THE INDIAN POLITY AND GOVERNANCE

1. SC SAYS TOO EARLY TO INTERVENE IN KARNATAKA HIJAB CONTROVERSY

THE CONTEXT: The Supreme Court said it was “too early” for it to intervene in the Karnataka hijab row when the State High Court was hearing it.

• The court’s response came to a plea made by senior advocate Kapil Sibal to transfer the petitions from the High Court to the top court and to place it before a nine-judge Bench examining questions of law on religious freedom emanating from the Sabarimala review verdict.
• In February 2020, the Supreme Court had upheld the decision of the Sabarimala Review Bench to refer to a nine-judge Bench questions on the ambit and scope of religious freedom practised by multiple faiths.
• The court had framed various questions of law for the nine-judge Bench to decide. These include:
• What is the scope and ambit of religious freedom under Article 25 of the Constitution?
• What is the interplay between religious freedom and rights of religious denominations under Article 26 of the Constitution?
• Whether religious denominations are subject to fundamental rights?
• What is the definition of ‘morality’ used in Articles 25 and 26?
• What is the ambit and scope of judicial review of Article 25? What is the meaning of the phrase “sections of Hindus under Article 25 (2)(b)?
• Whether a person not be- longing to a religious group can question the practices, beliefs of that group in a PIL petition?

FUNDAMENTAL RIGHTS RELATED TO FREEDOM OF RELIGION

• Article 25 says that all persons are equally entitled to freedom of conscience and the right to freely profess, practice and propagate religion. The implications of these are:

1. Freedom of conscience: Inner freedom of an individual to mould his relation with God or Creatures in whatever way he desires.
2. Right to profess: Declaration of one’s religious beliefs and faith openly and freely.
3. Right to practice: Performance of religious worship, rituals, ceremonies and exhibition of beliefs and ideas.
4. Right to propagate: Transmission and dissemination of one’s religious beliefs to others or exposition of the tenets of one’s religion. But, it does not include a right to convert another person to one’s own religion. Forcible conversions impinge on the ‘freedom of conscience’ guaranteed to all the persons alike.

• Article 25 covers not only religious beliefs (doctrines) but also religious practices (rituals). Moreover, these rights are available to all persons—citizens as well as non-citizens.
• However, these rights are subject to public order, morality, health and other provisions relating to fundamental rights.
• Further, the State is permitted to:

1. regulate or restrict any economic, financial, political or other secular activity associated with religious practice; and
2. provide for social welfare and reform or throw open Hindu religious institutions of a public character to all classes and sections of Hindus.

• Article 25 also contains two explanations: one, wearing and carrying of kirpans is to be included in the profession of the Sikh religion; and two, the Hindus, in this context, include Sikhs, Jains and Buddhists.
• According to Article 26, every religious denomination or any of its section shall have the following rights:

a) Right to establish and maintain institutions for religious and charitable purposes.

b) Right to manage its own affairs in matters of religion.

c) Right to own and acquire movable and immovable property.

d) Right to administer such property in accordance with law.

• Article 25 guarantees rights of individuals, while Article 26 guarantees rights of religious denominations or their sections. In other words, Article 26 protects collective freedom of religion. Like the rights under Article 25, the rights under Article 26 are also subject to public order, morality and health but not subject to other provisions relating to the Fundamental Rights.
• Supreme Court held that the ‘Ramakrishna Mission’ and ‘Ananda Marga’ are religious denominations within the Hindu religion. It also held that Aurobindo Society is not a religious denomination.
• Article 27 lays down that no person shall be compelled to pay any taxes for the promotion or maintenance of any religion or religious denomination. In other words, the State should not spend the public money collected by way of tax for the promotion or maintenance of any religion. This provision prohibits the State from favouring, patronising, and supporting one religion over the other. This means that the taxes can be used for the promotion or maintenance of all religions.
• This provision prohibits only levy of a tax and not a fee. This is because the purpose of a fee is to control secular administration of religious institutions and not to promote or maintain religion.
• Under Article 28, no religious instruction shall be provided in any educational institution wholly maintained out of State funds. However, this provision shall not apply to an educational institution administered by the State but established under any endowment or trust, requiring imparting of religious instruction in such institution.
• Further, no person attending any educational institution recognised by the State or receiving aid out of State funds shall be required to attend any religious instruction or worship in that institution without his consent. In case of a minor, the consent of his guardian is needed.
• Article 28 distinguishes between four types of educational institutions:

a) Institutions wholly maintained by the State.

b) Institutions administered by the State but established under any endowment or trust.

c) Institutions recognised by the State.

d) Institutions receiving aid from the State.

• In (a) religious instruction is completely prohibited while in (b), religious instruction is permitted. In (c) and (d), religious instruction is permitted on a voluntary basis.

THE INTERNATIONAL ISSUES

2. PM TO ADDRESS HIGH-LEVEL SEGMENT OF ONE OCEAN SUMMIT

THE CONTEXT: Prime Minister Narendra Modi will address the high-level segment of the One Ocean Summit through a video message, his office said.

THE EXPLANATION:

• The high-level segment of the summit will also be addressed by several other heads of states and governments including Germany, the United Kingdom, South Korea, Japan and Canada, the Prime Minister’s Office (PMO) said in a statement.
• PM Modi will address the high-level segment of the One Ocean Summit at around 2:30 pm on Friday through a video message, it said.
• The summit is being organised by France from February 9-11 in Brest in cooperation with the United Nations and the World Bank.
• The objective of the summit is to mobilise the international community to take tangible action towards preserving and supporting healthy and sustainable ocean ecosystems.

THE ECONOMIC DEVELOPMENT

3. GOVT BANS IMPORT OF FOREIGN DRONES TO PROMOTE DOMESTIC MANUFACTURING

THE CONTEXT: As part of efforts to promote domestic manufacturing of drones in the country, the Government has banned import of foreign drones with certain exceptions. The Directorate General of Foreign Trade DGFT has issued a notification banning the import of foreign drones.

THE EXPLANATION:

• The Directorate General of Foreign Trade (DGFT) under the commerce and industry ministry has issued a notification banning the import of foreign drones.
• The civil aviation ministry said that in order to promote Made in India drones, import of foreign drones has been prohibited with effect from February 9, 2022.
• Import of drones for Research and Development, defence and security purposes have been exempted from the ban but such imports will require due clearances. Import of drone components shall not require any approvals.
• Import of drones for R&D, defence and security purposes have been exempted from the ban but such imports will require due clearances.
• Import of drone components, however, shall not require any approvals.
• Import of drones by government entities, educational institutions recognised by central or state government, government recognised R&D entities and drone manufacturers for R&D purpose will be allowed in CBU, SKD or CKD form. This will be subject to import authorisation issued by DGFT in consultation with concerned line ministries.
• Import of drones for defence and security purposes will be allowed in CBU, SKD or CKD form subject to import authorisation issued by DGFT in consultation with concerned line ministries.
• After the rules, the ministry issued the drone airspace map and PLI scheme in September 2021, UTM policy framework in October 2021. Besides, drone certification scheme and single window DigitalSky Platform were put in place last month.
• The ministry came out with liberalised drone rules in August 2021.

THE SCIENCE AND TECHNOLOGY

4. SOUTH AFRICA SEEKS TO INCREASE WATER THROUGH RECYCLING, REUSE

THE CONTEXT: South Africa, which witnessed a year-long drought in Cape Town, is using new, unique methods to increase its water supply: By recycling and reusing its wastewater. The country is using phycoremediation or the ‘use of algae to treat wastes or wastewaters’ towards this end in a number of its provinces.

THE EXPLANATION:

• One such instance is the Zaalklapspruit wetland system, some 75 kilometres from the Loskop Dam on the Olifants River in Mpumalanga province. Authorities were spurred into action after a large number of crocodiles, terrapins and fish died in the mid-2000s in the dam.
• The reason for the die-off was acid mine drainage, untreated sewage and industrial and agricultural pollution, which severely impacted the water quality. Mpumalanga is home to many of South Africa’s coal mines. The major sources of acid mine drainage spills in the area were not necessarily those mines currently in operation, but rather the abandoned ones that were mined from the 1930s. There are at least 3,000 abandoned mines in Mpumalanga.
• The work began in 2012 to ‘rehabilitate’ Zaalklapspruit. The water plants were reintroduced including algae. A channel through the middle of the wetland was removed, as were ridges and furrows that impacted water flow.
• More space has meant that the acidic water flows more slowly through the wetland, giving more time to the water plants and algae to filter out as much heavy metals as possible. Water flowing into the wetland has a pH of 2.7 and that being released is 7.1 pH.
• Tests show that the algae filter out around 74 per cent of phosphates, a nutrient that can cause harmful toxic blue-green algae bloom. The algal species were first isolated at the CSIR, has since been cultured in five 5,000 litre translucent water tanks on site.
• The low-cost passive system does not use chemicals nor electricity — crucial in a country such as South Africa suffering from electricity supply issues.
• If one could raise fish in such a system, or produce an alternative biomass source (in the form of dried-out algal-rich sludge) for bio-energy production — an attractive option given the depletion of fossil fuels and the need to manage climate-changing greenhouse gases. This aspect was piloted in a similar phycoremedial project at Brandwag, a 500-strong farming community in the Southern Cape.
• There, algae cultivated in three tanks have been added since 2016 to an existing pond micro-water treatment system that handles the wastewater Brandwag residents produce daily.
• COVID-19 has however temporarily halted plans to make compost and fertiliser from the dried-up sludge and to safely water the sports fields of a nearby school with water cleaned at the sewerage works.
• The algal-based system as an ideal, electricity-free, passive option to reduce eutrophic conditions and clean wastewater, as 65 per cent of wastewater treated on the continent is in any case done in maturation treatment pond facilities similar to that of Motetema and Brandwag.

Recent paper in 2021, the science journal Processes:

• The implementation of phycoremediation in maturation treatment pond systems in African countries could also effectively minimise greenhouse effects, since the algae mass culturing in maturation ponds is a carbon-absorbing process, which can be used by municipalities in the carbon trading market and to provide a subsidy to reward their contributions to environmental protection.

Spinach farming

• In another of South Africa’s provinces, the Eastern Cape, brewery effluent rather than domestic wastewater is successfully being farmed with at the Ibhayi Brewery of South African Breweries (SAB) in the harbour city of Gqeberha (formerly known as Port Elizabeth).
• The 900 bunches of spinach, 70 bunches of kale (leaf cabbage) and 40 kilograms of baby spinach being sold from a 2,000 square metre irrigated mini-farm in the shadows of the brewery is testimony to the success of the first fully-green biological treatment system at a brewery in Africa.
• Row upon row of produce grows in plastic-lined raised beds, from which all unused irrigation water is again collected and recycled.
• No fertiliser is added, as the crops’ nutrient requirements are fully provided for by the phosphate-rich wastewater generated in the brewing process and cleaned through an activated sludge system.

5. AUSTRALIA DESIGNATES KOALAS AS ENDANGERED SPECIES

THE CONTEXT: Australia has designated the koala an endangered species amid unprecedented pressure on the marsupials’ eucalyptus tree habitats across the country’s eastern states.

THE EXPLANATION:

• Environment Minister said there would be increased protection for the animal, classed as vulnerable only 10 years ago, in New South Wales, Queensland and the Australian Capital Territory (ACT).
• The impact of prolonged drought, followed by the black summer bushfires, and the cumulative impacts of disease, urbanisation and habitat loss over the past twenty years have led to the advice.
• Conservationists have long been calling for more support for the koala amid dramatic declines in populations across the country.
• WWF-Australia, the International Fund for Animal Welfare (IFAW) and Humane Society International all proposed the listing to the government in April 2020 after research found population declines of about 50 percent in Queensland since 2001, and 62 percent in New South Wales.
• The Endangered status of the koala means they and forest homes should be provided with greater protection under Australia’s national environment law. Not only will this protect the iconic animal but many other species living alongside them. Consideration of future development plans would take into account the potential effect on the animal.
• This must be a wakeup call to Australia and the government to move much faster to protect critical habitat from development and land-clearing and seriously address the impacts of climate change.
• Thousands of koalas are thought to have been among the native animals killed in the fires that swept Australia’s eastern and southern states in late 2019 and early 2020.
• An inquiry last year in New South Wales, Australia’s most populous state, warned the koala could become extinct by 2050.

THE PRELIMS PRACTICE QUESTIONS

QUESTIONS OF THE DAY 11TH FEB 2022

Q1. The koala bear, is seen recently in the news, is an arboreal herbivorous marsupial native to which of the following regions?

a) Africa

b) East Asia

c) South America

d) Australia

ANSWER FOR 10^TH FEB 2022

Answer: D

Explanation:

• The PMMVY scheme was announced by Prime Minister in a televised address to the nation on December 31, 2016.
• It provides a benefit of 5,000 in three installments to a woman for her first living child upon meeting certain conditions.

This is meant as partial compensation for loss of wage during her pregnancy so that she can get proper nutrition.

1. It’s Tough to Slow Down READ MORE
2. Over 60 social media accounts blocked for anti-India fake news READ MORE

1. Emissions Trading READ MORE
2. Union Budget Lacks Focus on Climate Change Adaptation READ MORE

1. Suicide by unemployed: Centre, states not doing enough to curb joblessness READ MORE
2. Poverty report card READ MORE

1. Local job laws that raise constitutional questions: State laws that limit the rights of out-of-State citizens go against the idea of India being one nation READ MORE  
2. Protecting the right to voice one’s views READ MORE
3. MP Moves to Commissionerate System, but Will It Make Police More Accountable? READ MORE

(Newspapers, PIB and other important sources)

Prelim and Main

1. Too early to intervene in Karnataka hijab row, says Supreme Court READ MORE
2. Clothing and the right to religious freedom READ MORE
3. RBI sticks to dovish policy path even as world turns hawkish to tackle inflation READ MORE
4. Water, Africa’s Gold: South Africa seeks to increase water through recycling, reuse READ MORE
5. Govt Bans Import of Foreign Drones to Promote Domestic Manufacturing READ MORE
6. Australia designates koalas as endangered species READ MORE
7. PM to address high-level segment of One Ocean Summit READ MORE

Main Exam    

GS Paper- 1

1. Suicide by unemployed: Centre, states not doing enough to curb joblessness READ MORE

GS Paper- 2

POLITY AND GOVERNANCE

1. Local job laws that raise constitutional questions: State laws that limit the rights of out-of-State citizens go against the idea of India being one nation READ MORE  
2. Protecting the right to voice one’s views READ MORE
3. MP Moves to Commissionerate System, but Will It Make Police More Accountable? READ MORE

SOCIAL ISSUE

1. Poverty report card READ MORE

 INTERNATIONAL ISSUES

1. Saarc members must find way around roadblocks READ MORE  

GS Paper- 3

ECONOMIC DEVELOPMENT

1. Frozen by uncertainty: RBI has forsaken its mandate of ensuring price stability to give an impetus to the economy READ MORE
2. A growth-focussed monetary policy READ MORE
3. An MSP scheme to transform Indian agriculture: A decentralised plan would aid price stabilisation, offer income support, and also cope with the indebtedness of farmers READ MORE

ENVIRONMENT AND ECOLOGY  

1. Emissions Trading READ MORE
2. Union Budget Lacks Focus on Climate Change Adaptation READ MORE

GS Paper- 4

ETHICS EXAMPLES AND CASE STUDY

1. It’s Tough to Slow Down READ MORE
2. Over 60 social media accounts blocked for anti-India fake news READ MORE

Questions for the MAIN exam

1. State laws that limit the rights of out-of-State citizens raises several constitutional questions and go against the idea of India being one nation. Critically analyse.
2. Analyse India’s recently announced semiconductor policy. Do you think that the new policy is the right direction to make self-reliance in chip manufacturing?

QUOTATIONS AND CAPTIONS

• State laws that limit the rights of out-of-State citizens go against the idea of India being one nation.
• RBI has forsaken its mandate of ensuring price stability to give an impetus to the economy.
• A decentralised plan would aid price stabilisation, offer income support, and also cope with the indebtedness of farmers.
• RBI stays the course despite risks to inflation, changing global environment.
• Due to heightened uncertainty, the monetary policy will largely remain data-driven. The RBI will have to keep its eyes peeled for price trends, which have, so far, surprised on the upside in many economies.
• A serious intent to redefine the perceived goal value may offer the secret sauce to those who are in the rat race to slow down.
• Poverty numbers and trends have traditionally been reported on a country-by-country basis. But in the contemporary world, low-income countries have significant corridors of prosperity while middle-income countries can have large pockets of poverty.
• An effort to replicate such bilateral agreements between other member nations of Saarc could potentially result in a paradigm shift in its performance.
• Placing an adequate price on GHG emissions is of fundamental relevance to internalise the external cost of climate change in the broadest possible range of economic decision making and in setting economic incentives for clean development.
• Even decentralisation of powers within this very system through the creation of distinct allocations, for handling crime and law-and-order functions, still has the effect of concentration of powers within the system.
• The announcements on low-carbon development are encouraging but don’t stipulate a strategy for climate-responsive budgeting.

50-WORD TALK

• A job guarantee scheme for urban areas, on the lines of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), needs to be worked out. With joblessness increasingly fuelling despair, anger and unrest, as witnessed during the recent protests in Bihar, this burning issue can no longer be put on the back-burner.
• The Supreme Court verdict reinstating a former woman judge who resigned following her alleged sexual harassment shows the judiciary too is not free from the vices of arbitrariness in its administrative decisions. The judgement instils confidence in women to fight back when wronged, but does it call for a seven-year-struggle?

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 mains 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.

THE CONTEXT: An ongoing debate in India is whether or not Indian non-banking financial companies (NBFCs) are “shadow banks”. This question appears important because we have learned from the ongoing global financial crisis that shadow banking might create systemic risks which have been defined “broadly as the expected losses from the risk that the failure of a significant part of the financial sector leads to a reduction in credit availability with the potential for adversely affecting the real estate and economy at large.

WHAT IS SHADOW BANKING?

• Shadow banking is a blanket term to describe financial activities that take place among non-bank financial institutions outside the scope of federal regulators. These include investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, and payday lenders, all of which are significant and growing sources of credit in the economy.
• Although these entities do not accept traditional demand deposits offered by banks, they do provide services similar to what commercial banks offer.
• The shadow banking system had overtaken the regular banking system in offering loans in the US before the financial crisis erupted in 2008.

WHAT ARE THE RISKS ASSOCIATED WITH SHADOW BANKING?

• The 2008 financial crisis has shown that shadow banking can be a source of systemic risk to the banking system. The risks can be transmitted directly and through the interconnectedness of partially-regulated entities with the banking system.

WHY IS RBI TIGHTENING SHADOW BANKING RULES?

• The Reserve Bank is simply following the trend of global central banks increasing surveillance on shadow banking. Basel III norms require central banks to tighten supervision on shadow banks across the globe through steps such as defining minimum capital.

WHAT STEPS IS RBI TAKING?

• The Usha Thorat committee has come out with draft regulations on NBFCs, such as increasing tier I capital and risk weight on certain assets. After the recommendations, smaller NBFCs with asset sizes of less than 25 crores are likely to go out of business.

WHAT IS THE GLOBAL SITUATION?

• The size of shadow banking has reached a record $67 trillion in 2011, according to a report by the Finance Stability Board, a regulatory task force for the world’s group of 20 economies. America has the biggest shadow banking system, followed by the Eurozone and the United Kingdom.

Key Takeaways:

• The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
• It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
• The shadow banking system played a major role in the expansion of housing credit in the run-up to the 2008 financial crisis but has grown in size and largely escaped government oversight even since then.

WHY SHADOW BANKING SHOULD WORRY POLICYMAKERS?

• RBI has warned that economic disruptions may intensify systemic risks to India’s financial sector, primarily because NBFCs remain vulnerable with their deteriorating asset quality and the reluctance of the market to lend them money.
• The banking regulator RBI issued a clear warning in its Fiscal Stability Report, that the economic disruptions may intensify risks to its shadow banking firms, the Non-Banking, Financial Companies (NBFCs), “and consequently” the systemic risks to the entire financial sector.

THREAT TO INDIA’S FINANCIAL SYSTEM

• The threats to the NBFCs come from two sources: (i) their deteriorating asset quality and (ii) continued reluctance of the market to lend money in the aftermath of implosion in two leading NBFC players, Infrastructure Leasing & Financial Services Limited (IL&FS) and Dewan Housing Finance Corporation Ltd (DHFL) in 2018 and 2019. Both were taken over by the RBI for loan defaults and now face bankruptcy proceedings.
• About 50% of the NBFCs’ aggregate assets were under the moratorium on loan repayment as per the latest analysis. Banks, which have been fighting shy of lending directly to the industry because of the growing threat of bad loans (non-performing assets or NPAs), increased their lending to the NBFCs in recent years, as a result of which bank lending accounted for 28.9% of the total NBFC borrowings in December 2019 – up from 23.1% in March 2017.
• The RBI noted that, notwithstanding this support from banks, the real risks to the NBFCs’ liquidity come from declining market borrowings. It said that under the stress tests, 11.2% to 19.5% of NBFCs would not be able to comply with the minimum regulatory capital requirements (CRAR) of 15%.

The following graph maps the NBFCs’ assets quality (GNPA and NNPA ratios) and capital-to-risk-assets ratio (CRAR) since FY14.

In the meanwhile, the NBFCs have grown in influence, as is evident from the RBI data mapped below, against the GDP (at constant prices).

• Shadow banking not only poses a threat to India but is equally a risk to the global financial order. For better appreciation, the 2007-08 financial crisis needs to be revisited.

ENDURING OVERALL GROWTH IN SHADOW BANKING

• When the world woke up and started monitoring shadow banking, Kodres recorded the growth in their assets. In 2015, she wrote, their assets in the US was 28% of the total financial sector (down from 32% in 2011); in the euro area, it was 33% (up from 32% in 2011) and globally they accounted for $92 trillion (up from $62 trillion in 2007 and $59 trillion during the crisis).
• One big initiative to monitor shadow banking was the multinational Financial Stability Board (FSB), set up in 2011. India is a part of this initiative.
• But Kodres was not happy. She commented: “The authorities (monitoring shadow banking) are making progress, but they work in the shadows themselves – trying to piece together disparate and incomplete data to see what, if any, systemic risks are associated with the various activities, entities, and instruments that comprise the shadow banking system.”
• Initially, the FSB defined shadow banks broadly to include all entities “outside the regulated banking system that perform core banking function”, which meant credit intermediation (taking money from savers and lending it to borrowers) and they were called Non-Banking Financial Intermediation (NBFI).
• In its latest report of January 2020, the FSB divided those into three categories: (a) MUNFI (Monitoring Universe of Non-bank Financial Intermediation): “broad measure” of all NBFIs that are not central banks, banks, or public financial institutions (b) OFIs (Other Financial Intermediaries): a subset of MUNFI that excludes insurance corporations, pension funds or financial auxiliaries and (c) NBFIs: “narrow measure” of NBFI comprising of non-banks that authorities have identified as the ones that may pose bank-like financial stability risks and/or regulatory arbitrage.
• The NBFIs (narrow measure) are the ones identified as posing systemic risks.

HEIGHTENED SYSTEMIC RISKS FROM SHADOW BANKING

• The 2020 FSB report shows that global estimates for the MUNFI assets stood at $183.6 trillion in 2018 or 49% of the total financial assets ($379 trillion). Of this, OFIs accounted for $114.3 trillion (30% of the total); NBFI for $50.9 trillion (13.4% of the total), and the rest for $18 trillion.
• The FSB 2020 report says the “systemic risk” comes from activities that are “typically performed by banks, such as maturity/liquidity transformation and the creation of leverage”.
• The alarming aspect of the NBFI is that it is growing.
• The FSB 2020 report says it “has grown faster than GDP since 2012, increasing to 77% of all participating jurisdictions’ GDP in 2018 from 64% in 2012. This trend is observed in most jurisdictions”.
• The FSB measures 29 jurisdictions (including India and China), representing over 80% of global GDP.

GROWTH IN INDIA’S SHADOW BANKING (NBFCS)

• What does the FSB of 2020 say about India? (India’s NBFCs correspond to the NBFIs.)  It shows India is an outlier – in a negative way.

Here are two examples

• India recorded 22.4% growth in OFI assets in 2018, while the global growth was 0.4%.
• As for NBFIs (NBFCs in India), a major drawback is their over-dependence on short-term funding for long-term lending (technically called EF2 function).
• Globally, such funding accounted for 7% of the total in 2018 and it grew 6.9%. In sharp contrast, India recorded a 17.4% growth in 2018. As for its share in the total NBFC funding, the RBI’s banking trend report released in December 2017 revealed that it stood at an unbelievably high of 99.7%.
• In the NBFC context, short-term means a period of up to three years and long-term for up to 15 years, as in the case of housing and infrastructure loans. Why such anomaly continues in the NBFCs’ functioning is an abiding mystery.
• Little wonder, when the NBFC crisis hit India in 2018 and 2019, the two big players to implode (IL&FS and DHIL) were associated with infrastructure and housing sectors, though this is only one part of the saga.

IS SHADOW BANKING A SERIOUS THREAT IN EMERGING MARKETS?

• The IL&FS crisis has exposed the vulnerabilities of non-bank lending. But in India, the problem is one of a huge bad debt pile-up despite low credit disbursal.
• Everyone seems to have woken up to the fact that global debt levels are too high and portent difficulties ahead. As Figure 1 indicates, the levels of credit to GDP, which were so high as to be unsustainable and resulted in the big crisis of 2008, have increased even more since then.
• There was a phase of deleveraging in the advanced economies until around 2014, and in developing countries and emerging markets until 2011, but since then, credit/debt has been expanding again.
• So much so that the credit GDP levels in 2017 were 15 percent higher than in 2008 in the advanced economies, and more than 80 percent higher for emerging markets (Figure 1).
• More recently, the attention has shifted from bank lending to shadow banking activities, which are by those institutions that do not collect deposits but still provide loans. These include a variety of institutions, ranging from trusts, investment funds, and similar corporations to kerb lenders.

• Because they do not come under the regulatory framework for banks, yet tend to be interlinked with them in various ways, there are concerns that overlending and default in such institutions can destabilize the financial system.

LINGERING FRAGILITIES

• Ever since the IL&FS crisis broke in India, there has been much discussion of the fragilities posed by non-bank lending and the potential for financial and economic crises in emerging markets that could be led by the collapse of shadow banks. This is in no small measure due to the significant role played by such shadow lending in the core capitalist countries (especially the US) in the build-up to the Great Financial Crisis in 2008.
• However, since then, shadow lending appears to have reduced or at least been contained relative to GDP, as indicated by Figure 2. For the G20 countries taken as a group, credit from non-banks as a percent of GDP was about 6 percentage points lower in 2017 than in 2007, while bank credit had actually increased by 15 percentage points. This suggests that excessive debt creation is much more a problem of the banking sector as a whole than the non-bank or shadow bank sector.

• Table 1 provides data for some important advanced and emerging economies to assess the extent to which this argument is valid. Significantly, the reliance on shadow banking appears to have reduced significantly in the advanced economies by 2015-17 from what it was during 2008-10, other than in Germany, where it seems to have remained at roughly the same level of around 30 percent. Even the increase in bank credit was confined to Japan and South Korea, rather than the US, UK, or Germany, where it has fallen relative to the levels of 2008-10.

WAY FORWARD:

• It is also increasingly suggested that the problem of shadow banking has become more significant in emerging markets rather than in advanced economies and that the dramatic increase in such loans in these economies is what will be associated with the next big systemic risk to global finance.
• In particular, it is suggested that the rapid increase of shadow banking in Asia, especially China, points to the likely area of greatest future concern.

CONCLUSION:

NBFC sector has been stung by a crisis set off by the shock collapse of non-bank lender IL&FS group in 2018. India’s shadow banks, which lend to everyone from teashop merchants to property tycoons, get a mixed bill of health in Bloomberg’s latest check. Revitalization of the industry, whose woes mounted when major mortgage lender Dewan Housing Finance Corp. missed repayments is key to helping staunch a further slowdown in the nation’s economy. In a sign that creditors remain jittery, borrowing costs rose. The extra yield investor’s demand to hold five-year AAA-rated bonds from shadow banks over government notes increased, one of the gauges shows. Shadow lender woes have made it harder for policymakers to prop up the economy, which grew at its weakest pace since 2009. The slowdown hurts borrowers’ ability to repay debt and has prompted the central bank to predict that an improvement in banks’ bad-loan ratios will reverse. So, it is established that Indian NBFCs are shadow banks and they do pose systemic risks to a certain extent. Hence, the RBI should make a long-term policy for the Indian NBFC sector to mitigate any risk that may crop up in the already fragile financial sector in India.

[WpProQuiz 156]