IASbaba's Daily Current Affairs Analysis
China, Solomon Islands sign landmark security pact
Part of: Prelims and GS II – International Relations
Context: China has announced the signing of a security pact with the Solomon Islands, despite the US and Australia raising concerns over the landmark deal that could result in China setting up a military base in the South Pacific country, close to Australia.
- According to the agreement, the two countries will conduct cooperation in such areas as maintenance of social order, protection of the safety of people’s lives and property, humanitarian assistance and natural disaster response, in an effort to help the Solomon Islands strengthen capacity building in safeguarding its own security.
- The news comes amid concerns from Australia, the US and New Zealand that the agreement would include the setting up of a military base, similar to the deal that China struck with the African nation Djibouti in 2017. But the Pacific island nation has clarified that there was no such clause in the deal.
What are the concerns?
- China’s increased military activity and influence in the Indo-Pacific could destabilize the region as the island could also be used as a stopover for China’s troops for tactical replenishments.
- A major shift in the geopolitics since it gives China direct access to the South Pacific, including Australia and New Zealand.
- The Pacific islands, in the post-World War II scenario, were exclusively under the spheres of influence of the Western powers, in particular the U.S., U.K., France and the regional heavyweights, Australia and New Zealand.
- All of them have territorial possessions in the region, with the three nuclear powers among them having used the region as a nuclear weapons testing ground.
- The smaller island nations of the region are heavily dependent on them, especially Australia as it is a resident power.
- This established power structure in the region is being increasingly challenged by China through the steady displacement of Taiwan and the cultivation of economic and political clout.
- Its proposed deal with the Solomon Islands has added a security dimension to its fast-growing profile in the region.
- Solomon Islands are strategically located for China to insert itself between America’s military bases in the Pacific islands and Australia. This is especially significant in the current scenario, given the emergence of the AUKUS (Australia, the U.K. and the U.S.) which seeks to elevate Australia’s strategic capabilities vis-à-vis China through Anglo-American cooperation.
- Solomon Islands is a sovereign country consisting of six major islands and over 900 smaller islands in Oceania, to the east of Papua New Guinea and northwest of Vanuatu.
- It is located in the southwestern Pacific Ocean.
- Its capital, Honiara, is located on the largest island, Guadalcanal.
- Have significant reserves of timber and mineral resources, along with fisheries.
India’s first pure green hydrogen plant commissioned
Part of: Prelims and GS III – Economy
Context: Oil India Limited (OIL) has taken the first significant step towards Green Hydrogen Economy in India with the commissioning of India’s First 99.999% pure Green Hydrogen pilot plant, with an installed capacity of 10 kg per day at its Jorhat Pump Station in Assam.
- Produces Green Hydrogen from the electricity generated by the existing 500kW Solar plant using a 100 kW Anion Exchange Membrane (AEM) Electrolyser array. The use of AEM technology is being used for the first time in India.
- Expected to increase its production of green hydrogen from 10 kg per day to 30 kg per day in future.
Green hydrogen is hydrogen gas produced through electrolysis of water — an energy intensive process for splitting water into hydrogen and oxygen— using renewable power to achieve this.
Green hydrogen has specific advantages –
- Environment Friendly: Green Hydrogen as energy source is seen as the next big thing as its usage would lead to zero emissions
- Potential to Decarbonise various sectors: It is a clean burning molecule, which can decarbonise a range of sectors including iron and steel, chemicals, and transportation.
- Efficient utilization of Renewable Energy: Renewable energy that cannot be stored or used by the grid can be channelled to produce hydrogen.
- Reduced Dependence on Rare Minerals: Green Hydrogen also holds the key to clean electric mobility that doesn’t depend on rare minerals. Green Hydrogen helps achieve long-term vision of reduced dependency on minerals and rare-earth element-based battery as energy storage.
- Helps Achieve Paris Goal: Green hydrogen energy is vital for India to meet its Nationally Determined Contributions and ensure regional and national energy security, access and availability
- Energy Security: Green energy helps reduce import dependency on fossil fuels
Challenges with regard to Hydrogen Fuel
- Fuelling Infrastructure: A big barrier to the adoption of hydrogen fuel cell vehicles has been a lack of fuelling station infrastructure — fuel cell cars refuel in a similar way to conventional cars, but can’t use the same station (only 500 in the world & that too in Europe, Japan, South Korea)
- Safety is seen as a concern: Hydrogen is pressurised and stored in a cryogenic tank, from there it is fed to a lower-pressure cell and put through an electro-chemical reaction to generate electricity.
- Scaling up the technology and achieving critical mass remains the big challenge. More vehicles on the road and more supporting infrastructure can lower costs.
400th Parkash Purab of Sri Guru Tegh Bahadur Ji (1621–1675)
Part of: Prelims and GS I – History
The period of history in India in the last four centuries cannot be imagined without the influence of Guru Tegh Bahadur, the ninth Sikh Guru.
- Guru Tegh Bahadur was the ninth of ten Gurus of the Sikh religion.
- Born at Amritsar in 1621, was the youngest son of Guru Hargobind.
- One hundred and fifteen of his hymns are in Guru Granth Sahib.
- There are several accounts explaining the motive behind the assassination of Guru Tegh Bahadur on Aurangzeb’s orders. He stood up for the rights of Kashmiri Pandits who approached him against religious persecution by Aurangzeb.
- He was publicly killed in 1675 on the orders of Mughal emperor Aurangzeb in Delhi for himself refusing Mughal rulers and defying them.
- Gurudwara Sis Ganj Sahib and Gurdwara Rakab Ganj Sahib in Delhi mark the places of execution and cremation of his body.
Impact of his martyrdom: The execution hardened the resolve of Sikhs against religious oppression and persecution.
- His martyrdom helped all Sikh Panths consolidate to make the protection of human rights central to its Sikh identity.
- Inspired by him, his nine-year-old son, Guru Gobind Singh Ji, eventually organized the Sikh group into a distinct, formal, symbol-patterned community came to be known as Khalsa (Martial) identity.
- GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
- GS-3: Science and Technology- developments and their applications and effects in everyday life.
Digital Banking Units (DBU)
Context: Finance Minister has reiterated her Budget announcement on setting up 75 digital banking units in 75 districts of the country this year.
What was the announcement?
- In the Budget for 2022-23, the Finance Minister had noted that in recent years, digital banking, digital payments and fintech innovations have grown at a rapid pace in the country.
- As result, government is continuously encouraging these sectors to ensure that the benefits of digital banking reach every nook and corner of the country in a consumer-friendly manner.
- Taking forward this agenda, and to mark 75 years of our independence, government proposed to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled Commercial Banks.
What are these DBUs?
- DBU is a specialised fixed point business unit housing a certain minimum digital infrastructure for delivering digital banking products and services.
- It will be a fixed business unit operating under the retail banking division of the bank and will deliver new digital products and services and service existing financial products digitally, in a cost-effective, efficient, paperless and secure manner with 24X7 availability in both self-service and assisted mode.
Who will set up these DBUs?
- Commercial banks (other than regional rural banks, payment banks and local area banks) with past digital banking experience are permitted to open DBUs in tier 1 to tier 6 centres, unless otherwise specifically restricted, without having the need to take permission from the RBI in each case.
What are the minimum Products and Services to be offered by DBUs?
- Liability Products and services: (i) Account Opening: Saving Bank account under various schemes, Current account, Fixed deposit and Recurring deposit account; (ii) Digital Kit for customers: Mobile Banking, Internet Banking, Debit Card, Credit card and mass transit system cards; (iii) Digital Kit for Merchants: UPI QR code, BHIM Aadhaar, POS, etc.
- Asset Products and services: (i) Making applications for and onboarding of customer for identified retail, MSME or schematic loans. This may also include end to end digital processing of such loans, starting from online application to disbursal; (ii) Identified Government sponsored schemes which are covered under the National Portal.
- Digital Services: (i) Cash withdrawal and Cash Deposit only through ATM and Cash Deposit Machines respectively; (ii) Passbook printing / Statement Generation; (iii) Internet Banking Kiosk which may also include facilities like Cheque Book request, receipt and online processing of various standing instructions of clients;(iv) transfer of funds (NEFT/IMPS support); (v)Digital onboarding of customers for schemes such as Atal Pension Yojana (APY); Insurance onboarding for Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha Bima Yojana (PMSBY). Etc.
What are the other key guidelines by RBI on DBUs?
- Digital Banking Customer Education: In addition to onboarding of customers in a fully digital environment, various tools and methods shall be used by DBUs to offer hands-on customer education on safe digital banking products and practices for inducing customers to self-service digital banking.
- Customer Grievances: There should be adequate digital mechanism to offer real time assistance and redress customer grievances arising from business and services offered by the DBUs directly or through Business Facilitators / Correspondents.
- Reporting Requirements: Performance update with respect to DBU shall be furnished in a RBI pre-defined reporting format. Banks shall furnish information relating to opening, closure, merger or shifting of DBUs to RBI.
- Cyber Security: In addition to ensuring physical security of the infrastructure of the DBU, adequate safeguards for cyber security of the DBUs will have to be ensured by the banks
What are the benefits of DBUs?
- Digital India: It will prompt the banks, including the traditional ones to adopt a Digital Strategy and thereby moving a step closer in realising the objectives of Digital India mission.
- Cost Effective Banking: DBUs will help banks themselves which are now looking to reduce physical footprint with fewer brick & mortar branches, with a ‘light’ banking approach.
- Increases Rural Penetration: The move will open up rural market for service providers besides providing a boost to credit flow.
- Personalised products for new age customers: The units can also be branded as new-age banks than can help provide personalised finance management tools to new customers.
- Financial Literacy: More such units will encourage more financial literacy and a favourable outlook towards digital banking – which is the need of the hour.
- Fosters Innovation: This will also prompt the launch of new products or services or transition of the existing ones to become holistically digitized, particularly for the Retail and SME segments, fostering innovation.
- Better Consumer Experience: Such units will be cheaper to establish than a new branch and can provide better customer experience aided by technology.
How will these DBUs compete with fintechs?
- Currently, fintechs operating as neobanks offer digital banking services but they do so in partnership with non-banking financial companies (NBFCs). Some of the neobanks offering services in India are Jupiter, Fi Money, Niyo, Razorpay X.
- Compared to conventional banks with online and mobile banking facilities, neobanks or digital banks excel at product innovation and offer far better digital solutions.
- However, given the arrangement they have currently with NBFCs or scheduled banks to conduct the actual banking part, some have pegged these digital banks as “glorified digital distribution companies”.
Connecting the dots;
- GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
- GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
MCLR Hike Effects
What is Marginal Cost of funds-based lending rate (MCLR)?
- Introduced by the RBI in 2016, MCLR was aimed at ensuring faster transmission of repo rate changes.
- It was designed to be a transparent rate transmission mechanism as against its predecessor — the benchmark prime lending rate or BPLR.
- Apart from the base repo rate, operating costs, current cost of carry-in cash reserve ratio and tenor premium are components of MCLR.
- MCLR proved to be effective compared to BPLR as the former factored the current cost of money, whereas BPLR was based on average cost. This ensured better transmission.
Why are banks increasing MCLR?
- After three years, SBI increased its MCLR by 10 basis points (bps), while Bank of Baroda, Axis Bank, and Kotak Mahindra Bank raised their MCLRs by 5 bps each across tenures.
- This follows the RBI’s monetary policy committee or MPC replacing the reverse repo with SDF or the standing deposit facility as the floor rate for liquidity adjustment facility.
- SDF allows the RBI to absorb liquidity (deposit) from commercial banks without giving government securities in return to the banks.
- Under reverse repo (which is a part of the Liquidity Adjustment Facility), banks will get government securities in return when they give excess cash to the RBI.
- As a standing facility, the SDF supplements Marginal Standing Facility or the MSF (SDF for liquidity absorption whereas MSF for liquidity injection).
- In effect, it incentivises banks to park more money with the RBI as SDF can earn 3.75 per cent interest as against the reverse repo at 3.35 per cent.
- SDF can have an indirect implication as banks may raise their deposit rates to attract more money into the system. As a precursor, they are tinkering with the lending rate so that the impact on banks’ profitability can be minimised.
What does it mean for borrowers?
- Borrowers are subjected to two categories of benchmark rates – MCLR and EBLR or external benchmark lending rate.
- Introduced in 2019, EBLR was intended to plug the deficiencies in MCLR, which faced the criticism of slower than expected rate transmission.
- Therefore, to further increase transparency and transmission, EBLR, which allowed banks to directly benchmark their loans against the repo rate, was introduced.
- However, EBLR is now widely used in home loans. Just recently, banks have started adopting EBLR for other retail products such as personal loans and education loans, which were earlier based on MCLR.
- However, being short-tenured, the recent hikes may not have much impact on retail loans.
- That said, over 60 per cent of corporates borrow based on MCLR. Only fresh borrowing since mid-2020 and roll over of loans to high-rated corporates are happening at EBLR. Hence, corporates may bear the brunt of a MCLR hike.
Are the banks going against the trend by increasing MCLR when RBI has kept the Bank Rate static and Monetary Policy accommodative?
- Yes and no.
- As mentioned above, the hike in SDR indirectly is a rate hike by 40 bps as it allows banks to earn more income from deposits.
- It’s a tactical tool to reduce the money supply in the market and hence to that extent banks are justified in increasing the MCLR to account and create a buffer for a possible increase in their deposit rates as well.
- However, at a time when Indian industries aren’t geared to bear higher cost of leverage, the rate hike goes against the spirit of the MPC’s accommodative stance.
- While one could say that the RBI Governor’s speech clearly signalled a tapering of easy money and a gradual increase in repo rates, sections of India Inc feel banks could have deferred the MCLR hikes by at least a quarter, to give companies a breather to plan for these rate hikes.
Does this mean that a Bank Rate increase will happen soon?
- The RBI Governor set the base for a gradual and calibrated withdrawal of excess liquidity in a non-disruptive manner earlier this month.
- Seen along with the policy action of central banks globally, it does make a case for a rate hike in India.
- Until recently, excess liquidity in the system was tapered or partially withdrawn using indirect or non-monetary tools such as VRRR (variable rate reverse repo auctions) and forex auctions.
- But these don’t help fight inflation, a battle which has now become necessary to take on, given that the recent wholesale inflation number at 14.55 per cent is at an all-time high.
- Therefore, a repo rate hike is the last ammunition that the central bank will unleash to serve the dual purpose of shirking liquidity and controlling inflation. Economists expect 50 basis points increase in repo rate by December 2022.
Connecting the dots:
(TEST YOUR KNOWLEDGE)
Model questions: (You can now post your answers in comment section)
Q.1) Which of the following are allowed to set up ‘Digital Banking Units (DBUs)?
- Regional rural banks
- Payment banks
- Local area banks
Select the correct code:
- 1 only
- 2 only
- 3 only
- None of the above
Q.2) Consider the following statements
- MCLR is the minimum rate at which banks can offer loans to end-consumers.
- When banks hike MCLR, new borrowers will have to shell out more to service their loans.
Select the correct code:
- 1 Only
- 2 Only
- Both 1 and 2
- Neither 1 nor 2
Q.3) ‘Green Hydrogen Catapult’ is launched by
- Climate Vulnerable Forum
- United Nations
- World Economic Forum
ANSWERS FOR 21st APRIL 2022 – TEST YOUR KNOWLEDGE (TYK)
On IMF’s India forecast:
On Pakistan’s frustration with the Taliban:
On freebies and its impact on fiscal position:
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