- Clear the policy confusion over NPAs
- Poverty and inequality after reforms
Defence & Security Issues
- No substitute to accountability
- Mahatma Gandhi’s obsession with cleanliness
GS (M) Paper-3 Topic: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”
Clear the policy confusion over NPAs
There has been almost no serious attempt to understand root causes of non-performing assets (NPAs).
Author here gives an account of main reasons of loans slipping into NPAs.
Definition of ‘Non Performing Assets’:
- A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
- The NPAs are defined and classified under the Reserve Bank’s Income Recognition and Asset Classification (IRAC) norms.
NPAs are a double whammy — banks no longer can earn interest income from such accounts, and they have to make a certain amount of provision from their profit for those accounts.
Classification of NPAs:
Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
- Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
- Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
Reasons of loans slipping into NPAs:
According to author, there are internal and external factors responsible for NPAs.
- Serious illness or death of the promoter, managing partner or key persons in management;
- Mismanagement of funds or inventory;
- Siphoning off funds; and,
- Importantly, diversion of working capital funds.
If loans slipping into NPAs are on account of internal reasons, a close monitoring of loan books can provide signals of them.
- An unexpected delay in getting raw materials;
- Unexpected fall in the order book;
- Natural calamities;
- Damage to due fire; and,
- Importantly, very subdued growth in the economy.
It would be beyond the control of banks in the case of NPAs arising due to external factors. Again, external factors sometimes produce systemic effects. For example, several small-scale units work on sub-contracts and make supplies to big companies. If these giants fail to pay these small firms or even prolong payments, it will hit the loan accounts of dependent firms.
What is the meaning of diversion of funds?
The diversion of funds may be external or internal.
- External diversion refers to ‘misuse’ of the working capital provided by the bank to invest in associate firms or to buy properties not relevant to the business concerned. This is deemed a case of fraud.
- Internal diversion refers to the working capital funds being used to buy capital goods such as machinery.
There could be a multitude of reasons at work for a loan slipping into an NPA.
- The RBI permits rescheduling of a bad loan ‘only if’ the bank declares the loan an NPA.
- To identify and mark an account as NPA, which is a system-driven process in all banks, there is a standard formula. The yardstick is the same for all loans — big or small; personal or trade; or a loan to a manufacturer; all loans, except farm loans, are equal in the eyes of the IRAC norms.
- The IRAC norms are similar to the earlier versions of the Basel rules i.e. ‘one cap fits for all’. In Basel I, the risk weights were predetermined or fixed for the credit portfolio of banks.
- The IRAC norms are also similar in nature and they are uniformly applicable to all loans and advances.
About Basel Norms:
- In 1992, the Basel Accord was introduced to strengthen the capital base of banks.
- Later in 2003, the improved version of the same was brought into force, namely Basel II. Now Basel III is in vogue.
Suggestions to tame the menace of NPAs:
According to author,
- Banks may be permitted to restructure or reschedule its payment terms at least once during the currency of the loan, if it is stressed on account of any of the reasons i.e. internal or external.
- To make IRAC norms more relevant, they need to be modified.
- The RBI or the Government must constitute a core committee to re-examine the IRAC norms see and how best they could be made more dynamic, workable and realistic.
Features of the author’s proposed committee:
The committee must have at least two or three senior bankers who have rich, varied and hands-on experience in the area of credit dispensation.
The terms of reference of the committee could be
- To review and revise the existing NPA norms and make them flexible;
- To suggest how and where restructuring could be allowed without lowering the status of the asset;
- To suggest how and where haircuts could be done while making provisions; and,
- To look into the level of freedom top management of banks can enjoy while managing stressed assets without resorting to “ever-greening” of accounts.
Such a strategy would provide a great relief to banks in the matter of handling stressed assets. More importantly, they will shift their focus to credit growth by shedding their abhorrence towards lending to new projects.[Ref: Business Line, ET]
GS (M) Paper-1 Topic: “Poverty and developmental issues”
GS (M) Paper-3 Topic: “Effects of liberalization on the economy”
Poverty and inequality after reforms
In the post-reform period since 1991, GDP growth has been much higher. However, GDP is only one metric. Ultimately, the success of reforms depends on whether the well-being of people, particularly that of poor, increased over time.
In this context, let’s examine the impact of economic reforms on poverty and inequality.
Two conclusions on trends in poverty in the post-reform period:
- According to World Bank study by Gaurav Datt and others, poverty declined by 1.36 percentage points per annum after 1991, compared to that of 0.44 percentage points per annum prior to 1991.
- Their study shows that among other things, urban growth is the most important contributor to the rapid reduction in poverty even though rural areas showed growth in the post-reform period.
- In the post-reform period, poverty declined faster in the 2000s than in the 1990s.
- The official estimates based on Tendulkar committee’s poverty lines shows that poverty declined only 0.74 percentage points per annum during 1993-94 to 2004-05. But poverty declined by 2.2 percentage points per annum during 2004-05 to 2011-12. This indicates the success of reforms in reducing poverty.
- The poverty of Scheduled Castes and Scheduled Tribes also declined faster in the 2000s.
- The Rangarajan committee report also showed faster reduction in poverty during 2009-10 to 2011-12.
However, India still has 300 million people below the poverty line.
What are the factors contributed to higher poverty reduction in the 2000s compared to the 1990s?
Following factors contributed to higher poverty reduction in the 2000s compared to the 1990s:
- Higher economic growth,
- Agriculture growth,
- Rural non-farm employment,
- Increase in real wages for rural labourers,
- Employment in construction programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
Trends in inequality in the post-reform period:
- The evidence shows that poverty declined faster but inequality increased in the post-reform period.
- The Gini coefficient measured in terms of consumption for rural India increased marginally while for urban areas during the same period there was a significant rise.
- Moreover, inequality is much higher in India if we use income rather than consumption.
- If we consider non-income indicators like health and education, inequalities between the poor and rich are much higher.
According to author,
- Policymakers must continue to follow the two-fold strategy of achieving high economic growth and direct measures through social protection programmes.
- The focus should also be on increase in urban growth and income as the share of urban poverty will rise with urbanization.
- Policymakers should create productive employment and provide quality education for reduction in poverty and inequality.
- No doubt flagship programmes like MGNREGA are important for protecting the poor. But equitable growth is much broader than this and productive inclusion in terms of generating quality employment should be the focus of any inclusive approach.
- Studies have shown that agricultural growth leads to reduction in poverty twice as that of non-agriculture.
- However, future employment has to be created in manufacturing and service. In this context, the Make in India initiative, focus on start-ups, Mudra, financial inclusion, etc., are steps in the right direction.
- Over time, the share of the organized sector has to be raised while simultaneously improving productivity in the unorganized sector.
- The need for skill development and productive jobs to reap the demographic dividend is obvious.
- For reducing inequality, some advocate measures such as redistribution of assets and wealth in favour of the poor via higher taxes for the rich. However, these may not be pragmatic solutions.
- The tax/GDP ratio has to be raised with a wider tax base.
- Fiscal instruments like public investment in physical and social infrastructure can be used to reduce inequality.
- The new generation wants equality of opportunity rather than redistributive measures. Everyone irrespective of caste, class and gender should have equal opportunities in education, health, employment and entrepreneurship. Economic and employment opportunities improve with education and skills.
Economic reforms should focus more on efficient delivery systems of public services. A major institutional challenge is the accountability of service providers, particularly the public sector. Issues like electoral reforms, crony capitalism, election funding and corruption should be part of the reform agenda to reduce inequalities.[Ref: LiveMint]
Defence & Security Issues
GS (M) Paper-3 Topic: “Security challenges and their management in border areas; linkages of organized crime with terrorism”
No substitute to accountability
- Recent complaint from J&K is that pellets used by the security forces have not only caused bodily harm, but have also injured the eyes of many demonstrators, leading to loss of sight. The Home Ministry has responded swiftly to these complaints by rushing eye specialists to J&K and also set up a committee to examine other non-lethal alternatives to pellets.
- In this context, what divides opinion is whether the techniques of such force should be so regulated that they achieve the objective of maintaining public order without transgressing human rights.
About pellets used in J&K:
- Pellets as ammunition were introduced recently in Jammu and Kashmir (J&K) in reaction to complaints of excesses in 2010 by the security forces, who were using rubber bullets to disperse stone-pelting mobs.
- While pellets may not kill the person they hit, they penetrate skin tissues and cause serious injuries. Further, they travel from the cartridge at high speed and disperse in unpredictable trajectories.
- However, according to some specialists who had examined the eyes of the injured persons, the pellets used in the State by security forces were not all round. Some were irregular and sharp-edged, capable of causing serious injuries.
- It is also important to examine the credibility of the above complaint before taking any decision to give up pellets in favour of less injurious ammunition. Any abrupt discontinuance of pellets has serious implications for the effectiveness of law enforcement in handling mobs.
- The objective should be to find out whether there is any other non-lethal method to handle demonstrations.
- The administrative response to mob violence will need to blend firmness with moderation.
Police morale vs. Government responsibility:
There are two important aspects to this controversy, which have relevance to the criminal justice system.
- Since it is difficult to quantify the amount of force that the police can legitimately employ when order is threatened, the state has a huge responsibility to quickly assess police action and punish policemen in cases of wanton violence.
- Many governments are reluctant to take action in the name of police morale. We have seen this happening over and over again in J&K. This is why opposition to the use of pellets is symbolic of the overall dislike of the police in the Valley.
- Any action to whittle down the operational autonomy of the police in disturbed areas should be taken only after great deliberation on the likely impact on police effectiveness and the morale of the forces. Otherwise there could be problems that may adversely affect the image of the government itself.
- No government can afford to be soft on lawbreakers nor can it permit arbitrary police conduct in the field.
Research in this field:
Criminal justice scholars across the world, especially in U.S. universities, have conducted serious research in this area.
- Their broad conclusions converge on the inevitability of the police resorting to force and the need to simultaneously bridle police hands so that there are no excesses.
- Indian police use tear gas, lathis, and sometimes water cannons before resorting to the use of firearms to break up violent crowds. Police firing was a rare occurrence until about two decades ago, but with growing violence in India it has become distressingly frequent.
- Judicial probes into such action have seldom ended in adverse findings against the police.
Mahatma Gandhi’s obsession with cleanliness
- In his description of life on Tolstoy Farm in South Africa, Gandhi gives an elaborate description of how one could not find refuse or dirt anywhere on the farm. Rubbish was properly buried, waste-water collected and used to water trees, a pit dug for nightsoil and converted to manure for use on the farm.
- Gandhi noted that
‘By our bad habits we spoil our sacred river banks and furnish excellent breeding grounds for flies with the result that the very flies which through our criminal negligence settle upon uncovered nightsoil defile our bodies after we have bathed.’
- Gandhi would personally clean latrines.
- He used the inauguration of Benaras Hindu University in 1916 to talk about visiting the Viswanath Temple and asks:
‘Is it right that the lanes of our sacred temple should be as dirty as they are? If even our temples are not models of roominess and cleanliness, what can our self-government be?’
- He frequently talked about cleanliness in the villages where he stopped during the salt march to Dandi in 1930.