UPSC Online Editorial Analysis
Title: What a failed bank means – The moratorium on Lakshmi Vilas Bank, and what it means for depositors and the financial sector.
Topic in the syllabus: Indian Economy and issues relating to planning, mobilization, of resources, growth,
development and employment. (GS-3)
- Non-performing asset (NPA): It is a classification used by financial institutions for loans and advances on which the principal is past due and on which no interest payments. It represents the amount of interest currently owed to lenders and is typically a current liability have been made for a period of time.
- Capital Adequacy Ratio: It is also known as Capital to Risk Assets Ratio, is the ratio of a bank’s capital to its risk. National regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. It is a measure of a bank’s capital.
- Bank advances: The extension of money from a bank to another party with the agreement that the money will be repaid. A bank loan occasionally is called a bank advance.
- Common equity Tier 1: It covers the obvious of equities a bank holds such as cash, stock, etc. The CET1 ratio compares a bank’s capital against its assets. CET1 is a measure of bank solvency that gauges a bank’s capital strength.
- Tier 1 capital: It is essentially a perfect picture of a bank’s capital and is considered as such because it is comprised of core capital. Core capital is primarily composed of disclosed reserves and common stock.
- Tier 2 capital: It is the second layer of capital that a bank must keep as part of its required reserves. This tier is comprised of revaluation reserves, general provisions, subordinated term debt, and hybrid capital instruments.
- AT-1 bonds: AT-1, short for Additional Tier-1 bonds, are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms. These bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value. If the RBI feels that a bank is tottering on the brink and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors.
- After the failures of IL&FS, Punjab & Maharashtra Cooperative Bank and DHFL, and the bailout of Yes Bank, the Reserve Bank of India decision to impose a 30-day moratorium on Lakshmi Vilas Bank Ltd (LVB) and put in place a draft scheme for its amalgamation with DBS Bank India, a subsidiary of DBS of Singapore, has raised concerns about the safety of the financial system.
Why was LVB put under moratorium and amalgamated with DBS Bank?
- The RBI said the financial position of the Chennai-based LVB, which has a network of 563 branches and deposits of Rs 20,973 crore, has undergone a steady decline, with continuous losses over the last three years eroding the bank’s net-worth.
- The bank has not been able to raise adequate capital to address these issues.
- It was also experiencing continuous withdrawal of deposits and low levels of liquidity.
- Serious governance issues in recent years have led to deterioration in its performance.
- Its gross non-performing assets (NPAs) stood 25.4% of its advances as of June 2020, as against 17.3% a year ago.
Are depositors and the financial system safe?
- The RBI, which put a cap of Rs 25,000 on withdrawals, has assured depositors of the bank that their interest will be protected.
- The combined balance sheet of DBS India and LVB would remain healthy after the proposed amalgamation, with Capital to Risk Weighted Assets Ratio (CRAR) at 12.51% and Common Equity Tier-1 (CET-1) capital at 9.61%, without taking into account the infusion of additional capital.
- One safety net for small depositors is the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, which gives insurance cover on up to Rs. 5 lakh deposits in banks.
What has gone wrong with the sector?
- The collapse of IL&FS in 2018 had set off a chain reaction in the financial sector, leading to liquidity issues and defaults.
- Punjab & Maharashtra Co-op Bank was hit by a loan scam involving HDIL promoters and the bank is yet to be bailed out. The near-death experience of Yes Bank in March 2020 sent jitters among depositors.
- The RBI action against LVB was expected after shareholders recently voted against the appointment of seven directors to its board.
- The LVB episode started unfolding after the RBI and banks led by SBI bailed out fraud-hit Yes Bank.
- The RBI has been monitoring the performance of private banks and large NBFCs.
What happens to investors in these banks?
- Shareholders in Yes Bank faced a significant erosion in wealth as the stock price crashed below Rs 10 per share from a peak of Rs 400 per share.
- In the case of LVB, equity capital is being fully written off. This means existing shareholders face a total loss on their investments.
- In the case of Yes Bank, too, some individual investors faced a total loss on their investments in AT-1 bonds.
- Nearly Rs 9,000 crore worth of AT-1 bonds sold to various institutional investors, and to high net worth individual investors in the secondary market, were fully written off.
- As per RBI rules based on the Basel-III framework, AT-1 bonds have principal loss absorption features, which can cause a full write-down or conversion to equity.
What are the issues facing old-generation private banks?
- The functioning of many such banks has been under scrutiny in the last couple of years, as most of them do not have strong promoters, making them targets for mergers or forced amalgamation.
What has been the regulatory response to these failures?
- On July 24, 2004, the RBI, then headed by Y V Reddy, announced a moratorium on private sector lender Global Trust Bank, which was then reeling under huge losses and bad loans.
- The bank was merged with public sector Oriental Bank of Commerce within 48 hours under an RBI-led rescue plan.
- Nearly 16 years later, the RBI has followed a somewhat similar approach on resuscitation of the troubled lenders of Yes Bank and now LVB.
- The moratorium announcement was followed by a reconstruction plan for Yes Bank and capital infusion by banks and financial institutions.
Will loan stress caused by the pandemic impact the banking system?
- Corporate sector debt worth Rs 15.52 lakh crore has come under stress after Covid-19 hit India, while another Rs 22.20 lakh crore was already under stress.
- This effectively means Rs 37.72 crore (72% of the banking sector debt to industry) remains under stress.
- NPAs in the banking sector are expected to increase as the pandemic affects cash flows of people and companies.
- However, the impact will differ depending upon the sector, as segments like pharmaceuticals and IT seem to have benefited in terms of revenues.
- NPA accretion in cash-rich sectors like IT, pharmaceuticals, FMCG, chemicals, automobiles are expected to be smaller when compared to areas like hospitality, tourism, aviation and other services.
- Companies in sectors such as retail trade, wholesale trade, roads and textiles are facing stress, while NBFCs, power, steel, real estate and construction were already under stress when the pandemic began.
Title: New challenges: On India and Joe Biden
Topic in the syllabus: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests. (GS-2)
Analysis about: This editorial talks about similarities in the policies of the both the leaders (Modi & Biden) & future prospects of their relations.
Important areas of the relations between two countries:
- Both the leaders committed to strengthening the Indo-U.S. Comprehensive “Global” Strategic Partnership, and cooperating on global challenges including the COVID-19 pandemic, affordable vaccines, climate change and the Indo-Pacific region.
- The leaders did not dwell on traditional security issues, global terrorism, conflict regions or even trade, but instead charted areas for Indo-U.S. cooperation that are more in line with their current challenges and indicate Mr. Biden’s own immediate priorities.
What are the immediate priorities?
- The U.S. (over 11 million cases) and India (over 8 million cases) remain the top two worst affected countries, and showing daily increases.
- Making affordable vaccines available to their afflicted populations will be the immediate challenge.
What are the similarities between the policies of both the leaders?
- Unveiling his administration’s economic revival policy, Mr. Biden announced a plan to “Buy American”, and to ensure no government contract goes to companies that do not make their products in America.
- The Modi government has already launched its “Atmanirbhar Bharat” programme on similar lines.
- On climate change, a decision by the U.S. to re-enter the Paris Accord will be welcomed by India, that is also hoping to promote cooperation on the International Solar Alliance that it co-founded in 2016 with France.
What about funding Green technologies?
- It is unclear if Mr. Biden would revive the earlier U.S. promises of funding green technology that Mr. Trump cancelled when he walked out of the Paris Accord.
What about Indo-Pacific?
- It is significant that Mr. Biden expressed his commitment to the Indo-Pacific policy, but New Delhi will be keen to see just what shape the new administration intends to take in its measures to maintain a “secure and prosperous” Indo-Pacific, and how far the Biden Administration will challenge China’s moves in the region.
The way forward:
- Critical and recent comments made by Mr. Biden and Vice-President-elect Kamala Harris over Jammu and Kashmir, the Citizenship (Amendment) Act and actions against NGOs should not make the Modi government shy from engaging with the U.S. on these issues.
Title: Reinventing cities: On urban planning and disease spread
Topic in the syllabus: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. (GS-2)
Analysis about: This editorial talks about the need of a new urban development paradigm that should be focussed on cutting disease spread.
- Prime Minister Narendra Modi’s call for a reimagining of urban planning and development to make cities and towns healthy and liveable after COVID-19 reflects the reality of decrepit infrastructure aiding the virus’s spread.
- At the Bloomberg New Economy Forum, he emphasised resetting the mindset, processes and practices for safe urban living, and acknowledged that governments actually do little for the working millions.
- In the first hundred days of the pandemic, the top 10 cities affected worldwide accounted for 15% of the total cases, and data for populous Indian cities later showed large spikes that radiated into smaller towns.
Issues related Infrastructure & the Pandemic:
- Affordable housing is the cornerstone of a sustainable and healthy city, but it also represents India’s weakest link.
- Well-designed rental housing that is key to protecting migrant labour and other less affluent sections remains poorly funded.
- Mumbai is estimated to have added only 5% of rental housing in new residential construction (1961-2000), and that too led by private funding.
- Laws on air pollution, municipal solid waste management and water quality are hardly enforced, and tokenism marks the approach to urban mobility.
How diseases led to the change in the past?
- Past scourges such as cholera, the plague and the global flu pandemic a century ago led to change — as sewerage, waste handling, social housing and health care that reduced disease.
What is the need?
- It is an opportunity to make schemes such as the Centre’s Affordable Rental Housing Complexes deliver at scale, focusing on new good houses built by the state — on the lines of the post-war reconstruction in Europe, Japan and South Korea.
- The Ministry of Housing, which has thus far focused on a limited set of expensive showpiece smart cities, could work on this imperative with the States, digitally aggregating and transparently publishing data on demand and supply for each city.
Title: The storage tale of two vaccines
Topic in the syllabus: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. (GS-2) | Science & Technology (GS-3)
Analysis about: This editorial talks about the Issue of storage facility for vaccine in India & compares the two recently developed vaccines.
- What is m-RNA?
- Messenger RNA (mRNA) is a single-stranded RNA molecule that is complementary to one of the DNA strands of a gene.
- Messenger RNA (mRNA) is a subtype of RNA.
- Main role – It plays a vital role in human biology, specifically in a process known as protein synthesis. mRNA carries genetic code from DNA in a cell’s nucleus to ribosomes, the cell’s protein-making machinery.
- What is lipid nanoparticle encapsulation?
- Margaret Liu, a vaccine researcher who chairs the board of the International Society for Vaccines, explains lipid nanoparticle encapsulation as “putting chocolate inside a candy
coating so the chocolate doesn’t melt”.
- A week after Pfizer announced encouraging results of its mRNA vaccine for COVID19 based on an interim analysis of a large Phase3 trial that is underway, data from the Phase3 trial of the vaccine of the U.S. based Moderna mRNA vaccine show that it has 94.5% efficacy in preventing COVID19.
What is the difference between Moderna & Pfizer vaccine?
- Pfizer’s mRNA vaccine requires storage at 70°C to 80°C
- The stability of the Moderna vaccine at 20°C for up to six months, 2°C8°C for 30 days, and at
room temperature for up to 12 hours
- Moderna vaccine has better thermostability at relatively higher temperatures.
How Mrna shows stability at higher temperature?
- Improving the thermostability of mRNA vaccines boils down to the nature of the lipid nanoparticle that binds the mRNA and the clean mRNA preparation in cGMP (current Good Manufacturing Practice) conditions.
- The charge interaction between the lipid nanoparticle and the mRNA renders stability to Gennova’s vaccine at higher temperature — 2°C8°C.
What is the concern?
- Despite the encapsulation with lipid nanoparticles, mRNA, which is very fragile, might fall apart,
thus necessitating storage at low temperatures.
Why Moderna vaccine is better for developing and least developed countries (also for India)?
- If making available storage facilities at such low temperatures for hundreds of million doses of the vaccine is a challenge even in the U.S. and other developed countries, it will be impossible for
countries in the Global South to establish such facilities at scales in a short time. Against this background, Moderna’s vaccine offers great promise.
- The ready availability of such a vaccine from Moderna increases the probability of wider access in most countries when millions of doses are manufactured.
- Most districts in India that are under the universal immunisation programme already have facilities to
store huge volumes of the oral polio vaccine at 20°C.
- Hence, Moderna’s mRNA vaccine can be made available in most parts of the country as it remains stable for 30 days at 2°C8°C.
How soon shall we get the vaccine?
- The issue is no vaccine manufacturer in India has tied up with Moderna to make the vaccine in India
- And as on October 31, “discussions about the terms of India’s potential participation” in GAVI’s COVAX Advance Market Commitment for COVID19 vaccines were only getting “underway”.
Title: Writing on the water
Topic in the syllabus: Government policies and interventions for development in various sectors and issues arising out of their design and implementation, Centre – state relations (GS-2)
Analysis about: This editorial talks about the need of good centre state cooperation for water governance.
- What is Jal Jeevan Mission?
- Jal Jeevan Mission, is envisioned to provide safe and adequate drinking water through individual household tap connections by 2024 to all households in rural India.
- The programme will also implement source sustainability measures as mandatory elements, such as recharge and reuse through grey water management, water conservation, rain water harvesting.
- The Jal Jeevan Mission will be based on a community approach to water and will include extensive Information, Education and communication as a key component of the mission.
- JJM looks to create a jan andolan for water, thereby making it everyone’s priority.
- A slew of bills on water awaits Parliament’s approval. Two of them, passed by the Lok Sabha, were listed for clearing by Rajya Sabha in the monsoon session — The Interstate River Water Disputes Amendment Bill 2019 and the Dam Safety Bill 2019.
- The two bills under Parliament’s consideration attend to longstanding issues of inter-state externalities.
- The Interstate River Water Disputes Amendment Bill 2019 seeks to improve the inter-state water disputes resolution by setting up a permanent tribunal supported by a deliberative mechanism, the dispute resolution committee.
- The Dam Safety Bill 2019 aims to deal with the risks of India’s ageing dams, with the help of a comprehensive federal institutional framework comprising committees and authorities for dam safety at national and state levels.
What are the issues in water governance?
- Water governance is perceived and practiced as the states’ exclusive domain, even though their powers are subject to those of the Union under the Entry 56 about inter-state river water governance.
- The River Boards Act 1956 legislated under the Entry 56 has been in disuse.
- No river board was ever created under the law.
- The Centre’s role is largely limited to resolving inter-state river water disputes. That, too, a detached one in setting up tribunals for their adjudication.
- Combined with the states’ dominant executive power, these conditions create challenges for federal water governance.
- The country is ill-equipped to address the governance of increasingly federalised waters to pursue its development and sustainability goals.
Why a coordinated response from the Centre and states is vital?
- These include emerging concerns of long-term national water security and sustainability, the risks of climate change, and the growing environmental challenges, including river pollution.
- These challenges need systematic federal response where the Centre and the states need to work in a partnership mode.
- Greater Centre-states coordination is also crucial for pursuing the current national projects — whether Ganga river rejuvenation or inland navigation or inter-basin transfers.
- Each bill proposes their own institutional mechanisms and processes leaning on closer Centre-state coordination and deliberation.
- The disputes resolution committee and dam safety authority rely on active Centre-states participation. Segmented and fragmented mechanisms bear the risks of the federal water governance gap.
How Jal jeevan mission provides an opportunity in this way?
- JJM involves large-scale intergovernmental transfers to states at a proposed outlay of Rs 3.6 lakh crore (Centre and states together) over the next five years towards universal access to safe and secure drinking water in rural areas.
- The scale of investments under JJM can be used similarly to draw states to deliberate over reworking of the larger structural contours of federal water governance.
- The massive central assistance through JJM is an opportunity to open a dialogue with the states to address this gap.
Is there any successful example of water sector reforms?
- Globally, federated systems with comparable organisation of powers have used similar investments to usher key water sector reforms.
- Australia has plans to make large investments to nudge its federal constituents towards a dialogue under its National Water Act of 2007 and to arrive at the Murray-Darling agreement.
- The experiences also suggest that inter-governmental transfers produce better outcomes when the transfers build on an ex ante federal consensus.
What is necessary?
- Drinking water supply is within the states’ domain of responsibilities. They are equipped with the institutional channels for this purpose.
- The mission has to build on these structures for enduring outcomes.
- It has to ensure that the states maintain the assets and facilities created through the mission. Such institutionalisation is most critical for JJM’s success.
- The symbiotic phase of implementing JJM can be productively used to engage in a dialogue with the states about the larger water resources management agenda, beyond the mission’s goals.
- It can discuss the contours of Centre-state partnership for the success of the above two bills and move towards a robust federal water governance ecosystem.
- The dialogue can consider the long-recommended idea of distributing responsibilities and partnership-building between the Centre and states to long-term water security goals.
- The Centre can work with the states in building a credible institutional architecture for gathering data and producing knowledge about water resources — a foundational necessity to address most federal water governance challenges.