Doubt Clearance Thread: UPSC 2021
"When in doubt, observe and ask questions. When certain, observe at length and ask many more questions."
Created this thread as a one stop solution for all members so that all the doubts wherein any conceptual clarification is required can be solved here.
Bond yields are inversely proportional to equity returns. True or False?
My take : Equity returns reduce -->Bond demand increases -->Price increases -->Yield decreases. So, bond yield and equity returns isdirectly proportional. Above statement is false.
Above statement is mentioned true. So, where am I going wrong?
@Shailputri you are correct the statement is false, maybe the answer given is false. However "equity returns are inversely proportional to bond yields " this statement is true.
Well. I crosschecked. Couldn't find that sentence over net to check its veracity. And there is possibility of question being interpreted in different ways by different persons. So, I will go with my understanding which aligns to screenshot attached by tarun earlier. Thanks for pointing out though!
I have an doubt over this.
1. Deficit financing - OMO's is a method used by RBI to buy bonds in secondary market.
2. Monetisation of deficit - when RBI buys directly from the primary market the G-sec's.
But won't the reserve money increase in both the cases ?
EDIT : I think not in both the cases.
DIFFERANCE BETWEEN ASSET RECONSTRUCTON COMPANY AND BAD BANKS?Asset Reconstruction would just tend to take find potential buyers of the strained assets . It does not take over the control of the entire assets rather just facilitate the purchase.( in layman term you can equate them to real estate broker facilitating land sale/purchase). THE ARC take these Assets on discount and then resell. they do not take direct upfront NPA's.
BAD banks will just take over the entire NPA of PSB,s . Effect will be that PSB will recover entire amount upfront. While the Bad bank will suffer the loss of the NPA,s. Burden of NPA gets transferred to bad bank.
Hope this helps.
FROM VIVEK SIRS EXPLAINATION : THIS MIGHT GIVVE MORE CLARITY REG BAD BANK :
The above is news from Hindu. Following are some relevant points.
1) Govt. of India has created a "bad bank" named "National Asset Reconstruction Company Limited (NARCL)". NARCL is owned by Government of India, which basically means NARCL/bad bank is a PSU.
2) Let us understand what the article is trying to say through an example:
Suppose SBI had earlier given loan worth Rs. 1000 crore and it turned into NPA.
So, SBI would like to sell this NPA/bad loan to the bad bank (NARCL) and recover the money and would like to focus on its banking business.
So, Bad bank will purchase this NPA from SBI but not in Rs. 1000 crore. The bad bank will try to estimate how much money it would actually be able to recover from the NPA and accordingly it would quote a price for it. If SBI also agrees then, SBI will sell this NPA/bad loan (paper) to bad bank, let us say in Rs. 300 crore. But the bad bank will not immediately pay in cash Rs. 300 crore to SBI. Rather, the bad bank will pay 15% of the agreed amount (of the Rs. 300 crore) i,e. Rs. 45 crore in cash and the rest 85% i.e. Rs. 255 crore in securities (a kind of debt paper). But what if the bad bank/NARCL in future does not pay the amount mentioned in the security ?? i.e. bad bank does not repay its debt of Rs. 255 crore.
So, as per the news article, Govt. of India has agreed to provide "Government Guarantee" on the securities that will be issued by the bad bank.
You may be wondering that why there is a need of Govt. guarantee, when the bad bank is already a Govt. company. You should know that a Govt. company can also default. Govt. of India is not legally bound to pay the liabilities of a Govt. company.
I think both of your statement are contradictry.
The name of the proposed bad bank in the name itself has ARC in it. So I don't think there is any such difference between the two.
Correct me if I am wrong.
@Shailputrihigh bond yield >money flows out of risky equity to safe and assured return on bonds >equity returns decrease. There may be exceptions but generally there's a negative relation between the two. The movement in bonds may be like 6% to 8% to 7.5% as investors flock towards bonds but in parallel equity may be going 8% to 6% to 5%.
.
RBI doesn't buy securities to provide finance to the government. That would mean the RBI gives money to the investors and so the government wouldn't actually be getting any money. RBI would have to sell securities to investors so that it can get money which can then be transferred to the government. In both cases, the money is not being printed by RBI and so there would be no increase in reserve money since it is defined as printed money.
DIFFERANCE BETWEEN ASSET RECONSTRUCTON COMPANY AND BAD BANKS?Asset Reconstruction would just tend to take find potential buyers of the strained assets . It does not take over the control of the entire assets rather just facilitate the purchase.( in layman term you can equate them to real estate broker facilitating land sale/purchase). THE ARC take these Assets on discount and then resell. they do not take direct upfront NPA's.
BAD banks will just take over the entire NPA of PSB,s . Effect will be that PSB will recover entire amount upfront. While the Bad bank will suffer the loss of the NPA,s. Burden of NPA gets transferred to bad bank.
Hope this helps.
FROM VIVEK SIRS EXPLAINATION : THIS MIGHT GIVVE MORE CLARITY REG BAD BANK :
The above is news from Hindu. Following are some relevant points.
1) Govt. of India has created a "bad bank" named "National Asset Reconstruction Company Limited (NARCL)". NARCL is owned by Government of India, which basically means NARCL/bad bank is a PSU.
2) Let us understand what the article is trying to say through an example:
Suppose SBI had earlier given loan worth Rs. 1000 crore and it turned into NPA.
So, SBI would like to sell this NPA/bad loan to the bad bank (NARCL) and recover the money and would like to focus on its banking business.
So, Bad bank will purchase this NPA from SBI but not in Rs. 1000 crore. The bad bank will try to estimate how much money it would actually be able to recover from the NPA and accordingly it would quote a price for it. If SBI also agrees then, SBI will sell this NPA/bad loan (paper) to bad bank, let us say in Rs. 300 crore. But the bad bank will not immediately pay in cash Rs. 300 crore to SBI. Rather, the bad bank will pay 15% of the agreed amount (of the Rs. 300 crore) i,e. Rs. 45 crore in cash and the rest 85% i.e. Rs. 255 crore in securities (a kind of debt paper). But what if the bad bank/NARCL in future does not pay the amount mentioned in the security ?? i.e. bad bank does not repay its debt of Rs. 255 crore.
So, as per the news article, Govt. of India has agreed to provide "Government Guarantee" on the securities that will be issued by the bad bank.
You may be wondering that why there is a need of Govt. guarantee, when the bad bank is already a Govt. company. You should know that a Govt. company can also default. Govt. of India is not legally bound to pay the liabilities of a Govt. company.
I think both of your statement are contradictry.
The name of the proposed bad bank in the name itself has ARC in it. So I don't think there is any such difference between the two.
Correct me if I am wrong.
see govt has addressed it ARC /BAD BANKS so now go with the current updated version of the statements. This means no difference as such. Earlier there was strict classification when ex-CEA arvind subramanium sir had proposed the concept of BAD BANKS.
SO yeah you are correct.
Can anyone provide a document which has details of all the international organisations like asean, eu and stuff.
La Ex - RRP 2021 International Groupings.pdf
UK01,sstarrr
sstarrr,@TheNotorious any clue from where to get all rrp pdfs ?
DIFFERANCE BETWEEN ASSET RECONSTRUCTON COMPANY AND BAD BANKS?Asset Reconstruction would just tend to take find potential buyers of the strained assets . It does not take over the control of the entire assets rather just facilitate the purchase.( in layman term you can equate them to real estate broker facilitating land sale/purchase). THE ARC take these Assets on discount and then resell. they do not take direct upfront NPA's.
BAD banks will just take over the entire NPA of PSB,s . Effect will be that PSB will recover entire amount upfront. While the Bad bank will suffer the loss of the NPA,s. Burden of NPA gets transferred to bad bank.
Hope this helps.
FROM VIVEK SIRS EXPLAINATION : THIS MIGHT GIVVE MORE CLARITY REG BAD BANK :
The above is news from Hindu. Following are some relevant points.
1) Govt. of India has created a "bad bank" named "National Asset Reconstruction Company Limited (NARCL)". NARCL is owned by Government of India, which basically means NARCL/bad bank is a PSU.
2) Let us understand what the article is trying to say through an example:
Suppose SBI had earlier given loan worth Rs. 1000 crore and it turned into NPA.
So, SBI would like to sell this NPA/bad loan to the bad bank (NARCL) and recover the money and would like to focus on its banking business.
So, Bad bank will purchase this NPA from SBI but not in Rs. 1000 crore. The bad bank will try to estimate how much money it would actually be able to recover from the NPA and accordingly it would quote a price for it. If SBI also agrees then, SBI will sell this NPA/bad loan (paper) to bad bank, let us say in Rs. 300 crore. But the bad bank will not immediately pay in cash Rs. 300 crore to SBI. Rather, the bad bank will pay 15% of the agreed amount (of the Rs. 300 crore) i,e. Rs. 45 crore in cash and the rest 85% i.e. Rs. 255 crore in securities (a kind of debt paper). But what if the bad bank/NARCL in future does not pay the amount mentioned in the security ?? i.e. bad bank does not repay its debt of Rs. 255 crore.
So, as per the news article, Govt. of India has agreed to provide "Government Guarantee" on the securities that will be issued by the bad bank.
You may be wondering that why there is a need of Govt. guarantee, when the bad bank is already a Govt. company. You should know that a Govt. company can also default. Govt. of India is not legally bound to pay the liabilities of a Govt. company.
I think both of your statement are contradictry.
The name of the proposed bad bank in the name itself has ARC in it. So I don't think there is any such difference between the two.
Correct me if I am wrong.
The bad bank concept is in some ways similar to an Asset Reconstruction Companies (ARC) but is funded by the government initially, with banks and other investors co-investing in due course. The presence of the government is seen as a means to speed up the clean-up process. ( Quoting from Vivek sir's book ). This means they are the same.
sstarrr,sjerngal
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