9 PM Daily Current Affairs Brief – 31 January 2017

The Hindu

Context

The Supreme Court latest order pertaining to reforms in BCCI

What has happened?

The Supreme Court has appointed a four-member Committee of Administrators (CoA) headed by former Comptroller and Auditor General of India Vinod Rai to oversee the Board of Control for Cricket in India (BCCI)

Other members

• Former woman Test cricketer Diana Edulji
• Historian Ramachandra Guha
• IDFC Ltd MD and CEO VikramLimaye

Interim bosses

The four will function as the interim bosses of the BCCI and run the day-to-day administration of the cricket body till the Lodha reforms are fully implemented and elections held.

Next hearing is scheduled on March 27

The Hindu

Context

The Supreme Court has refused to heed the Centre’s plea to stop hearing a batch of writ petitions on the increasing number of judicial vacancies in High Courts across the country and the delay in filling them

Centre’s plea

The Supreme Court should deal with the delay in judicial appointments in High Courts on its administrative side and not lend its judicial weight to public interest petitions filed by individuals in a “parallel proceeding” like this.

• AG representing centre said that  all problems on the delay would end if the draft Memorandum of Procedure (MoP) was finalised

Progress on MoU stalled

The government and the Supreme Court Collegium, then led by Chief Justice Khehar’s predecessor, Justice T.S. Thakur, had serious differences on several issues regarding the MoP draft, including that the AG should be consulted on judicial appointments. The last draft was handed over by the government to the Collegium in August 2016 for finalization

The Hindu

Context

Tripartite dialogue mooted with United Naga Council and State government over the ongoing highway blockade

What has happened?

The Centre has decided to hold tripartite talks with the United Naga Council (UNC) and the Manipur government to end the ongoing blockade of two national highways in Manipur, which has disrupted normal life and led to a shortage of essential commodities in the State.

The Blockade

The economic blockade imposed by the UNC, an umbrella body of Naga groups under the patronage of National Socialist Council of Nagaland (Isak-Muivah), against the Manipur government’s decision to carve out seven new districts, has continued for over four months now

Accusations on centre

The Centre has been accused of turning a blind eye to the activities of the UNC, with which the Union government had signed a framework agreement in 2015 to resolve the decades-old Naga issue

Centre’ stand

After consulting the Attorney General (AG) central government has stated that no law permitted it to interfere in the matter, as law and order was a State subject.

“We have been sending Central forces and are doing our bit. The State government has not been forthcoming to end the deadlock as the current situation would help them in the upcoming elections”, an official said

The Hindu

Context

Author tries to justify the RBI’s continuance of the cash withdrawal limits

What is a bank run?

A bank run occurs when a large number of customers of a bank or another financial institution withdraw their deposits simultaneously due to concerns about the bank’s solvency. As more people withdraw their funds, the probability of default increases, thereby prompting more people to withdraw their deposits

• A bank run is typically the result of panic rather than true insolvency on the part of the bank. However, the bank does risk default as more individuals withdraw funds; what began as panic can turn into a true default situation

How Bank runs happen?

Because banks typically keep only a small percentage of deposits as cash on hand, they must increase cash to meet depositors’ withdrawal demands. One method a bank uses to increase cash on hand is to sell off its assets, sometimes at significantly lower prices than if it did not have to sell quickly. Losses on selling the assets at lower prices can cause a bank to become insolvent. A bank panic occurs when multiple banks endure runs at the same time

How RBI prevents Bank run?

Author states that in the view of financial crisis of 2008, central banks world over are engaged in the issue of financial stability and pre-emption (predicting beforehand) of bank runs.

• Financial stability reports: RBI has started bringing out half-yearly Financial Stability Reports (FSR) since 2010, in which one section is devoted exclusively to the commercial banking sector. These reports contain sophisticated tests that gauge the risk to the banking system

• Review of the reports: These reports are reviewed by a subcommittee of the Financial Stability Development Council that functions under the Finance Ministry.

Risky business

Author states that banking is a risky business with the following risks always looming large over its head

• Liquidity risk: Banks work on the presumption that all the depositors won’t demand all their money back at the same time. If such a scenario happens. It can lead to a bank run
• Credit risk: Banks lend money and a credit risk occurs if the bank is unable to recover its loans

RBI’s role in mitigating risks

RBI as a regulator ensures that a bank is prepared to meet liquidity and credit risks.

• The capital to risk (weighted) assets ratio (CRAR) is a safeguard that the capital base of a bank is not eroded
  • CRAR: The CRAR is the capital needed for a bank measured in terms of the assets (mostly loans) disbursed by the banks. Higher the assets, higher should be the capital by the bank
• The statutory liquidity ratio (SLR) is a safeguard that a bank is able to return deposits of customers on demand

• SLR: corresponds to the percentage of liquid reserves each banks have to keep as cash reserve with themselves corresponding to the deposits they have. Banks have to mandatory keep reserves corresponding to SLR locked with themselves in the form of gold or government securities

• Adoption of international standards: In order to further mitigate these risks, the RBI is adopting international standards prescribed by the Basel Committee on Bank Supervision and the Financial Stability Board
  • It has directed banks to give up forbearance in the classification and reporting of non-performing assets (NPA) from April 1, 2015

What is credit risk?

As explained earlier, banks lend money to big borrowers like corporate houses etc. Credit risk covers possibilities of defaults by such individual borrowers and borrower groups

• Default by one borrower affects multiple banks: If because of borrower default, one bank fails, it is likely to trigger a domino effect across banks — since banks have financial linkages with each other besides exposure to the same big borrower groups. However, a bank with adequate CRAR would be able to withstand this credit shock.
  • Linkage of borrower default &corresponding CRAR fall : The December 2016 FSR reveals that CRAR would fall below 9% for two banks if there is default of the top 1 borrower group; five banks if the top two borrower groups default; 12 banks if the top five borrower groups default and as many as 22 banks if the 10 top borrower groups default

Liquidity risk scenario

A typical liquidity risk scenario covers unexpected deposit withdrawals (10% withdrawal in 10 days or a 15% withdrawal in 5 days) in banks on account of loss of depositor confidence

• The December 2016 FSR analyses the liquidity risk to the banking system on the assumption of increased withdrawals of the uninsured 10% deposits (presently these are 69% of total deposits) and unutilized portions of 75% sanctioned working capital limits
• It concludes that 11 out of the 60 banks will fail the liquidity test

Reform needed

A study titled “State intervention in banking: the relative health of Indian public sector and private sector banks” concludes the following,

• The Indian banking system needs radical reform
• It further recommends repealing the SBI Act, SBI (Subsidiary Banks) Act, and Nationalisation Acts 1970, 1980

Conclusion

Author concludes by stating that although the tests conducted under FSR reports are not fool proof but these tests do indicate that the banking system is apparently not even prepared for the withdrawal of 10% of depositors’ funds. Hence, RBI’s stand of withdrawal limit is justified.

Read More: CRAR

The Hindu

Context

The interaction between people and land is as old as human evolution

Definitions

Anthropocene

Period relating to or denoting the current geological age, viewed as the period during which human activity has been the dominant influence on climate and the environment.

Holocene

The Holocene is the name given to the last 11,700 years* of the Earth’s history — the time since the end of the last major glacial epoch, or “ice age.” Since then, there have been small-scale climate shifts — notably the “Little Ice Age” between about 1200 and 1700 A.D. — but in general, the Holocene has been a relatively warm period in between ice ages

Peri-urban areas: Those areas which are outside city limits but not quite part of the rural hinterland (remote or less developed parts of a country)

What is the urban heat island effect?

An urban heat island (UHI) is an urban area or metropolitan area that is significantly warmer than its surrounding rural areas due to human activities. Consequently, under the UHI effect the cities remain warmer than the surrounding rural areas due to a lack of vegetation or evaporation

Points from the article:-

Evolution of interaction between people and land

• Settling down of hunter-gatherers: When early hunter-gatherers started to settle down in the Neolithic transition and practice agriculture, they began to change their relationship with land in a major way
• Domestication of plants:Starting with the Holocene, approximately 11,500 years ago, many plants were domesticated for agriculture
• Formation of early cities:These and the associated social and technological changes led to dense human settlements that then paved the way for the formation of early cities

How does land-use change takes place through human activity?

Author states that land-use change takes place through human activity in several ways

• Clearance of forest areas: Forest areas are often cleared for commercial or residential purposes For example, in Indonesia, about 500 sq km of forest area are cleared each year, much of which is replaced with oil palm plantations
• Urbanization: The expansion of cities well beyond their limits transforms land use from agriculture and forests into industry, residential and commercial buildings and associated infrastructure, and horticulture
• Transformation of Per-urban areas: As urbanization increases, Peri-urban areas are transformed into supply units that fulfill the necessities of the cities. Responsibilities ranging from growing of vegetables to pumping of groundwater for industries and acting as a dumping station for waste are borne by such areas

Multiple patterns of growth in India

Author states that in India varying patterns of urban and per-urban growth can be seen resulting in different consequences for each region. Examples

• Mumbai: An excellent network of BEST (Brihanmumbai Electric Supply and Transport Undertaking) and suburban trains defined Mumbai early on in its growth
• Bengaluru and Hyderabad: Unlike Mumbai, expansion and infrastructure development in these two cities took place primarily outside the core areas with the view to establishing and supporting public sector companies such as HMT, Bharat Electronics Limited, and the Defence Research and Development Organisation, and later Information Technology companies
• Gurugram:Gurugram, south of Delhi, has become a centre for several kinds of industries and has developed into a financial and industrial hub

Implications

Author states that a city, based on its pattern of growth and expansion, can lead to particular lifestyles and restrict a quality of life for its many residents.

• Impact on climate:
  • Activities impacting climate: Interventions like converting agricultural land for housing or industry, filling up ponds and building housing complexes on lake beds, etc. impact ecosystem services and climate adaptation. These especially affect the poor who are largely reliant on ecosystems for their livelihoods
  • Change in weather pattern: According to some scientists, land cover and land management practices influence local and regional weather patterns. This is largely due to changes in aerosols, carbon, nitrogen and other gases along with the moisture in the air, heat and light

Both urban and per-urban areas are affected: The urban heat island effect is understood readily, but this also affects peri-urban regions of expansion

The Hindu

Context

The push for digitization in the wake of demonetisation and the proposal for public sector bank (PSB) consolidation are likely to top the agenda for Gyan Sangam

What is Gyan Sangam?

It is the retreat for PSBs, government-owned Financial Institutions (FI) and insurance companies

3^rd edition of Gyan Sangam

The third edition of the retreat – which will be attended by senior finance ministry officials as well as heads of PSBs, state-run FIs and insurance firms – is likely to be held in Hyderabad or Bengaluru

Topics to be taken up for discussion

• Push for digitization in the wake of demonetisation: The sessions on digitization will include presentations on increasing the use of Artificial Intelligence (AI) systems and big data analytics in the banking & financial services industry in India
• Proposal for public sector bank (PSB) consolidation
• Credit growth slowdown: The major slowdown in credit growth – to a more than six-decade low of 5.1% for the fortnight ended December 23 – and ways to revitalize it, as well as measures to effectively tackle bad loans
  • National Asset Management Company: On bad loans, the discussions are likely to be centered on the pros and cons of the proposed National Asset Management Company (or a ‘bad bank’) – a special category asset reconstruction company with stakeholders including the government and the private sector, for takeover and turnaround of bad loans, stressed assets and restructured assets
• Automation of middle management functions: Referring to the manpower shortage, especially in middle management in PSBs, the sources said the retreat would have discussions on automating many of these functions to ensure productivity improvement
• Strategies for strengthening the ‘banking correspondent’-network and increasing the usage of micro ATMs and Point of Sale machines

Expediting banking reforms: The high-profile meeting will also deliberate upon the need for the autonomous Banks Board Bureau (BBB) to expedite banking reforms including PSB consolidation

Indian Express

Context

He must stimulate the economy, keep tax incentives, and placate people post-demonetisation

In the light of upcoming Union Budget 2017, article provides us with few pointers regarding what to expect and what not to expect from it.

Give it a light read

Live Mint

Context

Digital lending has the potential to benefit Indians immensely, but it also poses some major risks

What is Digital lending?

Digital lending consists of lending through Web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment

Significance for India

• Unmet credit needs: There is a huge unmet credit need (approximately $400 billion plus per year), particularly in the microenterprise and low-income consumer segment in India
  • Borrowing from informal channels: Indians continue to borrow from family and friends, and moneylenders, sometimes at unreasonably high interest rates, primarily because these loans are more flexible and convenient
  • Inability of formal lenders: Institutional lenders are unable to lend without appropriate collateral, and the high costs of lending limit the flexibility of lending products

Enabling inclusive lending: Digitization can help

Inclusive lending means making credit available to all the sections of society at affordable costs

• India has the perfect set of conditions for digital lending which includes the fact that it is the only country in the world with a billion unique digital IDs and more than 600 million mobile-phone users

Author states that digitization can help to achieve purpose of inclusive lending. Digital data trail can be instrumental in this respect

What is a digital data trail?

It refers to the histories of an individual’s past digital activity, such as phone call and SMS records, remittance data &social media footprint

• Inclusive digital lending: Digital footprint that can be tracked, archived and used for credit assessments, opens up the potential of inclusive digital lending. Lenders can utilize digital trail to offer credit to low income groups in India. Around 40 Start-ups are already active in this segment in India

What is an API?

It is a set of functions and procedures that allow the creation of applications which access the features or data of an operating system, application, or other service

Read More: API has been explained quite beautifully here

What is India Stack?

India Stack is a complete set of API for developers and includes the Aadhaar for Authentication (Aadhaar already covers over 940 million people and will quickly cover the population of the entire nation), e-KYC documents (safe deposit locker for issue, storage and use of documents), e-Sign (digital signature acceptable under the laws), unified payment interface (for financial transactions) and privacy-protected data sharing within the stack of API.

• Together, the India Stack enables Apps that could open up many opportunities in financial services, healthcare and education sectors of the Indian economy
• What this essentially means is that developers and tech startups can now build software and create businesses around the readily available infrastructure offered through India Stack, thus opening a huge potential to tap into the booming smartphone market in the country

Note: Inclusive digital lending in India also utilizes ‘India Stack’

Risks involved

There are three major risks in the digital lending space that the Indian borrowers may face

1. Overlending: Because there is no centralized tracking of lenders and borrowers in the digital lending space, it is possible that people will end up borrowing “too much” from multiple lenders that they cannot pay back
2. Unsuitable lending: Indians—especially the marginalized, less literate consumers—may choose the wrong loan because of unclear disclosure of terms around, for example, interest, repayment time, and qualifying terms and conditions
3. Misuse of personal data: Sensitive data can be shared or sold without proper consent, as data is controlled by under-regulated non-state actors. These risks may very well lead to another lending bubble, with unintended consequences, like the one that India witnessed with the microfinance institutions crisis in 2010

Read More: Causes of Microfinance crisis, Microfinance: To hell and back, Why is bad word all over again?

Measures to mitigate risks

1. Institute strong data-sharing protocols: Because several players will have access to sensitive consumer data, there must be clear guidelines around, for example, the type of data that can be held, the length of time data can be held for, and restrictions on the use of data
2. Put in place a code of conduct for lenders: Like the Microfinance Institutions Network code of conduct, digital lenders should proactively develop and commit to a code of conduct that outlines the principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance redress
3. Super-credit bureau: Explore the possibility of creating a “super credit bureau” that tracks all digital loans and consumer/lender credit history
4. Strengthen and scale the DigiLocker initiative, which has the potential to be a safe repository of individual data, with access rights controlled by the individual

What is DigiLocker?

DigiLocker is a key initiative under Digital India, the Indian Government’s flagship program aimed at transforming India into a digitally empowered society and knowledge economy. DigiLocker ties into Digital India’s visions areas of providing citizens a shareable private space on a public cloud and making all documents / certificates available on this cloud

• Paperless governance: Targeted at the idea of paperless governance, DigiLocker is a platform for issuance and verification of documents & certificates in a digital way, thus eliminating the use of physical documents
• Dedicated cloud storage space:Indian citizens who sign up for a DigiLocker account get a dedicated cloud storage space that is linked to their Aadhaar (UIDAI) number
• Documents & certificates in locker:Organizations that are registered with Digital Locker can push electronic copies of documents and certificates (e.g. driving license, Voter ID, School certificates) directly into citizens lockers
• Storage and esigning of legacy documents: Citizens can also upload scanned copies of their legacy documents (any old documents like old drivers licence or an old ration card etc.) in their accounts. These legacy documents can be electronically signed using the eSign facility

The platform has the following benefits:

1. Citizens can access their digital documents anytime, anywhere and share it online. This is convenient and time saving
2. It reduces the administrative overhead of Government departments by minimizing the use of paper
3. Digital Locker makes it easier to validate the authenticity of documents as they are issued directly by the registered issuers
4. Self-uploaded documents can be digitally signed using the eSign facility (which is similar to the process of self-attestation)

Way forward

Authors suggest that it is the responsibility of the credit providers to invest in more user-friendly products: developing intuitive products that will help consumers better understand loans and consent protocols so they can make truly informed choices

Conclusion

Authors conclude by stating that India is on the verge of a digital lending revolution and ensuring that this lending is done responsibly can ensure the fruits of this revolution are realized