1. Microfinance Sector in India: Opportunities, Challenges and Strategies needed
UPSC Syllabus: Mains GS paper III : Economy
Sub Theme: Micro-Finance |UPSC
Microfinance is considered to be a tool to promote financial inclusion, enable the households to come out of poverty and increase their income levels. It can facilitate achievement of national policies such as poverty reduction, women empowerment, improvement in the standards of living etc. Indian microfinance sector has witnessed phenomenal growth over past two decades. However, it is facing number of challenges such as absence of comprehensive regulatory framework, higher indebtedness, coercive recovery practices etc.
In this regard, recently the RBI has come out with a consultative document on the microfinance sector. Let’s take this opportunity to understand various facets related to Microfinance which becomes quite important from the perspective of both Prelims and Mains Exam.
Evolution of Micro Finance Sector in India
1992: NABARD’s SHG-Bank Linkage programme. Banks started lending to Women-led SHGs based upon the money which these SHGs saved in the bank accounts.
1992 to 2010: No separate RBI guidelines for the Micro finance sector. Facilitated rapid growth of micro-finance institutions (MFIs). These MFIs operated in regulatory vacuum and hence led to their exponential growth. This phase saw the growth of large sized MFIs such as SKS Microfinance, Spandana etc.
2010: Andhra Pradesh Microfinance crisis. MFIs indulged in unethical practices such as charging higher interest rates, adoption of forced recovery techniques, not following due-diligence in giving loans etc. Led to suicide by large number of people in the rural areas.
2011: Appointment of Malegam Committee on Regulation of MFIs. Committee recommended creation of separate category of MFIs called as NBFC-MFIs. Called upon RBI to lay down comprehensive guidelines. 2011-2020
- RBI created separate category of NBFC-MFIs and has laid down comprehensive regulatory framework. • Some of the MFIs have been merged into Banks while some MFIs have been issued license to operate as Small finance Bank
- Bandhan Financial services, which was a MFI earlier, has been issued license for Universal Bank Present Status: The total micro-finance loans stand at Rs 2.7 lakh crores. The highest share is accounted by the SCBs (40%). The NBFC-MFIs account for 30% of the loans.
RBI’s present guidelines for the NBFC-MFIs
MFI is defined as a non-deposit taking NBFC that fulfils the following conditions:
- Minimum Net Owned Funds of Rs.5 crore. (For NBFC-MFIs registered in the Northeastern Region of the country, the minimum NOF requirement shall stand at Rs. 2 crore).
- Not less than 85% of its loans are in the nature of “qualifying assets.”
“Qualifying asset” shall mean a loan which satisfies the following criteria: –
- Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income less than Rs. 1.25 lakh or urban and semi-urban household income less than Rs. 2lakhs.
- Loan amount does not exceed Rs. 1.25 lakh per borrower.
- Loan extended without collateral.
- The aggregate amount of loans, given for income generation should be at least 50 per cent of the total loans given by the MFIs.
- The loan is repayable on weekly, fortnightly or monthly instalments as per the choice of the borrower.
Summary of the RBI’s Recommendations on the regulatory framework for the MFIs
2. Additional Tier-1 Bonds: Rationale and Features
UPSC Syllabus: Prelims : Economy
Sub Theme: Basel III| Banking | UPSC
Understanding BASEL-III Guidelines
As part of BASEL III, the banks are required to maintain regulatory capital in order to improve the strength and resilience of the banks to external shocks.
According to the RBI’s guidelines, the regulatory capital to be maintained by the Indian banks is as under: • Tier-1 Capital: 7% (Core Equity capital consisting of Minimum Common Equity Tier 1 of 5.5% and Additional Tier 1 capital of 1.5%)
- Tier-2 Capital: 2% (Basically comprising of Debt)
- Capital Conservation Buffer: 2.5%
- Total Regulatory Capital: 11.5% of Risk-weighted Assets
What are Additional Tier-1 Bonds?
The AT-1 Bonds are the unsecured and perpetual bonds which are issued by the Banks to meet regulatory capital requirements of 1.5% of Additional Tier 1 Capital under the BASEL III norms. However, they are quite different from the normal bonds in a number of ways:
Hybrid Instruments: The AT-1 Bonds are considered to be hybrid of shares and bonds. Just like shares, there is no obligation to return the money or pay the dividend. Just like bonds, the bank pay interest on such AT-1 bonds. Perpetual Bonds: These Bonds do not have maturity period. Instead, these bonds carry call options i.e. the banks have an option redeem them after five or 10 years. But banks are not obliged to use this call option and they can opt to pay only interest on these bonds for perpetuity. That is why they are called as Perpetual Bonds.
No Put Option: Investors do not have put option i.e. the investors cannot return back the AT-1 bonds to the banks. However, the investors can sell these bonds in the secondary market.
Skip Interest Payments: The Banks issuing the AT-1 bonds can skip payment of interest for a particular year. They can also reduce the face value of the bond. However, the banks can do so only when their regulatory capital ratio falls below certain threshold levels. These threshold levels are clearly specified when Banks issue AT-1 bonds.
Writing down of AT-1 Bonds: If the RBI feels that any bank is under a financial crunch, it can waive off the liability of the banks to redeem the AT-1 bonds and completely write it off. The RBI has used this option in the case of Yes Bank.
3. Trends in GST Collection
UPSC Syllabus: Mains |GS paper III Economy
Sub Theme: GST| UPSC
What is GST? GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage is made available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. GST is a consumption-based value-added tax on goods and services with dual levy by both the Union and the States.
Components of GST: States levy and collect State GST (SGST) and the Union levies and collects the Central GST (CGST). For any particular good or service, the SGST and CGST rates are equal. An integrated GST (IGST) is applied on inter-state movement of goods and services and on imports.
Taxes subsumed under GST:
Trends in GST Collection- Important Prelims Pointers
Lack of Revenue Neutrality: A change in tax structure can be said to be revenue neutral if the modified tax is able to realize revenue comparable to the original tax regime. In this sense, the much-needed revenue neutrality of GST stands compromised. The Share of General Government’s revenue from taxes subsumed under GST was 6.3% of GDP in 2016-17. However, the collections under GST was 5.7% of GDP in 2018-19 and 5.6% in 2019-20.
Share of GST in Total Tax collection: GST accounts for the highest share followed by Income Tax and Corporate Tax. Amongst different components, IGST accounts for highest share.
Improvement in Tax base: Increase in number of registered taxpayers from 1.08 crore to 1.23 crore. More number of informal entities have come under the tax bracket.
Challenges and Concerns
The 15th Finance Commission has highlighted some challenges with the implementation of the Goods and Services Tax (GST). These include:
Stagnation in Revenue: Monthly GST collections crossed Rs 1 lakh crore in April 2018 and since then remained stagnant. Inverted Duty Structure: The term ‘Inverted duty Structure’ refers to a situation where the rate of tax on inputs purchased (i.e. GST Rate paid on inputs) is more than the GST rate on finished goods. The inverted duty structure leads to higher input tax credits and hence lower tax collection for the Government.
Complexity: The GST was introduced in order to simplify the tax structure and improve the tax compliance. However, the existing GST regime has multiple rates: 0, 0.25, 1, 3, 5, 12, 18 and 28%.
Coverage: Petroleum crude, petrol, high speed diesel, natural gas etc. are still outside GST.
Issues in Refunds: Delays in GST refunds, recent unearthing of fake invoices and fraudulent practices to corner input tax credit.
Anti-profiteering framework: Need to evolve clear guidelines on anti-profiteering mechanism. Shortfall in GST Compensation Cess: Almost 21 states still depend upon Centre for the GST compensation.
Severe fiscal strain is expected when the 14% compensation comes to an end as the median growth rate of subsumed taxes is only 11%, and in many States between 5% to 10%. The median subsumed tax buoyancy is below unity. This means with 1% growth, there will be a 0.75% growth of tax.
4. Ladakh adopts State Animal and State Bird
UPSC Syllabus: Prelims : Environment
Sub Theme: Vulnerable species| UPSC
- Ladakh adopted two endangered species, snow leopard and black-necked crane, as State animal and State bird, two years after it was carved out as a separate Union Territory (UT) from the erstwhile State of J&K.
About Snow Leopard:
- It is listed as Vulnerable on the IUCN Red List because the global population is estimated to number fewer than 10,000 mature individuals and is expected to decline about 10% by 2040.
- It is enlisted as Schedule I of Wildlife Protection Act, 1972.
- It is threatened by poaching and habitat destruction following infrastructural developments. • It inhabits alpine and subalpine zones at elevations from 3,000 to 4,500 m (9,800 to 14,800 ft), ranging from eastern Afghanistan, the Himalayas and the Tibetan Plateau, to southern Siberia, Mongolia and western China. In the northern part of its range, it also lives at lower elevations.
5. Meghalaya ‘scraps’ power project post protests
UPSC Syllabus: Prelims : Geography
Sub Theme: River| UPSC
- The Meghalaya government has “scrapped” an agreement with private power developers to execute the proposed 210 MW Umngot hydroelectric project following protests.
About Umngot River
- Umngot flows through Dawki, a small but busy town in the East Jaintia Hills district near the Indo-Bangladesh border. The town itself is a mere 95 km from Shillong.
- Dawki serves as a busy trade route between India and Bangladesh where hundreds of trucks pass every day. • The Umngot itself is a prime fishing spot for fishermen from nearby areas.
- The river is the natural boundary between Ri Pnar (of Jaintia Hills) with Hima Khyrim (of Khasi Hills) over which hangs a single span suspension bridge.
6. Zapad exercise
UPSC Syllabus: Security
Sub Theme: Military Exercise| UPSC
- It is a theatre level exercise (Army) that focus on terrorist activities.
- Multinational Exercise ZAPAD 2021 being held at Nizhniy, Russia from September 3 • to 16,
- Total 17 nations participating including Observer nations like China and Pakistan. • India is one of the participating nation out of total nine.