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Type: Op-ed

  • Ed-tech in India

    The article suggests a policy formulation for future of the learning with the adoption of technology.

    Learning crisis facing and finding solutions through technology

    • India was facing a learning crisis, even before the Covid-19 pandemic, with one in two children lacking basic reading proficiency at the age of 10.
    • The pandemic worsened it with the physical closure of 15.5 lakh schools that has affected more than 248 million students for over a year.
    • With the Fourth Industrial Revolution — the imperative now is to reimagine education and align it with the unprecedented technological transformation.
    • The pandemic offers a critical, yet stark reminder of the impending need to weave technology into education.

    Is India prepared for integrating technology in learning?

    • India’s new National Education Policy (NEP) 2020envisions the establishment of an autonomous body, the National Education Technology Forum (NETF).
    • The NETF will spearhead efforts towards providing a strategic thrust to the deployment and use of technology.
    • India is well-poised to take this leap forward with increasing access to tech-based infrastructure, electricity, and affordable internet connectivity.
    • Flagship programmes such as Digital India and the Ministry of Education’s initiatives, including the Digital Infrastructure for School Education (DIKSHA), open-source learning platform and UDISE+  will help in this direction.
    • However, we must remember that technology cannot substitute schools or replace teachers.
    • It’s not “teachers versus technology”; the solution is in “teachers and technology”.
    • In fact, tech solutions are impactful only when embraced and effectively leveraged by teachers.

    Four key elements for ed-tech policy architecture

    • A comprehensive ed-tech policy architecture must focus on four key elements:
    • Access: Providing access to learning, especially to disadvantaged groups.
    • Enable: Enabling processes of teaching, learning, and evaluation.
    • Teacher training: Facilitating teacher training and continuous professional development.
    • Governance: Improving governance systems including planning, management, and monitoring processes.

    Ed-tech ecosystem in India

    • With over 4,500 start-ups and a current valuation of around $700 million, the ed-tech market is geared for exponential growth.
    • There are, in fact, several examples of grassroots innovation.
    • The Hamara Vidhyalaya in Namsai district, Arunachal Pradesh, is fostering tech-based performance assessments.
    • Assam’s online career guidance portal is strengthening school-to-work and higher-education transition for students in grades 9 to 12.
    • Samarth in Gujarat is facilitating the online professional development of lakhs of teachers in collaboration with IIM-Ahmedabad.
    • Jharkhand’s DigiSATH is spearheading behaviour change by establishing stronger parent-teacher-student linkages.
    • Himachal Pradesh’s HarGhar Pathshala is providing digital education for children with special needs.

    Way forward

    1) Short term policy formulation

    • In the immediate term, there must be a mechanism to thoroughly map the ed-tech landscape, especially their scale, reach, and impact.
    • The policy formulation and planning process must strive to:
    • 1) Enable convergence across schemes– education, skills, digital governance, and finance.
    • 2) Foster integration of solutions through public-private partnerships, factor in voices of all stakeholders.
    • 3) Bolster cooperative federalism across all levels of government.
    • Special attention must be paid to address the digital divide at two levels: access and skills.
    • Thematic areas of the policy should feature infrastructure and connectivity; high-quality software and content; and global standards for outcome-based evaluation, real-time assessments, and systems monitoring.

    2) Long-term policy measures

    • In the longer term, as policy translates to practice at local levels a repository of the best-in-class technology solutions, good practices and lessons from successful implementation must be curated.
    • The NITI Aayog’s India Knowledge Hub and the Ministry of Education’s DIKSHA and ShaGun platforms can facilitate and amplify such learning.

    Conclusion

    With NEP 2020 having set the ball rolling, a transformative ed-tech policy architecture is the need of the hour to effectively maximise student learning.

  • Taking note of the Delhi High Court’s judgment on ‘defining terrorism’

    The recent Delhi High Court order granting bail to the student activists charged with the UAPA has brought into focus the issue of misuse of anti-terror laws by the policy. The article deals with this issue.

    Misuse of anti-terror laws

    • In the period 2015-2019, as many as 7,840 persons were arrested under the UAPA (Unlawful Activities (Prevention) Act) 1967 but only 155 were convicted by the trial courts.
    • Under TADA, till 1994, though 67,000 people were detained, just 725 were convicted in spite of confessions made to police officers being made admissible.
    • In Kartar Singh (1994), the Supreme Court of India had observed that in many cases, the prosecution had unjustifiably invoked provisions of TADA.
    • It added that such an invocation of TADA was ‘nothing but the sheer misuse and abuse of the Act by the police’.

     The definition of terrorism

    • There is no universal definition of the term ‘terrorism’ either in India or at the international level.
    •  Accordingly, neither TADA nor UAPA has a definition of the crucial terms ‘terror’ and ‘terrorism’.
    • Section 15 of UAPA merely defines a terrorist act in extremely wide and vague words: ‘as any act with intent to threaten or likely to threaten the unity, integrity, security, or sovereignty of India or with intent to strike terror or likely to strike terror in the people….’.
    • In Yaqoob Abdul Razzak Memon (2013), the Supreme Court said that terrorist acts can range from threats to actual assassinations, kidnappings, airline hijacking, car bombs, explosions, mailing of dangerous materials, use of chemical, biological, nuclear weapons etc.
    • In Hitendra Vishnu Thakur (1994), the Supreme Court had defined terrorism as the ‘use of violence when its most important result is not merely the physical and mental damage of the victim but the prolonged psychological effect it produces … on the society as a whole’.
    • In Kartar Singh (1994), the Supreme Court held that a mere disturbance of public order that disturbs even the tempo of the life of community of any particular locality is not a terrorist act.
    • By this interpretation, the CAA protests in a few localities of Delhi cannot be termed as terrorist activity.
    • In the PUCL judgment (2003), the Supreme Court included within its meaning amongst other things the ‘razing of constitutional principles that we hold dear’, ‘tearing apart of the secular fabric’ and ‘promotion of prejudice and bigotry.
    • Accordingly, in the CAA protest case the Delhi High Court concluded that since the definition of a ‘terrorist act’ in UAPA is wide and somewhat vague, it cannot be casually applied to ordinary conventional crimes.
    • The Delhi High Court said that the act of the accused must reflect the essential character of terrorism.

    Distinction between ‘law and order’, ‘public order’ and ‘security of state’

    • In Ram Manohar Lohia (1966), the Supreme Court explained the distinction between the above three terms.
    • Law and order represents the largest circle within which is the next circle representing ‘public order’, and the smallest circle represents the ‘security of state’.
    • Accordingly, an act may affect ‘law and order’ but not ‘public order’.
    • Similarly, an act may adversely affect ‘public order’ but not the ‘security of state.’
    • In most UAPA cases, the police have failed to understand these distinctions and unnecessarily clamped UAPA charges for simple violations of law and order.

    Conclusion

    Radicalisation generally succeeds only with those who have been subjected to real or perceived injustices. Let us remove injustice to combat terrorism. The creation of a truly just, egalitarian and non-oppressive society would be far more effective in combating terrorism.

  • Testing the constitutionality of section 124A of IPC

    The article highlights the issues with section 124A of the Indian Penal Code and suggests a review of its constitutionality in Kedar Nath judgement by a larger bench.

    About section 124A of IPC

    • Section 124A of the IPC contains the law of sedition.
    • This law was enacted by the British colonial government in 1870 with the sole object of suppressing all voices of Indians critical of the government.
    • The gist of the offence is: bringing or attempting to bring the government into contempt or hatred, or exciting or attempting to excite disaffection towards the government.
    • It categorises four ways sources of seditious acts: spoken words, written words, signs or visible representations.
    • There are three explanations attached to this section.
    • The first explanation says that ‘disaffection’ includes disloyalty and all feelings of enmity.
    • The second and third explanations say that one can comment on the measures of the government without bringing or attempting to bring it into contempt or hatred or exciting or attempting to excite disaffection towards the government.

    What did Supreme Court say in Kedar Nath case (1962)

    • In the ultimate analysis, the judgment in Kedar Nath which read down Section 124A and held that without incitement to violence or rebellion there is no sedition.
    •  It says that ‘only when the words written or spoken etc. which have the pernicious tendency or intention of creating public disorder’ the law steps in.
    • So if a policeman thinks that a cartoon has the pernicious tendency to create public disorder, he will arrest that cartoonist.
    • The Kedar Nath judgment makes it possible for the law enforcement machinery to easily take away the fundamental right of citizens.

    Violation of Article 19

    • Sedition, as defined in Section 124A of the IPC, clearly violates Article 19(1)(a) of the Constitution which confers the Fundamental Right of freedom of speech and expression.
    • Further, this section does not get protection under Article 19(2) on the ground of reasonable restriction.
    • However, the Supreme Court invoked the words ‘in the interest … of public order’ used in Article 19(2) and held that the offence of sedition arises when seditious utterances can lead to disorder or violence.
    • This act of reading down Section 124A brought it clearly under Article 19(2) and saved the law of sedition from being declared unconstitutional.

    Consider the question “What are the issues with section 124A of Indian Penal Code? Examine the interplay between Article 19 and section 124 of IPC.”

    Conclusion

    People will display disaffection towards a government which has failed them. The law of sedition which penalises them for hating a government which does not serve them cannot exist because it violates Article 19(1)(a) and is not protected by Article 19(2). Therefore, an urgent review of the Kedar Nath judgement by a larger Bench has become necessary.

  • Privatisation of public sector enterprises in India

    The article suggests the privatisation of public sector enterprises by analysing their performance and devising strategy for privatisation accordingingly.

    Three categories of public sector enterprises

    1) Sick for long time and beyond redemption

    • There is the category of enterprises which have been sick for a long time.
    • Their technology, plants and machinery are obsolete. 
    • They should be closed, and assets sold.
    • The labour in these enterprises have had a political constituency which has prevented closure.

    What should be done with these enterprises?

    • The Government should close these in a time-bound manner with a generous handshake for labour.
    • After selling machinery as scrap, there would be valuable land left.
    • Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
    • All this would need the creation of dedicated efficient capacity as the task is huge and challenging.
    • These enterprises may be taken away from their parent line Ministries and brought under one holding company.
    • This holding company should have the sole mandate of speedy liquidation and asset sale.

    2) Financially troubled but can be turned around

    • Private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
    • Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.

    What should be done with these enterprises?

    • Air India should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
    • As valuation rises, the Government could reduce its stake further and get more money.
    • If well handled, significant revenues would flow to the Government.

    3) Profitable enterprises

    • Pragmatism instead of ideology should guide thinking about them.
    • The Chinese chose to nurture their good state-owned enterprises as well as their private ones to succeed in the domestic and global markets by increasing their competitiveness in cost, quality, and technology.
    • The Chinese chose to promote both their public as well as their private sector enterprises to rise.
    • Both have made China the economic superpower that it is today.

    What should be done with profitable enterprises?

    • The Government can continue to reduce its shareholding by offloading shares and even reducing its stake to less than 51% while remaining the promoter and being in control.
    • Calibrated divestment to get maximum value should be the goal instead of being target driven to get a lower fiscal deficit number to please rating agencies.
    • In parallel, managements may be given longer and stabler tenures, greater flexibility to achieve outcomes, and more confidence to take well-considered commercial risks.

    Challenges

    • First, the number of Indian private firms which can buy out public sector firms are very few.
    • Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
    • Then, these successful large corporates need to be encouraged to invest and grow both in brownfield and greenfield modes in the domestic as well as international markets.
    • Sale at fair or lower than fair valuations to foreign entities, firms as well as funds, has adverse implications from the perspective of being ‘Atma Nirbhar’.
    • Again, greenfield foreign investment is what India needs and not takeovers.
    • Public sector enterprises provide for reservations in recruitment.
    • With privatisation, this would end and unnecessarily generate social unrest.

    Conclusion

    Would it be in India’s interest to lose the strategic capacity that its ownership of public enterprises including financial ones provide it? It would be better to think carefully now.

  • Fighting hunger needs fighting climate change

    The article suggests pathways to achieve SDG-2 by the adoption of climate-friendly agriculture practices.

    Food and SDG

    • Food is a common thread linking all 17 UN Sustainable Development Goals (SDGs) and critical to achieving overall goals within the timeframe.
    • NITI Aayog recently released the SDG India Index 2020-21, highlighting the national and states’ progress on SDGs.
    • The report states that 34.7% children aged under five in India are stunted.
    • 40.5% of children between 6-59 months are anaemic.
    • 50.3% of pregnant women between 15-49 years are anaemic.
    • India shares a quarter of the global hunger burden.
    • Four out of 10 children in India are not meeting their full human potential because of chronic undernutrition or stunting.
    • NFHS-5 shows many states have not fared well on nutrition indicators.
    • In addition to the malnutrition challenges, India’s food system faces negative consequences of the Green Revolution technologies.

    Pathways to follow in meeting the targets under SDG-2 (Zero Hunger)

    • Crop diversification especially in those areas where the existing practices are ecologically unsustainable should be promoted.
    • While Indian agriculture is a significant contributor to GHG emissions.
    • As per third Biennial Update Report submitted by Government of India to UNFCCC, agriculture sector contributes 14% of the total emissions.
    • Some of the climate-smart interventions like conservation agriculture, organic farming and agro-ecological approaches can effectively address the environmental concerns while ensuring food security and nutrition.
    • Crop-residue burning has become a huge problem in parts of the country.
    • This is mainly propelled by monoculture and a package of subsidies.
    • Conservation agriculture offers solutions to such problems with good agronomy and soil management such as zero-tillage or no-till farming, crop rotation, in-situ crop harvest residue management/mulching, etc, and industrial uses like baling and bio-fuel production.
    • Use of botanical pesticides, green-manuring, biological pest control, etc. are nature-friendly and such practices lead to eco-conservation.
    • The organic movement, fortunately, is catching up in Sikkim, Himachal Pradesh, and a few other states.
    • Modifying consumer behaviour forms an essential ingredient to transform Indian food systems and correlate positively with crop and diet diversity.
    • POSHAN Abhiyaan, India’s national nutrition mission, can play an effective role in addressing the issues of persistent malnutrition.
    • According to FAO estimates, 40% of the food produced in India is either lost or wasted in every stage of supply chain.
    • Winning the fight against food loss and waste can save India $61 billion in 2050 through increased industry profitability and reduced food insecurity, as well as reduced GHG emissions, water usage, and environmental degradation.
    • Shifting towards a circular economy can enable India progress towards the SDGs including halving food waste by 2030 and improving resource efficiency.

    Conclusion

    India’s success is essential to achieve the planetary goal of Zero Hunger. There is a need for transformation towards sustainable, nutritious and resilient food systems to achieve the goal of zero hunger.

    Source:-

    https://www.financialexpress.com/opinion/fighting-hunger-needs-fighting-climate-change/2279369/

  • India-Africa relations

    The article deals with India’s strategy to deepen the ties with African nations and suggest a critical review of the implementation of India’s strategy.

    Need for review of India’s foreign policy for Africa

    • Africa is considered a foreign policy priority by India.
    •  Even as the COVID-19 era began in March 2020, New Delhi took new initiatives to assist Africa through prompt despatch of medicines and later vaccines.
    • But now the policy implementation needs a critical review.

    Four factors that explain need for a review of policy implementation

    1) Declining trade

    • Declining trade: Bilateral trade valued at $55.9 billion in 2020-21, fell by $10.8 billion compared to 2019-20, and $15.5 billion compared to the peak year of 2014-15.
    • Decline in investment: India’s investments in Africa too saw a decrease from $3.2 billion in 2019-20 to $2.9 billion in 2020-21.
    • The composition of the India-Africa trade has not changed much over the two decades.
    • Mineral fuels and oils, (essentially crude oil) and pearls, precious or semi-precious stones are the top two imports accounting for over 77% of our imports from Africa.
    • India’s top five markets today are South Africa, Nigeria, Egypt, Kenya and Togo.
    • The countries from which India imports the most are South Africa, Nigeria, Egypt, Angola and Guinea.

    2) Covid impact

    • COVID-19 has brought misery to Africa.
    • As on June 24, 2021, Africa registered 5.2 million infections and 1,37,855 deaths.
    • A recent World Health Organization survey revealed that 41 African countries had fewer than 2,000 working ventilators among them.
    • Despite these shortcomings, Africa has not done so badly.
    •  Sadly though, with much of the world caught up in coping with the novel coronavirus pandemic’s ill effects, flows of assistance and investment to Africa have decreased.
    • While China has successfully used the pandemic to expand its footprint by increasing the outflow of its vaccines.
    • Unfortunately India’s ‘vax diplomacy’ has suffered a setback. 

    3) Global competition for influence

    • Africa experienced a sharpened international competition, known as ‘the third scramble’, in the first two decades of the 21st century.
    • A dozen nations from the Americas, Europe and Asia have striven to assist Africa in resolving the continent’s political and social challenge.
    • These nations, in turn, stand to benefit from Africa’s markets, minerals, hydrocarbons and oceanic resources, and thereby to expand their geopolitical influence.

    4) Geopolitical tensions in Asia

    • Geopolitical tensions in Asia and the imperative to consolidate its position in the Indo-Pacific region have compelled New Delhi to concentrate on its ties with the United Kingdom, the EU, and the Quad powers, particularly the U.S.
    • Consequently, the attention normally paid to Africa lost out.
    • This must now change.

    Way forward for India-Africa relation

    • For mutual benefit, Africa and India should remain optimally engaged.
    • The third India-Africa Forum Summit was held in 2015.
    • The fourth summit, pending since last year, should be held as soon as possible, even if in a virtual format.
    • Fresh financial resources for grants and concessional loans to Africa must be allocated, as previous allocations stand almost fully exhausted.
    • The promotion of economic relations demands a higher priority.
    • Industry representatives should be consulted about their grievances and challenges in the COVID-19 era.
    • To impart a 21st-century complexion to the partnership, developing and deepening collaborations in health, space and digital technologies is essential.
    • India should continue its role in peacekeeping in Africa, in lending support to African counter-terrorism operations, and contributing to African institutions through training and capacity-enhancing assistance.
    • To overcome the China challenge in Africa, increased cooperation between India and its international allies, rates priority.
    • The recent India-EU Summit has identified Africa as a region where a partnership-based approach will be followed.
    •  When the first in-person summit of the Quad powers is held in Washington, a robust partnership plan for Africa should be announced. 

    Conclusion

    India should review the policy implementation and make changes in line with the changing geopolitical realities.

  • Issues faced by India’s sexual minorities

    The article highlights the plight of sexual minorities despite the landmark judgments by the Supreme Court.

    Role played by the judiciary

    • The Delhi High Court’s verdict in Naz Foundation vs Government of NCT of Delhi (2009) was a landmark in the law of sexuality and equality jurisprudence in India.
    • The court held that Section 377 offended the guarantee of equality enshrined in Article 14 of the Constitution, because it creates an unreasonable classification and targets homosexuals as a class.
    • In a retrograde step, the Supreme Court, in Suresh Kumar Koushal vs Naz Foundation (2013), reinstated Section 377 to the IPC.
    • However, the Supreme Court in Navtej Singh Johar & Ors. vs Union of India (2018) declared that the application of Section 377 IPC to consensual homosexual behaviour was “unconstitutional”.
    • This Supreme Court judgment has been a great victory to the Indian individual in his quest for identity and dignity.
    • It also underscored the doctrine of progressive realisation of rights.

    No legal sanction to same-sex marriage

    • Despite the judgments of the Supreme Court, there is still a lot of discrimination against sexual minorities in matters of employment, health and personal relationship.
    • The Union of India has recently opposed any move to accord legal sanction to same-sex marriages in India.
    • The Union of India stated that the decriminalisation of Section 377 of the Indian Penal Code does not automatically translate into a fundamental right for same sex couples to marry. 
    • The U.S. Supreme Court, in Obergefell vs Hodges (2015) underscored the emotional and social value of the institution of marriage and asserted that the universal human right of marriage should not be denied to a same-sex couple.
    • Indian society and the state should synchronise themselves with changing trends.

    Need to amend Article 15 to prohibit discrimination based on gender or sexual orientation

    • Article 15 secures the citizens from every sort of discrimination by the state, on the grounds of religion, race, caste, sex or place of birth or any of them.
    • The grounds of non-discrimination should be expanded by including gender and sexual orientation.
    • In May 1996, South Africa became the first country to constitutionally prohibit discrimination based on sexual orientation.
    • The United Kingdom passed the “Alan Turing law” in 2017 which ‘granted amnesty and pardon to the men who were cautioned or convicted under historical legislation that outlawed homosexual acts’.

    Way forward

    • Justice Rohinton F. Nariman had directed in Navtej Singh Johar & Ors., the Government to sensitise the general public and officials, to reduce and finally eliminate the stigma associated with LGBTQ+ community through the mass media and the official channels.
    • School and university students too should be sensitised about the diversity of sexuality to deconstruct the myth of heteronormativity.
    • Heteronormativity is the root cause of hetero-sexism and homophobia.

    Conclusion

    It is time for change, but the burden should not be left to the powers that be. The onus remains with the civil society, the citizenry concerned and the LGBTQ+ community itself.

  • Where is the Indian rupee headed?

    The article explains the factors affecting the Indian rupee’s value against the dollar in implications of change in value for the Indian economy.

    Factor’s affecting rupee’s value

    • First, India’s foreign exchange reserves need to be considered, which have been increasing quite rapidly.
    • Second, there are daily fluctuations caused by foreign portfolio investment (FPI) flows.
    • Third, there is the external factor of the dollar, when the US currency strengthens against the euro, the rupee tends to decline and vice-versa.
    • Fourth, there is the concept of the real effective exchange rate (REER), a construct of economists in which relative inflation comes into play.
    • If inflation in India is higher than in countries associated with its export basket of currencies, then the rupee is overvalued and will correct through depreciation.
    • Fifth, at what stage will the RBI intervene by buying or selling dollars to stabilize the Indian currency also matters.

    Let’s look at some of these factors in detail.

    Impact of the U.S. economy and Fed

    • The dollar is driven by the US economy as well as its Federal Reserve’s policies.
    • The Fed’s recent indication that it would raise its policy rate of funds in the years ahead was enough to strengthen the dollar and weaken the rupee.  As an increase in US rates could see global investor money flocking back to the US, the dollar gained in relative value.
    • The dollar should logically be strengthening, given improving US growth, now reinforced by the Fed.

    Inflation factor

    • The inflation factor, however, has been curious.
    • Indian inflation will be high in India and hence also the rupee’s REER.
    • To the extent the market understands this concept and uses it for valuation, it should be pushing the rupee downwards.
    • But the pressure will be less this time as global inflation is also being raised by rising commodity prices.
    • Indian inflation may not be so much higher as to warrant a deep depreciation.

    Increase in Forex reserves

    • An increase in forex reserves is an indication that India is getting in more dollars than we are spending.
    • This also means that our combined current and capital accounts are in surplus zone.
    • However, India’s current account will go into a deficit this year, as imports will be greater than exports, but will not be very high. Maybe 0.5-1% of GDP.
    • The capital account can get tricky.
    • Inward foreign direct investment was high in 2020-21.
    • At $60 billion in equity and $80 billion overall, it was one of the world’s highest.
    • Therefore, capital flows should remain strong.
    • External commercial borrowings could slow down amid weak investment within India.
    • So the fundamentals suggest that the rupee should be stable, with a tilt towards depreciation.

    The RBI intervention

    • The RBI’s surplus liquidity and accommodative stance have not worked in favour of the rupee.
    • In response to its April policy, when RBI affirmed its dovish stance, the rupee began falling on expectations that if RBI kept rates low at a time of high inflation and excessive market borrowing by the government, investors will potentially move out.
    • This pushed the rupee towards the 75 level against the dollar, but reverted with time as RBI kept infusing liquidity and managed the yield curve.
    •  In April, RBI bought $4.2 billion worth of the US currency.
    • Exports have grown smartly in the first two months of 2021-22, and at this stage, the central bank would not want to that trend by stalling the rupee’s depreciation.

    Conclusion

    Taking all these factors into account, one can foresee the rupee moving in the range of ₹74-75 to the dollar, unless there’s a shock of some sort, though none looks likely at present.

  • Microfinance institutions

    The microfinance institutions (MFI) faced several restrictions by RBI which were not applicable to banks, NBFC and small finance banks. This denied the MFIs level playing field. A recent Consultative document by the RBI frees MFIs from such restrictions. The article explains this in detail.

    Background of regulation of MFI’s  by RBI

    • RBI first allowed informal self-help groups to open savings accounts in banks and bank lending to these groups in 1991-92.
    • In 2000, RBI permitted all types of institutions to offer microcredit and bank loans extended to these institutions for on-lending were treated as part of the priority sector lending.
    • Beyond these, RBI was unwilling to bring in any regulations on the plea that as long as these are not deposit-taking institutions there is no need to regulate them. 
    • That was the stand of various RBI-appointed committees too, including the Vyas Committee of 2004.
    • Based on the Malegam Committee recommendations, RBI came out with detailed guidelines for microfinance institutions (not the microfinance sector) in 2011.
    • These guidelines introduced a new category of NBFCs, viz NBFC-MFIs (microfinance institutions).
    • It also set norms for income criteria for clients of MFIs, repayment period, borrower loan limits, interest rate norms and caps, limits on a number of lenders to a borrower and a host of other norms and criteria.

    How these norms created the issue of a level playing field?

    • After 2015-16, the entry of small finance banks, eight of which were MFIs, into the microfinance space started to create issues.
    • MFIs discovered to their dismay that while they had to adhere to a set of regulations, it was a free-for-all for non-MFIs (banks, SFBs and NBFCs).
    • The main issue was that non-MFIs need not adhere to the norm of number of lenders (two in the case of NBFC-MFIs) and per-borrower loan limits.
    • It prompted non-MFIs to target borrowers identified and nurtured by MFIs with higher loan amounts, leading to high levels of borrower indebtedness.
    • In addition, the interest rate cap (2.75 times the base rate declared quarterly by RBI) was squeezing the margins of small and medium MFIs, as none of them get loans from the biggest banks.

    Way forward

    • The recent Consultative Document by RBI frees MFIs from the restriction imposed by the 2011 regulations and gives them a level-playing field.
    • Another important feature for MFIs is that by doing away with the 50% income generation loans criteria and the repayment period norms.
    • RBI is facilitating credit flow into lifecycle needs like housing, water sanitation, education, health, renewable energy, etc, which are now as important as income generation.
    • On the interest rate front, initially, some upward correction could be there by medium and small MFIs based on their borrowing rates.
    • The document enhances the role for the regulator as the adoption of Board-approved policies to determine the norms of household indebtedness and to fix a transparent rate of interest by each institution and their implementation need a rigorous supervisory oversight

    Conclusion

    Providing a level playing field to the MFI is critical to their development, the document by RBI rightly does that. It will help in providing credit to those who remain outside the formal banking network.

    Source:

    https://www.financialexpress.com/opinion/unfettering-microfinance-recent-rbi-consultative-document-frees-mfis-from-shackles-imposed-by-2011-regulations/2277925/

  • Bad bank

    The article suggests drawing the lessons from China’s experience with the bad bank as India India gets ready to operationalise a new bad bank.

    Bad bank in China and issues

    • In the aftermath of the Asian financial crisis, China set up dedicated bad banks for each of its big four state-owned commercial banks.
    • These bad banks were meant to acquire non-performing loans (NPLs) from those banks and resolve them within 10 years.
    • In 2009, their tenure was extended indefinitely.
    • Chinese banks can currently transfer NPLs only to the national or local bad banks.
    • One of China’s biggest bad banks is the China Huarong Asset Management Co. Ltd. (Huarong).
    • The Chinese government is its principal shareholder.
    • Recently this bad bank stoked financial stability concerns when it skirted a potential bond default.
    • An incentive to conceal: Recent research at the National University of Singapore and others highlights that Chinese bad banks effectively help conceal Non-Performing Loans.
    • The banks finance over 90 per cent of NPL transactions through direct loans to bad banks or indirect financing vehicles.
    • The bad banks resell over 70 per cent of the NPLs at inflated prices to third parties, who happen to be borrowers of the same banks.
    • The researchers conclude that in the presence of binding financial regulations and opaque market structures bad bank model could create incentives to hide bad loans instead of resolving them.
    • Broadening of tenure: In case of Huarong, the main source of the problem appears to be the gradual broadening of the original mandate and tenure of Chinese bad banks.

    Four lessons for India

    • India is about to operationalise a new bad bank, the National Asset Reconstruction Company Ltd. (NARCL).
    • The Chinese experience holds four important lessons for India.

    1) Finite tenure of bad bank

    • A centralised bad bank like NARCL should ideally have a finite tenure.
    • Such an institution is typically a swift response to an abrupt economic shock (like Covid) when orderly disposal of bad loans via securitisation or direct sales may not be possible.
    • The banks could transfer their crisis-induced NPLs to the bad bank and focus on expanding lending activity.
    • The bad bank in turn can restructure and protect asset value.
    • Over time, it could gradually dispose of the assets to private players.

    2) Narrow mandate

    •  A bad bank must have a specific, narrow mandate with clearly defined goals.
    • Transferring NPLs to a bad bank is not a solution in itself.
    • There must be a clear resolution strategy.
    • Otherwise, allowing a bad bank to exist in perpetuity risks a potential mission creep, which might in the long run threaten financial stability itself.

    3) Diversify the sources of funds for ARC

    • Indian banks remain exposed to these bad loans even after they are transferred to asset reconstruction companies (ARCs).
    • The RBI Bulletin (2021) notes that sources of funds of ARCs have largely been bank-centric.
    • The same banks also continue to hold close to 70 per cent of the total security receipts (SRs).
    • To address this problem, RBI has tightened bank provisioning while liberalising foreign portfolio investment norms.

    4) Resolution of bad loans should be through market mechanism

    • In a steady state, the resolution of bad loans should happen through a market mechanism and not through a multitude of bad banks.
    • In India, the Narasimham Committee (1998) had envisaged a single ARC as a bad bank.
    • Yet, the SARFAESI Act, 2002 ended up creating multiple, privately owned ARCs.
    • As a result, regulations have treated ARCs like bad banks, although functionally they are closer to stressed asset funds registered as Alternative Investment Fund Category II (AIFs).
    • With the setting up of NARCL as a centralised bad bank, the regulatory arbitrage between ARCs and AIFs must end.
    • While AIFs should be allowed to purchase bad loans directly from banks and enjoy enforcement rights under the SARFAESI Act.
    • ARCs should be allowed to purchase stressed assets from mutual funds, insurance companies, bond investors and ECB lenders.
    • ARC trusts should be allowed to infuse fresh equity in distressed companies, within IBC or outside of it.
    • Lastly, the continued interest of the manager/sponsor of ARCs should be at par with AIFs, that is, at least 2.5 per cent in each scheme or Rs 5 crore, whichever is lower.

    Conclusion

    The Chinese experience should nudge Indian policymakers to limit the mandate and tenure of NARCL, while facilitating market-based mechanisms for bad loan resolution in a steady state.