THE INDIAN ECONOMY

1. BIOENERGY CROPS CREATE A COOLING EFFECT ON CULTIVATED AREAS

THE CONTEXT: Researchers found that global air temperature decreases by 0.03~0.08 °C, with strong regional contrasts and inter-annual variability, after 50 years of large-scale bioenergy crop cultivation.

THE EXPLANATION:

• The researchers — led by Institute for Global Change Studies, Beijing — looked at the biophysical climate effects of large-scale bioenergy crops to fully assess their role in climate mitigation.
• According to a new study, converting annual crops to perennial bioenergy crops can induce a cooling effect on the areas where they are cultivated.
• Cultivation area under bioenergy crops occupies 8 percent ± 0.5 percent of the global total land area, but they exert strong regional biophysical effects, leading to a global net change in air temperature of −0.08 ~ +0.05 degrees Celsius.
• The study also demonstrated the importance of the crop type choice, the original land use type upon which bioenergy crops are expanded, the total cultivation area and its spatial distribution patterns.

Importance:

• The biophysical cooling or warming effects of bioenergy crop cultivation can significantly strengthen or weaken the effectiveness of bioenergy crop cultivation with carbon capture and storage (BECCS) in limiting the temperature increments, depending on the cultivation map and the bioenergy crop type.
• Large-scale bioenergy crop cultivation induces a biophysical cooling effect at the global scale, but the air temperature change has strong spatial variations and inter-annual variability.
• Cultivating eucalypt shows generally cooling effects that are more robust than if switchgrass is used as the main bioenergy crop, implying that eucalypt is superior to switchgrass in cooling the lands biophysically.
• Replacing forests with switchgrass not only results in biophysical warming effects but could also release more carbon through deforestation than converting other short vegetation to bioenergy crops.
• Deforestation, therefore, should be avoided. The magnitude of changes in the biophysical effects also depends on the total area under cultivation.

What are Bioenergy Crops?

• Bioenergy crops are defined as any. plant material used to produce bioenergy. These crops have the capacity to produce large volumes of biomass, have high energy potential, and can be grown in marginal soils.
• It is a renewable source of energy that is produced from plants and animals. … Some forms of bioenergy have been around for a long time. Examples include burning wood to create heat, using biodiesel and ethanol to fuel vehicles, and using methane gas and wood to generate electricity.

Impacts on Environment:

2. SIX ONE DISTRICT ONE PRODUCT BRANDS LAUNCHED UNDER THE PMFME

THE CONTEXT: The Union Ministry of Food Processing Industries launched six, One District One Product (ODOP) brands under the Pradhan Mantri Formalizations of Micro food processing Enterprises (PMFME) Scheme.

THE EXPLANATION:

• The Ministry of Food Processing Industries has signed an agreement with NAFED for developing 10 brands of selected ODOPs under the branding and marketing component of the PMFME scheme. Out of these, six brands namely Amrit Phal, Cori Gold, Kashmiri Mantra, Madhu Mantra, Somdana, and Whole Wheat Cookies of Dilli Bakes.
• Through this initiative under the PMFME scheme, the Ministry of Food Processing Industries aims to encourage the micro food processing enterprises (MFPEs) across the country about the vision, efforts, and initiatives of the Government to formalise, upgrade and strengthen them and take them a step closer to Aatmanirbhar Bharat.

Value Addition:

PMFME Scheme

• The PMFME Scheme is a centrally sponsored scheme that aims to enhance the competitiveness of existing individual micro-enterprises in the unorganized segment of the food processing industry.
• It aims to enhance the competitiveness of existing individual micro-enterprises in the unorganized segment of the food processing industry and promote formalization of the sector,
• It further aims to promote formalization of the sector and provide support to Farmer Producer Organizations, Self Help Groups, and Producers Cooperatives along their entire value chain.
• The scheme envisions to directly assisting the 2,00,000 micro food processing units for providing financial, technical, and business support for the up-gradation of existing micro food processing enterprises.

A major component of the scheme

One District One Product

• Under the One District One Product (ODOP) component of the PMFME Scheme, the Ministry of Food Processing Industries approved ODOP for 137 unique products.
• The GIS ODOP digital map of India has been launched to provide details of ODOP products of all the States and UTs.
• The digital map also has indicators for Tribal, SC, ST, and aspirational districts.
• It will enable stakeholders to make concerted efforts for its value chain development.

About NAFED:

• National Agricultural Cooperative Marketing Federation of India Ltd.(NAFED), established in 1958, is registered under the Multi State Co-operative Societies Act.
• Nafed was setup with the object to promote Co-operative marketing of Agricultural Produce to benefit the farmers.
• The objectives of the NAFED shall be to organize, promote and develop marketing, processing and storage of agricultural, horticultural and forest produce, distribution of agricultural machinery, implements and other inputs, undertake inter-state, import and export trade etc.

THE ENVIRONMENT ECOLOGY AND CLIMATE CHANGE

3. THE NEW RULES ON FLY ASH DISPOSAL

THE CONTEXT: The notification from the Union Ministry of Environment, Forest and Climate Change intends to “bring out a comprehensive framework for ash utilization including a system of environmental compensation based on the polluter-pays principle”.

THE EXPLANATION:

The New Rule highlights:

• It is mandatory for Thermal Power Plants (TPPs) to ensure 100% utilization of fly ash within three to five years.
• Existing provisions allow TPPs to fully utilize fly ash in a four-year cycle in a staggered manner.
• It also introduced fines of Rs 1,000 on non-compliant plants under the ‘polluter pays principle’, taking into account utilization targets from April 1, 2022.
• The ‘polluter pays principle is the commonly accepted practice that those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment.
• Under this, the collected fines will be deposited in the designated account of the Central Pollution Control Board (CPCB).
• The fine collected by CPCB from the TPPs and other defaulters shall be used towards the safe disposal of the unutilized ash.
• It also deals with unutilized accumulated ash (legacy ash) where TPPs will have to utilize it within 10 years from the date of publication of final notification in a staggered manner.
• If the utilization of legacy ash is not completed at the end of 10 years, a fine of Rs 1000 per tons will be imposed on the remaining unutilized quantity which has not been fined earlier.

BACKGROUND:

• India has over 200 coal power plants that generate an enormous amount of fly ash. According to the Central Electricity Authority, India’s coal plants generated 232.56 million tonnes of fly ash in 2020-2021. Although 93 percent of it was utilized, millions of tonnes accumulated over the years lie unused.
• A study by the think tank Centre for Science and Environment in March 2021 found that over half of India’s power plants failed to fully utilize their fly ash and fell behind previous government targets.
• The new notification will replace the 1999 notification that had originally set up rules for fly ash utilisation. It will also supersede the various amendments to the 1999 notification made in 2003, 2009 and 2016, which have all sought to manage the generation of fly ash.

What do experts say?

• According to experts, the introduction of a penalty for non-compliance and acknowledgment of legacy ash is a step in the right direction, but there are other facets that the notification doesn’t adequately address.
• “The notification calls the filling of low-lying areas an eco-friendly method of utilizing fly ash, but more often than not, this is a euphemism for irresponsibly dumping ash. Dumping ash in low-lying areas can lead to severe ecological consequences.
• A report found that there were eight major fly ash breaches between 2019 and 2021, leading to destruction and contamination.
• While the notification says that all yearly and legacy ash must be utilized, it also makes a provision for ash stored in dykes and ponds — structures built for large amounts of ash disposal — saying that as long as such storage is “stabilized” or reclaimed by growing plantations, coal power plants certified with the CPCB can be excluded from the 10-year deadline.
• “It is critical to take policy measures to link fly ash utilization with steps being taken by the government to prevent diseases and deaths and provide health services. The environmental regulation that emerges from this approach of ‘fly ash as a health risk’ has the potential to identify remedies to address the legacy impact and prevent future legal breaches.

Value Addition:

What is Fly Ash?

• Fly ash is a byproduct of burning pulverized coal in thermal power plants.
• During combustion, mineral impurities in the coal (clay, feldspar, quartz, and shale) fuse in suspension and float out of the combustion chamber with the exhaust gases. As the fused material rises, it cools and solidifies into spherical glassy particles called fly ash.
• The low-grade coal used in thermal power generation carries 30-45% ash content. The high-grade imported coal has a low ash content of 10-15%.
• Since most of the coal used in thermal plants is low-grade, it generates a large quantity of ash which requires a large area as landfill or ponds for disposal.
• All fly ashes exhibit cementitious properties to varying degrees depending on the chemical and physical properties of both the fly ash and cement.

Composition:

• Depending upon the source and composition of the coal being burned, the components of fly ash vary considerably, but all fly ash includes substantial amounts of silicon dioxide (SiO2), aluminum oxide (Al2O3) and calcium oxide (CaO), the main mineral compounds in coal-bearing rock strata.
• Minor constituents include arsenic, beryllium, boron, cadmium, chromium, hexavalent chromium, cobalt, lead, manganese, mercury, molybdenum, selenium, strontium, thallium, and vanadium, along with very small concentrations of dioxins and PAH compounds. It also has unburnt carbon.

Applications:

• It is an excellent material for making construction materials such as bricks, mosaic tiles and hollow blocks.
• Bricks made of fly ash can help conserve soil to a great extent.
• There are several eco-friendly ways to utilize fly ash so that it does not pollute air and water.
• It includes the use of fly ash in the manufacturing of cement, ready-mix concrete; constructing roads, dams and embankments, and filling of low-lying areas and mines.

Health and environmental hazards:

• Toxic heavy metals present: All the heavy metals found in fly ash nickel, cadmium, arsenic, chromium, lead, etc—are toxic in nature. They are minute, poisonous particles that accumulate in the respiratory tract, and cause gradual poisoning.
• Radiation: For an equal amount of electricity generated, fly ash contains a hundred times more radiation than nuclear waste secured via dry cask or water storage.
• Water pollution: The breaching of ash dykes and consequent ash spills occur frequently in India, polluting a large number of water bodies.
• Effects on the environment: The destruction of mangroves, drastic reduction in crop yields, and the pollution of groundwater in the Rann of Kutch from the ash sludge of adjoining Coal power plants has been well documented.

THE DISASTER MANAGEMENT

4. THAILAND’S NEW EARLY WARNING TECHNOLOGY

THE CONTEXT: A new early warning and hazard monitoring system, ThaiAWARE, will provide advanced decision support capabilities to Thailand’s disaster managers, protecting the country’s 70 million residents from natural disasters.

THE EXPLANATION:

• Thailand is prone to natural disasters, such as floods, droughts and tropical storms.
• The country suffered an economic loss to the tune of $46,055,161 due to natural disasters from 2009-2018.
• The National Disaster Relief Centre has indicated that flood disasters in Thailand between 1989 and 2018 caused more than B160.8 billion ($5.1 billion) in damage to the economy. The 2011 floods accrued economic damage of more than B23 billion ($0.7 billion) alone.
• Thailand’s Disaster Prevention and Mitigation Department (DDPM) reported that flooding affected 229,220 households across 6,827 villages in 193 districts of 31 provinces, as of September 2021.
• According to the Thailand Department of Disaster Prevention and Mitigation, 32 of the country’s 76 provinces have been affected by flooding in October 2021. In late September and early October 2021 , tropical storm Dianmu inundated the region, leading to flash flooding.

THE PRELIMS PRACTICE QUESTION 

Q1. Bisphenol A (BPA), a cause of concern, is a structural/key component in the manufacture of which of the following kinds of plastics?

                 a) Low-density polyethylene

                 b) Polycarbonate

                 c) Polyethylene terephthalate

                 d) Polyvinyl chloride

ANSWER FOR 04^TH JANUARY 2022 

ANSWER: A

Explanation:

Dholavira: a Harappan city, is one of the very few well preserved urban settlements in South Asia dating from the 3rd to mid-2nd millennium BCE. Being the 6th largest of more than 1,000 Harappan sites discovered so far, and occupied for over 1,500 years, Dholavira not only witnesses the entire trajectory of the rise and fall of this early civilization of humankind, but also demonstrates its multifaceted achievements in terms of urban planning, construction techniques, water management, social governance and development, art, manufacturing, trading, and belief system. With extremely rich artifacts, the well-preserved urban settlement of Dholavira depicts a vivid picture of a regional center with its distinct characteristics, that also contribute significantly to the existing knowledge of Harappan Civilization as a whole.

The property comprises two parts: a walled city and a cemetery to the west of the city. The walled city consists of a fortified Castle with attached fortified Bailey and Ceremonial Ground, and a fortified Middle Town and Lower Town. A series of reservoirs are found to the east and south of the Citadel. The great majority of the burials in the Cemetery are memorial in nature.

1. Supreme Court must ensure hate speech guilty are punished READ MORE
2. Age & agility READ MORE
3. Opinion: The electoral bonds act akin to a ‘token’ in the hawala model READ MORE

1. What the targeting of Muslim women really means READ MORE
2. Food insecurity and child malnutrition: New empirical evidence from India READ MORE

1. Protect the Aravalli range: Thar desert can creep towards the east READ MORE  
2. Climate funds: Developed nations must step up READ MORE
3. Moving beyond a zero-sum approach: In many situations, acting for oneself as well as the group gets the best results READ MORE

1. Message from Mumbai: Online mobs spreading hate should not be allowed to continue their work with impunity READ MORE
2. Great ecstasy comes from doing something useless READ MORE

(Newspapers, PIB and other important sources)

Prelim and Main

1. Write-offs in Covid year helped banks reduce bad loans: RBI READ MORE
2. Bhojeshwara temple: A hidden living gem READ MORE
3. Six One District One Product brands launched under the PMFME scheme of the Ministry of Food Processing Industries READ MORE
4. UJALA completes 7 years of energy-efficient and affordable LED distribution READ MORE
5. 74 lakh birds flock to Chilika, the largest wintering ground in the Indian subcontinent READ MORE

Main Exam    

GS Paper- 1

1. Protect the Aravalli range: Thar desert can creep towards the east READ MORE  
2. What the targeting of Muslim women really means READ MORE

GS Paper- 1

POLITY AND GOVERNANCE

1. Supreme Court must ensure hate speech guilty are punished READ MORE
2. Age & agility READ MORE
3. Opinion: The electoral bonds act akin to a ‘token’ in the hawala model READ MORE

SOCIAL JUSTICE

1. Food insecurity and child malnutrition: New empirical evidence from India READ MORE

INTERNATIONAL ISSUES

1. The Chinese challenge uncovers India’s fragilities: The border crisis has laid bare political, economic and diplomatic problems — the result of choices made after 2014 READ MORE
2. China: An abiding challenge for India READ MORE

GS Paper- 1

ECONOMIC DEVELOPMENT

1. The infrastructure push: Higher expenditure will be needed to sustain recovery READ MORE
2. Missing: Bank Credit Engine in India’s Economic Growth READ MORE
3. To achieve $ 5 trillion GDP goal, India needs to revamp its regulatory frameworks READ MORE

ENVIRONMENT AND ECOLOGY

1. Climate funds: Developed nations must step up READ MORE
2. Moving beyond a zero-sum approach: In many situations, acting for oneself as well as the group gets the best results READ MORE

DISASTER MANAGEMENT

1. Why short-termism is a recipe for disaster READ MORE
2. Thailand’s new early warning technology to protect 70 million from disasters READ MORE

GS Paper- 1

ETHICS EXAMPLES AND CASE STUDY

1. Message from Mumbai: Online mobs spreading hate should not be allowed to continue their work with impunity READ MORE
2. Great ecstasy comes from doing something useless READ MORE

Questions for the MAIN exam

1. ‘The judiciary has an absolute obligation and duty to step in when the executive fails in the enforcement of the fundamental rights of citizens’. Substantiate the statement.
2. ‘The principle of constitutionalism is now a legal principle that requires control over the exercise of governmental power to ensure that it does not destroy the democratic principles upon which it is based’. Analyse.
3. ‘Without transforming society from a neutral or contentious to a collaborative stance, expecting public-private-partnerships to work is unrealistic’. Critically examine.

QUOTATIONS AND CAPTIONS

• In the midst of chaos, there is also opportunity.
• Quick, appropriate regulatory frameworks that respond to technological changes and innovations are in themselves a significant source of value creation in an economy.
• The targeting of Muslim women is not just a one-off thing; it is well ideated and deliberated. This is not just an attack on Muslim women alone; it’s an attack on religious identity, a normalisation of the ‘othering’ and dehumanisation of Muslims.
• The electoral bonds scheme seems to be a systematic design to route the black money of the ruling political party at the Centre through its crony corporates.
• Prompt reporting of cases, well-trained investigators and prosecutors, fast and fair trial are essential to control cyber crimes against women.
• The rule of law is a basic structure and basic feature of the Constitution. It clearly obliges the executive to enforce the law, without fear or favour.
• The judiciary has an absolute obligation and duty to step in when the executive fails in the enforcement of the fundamental rights of citizens.
• The principle of constitutionalism is now a legal principle that requires control over the exercise of governmental power to ensure that it does not destroy the democratic principles upon which it is based.
• A distinction between development and climate finance is vital. More funds are needed for climate adaptation projects.
• As the LAC challenge heightens, India must evolve a resolute and effective holding strategy to prevent further salami-slicing by PLA.
• Without transforming society from a neutral or contentious to a collaborative stance, expecting public-private partnerships to work is unrealistic.
• While latest data signals nascent signs of recovery, it will be misleading to accept it at face value without accounting for the headwinds that lie in wait in the Indian macroeconomic scene.

50-WORD TALK

• PM Modi cancelling the Ferozepur rally due to a ‘security lapse’ is disturbing. His safety is of prime concern. Its politicization is deplorable. What’s equally disconcerting is how politicians are holding meetings and rallies in poll-bound states as the third wave of the pandemic hits India. They are setting a terrible example.
• India’s first Omicron case was in November, but we are still quoting data from South Africa and the UK to plan strategy. Without India-specific data about mortality, hospitalisation and demography of cases – Mumbai is an exception — we are shooting in the dark. Data transparency is a casualty of the pandemic.

Things to Remember:

• For prelims-related news try to understand the context of the news and relate with its concepts so that it will be easier for you to answer (or eliminate) from given options.
• Whenever any international place will be in news, you should do map work (marking those areas in maps and also exploring other geographical locations nearby including mountains, rivers, etc. same applies to the national places.)
• For economy-related news (banking, agriculture, etc.) you should focus on terms and how these are related to various economic aspects, for example, if inflation has been mentioned, try to relate with prevailing price rises, shortage of essential supplies, banking rates, etc.
• For main exam-related topics, you should focus on the various dimensions of the given topic, the most important topics which occur frequently and are important from the main point of view will be covered in ED.
• Try to use the given content in your answer. Regular use of this content will bring more enrichment to your writing.

[WpProQuiz 130]

THE CONTEXT: In November 2021, RBI issued a revised Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks (SCBs) excluding Small Finance Banks, Payment Banks, and Regional Rural Banks to enable intervention at the appropriate time and require the SCB to initiate and implement remedial measures in a timely manner. The provisions of the revised PCA framework will be effective from January 1, 2022. The detailed analysis of the development is as follows.

THE DEVELOPMENT

• The revised framework excludes return on assets as a parameter that may trigger action under the framework.
• Payments banks and small finance banks (SFBs) have also been removed from the list of lenders where prompt corrective action can be initiated. Capital, asset quality, and leverage will be the key areas for monitoring in the revised framework.
• Indicators to be tracked for capital, asset quality, and leverage would be CRAR/ common equity tier I ratio, net NPA ratio, and Tier I leverage ratio, respectively.
• In governance-related actions, the RBI can supersede the board under Section 36ACA of the BR Act, 1949.
• The framework will apply to all banks operating in India, including foreign banks operating through branches or subsidiaries based on breach of risk thresholds of identified indicators.

WHAT HAS CHANGED?

Key Monitoring areas:

• 2017 (Revised) Framework: Capital, asset quality, and profitability, while leverage would be monitored additionally.
• New Framework: Capital, Asset Quality and Leverage.

Indicators to be tracked: 

• 2017 (Revised) Framework: Capital, asset quality, and profitability would be CRAR/ Common Equity Tier I ratio, Net NPA ratio, and Return on Assets, respectively.
• New Framework: Capital, Asset Quality, and Leverage would be CRAR/ Common Equity Tier I Ratio, Net NPA Ratio, and Tier I Leverage Ratio, respectively.

Profitability – ROA:

• 2017 (Revised) Framework: Negative ROA for 2/3/4 consecutive years
• New Framework: Has been removed from the New Framework.

Capital – Risk Threshold 3: 

• New Framework: RBI has specifically included this level of 400 bps below CRAR as a monitorable.

Leverage:

• 2017 (Revised) Framework: Tier 1 Leverage ratio: Threshold 1: <=4.0% but > = 3.5% (leverage is over 25 times Tier 1 capital). Threshold 2: < 3.5% (leverage is over 28.6 times Tier 1 capital)
• New Framework: Monitoring of leverage has been made explicit and levels have been made explicit across thresholds Threshold 1: Up to 50 bps below the regulatory minimum Threshold 2: More than 50 bps but not exceeding 100 bps below the regulatory minimum Threshold 3: More than 100 bps below the regulatory minimum.

Expense monitoring: 

• 2017 (Revised) Framework: The following points were mandatory: Threshold 2: Higher provisions as part of the coverage regime. Threshold 3: Restriction on management compensation and directors’ fees, as applicable.
• New Framework: These actions have been included in discretionary activities and have been made applicable across all thresholds. They have been combined and made more stringent by restriction/ reduction on variable operating costs, outsourcing activities, and restriction/reduction of outsourcing activities. Further restrictions on capital expenditure, other than for technological up-gradation within board-approved limits, have been made mandatory in risk threshold 3.

Discretionary Corrective Actions – Special Supervisory Actions:

• 2017 (Revised) Framework: RBI could amalgamate/ reconstruct a bank under extant regulations.
• New Framework: The RBI has specifically included resolution of the bank by Amalgamation or Reconstruction (Ref. Section 45 of Banking Regulation Act 1949) under the revised framework.

Exit from PCA and Withdrawal of Restrictions under PCA: 

• 2017 (Revised) Framework: Exit of a bank from the PCA framework was based on RBI’s assessment on multiple parameters based on the financials of the bank.
• New Framework: The new framework has laid down an explicit framework for a bank to exit the PCA framework as follows: Once a bank is placed under PCA, taking the bank out of PCA Framework and/or withdrawal of restrictions imposed under the PCA Framework will be considered: a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements, one of which should be Audited Annual Financial Statement (subject to assessment by RBI); and b) based on Supervisory comfort of the RBI, including an assessment on sustainability of profitability of the bank.

WHAT IS PCA FRAMEWORK?

• 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.
• Based on where a bank stands on these ratios, it has three risk threshold levels (1 being the lowest and 3 the highest). Banks with capital to risk-weighted assets ratio (CRAR) of less than 10.25 percent but more than 7.75 percent fall under threshold 1.
• Those with CRAR of more than 6.25 percent but less than 7.75 percent fall in the second threshold. In case a bank’s common equity Tier 1 (the bare minimum capital under CRAR) falls below 3.625 percent, it gets categorized under the third threshold level.
• Banks that have a net NPA of 6 percent or more but less than 9 percent fall under threshold 1, and those with 12 percent or more fall under the third threshold level.
• On profitability, banks with negative return on assets for two, three, and four years fall under threshold 1, threshold 2, and threshold 3, respectively.

WHAT IS THE PURPOSE OF THE PCA FRAMEWORK?

• The objective of the PCA framework is to enable supervisory intervention at the appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner to restore its financial health.
• Act as a tool for effective market discipline.
• It does not preclude the Reserve Bank of India from taking any other action as it deems fit at any time, in addition to the corrective actions prescribed in the framework”.
• In the last almost two decades — the PCA was first notified in December 2002 — several banks have been placed under the framework, with their operations restricted. In 2021, UCO Bank, IDBI Bank, and Indian Overseas Bank exited the framework on improved performance. Only the Central Bank of India remains under it now.

HOW DO BANKS BENEFIT FROM PCA?

• One of the objectives of PCA is to amend a bank’s mistakes before they lead to a crisis.
• RBI controls the loan disbursal of banks belonging to the PCA watchlist. That said, note that the regulator does not entirely prohibit PCA banks from disbursing loans.
• RBI’s PCA framework has been designed to improve a bank’s financial performance by tracking vital metrics. In other words, it involves the RBI taking remedial measures.
• PCA banks cannot enter a new line of business, which improves their core financials.
• In some rare cases, RBI might choose to close non-compliant banks or initiate amalgamation for them.

WHEN DOES RBI INVOKE PROMPT CORRECTIVE ACTION?

RBI considers four factors to determine whether it needs to put a bank under the PCA framework. These include profitability, asset quality, capital ratios, and debt level. The central bank grades each of these factors based on actions depending upon the grade/threshold level, categorized from one to three, where 1 is the lowest of the lot and 3 is the highest based on how banks stand with respective frameworks.

Following is a look at these factors and their grades:

CAPITAL ADEQUACY RATIO (CRAR): The CRAR is the capital needed for a bank measured in assets (mostly loans) disbursed by the banks. The higher the assets, the higher should be the capital retained by the bank. This measures how much debt and equity capital banks possess to cover their asset book risk. If CRAR is less than 10.25%, but above 7.75%, the bank falls in the first grade. Banks having a CRAR of over 6.25%, but below 7.75%, fall under grade 2. However, if a bank’s capital adequacy ratio is less than 3.625%, it is categorized under grade 3.

ASSET QUALITY: This parameter refers to the non-performing assets of a bank. If the net NPA of a bank is more than 6%, but less than 9%, it falls under the first threshold. If Net NPA crosses the 9% mark, it triggers the second grade. That said, if this metric is 12% or more, the bank will fall in the third grade of PCA.

PROFITABILITY: The regulator considers the bank’s return on assets (ROA) as the key measure for profitability. Note that if a bank’s ROA is negative for two, three, and four years in a row, it will be categorized as grade 1, grade 2, and grade 3, respectively.

DEBT LEVEL/LEVERAGE: The last factor that RBI considers to measure the financial risk of any bank is its overall debt level/leverage. The regulator triggers grade 1 if the overall leverage is more than 25 times its Tier 1 capital. However, when total leverage is over 28.5 times its core capital (including disclosed reserves), RBI acts according to grade 2 of PCA.

WHAT HAPPENS WHEN RBI PUTS A BANK UNDER PCA?

When RBI puts a bank on its PCA watchlist, it imposes two types of limitations on it – mandatory and discretionary. These include restrictions related to the expansion of a branch, dividend, and director’s remuneration, and so on.

Nevertheless, the Central Bank may choose to take these actions at their discretion, where the RBI can:

• Ask the bank’s board to reassess its business model and evaluate the profitability of the business line and operations.
• Advise banks to reassess their business plans and strategy to take remedial measures, including dismissing certain officials from employment.
• Ask a Bank’s board to implement a resolution plan after seeking approval from the supervisor.
• Advise banks to gauge their viability over the medium to long term besides evaluating balance sheet estimates.
• PCA banks might not be able to hire more employees or fill up vacant positions.
• Lastly, RBI may allow PCA banks to incur capital expenditure only to upgrade technology. However, the allocation of funds for the same has to be within pre-approved limits.

ANALYSIS OF NEW FRAMEWORK

The revised rules propose changes on three fronts:

1. The triggers to invoke PCA against a bank,
2. The mandatory actions RBI may take after it
3. Conditions for a bank to exit it.

• Rules currently allow RBI to invoke PCA if a bank’s capital-to-risk weighted assets ratio and Tier 1 capital ratio, Return on Assets (ROA), net Non-Performing Assets, and leverage fall well short of statutory thresholds.
• Under the new regime, a negative ROA will no longer trigger a bank to invite corrective action. This appears sensible because the accounting profit for a bank is the residual sum left over after provisioning for bad and doubtful loans.
• A bank that proactively provisions for possible NPAs and maintains high provision coverage may report losses but is better protecting the interests of its stakeholders than a bank that skimps provisioning to show a profit.
• Some of the corrective actions to be taken by RBI once a bank falls under PCA, have been left to its discretion instead of being mandated.
• PCA rules require RBI to enforce higher provisioning norms and cap management compensation. The new rules allow it to take a discretionary call, perhaps to avoid denting depositor confidence.
• The existing curbs placed by the RBI on PCA banks lending to lower-rated or unsecured borrowers have been diluted and replaced with more generic powers, which is a good step.

 THE CONCLUSION

While the new framework rightly affords RBI greater flexibility in resolving stressed banks on a case-to-case basis, the roadmap it offers for a bank’s exit from PCA appears to run counter to this. While such exit was earlier left to RBI’s discretion, the new regime requires a bank to stay above-mandated capital, NPA, and leverage thresholds for four consecutive quarters to apply for the exit. This may be a rather high bar. A troubled bank can mend its capital adequacy or leverage quickly with an infusion from its promoter. But resolving legacy NPAs often requires it to pursue business growth or margin-improving strategies that may not be possible while PCA ties its hands.