Day: June 25, 2021

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NPA Crisis

Bad bank

op-ed snap | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Bad bank

Mains level: Paper 3- Lessons from China as India operationalise its new 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.

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Promoting Science and Technology – Missions,Policies & Schemes

60 Years of Antarctic Treaty

| International Relations | Mains Paper 2: International Institutions
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Antarctic Treaty

Mains level: Significance of Antarctic Treaty in geopolitics

The 1959 Antarctic Treaty (wef 1961) recently celebrated its 60th anniversary.

Antarctic Treaty

  • The Antarctic Treaty and related agreements are collectively known as the Antarctic Treaty System (ATS).
  • It regulates international relations with respect to Antarctica, Earth’s only continent without a native human population.
  • For the purposes of the treaty system, Antarctica is defined as all of the land and ice shelves south of 60°S latitude.
  • The treaty entered into force in 1961 and currently has 54 parties.
  • The treaty sets aside Antarctica as a scientific preserve, establishes freedom of scientific investigation, and bans military activity on the continent.
  • The treaty was the first arms control agreement established during the Cold War.
  • India is a signatory of this treaty since 1983.

Why is it significant?

  • Negotiated during the middle of the Cold War by 12 countries with Antarctic interests, it remains the only example of a single treaty that governs a whole continent.
  • It is also the foundation of a rules-based international order for a continent without a permanent population.

Key provisions

  • The treaty is remarkably short and contains only 14 articles.
  • Principal provisions include promoting the freedom of scientific research, the use of the continent only for peaceful purposes, and the prohibition of military activities, nuclear tests and the disposal of radioactive waste.

What the treaty says about territorial claims

  • The most important provision of the treaty is Article IV, which effectively seeks to neutralise territorial sovereignty in Antarctica.
  • For the Antarctic territorial claimants, this meant a limit was placed on making any new claim or enlargement of an existing claim.
  • Likewise, no formal recognition was given to any of the seven territorial claims on the continent, by Argentina, Australia, Chile, France, New Zealand, Norway and the United Kingdom.
  • Russia, the United States and China — signatories with significant Antarctic interests who have not formally made territorial claims — are also bound by the limitations of Article IV.
  • And one sector of Antarctica is not subject to the claim of any country, which effectively makes it the last unclaimed land on earth.
  • The treaty also put a freeze on any disputes between claimants over their territories on the continent.

How the treaty has expanded

  • Though the compact has held for 60 years, there have been tensions from time to time.
  • Argentina and the UK, for instance, have overlapping claims to territory on the continent.
  • When combined with their ongoing dispute over the nearby Falkland (Malvinas) Islands, their Antarctic relationship remains frosty.
  • Membership of the treaty has grown in the intervening years, with 54 signatories today.

Where to from here?

  • While the Antarctic Treaty has been able to successfully respond to a range of challenges, circumstances are radically different in the 2020s compared to the 1950s.
  • Antarctica is much more accessible, partly due to technology but also climate change.
  • More countries now have substantive interests in the continent than the original 12.
  • Some global resources are becoming scarce, especially oil.

Answer this PYQ:

Q.The term ‘IndARC’, sometimes seen in the news, is the name of:

(a) An indigenously developed radar system inducted into Indian Defence

(b) India’s satellite to provide services to the countries of Indian Ocean Rim

(c) A scientific establishment set up by India in Antarctic region

(d) India’s underwater observatory to scientifically study the Arctic region

Back2Basics: Indian Antarctic Program

  • The Indian Antarctic Program is a multi-disciplinary, multi-institutional program under the control of the National Centre for Polar and Ocean Research, Ministry of Earth Sciences.
  • It was initiated in 1981 with the first Indian expedition to Antarctica.
  • The program gained global acceptance with India’s signing of the Antarctic Treaty and subsequent construction of the Dakshin Gangotri Antarctic research base in 1983 superseded by the Maitri base from 1989.
  • The newest base commissioned in 2012 is Bharati, constructed out of 134 shipping containers.

Various missions

In 1981 the Indian flag unfurled for the first time in Antarctica, marking the start of Southern Ocean expeditions under the environmental protocol of the Antarctic Treaty (1959).

(1) Dakshin Gangotri

The first permanent settlement was built in 1983 and named Dakshin Gangotri. In 1989 it was excavated and is being used again as supply base and transit camp. It was decommissioned in the year 1990 after half of it got buried under the ice.

(2) Maitri

The second permanent settlement, Maitri, was put up in 1989 on the Schirmacher Oasis and has been conducting experiments in geology, geography and medicine. India built this station close to a freshwater lake around Maitri known as Lake Priyadarshini.

(3) Bharati

Located beside Larsmann Hill at 69°S, 76°E, Bharati is established in 2015.  This newest research station for oceanographic research will collect evidence of continental breakup to reveal the 120-million-year-old ancient history of the Indian subcontinent.

(4) India Post Office in Antarctica

It was established in the year 1984 during the third Indian expedition to Antarctica. It was located at Dakshin Gangotri. This post office was indeed situated in a stunning location and it was more than just a post office. An interesting fact about this place is that as many as 10,000 letters were posted and canceled in this post office in total in the first year of its establishment.

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Indian Army Updates

Proposal for Integrated Theatre Commands

| Security Issues | Mains Paper 3: Various Security Forces, Agencies & Their Mandates
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Integrated Theatre Commands

Mains level: Joint operability of the armed forces

The Chief of Defence Staff has held a meeting with the Vice Chiefs of the Army, the Navy and the Air Force, and others in the backdrop of concerns about the proposed model of the integrated theatre commands.

What are integrated theatre commands?

  • In the simplest words, it is a unified command under which all the resources of the Army, the Navy and the Air Force are pooled, depending on the threat perception.
  • The commands could be geographical — like looking at a border with a particular country — or thematic, like a command for all maritime threats.
  • Several nations in the world have theatre commands, including the United States and China.

Is theatre commands a new idea?

  • The idea of creating an integrated tri-Services command in India is not new — it had been recommended at various levels after the Kargil conflict.
  • When Gen Rawat was appointed Chief of Defence Staff in January 2020 with a mandate to raise such commands within his three-year tenure, the idea was finally brought to the design table.
  • After his appointment, Gen Rawat had commissioned studies within each of the armed forces to come up with ideas of what these commands could look like.
  • These were headed by the Vice Chiefs of the forces.
  • Last year, Gen Rawat had suggested that the first of these commands, the Air Defence Command, could come up by the end of 2020.
  • However, the process has been delayed due to multiple factors, including the Covid-19 pandemic.
  • Officials are now suggesting that some of the new commands could be rolled out by the end of this year.

What is the proposal under discussion?

  • A model with four to five integrated tri-Services theatre commands is under discussion, with each command headed by a three-star officer.
  • This officer, the theatre commander, will report to the Chiefs of Staff Committee (COSC), which, as the name suggests, includes the three Service Chiefs, and is headed by the CDS as its permanent chairman.
  • This brings in a major change — the Service chiefs currently have all the operational control over their forces; operational powers will now move to the COSC.
  • Each of these commands will have the needed assets from all the three forces. Operational control over all of those assets, regardless of the force, will lie with the commander of that theatre.

The proposed commands are:

  • A Maritime Theatre Command, which will take care of all the maritime security needs of the country on both the eastern and the western seaboards, and will include air strike assets and amphibian forces of the Army.
  • An Air Defence Command, which will be mandated with air defence across the country and beyond. The fighter jets will have reconnaissance and surveillance assets as well.
  • Two or three land-based commands are proposed. If there are two commands, there will be one each for India’s borders with China and Pakistan.
  • But there is also a proposal to have another command looking at India’s borders with Pakistan and China in Jammu and Kashmir, and Ladakh.
  • There will be a Logistics Command, which will have the logistics of all the Services under one person; and there will be a Training and Doctrine Command, so that all Services work under a common doctrine and have some basic common training.

What will be the role of the Services, if not operational?

  • As of now, the Services have to speak to each other in times of need and urgency to request their assets to conduct a particular operation.
  • The proposal is to have a theatre commander who will have operational control of the assets under his command, thus enhancing jointness among the forces, and also reducing duplication of resources.
  • However, this would leave the Service chiefs with no direct control over their assets operationally.
  • This does not mean their roles will be made redundant. Now the Services will have the core tasks to Raise, Train and Sustain their respective forces.
  • Also, as each chief will be a member of the COSC and an expert of his/her domain, his or her inputs will be necessary for all operational decisions.

Readiness of the services

  • Sources within the Services and the Defence Ministry have mentioned that while the Army and the Navy are on board with the proposal, the Air Force has certain reservations.
  • One, the Air Force does not want the Air Force chief to lose operational control of Air assets, according to the sources.
  • Two, the Air Force is concerned that all of its assets might be divided within these integrated theatres.
  • Sources in the Air Force said that all such concerns need to be addressed before such a significant transformation of the defence set-up takes place.

How many commands are there now; are any of them tri-Service commands?

As of now, the three forces have 17 commands between them.

  • The Army has seven commands: Northern, Eastern, Southern, Western, Central, Southwestern and Army Training Command (ARTRAC).
  • The Air Force has seven as well: Western, Eastern, Southern, Southwestern, Central, Training, and Maintenance commands.
  • The Navy has three: Western, Eastern and Southern, of which Southern is largely about training.
  • Even if these commands operate in the same region, they are not co-located, and their areas of operational responsibility are not necessarily the same.
  • There are two existing tri-Service commands as well — the Andaman and Nicobar Command (ANC), which is headed by rotation by officers from the three Services.

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Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

GIMAC: India’s first maritime arbitration centre

| Economics | Mains Paper 3: Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth
Note4Students

From UPSC perspective, the following things are important :

Prelims level: GIMAC

Mains level: International arbitration and India

The Gujarat Maritime University signed a Memorandum of Understanding (MoU) with the International Financial Services Centres Authority in GIFT City to promote the Gujarat International Maritime Arbitration Centre (GIMAC).

What is GIMAC?

  • The GIMAC will be part of a maritime cluster that the Gujarat Maritime Board (GMB) is setting up in GIFT City at Gandhinagar.
  • The Maritime Board has rented about 10,000 square feet at GIFT House which is part of the Special Economic Zone (SEZ) area with clearance from the development commissioner.
  • This will be the first centre of its kind in the country that will manage arbitration and mediation proceedings with disputes related to the maritime and shipping sector.
  • The centre is expected to be ready by the end of August.

Why is such a centre needed?

  • It is required because, for instance, the ship owners belong to a different country and the person leasing the ship is from another country.
  • Any dispute arising between them can be resolved within this centre.
  • There are over 35 arbitration centres in India. However, none of them exclusively deals with the maritime sector.
  • The arbitration involving Indian players is now heard at the Singapore Arbitration Centre.
  • The idea is to create a world-class arbitration centre focused on maritime and shipping disputes that can help resolve commercial and financial conflicts between entities having operations in India.
  • Globally, London is the preferred centre for arbitration for the maritime and shipping sector.

What is the current status of the project?

  • The process of recruiting staff for the arbitration centre is currently underway.
  • A 10-member advisory board for GIMAC, consisting of international experts and professionals, has been created, which will help in the framing of rules for the arbitration centre and in empanelling arbitrators.

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Goods and Services Tax (GST)

National Anti-Profiteering Authority (NAA)

DOMR | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: National Anti-Profiteering Authority (NAA)

Mains level: Not Much

The National Anti-Profiteering Authority (NAA) has directed GST officials across the country to ensure that the tax rate cuts notified on some COVID-19-related essentials are passed on to consumers.

What is National Anti-Profiteering Authority (NAA)?

  • The NAA has been constituted under Section 171 of the Central GST Act, 2017 to ensure that the reduction in the rate of tax or the benefit of the input tax credit is passed on to the recipient by way of commensurate reduction in prices.
  • The decision about the formation of the NAA came in the background of a rate reduction of a large number of items by the GST Council in its 22ndmeeting at Guwahati.
  • At the meeting, the Council reduced rates of more than 200 items including goods and services.
  • This has made a tremendous price reduction effect and the consumers will be benefited only if the traders are making the quick reduction of the prices of respective items.
  • There was a concern that traders are reluctant to make price cuts so that they can make a profit.

Answer this PYQ in the comment box:

Q. Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

What is profiteering?

  • Profiteering means unfair profit realized by traders by manipulating prices, tax rate adjustment etc.
  • In the context of the newly launched GST, profiteering means that traders are not reducing the prices of the commodities when the GST Council reduces the tax rates of commodities and services.
  • Conventionally, several traders will have a strong tendency to quickly increase the price of a commodity whose tax rate has been increased.
  • But on the opposite side, they may delay the price reduction of a commodity whose tax rate has been cut by the government.
  • A delayed or postponed price reduction helps business firms to make a higher profits. The losers here are the consumers.

Functioning of NAA

  • The Authority’s main function is to ensure that traders are not realizing unfair profit by charging high prices from the consumers in the name of GST.
  • Traders may charge high prices from the consumers by naming the GST factor.
  • Similarly, they may not make quick and corresponding price reductions when the GST Council makes a tax cut. All these constitute profiteering.
  • The responsibility of the NAA is to examine and check such profiteering activities and recommend punitive actions including the cancellation of licenses.

Steps were taken by the NAA to ensure that customers get the full benefit of tax cuts:

  • Holding regular meetings with the Zonal Screening Committees and the Chief Commissioners of Central Tax to stress upon consumer awareness programs;
  • Launching a helpline to resolve the queries of citizens regarding registration of complaints against profiteering.
  • Receiving complaints through email and the NAA portal.
  • Working with consumer welfare organizations in order to facilitate outreach activities.

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

Places in news: Yellowstone National Park

Places in news | Enviro & Biodiversity | Mains Paper 1: Climatic Change
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Yellowstone National Park

Mains level: NA

A new assessment of climate change in the Yellowstone National Park shows that it has lost a quarter of its annual snowfall.

Yellowstone National Park

  • Yellowstone NP is an American national park located in the western United States, largely in the northwest corner of Wyoming and extending into Montana and Idaho.
  • Yellowstone was the first national park in the US and is also widely held to be the first national park in the world.
  • The park is known for its wildlife and its many geothermal features, especially Old Faithful geyser, one of its most popular.
  • While it represents many types of biomes, the subalpine forest is the most abundant. It is part of the South Central Rockies forests ecoregion.
  • The area also represents the one point where the three major river basins of the western U.S. converge.
  • The rivers of the Snake-Columbia basin, Green-Colorado basin, and Missouri River Basin all begin as snow on the Continental Divide as it weaves across Yellowstone’s peaks and plateaus.

Impact of climate change

  • Since 1950, average temperatures in the Greater Yellowstone Area have risen 1.3°C and potentially, more importantly, the region has lost a quarter of its annual snowfall.
  • The loss of snow there has repercussions for a vast range of ecosystems and wildlife, as well as cities and farms downstream that rely on rivers that start in these mountains.
  • It is home to the southernmost range of grizzly bear populations in North America and some of the longest intact wildlife migrations, including the seasonal traverses of elk, pronghorn, mule deer and bison.

Answer this PYQ in the comment box:

Q.Consider the following pairs:

River                              Flows into

1. Mekong –                   Andaman Sea

  1. Thames –                     Irish Sea
  2. Volga –                     Caspian Sea
  3. Zambezi –                  Indian Ocean

Which of the statements given above is/are correct? (CSP 2020)

(a) 1 and 2 only

(b) 3 only

(c) 3 and 4 only

(d) 1,2 and 4 only

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