Daily Editorial Analysis for 6th July 2021

DAILY EDITORIAL ANALYSIS

(Source: The Hindu, Indian Express, The Economic Times, PIB, etc.)

(6 July 2021)

GS PAPER II EDITORIAL

A blueprint for making PSBs Atmanirbhar

Self-reliance

• The dictionary meaning of self-reliance (Atmanirbhar) is “reliance on one’s own powers and resources rather than those of others.”
• Accordingly, there are two ways of determining when a bank, or more specifically a PSB, is not self-reliant.
• The first, known as “internal scaffolding”, is one under which the loss incurred by a bank in a year is adjusted against its ‘Reserves and Surplus’ which consequently erodes its net worth even if the bank remains liquid and solvent.
• The second, the “external scaffolding” kicks in when the “internal scaffolding” collapses.
• The “external scaffolding” involves protecting a serially loss­making bank with weakening net worth and other relevant parameters from going bust by restricting its risk-taking activities with or without capital infusion from the owner (commonly referred to as Prompt Corrective Action).
• A second method under this approach is ‘blanket recapitalization’ by the owner/s, which in the case of PSBs is the government — through annual budgetary allocations.
• Under both “scaffoldings”, the PSBs cannot be said to be Atmanirbhar or self-reliant. Therefore, the question is how to make the PSBs self-reliant as any ‘scaffolding’, real or virtual, is temporary.
• There are some unconventional measures that can move PSBs towards self­reliance. While up to 2009­10, the cumulative recapitalisation amounted to ₹230 billion, during the period 2010­11 to 2017­18, it was over ₹1,181 billion.
• As the majority owner, the government is naturally free to recapitalize PSBs, but the crux of the issue is, at what cost, for how long, and whether recapitalisation alone is enough. As an IMF note says, bailouts are “too expensive, too inequitable, and too harmful to market discipline.”
• Besides, the government is finding it increasingly difficult to recapitalise the PSBs through annual budgets due to the need to adhere the stringent deficit benchmarks. So, in recent years the government has opted for
• recapitalisation via ‘special securities’ which is budget neutral to a major extent, and
• ‘selective’ recapitalisation.
• Moreover, frequent government recapitalisation lets the presence of weak banks stifle systemic efficiency.

Contingent Convertible capital instruments (CoCos)

• The bailout through public recapitalisation can be replaced with a ‘bail­in’ via Contingent Convertible capital instruments (CoCos).
• CoCos are non­traditional hybrid capital instruments. Their twin objectives are:
• Loss absorption, and
• Recapitalisation, when a bank ‘is’ in trouble, or when it is a ‘going concern’.
• CoCos can absorb losses either by converting the losses into common equity or writing down the principal, subject to activation of “triggers”, which are of three types: Mechanical or Point of Non­Viability’ or Multiple.
• There are two, but contrasting, ways in which a CoCo can recapitalise the issuing bank:
• By converting into equity at a pre­defined conversion rate, i.e., a Conversion­to­Equity CoCo which increases the Common Equity Tier1 or CET1 and
• By writing down the principal, i.e., a Principal Write-down CoCo which raises equity.
• As per Basel III (the 2009 international regulatory accord developed in response to the 2008 financial crisis) CoCos qualify as either Additional Tier 1 (AT1) or Tier 2 (T2) capital.
• Low trigger CoCos, which qualify as T2 capital, have less loss absorbing capacity and facilitate banks in increasing their T2 capital.
• High trigger CoCos are eligible for AT1 capital, and therefore, banks use these to increase their T1 capital.
• However, this would necessitate instituting a statutory resolution framework, which should be quick and economic, in lieu of the case­by-case method that is being followed now.
• While a statutory resolution framework is necessary, it is not sufficient — this should come from putting in place a risk-based deposit insurance premium system which would leash the overly aggressive behaviour of banks — public or private.
• If a variable premium system is followed, some banks may save a lot in the form of premium payment if they fall into lower risk matrices.

Change deposit insurance coverage

• The financial independence of the PSBs will receive a further fillip if:
• They are excluded from the deposit insurance system because, anyway, they are a ‘protected’ species or (b)
• They are allowed to pay premium on ‘insured’ deposits ‘only’ rather than ‘assessable’ deposits as currently provided, or
• Only ‘household’ deposits are made eligible for insurance.

Reinvest dividend

• If and when a PSB declares dividend, the government can reinvest whole or part of the dividend amount due to it in the same bank, instead of writing it into the budget where the funds are fungible. This will fortify the dividend paying bank financially.

Boosting profit via tax measures

• The corporate tax on banks needs to be a few basis points below that in respect of the real sector corporates. This is because:
• Banks are unequivocally ‘special’, and one should not allow them, especially the PSBs which together control 63 per cent of the scheduled commercial banks’ business (excluding RRBs), to be in the red for a long time risking systemic stability; and
• A sizeable part of the humongous NPAs, which are responsible for the pathetic condition of banks today, sources from various exogenous reasons.
• This measure, which will prop up banking indices in the stock markets as well as shareholders’ value, will set the ground for the government to divest from PSBs, instead of going in for fiscally unsustainable recapitalisation.
• Another proposal could be to increase the depreciation rates on various IT infrastructure that the banks invest in.
• Besides increasing profit, this will help banks to take on the mushrooming FinTech companies.

Uninstalling internal scaffolding

• Since the interest income of banks is near dormant, the banks should strengthen their fee­based income through diversification.
• For banks selling third­party products such as bancassurance, mutual fund and capital­market related products
• Provides a lucrative option.
• In 2019­20, the 10 new private banks earned on an average ₹6.1 billion from cross­selling which was double of what 13 PSBs earned.
• The major constraint on the financial self­reliance of the PSBs today is the humongous non­performing loans, the solution to which will not be easy or quick.
• Therefore, ways of bolstering PSBs’ finances through some unconventional means needs to be looked at. Some of these measures may necessitate amendments to a few of the existing Acts.
• If the Acts to convert PSBs into private banks can be amended, other less difficult Acts can also be amended.

GS PAPER II

Will a national judiciary work?

Why in News

• The Union government appears to be steadfast in its resolve to implement reforms in recruitment and appointment to the subordinate judicial services.
• In 2019, it spearheaded a consultative process for the creation of the All-India Judicial Service (AIJS). Initially, only four States and two High Courts supported the proposal.
• Eight States rejected it, five suggested changes, and 11 are yet to respond.
• Recently, the Centre took the ordinance route to effect changes in the appointment of members to various tribunals.
• In a single stroke, it abolished several tribunals. The manner of appointment of members to the remaining tribunals underwent a sea change. It is likely that the ordinance may not pass judicial scrutiny in light of the Supreme Court’s judgment in Rojer Mathew v. South Indian Bank (2019).

Constitutional perspective

• Article 233(1) of the Constitution lays down that “appointments of persons to be, and the posting and promotion of, district judges in any State shall be made by the Governor of the State in consultation with the High Court exercising jurisdiction in relation to such State”.
• The 42nd Constitutional amendment in 1976 amended Article 312 (1) empowering Parliament to make laws for the creation of one or more All­India Services, including an AIJS, common to the Union and the States.
• However, Clause 3 of Article 312 places a restriction that such a service shall not include a post inferior to that of a district judge.
• The amendment also brought about a significant change in the Seventh Schedule — Entry 3 of List II in its entirety was placed as Entry 11A in List III.
• This paves the way for Parliament to enact laws with regard to ‘Administration of Justice; constitution and organisation of all courts, except the Supreme Court and the High Courts’.
• Post Emergency, amendment to Article 312 (1) has escaped parliamentary scrutiny. A dichotomy exists with regard to Articles 233 and 312.
• If the fundamental power of the States to make such rules and govern the appointment of district judges is taken away, it may be against the principle of federalism and the basic structure doctrine.
• The First Law Commission deliberated upon this, but it was only in 1972 that the issue gained momentum. The views of the Chief Justice of India and the Law Commission reports perhaps paved the way to bring in the 42nd constitutional amendment.
• It was only in 1986 that the Law Commission resurrected the issue and deliberated upon the objections. The primary fear was that promotional avenues of the subordinate judiciary would be severely curtailed. Fifty percent of the posts of district judges are to be filled by promotion from the subordinate judicial service, thus leaving open the remaining for direct recruitment.
• Another fundamental concern was the language barrier.
• The Union Law Minister has extolled AIJS to be an ideal solution for equal representation of the marginalised and deprived sections of society.
• Most States already have a reservation policy in force. Tamil Nadu provides for a roster-based reservation of 69%, of which 30% is for women. Uttar Pradesh merely provides 20% reservation for women and the AIJS may therefore benefit States like U.P.
• Arguments that the AIJS will reduce judicial delays do not hold water as the subordinate courts are the crucial point of delays owing to the existence of large vacancies.
• In the early 1960s, the issue was debated during the Chief Justices Conference and was favoured by the eminent body, but many States and High Courts opposed it.
• The First National Judicial Pay Commission found that it would be in the interest and the health of the judiciary to form an AIJS. The report supported and reiterated the recommendations of the 14th Law Commission.
• In the All-India Judges case in 1992 the apex court had opined that the recommendations of the Law Commission should be examined and implemented.
• The issue was again discussed in All India Judges Association Vs. Union of India (2002). The court accepted most recommendations of the Shetty Commission and directed the government to implement the judgment.
• Any groundbreaking reform is bound to receive criticism. The National Commission constituted for review of the Constitution headed by luminaries including Justice H.R. Khanna, Justice B.P. Jeevan Reddy and K. Parasaran, the then Attorney General, had suggested a paradigm shift in the approach of the Union.
• The feasibility of the AIJS in the current context requires to be studied, especially when reliance is placed upon archaic reports of the Law Commission.
• It is for the Union to dispel doubts and at the same time give wings to the aspirations of all stakeholders when implementing the proposal.
• It, however, remains to be seen if the AIJS would be like the proverbial curate’s egg.