CURRENT AFFAIRS – 29/11/2023

CURRENT AFFAIRS – 29/11/2023

Irish author Paul Lynch’s ‘Prophet Song’ wins Booker Prize 2023

(General Studies- Paper I)

Source : The Indian Express

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Irish author Paul Lynch clinched the prestigious Booker Prize in 2023 for his novel “Prophet Song.”

• The book triumphed over the debut novel “Western Lane” by London-based Indian-origin author ChetnaMaroo.
• The awards ceremony took place in London, adding Lynch to the esteemed roster of Irish Booker Prize winners.

Key Highlights

• Dystopian Vision of Ireland:
  • “Prophet Song” unfolds a dystopian narrative, presenting a vision of Ireland under totalitarian rule.
  • Lynch, 46, characterized his work as “an attempt at radical empathy.”
  • The storyline, set in Dublin, revolves around a family navigating a frightening new reality where democratic norms are eroding.
• Inspiration and Motivation:
  • In an interview, Lynch shared that his novel aimed to delve into contemporary chaos, reflecting on the unrest in Western democracies and the Syrian crisis.
  • Unable to directly tackle the Syrian situation, he simulated the problem in Ireland.
  • The core dilemma explored in the book is how to prove that a democratic act is not an act against the state.
• This victory marks Lynch as the fifth Irish author to receive the prestigious accolade, joining the ranks of Iris Murdoch, John Banville, Roddy Doyle, and Anne Enright.
• Sri Lankan author ShehanKarunatilaka, the previous year’s Booker winner for “The Seven Moons of Maali Almeida,” presented the trophy to Paul Lynch.
• Author Background and Previous Works:
  • Dublin-based author Paul Lynch, winner of the 2023 Booker Prize for “Prophet Song,” has a notable literary career.
  • His debut novel, “Red Sky in Morning” (2013), garnered critical acclaim.
  • Subsequent works include “The Black Snow” (2014), which received the French booksellers’ prize Prix Libr’à Nous for Best Foreign Novel and the inaugural Prix des LecteursPrivat.
  • Lynch’s novels “Grace” (2017) and “Beyond the Sea” (2019) also earned international accolades.
• Booker Prize 2023 Shortlist:
  • The Booker Prize 2023 shortlist featured diverse works, including the novel by Kenya-born ChetnaMaroo.
  • Her book, set in the British Gujarati milieu, drew praise from judges for using the sport of squash as a metaphor for complex human emotions.
  • The narrative revolves around 11-year-old Gopi and her familial bonds.
  • Other shortlisted works included Sarah Bernstein’s “Study for Obedience,” Jonathan Escoffery’s “If I Survive You,” Paul Harding’s “The Other Eden,” and Paul Murray’s “The Bee Sting.”
• Shortlisted Author Recognition:
  • Each author on the shortlist received GBP 2,500 along with a unique hand-bound edition of their book, specially designed by members of the Designer Bookbinders society.
  • This recognition underlines the significance of their contributions to contemporary literature and the artistic presentation of their works.

About The Booker Prize

• The Booker Prize, now officially known as the “Booker Prize for Fiction,” is one of the most prestigious literary awards in the world.
• It was originally established in 1968 as the Booker-McConnell Prize, sponsored by the British food wholesaler Booker-McConnell.
• The prize aims to recognize and reward the best novel written in English and published in the United Kingdom or Ireland.
• Eligibility:
  • The Booker Prize is open to novels written in English and published in the UK or Ireland. Initially, only authors from the Commonwealth, the Republic of Ireland, and Zimbabwe were eligible, but the rules were later expanded to include any English-language novel.
• Booker Prize for International Fiction:
  • In 2020, a separate award called the “Booker Prize for International Fiction” was introduced.
  • This prize is specifically for novels translated into English and aims to recognize the work of authors and translators.

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How Indian agriculture has grown with limited ‘factors of production’?

(General Studies- Paper I and III)

Source : The Indian Express

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In agriculture, economists identify four primary factors of production: land, water, labour, and energy.

• These inputs are crucial for crop cultivation, and the output is largely determined by the quantity of these inputs.
• Historically, the extent and quality of land played a significant role in limiting agricultural production.

Key Highlights

• Pre-Green Revolution Era: Land Expansion as the Driving Force
  • During the period of 1950-51 to 1961-62, India’s agricultural sector experienced an average annual growth of 2.8%.
  • The key driver behind this growth was the expansion of land under cultivation.
  • The net sown area in the country increased from 118.75 lakh hectares to 135.40 lakh hectares during this time.
  • Land Quality and Fertility
    • The quality of agricultural land is influenced by soil fertility and water availability.
    • Alluvial soils in regions like the Indo-Gangetic plains and the deltas of the eastern coast (Kaveri, Krishna, Godavari, and Mahanadi) are highly fertile.
    • Following closely are the black cotton soils of the Deccan, Malwa, and Saurashtra plateaus, which yield higher crop output per acre.
    • In contrast, red, brown, laterite, mountain, and desert soils have decreasing fertility.
  • Water as a Critical Resource
    • Water availability is a crucial factor in agriculture, dependent on both rainfall and irrigation from various sources such as rivers, lakes, tanks, and ponds.
    • The development of ancient civilizations often occurred in river valleys due to the sustained agricultural activity supported by these water sources.
  • Labour and Energy in Traditional Agriculture
    • Before the advent of modern machinery, labour and energy sources played vital roles in traditional agriculture.
    • The more farm hands and bullocks available, the higher the agricultural output.
    • Bullocks served as the main energy source, involved in ploughing fields, threshing crops, and powering Persian wheels for drawing water from wells for irrigation.
  • Transition to Modern Agriculture
    • The historical context highlights a shift from the limitations imposed by land availability to a more multifaceted approach, integrating technological advancements and machinery into agriculture.
    • Tractors, threshers, harvester combines, and electric/diesel engine-driven tubewells have gradually replaced traditional methods, marking the transition to modern agricultural practices.
  • Factors of Technology in Agriculture
    • In agriculture, similar to the four factors of production, there are four critical elements known as “factors of technology.”
    • These factors play a crucial role in enhancing the efficiency of production factors, leading to increased yields and improved resource utilization.
    • The four “factors of technology” are genetics, crop nutrition, crop protection and agronomic interventions.
  • Genetics: Seeds and Plant Breeding
    • Genetics in agriculture revolves around seeds and plant breeding.
    • The Green Revolution, exemplified by high-yielding wheat and rice varieties developed by scientists like Norman Borlaug, Henry Beachell, and Gurdev Singh Khush, was made possible through the incorporation of dwarfing genes.
    • These genes reduced plant height, addressing the issue of traditional tall varieties that couldn’t efficiently respond to fertilizers or water.
    • Semi-dwarf varieties with strong stems could hold grain-bearing panicles upright, facilitating better nutrient absorption and conversion to grain.
    • Genetic information for desirable traits like disease resistance, drought tolerance, and nutrient use efficiency is embedded in seeds developed through crossbreeding and biotechnology tools.
  • Crop Nutrition: Transition to Chemical Fertilizers
    • Traditionally, farmyard manure, a mixture of dung, urine, and farm residues, was crucial for plant growth, containing 0.5% nitrogen (N), 0.2% phosphorus (P), and 0.5% potassium (K) on average.
    • The revolution in crop nutrition occurred with the advent of chemical fertilizers with significantly higher NPK content.
    • Urea (46% N), di-ammonium phosphate (18% N and 46% P), and muriate of potash (60% K) became key components.
    • Synthetic fertilizers, combined with the breeding of varieties responsive to high nutrient doses, resulted in a substantial increase in crop yields.
    • This shift also led to labour savings, as farmers no longer needed to maintain animals for manure production, and fertilizers were readily available in factory-produced, bagged forms.
  • Crop Protection: Guarding Against Pests and Diseases
    • With higher yields, technologies for crop protection have evolved to defend plants against various threats, including insect pests, pathogens (fungi, bacteria, and viruses), and weeds.
    • Crop protection chemicals aim to maximize the yield gains from genetic breeding and nutritional improvements.
    • Additionally, some technologies, such as herbicides, serve a dual purpose by not only protecting crops but also saving labor by replacing manual weed removal.
  • Mechanization and Agronomic Interventions: Transforming Agricultural Practices
    • Mechanization, exemplified by tractors, has revolutionized agriculture by rendering traditional methods obsolete.
    • Implements like rotavators and reversible moldboardplows facilitate deep tillage, soil mixing, and pulverization, breaking hardpan layers.
    • Agronomic interventions extend to water-saving technologies like drip irrigation and laser land levelers, promoting uniform seed and fertilizer placement.
    • Farmers employ intercropping, cultivating multiple crops simultaneously on the same land, enhancing efficiency and output.
    • The agricultural landscape anticipates game-changing technologies like drones for spraying fertilizers and agrochemicals and sensors for real-time monitoring of crop and field conditions.
    • Although their impact on Indian farms may take time, these innovations hold potential for further transforming agricultural practices.
  • Shift in Aggregate Production Function: More Output with the Same or Less Inputs
    • The factors of technology have shifted the aggregate production function in agriculture, moving beyond the traditional model of more output from more inputs.
    • Productivity increases have resulted in achieving more output from the same or even fewer inputs, signaling a significant shift in efficiency.
    • This is evidenced by the modest 3.3% increase in India’s net sown area from 1961-62 to 2019-20, compared to the substantial 14% growth during 1950-51 to 1961-62.
    • The growth in agricultural production over the past 50 years has been predominantly driven by technological factors.
  • Trend Growth Rates and the Dominance of Technology
    • Estimates by experts like Ramesh Chand and Jaspal Singh indicate that the trend growth rates in gross value added from agriculture and allied activities have seen different phases.
    • The period from 2005-06 to 2021-22 recorded the highest annual growth at 3.7%, highlighting the dominance of technological factors.
    • This growth is attributed to the faster diffusion of productivity-enhancing technologies and improvements in rural infrastructure since the beginning of the century.

Overview of Agriculture in India

• India boasts approximately 160 million hectares of arable land, making it the world’s second-largest after the US.
• Agriculture in the country covers around 50% of its total geographical area, with some regions, particularly the Indo-Gangetic Plain and eastern coast deltas, having cultivated land proportions exceeding 90%.
• This sector is integral to India’s long-term economic growth, employing nearly half of the workforce, contributing approximately 17% to the GDP, and serving as a major producer of cereals, sugar, milk, fruits, vegetables, eggs, and spices.
• Key Statistics:
  • Employs 49.6% of the workforce, often in seasonal, under-employed, and underpaid capacities.
  • Accounts for around 17% of India’s GDP.
  • India’s diverse agriculture sector supports 58% of the population.
  • With only 4% of the world’s water resources and 2.4% of the world’s land, India supports 17.8% of the global population and 15% of the livestock population.
• Recent Performance:
  • Agriculture sector grew at a CAGR of 3.7% between 2017-18 and 2021-22.
  • Estimated real agriculture gross value added (GVA) in 2021-22 was Rs. 21.1 lakh crore (US$ 256.4 billion), contributing to 15.5% of total GVA.
• Despite the challenges of the pandemic, agriculture GVA increased for all products, including foodgrains, cereals, pulses, and oilseeds.
• This growth has contributed significantly to ensuring the country’s food security.

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The challenge of maritime security in the Global South

(General Studies- Paper III)

Source : TH

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Charles Darwin’s perspective on survival emphasizes adaptability over innate superiority.

• He posited that the ability to adapt to a changing environment is crucial for survival, and this concept remains relevant in various contexts, including the maritime domain.

Key Highlights

• Evolving Threats in the Maritime Domain
  • Recent years have seen a shift in the nature of hard security challenges in the maritime domain.
  • Examples include Ukraine’s use of asymmetrical tactics in the Black Sea and China’s deployment of maritime militias in the South China Sea.
  • Notably, there is a rise in improvisation, involving grey-zone warfare, land attack missiles, and combat drones.
• Diverse Security Demands
  • While traditional security threats persist, the majority of recent maritime security demands stem from unconventional challenges.
  • These include illegal fishing, natural disasters, marine pollution, human and drug trafficking, and the impacts of climate change.
  • Combatting these requires a flexible and sustained commitment of capital, resources, and specialized personnel.
• Global South’s Perspective
  • The Global South, particularly littoral states in Asia, Africa, and the Southern Pacific, perceives a zero-sum competition among powerful nations in the Indo-Pacific, which they believe has negatively affected their interests.
  • The interconnected nature of contemporary security objectives involving national, environmental, economic, and human security goals makes addressing them challenging.
  • Littoral states in the Global South face unequal law-enforcement capabilities and struggle with security coordination to combat maritime threats effectively.
  • Marine governance objectives, especially related to sustainable development goals in littorals, remain unrealized.
  • Less developed states, primarily in Asia and Africa, are disproportionately affected by rising sea levels, marine pollution, climate change, and natural disasters, placing them in vulnerable positions.
• Cooperation Challenges
  • Littoral states in Asia and Africa often lack equal law-enforcement capabilities and face challenges in coordinating efforts to combat maritime threats.
  • Varying security priorities and reluctance to rely on foreign agencies hinder effective cooperation.
  • While some are willing to share information, there’s a tendency to limit it to common minimum security goals to reduce dependence on external partners.
• Creative Models in Maritime Security
  • Maritime security is evolving beyond traditional military and law enforcement approaches.
  • India’s Maritime Vision 2030 exemplifies a creative model, focusing on the development of ports, shipping, and inland waterways to stimulate economic growth and provide livelihoods.
  • Similarly, Dhaka’s Indo-Pacific document and African discourse emphasize a developmental approach, promoting a thriving Blue Economy and a secure maritime domain.
• Challenges in the Southern Seas
  • Despite creative models, the fight against illegal fishing in Asia and Africa remains a significant challenge.
  • Faulty policies encouraging destructive fishing methods contribute to an uptick in illegal unreported and unregulated fishing.
  • Environmental concerns include lenient regulations, lax law enforcement, and harmful subsidies incentivizing destructive fishing practices.
• Initiatives to Address Maritime Challenges
  • India’s Indo-Pacific Oceans Initiative proposes solutions to maritime challenges, focusing on seven pillars, including maritime ecology, marine resources, capacity building, disaster risk reduction, and maritime connectivity.
  • The initiative underscores the need for collective solutions due to economic interdependence and has garnered support from major Indo-Pacific states.
  • Implementing collaborative strategies poses challenges, requiring improved interoperability, intelligence sharing, and agreement on a regional rules-based order among maritime agencies.
  • States must adapt to integrated maritime security operations and align domestic regulation with international law.
  • This shift is met with resistance from those prioritizing sovereignty and strategic independence over collective action.
• Consensus Challenges in the Global South
  • Despite advocating for a cooperative security architecture, many littoral states in the Global South hesitate to pursue concrete solutions to maritime challenges.
  • There exists a paradox wherein the collective issues and creative solutions sought by developing nations conflict with their sense of political and strategic autonomy.
  • Consensus remains elusive in addressing non-traditional maritime security concerns.

What is Grey-zone warfare?

• Grey-zone warfare, also known as grey-zone conflict or hybrid warfare, refers to a form of aggression that falls between traditional war and peace.
• In this type of conflict, states or non-state actors employ a combination of conventional military tactics, irregular warfare, and non-military means to achieve their strategic objectives.
• Grey-zone warfare is characterized by ambiguity, deniability, and the use of unconventional tools and methods.
• It often involves activities such as cyberattacks, disinformation campaigns, economic coercion, political subversion, and proxy warfare.

What is ‘India’s Indo-Pacific Oceans Initiative ‘?

• The Indo-Pacific Oceans Initiative (IPOI) is a collaborative strategy addressing shared challenges in the Indo-Pacific region, spanning the Indian and Pacific Oceans.
• Originating from the “Security and Growth for All in the Region” (SAGAR) initiative of 2015, IPOI was proposed by Indian Prime Minister Narendra Modi at the 14th East Asian Summit in 2019.
• The initiative aims to enhance maritime boundaries and partnerships, with a focus on promoting free trade and sustainable resource usage.
• IPOI encompasses seven thematic areas or pillar including:
  • Maritime Security,
  • Maritime Ecology,
  • Maritime Resources,
  • Capacity Building and Resource Sharing,
  • Disaster Risk Reduction and Management,
  • Trade Connectivity and Maritime Transport, and
  • Science and Technology and Academic Collaboration.
• India seeks to establish connections with various nations through IPOI, emphasizing collaboration with nations that share common goals for advancing maritime trade.
• The initiative is open to all participating nations in the Indo-Pacific region and underscores the importance of collaboration to achieve shared objective.

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Why are the Marathas mobilising now?

 (General Studies- Paper II)

Source : TH

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There is an ongoing Maratha mobilization for reservation in higher education and public employment.

• Despite facing rejections from various Backward Classes Commissions between 1953 and 2008, the Marathas have intensified their protests, issuing ultimatums to the government.

Key Highlights

• Shift in Maratha Mobilization Reasons
  • While scholars attribute the mobilization to agrarian crises and OBC assertion, the crisis of dominance is also a key factor.
  • Urban Crisis: Disappearance of Well-Paid Jobs
    • The term “urban crisis” refers to the decline of well-paid jobs in large-scale manufacturing industries since the late 1990s.
    • Previously, these jobs were accessible to individuals with minimal education.
    • Marathas, leveraging their socially superior position, historically dominated these jobs.
    • Examples include the Bombay Mill Owners Association 1940 survey showing Marathas holding over 50% of well-paid jobs in textile mills.
    • However, since the 1990s, these industries have either closed or significantly downsized, leading to a scarcity of such jobs.
    • Marathas, who traditionally occupied a significant percentage of open-category jobs in government, have faced challenges due to economic liberalization and a reduction in public sector jobs.
    • With only 3.5% of secured jobs in the government and 2% in the private formal sector nationwide, competition for a shrinking pool of opportunities has intensified.
    • Additionally, the rise in contractual government jobs has further heightened competition.
  • Shifting Employment Trends for Maratha Youth
    • The decline in jobs in state-owned and state-funded schools and colleges is also a factor.
    • Municipal schools have closed, and educators are often hired on contracts.
    • Maratha youth, like others, have turned to informal work such as security guards and courier services.
    • Those with better education find themselves in contractual jobs, with the private sector witnessing an increase in such positions from 3.6 million in 2004–05 to 7.1 million in 2017–18.
  • Rural Crisis: Impact on Maratha Youth and Dominance
    • The rural crisis is marked by the return of workers from closed factories to villages and the inability of rural youth to migrate for better-paid employment.
    • Historically, well-paid urban incomes supported family members in villages, reinforcing Marathas’ socially superior position.
    • The disappearance of urban jobs disrupts this pattern, pushing rural Maratha youth towards informal sector jobs and hindering their ability to financially support and garner respect in their villages.
  • Disruption of Traditional Patterns and Aspirations for Higher Education
    • With the decline in well-paid jobs, traditional patterns of workers retiring in villages and offspring taking urban employment are disrupted.
    • Rural Maratha youth now face limited opportunities and aspire for higher education.
    • However, the fiscal crisis post-1980s led to decreased government institution seats and increased private institutions with exorbitant fees.
    • The majority, including financially constrained Marathas, compete for fewer open-category seats in public institutions.
  • Challenges in Education: Dominance and Economic Disparities
    • The Yashpal Committee notes the exorbitant fees in private institutions, exacerbating challenges for financially constrained Marathas who predominantly rely on public institutions.
    • As education becomes a key factor in social mobility, economic disparities in accessing quality education intensify the crisis for the Marathas.
  • Crisis of Dominance: Urban, Rural, and Caste Dynamics
    • The combination of urban and rural crises creates a broader crisis of dominance for the Marathas.
    • Economic mobility of a section of Dalits, along with their social and political assertion, disrupts caste hierarchy norms.
    • The economic and political assertion of OBCs adds to the anxiety among protesting Marathas.
    • It is argued that unless the state addresses the scarcity of formal sector jobs and expands public educational institutions (or initiates large-scale scholarship programs), the crisis for the Marathas will persist.

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The need to disclose political donations

(General Studies- Paper II)

Source : TH

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The ongoing Supreme Court hearings on the electoral bonds challenge in India, emphasizes the critical importance of the outcome for democracy and the rule of law.

• Political parties are integral to the democratic process, and their funding methods are crucial for maintaining public confidence.

Key Highlights

• Concerns with Electoral Bonds Amendments
  • The amendments to the Representation of the People Act 1951 and other laws, introducing electoral bonds, have raised concerns due to the complete anonymity they provide to political donors.
  • This contrasts with global norms, where the requirement is generally for full disclosure of donations to political parties, whether from individuals or corporations.
• Historical Context: U.S. Publicity Act and European Union Regulation
  • The U.S. Publicity Act of 1910 mandated disclosure of political party funding and imposed limits on contributions.
  • The U.S. Supreme Court, in the Buckley versus Valeo case in 1976, upheld the constitutionality of public disclosure requirements and limits on contributions, emphasizing the importance of preventing the appearance of corruption and maintaining confidence in the democratic system.
  • In 2014, the European Union enacted a regulation setting limits on donations to political parties and requiring disclosure, with immediate reporting for large donations.
• K.’s Political Parties, Elections, and Referendums Act 2000
  • In the U.K., the Political Parties, Elections, and Referendums Act 2000 imposes restrictions on donations and loans that political parties can accept.
  • It also mandates the declaration of the source of donations, outlining a comprehensive regulatory framework.
• Common Requirements in Legal Regulations
  • The two common requirements in legal regulations for political party funding worldwide:
    • complete disclosure of donors above certain minimal amounts and the imposition of limits or caps on donations.
  • There is essential need for public disclosure of political party funding, emphasizing that political parties are fundamental to representative democracy.
  • Transparent accounts are seen as crucial for preserving citizens’ trust in parties and politicians, upholding the rule of law, and combating corruption in the electoral and political processes.
  • Donation limits are imposed to prevent unchecked large contributions, which can undermine democracy and create disparities in the electoral process.
  • Preserving Democratic Principles: Wealth Separation from Power
    • The separation of wealth from power is fundamental to a democratic system.
    • Unchecked financial contributions should not determine election outcomes, ensuring that democracy is not compromised by parties with more financial resources having an undue advantage.
    • Preserving the democratic principle involves maintaining a level playing field and preventing the influence of money in politics.
  • Electoral Justice: Upholding Rule of Law and Democratic Values
    • Highlighting the importance of electoral justice, the process is defined as a system ensuring that every action, procedure, and decision related to the electoral process aligns with the law and protects individuals’ enjoyment of electoral rights.
    • An electoral justice system is crucial for upholding the rule of law and ensuring free, fair, and genuine elections.
  • Challenges with Electoral Bonds and the Call for Legislation
    • The electoral bond system is criticised for keeping donor details undisclosed, asserting that this practice violates democratic requirements of transparency and jeopardizes the integrity of elections.
    • It is argued that merely deeming them unconstitutional is insufficient and calls for the enactment of separate legislation.
    • This legislation should mandate public disclosure of donors’ identities above a certain limit, immediate reporting of large donations to the election commission, publicizing political party accounts, independent auditing of party accounts, setting limits on funding and expenditure, and enforcing these regulations through mechanisms outlined in the law.

What are electoral bonds?

• Electoral bonds are interest-free bearer bonds or money instruments available for purchase by companies and individuals in India through authorized State Bank of India (SBI) branches.
• Sold in multiples of Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 10 lakh, and Rs 1 crore.
• KYC-compliant accounts are necessary for their purchase, and they are specifically intended for making donations to political parties.
• Payment for the bonds must be made from a bank account.
• The bonds do not carry the name of the payee.
• Validity and Usage:
  • Electoral bonds have a limited lifespan of 15 days.
  • During this period, they can only be utilized for making donations to political parties registered under section 29A of the Representation of the Peoples Act, 1951.
  • Eligible parties are those securing not less than one percent of the votes in the last general election to the House of the People or a Legislative Assembly.
• Encashment Process:
  • Electoral bonds can only be encashed by an eligible political party.
  • Encashment must occur through a designated bank account with the authorized bank.
• Legislative Amendments and Acts:
  • The introduction of the Electoral Bond Scheme involved amendments to four key Acts, facilitated by the Finance Acts of 2016 and 2017.
  • These Acts include the Representation of the People Act, 1951 (RPA), the Companies Act, 2013, the Income Tax Act, 1961, and the Foreign Contributions Regulation Act, 2010 (FCRA).
• Prior to the introduction of the scheme, political parties were obligated to disclose all donations exceeding Rs 20,000.
  • Corporate contributions were subject to limitations, with companies not allowed to donate more than 7.5% of their total profit or 10% of revenue.
• Eligible Political Parties:
  • Political parties eligible to receive funding via electoral bonds are those that secured a minimum of 1% of the votes in the recent Lok Sabha or State Assembly elections.
  • These parties must be registered under the Representation of the People Act (RPA).
  • Eligible political parties can obtain a verified account from the Election Commission of India (ECI).

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What is RBI’s latest move to increase risk weight for lending about?

(General Studies- Paper III)

Source : TH

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The Reserve Bank of India (RBI) has taken measures to address the rise in unsecured personal loans and credit cards, aiming to mitigate credit risk.

Key Highlights

• Capital Reservation Directive:
  • The RBI has mandated a 25 percentage point increase in the risk weights for unsecured personal loans, credit cards, and lending to non-banking financial companies (NBFCs).
  • The directive comes into effect immediately, with mandatory compliance expected by the end of February next year.
• Rationale for the Move:
  • The focus is on managing credit risk associated with borrowers’ potential inability to meet obligations or defaulting on commitments.
  • Risk weights, measured in percentage factors, are crucial for banks to manage asset-specific risks, indicating the necessary capital holding to adjust for associated risks.
  • The RBI emphasizes effective risk management to maximize returns by maintaining credit risk exposure within acceptable parameters.
• Concerns Raised with Banks:
  • Earlier discussions with major banks’ leadership highlighted concerns about the increasing growth in consumer credit.
  • The RBI expressed worry about the growing reliance of NBFCs on bank borrowings.
• Directives on Risk Weights:
  • Risk weight for consumer credit exposure raised by 25 percentage points to 125% for all commercial banks and NBFCs.
  • Excludes housing loans, education loans, vehicle loans, loans secured by gold and gold jewellery, SHG loans, and microfinance.
  • Risk weight for credit card loans increased by 25 percentage points, making it 125% for NBFCs and 150% for scheduled commercial banks (SCBs).
  • Risk weights for bank credit to NBFCs (excluding core investment companies) increased by 25 percentage points, applicable where existing risk weights are below 100%.
  • Exemptions: Exemptions for housing finance companies and loans to NBFCs classified in the priority sector.
• Expected Impact:
  • The directives are anticipated to result in higher capital requirements for lenders.
  • This may lead to an increase in lending rates for consumers.
• Concerns Raised by RBI Governor:
  • Governor Shaktikanta Das expressed concerns about the substantial growth in specific components of consumer credit during the October monetary policy statement.
  • Advised banks and NBFCs to strengthen internal surveillance mechanisms, address risk build-up, and institute safeguards.
• Moody’s Insights:
  • Moody’s suggests that higher risk weights aim to dampen lenders’ appetite for consumer loan growth, particularly in the rapidly growing unsecured segment.
  • The rapid growth in the unsecured segment exposes financial institutions to the risk of increased credit costs in case of economic or interest rate shocks.
  • Delinquency rates in personal loans, especially below Rs 50,000, raise concerns, with financial technology firms being particularly exposed to this segment.
• Data and Figures:
  • As of September 22, unsecured personal loans increased by approximately 23% YoY, while outstanding credit card loans rose by about 30%.
  • Delinquencies in personal loans below Rs 50,000 stand at 5.4%, reflecting the highest default risk.
  • Moody’s notes that several NBFCs, previously focused on secured lending, have shifted to riskier segments due to declining net interest margins and increased competition.
• Chief Concerns:
• Impact on Capital Adequacy and Profitability:
  • Tier-1 Capital Adequacy: S&P anticipates a decline of about 60 basis points in Tier-1 capital adequacy, impacting banks’ ability to absorb losses and prompting potential capital raising.
• Immediate Effects: Higher interest rates, slower loan growth, reduced capital adequacy, and some hit on profits are expected consequences.
  • Public sector banks, generally having lower capital adequacy, might be more vulnerable to these changes.
• Challenges for Finance Companies and NBFCs:
  • Higher risk weights on unsecured loans and bank lending mandates to NBFCs create a double challenge, squeezing reported capital adequacy and increasing funding costs.
  • Increased costs might be passed on to borrowers, impacting profit margins for NBFCs.
  • Bank lending constitutes a significant portion (41.2%) of total borrowing for NBFCs, indicating potential challenges in managing increased costs.

What is Capital Adequacy Ratio (CAR)?

• The Capital Adequacy Ratio (CAR) is a regulatory measure that assesses a financial institution’s capital adequacy in relation to its risk-weighted assets.
• It is a crucial indicator of a bank’s ability to absorb potential losses and meet its financial obligations.
• A higher CAR indicates a greater buffer against potential losses and financial stress.

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