Today's Headlines

Today's Headlines - 20 January 2023

RBI proposed Loan loss provision

GS Paper - 3 (Economy)

The Reserve Bank of India (RBI) published a discussion paper on “loan loss provision”, proposing a framework for adopting an expected loss (EL)-based approach for provisioning by banks in case of loan defaults. The RBI’s proposal is based on the premise that the present “incurred loss”-based approach for provision by banks is inadequate, and there is a need to shift to the “expected credit loss” regime in order to avoid any systemic issues.

What is loan-loss provision?

  1. The RBI defines a loan loss provision as an expense that banks set aside for defaulted loans.
  2. Banks set aside a portion of the expected loan repayments from all loans in their portfolio to cover the losses either completely or partially.
  3. In the event of a loss, instead of taking a loss in its cash flows, the bank can use its loan loss reserves to cover the loss.
  4. Since the bank does not expect all loans to become impaired, there is usually enough in the loan loss reserves to cover the full loss for any one or a small number of loans when needed.
  5. An increase in the balance of reserves is called loan loss provision. The level of loan loss provision is determined based on the level expected to protect the safety and soundness of the bank.

What are the benefits of this approach?

  1. The forward-looking expected credit losses approach will further enhance the resilience of the banking system in line with globally accepted norms.
  2. It is likely to result in excess provisions as compared to shortfall in provisions as seen in the incurred loss approach, RBI said in the discussion paper.

What is the problem with the incurred loss-based approach?

  1. The incurred loss approach requires banks to provide for losses that have already occurred or been incurred.
  2. The delay in recognising expected losses under an “incurred loss” approach was found to exacerbate the downswing during the financial crisis of 2007-09.
  3. Faced with a systemic increase in defaults, the delay in recognising loan losses resulted in banks having to make higher levels of provisions which ate into the capital maintained precisely at a time when banks needed to shore up their capital. This affected banks’ resilience and posed systemic risks.

 

RBI’s report on state govt. Budgets

GS Paper -3 (Economy)

The Reserve Bank of India released its report on state government budgets for 2022-23. The report outlines how state government finances, which had come under severe stress in 2020-21 because of the slowdown in the economy due to the pandemic, have improved in the years thereafter. State governments account for a lion’s share of general government spending (central government and states), with capital expenditure by states exceeding that of the central government. Thus, state budgets are of critical importance.

Several areas of concern:

Debt-to-GDP ratio:

  1. The state debt-to-GDP ratio remains uncomfortably high. As per the report, the debt-to-GDP ratio has fallen from 31.1 per cent in 2020-21 – a year when states had struggled to manage the economic fallout of the pandemic to 29.5 per cent in 2022-23.
  2. To put it in perspective, the Fiscal Responsibility and Budget Management review committee, headed by N K Singh, had recommended a debt-to-GDP ratio of 20 per cent for states.
  3. high debt-deficit burden leaves little room for states to manoeuvre when faced with the next economic shock, states may have to pay more to service their obligations.
  4. As per the report, interest payments by states rose to 2 per cent of GDP in 2020-21, up from 1.7 per cent in 2017-18. States expect this to come down to 1.8 per cent in 2022-23.
  5. There is marked variation across states. Punjab, Tamil Nadu, Haryana and West Bengal have the highest interest payments to revenue receipts ratio.
  6. This implies that in these states, interest payments account for a sizable portion of the states’ revenues, leaving them with less room to spend on other areas of priority such as health or education.

Contingent liabilities

  1. State governments have also seen a significant expansion in their contingent liabilities. It refers to the obligations of a state government to repay the principal and interest payments in case a state-owned entity defaults on a loan.
  2. As per the report, the guarantees issued by state governments have risen from Rs 3.12 lakh crore or 2 per cent of GDP in 2017 to Rs 7.4 lakh crore or 3.7 per cent of GDP.
  3. The disaggregated data shows that the states of Andhra Pradesh, Telangana and Uttar Pradesh have the most guarantees outstanding at the end of March 2021.
  4. The perilous state of state-owned power distribution companies or discoms also has adverse implications for state finances.

Old Pension Scheme

  1. New risks have emerged with some states now opting to return to the old pension scheme.
  2. This will have adverse implications for state finances. States already allocate a significant portion of their own tax revenues towards pension — in 2020-21, Rs 3.86 lakh crore was allocated towards pension.
  3. Shifting back to the old pension scheme will only end up increasing pension liabilities, leaving even less room for more productive spending.

 

SC order against Google a landmark decision

GS Paper -2 (Judiciary)

In a major setback to Google, the Supreme Court refused to stay the Competition Commission of India’s (CCI) fine of Rs 1337 crore on the tech giant. The company had sought a stay on the fine through an appeal with the National Company Law Appellate Tribunal (NCLAT) which the SC court refused to address.

More about the news:

The fine was imposed on Google by the regulating agency over its anti-competitive policy related to Android smartphones that restricted other players from entering the Indian market.

How do decisions benefit the Indian industry?

  1. It marks a very critical step towards India breaking free from the digital slavery Google has perpetuated on Indians for the last 15 years.
  2. It is the right moment for all Indians – consumers, media, app developers, OEMs, industry and government – to come together to create our own indigenous Aatma Nirbhar ecosystem that gives India its rightful place at the forefront of the world, independent of foreign big tech monopolies.
  3. Due to Google’s anti-competitive practices,people are unable to use MapmyIndia’s Mappls app, which offers far better maps, navigation and safety features than Google Maps.
  4. It will be a watershed moment in India’s digital history.This decision will usher in a cataclysmic change in the Indian smartphone ecosystem and further improve and enhance digital penetration in our country.

Impact of the decision:

  1. The CCI order upheld by SC will aid Android in staying true to its mission of providing an open source, free, software away from Google’s restriction.

How it will provide more scope for Indian players:

  1. The CCIs wide ranging remedies go beyond Europe and will force Google to change the way it does business.
  2. It will open markets for Google’s competitors, who have long been marginalised by the tech behemoth’s vice-like grip over the Android ecosystem.
  3. India as a market offers an unprecedented untapped user base, which makes these remedies even more effective.

Google arguments:

  1. Google said,it will lead to devices getting expensive in India. It also highlighted how the proliferation of unchecked apps may cause a threat to users and national security. 
  2. Google had also argued in its blog that the CCI order which asks it to allow different versions of Android would potentially cause more damage.

 

Designation of ‘global terrorist’

GS Paper - 2 (International Relations)

Pakistan-based Abdul Rehman Makki, the deputy chief of the terror outfit Lashkar-e-Taiba, has been blacklisted as a global terrorist by the United Nations. He is the brother-in-law of Hafiz Saeed, the founder of Lashkar-e-Taiba. The UN Security Council’s 1267 Al Qaeda Sanctions Committee added 68-year-old Makki to its list of designated terrorists on 16 January 2023, after China withdrew its hold on a joint proposal by India and the US. Individuals and entities in the list are subject to the assets freeze, travel ban, and arms embargo.

Who is Abdul Rehman Makki?

  1. Makki was mainly known for his proximity to Hafiz Saeed, until the latter was jailed in 2019 for 35 years. He continues to front for him now, as he had in the past when the LeT/Jamat-ud-Dawa (JuD) leader, listed by the UN Security Council as a terrorist after the 2008 Mumbai attacks, went in and out of house arrest.
  2. The sanctions committee said that while Makki has held his leadership positions within LeT and JUD, the LeT has been responsible for or had involvement in prominent attacks, including the Red Fort Attack in which six terrorists stormed the Red Fort on 22 December 2000, and opened indiscriminate fire on the security forces present.
  3. Makki too uses the title of Hafiz, an honorific for someone who has memorised the Quran, as well as the title of Naib Emir of JuD.
  4. At one such rally in 2010, two years after the Mumbai attacks, Makki threatened “rivers of blood” in India for not handing over Kashmir to Pakistan and threatened to seize it by force.

What is the 1267 Al Qaeda Sanctions Committee?

  1. The committee is part of the UN Security Council and its job is to implement international sanctions against terrorists.
  2. The Al Qaeda committee was established as the Al-Qaida and Taliban Sanctions Committee on 15 October 1999, after Security Council Resolution 1267 designated al-Qaeda and the Taliban as terrorist bodiesIn 2011, a separate committee was formed for the Taliban.
  3. Resolution 1267 was adopted under Chapter VII of the United Nations Charter and requires all UN member states to “freeze the assets of, prevent the entry into or transit through their territories by, and prevent the direct or indirect supply, sale and transfer of arms and military equipment to any individual or entity associated with Al-Qaida, Osama bin Laden and/or the Taliban as designated by the Committee.”

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