PM IAS SEPTEMBER 18 CURRENT EVENTS

Govt. sets up ‘bad bank’ to clear the NPA mess

Context:

The Cabinet has cleared a Rs. 30,600 crore guarantee programme for securities to be issued by the National Asset Reconstruction Company Limited (NARCL).

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, NPAs, Banking)

Dimensions of the Article:

1. NPA stress in the Indian financial system
2. What is an Asset Reconstruction Company?
3. What are Bad Banks?
4. National Asset Reconstruction Company Ltd (NARCL)
5. Highlights RBI’s report on Growth of the ARC Industry
6. Issues with Indian ARCs

NPA stress in the Indian financial system

• The Indian banking system has been reeling under the pressure of non-performing assets (NPAs) since 2015. The twin balance sheet problem which caused a lot of stress amounted to a huge challenge for the Indian economy.
• Twin balance sheet problem is a scenario where the balance sheets of both public sector banks (PSBs) and some corporate houses are in bad shape. It is known as the twin balance sheet problem as the challenges faced by the banks are linked to that of the corporate sector. The corporates are unable to repay their loans to banks which in turn affect the capacity of the banks to lend.
• The enhanced stresses experienced by both lenders and borrowers had the potential to lead to financial instability and also undermine the growth potential of the Indian economy.

Attempts at resolution of NPAs

• Various resolution measures like Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts were undertaken to bring down NPAs.
• In spite of these efforts, a substantial amount of NPAs continues on the balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders.

What is an Asset Reconstruction Company?

• An asset reconstruction company is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.
• The asset reconstruction companies or ARCs are registered under the RBI. Hence, RBI has the power to regulate the ARCs.
• ARCs are regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).
• The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-Performing Assets. Thus, ARCs are engaged in the business of asset reconstruction or securitization (securitization is the acquisition of financial assets either by way of issuing security receipts to Qualified Buyers or any other means) or both.
• All the rights that were held by the lender (the bank) in respect of the debt would be transferred to the ARC. The required funds to purchase such such debts can be raised from Qualified Buyers.
• The ARC can take over only secured debts which have been classified as a non-performing asset (NPA). In case debentures / bonds remain unpaid, the beneficiary of the securities is required to give a notice of 90 days before it qualifies to be taken over.

What are Bad Banks?

• A Bad Bank (usually set up as a government-backed bad bank) is technically an asset reconstruction company (ARC) or an asset management company.
• Bad banks are typically set up in times of crisis when long-standing financial institutions are trying to recuperate their reputations and wallets.

How does it work?

• A bad bank buys the bad loans and other illiquid holdings of other banks and financial institutions, which clears their balance sheet.
• A bad bank structure may also assume the risky assets of a group of financial institutions, instead of a single bank.
• The bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.

National Asset Reconstruction Company Ltd (NARCL)

• National Asset Reconstruction Company Ltd (NARCL) is the name coined for the bad bank announced in the Budget 2021-22.
• The new entity is being created in collaboration with both public and private sector banks.
• NARCL will take over identified bad loans of lenders and the lead bank with offer in hand of NARCL will go for a ‘Swiss Challenge’, where other asset reconstruction players will be invited to better the offer made by a chosen bidder for finding higher valuation of an NPA on sale. The company will pick up those assets that are 100 per cent provided for by the lenders.
• The biggest advantage of NARCL would be aggregation of identified NPAs (non-performing assets). This is expected to be more efficient in recovery as it will step into the shoes of multiple lenders who currently have different compulsions when it comes to resolving a bad loan.
• After enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, regulatory guidelines for ARCs were issued in 2003 to enable development of this sector and to facilitate smooth functioning of companies such as NARCL.

Highlights RBI’s report on Growth of the ARC Industry

• The ARC industry began with the establishment of the Asset Reconstruction Company India Ltd (ARCIL) in 2003.
• After remaining subdued in the initial years of their inception, a jump was seen in the number of ARCs in 2008, and then in 2016.
• There has been a concentration in the industry in terms of Assets Under Management (AUM) and the Security Receipts (SRs) issued.
• The growth in ARCs’ AUM has been largely trendless except for a major spurt in FY14.
• The AUM of ARCs has been on a declining trend when compared with the volume of NPAs of banks and NBFCs, except during the period of high growth in the AUM around 2013-14.
• During 2019-20, asset sales by banks to ARCs declined, which could probably be due to banks opting for other resolution channels such as Insolvency and Bankruptcy Code (IBC) and SARFAESI.

Issues with Indian ARCs

• Indian ARCs have been private sector entities registered with the Reserve Bank. Public sector AMCs in other countries have often enjoyed easy access to government funding or government-backed. The capital constraints have often been highlighted as an area of concern for ARCs in India.
• Despite the regulatory push to broaden, and thereby enhance, the capital base of these companies, they have remained reliant primarily on domestic sources of capital, particularly banks.
• Banks supply NPAs to the ARCs, hold shareholding in these entities and also lend to them, which makes it necessary to monitor if there is a “circuitous movement of funds between banks and these institutions”.

-Source: The Hindu

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China questions India’s Agni-V missile project

Context:

China cited a United Nations Security Council (UNSC) resolution issued after the 1998 nuclear tests to question India’s missile programme amid reports of an upcoming test for the Agni-V intercontinental ballistic missile.

Relevance:

GS-III: Science and Technology (Achievements of Indians in Science & Technology, Defence Technology, Indigenization of Technology)

Dimensions of the Article:

1. About Agni Missiles
2. Agni-V missile
3. Recently in news: Agni-P
4. What did China say regarding India and UNSCR 1172?

About Agni Missiles

There are 5 Agni series of missiles:

1. Agni I: Range of 700-800 km.
2. Agni II: Range more than 2000 km.
3. Agni III: Range of more than 2,500 Km
4. Agni IV: Range is more than 3,500 km and can fire from a road mobile launcher.
5. Agni-V: The longest of the Agni series, an Inter-Continental Ballistic Missile (ICBM) with a range of over 5,000 km.

Agni-V missile

• Agni-V is an Indian nuclear-capable intercontinental ballistic missile (ICBM) developed by the Defence Research and Development Organisation.
• The exact range of the Agni-V missile is classified. The missile is believed to have a range of over 5,000 km and expandable up to 8,000 km.
• It is a three-stage solid-fuelled missile.
• Agni-V incorporated advanced technologies involving ring laser gyroscope and accelerometer for navigation and guidance. A ring laser gyroscope based inertial navigation system (RLG-INS) is primarily responsible for guiding the Agni-V to its target. However, Agni-V is equipped with another guidance system called micro inertial navigation system (MINGS) as a backup. These are capable of interacting with Indian and non-Indian satellite navigation systems.
• Agni-V is also expected to feature Multiple independently targetable re-entry vehicles (MIRVs) with each missile being capable of carrying 2–10 separate nuclear warheads.
• India is the eighth country to have intercontinental ballistic missiles after the US, UK, Russia, China, France, Israel and North Korea.
• Agni V is primarily for enhancing India’s nuclear deterrence against China.

Recently in news: Agni-P

• Agni-P is a new generation advanced variant of the Agni class (under IGMDP – Integrated Guided Missile Development Program).
• It is a canisterised missile with range capability between 1,000 and 2,000 km. Canisterisation of missiles reduces the time required to launch the missile while improving its storage and mobility.
• Many advanced technologies including composites, propulsion systems, innovative guidance and control mechanisms and state-of-the-art navigation systems have been introduced. The Agni-P missile would further strengthen India’s credible deterrence capabilities.
• In comparison to other Agni class missiles, Agni-P has improved parameters including manoeuvring and accuracy.

What did China say regarding India and UNSCR 1172?

• China said that as for whether India can develop ballistic missiles capable of delivering nuclear weapons, the UNSCR 1172 already has clear stipulations and maintaining peace, security and stability in South Asia meets the common interests of all.
• China was referring to the UNSC resolution 1172, adopted in 1998 (in the aftermath of the 1998 nuclear tests) “calls upon India and Pakistan immediately to stop their nuclear weapon development programmes, to refrain from weaponisation or from the deployment of nuclear weapons, to cease development of ballistic missiles capable of delivering nuclear weapons and any further production of fissile material for nuclear weapons, to confirm their policies not to export equipment, materials or technology that could contribute to weapons of mass destruction or missiles capable of delivering them and to undertake appropriate commitments in that regard”.
• While citing the resolution regarding India’s missile programme, China has, in contrast, been aiding the development of Pakistan’s nuclear and missile programmes for decades, from providing enriched uranium and even technology for nuclear-capable missiles.

-Source: The Hindu

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WMO on Covid-19 barely cutting down carbon emissions

Context:

The virus-related economic downturn caused only a temporary downturn in CO2 emissions last year and it was not enough to reverse the rising levels of greenhouse gases in the atmosphere, the World Meteorological Organisation (WMO) said.

Relevance:

GS-III: Environment and Ecology (Environmental Pollution and Degradation, Conservation of Environment)

Dimensions of the Article:

1. World Meteorological Organization (WMO)
2. Highlights of the United in Science 2021 by WMO
3. Way Forward

Highlights of the United in Science 2021 by WMO

• The pace of climate change has not been slowed by the global Covid-19 pandemic and the world remains behind in its battle to cut carbon emissions. It has caused only a temporary downturn in carbon dioxide (CO2) emissions in 2020. High latitude regions and the Sahel are likely to be wetter over 2021–2025, than the recent past.
• Reduction targets are not being met and there is a rising likelihood the world will miss its Paris Agreement target of reducing global warming to 1.5 degrees Celsius above pre-industrial levels. There is an increasing likelihood that temperatures would temporarily breach the threshold of 1.5 degrees Celsius above the pre-industrial era, in the next five years.
• Average global temperature for the past five years was among the highest on record.
• Rising global temperatures are fuelling devastating extreme weather throughout the world, with spiralling impacts on economies and societies. Climate hazards such as heatwaves, wildfires and poor air quality combine to threaten human health worldwide, putting vulnerable populations at particular risk.
• Concentrations of major greenhouse gases in the atmosphere continued to increase last year and during the first half of 2021.
• Fossil fuel emissions from coal, gas, cement, etc were back to 2019 levels or even higher in 2021.
• Global mean sea levels rose 20 cm from 1900 to 2018. Even if emissions are reduced to limit warming to well below 2°C, global mean sea level would likely rise by 0.3-0.6 m by 2100, and could rise 0.3-3.1 m by 2300.
• An excess of 103 billion potential work hours were lost globally in 2019, compared to 2000. It was due to heat-related mortality and work impairment, caused by rising temperatures.

Way Forwards suggested by the report

• More countries should develop long-term strategies that are consistent with the 2015 Paris Agreement.
• Net-zero commitments needed to be translated into strong near-term policies and action.
• Adaptation strategies are needed where they do not exist – especially in low-lying coasts, small islands, deltas and coastal cities.
• Covid-19 recovery efforts should be aligned with national climate change and air quality strategies to reduce risks from compounding and cascading climate hazards, and gain health co-benefits.
• World needs a breakthrough on protecting people and their livelihoods, with at least half of all public climate finance committed to building resilience and helping people adapt.
• And it needs much greater solidarity, including full delivery of the long-standing climate finance pledge to help developing countries take climate action.

SOURCE https://www.thehindu.com/

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