THE INTERNATIONAL RELATIONS

1. INDIA, UAE INKS COMPREHENSIVE TRADE PACT

THE CONTEXT: India and the United Arab Emirates (UAE) signed a Free Trade Agreement (FTA), which is set to reduce tariffs for 80 per cent of goods and give zero duty access to 90 per cent of India’s exports to the UAE.

THE EXPLANATION:

• The agreement, which is expected to come into effect in about 60 days, is expected to boost annual bilateral trade to $100 billion within 5 years of its adoption, up from about $60 billion currently. The Comprehensive Economic Partnership Agreement was signed between the Ministry of Commerce and Industry and the UAE’s Ministry of Economy Ab after 88 days of negotiations.

HIGHLIGHTS OF THE TRADE PACT

• An India-UAE Joint Vision Statement was adopted which lays down contours of future course of bilateral relations and highlights areas of focus.
• On defence and security, both sides agreed to enhance maritime cooperation contributing to maintenance of peace and security in the region. They also reaffirmed joint commitment to fight against extremism and terrorism, including cross-border terrorism, in all forms, at both regional and international levels.
• On energy partnership, they agreed to promote collaboration opportunities to support India’s energy requirements, including new energies, and ensure the provision of affordable and secure energy supplies to India’s growing economy. They also expressed mutual support in energy transition and focused work on a low-carbon future.
• On climate action and renewables, they agreed to support each other’s clean energy missions and establish a joint Hydrogen Task Force to help scale up technologies, with special focus on production of Green Hydrogen.
• On emerging technologies, they agreed to expand cooperation on critical technologies and mutually promote e-businesses and e-payment solutions and promote start-ups from both countries.
• On education cooperation, they agreed to establish an Indian Institute of Technology in the UAE.
• On health cooperation, they decided to collaborate in research, production and development of reliable supply chains for vaccines and enhance investments by UAE entities in the health infrastructure in India as well as collaborate in providing healthcare in underprivileged nations.
• On food security, they acknowledged the need to enhance the resilience and reliability of food supply chains. They also decided to expand cooperation through enhanced bilateral food and agriculture trade and, promote and strengthen the infrastructure and dedicated logistic services connecting farms to ports to final destinations in the UAE.

VALUE ADDITION:

India–United Arab Emirates relations:

• Relations between both the countries were traditionally close. They had enjoyed close and friendly ties on the basis of historic and cultural ties. Barter trade for clothes & spices in exchange of dates & pearls and people-to-people contacts from the region have existed for centuries.
• Relations flourished with the creation of federation in 1971. Today, Indians make up ‘largest minority ethnic group’ in the UAE, accounting for around 38% of UAE’s total residents.

Trade Relations:

• UAE is currently India’s third-largest trading partner. It is also India’s second-largest export destination after the US. India was UAE’s second-largest trading partner in 2019. Furthermore, UAE is the eighth-largest investor in India.
• India’s major exports to the UAE include petroleum products, stones, minerals, precious metals, gems &jewellery, food items like sugar, cereals, tea, meat, fruits & vegetables, seafood, textiles etc. India imports crude petroleum, petroleum products, stones, minerals, precious metals, gems and jewellery, chemicals, wood and wood products.

THE ENVIRONMENT AND ECOLOGY

2. THE ARMY TAG FOR NEW GECKO FROM MEGHALAYA

THE CONTEXT: A team of herpetologists have recorded a new species of bent-toed gecko from a wooded part of the Umroi Military Station in Meghalaya.

THE EXPLANATION:

• Its scientific name is Crytodactylusexercitus and English name is Indian Army’s bent-toed gecko. Exercitus in Latin means army.
• “The name was given to honour the Army for its services to the country. The military station where the bent-toed gecko was discovered was also a factor behind its name.
• The genus Cyrtodactylus is represented by about 320 species worldwide and is the third most speciose vertebrate genus in the world. The members of the genus range from South Asia to Melanesia with high diversity in south Asia.
• India is now home to 40 species of the bent-toed gecko with the northeast accounting for 16 of them.

3. THE NATIONAL GREEN HYDROGEN POLICY

THE CONTEXT: Releasing the first part of India’s National Green Hydrogen Policy, the government on announced some incentives for potential manufacturers, generation companies (gencos) and distribution licensees (discoms) to boost large scale indigenous production of green hydrogen, so as todecarbonise the energy sector and reduce India’s heavy dependence on fossil fuels and crude oil imports.

THE EXPLANATION:

The Mission aims to aid the government in meeting its climate targets and making India a green hydrogen hub. This will help in meeting the target of production of 5 million tonnes of Green hydrogen by 2030 and the related development of renewable energy capacity.

What is the Significance?

• Hydrogen and Ammonia are envisaged to be the future fuels to replace fossil fuels. Production of these fuels by using power from renewable energy, termed as green hydrogen and green ammonia, is one of the major requirements towards environmentally sustainable energy security of the nation.
• Government of India is taking various measures to facilitate the transition from fossil fuel / fossil fuel based feed stocks to green hydrogen / green ammonia. The notification of this policy is one of the major steps in this endeavour.
• The policy promotes Renewable Energy (RE) generation as RE will be the basic ingredient in making green hydrogen. This in turn will help in meeting the international commitments for clean energy.

The policy provides as follows:

• Green Hydrogen / Ammonia manufacturers may purchase renewable power from the power exchange or set up renewable energy capacity themselves or through any other, developer, anywhere.
• Open access will be granted within 15 days of receipt of application.
• The Green Hydrogen / Ammonia manufacturer can bank his unconsumed renewable power, up to 30 days, with distribution company and take it back when required.
• Distribution licensees can also procure and supply Renewable Energy to the manufacturers of Green Hydrogen / Green Ammonia in their States at concessional prices which will only include the cost of procurement, wheeling charges and a small margin as determined by the State Commission.
• Waiver of inter-state transmission charges for a period of 25 years will be allowed to the manufacturers of Green Hydrogen and Green Ammonia for the projects commissioned before 30th June 2025.
• The manufacturers of Green Hydrogen / Ammonia and the renewable energy plant shall be given connectivity to the grid on priority basis to avoid any procedural delays.
• The benefit of Renewable Purchase Obligation (RPO) will be granted incentive to the hydrogen/Ammonia manufacturer and the Distribution licensee for consumption of renewable power.
• To ensure ease of doing business a single portal for carrying out all the activities including statutory clearances in a time bound manner will be set up by MNRE.
• Connectivity, at the generation end and the Green Hydrogen / Green Ammonia manufacturing end, to the ISTS for Renewable Energy capacity set up for the purpose of manufacturing Green Hydrogen / Green Ammonia shall be granted on priority.
• Manufacturers of Green Hydrogen / Green Ammonia shall be allowed to set up bunkers near Ports for storage of Green Ammonia for export / use by shipping. The land for the storage for this purpose shall be provided by the respective Port Authorities at applicable charges.

The implementation of this Policy will provide clean fuel to the common people of the country. This will reduce dependence on fossil fuel and also reduce crude oil imports.

THE GOVERNMENT SCHEMES IN NEWS

4. PRADHAN MANTRI FASAL BIMA YOJANA (PMFBY) ENTERS ITS 7TH YEAR OF IMPLEMENTATION

THE CONTEXT: The Pradhan Mantri FasalBima Yojana (PMFBY) has successfully entered its 7th year of implementation with the upcoming Kharif 2022 season, completing 6 years of its implementation since its launch announcement in February 2016.

THE EXPLANATION:

According to the Government, over 36 crore farmer applications have been insured under PMFBY, with over INR 1,07,059 crores of claims have already been paid under the scheme as of 4th February 2022.

• The PMFBY replaces the existing two schemes National Agricultural Insurance Scheme as well as the Modified NAIS.
• The scheme has been able to provide financial assistance to the most vulnerable farmers, as around 85% of the farmers enrolled with the scheme are small and marginal farmers. The recent announcement by Finance Minister of India during her 2022-23 budget speech on the use of drones for crop insurance will further strengthen the integration of technology for smooth implementation of the scheme on the ground.
• It is to be noted that the scheme will be launching a doorstep distribution drive to deliver crop insurance policies to the farmers ‘Meri Policy Mere Hath’ in all implementing States. The campaign aims to ensure all farmers are well aware and equipped with all information on their policies, land records, the process of claim and grievance redressal under PMFBY.

ABOUT THE SCHEME

Objectives

• To provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crop as a result of natural calamities, pests & diseases.
• To stabilise the income of farmers to ensure their continuance in farming.
• To encourage farmers to adopt innovative and modern agricultural practices.
• To ensure flow of credit to the agriculture sector.

Highlights of the scheme

• There will be a uniform premium of only 2% to be paid by farmers for all Kharif crops and 5% for all Rabi crops. In case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5%. The premium rates to be paid by farmers are very low and balance premium will be paid by the Government to provide full insured amount to the farmers against crop loss on account of natural calamities.
• There is no upper limit on Government subsidy. Even if balance premium is 90%, it will be borne by the Government.

Farmers to be covered

• All farmers growing notified crops in a notified area during the season who have insurable interest in the crop are eligible.
• To address the demand of farmers, the scheme has been made voluntary for all farmers from Kharif 2020.
• Earlier to Kharif 2020, the enrolment under the scheme was compulsory for following categories of farmers:
  • Farmers in the notified area who possess a Crop Loan account/KCC account (called as Loanee Farmers) to whom credit limit is sanctioned/renewed for the notified crop during the crop season.
  • And such other farmers whom the Government may decide to include from time to time.

Voluntary coverage: Voluntary coverage may be obtained by all farmers not covered above, including Crop KCC/Crop Loan Account holders whose credit limit is not renewed.

 THE MISCELLANEOUS

5. EXPLAINED: ALL YOU NEED TO KNOW ABOUT FIR

What is an FIR?

An FIR is the document that has been prepared by the police after verifying the facts of the complaint. The FIR may contain details of the crime and the alleged criminal.

The term first information report (FIR) is not defined in the Indian Penal Code (IPC), Code of Criminal Procedure (CrPC), 1973, or in any other law, but in police regulations or rules, information recorded under Section 154 of CrPC is known as First Information Report (FIR).

Section 154 (“Information in cognizable cases”) says that “every information relating to the commission of a cognizable offence, if given orally to an officer in charge of a police station, shall be reduced to writing by him or under his direction, and be read over to the informant; and every such information, whether given in writing or reduced to writing as aforesaid, shall be signed by the person giving it, and the substance thereof shall be entered in a book to be kept by such officer in such form as the State Government may prescribe”.

Also, “a copy of the information as recorded…shall be given forthwith, free of cost, to the informant”.

In essence then, there are three important elements of an FIR:

1. the information must relate to the commission of a cognizable offence,
2. it should be given in writing or orally to the head of the police station and,
3. it must be written down and signed by the informant, and its key points should be recorded in a daily diary.

What is a cognizable offence?

• A cognizable offence/case is one in which a police officer may, in accordance with the First Schedule of the CrPC, or under any other law for the time being in force, make an arrest without a warrant.
• In the First Schedule, “the word ‘cognizable’ stands for ‘a police officer may arrest without warrant’; and the word ‘non-cognizable’ stands for ‘a police officer shall not arrest without warrant’.”

What is the difference between a complaint and an FIR?

• The CrPC defines a “complaint” as “any allegation made orally or in writing to a Magistrate, with a view to his taking action under this Code, that some person, whether known or unknown, has committed an offence, but does not include a police report.”
• However, an FIR is the document that has been prepared by the police after verifying the facts of the complaint. The FIR may contain details of the crime and the alleged criminal.
• If, on the basis of a complaint, it appears that a cognizable offence has been committed, then an FIR under Section 154 CrPC will be registered, and police will open an investigation. If no offence is found, the police will close the inquiry.
• In case of non-cognizable offences, an FIR under Section 155 CrPC, commonly called “NCR”, is registered, and the complainant will be asked to approach a court for an order. The court may then direct the police to conduct an investigation on the complaint.
• Section 155 (“Information as to non-cognizable cases and investigation of such cases”) says: “When information is given to an officer in charge of a police station of the commission within the limits of such station of a non-cognizable offence, he shall enter or cause to be entered the substance of the information in a book…and refer the informant to the Magistrate. No police officer shall investigate a non-cognizable case without the order of a Magistrate having power to try such case or commit the case for trial.”

 What is a Zero FIR?

• When a police station receives a complaint regarding an alleged offence that has been committed in the jurisdiction of another police station, it registers an FIR, and then transfers it to the concerned police station for further investigation. This is called a Zero FIR.
• No regular FIR number is given. After receiving the Zero FIR, the concerned police station registers a fresh FIR and starts the investigation.

What if the police refuse to register an FIR?

• Under Section 154(3) CrPC, if any person is aggrieved by the refusal on the part of the officer in charge of a police station to register an FIR, she can send the complaint to the Superintendent of Police/DCP concerned who, if satisfied that such information discloses the commission of a cognizable offence, will either investigate the case, or direct an investigation by a subordinate police officer.
• If no FIR is registered, the aggrieved persons can file a complaint under Section 156(3) CrPC before a concerned court which, if satisfied that a cognizable offence is made out from the complaint, will direct the police to register an FIR and conduct an investigation.

What happens after an FIR is filed?

• The police will investigate the case and will collect evidence in the form of statements of witnesses or other scientific materials. They can arrest the alleged persons as per law.
• If there is sufficient evidence to corroborate the allegations of the complainant, then a chargesheet will be filed. Or else, a Final Report mentioning that no evidence was found will be filed in court.
• If it is found that no offence has been committed, a cancellation report will be filed. If no trace of the accused persons is found, an ‘untraced’ report will be filed.

THE PRELIMS PRACTICE QUESTIONS

QUESTION OF THE DAY 19^TH FEB 2022

Q.Which of the following explains ‘green hydrogen’?

a It is produced from renewable resources of energy.

b It is produced from green plants.

c It is produced from sea water.

d It is produced from fossil fuels.

ANSWER FOR 18^TH FEB 2022

Answer: B

Explanation:

India’s first water taxi service was inaugurated in Maharashtra connecting the Navi Mumbai area to mainland Mumbai.

1. What it means to have a fertility rate of 2 READ MORE
2. Muslim women and their right to an education READ MORE
3. Child safety READ MORE

1. Culture is not fixed, it keeps changing with time READ MORE
2. Cease all arguments READ MORE
3. How Secular are Indian Schools in Practice? READ MORE

1. The developed world and its climate goals READ MORE
2. Scarcity to abundance: How a Maharashtra village came together to address water crisis READ MORE

(Newspapers, PIB and other important sources)

Prelim and Main

1. Pradhan Mantri Fasal Bima Yojana (PMFBY) enters its 7th year of implementation READ MORE
2. Army tag for new gecko from Meghalaya READ MORE
3. Govt releases national hydrogen policy READ MORE
4. India, UAE ink comprehensive trade pact; vow to jointly fight terrorism READ MORE
5. Emerging Asian countries, including India, running out of room to keep monetary policy on pause READ MORE
6. Scarcity to abundance: How a Maharashtra village came together to address water crisis READ MORE
7. Missing: One-third of India’s recorded forests READ MORE

Main Exam   

GS Paper- 1

1. Why India Can Expect Extremely Severe Cyclones During the 2022 Pre-Monsoon READ MORE
2. What it means to have a fertility rate of 2 READ MORE
3. Muslim women and their right to an education READ MORE

GS Paper- 2

POLITY AND GOVERNANCE

1. Why farm unions must stay out of electoral politics READ MORE
2. We need to build a deliberative democracy READ MORE
3. How colonial is Indian law? READ MORE
4. Too close to call: Contest wide open in high-stakes Punjab elections READ MORE
5. How India’s centralised bureaucracy undermines its federalism READ MORE

SOCIAL ISSUE

1. Child safety READ MORE

INTERNATIONAL ISSUES

1. India needs a refugee and asylum law: On refugee issues, it ought to be among the most admired nations and not one that has much to be ashamed of — as now READ MORE  
2. Foreign quarter: On internal matters and India’s response: India must show maturity in response to international criticism of internal matters READ MORE
3. Covid has shown why world must stand united READ MORE

GS Paper- 3

ECONOMIC DEVELOPMENT

1. Beyond the hype of blockchain, a look at its reality READ MORE

ENVIRONMENT AND ECOLOGY  

1. The developed world and its climate goals READ MORE
2. Scarcity to abundance: How a Maharashtra village came together to address water crisis READ MORE

TECHNOLOGY

1. Technology has changed intelligence gathering. Now all you need is an internet connection READ MORE

GS Paper- 4

ETHICS EXAMPLES AND CASE STUDY

1. Culture is not fixed, it keeps changing with time READ MORE
2. Cease all arguments READ MORE
3. How Secular are Indian Schools in Practice? READ MORE

Questions for the MAIN exam

1. ‘When democracy lends itself to greater centralisation, state institutions do not serve as effective checks’. Comment on the statement in the light of recent issue of deputation related to civil services.
2. Discuss how the financial commitments of developed world will be a vital help for developing countries to mitigate the impacts of extreme weather events?

QUOTATIONS AND CAPTIONS

• An imbalance between the rich and the poor is the oldest and most fatal ailment of all republics.
• Minority students are made to live with dominant and majority narratives and symbolisms in educational institutions. It always happens at the cost of learning.
• When democracy lends itself to greater centralisation, state institutions do not serve as effective checks.
• With investment not forthcoming from the corporates, it was imperative to raise investment, especially in the infrastructure sector.
• The goals of going digital are novel but much will depend on the quality and speed of internet connectivity and the excellence of trainers.
• Critiques of the colonial rule in India and its legacy have been extended to law – with many allusions to the need to shake off the yoke of the colonial legacy.
• As extreme weather events rise, impacting the world’s poorest, the developed world must step up and meet its finance commitments.
• It doesn’t matter whether you are for or against the headscarf. Or if the conversation should be about legality or religion. At its core, the hijab controversy is about access to education.
• The drop in India’s fertility rate below ‘replacement level’ has been both welcome and along expected lines but it will be many years before the country’s population will actually peak.
• Blockchain is an elegant concept whose properties and potential require careful research, but treating it as a solution for all problems without thinking things through is techno-determinism.
• India must show maturity in response to international criticism of internal matters.

50-WORD TALK

• New Delhi’s decision to reprimand Singapore PM Lee Hsien Loong for observing that half of India’s MPs face criminal charges, shows how thin-skinned and easily outraged new India really is. It’s a no brainer that criminality, corruption have degraded India’s democracy. Perhaps the ire is really because Loong praised Nehru.
• Eight decades after temple entry movement, the horrific video of Brahmin priests in the Chidambaram Nataraja temple, Tamil Nadu, obstructing a Dalit woman’s prayer shows a mission unaccomplished. That too in the land of Periyar. Casteism is structural. A few laws, MPs aren’t enough to stamp out the caste privilegentsia.
• We have to live with conflict the way we live with our own selves as divided and troubled souls. We have to accept that our city or our country reflects divisions of our souls and fragments of ourselves. When we are troubled, we talk to a friend, and sort out our problems. Similarly, members of a deliberative community have to keep a conversation going to resolve issues. Elections are but one moment, albeit a defining one, in a democratic life.

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: Recently, there is a debate on the illusion of rating agencies. Basically, the issues are -their necessities, flaws &fragilities, and the need for regulation. Similarly, credit score has also become complicated due to the current covid induced financial crisis.

WHAT IS A RATING AGENCY?

Credit rating is an informed opinion of a recognized entity on the relative creditworthiness of an issuer or instrument. In other words, it is an opinion “on the relative degree of risk associated with the timely payment of interest and principal on a debt instrument”. Such recognized entity is known as Credit Rating Agencies (CRAs).

CRAs typically rate on the basis.

• Debt securities
• Short term debt instruments, like commercial papers
• Structured debt obligations
• Loans and fixed deposits

WHY THERE ARE ISSUES OF ILLUSION?

IDEOLOGICAL BIASES: CRAs might lower ratings for left governments as a strategy to limit negative policy and market surprises as they strive to keep ratings stable over the medium term. For e.g. A panel analysis of Standard & Poor’s, Moody’s, and Fitch’s rating actions for 23 Organisation for Economic Co-Operation and Development (OECD) countries from 1995 to 2014 shows that left executives and the electoral victory of nonincumbent left executives are associated with significantly higher probabilities of negative rating changes.

CONFLICT OF   INTERESTS: CRAs are funded by the very companies they rate.

LACK OF ABILITY TO PREDICT: CRAs follow the market, so the market alerts the agencies of trouble. This reason can be attributed to CRA’s ability to predict frequent near default, default, and financial disasters.

NEGLIGENCE & INCOMPETENCE: The methodology of CRAs has come under question. For example, even after using different methodologies, the result for sovereign debts comes the same. It is also alleged that CRAs can make a sound judgement on rating, but they didn’t make an effort to do it. For e.g. Moody accepted that it did not have a good model on which it could have estimated a correlation between mortgage-backed securities, so they made them up.

POLITICALLY MOTIVATED: It has also been alleged that CRAs, through their rating mechanism, force the govt to follow the path they prescribe. For e.g. During the turmoil in Tunisia, S&P issued a report warning of “downward rating pressures” on neighbouring governments if they tried to calm social unrest with “populist” tax cuts or spending increases. Further, after Crimea’s annexation, rating agencies downgraded the rating of Russia.

POLICY MEDDLING: In 203, to stop predatory lending state of Georgia brought a law. Other states of the USA, was to follow suit until S&P retaliated. And it is well known that predatory lending is responsible for the financial crisis of 2008-09.

HOW A RATING AGENCY FUNCTION

1. FOR COMPANIES 

It is evident from the Above picture that credit rating agencies depend upon the audited statements. The agencies are only as effective the as honesty of their clients.

2. FOR COUNTRY

Following are the parameters on which a country is rated

• Regulatory framework
• Tariffs
• Fiscal Policy
• Monetary Policy
• Foreign Currency Control
• Physical and human Infrastructure
• Financial Markets
• Macro Factors (Consumer spending, Inflation, Interest Rates)

 WHY RATING AGENCY IS REQUIRED

From the 80s onwards, as the financial system became more deregulated, companies started borrowing more and more from the globalized debt markets, and so the opinion of the credit rating agencies became more and more relevant.

ROLE OF THE CRAs

REDUCE INFORMATION ASYMMETRY: Since CRAs get access to the tcompany’s management and confidential information about its working, they can give an informed opinion about the ability of an instrument to meet its obligations.

UTILITY FOR ISSUERS: The issuer concisely communicates the quality of their issue through the rating of the CRAs, which helps it establish its creditworthiness.

GATEKEEPERS FOR FINANCIAL MARKETS: CRAs provide tangible benefits to financial market regulators by reducing the costs of regulation. Regulators such as RBI use CRAs to improve the awareness and decision-making of their regulated entities. For instance, credit ratings are used to determine the capital adequacy of banks the resolution of stressed assets.

PURVEYORS OF REGULATORY LICENSES: Some financial regulators mandate that certain instruments must be rated mandatorily before they are issued. Extensive integration of CRAs into the financial system transforms their role as purveyors.

MORAL SUASION: It compels developing countries to pursue more prudent and sensible monetary and fiscal policies.

INSTANCES WHEN RATING AGENCIES FAILED

• The financial collapse of New York City in the mid-1970s
• Asian financial crisis
• Enron scandal
• Global Financial Crisis
• During the global financial crisis, hundreds of billions of dollars worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to “junk” (the lowest possible rating) within two years of the issue of the original rating.
• The US Financial Crisis Inquiry Commission called them “key enablers” of the financial crisis and “cogs in the wheel of financial destruction.”

THE HISTORY OF RATING AGENCY

• Credit rating agencies were first established after the financial crisis of 1837 in the US. Such agencies were then needed to rate the ability of a merchant to pay his debts, consolidating such data in ledgers.
• Systematic credit rating started with the rating of US railroad bonds by John Moody in 1909.

COMPARATIVE RATING SYMBOLS FOR LONG TERM RATINGS

• DEGREE OF SAFETY: Highest
• RATING: AAA
• Meaning: Timely payment of financial obligations
• DEGREE OF SAFETY: High
• RATING: AA
• Meaning: Timely payment of financial obligations
• DEGREE OF SAFETY: Adequate
• RATING: A
• Meaning: Changes in circumstances can adversely affect such issues more than those in the higher rating categories.
• DEGREE OF SAFETY: Moderate
• RATING: BBB
• Meaning: Changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal.
• DEGREE OF SAFETY: Inadequate
• RATING: BB
• Meaning: Less likely to default in the immediate future
• DEGREE OF SAFETY: A greater likelihood of default
• RATING: B
• Meaning: While currently financial obligations are met, adverse business or economic conditions would lead to a lack of ability or willingness.
• DEGREE OF SAFETY: Vulnerable to default
• RATING: C
• Meaning: Timely payment of financial obligations is possible only if favorable circumstances continue
• DEGREE OF SAFETY: In default or are expected to default
• RATING: D
• Meaning: Such instruments are extremely speculative and returns from these instruments may be realized only on reorganization or liquidation.
• DEGREE OF SAFETY: Some factors which render instruments outstanding meaningless
• RATING: NM
• Meaning: Factors include reorganization or liquidation of the issuer; the obligation is under dispute in a court of law or before a statutory authority etc.

CREDIT RATING AGENCIES IN INDIA

CRISIL:

• This full-service rating agency is India’s major credit rating agency, with a market share of more than 60%.
• It is offering its services in the financial, manufacturing, service, and SME sectors.
• The headquarter of CRISIL is in Mumbai.
• The majority stake of CRISIL was held by the world’s largest rating agency, Standard & Poor’s.

CREDIT ANALYSIS AND RESEARCH LIMITED RATINGS (CARE) RATINGS:

• Credit Analysis and Research Limited Ratings was established in 1993.
• It is supported by Canara Bank, Unit Trust of India (UTI), Industrial Development Bank of India (IDBI), and other financial and lending institutions.
• This is considered the second-largest credit rating company in India.
• The headquarter of Credit Analysis, and Research Limited Ratings is in Mumbai.

SMALL AND MEDIUM ENTERPRISES RATING AGENCY (SMERA):

• It is a rating agency entirely created for the rating of Small Medium Enterprises.
• It is a joint enterprise by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B), and some chief banks in India.
• The headquarter of SMERA is in Mumbai
• It has accomplished 7000 ratings.

ONICRA CREDIT RATING AGENCY:

• SonuMirchandani incorporated it in 1993
• It investigates data and arranges for possible rating solutions for Small and Medium Enterprises and Individuals.
• The headquarter of ONICRA Credit Rating Agency is located in Gurgaon
• It has broad experience in performing a wide range of areas such as Accounting, Finance, Back-end Management, Analytics, and Customer Relations. It has rated more than 2500 SMEs.

FITCH (INDIA RATINGS & RESEARCH):

• Fitch Ratings is a global rating agency dedicated to providing the world’s credit markets with independent and prospective credit opinions, research, and data.
• The headquarter of Fitch Ratings is in Mumbai.

ICRA:

• It was created in 1991 by prominent financial institutions and commercial banks in India with a devoted crew of experts for the MSME sector
• Moodys, which is considered the international credit rating agency holds the major share.

DIFFERENT BUSINESS MODELS OF CREDIT RATING AGENCIES

• MODELS: ISSUER PAY MODEL
• ADVANTAGE: Ratings are available to the entire market free of charge and will greatly aid small investors. It gives the rating agencies access to high-quality information that enhances the quality of analysis.
• DISADVANTAGE: It can lead to a serious conflict of interest since the company pays the CRAs to get the rating. The CRAs may inflate the rating to satisfy the company. It may lead to ‘Rating Shopping’ which refers to the situations where an issuer approaches different rating agencies for the ratings and then choose to publish the most favorable ratings to disclose them to the public via media while concealing the lower ratings.
• MODELS: INVESTOR PAYS MODEL
• ADVANTAGE: It would avoid the serious conflict of interest of the CRAs. This would enable the investors to get the credit rating based on the company’s true and actual financial condition.
• DISADVANTAGE: Ratings would be available only to those investors who can pay for them and take ratings out of the public domain and thus affecting the small investors. The company may not always share all the necessary information with the CRAs which can have an adverse impact on the quality of the ratings. It can pose a serious conflict of interest involving the investors themselves. If investors are the payees, they can influence CRAs to give lower-than-warranted ratings to help them negotiate higher interest rates.
• MODELS: REGULATOR PAYS MODEL
• ADVANTAGE: It eliminates the conflict of interest as seen in both Issuer Pay Model and  Investor Pay Model.
• DISADVANTAGE: The problem with this model lies in choosing the CRA and payment to be fixed. The CRA chosen by the regulator may not provide the best credit rating. Further, if the regulator pays less amount of money to the CRA, the CRA may find it difficult to continue with its business and could have an adverse impact on the quality of the ratings issued.

SHOULD RATING AGENCIES BE REGULATED?

• RATING SHOPPING: It has often been seen that both issuer and investor are involved in rating shopping. CRAs inflate the rating, particularly for structured product markets for getting more market share and profit margins.
• OLIGOPOLISTIC TENDENCIES: Around 95% of the market is controlled by only 3 CRA VIZ. S&P, MOODY’S and  Further, they use expansionist marketing. For e.g. Hannover Re lost a big chunk of the market share when it didn’t pay the service fee. (CRAs promised it free service).
• HEGEMONIC CONTROL: As the big three CRAsare located in North America, America exerts great control on the functioning of CRAs. When CRAs downgraded the USA, CRAs were fined. Further, the rating of the country is not done objectively. UK was rated lower than the USA, even when the fiscal deficit of the UK was lower than the USA.
• CONTROL: CRAs have great control over the world economy as their rating can result in the flight of capital.
• ACCOUNTABILITY: CRAs are not accountable to any country and their functioning is not transparent

CHANGES THAT IS IMPERATIVE FOR BETTER FUNCTIONING

DODD-FRANK ACT

In response to the Global Financial Crisis of 2008-2009, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. It encourages CRAs to invest in due diligence, strengthen internal controls and corporate governance, and improve their methodology. But some of the following provisions of it are still unimplemented:

• The legal liability of credit rating agencies should be increased.
• The use of credit ratings in regulations that set capital requirements and restrict asset holdings for financial institutions should be removed or replaced.
•  Internal controls, conflicts of interest for credit analysts, standards for credit analysts, transparency, the internal conflict of interest, and rating performance statistics should be ruled based and regulated.

THE WAY FORWARD

• A rating agency run by the UN, funded by pooled contributions from both lenders and borrowers should be established. Rating business must be made a utility, rather than a semi-cartel that intimidates elected politicians and rakes in excess profits
• With the help of technology, open-source models with fully transparent inputs and outputs should be created and promoted. Credit Risk Initiative of the National University of Singapore Risk Management Institute is one such example.

THE CONCLUSION: CRAs play a valuable role in financial markets by analyzing credit for many investors, but their inaccurate ratings can create problems of enormous proportion for the world economy. A unified, integrated effort by all the country is needed to avoid another economic meltdown, which would have severe repercussions for both, any country or its citizen

ADDITIONAL INFORMATION

ALL YOU NEED TO KNOW CREDIT SCORE

Credit score: A credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.

The background: The credit score model was created by the Fair Isaac Corporation, also known as FICO, and financial institutions use it.

How Credit Scores Work: A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a higher rate than a conventional mortgage to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.

The history of credit scores in India: Credit Information Bureau (India) Limited was founded in August 2000 and is India’s first credit information firm. The organization gathers and manages financial records of individuals as well as business organizations relating to loan and credit card payments & borrowings. CIBIL acquires this data with the assistance of its bankers and credit institutions.

• CIBIL is RBI authorized and is also known as the Credit Bureau. It is covered under the 2005 Credit Information Companies Regulation Act. To find relevant information, it requires support from its associated partners, including bank members & credit institutions. Associate partners give it every month.
• In 2014, keeping the prevalent information asymmetry in mind, the RBI decided to set up a technical group on credit information based on the recommendations of the Aditya Puri committee.
• The committee included chief executives belonging to all the four credit bureaus, representation from large banks, an executive from the Indian Banks’ Association (IBA), and several RBI officials.
• The Puri committee suggested that the Cibil format could be used to standardize data formats for both consumer and commercial borrowers.

Problems in credit ratings: Erroneous credit score could either be a genuine mistake by the bank or, in some cases, when an individual stands as a guarantor for a loan. Experts believe that customers should check their scores regularly and report any discrepancies that they notice in their credit history. Due to the data entry operator, the lackadaisical attitude of most lenders and the long-winding dispute resolution process cannot be pinned on customers. While checking credit scores at regular intervals would weed out any