Surge in small borrower defaults stokes worries

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

News: Small borrowers, whose default rates have traditionally been among the lowest in India, are increasingly missing loan repayments as rising unemployment and stagnant-to-declining wages put pressure on finances of small companies as well as households.

Prelims and Mains focus: About MUDRA scheme, current economic downturn and its impact on the SMEs and overall economy of India, IIP

Issue:

• Indian banks, which hold the dubious distinction of having the world’s worst bad loan ratio, have so far seen most of its asset-quality troubles originate in the corporate sector. With the economy slowing down sharply, smaller borrowers are also finding it difficult to repay loans.
• According to data from credit bureau Cibil, bad loan rates in micro enterprises and small and medium-sized enterprises were at 8.7% and 10.6%, respectively in June this year.

• One of the categories of borrowers that have been the worst hit are those that have availed small loans under the government’s MUDRA scheme designed to encourage micro-entrepreneurship. So much so, the central bank Tuesday asked bankers to monitor defaults in Mudra loans closely.
• The Reserve Bank of India deputy governor M.K.Jain said banks need to focus on repayment capacity of borrowers at the appraisal stage and monitor the loans through their lifecycle much more closely.

Reasons for the rising defaults

• Experts said the slowdown in economic growth is hampering the loan-servicing capability of small businesses.
• For small retail borrowers, slackening growth in rural income has been a pain point.
• Whenever there is an economic downturn, one can expect small businesses to be affected the most, since their activities are linked to other larger companies. When the index of industrial production (IIP) has grown at a negative rate in September, it actually means that the overall performance of these businesses have been affected along with their ability to service loans.

About Pradhan Mantri Mudra Yojana (PMMY)

• Under the Pradhan Mantri Mudra Yojana launched in April 2015 banks provide loans up to ?10 lakh to non-corporate, non-farm small/micro enterprises.
• There are three categories of Mudra loans, depending on size.

• loans up to ?50,000 are termed Shishu,
• loans of ?50,000-5 lakh are called Kishore
• loans of ?5-10 lakh are called Tarun,

• Data from Mudra’s annual report showed that non-performing assets (NPA) ratio or bad loans as a percentage of total loans were at 5.38% as on 31 March 2018. The FY19 annual report is not available.

Challenges ahead

• With banks hesitating to lend to them incrementally if there are even marginal cash flow issues, the defaults in SME could materially increase even from 10-11% seen currently for public sector banks (PSBs).
• Systemic risks arising from unsustainable credit growth, increased inter-connectedness and financial risk manifested by lower profitability of the small businesses.
• Small businesses, contributing to 29% of the gross domestic product (GDP), are not isolated from the slowdown. The latest in a series of bad news came in earlier last month as India’s factory output shrank for the second straight month at 4.3% in September.
• In the June quarter, India reported its weakest growth in more than six years at 5%. The latest GDP estimates by banks indicate that the economy may slow down further.

Index of Industrial Production (IIP)

• It is an index which helps us understand the growth of various sectors in the Indian economy such as mining, electricity and manufacturing.

• IIP is a short term indicator of industrial growth till the results from Annual Survey of Industries (ASI) and National Accounts Statistics (Eg: GDP) are available.

• The base year of the index is given a value of 100. The current base year for the IIP series in India is 2011-12. So, if the current IIP reads 180, it means that there has been 80% industrial growth compared to the base year, ie 2011-12.

Who releases IIP?

• Index of Industrial Production (IIP) is released by the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation.
• IIP is published monthly, six weeks after the reference month ends.

Syllabus subtopic: Challenges to internal security through communication networks, role of media and social networking sites in internal security challenges, basics of cyber security; money-laundering and its prevention

News: The Cambridge Analytica scandal, the Pegasus spyware attack on WhatsApp and the growing misuse of social media platforms to spread misinformation have made governments world over, including in India, realise the limitations of existing laws in dealing with the misuse of these platforms.

Prelims and Mains focus: about Pegasus spyware, the cyber threat, challenges and ways to address it

Need for stricter regulation of social media

• The need for greater regulation of social media companies stems from the growing feeling that they are not doing enough to curb the misuse of their platforms.
• In recent times, many of them have been involved in brushes with the government and courts. For instance, short-video app TikTok was accused of promoting pornography among teens and temporarily banned from app stores following a Madras high court order;
• WhatsApp was slammed for not being able to curb fake messages which led to several cases of mob lynchings in 2018 and, more recently, for the Pegasus spyware attack.
• Twitter too has been criticised for failing to curb hate speech.

What are the remedial proposals?

• While forcing companies to have a nodal officer in the country can make these platforms more accountable to legal requests, it also makes them vulnerable to government pressure.
• Having offices in India allows the government to exert extralegal pressure on the company officials by forcing them to comply with informal requests. It is only useful if the intermediaries are willing to push back on the pressure and not entertain any informal request from the government.
• China-based TikTok, in a statement, emphasised that it is committed to respecting local laws and actively coordinates with law enforcement agencies through an India-based grievance officer. TikTok claims to have removed six million videos between July 2018 and April 2019 for violation of its guidelines.
• Some of these proposals have been flagged on grounds of privacy. For instance, the traceability clause is going to have a huge impact on specific platforms such as WhatsApp and Telegram that encrypt all messages and calls. Enforcing traceability and deploying technology based automated tools to proactively identify and disable public access to malicious content will force them to break or lower the encryption as has been pointed out by industry in the past.
• WhatsApp maintained its official stance from February and reiterated that what is contemplated by the rules is not possible today given the end-to-end encryption that it provides. The rules would require the company to re-architect WhatsApp, which would lead to a different product, one that would not be fundamentally private.

India position vis-a-vis USA

• The fact that India doesn’t have an encryption law per say also complicates the scenario. In fact, section 84A (introduced after an amendment in 2008) of IT Act 2000 has specific provisions authorizing central government for coming up with a policy on encryption. It has been 11 years but there is still no law on it.
• Further, to ensure that companies abide by the proposed rules and furnish information within 24 hours, the government will have to address hurdles in mutual legal assistance treaty between India and the US, which is why many of these requests take a lot of time to process. The target of the government should be having an executive agreement with the US under the Cloud Act.
• The US has significant stakes in the data localization debate as many of the companies are based in the US, and that can be used as leverage to negotiate such an agreement. That will allow law enforcement agencies in India to have expedited access to information held by platforms which are based outside the country.

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

News: A new report released by the UN Environment Programme (UNEP) has said that even if the present Paris Agreement commitments are met global temperatures are expected to rise by 3.2 degrees Celsius by 2030.

Prelims and Mains focus: about UNEP, findings of Emissions gap Report and its significance, challenges of climate change

Key findings of the report

• The report – UNEP’s annual Emissions Gap Report – says that unless global greenhouse emissions fall by 7.6 per cent annually between 2020 and 2030, “ the world will miss the opportunity to get on track towards the 1.5°C temperature goal of the Paris Agreement.”
• The Intergovernmental Panel on Climate Change (IPCC) has warned that going beyond 1.5 degrees Celsius means the “bringing of eve wider-ranging and more destructive climate impacts” including storm and heat waves.
• The UN climate change conference is scheduled to be held in 2020 in Glasgow and will look at the Paris Agreement commitments
• G20 nations collectively account for 78 per cent of all emissions, but only five G20 members have committed to a long-term zero-emission target.
• In the short-term, developed countries will have to reduce their emissions quicker than developing countries, for reasons of fairness and equity, says the report.
• Crucially, the report says all nations must substantially increase ambition in their Nationally Determined Contributions (NDCs), as the Paris commitments are known in 2020 and follow up with policies and strategies to implement them.

• Each year, the Emissions Gap Report assesses the gap between anticipated emissions in 2030 and levels consistent with the 1.5°C and 2°C targets of the Paris Agreement.
• The report finds that greenhouse gas emissions have risen 1.5 per cent per year over the last decade Emissions in 2018, including from land-use changes such deforestation, hit a new high of 55.3 Gigatonnes of CO2 equivalent.

Way forward

• To limit temperatures, annual emissions in 2030 need to be 1 Gigatonne of CO2 equivalent lower than current unconditional NDC imply for the 2°C goal; they need to be 32 Gigatonnes lower for the 1.5°C goal.
• On an annual basis, this means cuts in emissions of 7. per cent per year from 2020 to 2030 to meet the 1.5°C goal and 2.7 per cent per year for the 2°C goal.

United Nations Environment Programme (UNEP):-

• It is an agency of United Nations and coordinates its environmental activities, assisting developing countries in implementing environmentally sound policies and practices.
• It was founded by Maurice Strong, its first director, as a result of the "United Nations Conference on the Human Environment" (also known as Stockholm Conference) in June 1972
• has its headquarters in the Gigiri neighborhood of Nairobi, Kenya.

The United Nations Environment Programme (UNEP) is the leading global environmental authority that sets the global environmental agenda, promotes the coherent implementation of the environmental dimension of sustainable development within the United Nations system and serves as an authoritative advocate for the global environment.

UNEP work encompasses:

• Assessing global, regional and national environmental conditions and trends
• Developing international and national environmental instruments
• Strengthening institutions for the wise management of the environment

Its activities cover a wide range of issues regarding the atmosphere, marine and terrestrial ecosystems, environmental governance and green economy.

It has played a significant role in

• developing international environmental conventions,
• promoting environmental science and information and illustrating the way those can be implemented in conjunction with policy,
• working on the development and implementation of policy with national governments, regional institutions in conjunction with environmental non-governmental organizations (NGOs).
• UNEP has also been active in funding and implementing environment related development projects.

• UNEP has aided in the formulation of guidelines and treaties on issues such as the international trade in potentially harmful chemicals, transboundary air pollution, and contamination of international waterways.
• The World Meteorological Organization and UNEP established the Intergovernmental Panel on Climate Change (IPCC) in 1988.
• UNEP is also one of several Implementing Agencies for the Global Environment Facility (GEF) and the Multilateral Fund for the Implementation of the "Montreal Protocol", and it is also a member of the United Nations Development Group.