The HINDU Notes – 26th February 2018 - VISION

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Monday, February 26, 2018

The HINDU Notes – 26th February 2018

📰 New India needs women as equal partners, says Modi

A woman’s power today underlines inner fortitude and self-confidence: PM

•Prime Minister Narendra Modi has stressed the need to have women as equal partners in the development of the country.

•“Today, the country is moving forward from the path of women development to women-led development,” he said in the 41st edition of his Mann Ki Baat radio broadcast on Sunday.

•Recalling Swami Vivekananda’s words that “the idea of perfect womanhood is perfect independence”, Mr. Modi said: “This idea of Swami ji about 125 years ago expresses the contemplation of woman power in Indian culture. Today, it is our duty to ensure the participation of women in every field of life, be it social or economic life; it is also our fundamental duty.”

•The Prime Minister said a woman’s power today underlined inner fortitude and self-confidence, which made her self-reliant.

•“Not only has she herself advanced but has carried forward the country and society to newer heights ... Today the country is moving forward from the path of women development to women-led development,” he said.

•Referring to International Women’s Day observed every year on March 8, he said, “We are part of a tradition where men were identified because of women. Yashoda-Nandan, Kaushalya-Nandan, Gandhari-Putra, these were identities of a son ...”

Focus on safety

•Apart from women’s rights, Mr. Modi spoke at length about National Safety Day, National Science Day and issues such as clean energy.

•“If we are not aware of safety in our daily life, if we are not able to attain a certain level, it will get extremely difficult during the time of disasters,” he said.

•Mr. Modi regretted that while people read signboards put up on safety issues, they often ignored the messages.

•“Leave aside natural disasters, most of the mishaps are a consequence of some mistake or the other on our part. If we stay alert, abide by the prescribed rules and regulations, we shall not only be able to save our own lives but we can also prevent catastrophes harming society,” he said.

•He urged the people to inculcate safety in their day-to-day lives, stressing that India had to become a “risk-conscious” society.

•He said that till three years ago, thousands of people lost their lives every year because of heat waves.

•Since then, the National Disaster Management Authority had organised workshops on heatwave management to raise awareness among the people, the Prime Minister said.

•“In 2017, the death toll on account of heatwave remarkably came down to around 220 or so. This proves that if we accord priority to safety, we can actually attain safety,” he said.

‘Gobar Dhan’ scheme

•Mr. Modi also referred to the newly launched “Gobar Dhan” scheme for converting rural waste into clean energy through biogas under the government’s Swachch Bharat campaign. ‘Gobar Dhan’ — Galvanising Organic Bio Agro Resources — would ensure a hygienic environment in villages and monetise cattle dung and solid agricultural waste.

📰 Justin Trudeau’s discovery of India

While mutual interests can drive India-Canada ties, there needs to be greater sensitivity shown to India’s core concerns

•Through his week-long state visit, Canadian Prime Minister Justin Trudeau tried hard to expand his understanding of India and foster closer India-Canada relations. Controversies about the Khalistan issue and an unusual programme could make it easy to portray this visit as a “disaster”, “fiasco” or “bad trip”. But, doing so is neither fair nor accurate, judging by the immediate outcomes.

•At age 11, Mr. Trudeau first visited India in 1983, accompanying his father, Canadian Prime Minister Pierre Trudeau. On his India mission last week, Justin Trudeau received valuable help from his family. From the moment their plane landed in Delhi on February 17, with the Trudeau couple and their three beautiful children giving a perfect ‘Namaste, India’ shot, until their departure, the Indian public saw more of them than any other foreign VIPs in recent years. Enhancement of awareness among Indians about Canada through creative public diplomacy is no small achievement.

•The Trudeaus wore ethnic Indian costumes with grace and rare ease. Many liked it, others did not. But, the motivation of Canada’s first family was good. By doing this, they proclaimed their love for India, and showed respect for its diversity and recognition of the significant role the Indian diaspora plays in Canada’s economy and public life.

Central controversy

•The Canadian delegation should have avoided the controversy concerning the Khalistan movement, but it was self-inflicted. It stemmed from the ruling Liberal Party’s soft approach on extremist and separatist activities in Canada. In its quest for votes of sections of the Sikh community in Canada, India’s basic interests were surprisingly given short shrift by the Liberals. The silver lining now is that Mr. Trudeau returns home amply enlightened and chastened about India’s red lines. Deeper friendship is possible when Canada reins in anti-India elements.

•From the Indian viewpoint, the most important agreement signed during the visit is the “Framework for Cooperation between India and Canada on Countering Terrorism and Violent Extremism”. It commits the two nations to combating this phenomenon in all its “forms and manifestations”, and to facilitate “effective cooperation” on security, finance, justice, law enforcement and operations. Through further interaction, New Delhi is certain to ensure and monitor closely that Ottawa delivers on this commitment. Progress in this realm will spur positivity in other domains of mutual cooperation. It was reassuring that Mr. Trudeau reiterated his support for a united India.

Regional, bilateral issues

•A close commonality of views emerged on several regional issues. The two Prime Ministers called for dismantling the infrastructure of support to terrorism “from across borders of Afghanistan”, a clear reference to Pakistan. The Maldives government was urged “to ensure early resumption of the political process.” On Myanmar, the need for voluntary, safe and sustainable return of the Rohingya refugees was stressed.

•More importantly, Canada and India showed a common perspective on freedom of navigation and over-flight “throughout the Indo-Pacific region” and respect for international law, including the United Nations Convention on the Law of the Sea. Canada implicitly shared India’s reservations on China’s mega Belt and Road Initiative. The two sides agreed on their analysis of the situation in the Korean Peninsula. They considered peacekeeping as “an effective response to global challenges”. Finally, Mr. Trudeau extended strong support for India’s membership of the Nuclear Suppliers Group.

•Bilateral cooperation, progressing fairly well on a wide spectrum, is likely to blossom further, thanks to the joint initiatives agreed during the visit. A business leader saw India-Canada cooperation anchored on five Es: economy, energy, education, entertainment industry linkages, and empowerment of women. While trade is rather limited (about $6 billion in 2016), investment in both directions has been increasing steadily. Mr. Trudeau announced that understandings reached last week would result in additional investment of over $1 billion. Progress on two government-level agreements, one on investment and the other on trade was minimal as expected, but the two leaders directed officials to intensify their negotiations.

•India’s need for continued uranium exports from Canada and for state-of-art technologies relating to clean energy and renewables came through vividly in discussions. The decision to expand the scope of Ministerial Energy Dialogue is noteworthy. Besides, a new Canada-India Track 1.5 Dialogue on Innovation, Growth and Prosperity was launched. This aims to establish contours of convergence through sustained research and brainstorming among experts, officials and business people.

The way ahead

•As a capital, technology and innovation-rich economy and an open, inclusive and multi-cultural society, Canada is highly relevant to India. It is sharpening its role as a Pacific Ocean power. India’s commitment to peace and prosperity in the Indo-Pacific should deepen geopolitical affinity. Thus mutual interests are likely to impel the two nations to strengthen their strategic partnership. However, for this vision to turn into reality, the Canadian leadership needs to demonstrate greater sensitivity to India’s core concerns than what Mr. Trudeau could muster last week.

📰 A relationship adrift

India and Canada need to go back to the drawing board and urgently repair ties

•The red flags had gone up long before Canadian Prime Minister Justin Trudeau arrived for an eight-day state visit to India. For some time now, New Delhi has been sending messages of protest to Ottawa — especially after his Liberal Party shepherded a resolution in the Ontario provincial legislature calling the 1984 anti-Sikh violence “genocide”; he went on to attend a rally in Toronto organised by Khalistani groups. More recently, Mr. Trudeau’s office and the Ministry of External Affairs differed over the details of the visit. While New Delhi would have preferred a shorter, more business-like itinerary beginning with the official engagement in Delhi, Ottawa opted for a five-city tour, with a bilateral meeting with Prime Minister Narendra Modi on the penultimate day. New Delhi would have also liked the delegation to exclude Canadian ministers suspected of sympathising with extremist Sikh groups in Canada, especially as they had already been in India controversially in the past few months — but Ottawa was adamant they be included. Finally, the government wanted Mr. Trudeau to reach out to Punjab Chief Minister Amarinder Singh well ahead of the visit, as the latter had been denied a trip to Canada in 2016 and was understandably offended. But till his arrival, Mr. Trudeau’s office did not confirm a meeting with the Chief Minister. As a result, the controversies that followed the Canadian Prime Minister through the visit had gathered their own momentum. The responsibility lies on both sides, on Ottawa for its tone-deafness to Indian sensitivities, and on New Delhi for failing to press its concerns or have the visit discreetly put off until the differences were resolved. Mr. Modi’s decision to stick to protocol, and not welcome Mr. Trudeau as effusively as he has tended to do for many foreign visitors, was a signal.

•The final straw in a visit steadily turning icy was the appearance of Jaspal Atwal at an official reception, which had an embarrassed Mr. Trudeau left explaining how a man who attempted to assassinate an Indian minister in 1986 had slipped into his entourage. In turn, the Indian government was left scrambling for answers on how Mr. Atwal was even allowed into the country. The real casualty amidst all the controversies was the India-Canada bilateral relationship, which has turned frosty after a decade of excellent progress. In this period, the two sides had forged close cooperation on energy and trade, including a civil nuclear cooperation agreement and a commitment from Canadian pension funds to invest in India. India and Canada have much in common as two pluralistic, diverse democracies with very strong people-to-people ties: there is an Indian diaspora of 1.3 million in Canada, besides 100,000 Indian students. The handling of Mr. Trudeau’s visit by both Ottawa and New Delhi doesn’t do justice to these ties; both countries must work to repair the rupture.

📰 Regulating the future

It is time to work on methods of moderation that can help withAI-human interaction

•Alan Turing speculated in 1950 that around the turn of the century, it would be possible to make computers that matched the capacity of human brains, packing in about a billion neurons. He predicted that if these machines were pitted against a human interrogator in what is now known as the Turing test, they would end up fooling the interrogator into guessing that he or she was playing against a human contestant 70% of the time. It is now nearly 70 years since then, and neither has the Turing test been surpassed by any robot, nor have humans succeeded in creating artificial brains that have this capacity. However, this is not to say that such an event may never come about; rather, the question is, how do we handle that eventuality?

•More recently, David Hanson, founder of Hanson Robotics that made the humanoid Sophia, when speaking at the World Congress on Information Technology and Nasscom India Leadership Forum in Hyderabad, invoked the possibility that robots will be alive and conscious in 25 years from now. This may appear to be a far-fetched goal at the outset, judging by our success, or lack of it, with the Turing test. In particular, it is the challenge of programming the human adeptness to learn that is one of the most crucial challenges facing developers of artificial intelligence (AI) that could stand up to human competition. We just have to see a face once to recognise the person the next time. However, AI, powered by neural networks and deep learning, needs to be trained with many exposures of a face before it can recognise it.

•An arXiv paper by Delahunt et al (2017) speaks of a biological neural network experiment that by far surmounts this. The researchers mimic a moth’s olfactory system and use neurotransmitters to generate a synthetic neural network that can detect odours and learn relatively faster. If this single task should take that much thought and effort to reproduce, building an AI that can match human behaviour and be self-aware is likely to take a long time. The route to building self-aware AI that can challenge humans will therefore be an arduous route, dotted with milestones in related areas such as robotics. The ongoing rise of AI will also challenge the human condition, for example through displacement from jobs, threat of inhuman errors, and threats of hacking that can damage or even hijack the robot from its assigned duties.

•The 21st century has seen major breakthroughs in numerous fields, touching what we believe is the core of our humanness — from gene editing methods that can, in principle, produce designer babies to robots that assist in surgery, computer programs that defeat humans at various games, drive cars, and write news reports. Rather than respond with fear or suppression, it is time we started working on methods of regulation and moderation that can deal with the inevitable AI-human interaction.

📰 Centre may enact law against fugitives

The Bill cleared by the Law Ministry has provision for settling dues of creditors by disposing properties of defaulters

•The Union government may consider enacting the Fugitive Economic Offenders Bill to confiscate assets of those who flee the country and refuse to return after committing frauds in excess of Rs. 100 crore.

•Such a law assumes significance as major bank frauds have come to light in quick succession of late. Nirav Modi, a diamond merchant accused in the Rs. 11,400-crore Punjab National Bank case, and his family members are currently abroad. The passports of Mr. Modi and his uncle Mehul Choksi have been revoked.

•In another case involving Rs. 389 crore of the Oriental Bank of Commerce, a Delhi-based jewellery exporter and his business partners fled the country in 2014. Under the existing laws, the bank has failed to recover the dues in the past three years.

Feedback taken

•A draft of the Bill, which is in consonance with similar legislation in several countries, was circulated last May seeking comments from all stakeholders. The Bill was cleared by the Union Law Ministry with certain recommendations on reconciliation of provisions with the existing laws.

•The draft Bill followed an announcement in the Union Budget for 2017-18 that the government planned to introduce a legal measure to confiscate assets of the economic offenders who flee to foreign jurisdictions to escape the clutches of law.

•The move came after Vijay Mallya, who owed more than Rs. 9,000 crore to the public sector banks, flew out of the country and refused to come back. It set off prolonged and multi-pronged legal proceedings, with the government still fighting a legal battle for his extradition from the U.K.

•The draft Bill defines a fugitive economic offender as any individual against whom an arrest warrant has been issued and who has either left the country or refuses to come back to face prosecution.

•As proposed, the Enforcement Directorate will be empowered under the Prevention of Money Laundering Act (PMLA) to initiate the proceedings. It has a provision enabling repayment of dues to creditors by disposing of confiscated assets, in case the accused offender continues to evade prosecution.

•As listed in the draft Bill’s schedule, it will be applicable to various financial and allied offences as defined under the Indian Penal Code, the Prevention of Corruption Act, the Securities and Exchange Board of India Act, Customs Act and so on.

📰 Judicial appointments in a flux

Chief Justices of various High Courts and several SC judges will retire this year

•The retirement of the Chief Justice of the Manipur High Court, Abhilasha Kumari, on Friday and the retirement of the Meghalaya High Court Chief Justice, Tarun Agarwala, in March, just within a few days of their appointments as Chief Justices, reveal that judicial appointments in the High Courts remain in a constant state of flux.

•Besides Chief Justice Agarwala, six Chief Justices of various High Courts are due to retire in 2018.

•Justice Antony Dominic, Chief Justice of Kerala High Court, will retire on May 29 after a tenure of just over three months since he took oath early this month.

•Likewise, J&K High Court Chief Justice B.D. Ahmed is due to retire on March 15. Punjab and Haryana High Court Chief Justice S.J. Vazifdar will follow suit on May 3.

•Gauhati High Court Chief Justice Ajit Singh is due to retire on September 5 and Calcutta High Court Acting Chief Justice J. Bhattacharya on September 24. On October 10, Allahabad High Court Chief Justice D.B. Bhosale will also demit office.

Vacant posts

•Again, the posts of Chief Justice in seven High Courts have been lying vacant for the past several months, with Acting Chief Justices at the helm.

•Further, in the Supreme Court, with Justice Amitava Roy retiring on February 28, the vacancies will go up to seven, reducing the number of judges to 24. The sanctioned strength is 31. The Supreme Court will see five more retirements this year, including that of Chief Justice of India Dipak Misra.

•Justices Jasti Chelameswar, Madan B. Lokur and Kurian Joseph, all part of the Misra Collegium, will retire this year. The concern over the rising vacancies has become part of a judgment delivered by a Supreme Court Bench, led by Justice A.K. Sikri. “Timely judicial appointments, unfortunately, remains a far cry,” it notes.

📰 Statute Bench to solve conflict in Supreme Court

Differences between two three-judge Benches, causing concern over ‘judicial discipline’

•Chief Justice of India Dipak Misra formed a five-judge Constitution Bench, led by him, to resolve the conflict between two three-judge Benches of the Supreme Court, which has again brought to the fore the simmering tensions within the court.

•Trouble started when Justice Kurian Joseph, one of the five senior-most judges, voiced his concern in open court about fellow judges “tinkering with judicial discipline” and how the judges should function as “one” rather than in disparate voices.

Judgment overruled

•Justice Kurian was reacting to a February 8 judgment of a Bench of Justices Arun Mishra, A.K. Goel and M.M. Shantanagoudar which had overruled a 2014 judgment of a co-ordinate Bench of the then Chief Justice, R.M. Lodha, and Justices Madan B. Lokur and Kurian.

•Justice Kurian made the remarks while he was sitting along with Justices Madan B. Lokur and Deepak Gupta on February 21.

•At this hearing on compensation for land acquisition, senior counsel like Mukul Rohatgi highlighted the divergent viewpoints in the 2014 judgment and the February 8 verdict.

•Mr. Rohatgi pointed out that the February 8 decision had “unsettled a long-standing statement of law and had very serious repercussions for land acquisition cases.”

•Justice Kurian passed scathing remarks about how judicial discipline did not allow a three-judge Bench to overrule the decision of another three-judge Bench.

•He said the three-judge Bench, led by Justice Mishra, should have instead referred the question of law to a Bench of five judges.

•The day after Justice Kurian made these remarks, Justice Mishra and Justice Goel referred the land acquisition cases before their Benches to the Chief Justice.

•They asked the Chief Justice of India to decide on whether these matters should be heard by a larger Bench.

•The February 8 judgment delivered by Justice Mishra’s Bench was on compensation paid to landowners, mostly farmers, when their land was acquired.

📰 States can relax highway liquor ban

SC order on outlets in panchayat areas

•The Supreme Court gave the State governments the discretion to decide, on facts, whether areas covered by local self-governing bodies or areas proximate to municipal pockets should be exempted from the court’s nationwide prohibition on sale of liquor within 500 metres along the highways.

•On July 11, 2017, the court exempted municipal areas from the prohibition. It said the ban mainly targeted busy national and State highways inter-connecting cities, towns and villages along. The purpose of the ban, imposed in a December, 2016 judgment, was to prevent drunken driving along these busy thoroughfares. “The order does not prohibit licensed establishments within municipal areas,” the court said.

Clarification sought

•However, the July 11 order triggered more questions than answers. States, especially Tamil Nadu, came back to the court, asking whether panchayats would also come under the definition of “municipal areas” mentioned in the July 11 order. Tamil Nadu said “municipal areas” were not “intended to exclude areas within the jurisdiction of local self-governing bodies.” The States reasoned that in future, these panchayats might be developed in a manner similar to municipalities, or some of them might be geographically proximate to an urban agglomeration. They sought a clarification about the “obvious uncertainties” thrown open by the order.

•Without intervening, a Bench of Chief Justice of India Dipak Misra and Justices Amitava Roy and D.Y. Chandrachud said the court left it to the States to take a decision after examining “whether an area covered by a local self-governing body is proximate to a municipal agglomeration or is sufficiently developed” to apply the exemption granted in the July 11 order.

•“In deciding whether the principle which has been set down in the July order should be extended to a local self-governing body, the State governments would take recourse to all relevant circumstances, including the nature and extent of development in the area and the object underlying the direction prohibiting the sale of liquor on highways,” the court said.

📰 Can banking recover?

We need stricter adherence to sound banking rules and more transparency from public and private players

•The bank frauds involving Punjab National Bank (PNB) and the companies associated with businessmen Nirav Modi and Mehul Choksi as well as the Rotomac case couldn’t have come at a worse time. The Indian banking system is already reeling under the pressure of growing NPAs, or non-performing assets (less politely known as loans that are not going to be repaid), which will touch nearly Rs. 10 lakh crore by March this year. This does not include the Rs. 6 lakh crore already written-off. This has already caused a slowdown in disbursal of bank credit, in turn affecting productive investment.

Failure at many levels

•What has been revealed so far could be only the tip of the iceberg. The sheer ease with which fraudulent practices have been carried out and the length of time over which they continued suggest that the rot is much deeper. Other banks could have provided large loans without due diligence, which other companies then received without intent to repay; this means that many more loans gone bad could soon surface.

•These revelations cannot bode well for the ruling party or for a Prime Minister who had promised to be the nation’s “chowkidar” to prevent any such loot. But let us step away from the politics. It is now clear that the scams are fundamentally and overwhelmingly a failure of regulation.

•This failure has occurred at many levels. At the level of the bank, it is impossible to believe that only a handful of employees (the current fall guys) have been implicated. Senior management and auditors did not track these problematic transactions for years. The Reserve Bank of India (RBI) did not monitor banks properly and created opacity with new financial instruments. The Finance Ministry failed in its oversight and regulation. And successive Central governments, including the present one, did and have not done anything to address the obvious problems that were festering, and made them even worse.

Using LoUs

•The PNB scam relied on the existence of an unusual financial instrument, the letter of undertaking (LoU). This is a bank guarantee that enables a bank’s customer to raise short-term credit from another Indian bank’s foreign branch. It has to be another Indian bank, because the LoU as a form of underwriting other borrowing does not exist in other countries and is not even recognised by foreign banks. It was created by the RBI as an additional incentive to importers who could then avail of cheaper credit abroad, even though import credits already exist.

•These LoUs — which are equivalent to providing credit and should be recorded as contingent liabilities — were not so recorded. When loans are not repaid — in this case vast amounts borrowed from other banks based on these LoUs were apparently siphoned off to shell companies controlled by the Modi-Choksi combine — the buck stops with the issuing bank. What was intended to be trade credit was misused, with no record and monitoring of the spending from those loans. There is talk of sums in excess of Rs. 20,000 crore being involved in this case as these businessmen were alleged to be so influential that they were even able to game the SWIFT system for foreign exchange transactions.

•This case involves pure criminal fraud, but there is a thin line between fraud and the many large defaults that plague the system. Commercial bank lending is massively skewed: according to the RBI, in March 2016, 11,643 borrowers accounted for 38% of all bank loans; large corporate borrowers had the overwhelming share (84%) of bad loans. Just 12 large outstanding NPA accounted for as much as Rs. 250,000 crore.

•The issue of crony capitalism that was much criticised during the United Progressive Alliance government is alive and well under this government. Finance is one of the many ways in which concessions and advantages are distributed. Some favoured companies are not declared wilful defaulters even when the government’s own investigating agencies find that they are diverting funds. Those declared as wilful defaulters are neither punished nor prevented from leaving the country. In fact their names are not even made public, so they can continue to access loans from other banks. Some insolvent companies are made to sell their assets which are then purchased at throwaway prices by relatives or associates of the defaulting owners. Despite claims to the contrary, shell companies held by influential people continue to enable the siphoning of assets and money laundering in various forms.

Privatisation no answer

•Many analysts within and outside government have responded to these scams by pointing the finger at public sector banks, claiming that they are more vulnerable to influence peddling and crony capitalism. The current mess has also become an excuse to demand the privatisation of state-held banks. This completely misses the point since privatisation would actually make things much worse for Indian banking.

•The key issue is one of poor regulation, and not ownership. Indeed, the reason why the current scam has not led to a widespread run on the PNB and other banks is precisely because of the sovereign guarantee that, despite everything, still generates trust in the public banking system.

•Poorly regulated private banks are even more prone to scams and failure as the financial sector is rife with information asymmetries and market imperfections. Private profit orientation generates incentives for managements to exploit loopholes in the rules and engage in risky behaviour, as examples by U.S. and European bank behaviour leading to the great financial crisis of 2008-09 show. The bailouts they then require tend to be even more expensive for the public exchequer because bank runs have to be prevented.

•In India, in the decade before the nationalisation of banks in 1969, there was an average of more than 35 private bank failures every year. After the liberalising reforms of the 1990s, the collapse of the private Global Trust Bank and Centurion Bank (among others) resulted in mergers, with the losses being borne by public sector banks. Private banks such as Axis and ICICI also face large NPAs, often with the same companies that are defaulting on public banks. Kotak Mahindra Bank and several others have been found guilty of providing unsecured loans and ever-greening, practices that the PNB is now accused of. In fact, because of the opacity of banking practices, public banks are actually easier to regulate.

•So why has banking regulation in India failed to this extent? It is not only mala fide intent and corruption but also an overall approach to economic policy. The RBI may have been too occupied in counting old currency notes and dealing with the other damaging consequences of demonetisation to pay enough attention to its real job — of bank regulation. But more significantly, this government, like the previous one, has created incentives for all banks to privilege large high-profile corporate borrowers and be relatively lax on their repayment in the mistaken belief that this would encourage sustained income growth. This context makes it easy for some players to game the system.

•Recovering from this will require stricter adherence to sound banking rules and more transparency and accountability from both public and private players. But most of all, these would apply to the regulators themselves and the government that frames all this.

📰 Is the endgame for NPAs in sight?

Stock of stressed loans is stabilising, but write-offs may stretch on. Investors, not depositors, must brace for pain

•Of late, the Reserve Bank of India’s (RBI’s) attempt to purge the banking system of bad loans has begun to resemble the spring-cleaning of a long-neglected kitchen cupboard. After demolishing the first few cockroaches with glee, one is dismayed to find dozens more sauntering out of the woodwork.

•So, given that non-performing assets (NPAs) have been making headlines for nearly three years now, how far have we come in identifying the extent of these bad loans? And given the big hits that banks have been taking lately, how close are we to the endgame on NPAs?

•We take stock, using RBI’s statistical tables and its half-yearly Financial Stability Reports.

Galloping NPAs

•Gross NPAs of Indian banks, after staying below the Rs. 1 lakh-crore mark between FY06 and FY11, began to gallop from FY12. Jumping to Rs. 1.4 lakh crore in March 2012, gross NPAs proceeded to rise almost sixfold over the next five years to Rs. 7.9 lakh crore by March 2017.

•The picture is equally dire if one considers gross NPAs as a proportion of total loans. After hovering below 3% till March 2012, it soared to 10.2% by September 2017, data from RBI’s financial stability reports show. In effect, for every Rs. 100 in loans advanced by Indian banks over the years, Rs. 10 is already in default. Indian banks recognise a loan as an NPA if its interest or principal repayments are overdue for more than 90 days.

•The bulk of these NPAs have been stockpiled by public sector banks. In March 2017, they held Rs. 6.8 lakh crore of the Rs. 7.9 lakh crore bad loans; private sector banks held Rs. 91,900 crore and foreign banks the rest.

Provisions kill profits

•As soon as a bank recognises a loan as an NPA, RBI rules require it to set aside a percentage of its current profits towards the likely loss, ranging from 15% to 100% of the loan amount.

•Therefore, as banks’ NPAs soared in the last five years, bad loan provisions rose in tandem. This has directly dented their reported profits. Aggregate net profits of Indian banks have slumped from about Rs. 91,000 crore in FY13 to Rs. 43,900 crore by FY17. That there is still a profit, is thanks to private sector banks. Public sector banks in aggregate,have reported losses since FY16.

•Persisting losses pose a threat to continued operations for a bank because they eat into its capital buffers. Basel III norms require banks to maintain a minimum 9% of owned capital to its total assets (CRAR).

•RBI’s FSR reports, which keep a close watch on the capital adequacy ratios of Indian banks, have shown that Indian banks have consistently maintained a CRAR above regulatory norms in the last four years. Though private sector banks (16%) were far more comfortably placed than public sector ones (12.2%), none of the banks fell short of 9% in March 2017.

•But given the galloping NPAs, RBI’s worry is whether individual public-sector banks are teetering on the brink and runs half-yearly stress tests to assess capital adequacy. The most recent one showed that if the system GNPA ratio were to spike to an extreme 16.6%, 19 banks would fall short of 9%.

•RBI can stop worrying about capital adequacy, if only the gross NPA ratios of Indian banks showed signs of peaking out. But the higher ‘stressed advances’ ratios of Indian banks hint at more bad news to come. While the gross NPA ratios of banks were at 10.2% as of September 2017, their ‘stressed assets’ were higher at 12.2%.

•While the gross NPAs of Indian banks reflect overdue loans recognised in their books, there’s a whole bunch of dubious loans outside these, which go by the moniker of ‘stressed assets’.

•Basically, after indiscriminate lending during the boom times of 2003 to 2010, banks found that many large corporates couldn’t service their loans. They entered into restructuring deals to extend their repayment timelines, and managed to keep these loans out of their official NPA accounting, with RBI looking the other way.

•In 2014, as it became increasingly clear that ‘restructured’ was euphemism for ‘doubtful’, RBI cracked the whip on banks to estimate and account for these NPAs. This is the key reason for the sharp spike in both the stressed advances and gross NPA ratios between March 2015 and September 2017.

•While banks have reluctantly identified stressed assets, their bad loan provisions haven’t kept pace with the sprinting NPAs. As a result, as of September 2017, the average provision coverage ratio for all banks stood at about 44%. In effect, for every Rs. 100 worth of disclosed NPAs, banks had provided for losses of just Rs. 44.

•RBI is not yet done with tightening the screws either. Recently, it decreed that banks would have to take more proactive steps to report large corporate loans overdue for less than 90 days and abruptly discontinued older schemes to restructure corporate loans.

•Over the next few quarters, therefore, apart from dealing with slippages on their legacy loans, banks may have to come clean on NPAs on newer loans as well.

Is it over?

•So, given that this spring-cleaning has been on for three years now, when can we expect Indian banks to emerge squeaky clean from this exercise? There’s a long way to go. As the Economic Survey noted, resurrecting Indian banks requires four Rs — recognition, resolution, recapitalisation and reforms.

•We’re still not done with the first one — ‘Recognition’. One can presume that the first R is over and done with when the key indicators of bad loan stock — the stressed advances ratio, gross NPA ratio and the net NPA ratio — stop escalating.

•On this, FSR data for the period between September 2016 and September 2017 does offer hope. The stressed advances ratio for the banking system, after peaking at 12.3% in September 2016, has dipped a bit this year to 12.2%. The gross NPA ratio has risen by 1 percentage point to 10.2%, but the pace of increase is far slower than the 4-percentage point spike last year. Net NPAs have also just inched up from 5.4% to 5.7% over 2016-17.

•But still, stability in these ratios is contingent on no new cockroaches, such as the PNB fraud, emerging from the woodwork. It is also important that newer bank loans given out in the last three years display good behaviour.

•The rating agencies are optimistic that the stock of NPAs may not grow rapidly from here. Crisil expects the stock of gross NPAs for Indian banks to stand at 10.5% by March 2018 and stressed assets to top out at 14%. But provisioning and losses from these NPAs are expected to stretch on for the next year or two.

•Yes, depositors can take comfort from the fact that the capital adequacy problem has been addressed by the Centre’s mega recapitalisation package for public sector banks. Investors in bank stocks though, must brace for more pain.

📰 PNB: freeze on lending feared

Industry warns against halt on loans; asks Centre to address systemic risks

•Lending to corporates should not be choked as a fallout of the Rs. 11,400-crore fraud at Punjab National Bank, especially at a time when credit growth is about to recover and the economy is set to grow at a higher pace, India Inc has cautioned.

•The Indian industry had called for better control systems to check financial frauds and had also, earlier, suggested gradual reduction in government holding in public sector banks (PSBs).

•“Government, regulators and industry must act fast to address systemic risks in the financial sector. The three key solutions for the banking sector are better management and operational efficiencies, use of technology such as blockchain and big data analytics, and lowering government shareholding in public sector banks,” CII President Shobana Kamineni said in a statement.

•Assocham cautioned against allowing the alleged fraud in the PNB to halt the entire system of corporate lending as demoralisation would set in among the top functionaries and employees of government-owned banks.

•It was something the country could ill-afford at a time when credit growth was about to recover and the economy was set to grow at a higher pace, Assocham said.

Increased cover

•Meanwhile, lenders are now planning to increase insurance cover against delinquencies by their employees to protect bottomlines.

•“Frauds of such magnitude and scale... have forced us to consider substantially much higher risk cover than the basic banker’s indemnity policy,” a top public sector bank official said.

•PNB had bought a basic banker’s indemnity policy covering employee fraud up to Rs. 2 crore, which would not cover even a fraction of the value of the recent fraud.

📰 Why has coal mining been opened up?

•The Centre opened up commercial coal mining for the private sector on February 20. About 70% of power generated in India uses coal. Domestic coal has been able to meet only 75% of our annual coal demand.

What is the significance of the move?

•The government has termed it the most ambitious coal sector reform since 1973 when the sector was nationalised. With an aim to boost coal production, the state-owned Coal India Limited (CIL) was set up in 1975. Ever since, it has monopolised the sector, and is now the world’s largest coal-producer.

•With the latest decision, the Centre said, the sector will move from an era of monopoly to that of competition.

What led to this move?

•The coal ministry had, from 1993 to 2011, allocated 218 coal blocks to eligible Public Sector Undertakings and private firms for specified end-use projects, that is power, steel and cement, as well as for commercial mining by PSUs.

•However, these allocations were challenged before the Supreme Court, which in August 2014 cancelled the allocation of 204 blocks after finding that the allocations were arbitrary and illegal.

•To manage and reallocate the cancelled blocks, the Coal Mines (Special Provisions) Act, 2015 was enacted.

•In March 2017, the coal ministry brought out a discussion paper on auction of coal mines for commercial mining. The paper said “given the present demand-supply situation and the projected economic growth of the country, it will be necessary to further augment the production through commercial mining... certain mines will be offered to all eligible companies in private as well as public sector through auction mode.”

How will the February 20 decision be implemented?

•The approved methodology for auction of coal mines / blocks for sale will prioritise on transparency and ease of doing business.

•There will be an ‘ascending forward auction’ -- a two-stage online auction comprising (i) technical bid and (ii) financial bid with initial and final price offers. There will be no curbs on the sale or use of coal from the mine.

What are the benefits, and where is the catch?

•It is expected to bring in greater efficiency, technology, higher investment and more employment. It would also lead to more revenue that can be used for development of the area and inhabitants around the mine by the State. Jharkhand, Odisha, Chhattisgarh, West Bengal, Madhya Pradesh, Telangana and Maharashtra would benefit the most.

•Angel Broking said the move could be the first step towards the full privatisation of the mining sector, adding that global mining giants like BHP, Rio Tinto, Anglo American and Glencore have expressed interest in prospecting for coal in India. However, it said, coal blocks would be commercially viable only if they are offered in minimum blocks of 40-50 million tonnes.

📰 Lithium ion batteries charge up rural houses

Kaho India says its product provides power beyond the grid

•The shift towards lithium ion batteries from the older technology of lead acid batteries has allowed firms like Kaho India Private Limited to help the Centre achieve its rural electrification target even in areas beyond the reach of the grid.

•Kaho India Private Limited, started in 2012, seeks to provide last-mile energy access through compact solar modules to areas that are so far not connected to the grid. “For instance, in Chhattisgarh, there are various tribal regions with no electricity and the grid cannot reach there maybe for the next 10 years because even roads cannot be built there due to the high intensity of LWE (left wing extremism) activities,” Subhag Jain, CEO, Kaho India Private Limited, told The Hindu.

•The device, developed by the company, can power three lights, one fan, one phone charger and has a socket to power a DC-power television. The firm provides all the related appliances as well, except for the TV.

•The firm had initially developed a unit using lead acid battery but found that the short lifespan of these batteries rendered the entire product all but useless.

•“We imported 10 units for our first try in 2012, and they got sold in no time,” said Mr. Jain said. “At that time, it was priced at Rs. 5,000. But everybody complained that these systems don’t work.

•“We were in a state of shock and excitement that a Rs. 5,000 product is selling like hot cakes in spite of the customer knowing that they don’t work. Then, we stopped all commercial activity and got into an extensive R&D programme to understand why they don’t work, and what we need to do to get them to work reliably,” he added. “It took two years to identify that the problem was with the battery.” The problem, Mr. Jain explained, was that while the solar panel in the unit had a lifespan of 25 years, the lead acid batteries had a lifespan of only 2-3 years.

•“And the battery is 40% of the cost of the product,” he said. “These people don’t want to spend 40% of the cost every 2-3 years to replace the battery and that’s why the perception came that they don’t work.”

‘Search for options’

•Subsequently, the firm began looking at other battery options and settled on lithium ion batteries.

•“This solved a lot of problems for the customer as well as for a lot of government schemes as well,” he said. “In lead acid batteries, the typical calculation is that you have to put 8 VAh per peak watt of solar panel. In lithium ion, you need to do 4.8 VAh per peak watt. So, you have the size benefit. In a smaller package, we could put in more storage, so it also became cheaper for the government on a per-energy cost basis.”

•However, the introduction of the more efficient battery technology was accompanied by a rise in the price of the product. This, though, was not much of a problem for the firm because it decided to sell its products to the government instead of to individual households.

•“Now, it priced at Rs. 50,000 per unit,” Mr. Jain said. “But the government is buying them now under the REC plan and the Saubhagya scheme.”

•Another benefit of using lithium ion batteries was that they were much lighter than lead acid batteries, a key issue when delivering these units to remote locations. Also, the charging time had reduced by half with the introduction.

•“Lead acid battery is said to be charged at what is called a c/10 rate, that is, it has to be charged for 10 hours,” Mr. Jain said. “In lithium ion batteries, there are certain technologies where you can charge the battery in 10 minutes,” he added.

📰 OVL drops plan to build Iran LNG facility

•ONGC Videsh Ltd. has shelved plans to build a $5 billion LNG export facility in Iran and has, instead, opted to only invest in developing a giant gas field in the Persian Gulf for which revised cost is being worked out, an official said.

‘Best offer’

•OVL, the overseas arm of state-owned Oil and Natural Gas Corporation (ONGC), had, last year, made its ‘best’ offer to spend $11 billion in developing the Farzad-B field in the Persian Gulf as well as in building the infrastructure to export the gas but Iran deterred on awarding the rights of the field to the Indian firm owing to differences over investments and price of gas.

•The company has now agreed to do just the upstream field development part, leaving fuel marketing to Iran, the official said.

•As had been agreed during the visit of Iranian President Hassan Rouhani earlier this month, a team of OVL officials will be visiting Tehran this week to discuss modalities of the upstream development.

•“We had initially thought that the upstream field development would cost $6.2 billion. But, this is not the final cost. We will be able to arrive at the final cost only after we at least appraise the discovery we had made about a decade back,” the official said.

📰 Rustom-2 UAV takes to the skies

•The Defence Research and Development Organisation (DRDO) carried out a test-flight of the unmanned aerial vehicle Rustom-2 on Sunday.

•“This flight assumes significance because of the fact that this is the first flight in user configuration with a higher power engine. All parameters were normal,” the DRDO said in a statement. The flight was conducted at its Aeronautical Test Range in Chitradurga of Karnataka.

•Rustom-2 belongs to a family of UAVs under development, besides Rustom-1 and Rustom-H. It is a medium-altitude long-endurance drone (MALE) and will fill a critical capability gap in the inventory of the armed forces.

•It can fly up to an altitude of 22,000 feet and has an endurance of over 20 hours. It is capable of carrying payloads for electronic and signal intelligence missions. Currently, the three services employ hundreds of Israeli drones and have projected a requirement of hundreds of more UAVs, including armed variants, in the near future. The DRDO is also developing other drones in different categories.

📰 U.K. industry body to shut India office

ADS helps small entities connect with Indian partners

•A U.K. industry body which facilitates defence and aerospace partnerships has decided to shut its office in India. Member-companies have however, expressed concern at the decision. “ADS (Aerospace, Defence, Security and Space) Group has decided to shut down its India office by March end. It is likely due to funding issues,” an industry source told The Hindu .

•While a few large U.K. companies such as BAE Systems have their own offices in India, the Small and Medium Enterprises which cannot afford to do so utilise the services of ADS to connect with the Indian industry.

•The closure move was taken by its Chief Executive Paul Everitt in December. Since then about 40 members had raised objections, the source said. When contacted, Mr. Everitt, without directly referring to the closure, said in an email that ADS had made a long-term commitment to India and would continue to prioritise this relationship.

📰 Drone survey of city soon to assess green cover

Data gathered in Tirupati being studied, says official

•Keen to assess the precise green cover, the State government has initiated an aerial survey through drones and has successfully completed the study over the Tirupati region.

•It is set to take it up in the Vijayawada region now, said S. Mustafa, general manager of the Andhra Pradesh Greening and Beautification Corporation.

•Speaking to The Hindu here on Friday, he said the data gathered in the Rayalaseema region was being assessed.

•The survey would help identify green cover in a specific geographical area.

•“It will take one week to complete (the survey) in the Vijayawada region, which will be followed by Visakhapatnam,” he said.

Gardener training

•Emphasising the corporation’s efforts to improve green cover in 13 districts, he said gardening workshops were being conducted in the city and already 100 candidates were trained in the nuances of the art. Amaravati would need thousands of professional gardeners to improve green cover.

•“Experts have been roped in to teach in the month-long workshops the art of landscaping, slopping, growing ornamental plants, avenue plants, nurturing parks, bonsai trees, dealing with plant diseases and use of several implements.” Mr. Mustafa said.


•“The trained gardeners are now employed in CRDA, Amaravati Development Corporation, Rose Society, private schools, colleges and universities. Apart from unemployed youth we are training employees of civic bodies. A stipend of Rs. 300 along with breakfast and lunch would be provided to unemployed youth,” he explained.

In-house architects

•“We have in-house architects and horticulturists who will visit various municipalities and corporations in the State and give their designs as per the requirements. We are taking up green enhancement in temples and the best example is the Kanaka Durga temple here,” Mr. Mustafa said.

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