The spectre of fresh NPAs looms over banks this year

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: on the NPA crisis in the banking sector: its causes and impact; evergreening of loans

News: The Reserve Bank of India’s (RBI) Financial Stability Report (FSR) said the gross non-performing assets (GNPA) ratio of banks remained the same between March and September 2019 but could rise to 9.9% by September 2020.

What has been the trend on NPAs?

The recognition of NPAs of banks improved after RBI initiated an asset quality review (AQR) in 2015. Prior to that, banks had been hiding bad loans rather than disclosing them transparently in their books. As a result of the AQR, the GNPA ratio shot up from 4.3% in March 2015 to 9.3% in March last year. This ratio could increase to 9.9% by September 2020, according to the latest FSR. The reasons given by the banking regulator for the expected increase include the changes in the macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth.

Does RBI have the full picture on NPAs?

The QAR brought transparency to the NPA recognition mechanism. However, RBI may not have a full measure of the problem of bad loans even now. The December 2018 FSR indicated a recovery in NPAs. The next one, in June 2019, had said that the bulk of the legacy NPAs had already been recognized in the books of banks. The report even projected a further drop in the GNPA ratio from 9.3% in March 2019 to 9.0% in March 2020. However, the December 2019 FSR says the GNPA ratio would rise close to 10% in September this year. RBI was unable to anticipate that the pile of bad loans would increase.

Is the recognition of bad loans nearing completion?

The central bank says so. However, what has to be kept in mind is that no AQR of non-banking financial companies (NBFCs) has been initiated so far. If NBFCs, especially those that intermediate in the real estate sector, are rolling over or evergreening loans they took from banks, the extent to which banks’ NPAs would rise if such loans turn bad remains unknown.

What about the under-reporting of NPAs?

Between the release of the June and December 2019 FSRs, RBI’s risk assessments showed at least 10 banks had understated GNPAs for March 2019. The discrepancies discovered by RBI were disclosed to stock exchanges by the banks. They totalled Rs. 26,546.45 crore. The disclosures follow guidelines of the Securities and Exchange Board of India (SEBI) issued in October 2019 that directed banks to intimate stock exchanges of all under-reporting of bad loans by them, within 24 hours of RBI’s risk assessment reports.

What is the impact of under-reported NPAs?

If the aggregate discrepancies of Rs. 26,546.45 crores disclosed by the 10 banks are incorporated into the GNPA ratio for March 2019, the figure rises to 9.3%. But the GNPA ratio for March 2019 given in RBI’s December FSR is the same as that in the June FSR. Whether RBI will restate the figure to account for banks’ under-reporting of GNPAs that its own risk assessments had found isn’t clear. RBI needs to give the full picture on under-reported NPAs’ impact on GNPA ratio.

What is evergreening of loans?

Evergreening in banking is a practice of providing a fresh loan to repay an old loan. For example, a bank can lend money to a company to pay another bank’s loan. In this way, the first bank can maintain its balance sheet and reduce its non-performing assets (NPAs). The first bank can then extend a similar service to a company which is unable to pay the debts of the second bank. So through evergreening practice banks try to ‘manage’ their balance sheets by circumventing banking laws.

Ever-greening of loans has unfortunately been a widespread practice adopted by banks in the past to ever-green their stressed accounts (and avoid classification of NPAs which would require higher provisioning, compliances and impact profitability). This has led to huge debts getting piled up with borrower entities who clearly have no capacity to repay such loans, and ultimately results in a situation of hundreds (and in many cases thousands of crores) of bank debt remaining unpaid, a consequence much against the public interest at large.

How automation affects global FDI flows

Syllabus subtopic: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Prelims and Mains focus: on automation: its advantages and impact on the economy

News: Across the world, the rise of automation has raised concerns over its impact on employment, especially in poor countries.

Is automation a threat?

• New research, however, suggests that these fears may be overblown. While automation will disrupt the flow of capital from rich to poorer countries, the poorest countries could actually gain from automation.

• A World Bank study uses data sets on greenfield foreign direct investments (FDI) and industrial robot usage between 2004 and 2015 to investigate the relationship between automation and FDI flows.

• During the period, because of outsourcing, high-income countries (HICs) such as the European nations and the US, witnessed the largest FDI outflows, measured in terms of project announcements, into low- and middle-income countries (LMICs).

• Besides, leading sectors in HICs witnessed a huge rise in automation. The study measures automation in terms of the intensity of robot use (robots per 1,000 employees ) .

• They find that electronic and automobile sectors were the most automated while textiles was the least automated. The study finds that as automation increases, FDI flows from HICs to LMICs fall.

• However, encouragingly, this relationship is non-linear. A 10% increase in the intensity of robots in HICs is associated with a 5.5% increase in the growth rate of FDI flows to LMICs. But above a certain threshold of automation in HICs, FDI inflows into LMICs grow at a diminishing rate and lead to reshoring with HICs investing in their own countries.

• For the poorest countries, automation actually leads to greater FDI inflows, but from a smaller pool of countries. Because of this, the study argues that fears of technological advancement displacing labour may be overstated, at least for the time being.

What does Automation mean?

• Automation is the creation of technology and its application in order to control and monitor the production and delivery of various goods and services. It performs tasks that were previously performed by humans. Automation is being used in a number of areas such as manufacturing, transport, utilities, defence, facilities, operations and lately, information technology.

• Automation can be performed in many ways in various industries. For example, in the information technology domain, a software script can test a software product and produce a report. There are also various software tools available in the market which can generate code for an application. The users only need to configure the tool and define the process. In other industries, automation is greatly improving productivity, saving time and cutting costs.

• Automation is evolving quickly and business intelligence in applications is a new form of high-quality automation. In the technology domain, the impact of automation is increasing rapidly, both in the software/hardware and machine layer. However, despite advances in automation, some manual intervention is always advised, even if the tool can perform most of the tasks.

Syllabus subtopic: Conservation, environmental pollution and degradation, environmental impact assessment

Prelims and Mains focus: about IMD’s State of Climate Report, 2019 and its findings

News: Extreme weather events driven by climate change claimed as many as 1,659 lives across India in 2019, which ended as the seventh warmest year on record, the India Meteorological Department (IMD) said on Monday.

Remarks of IMD

• It was an extreme year in terms of weather. There were deadly heatwaves in summer and intense cold waves during winter. Several studies have shown that it is all linked to climate change.
• Heavy rain- and flood-related incidents took the maximum toll, claiming more than 850 lives across states, according to the State of the Climate Report-2019 prepared by government’s weather department, which was released on Monday.

State-wise toll

• Bihar bore the brunt with 650 lives lost in the state, out of which 306 were lost in the floods triggered by heavy monsoon rain. Heavy showers also claimed several lives in Maharashtra (136), Uttar Pradesh (107), Kerala (88), Rajasthan (80), and Karnataka (43). Lightning and thunderstorm in these states led to the death of 380 people.

• The toll is derived from government reports and the actual toll could be higher. However, it is true that floods are causing the maximum casualty. This is one area that IMD is focusing on, developing early flood warning systems for cities. However, the management on ground based on those warnings has to be quick and adequate as well.

• The searing temperatures during summer led to heat-waves, killing 350 people. Of these, 292 were reported from Bihar alone, followed by 44 in Maharashtra, and 13 in Jharkhand.

• If summer was dominated by heatwaves, severe cold wave and cold conditions swept large parts of northwest India in December, killing more than 28 people in Uttar Pradesh.

• Snowfall and avalanche-related incidents killed 33 people in Jammu and Kashmir and 18 in Leh.

• The national capital recorded the longest cold spell of 18 days, with the maximum day-time temperature plummeting to the lowest ever (since 1902) of 9.4°C on 30 December.

Severe impact

• However, the most evident impact was seen on the oceans, with one of the most intense cyclone seasons ever. As many as eight cyclonic storms formed over the Indian seas, including five in the Arabian Sea, compared to the usual one per year.

• The assessment showed that India’s annual mean surface air temperature was +0.36°C above the 1981-2010 period average during all the four seasons in 2019, with the monsoon (June-September) being the warmest since 1901.

• The temperature was substantially lower than the surface air temperature in 2016, but scientists warned that the threat of climate change, if not dealt with, could lead to many more extreme weather events.

• The year 2016 remains the warmest year on record for India so far, followed by 2009, 2017, 2010, and 2015.

Way ahead

Extreme weather events are on the rise and we have been seeing this for the last few years. The challenge is to work on our early warning systems and prepare in advance.

Stressed urban cooperative banks to face PCA­-like curbs

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims and Mains focus: About the RBI’s move: reasons and merits; about PMC crisis; UCBs and their significance

News: The Reserve Bank of India (RBI) has decided to impose restrictions on urban cooperative banks (UCBs) for deterioration of financial position, in line with the prompt corrective action (PCA) framework that is imposed on commercial banks.

Context: The move comes in the wake of the recent crisis at the PMC Bank.

What are these restrictions?

• Under this revised Supervisory Action Framework (SAF), UCBs will face restrictions for worsening of three parameters:

1. when net non-performing assets exceed 6% of net advances,
2. when they incur losses for two consecutive financial years or have accumulated losses on their balance sheets, and
3. if capital adequacy ratio falls below 9%.

• Action can be also taken if there are serious governance issues.
• For breach of such risk thresholds, UCBs will be asked to submit a board­approved action plan to correct the situation like reducing net NPAs below 6%, for restoring the profitability and wiping out the accumulated losses, and increasing capital adequacy ratio to 9% or above within 12 months.
• The board of the UCB will be asked to review the progress under the action plan on quarterly/monthly basis and submit the post­review progress report to the RBI.
• The RBI may also seek a board­approved proposal for merging the UCB with another bank or converting itself into a credit society if CAR falls below 9%. It can impose restrictions on the declaration or payment of dividends or donations without prior approval if any one of the risk thresholds is breached.
• Some of the other curbs include restricting fresh loans and advances carrying risk­weights more than 100% on incurring capital expenditure beyond a specified limit and on the expansion of the balance sheet.

What does the RBI say?

The RBI said actions such as the imposition of all­inclusive directions under Section 35A of the Banking Regulation Act, 1949, and issue of show­cause notice for cancellation of banking licence may be considered when continued normal functioning of the UCB is no longer considered to be in the interest of its depositors/public.

What are Cooperative Banks

Cooperative banks were set up to supplant indigenous sources of rural credit, particularly money lenders, today they mostly serve the needs of agriculture and allied activities, rural-based industries and to a lesser extent, trade and industry in urban centres. They work under the "No Profit No Loss" model.

Co-operative banks in India are registered under the States Cooperative Societies Act. The Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by the

• Banking Regulations Act 1949
• Banking Laws (Co-operative Societies) Act, 1955.

Features of Cooperative Banks:

• Customer Owned Entities: Co-operative bank members are both customers and owners of the bank.
• Democratic Member Control: Co-operative banks are owned and controlled by the members, who democratically elect a board of directors. Members usually have equal voting rights, according to the cooperative principle of “one person, one vote”.
• Profit Allocation: A significant part of the yearly profit, benefits or surplus is usually allocated to constitute reserves and a part of this profit can also be distributed to the co-operative members, with legal and statutory limitations.
• Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses.

Classification of Cooperative Banks

1. Urban Cooperative Banks
2. Rural Cooperative Banks

• State Cooperative Banks
• District: Central Cooperative banks
• Village: PACS (Primary agricultural cooperative society)

Syllabus subtopic: Science and Technology- developments and their applications and effects in everyday life Achievements of Indians in science & technology; indigenization of technology and developing new technology.

Prelims and Mains focus: About the proposed IDRSS: its aim and significance

News: India plans to ring in its own era of space­to­space tracking and communication of its space assets this year by putting up a new satellite series called the Indian Data Relay Satellite System (IDRSS).

Objective of IDRSS

• The IDRSS is planned to track and be constantly in touch with Indian satellites, in particular those in low-earth orbits which have limited coverage of earth.
• In the coming years, it will be vital to Indian Space Research Organisation (ISRO), whose roadmap is dotted with advanced LEO missions such as space docking, space station, as well as distant expeditions to moon, Mars and Venus. It will also be useful in monitoring launches.
• The first beneficiary would be the prospective crew members of the Gaganyaan mission of 2022 who can be fully and continuously in touch with mission control throughout their travel.

How is it going to be implemented?

• Work on the two IDRSS satellites planned initially has begun. The first of them will be sent towards the end of 2020. It will precede the pre-Gaganyaan experimental unmanned space flight which will have a humanoid dummy. A second one will follow in 2021. The two will offer near total tracking, sending and receiving of information from the crew 24/7.
• IDRSS satellites of the 2,000 kg class would be launched on the GSLV launcher to geostationary orbits around 36,000 km away. In such apparently fixed orbits, they would be covering the same area on earth. A satellite in GEO covers a third of the earth below and three of them can provide total coverage.

Why is IRDSS significant?

During the launch of the human mission and also when the crew craft orbits earth from a distance of 400 km, at least one ground station must see and track it. But with available ground stations, that would not be the case. Without data relay satellites, ISRO would have to create a large number ground stations everywhere or hire them globally and yet the crewed spacecraft would not be visible all the time.

Is India the first country to employ relay satellites?

No. Older space majors such as the U.S. and Russia started their relay satellite systems in the late 1970s­80s and a few already have around 10 satellites each. They have used them to monitor their respective space stations Mir and the International Space Station, and trips that dock with them, as well as the Hubble Space Telescope.

ICAR to set up an innovation fund to help farmers

Syllabus subtopic: e-technology in the aid of farmers.

Prelims and Mains focus: About the new Fund to be set up and its significance; about ICAR: role and mandate

News: A system will soon be put in place to scientifically validate, scale up and propagate the innovations of progressive farmers as the Indian Council of Agricultural Research (ICAR) is poised to set up a Farmers’ Innovation Fund (FIF).

What is it about?

• As part of this system, an innovation centre would be established in New Delhi where the innovations would be scientifically validated.
• Farmers would also be allowed to pursue research under the system.
• Though innovations of farmers were being documented by the Krishi Vigyan Kendras, the additional system would encourage farmers to continue their work.
• The intention was to link farmers and farming with science and to ensure that their farm practices were science­based.
• As part of efforts to encourage use of technology in the farm sector, a linkage had been created between 105 start­ups with farmers.

Why science is crucial for agriculture?

Agriculture is pure science. If we do not apply the principles of science to agriculture, then we will fail. Various revolutions in agricultural and allied sectors, including green revolution and white revolutions, happened because of scientific approach and use of technology.

About Indian Council of Agricultural Research (ICAR)

• It is an autonomous organisation under the Department of Agricultural Research and Education (DARE), Ministry of Agriculture and Farmers Welfare, Government of India.

• Formerly known as the Imperial Council of Agricultural Research, it was established on 16 July 1929 as a registered society under the Societies Registration Act, 1860 in pursuance of the report of the Royal Commission on Agriculture. The ICAR has its headquarters at New Delhi.

• The Council is the apex body for co-ordinating, guiding and managing research and education in agriculture including horticulture, fisheries and animal sciences in the entire country. With 101 ICAR institutes and 71 agricultural universities spread across the country, this is one of the largest national agricultural systems in the world.

• The ICAR has played a pioneering role in ushering Green Revolution and subsequent developments in agriculture in India through its research and technology development that has enabled the country to increase the production of food grains by 5 times, horticultural crops by 9.5 times, fish by 12.5 times, milk 7.8 times and eggs 39 times since 1951 to 2014, thus making a visible impact on the national food and nutritional security. It has played a major role in promoting excellence in higher education in agriculture. It is engaged in cutting edge areas of science and technology development and its scientists are internationally acknowledged in their fields.

Mandate

The mandate of the Indian Council of Agricultural Research is:

• To plan, undertake, aid, promote and coordinate education, research and its application in agriculture, agroforestry, animal husbandry, fisheries, home science and allied sciences.

• To act as a clearing house of research and general information relating to agriculture, animal husbandry, home science and allied sciences, and fisheries through its publications and information system; and instituting and promoting transfer of technology programmes.

• To provide, undertake and promote consultancy services in the fields of education, research, training and dissemination of information in agriculture, agroforestry, animal husbandry, fisheries, home science and allied sciences.

• To look into the problems relating to broader areas of rural development concerning agriculture, including postharvest technology by developing co-operative programmes with other organizations such as the Indian Council of Social Science Research, Council of Scientific and Industrial Research, Bhabha Atomic Research Centre and the universities.

• To do other things considered necessary to attain the objectives of the Society.