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- In his note to Parliament’s Estimates Committee on bank non-performing assets (NPAs), Former RBI Governor Raghuram Rajan has flagged three major sources of potential trouble: Mudra credit, which is basically small-ticket loans granted to micro and small enterprises; lending to farmers through Kisan Credit Cards; and contingent liabilities under the Credit Guarantee Scheme for MSMEs, run by the Small Industries Development Bank of India.
What is NPA as per RBI?
- Non-Performing assets in respect to banks are defined as the loans on which interest or principle is not being paid for 90 days.
- However, in terms of Agriculture / Farm Loans; the NPA is defined as under:
- For short duration crop if the loan (instalment / interest) is not paid for 2 crop seasons it would be termed as a NPA.
- For Long Duration Crops, the above would be 1 Crop season from the due date
- MUDRA stands for Micro Units Development and Refinance Agency
- Ministry: Ministry of Finance
- Objective: The core objective of the bank is to fund the unfunded. It will finance to “Last Mile Financiers” of small/micro businesses. The lending priority will be given to SC/ST enterprises
To address the three segments, MUDRA Bank has launched three loan instruments:
- Shishu: covers loans upto Rs 50,000/-
- Kishor: covers loans above Rs 50,000/- and upto Rs. 5 lakh
- Tarun: covers loans above Rs 5 lakh and upto Rs 10 lakh
Analysis of the issue
- The loans have been sanctioned under the Pradhan Mantri Mudra Yojana, which aims to ‘fund the unfunded’.
- Given that these are small loans up to ₹10 lakh each, with the borrowers mostly from the informal sector, banks have to monitor them very closely.
- It is debatable whether banks have the resources and manpower to do this when they are chasing the bigger borrowers for business and, increasingly these days, recoveries.
- The risk is that these small-ticket loans will drop under the radar and build into a large credit issue in course of time. The same logic holds true for crop loans made through Kisan Credit Cards.
- Recognition is the first step in a clean-up, and unless banks are cleaned of their non-performing loans, they cannot make fresh loans.
- The Central government should also take note of some forward-looking statements that Mr. Rajan has made on the governance of banks.
- Some suggestions to avert a recurrence of the current mess are, professionalising bank boards with appointments done by an independent Banks Board Bureau; inducting talent from outside banks to make up for the deficit within; revising compensation structures to attract the best talent; and ensuring that banks are not left without a leader at the top.
- Until Lehman Brothers filed for bankruptcy on 15 September 2008, home loans going bad in some pockets of the US seemed like a small problem for the world
- It was a local issue unlikely to cause a problem even for the US economy
- Banking regulators, as well as governments, did not worry too much even if a bank had a lot of small loans on their books
- With the bankruptcy of Lehman Brothers and the unfolding of the Global Financial Crisis (GFC), it came to be understood that mis-selling of financial products to consumers can create risks to the entire financial system
How the crisis deepened?
- By banks giving loans for nearly the entire value of the house being purchased, assuming that when house prices rise, the loan could be repaid, they created a risk
- When lots of banks gave lots of such loans, they created a risk for the banking sector
- And, when they created derivative products of these loans that were bought and sold to many other financial institutions, both in the US and globally, they created risks for the global financial system
- Once house prices started falling, home loans started going bad
- Foreclosure under the US law, or simply handing over the keys of the mortgaged house to the bank and walking away was the most rational step for borrowers to take
- As banks’ books started going bad and they sold their sub-prime loans to other parts of the financial system, the problem became widespread
Financial products need to be regulated
- What we receive by buying a financial product is a promise by a financial firm to pay us sometime in the future
- If this promise is not fulfilled by the firm there may be sheer fraud
- The firm may also go bankrupt and the entire financial system may collapse
Changes in legislation
- The post-GFC period saw a major re-haul of the financial sector laws and regulatory architecture
- The Dodd-Frank Act in the US, a new regulatory architecture in the UK in the form of “twin-peaks model’’ towards furthering prudential regulation and conduct regulation of market participants are some examples
- Financial regulators in Britain, Australia and many other countries had already moved away from sectoral models of regulation—such as separate banking regulators, insurance regulators, pensions regulator and so on—to regulators who looked at the different businesses and arms of a financial company that could involve banking, insurance, derivatives etc
- These now also started setting up systemic risk regulators, or macro-prudential regulators and gave them new powers
Indian financial system
- The Indian financial system was much less developed compared to the sophisticated ones that witnessed the crisis
- It was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions or are banned, and the bulk of the population has no access to bank loans
- But each regulator looking at risks in her sector was unable to see risks arising across the financial sector as a whole
- IMF advocated that only permanent capital controls like those in India and China could protect countries from capital surges and capital flight
Steps taken by India
- To address the issue of financial stability the government of India created a non-statutory council of regulators, the Financial Stability and Development Council (FSDC)
- To enable changes in the way financial regulations are made, the Financial Sector Legislative Reforms Commission (FSLRC), set up by the Government of India, proposed the Indian Financial Code—a blueprint of a comprehensive law to create a reformed financial regulatory framework
- Though the Indian Financial Code was not tabled in Parliament as a single piece of legislation, many elements of the law were implemented. These included
- the merger of the commodities regulator (Forwards Market Commission) with the securities market regulator (Sebi),
- the shift of regulation of non-debt capital flows from RBI to the Ministry of Finance and the setting up of an inflation targeting regime and a Monetary Policy Committee of the RBI
- Today, without a framework for bankruptcy and orderly resolution for financial firms, India faces the risk that if a large private sector bank goes bankrupt, there is no legal way of dealing with it other than to force a public sector bank or insurance company like the Life Insurance Company to buy it out
- To serve the growing needs of the economy for debt, equity, payment systems, and innovations in financial products and services it is required that regulatory reform is undertaken with much greater speed
- The India-Nepal relationship has seen a number of setbacks in recent times
- Nepal’s army did not participate in the joint military drill of the BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) member-states that is currently underway in Pune
- In another widely noted development, the government in Kathmandu has concluded an agreement with China to gain access to Chinese ports, including Tianjin, Shenzhen, Lianyungang and Zhanjiang
- In contrast, the Nepalese army is preparing to leave for a 12-day military exercise with China in Chengdu later this month
What’s brewing in Nepal?
- These developments can be seen as Nepal’s legitimate response to India’s economic blockade of the land-locked nation in 2015-16
- Nepal’s desire to get access to alternative ports is eminently understandable in this context
- Its abrupt withdrawal from the Bimstec military exercise caused significant diplomatic embarrassment for India, which is trying to project the regional grouping as an alternative to the South Asian Association for Regional Cooperation (SAARC)
- Nepal PM’s decisions seems to be a straight pick from Maldivian President Abdulla Yameen’s playbook
- Yameen, who doesn’t hesitate to allow Chinese warships to dock in Malé, had earlier asked India to take back its naval helicopters
Is China a feasible option for Nepal?
- While Nepal will have alternative trade routes via China, those will not be competitive against the Kolkata port given the geography, distance and cost involved in sending goods via Chinese ports
- China cannot substitute for India in Nepal
- India has an open border with Nepal and Nepalese citizens work in India, marry Indians and serve in the Indian Army
Way forward for India
- India needs to develop sharper instruments to coerce hostile leadership in the neighbourhood
- The blockade was a blunt instrument which caused substantial harm to the common people
- The recent engagement with Pushpa Kamal Dahal, Nepal’s former prime minister and current ally of Oli, is a step in the right direction
- A survey by the All India Survey on Higher Education published in July this year shows that the gross enrolment ratio (GER) was 25.8% in 2017-18, up from 10% in 2004-05
- GER is the ratio (expressed as a percentage), of the total enrolment within a country in a specific level of education, regardless of age, to the population in the official age group corresponding to this level of education
GER in higher education
- For higher education, the survey calculates the ratio for the age group 18 to 23 years
- For India, the Survey gives the corresponding figure as 30%
- Though the GER for higher education in India is still less than what it is in developed countries, the growth rate is still quite impressive
Radhakrishnan Commission Report
- Just after Independence, a commission comprising educationists from India, the U.K. and the U.S., and chaired by Dr. S. Radhakrishnan, was formed
- It had to report on Indian University Education and suggest improvements and extensions that may be desirable to suit present and future requirements of the country
- Its report filed after its deliberations came to be known as the Radhakrishnan Commission Report (RCR)
- Philosophical deliberations in the report that are related to the content of higher education are still relevant today
Recommendations of RCR
- The RCR recommended a well-balanced education with ‘general’, ‘liberal’ and ‘occupational’ components
- Without all-round general (including liberal) education, one could not be expected to play roles expected of a citizen outside one’s immediate professional sphere
- The report advocated that general education and specialised/professional education should proceed together
- The study of languages should be given equal importance as one communicated to the outside world only through the medium of language
- Recently this year, the National Academies Press (NAP) of the U.S. which represents the national academies of sciences, engineering and medicine published the report, “The Integration of the Humanities and Arts with Sciences, Engineering, and Medicine in Higher Education: Branches from the Same Tree”
- The report advocates integrating the teaching of humanities in STEM
- As in the NAP’s report, the purpose of higher education is to prepare graduates for work and life, as well as active and engaged citizenship
- This can be achieved only through the acquisition of knowledge, skills and competencies related to the profession they chose to specialise in and also written and oral communication skills, ability to work as a team, ethical decision making, critical thinking, and ability to apply knowledge in real world settings
Need for diversity in education
- Problems in a real-life setting are interdisciplinary and require an appreciation of related fields
- There are technical advances every day, influencing everyday life in diverse ways
- This is also leading to concerns about privacy, technology-driven social and workforce changes, and the evolving need for individuals to retrain themselves to remain in employment
- In such a scenario, it is important that professionals study the impact of innovations on society in a holistic manner
- Evidence shows that certain educational experiences that integrate the arts and humanities with STEM at the undergraduate level are associated with increased critical thinking abilities, higher order thinking and deeper learning, content mastery, creative problem solving, teamwork and communication skills
- As far as the inclusion of elements of general education in the curriculum for undergraduates is concerned, the situation is mixed
- Several engineering, and science education and research institutes have embedded general education programmes at the undergraduate level
- Such programmes are missing in most university-affiliated science colleges
- There are institutions that cater to a single stream which precludes the possibility of even an informal interaction between students and faculty with different specialisations
- The focus of undergraduate education should be on classical disciplines, with enough credits for general education
- It is time to bridge the divide between the two cultures in the education system and evolve a third culture where the two sides understand and appreciate each other
- It is an alcohol derived by process of fermentation mostly from carbohydrates of agricultural residue and feedstocks.
- As a quasi-renewable energy, ethanol can be blended with petrol or diesel making it a sustainable transport fuel.
- It will help in reducing emissions and dependency on imported fuel.
Benefits of bio-ethanol
- Help in solving the chronic problem of straw burning of leftover agro-based produce especially from wheat and rice feedstocks. Benefit farmers economically, as they would be paid for their agro-based produce to extract bio-ethanol.
- It would also help in preventing the loss of fertility of soil and damage to environment by reducing air pollution.
- Ethanol blending is the practice of blending petrol with ethanol.
- Many countries, including India, have adopted ethanol blending in petrol in order to reduce vehicle exhaust emissions and also to reduce the import burden on account of crude petroleum from which petrol is produced.
- The renewable ethanol content, which is a byproduct of the sugar industry, is expected to result in a net reduction in the emission of carbon dioxide, carbon monoxide (CO) and hydrocarbons (HC).
- Ethanol itself burns cleaner and burns more completely than petrol it is blended into.
- In India, ethanol is mainly derived by sugarcane molasses, which is a by-product in the conversion of sugar cane juice to sugar.
- The Union Cabinet has approved National Policy on Biofuels – 2018 in order to promote biofuels in the country.
- Biofuels in India are of strategic importance as it augers well with ongoing initiatives of Government such as Make in India, Skill Development and Swachh Bharat Abhiyan.
- It also offers great opportunity to integrate with ambitious targets of doubling of import reduction, farmers’ income, employment generation, waste to wealth Creation.
Salient features of Policy
- The policy categorises biofuels to enable extension of appropriate financial and fiscal incentives under each category
- Basic Biofuels: First Generation (1G) bioethanol and biodiesel.
- Advanced Biofuels: Second Generation (2G) ethanol, Municipal Solid Waste (MSW) to drop-in fuels, Third Generation (3G) biofuels, bio-CNG etc.
- Expansion scope of raw material for ethanol production: It allows use of sugarcane juice, sugar containing materials like sweet sorghum, sugar beet, starch containing materials like corn, cassava, damaged food grains like broken rice, wheat, rotten potatoes, unfit for human consumption for ethanol production.
- Use of surplus food grains: The policy allows use of surplus food grains for production of ethanol for blending with petrol with approval of National Biofuel Coordination Committee. This will ensure farmers get appropriate price for their produce during the surplus production phase.
- Incentives to advanced biofuel: Viability gap funding scheme indicated for 2G ethanol Bio refineries of Rs.5000 crore in 6 years for giving special emphasis to advanced biofuels. It also proposes additional tax incentives, higher purchase price as compared to 1G biofuels.
- Supply chain mechanisms: The policy encourages setting up of supply chain mechanisms for biodiesel production from non-edible oilseeds, used cooking oil, short gestation crops.
- Synergising efforts: It predefines roles and responsibilities of all the concerned Ministries and Government Departments with respect to biofuels to synergise efforts.
- Reduce Import Dependency: The ethanol supply will help to reduce import dependency on crude oil which will in turn result in savings of forex.
- Cleaner Environment: The use of ethanol will reduce CO2 emissions. It will also reduce Green House Gas emissions by reducing crop burning and conversion of agricultural residues and wastes into biofuels.
- Health benefits: Prolonged reuse of cooking oil for preparing food, particularly in deep-frying causes health hazard and can lead to many diseases. By using cooking oil as a potential feedstock for biodiesel will prevent diversion of used cooking oil in the food industry.
- Municipal Solid Waste (MSW) Management: Using advance technologies waste and plastic in MSW can be converted in use fuels. One ton of such waste has potential to provide around 20% of drop in fuels.
- Infrastructural Investment in Rural Areas: Addition of 2G bio refineries across country will spur infrastructural investment in the rural areas.
- Employment Generation: Setting up one 100klpd 2G bio refinery contributes to 1200 jobs in plant operations, village level entrepreneurs and supply chain management.
- Additional Income to Farmers: By adopting 2G technologies for producing biofuels, agricultural residues and waste which otherwise are burnt by farmers can be converted to ethanol. Through this process farmers can fetch price for these waste. Moreover, conversion of surplus grains and agricultural biomass can also help in price stabilization for farmers.
- The Centre has hiked ethanol prices, with a special incentive for ethanol directly produced from 100% sugarcane juice, in a dual bid to reduce both surplus sugar production and the fuel import bill. The ethanol produced from sugar is blended with petrol.
- The price of ethanol derived from 100% sugarcane juice is raised from ₹47.13 to ₹59.13. The rate for ethanol produced from B-heavy — or intermediary — molasses has been raised to ₹52.43.
- The rate of ethanol produced from C-heavy molasses (which has no sugar left) has been marginally reduced to ₹43.46.
- By increasing the price difference between ethanol with no sugar left and that of fully made up of sugar to almost 35%, the Centre has given sugar mills a clear incentive to increase ethanol production from sugar.
- In fact, oil marketing companies have been told to prioritise ethanol from 100% sugarcane juice followed by B-heavy molasses, said a statement. The companies will also pay GST and transportation charges.
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