RBI panel on ARCs

(GS-III: Inclusive growth and related issues)

In News:

To streamline the functioning of asset reconstruction companies (ARCs), the Reserve Bank panel has come out with a host of suggestions.

Background:

The RBI had set up a committee headed by Sudarshan Sen to undertake a comprehensive review of the working of asset reconstruction companies (ARCs) in the financial sector ecosystem and recommend suitable measures for enabling them to meet the growing requirements.

Suggestions:

Create an online platform for the sale of stressed assets.

Allow ARCs to act as resolution applicants during the IBC process.

The scope of Section 5 of the SARFAESI Act be expanded to permit ARCs to acquire financial assets from all regulated entities, including AIFs, FPIs, AMCs making investment on behalf of MFs and all NBFCs including HFCs.

For accounts above ₹500 crore, two bank-approved external valuers should carry out a valuation to determine liquidation value and fair market value.

Also, the final approval of the reserve price should be given by a high-level committee that has the power to approve the corresponding write-off of the loan.

What is an Asset Reconstruction Company (ARC)?

It is a specialized financial institution that buys the Non Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets. This helps banks to concentrate in normal banking activities. Banks rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.

The asset reconstruction companies or ARCs are registered under the RBI.

Legal Basis:

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India.

The SARFAESI Act helps reconstruction of bad assets without the intervention of courts. Since then, a large number of ARCs were formed and were registered with the Reserve Bank of India (RBI) which has got the power to regulate the ARCs.

Capital Needs for ARCs:

As per amendment made in the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs. 2 crore.

The RBI raised this amount to Rs. 100 crore in 2017. The ARCs also have to maintain a capital adequacy ratio of 15% of its risk weighted assets.

Infrastructure for Resilient Island States

(GS-III: Conservation, environmental pollution and degradation, environmental impact assessment)

In News:

This initiative has been launched by India for developing the infrastructure of small island nations vulnerable to climate change.

The new initiative is the result of cooperation between India, the U.K. and Australia and included the participation of leaders of small island nations such as Fiji, Jamaica and Mauritius.

Implementation:

The IRIS initiative is a part of the Coalition for Disaster Resilient Infrastructure (CDRI) that would focus on building capacity, having pilot projects, especially in small island developing states.

Need for:

The last few decades have proved that no one is untouched by the wrath of climate change. Whether they are developed countries or countries rich in natural resources, this is a big threat to everyone. But, Small Island Developing States (SIDS) face the biggest threat from climate change.

One-third of the entire population of SIDS lives on lands that are less than five metres below the sea level. This makes them highly vulnerable to sea-level rise, storm surge and coastal destruction.

These countries contribute to only 1 per cent of global greenhouse gas emissions, and yet are among the first to experience the worst impacts of climate change.

Agricultural production, fisheries, and related sectors are declining as the climate changes, threatening livelihoods and economic growth. In addition, extreme weather spawned by climate change is destroying SIDS land, real estate and infrastructure, with economically catastrophic effects.

About CDRI:

Launched by Modi in September 2019 at the UN Secretary-General’s Climate Action Summit in New York, US.

It is a platform where knowledge is generated and exchanged on different aspects of disaster and climate resilience of infrastructure.

It will create a mechanism to assist countries to upgrade their capacities and practices, with regard to infrastructure development in accordance with their risk context and economic needs.

So far, 25 other countries, including Germany, Italy, Japan, Australia, and the United States have joined this coalition.

CDRI is the second international collaboration set up by India in the climate change sphere, the other being the International Solar Alliance that has now evolved to the status of a “treaty-based” intergovernmental organisation.

Small Island Developing States:

Small Island Developing States (SIDS) are a distinct group of 38 UN Member States and 20 Non-UN Members/Associate Members of United Nations regional commissions that face unique social, economic and environmental vulnerabilities.

The SIDS were recognized as a distinct group of developing countries in June 1992, at the UN Conference on Environment and Development.

SIDS’ unique and particular vulnerabilities are highlighted in “The Future We Want”, adopted at the United Nations Conference on Sustainable Development (also known as Rio+20) that took place in Rio de Janeiro, Brazil in June 2012.

The geographical regions in which SIDS are located are the Caribbean, the Pacific, and the AIS (Atlantic, Indian Ocean and South China Sea).

The Barbados Programme of Action was produced in 1994 in order to assist the SIDS in their sustainable development efforts.

The United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UN-OHRLLS) represent this group of states.

RBI issues revised PCA framework for banks

(GS-III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment)

In News:

The RBI has issued a revised Prompt Corrective Action (PCA) framework for banks to enable supervisory intervention at “appropriate time” and also act as a tool for effective market discipline.

About the revised framework:

The revised PCA framework will be effective from January 1, 2022.

Capital, asset quality and leverage will be the key areas for monitoring.

Indicators to be tracked for capital, asset quality and leverage would be CRAR/Common Equity Tier I Ratio, Net NPA Ratio and Tier I Leverage Ratio, respectively.

What is Prompt Corrective Action (PCA)?

PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.

The RBI introduced the PCA framework in 2002 as a structured early-intervention mechanism for banks that become undercapitalised due to poor asset quality, or vulnerable due to loss of profitability.

It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.

The framework was reviewed in 2017 based on the recommendations of the working group of the Financial Stability and Development Council on Resolution Regimes for Financial Institutions in India and the Financial Sector Legislative Reforms Commission.

When is Prompt corrective action framework invoked?

The PCA is invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like.

What are the types of restrictions?

There are two types of restrictions, mandatory and discretionary. Restrictions on dividend, branch expansion, directors compensation, are mandatory while discretionary restrictions could include curbs on lending and deposit.

What will a bank do if PCA is triggered?

Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income.

Banks will also have to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs.

They will also not be allowed to enter into new lines of business. RBI will also impose restrictions on the bank on borrowings from the interbank market.

One Sun, One World, One Grid

(GS-III: Infrastructure- energy)

In News:

This initiative was announced on the second day of COP26 by India and the United Kingdom to tap solar energy and have it travel seamlessly across borders.

About the initiative:

The initiative brings together the International Solar Alliance and the UK’s green grid initiative and complements India’s focus on harnessing the sun’s energy.

The grid will be set up over the next few years by the International Solar Alliance (ISA), another initiative authored by India initially, to transport solar power to different countries.

The vision behind the OSOWOG is ‘The Sun Never Sets’ and is a constant at some geographical location, globally, at any given point of time.

Implementation:

A Ministerial Steering Group will work towards accelerating the making of large solar power stations and wind farms in the best locations, linked together by continental-scale grids crossing national borders.

The Ministerial Steering Group includes France, India, the United Kingdom and the United States, and will also have representatives from Africa, the Gulf, Latin America and Southeast Asia.

Significance of world grid:

With one worldwide grid, we can access clean energy at all places. The need to store energy would also lessen, and the viability of solar projects will increase.

Potential and benefits of the initiative:

India would generate 40% of power from non-fossil fuels by 2030 and has called for connecting solar energy supply across borders giving the mantra of ‘One World One Sun One Grid’.

The proposed integration would lead to reduced project costs, higher efficiencies and increased asset utilization for all the participating entities.

This plan will require only incremental investment because it will not require a parallel grid infrastructure due to working with existing grids.

It will help all the participating entities in attracting investments in renewable energy sources as well as utilizing skills, technology and finances.

Resulting economic benefits would positively impact poverty alleviation and support in mitigating water, sanitation, food and other socio-economic challenges.

It will allow national renewable energy management centers in India to grow as regional and global management centers.

At a global level, almost 2,600 GW of interconnection capacity may be possible up to 2050, delivering estimated power savings of 226 billion euros per year.

One Sun Declaration:

The announcement was accompanied by the “One Sun Declaration”, which stated that, “realising the vision of ‘One Sun One World One Grid’ through interconnected green grids can be transformational, enabling all of us to meet the targets of the Paris Agreement to prevent dangerous climate change, to accelerate the clean energy transition, and to achieve the sustainable development goals.

The declaration has been endorsed by 80 ISA member countries.