IASbaba’s Daily Current Affairs – 28th March, 2017

  • March 28, 2017
  • 1
IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs Mar 2017, IASbaba's Daily News Analysis, National, UPSC
Print Friendly, PDF & Email

IASbaba’s Daily Current Affairs – 28th March 2017

Archives

NATIONAL/ECONOMY

TOPIC: General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
  • Government Budgeting.

Banking reforms and NPAs

Introduction

Banks are the fundamental pillars of the financial infrastructure of the economy. The last decade of growth boom was financed by the banks largely. Post the global recession the stress on banks is increasing and hence has resulted in large NPAs threatening stability. Hence the government has initiated a number of reforms.

Issue:

The Finance Ministry’s unequivocal communication to 10 state-owned lenders to submit time-bound turnaround plans, or forsake any further capital infusion from the government, is a small yet timely step in the right direction.

  • As the Reserve Bank of India had flagged in its last Financial Stability Report, risks to the banking sector remain worryingly “high”.
  • The continuous deterioration in asset quality, especially at the public sector banks (PSBs), has led to low profitability and substantial value erosion to the principal shareholder — the government.
    • As the RBI’s report pointed out, PSBs saw the proportion of their gross non-performing assets to total advances almost double in the 12 months through September 2016 to 11.8%.
    • That the Ministry has identified 10 of these PSBs to administer a dose of tough love suggests they are the ones most in need of urgent corrective action.
  • It is true that the problem of bad loans has come to such a pass that, “we simply don’t as a society have any excuse or moral liberty to let the banking sector wounds fester and result in amputation of healthier parts of the economy.”
    • This is because commercial lenders have a central role in the economy, by serving to harness public savings and directing the flow of crucial credit to the most productive industrial and infrastructure sectors.
  • When PSBs, with their revolving-door top managements, have little incentive or accountability to redress the burgeoning imbalance in their balance sheets –
    • It is time the largest shareholder delivers an ultimatum: shape up or be prepared to face the consequences.

Government’s Approach:

That the Centre has chosen to include the employees’ unions in the proposed MoUs it intends to enter into with the lenders is also indicative of the seriousness with which it is approaching the resolution this time around.

  • Staff, who have been a key element in the growth and development of the sector, have a vested interest in the health of PSBs;
    • The risk of continued failure is closure and job losses.
  • To be sure, the Centre has to work simultaneously in close concert with –
    • The banking regulator and the lenders themselves
    • To structure appropriate mechanisms
    • To enable the implementation of the turnaround plans, including resolution of the stressed assets.
  • The PSB managements would need to be empowered so that “haircuts [writedowns on the value of debt] taken by banks under a feasible plan would be required by government ruling as being acceptable by the vigilance authorities.”
  • The stipulation of a three-year time limit for the implementation of the turnaround is also significant as Indian lenders have to meet Basel III capital regulations by March 31, 2019.

Conclusion:

There is therefore little time to lose, and the government and the banks have their work cut out if India is to avoid the situation of weak banks having little incentive to lend, and economic activity affected for want of credit.

Connecting the dots:

  • Elaborate on crisis facing banks w.r.t. stressed assets and NPAs. Discuss the possible policy solution that need to be mandated.

 

NATIONAL

TOPIC:

General Studies 3

  • Issues related to direct and indirect farm subsidies and minimum support prices

General Studies 2

  • Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Farm loan waiver is not the solution

In news: In UP election, the government formed by the winning party had promised waiving off crop loans. SBI Chairman and RBI Deputy Governor have expressed their reservations against the same as it burdens the banks further and punishes those who repay their loans on time.

  • If the newly elected UP government aims to implement its poll promise of waiving off farmer loans, it will lead to writing off over Rs. 27,400 crore, or a third of the outstanding credit to agriculture in the State of over Rs. 86,000 crore, according to SBI assessment.
  • The newly elected Punjab government is also reportedly seeking assistance for a loan waiver for farmers in the state. Even Maharashtra government is under the pressure to take such actions.
  • Similar action was taken by previous government in 2008 and it cannot be evidently said that it worked in favour of small and marginal farmers. Later, even the CAG expressed reservations about such policy decisions.
  • To tread this path now, confusion will once again surround the owners, lessees and cultivators.
  • Also, with such farm loan waivers attracting the electorate, it is highly morally punishable for those who repay their loans.
  • Thus, farm loan waivers are not the right way of addressing the problems in Indian agriculture.

Helping the agriculture?

  • The agriculture contributes about 15% to India’s GDP, yet a majority of the population directly or indirectly depends on the sector for livelihood.
  • Farmers are a sizeable and powerful vote base and politically would make sense in short run—but as experience shows, it is unlikely to help the agriculture sector in the long run.
  • Loan waivers have several adverse consequences:
    • Loan waiver affect credit discipline and disrupt the credit market.
    • Evidence from the 2008 farm loan waiver shows that bank lending moved away from districts with greater exposure to the loan waiver. Such outcomes can affect agricultural output in the medium to long run as banks may get more selective in extending credit.
    • It was said that farmers were not able to invest because of debt overhang. However, a by World Bank did not find any improvement in investment consumption or positive labour market outcomes in areas where debt relief led to a significant reduction of household debt.
    • Another study by Harvard Business School in 2008 showed that agricultural credit extended by government-owned banks goes up in an election year, while defaults also increase during election This again highlights that political intervention distorts the credit market.
    • Huge fiscal cost– The 2008 farm loan waiver, which benefited about 37 million farmers, resulted in a cost of over Rs. 52,000 crore to the exchequer. Similar will be the case if implemented this time too. On the contrary, expenditure on loan waivers will eventually leave less fiscal space for public expenditure in agriculture.

Steps that can be taken

  • It should be noted that, credit restructuring is done to industries too on the outstanding amount, often away from public glare. Similarly, an attempt can be made to restructure bad farm loans (particularly in regions where farmers’ suicides have taken place), before writing it off.
  • However, in the medium term, crop insurance should emerge as the main vehicle to cope with rural distress. The sudden stress on waivers, which runs contrary to the Pradhan Mantri Fasal Bima Yojana, points to an unwillingness to confront the real issues in agriculture.
  • Union FM has categorically said that Centre will not foot the bill in the case of loan waivers. Hence it is best that centre and states stay away from this course.
  • Instead of focussing on ramping up agricultural credit, efforts should be made to improve the institutions in this regard. This includes:
    • Strengthening rural credit cooperatives
    • Making rural credit cooperatives more publicly managed rather than government-controlled
    • SHGs could act as source of credit, but should not be burdened with onerous credit targets, as in the past
    • Jan Dhan accounts can arrest the trend towards informalisation of credit, provided the emerging banking systems and technologies work to the advantage of the farmers.
  • India needs massive investment in areas such as irrigation, water conservation, better storage facilities, market connectivity and agricultural research.

Conclusion

Agriculture needs better technologies to improve yields and combat the vagaries of rainfall and temperature, and better prices for its produce. The problems in Indian agriculture are structural. They need long-term solutions. Loan waivers will only end up complicating the problem. Loan waiver is a self-fulfilling cycle with long-term consequences—defaults would warrant loan waivers, and waivers will lead to more defaults. The Indian economy has suffered a lot due to competitive populism in the past. It’s time parties and governments addressed the real issues.

Connecting the dots:

  • Are farm loan waivers a suitable option to improve agricultural performance in economic and social sphere of lives? Critically examine.

MUST READ

Powered by a pause: delay in Indo-U.S. nuclear deal

Hindu

 

Turning the clock back

Hindu

 

Giving short shrift to children’s rights

Hindu

 

Halting the welfare state

Indian Express

 

Meat of the matter

Indian Express

 

Dismantling the permit raj in housing

Livemint

 

The foundation of Aadhaar

Livemint

 

We need Aadhaar, and much more

Business Line

 

Search now.....

Sign Up To Receive Regular Updates