JULY 06 CURRENT EVENTS

Making sense of RBI’s Financial Stability Report

Context:

The Reserve Bank of India released its latest Financial Stability Report (or FSR).

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, Fiscal Policy, Taxation)

Dimensions of the Article:

1. What is the Financial Stability Report (FSR)?
2. Trends regarding data in the FSR
3. The latest 2021 FSR regarding impact of regulatory relief
4. Other Key pointers in the FSR
5. Systemic Risk Survey (SRS) April 2021

What is the Financial Stability Report (FSR)?

• Published twice each year, the FSR is one of the most crucial documents on the Indian economy as it presents an assessment of the health of the financial system.
• As such, the FSR looks sufficiency of capital for operation of Indian banks (both public and private), levels of bad loans (or non-performing assets) and their manageable limits, ability of different sectors of the economy to get credit (or new loans) for economic activity etc.
• The FSR puts together a wealth of data and information that also allows the RBI to assess the state of the domestic economy, especially in a fast-changing global economy.
• The FSR also allows the RBI to assess the macro-financial risks in the economy. [Macro-financial risks refer to the risks that originate from the financial system but affect the wider economy as well as risks to the financial system that originate in the wider economy.]
• As part of the FSR, the RBI also conducts “stress tests” to figure out what might happen to the health of the banking system if the broader economy worsens.
• With the FSR, the RBI also tries to assess how factors outside India — say the crude oil prices or the interest rates prevailing in other countries — might affect the domestic economy.
• Each FSR also contains the results of something called the Systemic Risk Surveys.

Trends regarding data in the FSR

• The RBI was most worried about bad loans shooting through the roof. According to the FSR in June 2020, depending on the level of stress in the economy, Gross NPAs could rise from 8.5% (of gross loans and advances) at the end of March 2020 to a two-decade high of as much as almost 15% by March 2021.
• In 2021, the FSR has found that the actual level of bad loans as of March 2021 is just 7.5%.
• However, the FSR is quick to point out that “macro-stress tests” for credit risk show that the GNPA ratio of Scheduled Commercial Banks “may increase from by more 2% from March 2021 to 2022 under the baseline scenario and by almost 4% under a severe stress scenario”.
• In other words, while relief provided by the RBI in the past year — cheap credit, moratoriums and facilities to restructure existing loans — has contained the number of Indian firms that openly defaulted on their loan repayment, things could yet get worse, especially for the small firms (or MSMEs).
• It all depends on factors such as the evolution of the virus (and its impact on the economy) as well as the decision of central banks the world over (especially the RBI) to raise interest rates (to contain rising inflation) and wind up their cheap money policy.

The latest 2021 FSR regarding impact of regulatory relief

• Historical experience shows that credit losses remain elevated for several years after recessions end. Indeed, in EMEs [Emerging Market Economies], non-performing assets typically peak six to eight quarters after the onset of a severe recession.
• Eventually as the support measures will be phased out, it is important to note that he longer that blanket support is continued, the higher the risk that it props up persistently unprofitable firms (‘zombies’), with adverse consequences for future economic growth”. In other words, providing excess regulatory relief might just help firms that don’t deserve to get it because they are inherently inefficient. Moreover, helping out inefficient firms in this way is eventually a burden on the taxpayers of the country.

Flip side

• If support measures are phased out before firms’ cash flows recover, however, banks will have to increase provisions and might tighten lending standards to preserve capital which might, in turn, undermine the recovery. Banks need sufficient buffers to absorb losses along the entire path to full recovery,” states the FSR.

Other Key pointers in the FSR

• The chart which shows the rate of credit growth in commercial banks indicates three things:
• One, at less than 6%, the overall rate of credit growth (blue line) is quite dismal.
• The overall rate of credit growth also shows how the sharp fall in credit growth happened much before the Covid pandemic hit India. This points to a considerable weakness in demand even before the pandemic and, in turn, suggests that recovery in credit growth may take longer than usual because the Indian economy had lost its growth momentum long before Covid.

Systemic Risk Survey (SRS) April 2021

The chart below maps the prospects of the Indian banking sector in the next year. More than 70% of the respondents felt the prospects would worsen.

The table below names the sectors with the bleakest prospects in the first half of this year.

Of course, not everyone or every sector will recover at the same pace. As the chart below shows, most experts expect a K-shaped recovery from the second Covid wave. It is noteworthy that only a paltry 8% expect a “V-shaped” recovery.

Arctic’s ‘Last Ice Area’

Context:

A part of the Arctic’s ice called “Last Ice Area”, located north of Greenland, has melted before expected. Scientists had believed this area was strong enough to withstand global warming.

Relevance:

Prelims, GS-III: Environment and Ecology (Impact of Climate Change)

Dimensions of the Article:

1. What is the Last Ice Area?
2. Risk faced by the Last Ice Area

What is the Last Ice Area?

• The Last Ice Area is a region, located north of Ellesmere Island in the Canadian territory of Nunavut and Greenland will likely harbor the largest concentration of Arctic wildlife dependent on the sea-ice edge for survival, including bowhead whales, seals, narwhals, and polar bears.
• The Last Ice region is a vulnerable region of the Arctic ocean known locally as Pikialasorsuaq which lies between Canada’s Baffin Island and Northwest Greenland, is both ecologically and culturally significant, yet rapidly disappearing in a warming Arctic.
• This is the region where summer sea ice is expected to survive the longest and therefore act as a refuge for the wildlife that depends on it and hence its importance cannot be understated.

Risk faced by the Last Ice Area

• Record-breaking temperatures have coincided with record lows in Arctic sea ice coverage in recent years, with some scientists even warning that the rate of change taking place is so rapid and remarkable that the Arctic is entering an entirely new climate state.
• The Last Ice Area is a polar region to the north of Canada and Greenland that will be critically important in light of these trends, as the walruses, polar bears and seals that rely on sea ice for sustenance and shelter fight for survival.
• Studies have found that unusual winds played a role by sweeping sea ice out of the area and contributed around 80 percent overall to the decline, while 20 percent of it was due to the multiyear ice thinning, which exposes more of the ocean to sunlight and causes the water to warm and melt surrounding ice floes.
• About 80 percent of thinning can be attributed to weather-related factors such as winds that break up and move the ice around. The remaining 20 percent can be attributed to longer-term thinning of the ice due to global warming.

U.S. Child Soldier Recruiter List (CSRL)

Context:

The United States of America has added Pakistan and 14 other countries to a Child Soldier Recruiter List that identifies foreign governments having government-supported armed groups that recruit or use child soldiers.

Relevance:

GS-II: International Relations (Important International Treaties and Agreements, India’s Neighbors)

Dimensions of the Article:

1. Child Soldiers and International Regulations
2. UN Convention on the Rights of the Child (CRC)
3. About the US Child Soldiers Prevention Act (CSPA)
4. About the Child Soldier Recruiter List of 2021
5. Criticisms of the list

Child Soldiers and International Regulations

• The recruitment or use of children below the age of 15 as soldiers is prohibited by both the UN Convention on the Rights of the Child (CRC) and the additional protocols to the Geneva Conventions, and is considered a war crime under the Rome Statute of the International Criminal Court.
• Based on the Cape Town principles (1997), child soldiers are generally defined as “any person under eighteen years of age who is a member of or attached to the armed political forces or an armed political group, whether or not there is an armed conflict.”
• In addition, the Optional Protocol to the CRC on the involvement of children in armed conflict further prohibits kids under the age 18 from being compulsorily recruited into state or non-state armed forces or directly engaging in hostilities.
• The United Nations, too, has identified the recruitment and use of child soldiers as among six “grave violations” affecting children in war and has established numerous monitoring and reporting mechanisms and initiatives to combat this practice. The UN verified that over 7,000 children had been recruited and used as soldiers in 2019 alone.

UN Convention on the Rights of the Child (CRC)

• The United Nations Convention on the Rights of the Child s an international human rights treaty which sets out the civil, political, economic, social, health and cultural rights of children.
• The Convention defines a child as any human being under the age of eighteen, unless the age of majority is attained earlier under national legislation.
• Nations that have ratified this convention or have acceded to it are bound by international law.
• The UN Committee on the Rights of the Child, composed of 18 independent experts, is responsible for supervising the implementation of the Convention by the states that have ratified it.
• Their governments are required to report to and appear before the UN Committee on the Rights of the Child periodically to be examined on their progress regarding the advancement of the implementation of the Convention and the status of child rights in their country.
• Also, individuals can appeal to the Committee on the Rights of the Child if they believe that rights, according to the Convention, have been violated.

About the US Child Soldiers Prevention Act (CSPA)

• The US Child Soldiers Prevention Act (CSPA) requires the publication in the annual Trafficking in Persons (TIP) report a list of foreign governments that have recruited or used child soldiers during the previous year.
• The law criminalizes leading a military force which recruits child soldiers. The law’s definition of child soldiers includes “any person under 18 years of age who takes a direct part in hostilities as a member of governmental armed forces.”
• The CSPA bans the United States from providing military assistance or arms sales to governments that use children in combat, but the president may waive the application of the law.
• It also requires the US Secretary of State to designate portions of the annual Human Rights Report to the issue of child soldiers.

About the Child Soldier Recruiter List of 2021

The countries which have been added to the annual TIP list of the US State Department this year are: Pakistan, Turkey, Afghanistan, Myanmar, Democratic Republic of the Congo, Iran, Iraq, Libya, Mali, Nigeria, Somalia, South Sudan, Syria, Venezuela and Yemen.

What are prohibited for countries in the list?

The following types of security assistance are prohibited for countries that are in the list:

1. Licenses for direct commercial sales of military equipment
2. Foreign military financing for the purchase of defense articles and services, as well as design and construction services
3. International military education and training
4. Excess defense articles
5. Peacekeeping operations

The countries will also not be eligible for the US Department of Defence’s “train and equip” authority for building the capacity of foreign defense forces.

Criticisms of the list

• International treaties and instruments, such as the CRC and its Optional Protocol regarding children in armed conflict, are valuable and necessary tools to establish international norms as they raise awareness regarding human rights abuses. However, these treaties are limited in scope and nature, and they tend to be idealistic rather than practicable.
• The UN’s mechanisms only bind state parties that ratify the treaties. It therefore has no authority over countries that are not parties to the convention or are non-state entities, such as rebel militias recruiting child soldiers.
• It also relies on the signatories themselves to implement its doctrines and prevent human rights abuses around the world. Therefore, most of the responsibility in preventing such abuses lies with the individual countries themselves.
• While the UN views its treaties and conventions as binding on state parties, it has no police power mechanism to enforce its decisions. Therefore, the CRC and its Optional Protocol are limited by the signatories’ willingness to comply. Somalia, for example, is a signatory but it hasn’t ratified the convention.

Beggars should also work for country: Bombay HC

Context:

The Bombay High Court said that homeless people and beggars should also work for the country as everything cannot be provided to them by the state.

Relevance:

GS-II: Polity and Governance (Constitutional Provisions, Government Policies and Interventions, Issues arising out of the design and implementation of the policies)

Dimensions of the Article:

1. Criminalization of Beggary in India
   1. Beggary Laws in India
   2. Definition of Beggary
2. Criticism: Violation of Fundamental Rights

Criminalization of Beggary in India

• Beggary laws in India is a relic of the old colonial legacy- e.g., according to the Criminal Tribes Act (1871), indigenous peoples were deemed criminals by birth and herded into concentration camps, where families were separated and forced labour was the norm. (These criminal tribes are now called denotified tribes after independence, which forms a major section of people engaged in beggary.)

Beggary Laws in India

• There is no central Act on beggary, however, many States and Union Territories have used certain sections of the Bombay Prevention of Beggary Act, 1959, (Which criminalises beggary) as the basis for their own laws.
• Through these legislations, the governments try to maintain public order, addresses forced begging or “begging rackets”, prevent annoyance to tourists.
• In India, begging was first criminalised in the 1920s, as part of a colonial logic that sought to subjugate certain communities by imputing criminality to them.
• Railway Act, 1989: says that if any person begs in any railway carriage or upon a railway station, he shall be liable for punishment as provided under sub-section (1), which prescribes imprisonment for a term that may extend to one year, or with fine that may extend to Rs. 2,000, or with both. The railways had also proposed to amend the Section stating that “No person shall be permitted to beg in any railway carriage or upon any part of the Railway”.

Definition of Beggary

• The Act defines beggary as an activity of having no visible means of subsistence, and wandering about or remaining in any public place in such condition or manner, as makes it likely that the person doing so exists by soliciting or receiving alms.
• However, the provisions of legislation aim to effectively “cleanse” these spaces of individuals who appear poor or destitute.

Criticism: Unjust Process

• People found “begging” can be arrested without a warrant, and after a summary procedure, thrown into “Beggars Homes” for anything between a year and three years.
• Also, many of these beggars homes are poorly regulated without superintendents, probation officers or doctors.

Criticism: Violation of Fundamental Rights

• Begging and homelessness are indicators of chronic poverty, therefore, criminalising poverty violates basic human dignity.
• This coupled with the draconian processes under the Act, violated the right to life and personal liberty under Article 21 of the Constitution.
• Some argue that – Begging is a peaceful method by which a person sought to communicate their situation to another, and solicit their assistance.
• Beggary is a manifestation of the fact that the person has fallen through the socially created net.
• The government has the mandate to provide social security for everyone, to ensure that all citizens have basic facilities, and the presence of beggars is evidence that the state has not managed to provide these to all its citizens.

Past Judgement by Delhi HC

• “Criminalising begging is a wrong approach to deal with the underlying causes of the problem.”
• “The State simply cannot fail to do its duty to provide a decent life to its citizens and add insult to injury by arresting, detaining and, if necessary, imprisoning persons who beg in search for essentials of bare survival”.