1. EVERGREENING OF LOANS
TAGS: GS 3: ECONOMY
CONTEXT: Reserve Bank of India (RBI) Governor raised red flags over banks adopting innovative methods for evergreening of loans covering up the real status of stressed loans of corporates to project an artificial clean image in cahoots with corporates. However, bankers differ, saying that sometimes it is practical to extend liquidity support to companies that are genuinely facing issues.
EXPLANATION:
What is evergreening of loans?
- The process of evergreening of loans, a form of zombie lending, is typically a temporary fix for a bank. If an account turns into a non-performing asset (NPA), banks are required to make higher provisions which will impact their profitability.
- So, to avoid classifying a loan as an NPA, banks adopt the evergreening of loans. In the past, many banks had indulged in dressing up bad loans and given additional funds to companies who didn’t have the capacity to repay.
How evergreening of loans are done?
- An accommodative monetary policy creates an enabling environment for weak banks to evergreen loans to zombies and keeps them alive. The RBI has been following an accommodative policy since March 2020 when the pandemic struck the country.
- It is done by bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments.
- Here, good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress.
- It is done by use of internal or office accounts to adjust borrower’s repayment obligations.
- It is done by renewal of loans or disbursement of new/additional loans to the stressed borrower or related entities closer to the repayment date of the earlier loans.
Consequences:
- Most of the evergreening has happened in public sector banks which subsequently led to a jump in Non Performing Assets(NPAs).
- Banks delay the recognition of losses due to loan defaults and engage in evergreening, which is essentially the rolling over of debts of unviable borrowers that would have otherwise defaulted. This is purely misgovernance, so that bad loans are made to look good many a time by additional lending to troubled borrowers.
- Some banks have even extended such loans to wilful defaulters to keep them out of the defaulters’ books.
- Such resource misallocation supports the crowding-out effects ascribed to zombies, according to an RBI paper on Zombies and the Process of Creative Destruction.
- It results in credit being diverted to weak entities – which is ultimately diverted for other purposes or it becomes a bad loan – depriving the genuine credit needs of good borrowers.
When do banks evergreen loans?
- Restructuring is often used by banks for ‘evergreening’ problem accounts to keep the reported NPA levels low.
- However, with the enactment of the bankruptcy code, evergreening has declined but recovery has remained abysmally low.
- It normally happens due to the unholy relationship between bankers and borrowers.
How can evergreening be stopped?
- As suggested by committee to Review Governance of Boards of Banks wherever significant evergreening in a bank is detected by the RBI, penalties should be levied through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned.
- The primary defence against evergreening must however come from the CEO, the audit committee and the board. The audit committee, in particular, needs to be particularly vigilant.
What is Non Performing Assets(NPA):
- A loan turns into a nonperforming asset, or NPA, if the interest or instalment remains unpaid even after the due date and remains unpaid for a period of more than 90 days.
Different types of non-performing assets depend on how long they remain in the NPA category.
a) Sub-Standard Assets: An asset is classified as a sub-standard asset if it remains as an NPA for a period less than or equal to 12 months.
b) Doubtful Assets: An asset is classified as a doubtful asset if it remains as an NPA for more than 12 months.
c) Loss Assets: An asset is considered a loss asset when it is “uncollectible” or has such little value that its continuance as a bankable asset is not suggested. However, some recovery value may be left in it as the asset has not been written off wholly or in parts.
2. LEGAL PROVISIONS OF THE CONTRACT
TAGS: GS 2: GOVERNANCE
CONTEXT: The Supreme Court has held that the government, when entering into a contract under the President’s name, cannot claim immunity from the legal provisions of that contract under Article 299 of the Constitution.
EXPLANATION:
Issue:
- The case dealt with an application filed by Glock Asia-Pacific Limited, a pistol manufacturing company, against the Centre regarding the appointment of an arbitrator in a tender-related dispute
- Glock Asia Pacific entered into a contract with the Ministry of Home Affairs for the supply of 31,756 Glock pistols. Subsequently, there was a dispute between the two parties due to the Centre invoking a performance bank guarantee.
- Glock then issue a notice invoking arbitration, nominating a retired DelhiHigh Court judge as the sole arbitrator. When the government was called to accept this, it said that the arbitrator’s nomination violated one of the tender conditions that said an officer in the Law Ministry, appointed by the MHA Secretary, would be the arbitrator in case of a dispute.
- Thus, Glock challenged this clause in the agreement, which allowed a government officer to resolve the difference between the two parties as an arbitrator, as one party here was the MHA itself.
- A performance bank guarantee, similar to a letter of credit, is the bank’s promise that it will meet the debtor’s liabilities, provided that he fails to meet the contractual obligations.
- A letter of credit is essentially a financial contract between a bank, a bank’s customer and a beneficiary. Generally issued by an importer’s bank, the letter of credit guarantees the beneficiary will be paid once the conditions of the letter of credit have been met.
- Letters of credit are used to minimize risk in international trade transactions where the buyer and the seller may not know one another.
What did the court hold?
- One of the major grounds of the challenge given under Section 12(5) of the Arbitration and Conciliation Act, 1996, says that notwithstanding any prior agreement, any person whose relationship with the parties or counsel of the dispute falls under any of the categories in the Seventh Schedule will be ineligible to be appointed as an arbitrator.
- The Seventh Schedule includes relationships where the arbitrator is an employee, consultant, advisor, or has any other past or present business relationship with a party.
- Deciding the case in Glock’s favour, the court observed that the arbitration clause allowed a “serving employee of the Union of India, a party to the contract, to nominate a serving employee of the Union of India as the Sole Arbitrator.” Holding this to be in conflict with Section 12(5), the court allowed the present application.
- The court also appointed former SC judge Justice Indu Malhotra “as the Sole Arbitrator to adjudicate upon the disputes” in the case.
- Referring to the recommendation of the 246th Law Commission Report, which dealt with the issue of contracts with government entities, the court observed that when the party appointing an arbitrator is the State, “the duty to appoint an impartial and independent adjudicator is even more onerous.”
- Thus, the court rejected the Centre’s reliance on Article 299, saying, “Article 299 only lays down the formality that is necessary to bind the government with contractual liability” and not “the substantial law relating to the contractual liability of the Government”, which is to be found in the general laws of the land.
Article 299 of the Constitution:
- Article 298 grants the Centre and the state governments the power to carry on trade or business, acquire, hold, and dispose of property, and make contracts for any purpose,
- Article 299 delineates the manner in which these contracts will be concluded.
- Articles 298 and 299 came after the Constitution came into effect and the government entered into contracts even in the pre-independence era.
- According to the Crown Proceedings Act of 1947, the Crown could not be sued in court for a contract it entered into.
- Article 299 of the Constitution provides that “all contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President or by the Governor of the State” and that all such contracts and “assurances of property made in the exercise of that power shall be executed” on behalf of the President or the Governor by persons in a manner as directed and authorised by them.
- Further, the phrase ‘expressed to be made and executed’ under Article 299 (1) means that there must be a deed or contract in writing and that it should be executed by a person duly authorised by the President of the Governor on their behalf.
- The objective behind Article 299(1), as per the 1954 top court ruling in ‘Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram & Ors’, is that there must be a definite procedure according to which contracts must be made by agents acting on the government’s behalf; otherwise, public funds may be depleted by unauthorized or illegitimate contracts. It implies that contracts not adhering to the manner given in Article 299(1) cannot be enforced by any contracting party.
- However, Article 299 (2) says that essentially, neither the President nor the Governor can be personally held liable for such contracts.
What are the requirements for government or state contracts?
- In its judgement, the court referred to its 1966 ruling in ‘K.P. Chowdhry v. State of Madhya Pradesh. And Others’, which laid down essential requirements for government contracts under Article 299.
- In that ruling, the top court had reiterated three conditions to be met before a binding contract against the government could arise, namely:
(i)the contract must be expressed to be made by the Governor or the Governor-General
(ii) it must be executed in writing
(iii) the execution should be by such persons and in such manner as the Governor or the Governor-General might direct or authorise.
- Prior to this, the Apex Court, in its 1962 ruling in ‘State of Bihar v. Messrs. Karam Chand Thapar’, had laid down these three conditions too.
3. A COMMEMORATIVE COIN OF RS 75 DENOMINATION ON INAUGURATION OF NEW PARLIAMENT
TAGS: PRELIMS PERSPECTIVE
CONTEXT: To mark the inauguration of the new Parliament building, Prime Minster released a commemorative coin of Rs 75 denomination. In a notification released ,the Ministry of Finance first announced the launch of the coin. “The coin of Seventy-Five Rupees denomination shall be coined at the Mint for issue under the authority of the Central Government.
EXPLANATION:
- India has been issuing commemorative coins since the 1960s for several reasons such as paying homage to notable personalities, spreading awareness about government schemes, or remembering key historic events.
- The country released its first commemorative coin in 1964 in honour of Jawaharlal Nehru, who had passed away that year.
Features of commemorative coin:
- As per the Ministry of Finance notification, the latest Rs 75 coin is circular in shape with a diameter of 44mm. The composition of the coin is of a quaternary alloy 50 per cent silver, 40 per cent copper, 5 per cent nickel and 5 per cent zinc.
- “The face of the coin shall bear the Lion Capitol of Ashoka Pillar in the centre, with the legend “सत्यमेि जयते” (Satyameva Jayate) inscribed below, flanked on the left periphery with the word “भारत” (Bharat) in Devnagri script and on the right periphery the word “INDIA” in English.
- It added that the other side of the coin displays an image of the new parliament building. The inscription “Sansad Sankul” is written in Devanagari script on the upper periphery while the words “Parliament Complex” in English on the lower periphery of the coin.
- If someone wants to acquire commemorative coins, they can do so by visiting the website of the Securities of Printing and Minting Corporation of India Limited (SPMCIL).
- The Coinage Act, 2011 gives the central government the power to design and mint coins in various denominations. In the case of coins, the role of the RBI is limited to the distribution of coins that are supplied by the central government.
- All coins are minted in the four mints owned by the Government of India in Mumbai, Hyderabad, Kolkata and Noida
Securities of Printing and Minting Corporation of India Limited (SPMCIL)
- It a wholly owned Schedule ‘A’ Miniratna Category-I company of Government of India, incorporated on 13th January, 2006.
- SPMCIL, technically a new entity, has centuries-old experience in Security Printing and Minting.
- The management, control, maintenance and operations of the erstwhile 9 production units under Currency and Coinage division, Department of Economic Affairs, Ministry of Finance, Government of India, was transferred to SPMCIL on February 10, 2006.
- The Ministry of Finance exercises its administrative control over SPMCIL through Board of Directors.
- SPMCIL is engaged in the manufacture/ production of Currency and Bank Notes, Security Paper, Non-Judicial Stamp Papers, Postal Stamps & Stationery, Travel Documents viz. Passport and Visa, Security certificates, Cheques, Bonds, Warrant, Special Certificates with security features, Security Inks, Circulation & Commemorative Coins, Medallions, Refining of Gold & Silver, and Assay of Precious Metals.
Coinage Act, 2011
- The Coinage Act was enacted on 1st September 2011 and it extends to the whole of India.
- The Coinage Act, 2011 was enacted to consolidate the laws in relation to coinage and the mints and its protection.
- The Act puts a strict bar on activities like melting, destruction, making or possession of the coins thereof for issue and for matters connected therewith or incidental thereto
- RBI functions as an agent of the Government in the distribution of Coins. It is responsible for making decisions on the pattern, production and the all-inclusive management of the nation’s currency, with the aim of ensuring an adequate supply of clean and genuine notes.
Under the Act, the Government has the authority to —
- Establish a Mint at any place which may be managed by it or by any other person, upon whom the purpose is devolved
- Abolish any Mint.
4. GURU RAVIDAS
TAGS: GS 1: ART AND CULTURE
CONTEXT: In California, members of an under-the-radar, minority religious community are stepping into the public eye to advocate for making the state the first in the nation to outlaw caste bias. They are the Ravidassia followers of Ravidass, a 14th century Indian guru who preached caste and class equality. There are about 20,000 members of the community in California, most of them in the Central Valley.
EXPLANATION:
Guru Ravidass:
- Ravidass was born in the 14th century in a village near Varnasi, India, to a family of cobblers and tanners who belonged to the then-untouchable or leather-working caste known as “chamars.”
- Guru Ravidassbelonged to the lowest-rung of the caste system formerly considered untouchable and also known as Dalit, which means “broken” in Hindi.
- Ravidass was an Indian guru, mystic and poet who was one of the most renowned figures in the North Indian bhakti movement, which placed love and devotion to god above all and preached against the caste system.
- The Guru Granth Sahib, which is the sacred text of Sikhism, bears 40 verses or shabads of Ravidass.
Ravidassia temples:
- A Ravidassia place of worship is called a sabha, dera, gurdwara or gurughar, which could all be translated as temple.
- The temples serve a post-worship meal as Sikh gurdwaras also do, which is known as langar.
- Ravidassia temples often display idols and/or pictures of Guru Ravidass in the prayer halls.
The Ravidassia identity:
- Many male Ravidassia members wear long hair in a turban and carry Sikh articles of faith such as the kada or bracelet, kangha or wooden comb and kirpan, the sheathed, single-edged knife.
- Many men and women in the community also have Sikh last names Singh and Kaur.
- Idols and images of Ravidass, however, can only be seen in a Ravidass temple.
- In addition, the community celebrates the birthday of their guru, which typically falls in February. Many Ravidass temples also observe the birth anniversary of B.R. Ambedkar, the Indian Dalit rights icon whose given name was Bhimrao.
- The faith also has followers who are Hindu and those who are from different parts of India.
- Ravidassia community members in California are largely of Punjabi descent.
5. ENVIRONMENTAL IMPACT OF CONSUMPTION
TAGS: GS 3: ENVIRONMENT
CONTEXT: The ever-increasing demand for agricultural products is leading to significant social and environmental consequences worldwide. The expansion of international trade has created global supply chains, directly linking consumers to geographically-distant impacts, including carbon emissions, biodiversity loss, freshwater depletion, soil degradation and labour-rights issues – all of which have local, regional, and global relevance.
EXPLANATION:
- Due to its vast size and consumer market, India is a global anchor of the trade in agricultural products. It has also undergone remarkable social and economic development over the last several decades. This has led to an increasing demand as well as supply of these products.
- Large land areas in India are used to service the international demand for grains, fruits, and vegetables, among other products, which puts pressure on national soil and water resources. At the same time, India’s vast consumer market means that large amounts of land, even outside its borders, are used to satisfy domestic demand.
What is food-based impact accounting?
- The expansion of such imports has contributed to increasing the environmental pressure in the exporting countries.
- Tackling these demand-supply dynamics is now a key aspect of international environmental governance.
- The current paradigm in measuring impacts and allocating responsibility is based on a production-based accounting method: it measures impacts in the place where the products are produced.
- There are concerns about its limitations in managing ‘leaks’, fixing accountability, and ensuring equity and justice among producers and consumers.
What is consumption-based accounting?
- Consumption-based accounting accounts for impacts at the point of consumption, attributing all the social and environmental impacts that occurred during production and trade to the final products and to the eventual consumers.
- That is, the approach urges the consumer (whether social groups or countries) to accept responsibility for the embodied or ‘virtual’ impacts of the product that is being consumed.
- This approach has become prominent thanks to growing concerns around the divide between countries that are producers and those that are consumers, leading to a high degree of international co-dependence.
What is the demand perspective?
- From a demand perspective, the basis for this approach is straightforward: since the pressure on natural and human resources is largely the direct result of consumption practices in developed economies, the responsibility for any consequences due to the production process should fall on those consumers as well.
- A consumption-based approach thus highlights the responsibility of industrialised states to mitigate impact and the rights of developing economies to not carry an excexcessive burden. This is an extension of the principle of common but differentiated responsibilities that make up global climate governance.
What is the supply perspective?
- From a supply perspective, the proponents of consumption-based accounting claim that it can encourage cleaner production since producer countries are implicitly encouraged to implement strategies that lower the environmental footprint of their exports.
- The approach can also go a long way to fix ‘leaks’ in production systems, where production is often taken to jurisdictions that are relatively lenient about production standards (including India).
What are the benefits for environmental action?
- The application of this approach to estimate carbon emissions, in the form of embodied emissions, and water use, in the form of virtual water, has also been around in the scientific literature for some time, but has only recently made inroads into policy making.
- Even from a consumption-based accounting perspective, India finds itself in a unique position. Currently, major developed economies have an environmental footprint in India because of their consumption of Indian agricultural produce. Conversely, India’s own deforestation footprint outside its borders has increased over the last two decades and is rapidly growing, even if it remains below that of several G-20 countries on a per-capita basis.
