the recommendation of the board of the bank.
    • The objective of creating a genuinely commercial environment in which public sector banks can function and managements are made accountable can only be achieved if the government is willing to step back from exercising direct control. 

  • [pib] Bharat Airfiber

    The Union Ministry of Communications has inaugurated “Bharat Air Fibre Services” at Akola in Maharashtra.

    Try this PYQ from CSP 2018:

    Q: Which of the following is/are the aim/aims of “Digital India” plan of the Government of India?

    1. Formation of India’s own Internet companies like china did.
    2. Established a policy framework to encourage overseas multinational corporations that collect big data to build their large data centers within our national geographical boundaries.
    3. Connect many of our villages to the internet and bring WiFi to many of our schools, public places and major tourist centers.

    Select the correct answer using the code given below:

    (a) 1 and 2 only

    (b) 3 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    Bharat Air Fibre Services

    • The Bharat Air Fibre services are introduced by BSNL as part of Digital India initiates by the GoI.
    • It aims to provide Wireless Connectivity in the range of 20 KMs from the BSNL Locations.
    • It provides internet connectivity upto 100 Mbps speed.
    • It is completely wireless and offers broadband up to 10Mbps up to a distance of 5 Kms.
    • These services are special and different from other operators as BSNL is providing unlimited free voice calling.
    • Customers at remote places also will be benefitted as BSNL comes with the cheapest services with the support of Telecom Infrastructure Partners (TIPs).

  • The digital lifeline provided by UPI

    The UPI sets the template for India in its journey toward digitalisation. This article by WhatsApp head Will Cathcart explains the success story of UPI and the future scope to build on its success.

    The success story of UPI

    • The UPI system set a national open standard for all of India’s banks, more than 155 of which have adopted it.
    • UPI is open standard that technology companies can adopt on an equal and level-playing field.
    • This means that no one company, foreign or domestic, can write the rules for the other.
    • Since its launch, the UPI system has grown to manage a 100 million-strong user base.
    • NPCI has also set a goal to increase UPI’s user base to 500 million by 2022, which if achieved, would be a true game-changer for Digital India.

    What the success of UPI means

    •  UPI has set important new frameworks around security and efficiency.
    • Because of the strong rules that India has put in place, payment transaction information remains with the banks and within the country.
    • And as a platform built on Indian technology and governed by Indian rules, UPI benefits Indians now and holds great potential for further innovation and commerce.

    Future scope for UPI

    •  It is imperative more tech companies are able to leverage the power of UPI to expand the digital ecosystem to accelerate financial inclusion.
    • UPI can also anchor a broader suite of fintech applications like micro-pensions, digital insurance products, and flexible loans.
    • These are custom solutions created by Indian technology companies, on the public infrastructure of UPI.
    • These solutions will first solve large social, business and financial problems in India and then become templates for other countries to deploy.
    • COVID-19 has only underscored the importance of these tools that will serve as critical lifelines for small and micro-enterprises and individuals as they look to recover.

    Consider the question “Within a short period from its launch the UPI has transformed the payment landscape in India. Examine the factors that contributed to the success of UPI and elaborate on its future scope.”

    Conclusion

    With courage, ambition, and boundless potential, India can emerge from this pandemic stronger than ever before — a leading democratic digital powerhouse that will lead the world in the 21st century.

    B2BASICS

    What is Unified Payments Interface (UPI)?

    Image for post

    • It was launched in April 2016 and in the last two years, the platform has emerged as a popular choice among users for sending and receiving money.
    • UPI is a payment system that allows money transfer between any two bank accounts by using a smartphone.
    • UPI allows a customer to pay directly from a bank account to different merchants, both online and offline, without the hassle of typing credit card details, IFSC code, or net banking/wallet passwords.
    • It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.

    Original article:

    https://indianexpress.com/article/opinion/columns/coronavirus-india-economy-poverty-digital-payment-bhim-upi-6533171/

  • [pib] 15th Finance Commission submits report on Agricultural Exports

    The High-Level Group on Agricultural Exports set up by the Fifteenth Finance Commission has submitted its report to the Commission.

    Try this PYQ from CSP 2019

    Q.In India, which of the following reviews the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

    1. Ad Hoc Committees set up by the Parliament
    2. Parliamentary Department Related Standing Committees
    3. Finance Commission
    4. Financial Sector Legislative Reforms Commission
    5. NITI Aayog

    Select the correct answer using the code given below.

    (a) 1 and 2

    (b) 1, 3 and 4

    (c) 3, 4 and 5

    (d) 2 and 5

    Why focus on Agri-exports?

    • India’s agricultural export has the potential to grow from USD 40 billion to USD 70 billion in a few years.
    • The estimated investment in agricultural export could be in the tune to USD 8-10 billion across inputs, infrastructure, and processing and demand enablers.
    • Additional exports are likely to create an estimated 7-10 million jobs.
    • It will lead to higher farm productivity and farmer income.

    Highlights of the report

    (A) The HLEG has made its recommendations, major among which are:

    • Focus on 22 crop value chains – demand-driven approach.
    • Solve Value Chain Clusters (VCC) holistically with a focus on value addition.
    • Create a State-led export plan with participation from stakeholders.
    • Private Sector should play an anchor role.
    • The centre should be an enabler.
    • The robust institutional mechanism to fund and support implementation.

    (B) State-led Agri Exports

    The Group has recommended a State-led Export Plan –  a business plan for a crop value chain cluster. It will lay out the opportunity, initiatives and investment required to meet the desired value chain export aspiration.

    The Group has also said that for its success, the following factors needed to be considered:-

    • Plans should be collaboratively prepared with private sector players and Commodity Boards.
    • Leveraging of state plan guide and value chain deep dives.
    • The private sector should play an anchor role in driving outcomes and execution.
    • The centre should enable state-led plans.
    • Institutional governance should be promoted across the state and centre.
    • Funding through the convergence of existing schemes, Finance Commission allocation and private sector investment.

    Back2Basics: Finance Commission (FC)

    • The FC is a constitutionally mandated body that decides, among other things, the sharing of taxes between the Centre and the states.
    • Article 280 (1) requires the President to constitute, “within two years from the commencement of this Constitution.
    • And thereafter constitute FC at the expiration of every fifth year or at such earlier time as the President considers necessary.
    • An FC “which shall consist of a Chairman and four other members”.

    Divisible Pool of Taxes

    • Under Article 280(3) (a) the FC must make recommendations to the President “as the distribution between the Union and the States of the net proceeds of taxes which are to be, or maybe, divided between them under this Chapter and the allocation between the States of the respective shares of such proceeds”.
    • Accordingly, the FC determines a formula for tax-sharing between the states, which is a weighted sum of the states’ population, area, forest cover, tax capacity, tax effort and demographic performance, with the weights expressed in percentages.
    • This crucial role of the Commission makes it instrumental in the implementation of fiscal federalism.

  • Will capping the bank CEO tenure make difference

    The article examines the utility of the proposed limit on the banks CEO tenure.

    Context

    • Last month, the Reserve Bank of India released a discussion paper on governance in commercial banks in India.
    • It has a proposal to cap the tenure of bank CEOs.

    Details of the proposed limit and rationale

    • The paper proposes to cap the maximum tenure of a promoter/major shareholder of a bank as a CEO or a Whole Time Director (WTD) at 10 years.
    • This move aims to separate ownership from management.
    • The rationale offered is that 10 years is an adequate period for a promoter/major shareholder of a bank as CEO/WTD to stabilise its operations and to transition the managerial leadership to professional management.
    • The corresponding limit for a CEO who is not a promoter/major shareholder is 15 consecutive years. T
    • Thereafter, that individual is eligible for re-appointment as CEO or WTD only after the expiration of three years.

    Why banks are different from other companies: 3 Reasons

    • Ordinary corporate governance norms exhort managers to run a company in the interest of shareholders but it may not be suitable approach for all types of banks.
    • 1) Banks are highly leveraged, creating powerful incentives for shareholders to engage in risky strategies at great risk to creditors, including retail depositors.
    • 2) Bank failure could involve systemic risk, which could result in a government bail-out.
    • This moral hazard creates even more high-powered incentives for shareholders to engage in risky strategies.
    • 3) Financial assets held by a bank are hard to monitor and measure.
    • Consequently, external scrutiny of a bank by depositors and creditors is difficult.
    • These unique factors are likely to encourage bank managers to take excessive risks to maximise shareholder value.

    Purpose of Bank governance

    • Bank governance seeks to curb such excessive risk-taking discussed above.
    • It encourages prudent risk-taking such that shareholders’ interests are secondary to depositors’ interests.
    • This is the main logic as suggested in the Basel Committee on Banking Supervision guidelines and the Financial Stability Board principles respectively.

    Will capping the CEO tenure help

    • It is unclear whether imposing a maximum cap on CEO tenure would encourage prudent risk-taking by the management.
    • For Indian banks, the limited empirical evidence seems to suggest that bank performance improves with increasing CEO tenure.
    • A paper published in International Journal of Financial Studies finds that an increase in CEO tenure is associated with significant improvements in asset quality and performance of the bank.
    • The effect of CEO tenure increases rapidly with the year of CEO tenure.
    • Concerning public sector banks (PSBs), the P J Nayak Committee report had identified shorter tenure of chairmen and executive directors as a key reason for weaker empowerment of their boards.
    • These findings seem to be at odds with RBI’s suggestion to cap CEO tenure.

    Consider the question “Examine the factors that justify the application of stricter governance principle for the banks. What would be the impacts of the RBI’s proposed limit on the CEO term of the banks on governance?

    Conclusion

    It may be prudent for the RBI to publish an empirical study on the impact of CEO tenure on bank performance before translating this proposal into an enforceable regulation.