UPSC Quiz – 2020 : IAS Daily Current Affairs Quiz Day 83

Solution (c)

Co-operative banks, which are distinct from commercial banks, were born out of the concept of co-operative credit societies where members from a community band together to extend loans to each other, at favourable terms. Credit co-operatives (or co-operative banks) are broadly classified into urban or rural co-operative banks based on their region of operation. Urban co-op banks are classified into scheduled and non-scheduled banks.

There are three key points of difference between scheduled commercial banks and co-operative banks. One, unlike commercial banks, UCBs are only partly regulated by the RBI. While their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms, their management and resolution in the case of distress is regulated by the Registrar of Co-operative Societies either under the State or Central government. Two, unlike commercial banks which are structured as joint stock companies, UCBs are structured as co-operatives, with their members carrying unlimited liability. Three, while there is a clear distinction between a commercial bank’s shareholders and its borrowers, in a UCB borrowers can double up as shareholders.

In the event UCBs fail, deposits with them are covered by the Deposit Insurance and Credit Guarantee Corporation of India up to a sum of ₹1 lakh per depositor, the same as for a commercial bank.

Source: https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-urban-co-operative-banks/article29563724.ece

Q.2) Solution (a)

Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability.

It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios. Banks with a capital to risk-weighted assets ratio (CRAR) of less than 10.25 per cent but more than 7.75 per cent fall under threshold 1.

Those with CRAR of more than 6.25 per cent but less than 7.75 per cent fall in the second threshold. In case a bank’s common equity Tier 1 (the bare minimum capital under CRAR) falls below 3.625 per cent, it gets categorised under the third threshold level.

Banks that have a net NPA of 6 per cent or more but less than 9 per cent fall under threshold 1, and those with 12 per cent or more fall under the third threshold level.

On profitability, banks with negative return on assets for two, three and four consecutive years fall under threshold 1, threshold 2 and threshold 3, respectively.

Solution (d)

A DRR ensures that a company sets aside a portion of its profits toward repayment of long-term NCDs out of its current profits. When a company that has issued NCDs goes bankrupt or faces a liquidity crunch, it usually defaults on its repayments to lenders. In such cases, the existence of the DRR reduces the investment risk for the buyer of the debentures. Though a few companies issue secured debentures (with the assets of the company as security), a DRR can help them as well, as recovery of dues by liquidating assets can take a considerable amount of time.

But on August 16, the Ministry of Corporate Affairs relaxed this DRR requirement. It said that listed companies, NBFCs registered with the Reserve Bank of India and HFCs registered with the National Housing Bank would no longer be required to maintain a DRR if they issue NCDs. The DRR requirement for unlisted companies (excluding unlisted NBFCs and HFCs) is still on, but at a lower rate of 10 per cent (against the earlier 25 per cent).

NBFCs and HFCs have been the most frequent issuers of NCDs in the market. With the DRR rule gone, the government expects more of these firms to come up with NCD issues that could ease their funding constraints. The extra money that the companies will now be left with due to no provisioning for the DRR is expected to flow into the economy by way of credit too.

Source: https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-debenture-redemption-reserve/article29261970.ece

 Solution (c)

In conventional economic theory, it is accepted that the government pays for its expenses through the taxes that it collects. To pay for the rest of the expenses, it borrows money by issuing bonds. But government borrowing has an effect of increasing the cost of borrowing or the interest rate paid by individuals and businesses.

MMT takes the opposing stance and states that countries that have the sovereign right to print their own currency can never run out of money and default. In order to default, it would have to mean that they do not have any more money to pay their creditors. But this can never be the case as long as countries are free to print as much money as they want.

So, taxes and borrowing do not pay for government spending, instead money is created through government spending. In other words, the theory gives governments the leeway to spend as much as they want on public expenditure and not worry about ballooning fiscal deficit or government debt.

MMT believes that governments can use taxes as a means to make people use the currency as well as to control inflation.

Source: https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-modern-monetary-theory/article29162150.ece

Solution (a)

Much of the natural gas being produced in the country does not command a market-determined price — that is, it is not determined by buyers and sellers based on demand-supply dynamics in the market. Rather, a formula — and a peculiar one at that — is used to fix the price of the fuel every six months. As per the formula, the domestic gas price is the weighted average price of four global benchmarks — the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas. The domestic price is based on the prices of these international benchmarks in the prior year, and kicks in with a quarter’s lag. It applies for six months. So, the price applicable from April 1 to September 30, 2019 is based on benchmark prices from January to December 2018.

This formula-based pricing has some interesting features and outcomes. One, the formula has no mention about gas actually imported into India. Typically, gas imported in Asian markets is costlier than many international benchmarks. In effect, the price of domestic gas is lower than that of gas imports. Next, the averaging of benchmark prices over the past year and then the time lag of a quarter mean that the domestic gas price movement is often out of sync with what’s really happening on the ground. For instance, global gas prices were rising for a good part of the last year but have been on a decline in the last few months. But courtesy the formula, domestic gas producers have now been handed out price hikes, even as many global producers are taking price cuts.