CURRENT AFFAIRS – 18/11/2023

CURRENT AFFAIRS - 18/11/2023

CURRENT AFFAIRS – 18/11/2023

CURRENT AFFAIRS – 18/11/2023

India, EU inch closer to settling their trade dispute at WTO

(General Studies- Paper III)

Source : The Indian Express

India is on the verge of resolving a major trade dispute with the European Union (EU) involving information communications technology (ICT) products.

  • The disagreement has been a source of concern, particularly as it could impact India’s efforts to boost electronic product manufacturing and reduce reliance on China.

Key Highlights

  • Prior to the potential resolution with the EU, India successfully settled all seven trade disputes at the World Trade Organization (WTO) with its largest trade partner, the United States.
  • This indicates positive developments in India’s international trade relations.
  • Background of the Dispute:
    • The dispute at hand dates back to 2019 when Brussels took India to the WTO’s dispute settlement mechanism.
    • The EU contested India’s imposition of import duties on a broad spectrum of ICT products, including mobile phones, components, base stations, integrated circuits, and optical instruments.
    • The EU argued that these duties violated global trade norms and were negatively impacting €600 million worth of its tech exports to India.
  • Potential Ramifications:
    • The dispute holds significance due to its potential impact on India’s strategic efforts to bolster electronic product manufacturing.
    • An adverse final ruling could have disrupted the flagship Production-Linked Incentive (PLI) scheme, leading to the rolling back of duties.
    • This development is crucial for India’s economic interests, especially in the realm of ICT products.
  • Parallel Issues with the EU:
    • India had communicated to the EU that it was facing similar losses due to the EU’s restrictions on Indian steel.
    • The EU had imposed specific quotas for steel imports, beyond which additional import duties of 25 percent were levied.
    • This move aimed to prevent the diversion of exports from the US market to the EU market amid controversial tariffs on steel during the Donald Trump administration.
  • Mutual Settlement Anticipated
    • A probable mutual settlement is expected to follow the Trade and Tech Council (TTC) meeting between India and the European Union (EU).
    • This high-level meeting addressed various unresolved issues between the two nations, given the absence of a functional dispute resolution mechanism at the World Trade Organization (WTO).
    • The TTC with the EU is particularly noteworthy, as the EU currently only has a similar council with the United States.
    • The primary objective of the council is to establish technology partnerships with like-minded countries, especially in the context of increasing tensions with China.
  • Background and India’s ICT Duties:
    • India had imposed higher duties on Information Communications Technology (ICT) products as part of its strategy to enhance electronic product manufacturing, leveraging the Production-Linked Incentive (PLI) scheme.
    • This move aligns with India’s efforts to boost its electronic products sector, which has shown growth even amid a decline in broader goods exports during the current fiscal year.
  • Challenges at the WTO:
    • In earlier developments, India questioned the legality of a World Trade Organization (WTO) dispute resolution body’s order favoring the EU.
    • India argued that the panel’s decision incorrectly assumed that India had prior notice of the expansion of tariff lines under its schedule.
    • India emphasized that notice is essential before determining a member state’s contribution through conduct, and the panel’s decision was based on a legal error.
  • The significance of the Trade and Tech Council lies in its aim to foster technology partnerships with countries sharing similar perspectives, emphasizing the importance of collaborative efforts amid global geopolitical shifts and tensions, particularly with China.

About World Trade Organization (WTO)

  • The WTO, established in 1995, is an intergovernmental organization operating within the United Nations System.
  • It serves as a pivotal body for regulating and facilitating international trade, aiming to establish, revise, and enforce rules governing global trade.
  • Commencement and Historical Context:
    • The WTO officially commenced operations on January 1, 1995, as a result of the Marrakesh Agreement, marking the replacement of the General Agreement on Tariffs and Trade (GATT) from 1948.
  • Global Representation:
    • With 164 member states, the WTO stands as the world’s largest international economic organization.
    • Collectively, these member states represent over 98% of global trade and global GDP.
  • The WTO plays a crucial role in facilitating trade in goods, services, and intellectual property among participating nations.
  • It provides a comprehensive framework for negotiating trade agreements, which primarily aim to reduce or eliminate tariffs, quotas, and other trade restrictions.
  • Trade agreements are the result of negotiations between representatives of member governments.
  • These agreements, once negotiated, necessitate ratification by the legislatures of member states, solidifying a formal and legal commitment to the agreed-upon terms.
  • Dispute Resolution Mechanism:
    • The organization administers an independent dispute resolution mechanism to ensure participants’ adherence to trade agreements.
    • It actively engages in resolving trade-related disputes among member countries, contributing to the establishment of a fair and orderly global trading system.
  • Institutional Structure:
    • The WTO’s headquarters are situated in Geneva, Switzerland.
    • The Ministerial Conference, comprising representatives from all member states, serves as the top decision-making body, convening biennially and placing a strong emphasis on consensus.
    • Day-to-day functions are handled by the General Council, composed of representatives from all member states.
  • Secretariat and Administrative Support:
    • The Secretariat, led by the Director-General and four deputies, consists of over 600 personnel.
    • It plays a vital role in providing administrative, professional, and technical services essential for the efficient functioning of the organization.
  • Financial Overview:
    • The WTO’s annual budget, approximately 220 million USD, is contributed by member countries based on their proportion of international trade.
    • This financial structure ensures equitable participation and representation within the organization.

Adultery: What SC ruled and Why?

(General Studies- Paper II)

Source : The Indian Express

The Parliamentary Committee on Home Affairs has recommended the inclusion of adultery as a criminal offense in the proposed Bharatiya Nyaya Sanhita (BNS), 2023, intended to replace the Indian Penal Code (IPC), 1860.

  • This suggestion is part of the committee’s examination of three Bills, including replacements for the IPC, the Code of Criminal Procedure (CrPC), 1973, and the Indian Evidence Act, 1872.

Key Highlights

  • Committee Recommendations and Changes:
    • The parliamentary committee, led by BJP Rajya Sabha member Brij Lal, has proposed more than 50 changes to the Bills introduced in August.
    • The committee flagged numerous errors and modifications, indicating a comprehensive review of the proposed legal framework.
  • Legal Position on Adultery Pre-2018:
    • Until 2018, the IPC contained Section 497, defining adultery as a criminal offense punishable by up to five years in prison, a fine, or both.
    • Notably, only men could be penalized under Section 497, and the provision was criticized for its gender bias.
    • The section, in its wording, exclusively targeted men involved in sexual intercourse with a married woman without the consent or connivance of her husband.
  • Section 497 and Supreme Court Ruling:
    • The Supreme Court, in the case of Joseph Shine vs Union Of India (September 27, 2018), unanimously struck down Section 497 of the IPC.
    • The decision was based on grounds that included discrimination, emphasizing the need for gender-neutral laws and rejecting the previous distinction that allowed only men to be charged with adultery.
  • Proposed Reinstatement in BNS, 2023:
    • The committee’s recommendation to reintroduce adultery as a crime in the BNS, 2023, raises questions about the potential revival of a criminal framework for consensual sexual relations between married individuals.
    • The nature and implications of the proposed changes, as well as the potential for gender neutrality in the redefined offense, remain crucial aspects to be clarified.
  • The reintroduction of adultery as a crime is likely to spark legal debates surrounding personal liberties and the role of the state in regulating private relationships.
  • Public response to the proposed amendments, particularly in the context of evolving societal norms and constitutional principles, will be essential to gauge the acceptability and legitimacy of such legal changes.
  • Gender-Neutral Adultery Laws Proposed:
    • The Committee’s 350-page report, adopted on November 10, advocates for the reinstatement of adultery as a criminal offense but with a crucial modification: gender neutrality.
    • The recommendation suggests that both men and women should face punishment for adultery, addressing the discriminatory nature of the earlier provision.
    • The Committee contends that the earlier Section 497, which penalized only married men for adultery, reduced married women to the status of property.
    • It argues that safeguarding the sanctity of marriage, deemed sacred in Indian society, justifies the proposed gender-neutral approach.
  • Legal Context of Section 497:
    • Section 497, present in the IPC until 2018, was struck down by the Supreme Court on grounds of discrimination and violation of constitutional articles.
    • The court ruled that treating adultery as a criminal offense would intrude into the extreme privacy of the matrimonial sphere and emphasized the autonomy and dignity of women.
  • Supreme Court’s 2018 Ruling:
    • The Supreme Court, in Joseph Shine vs Union Of India (2018), declared Section 497 violative of Articles 14, 15, and 21 of the Constitution, protecting fundamental rights to equality, non-discrimination, and life.
    • The judgment underscored the autonomy of women, rejecting the notion of a husband’s legal sovereignty over his wife.
    • Adultery, according to the court, does not fit the concept of a crime and is better suited as grounds for divorce.
  • Challenges and Concerns:
    • Critics argue that the proposed reinstatement may contradict the Supreme Court’s 2018 ruling and risk infringing upon privacy and individual autonomy.
    • The judgment considered Section 497 a relic of Victorian morality, and any attempt to reintroduce similar provisions may face legal and societal challenges.
  • Possibility of Legislative Changes:
    • While a Supreme Court ruling is binding, the Parliament can pass a law that removes the basis of the court’s judgment.
    • Such legislation can be retrospective and prospective, altering the legal landscape while adhering to the altered position brought in by the validating statute.

State of the economy

(General Studies- Paper III)

Source : TH

The International Monetary Fund (IMF) in its semi-annual report, ‘Navigating Global Divergences,’ October 2023, has revised India’s projected GDP growth rate for 2023-24 to 6.3%, up from the previous estimate of 6.1%.

  • The IMF has revised downwards the world GDP growth projection, including China’s, by 0.3 percentage points to 4.2%.

Key Highlights

  • This revision positions India’s short-term economic management as successful, especially considering the global economic challenges.
  • India’s Economic Recovery Post-COVID:
    • Acknowledges the widely observed trend that economies most affected during the COVID-19 pandemic have recorded significant recovery.
    • India, initially one of the worst affected, has demonstrated a steep recovery, with its GDP contracting by 25.6% in Q2 2020.
    • The output contraction in 2020-21, at 8.5% over the previous year, was among the worst for large economies.
  • Longer-Term Economic Trends:
    • India’s real annual GDP growth rate had slowed down from 6.8% in 2016-17 to 2.8% in 2019-20, just before the pandemic.
    • Real per capita income in 2021-22 was higher than in 2019-20, indicating a recovery.
    • Recovery in 2022-23 gained momentum as domestic supplies were restored and global supply chains stabilized.
  • Concerns and Criticisms:
    • Despite output recovery, concerns persist regarding employment, its quality, and the persistence of inflation, particularly affecting the poor.
    • Critics emphasize the need for a holistic view beyond GDP growth, considering social and economic indicators.
  • Geopolitical Dynamics and Policy Implications:
    • The end of 2022-23 is marked as the end of globalization as known since 1989, with significant shifts in the world geopolitical order.
    • India faces persistent vulnerabilities, particularly in the form of oil and food shocks, as highlighted in the Finance Ministry’s Monthly Economic Review.
    • Policymakers are advised to temper their optimism by considering a slightly longer-term view and a wider perspective.
    • There is an emphasis on appreciating the fast-changing geopolitical underpinnings of economic policy-making.
  • Soaring Trade Deficit with China:
    • India faces a growing concern over its increasing trade deficit with China, contributing to its economic vulnerability.
    • The net exports to GDP ratio has sharply declined, indicating a heightened economic frailty.
  • Atmanirbhar Bharat Abhiyan and Challenges:
    • The Atmanirbhar Bharat Abhiyan, initiated in May 2020 amid the Galwan crisis, aimed to reduce Chinese imports of critical industrial products.
    • Despite efforts, the trade deficit with China continues to rise, reaching a third of India’s overall trade deficit.
    • Import restrictions were eased due to the domestic production being hindered by a lack of essential Chinese inputs.
    • The decline in Chinese imports correlates with a steady decrease in industrial growth rates, dropping from 13.1% in 2015-16 to negative 3.5% in 2019-20.
    • The Index of Industrial Production (IIP) shows a concerning regression, with manufacturing growth falling from 5.7% during the boom period (2004-05 to 2013-14) to 3.1% during 2014-15 and 2022-23.
    • Capital goods, a critical sector, witnessed a drastic fall from 9.7% to 1% during the same period.
  • Decline in Fixed Capital Formation and Foreign Direct Investment:
    • Gross fixed capital formation to GDP ratio at current prices witnessed an unprecedented fall from 34.3% in 2011-12 to 28.9% in 2021-22.
    • The public sector’s share in this decline remained constant at 8%.
    • Net foreign direct investment to GDP ratio fell from 3.6% in 2008 to 2.4% in 2022.
  • The merging of extra-budgetary borrowing by central public sector undertakings (PSUs) with the central government’s budget may create an illusory boost in public investment.
  • Public investment is estimated to be around 6% of GDP, possibly similar to pre-COVID-19 levels.
  • Human Development Index (HDI) Concerns:
    • Social development is under scrutiny, with debates over the credibility of multidimensional poverty measures and the Global Hunger Index.
    • The UN Development Programme’s Human Development Index (HDI) indicates a decline from 0.645 in 2018 to 0.633 in 2021, with a drop in global ranking.
    • Critics suggest using HDI as a more credible measure for assessing social development.
  • Overall Economic Setbacks:
    • Despite official spokespersons emphasizing short-term growth projections, a broader economic assessment reveals significant challenges.
    • Key issues include the strategic threat of a rising trade deficit with China, declining industrial output growth rates, a decade-long decline in fixed investment, and a slipping HDI ranking.

About International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international financial institution established to promote global monetary cooperation, exchange rate stability, balanced trade growth, and financial stability.

  • The IMF was established on December 27, 1945.
  • The IMF was created at the Bretton Woods Conference in 1944, along with the World Bank.
  • The conference aimed to set up a framework for international economic cooperation after World War II.
  • Objectives:
    • The primary purpose of the IMF is to facilitate international monetary cooperation and exchange rate stability.
    • The IMF aims to contribute to the promotion of high employment, economic growth, and poverty reduction globally.
    • It provides policy advice, financial assistance, and technical assistance to member countries to address balance of payments problems and financial crises.

11 lakh children in India missed 1st measles shot in 2022: Report

(General Studies- Paper II)

Source : Indian Express

An estimated 11 lakh children in India did not receive their crucial first dose of the measles vaccine in 2022.

  • India is among the top 10 countries with the highest number of children missing the first shot.

Key Highlights

  • Measles Outbreaks and Cases in India:
    • India is one of 37 countries that experienced large or disruptive measles outbreaks, reporting 40,967 measles cases in 2022.
    • The country faces challenges in measles immunization, contributing to outbreaks and increased cases.
  • Global Impact of Pandemic on Measles Immunization:
    • Globally, measles immunization dropped to the lowest levels since 2008 during the COVID-19 pandemic.
    • The decline led to an 18% rise in measles cases and a 43% increase in deaths in 2022, according to the report.
  • Gaps in routine immunization during the pandemic left children vulnerable to measles, especially in peri-urban areas and clusters.
  • The susceptibility of missing a single cohort vaccination is significant as it makes them highly susceptible to the infection.
    • Two doses of the measles vaccine provide 97% protection for life, emphasizing the importance of completing the vaccination schedule.
    • Measles can lead to severe complications, including brain swelling, pneumonia, breathing problems, and death.
  • Measles Elimination Goal in India:
    • India, along with other countries in the WHO South-East Asia Region, aims for measles elimination by 2023.
    • The government implemented the Indradhanush initiative to catch up on missed vaccinations after the pandemic.
  • Intensified Mission Indradhanush to Cover Gaps:
    • Three rounds of Intensified Mission Indradhanush, ending in October, aimed to cover immunization gaps by reaching children who missed shots.
    • Coverage expanded to include children up to the age of five to achieve high coverage of the measles-rubella vaccine.
  • Challenges and Response in India:
    • Challenges include a decline in coverage due to the focus on COVID-19, leading to increased measles cases, particularly in five states.
    • Outbreak response immunization drives, including vaccination of 13 lakh children, were initiated in affected states between November 2022 and May 2023.
    • Measles surveillance in India is highlighted as performing well, with sensitivity three to four times better than the global standard.
  • The report acknowledges India’s success in measles surveillance despite challenges posed by the pandemic.

About Measles

  • Measles, also known as rubeola, is a highly contagious viral infection caused by the measles virus (MeV).
  • It is a preventable disease, and vaccination is the most effective means of protection.
  • Key Characteristics of Measles:
    • Transmission:
      • Measles is primarily spread through respiratory droplets when an infected person coughs or sneezes.
      • The virus can remain contagious in the air and on surfaces for several hours.
    • Symptoms:
      • The typical symptoms of measles include high fever, cough, runny nose, and a characteristic red rash that usually starts on the face and spreads to the rest of the body.
      • Other symptoms may include malaise, loss of appetite, and conjunctivitis (inflammation of the eyes).
    • Complications:
      • Measles can lead to severe complications, especially in vulnerable populations such as young children and immunocompromised individuals.
      • Complications may include pneumonia, encephalitis (inflammation of the brain), and other secondary bacterial infections.
      • Measles infection during pregnancy can result in complications for both the mother and the unborn child.
    • Vaccination:
      • The measles vaccine is typically administered as part of the measles, mumps, and rubella (MMR) vaccine.
      • Two doses of the vaccine are recommended for optimal protection.
      • The first dose is usually given around the age of one, and the second dose is given before starting school, around the age of four to six.
      • The vaccine provides long-lasting immunity, and high vaccination coverage is crucial for preventing outbreaks.
    • Global Impact:
      • Measles remains a significant global public health concern, especially in regions with lower vaccination coverage.
      • Outbreaks can occur when there are pockets of unvaccinated individuals.
      • The World Health Organization (WHO) has set goals for measles elimination in various regions.
      • The COVID-19 pandemic has disrupted routine immunization services, leading to gaps in measles vaccination coverage in some regions.
    • Preventive Measures:
      • Apart from vaccination, preventive measures include practicing good respiratory hygiene, such as covering the mouth and nose when coughing or sneezing.
      • Isolation of infected individuals is crucial to prevent the spread of the virus.
    • Other Key Facts:
      • Measles vaccination averted 56 million deaths being between 2000 and 2021.
      • Even though a safe and cost-effective vaccine is available, in 2021, there were an estimated 128 000 measles deaths globally, mostly among unvaccinated or under vaccinated children under the age of 5 years.
      • In 2022, about 83% of the world’s children received one dose of measles vaccine by their first birthday through routine health services – the lowest since 2008.

About Mission Indradhanush

  • Mission Indradhanush is a flagship initiative of the Government of India aimed at expanding immunization coverage in the country.
  • Launched by the Ministry of Health and Family Welfare in December 2014, the mission has a specific focus on reaching children and pregnant women who are left out or missed during routine immunization rounds.
  • It is a special catch-up campaign under the Universal Immunization Program (UIP) to address low immunization coverage.
  • The primary objective of Mission Indradhanush is to achieve full immunization coverage for all children and pregnant women in India.
    • The mission targets children under the age of two years and pregnant women who have not been fully immunized or have missed their scheduled vaccines.
  • Universal Immunization Programme (UIP):
    • MI supplements India’s UIP, which provides free vaccines against 12 life-threatening diseases annually to approximately 26 million children.
    • Diseases Covered:
      • UIP offers free vaccines for diseases such as Tuberculosis, Diphtheria, Pertussis, Tetanus, Polio, Hepatitis B, Pneumonia, Meningitis (due to HaemophilusInfluenzae type b – Hib), Measles, Rubella, Japanese Encephalitis (JE), and Rotavirus diarrhoea (Rubella, JE, and Rotavirus vaccines in select states and districts).
    • Phases of Implementation:
      • The mission is implemented in phases, with focused efforts on identified districts and urban areas where immunization coverage is low.
      • The initiative is conducted in rounds, with each round lasting for about a week.
    • Intensified Mission Indradhanush (IMI):
      • The government launched Intensified Mission Indradhanush (IMI) in October 2017 to further accelerate efforts to achieve high immunization coverage.
      • IMI involves conducting more frequent immunization rounds, covering a broader age group, and expanding the range of vaccines.

HC quashes Haryana law on 75% quota in pvt jobs to residents

(General Studies- Paper I)

Source : The Indian Express

The Punjab and Haryana High Court has invalidated a law enacted by the Haryana government in 2020, which mandated 75% reservation in private jobs for state residents.

  • The decision stems from a series of petitions challenging the constitutionality of the law.

Key Highlights

  • Court Decision and Constitutional Violation:
    • The division bench of Justices G S Sandhawalia and Harpreet Kaur Jeewan declared the Haryana State Employment of Local Candidates Act, 2020 as unconstitutional and in violation of Part III of the Constitution of India.
    • The court asserted that the law infringes on the fundamental rights outlined in the Constitution.
    • The court ruled that the legislation would be ineffective from the date it came into force, rendering it null and void.
  • Legal Rationale and Criticism:
    • The court emphasized that it is beyond the state’s authority to impose restrictions on private employers in hiring from the open market.
    • It stated that such legislation constitutes negative discrimination against citizens from other states and contradicts principles of common citizenship enshrined in the Constitution.
    • The court rejected the argument that unemployed local youth constitute a distinct class justifying such legislation.
  • Petitioners’ Argument:
    • The petitioners, including MT Industrial Association, contended that the law intrudes on the fundamental rights of private employers and violates Article 19 of the Constitution.
    • They argued that the statute creates unwarranted distinctions between individuals based on their domicile, contrary to the concept of common citizenship.
  • Government’s Position:
    • The Haryana government defended the law, asserting that it did not discriminate in employment under central or state governments.
    • It argued that the legislation, based on domicile, was a reasonable classification to address the needs of unemployed local youth.

Fundamental Rights that could be affected by such legislation

  • Right to Equality (Article 14):
    • Article 14 of the Indian Constitution guarantees the right to equality before the law. Reservation based on state residency may lead to discrimination against individuals from other states, violating the principle of equal treatment.
  • Right to Freedom of Trade and Profession (Article 19(1)(g)):
    • Article 19(1)(g) provides the right to practice any profession, or to carry on any occupation, trade, or business.
    • Imposing restrictions on private employers to hire individuals from specific states may interfere with this right.
  • Right to Freedom of Residence and Movement (Article 19(1)(e) and (d)):
    • Articles 19(1)(e) and (d) guarantee the right to reside and settle in any part of the country.
    • Reservation policies that prioritize state residents may impede the freedom of individuals to choose their place of residence and employment.
  • Right Against Discrimination (Article 15):
    • Article 15 prohibits discrimination on grounds of religion, race, caste, sex, or place of birth.
    • If the reservation is solely based on the place of residence (state), it may be seen as discriminatory and inconsistent with the spirit of Article 15.
  • Right to Life and Personal Liberty (Article 21):
    • Article 21 protects the right to life and personal liberty.
    • Employment is often a critical aspect of an individual’s life, and restrictions based on state residency may impact one’s right to pursue a livelihood of their choice.
  • Right to Equality of Opportunity in Public Employment (Article 16):
    • Article 16 ensures equality of opportunity in matters of public employment.
    • While it primarily applies to the state, policies affecting private employment that result in inequality of opportunity may be subject to scrutiny.

RBI tightening of unsecured loans

(General Studies- Paper III)

Source : The Indian Express

The banking industry may require an additional Rs 84,000 crore of excess capital, constituting a 5% increase over the existing Rs 15.2 lakh crore capital requirement.

  • This is a result of the Reserve Bank of India’s (RBI) decision to raise the risk weight on banks’ exposure to consumer credit, credit card receivables, and non-banking finance companies (NBFCs).

Key Highlights

  • Immediate Impact on Banks:
    • The enhanced risk weights imply a need for excess capital in banks, leading to a 55-60 basis point increase in the Capital to Risk-Weighted Assets Ratio (CRAR).
  • The RBI’s circular impacts consumer loans but excludes housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery.
  • Unsecured loans affected by the RBI move account for approximately 9.8% of the total outstanding loans (Rs 151.5 lakh crore) as of September 2023.
  • Consumer Credit Growth:
    • Consumer credit, excluding the exempted categories, was growing at over 25% since May 2022.
    • The affected portion of personal loans is only 31% of the total personal loans, amounting to Rs 48.3 lakh crore.
  • SBI characterizes the regulatory steps as countercyclical, aiming to stabilize the business cycle by reining in economic activity during booms and bolstering it during downturns.
  • Impact on Lending Rates:
    • Experts anticipate higher capital requirements leading to an increase in lending rates for borrowers.
    • Higher lending rates by banks to non-banks could extend to corporate bonds, resulting in higher yields and wider credit spreads for non-banks.
  • Higher capital requirements are expected to moderate the growth of unsecured loans and address systemic risks.
  • Effects on NBFCs and Borrowing Costs:
    • NBFCs, especially those heavily involved in unsecured retail loans, may face higher capital mobilization requirements.
    • A sudden withdrawal of banks and NBFCs from the consumer loan market may increase delinquency risks.
  • RBI’s Proactive Measures:
    • The decision to raise risk weights is seen as an effort by RBI to proactively manage financial stability risks and aligns with an Expected Loss (EL) driven stress recognition system.
    • These measures align with the RBI’s recent move to subject 15 Upper Layer NBFCs to greater regulatory scrutiny, reflecting a shift towards a more rigorous regulatory framework.

Understanding: Capital to Risk-Weighted Assets Ratio (CRAR)

  • The Capital to Risk-Weighted Assets Ratio (CRAR), also known as the Capital Adequacy Ratio (CAR), is a key financial metric used to assess a bank’s financial strength and ability to absorb losses.
  • It is a regulatory requirement imposed by financial authorities to ensure that banks maintain a sufficient level of capital relative to their risk exposure.
  • The CRAR is expressed as a percentage and is calculated by dividing a bank’s capital by its risk-weighted assets.
  • Components and calculation of the CRAR:
    • Capital (Numerator):
      • The numerator of the CRAR formula represents the bank’s capital, which is divided into two main tiers:
      • Tier 1 Capital: Also known as Core Capital, it includes the bank’s common equity Tier 1 capital and additional Tier 1 capital.
        • Common equity Tier 1 capital is the highest quality capital, consisting mainly of common shares and retained earnings.
        • Additional Tier 1 capital includes instruments such as non-cumulative preferred stock.
      • Tier 2 Capital: This includes subordinated debt, hybrid instruments, and other instruments that provide additional loss-absorbing capacity.
    • Risk-Weighted Assets (Denominator):
      • The denominator of the CRAR formula is the risk-weighted assets, which is the sum of all the assets on a bank’s balance sheet adjusted for risk.
      • Different categories of assets carry different risk weights based on their perceived riskiness.
      • For example, cash and government securities may have lower risk weights, while loans to individuals or businesses may have higher risk weights.
    • Calculation:
      • The CRAR is calculated using the following formula:

  • Regulatory Requirements:
    • Regulatory authorities set minimum CRAR requirements to ensure that banks have an adequate capital buffer to cover potential losses.
    • The minimum CRAR threshold varies by jurisdiction and is often expressed as a percentage.
    • Banks are required to maintain a CRAR above the regulatory minimum.
  • Importance:
    • The CRAR is a crucial measure of a bank’s financial health and stability.
    • A higher CRAR indicates that a bank has a greater cushion to absorb losses, reducing the risk of insolvency.
    • It also reflects the bank’s ability to withstand economic downturns and financial stress.
  • The CRAR framework is part of the Basel III regulatory framework.

Understanding: Non-banking finance companies (NBFCs) and Banks

  • A Non-Banking Financial Company (NBFC) is a registered company under the Companies Act, 1956, engaged in various financial activities.
  • These activities include loans and advances, acquisition of securities, leasing, hire-purchase, insurance, and chit business.
  • However, NBFCs do not encompass institutions primarily involved in agriculture, industrial activities, the purchase or sale of goods (excluding securities), or the provision of certain services.
  • Additionally, NBFCs cannot be institutions whose principal business is related to the sale/purchase/construction of immovable property.
  • If a non-banking institution, which is a company, has the principal business of receiving deposits under specific schemes or arrangements, it is classified as a Residuary non-banking company.
  • Differences Between Banks and NBFCs:
    • Deposit Acceptance:
      • Banks: Banks can accept demand deposits from the public.
      • NBFCs: NBFCs cannot accept demand deposits.
    • Payment and Settlement System:
      • Banks: Banks are part of the payment and settlement system, allowing them to issue cheques drawn on themselves.
      • NBFCs: NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves.
    • Deposit Insurance:
      • Banks: Deposits in banks are covered by deposit insurance, providing a safety net for depositors.
      • NBFCs: NBFCs do not offer deposit insurance facilities to depositors.