Saturday, March 21, 2015

PM Kaushal Vikas Yojana (PMKVY)

The Union Cabinet approved the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) (translated to - Prime Minister Skill Development Scheme) with an outlay of Rs. 1,500 crore to provide skills training to youth (including Class 10 and 12 drop outs).

Ministry and NSDC
This flagship scheme is to be implemented by the new Ministry of Skill Development and Entrepreneurship (Minister of State (Independent Charge) - Shri Rajiv Pratap Rudy) through the National Skill Development Corporation (NSDC).

The scheme will cover 24 lakh youths. Skill training would be done on the National Skill Qualification Framework (NSQF) and industry-led standards.

Scheme and rewards
Under the scheme, a monetary reward is given to trainees on assessment and certification by third party assessment bodies. The average monetary reward would be approx Rs. 8,000 per trainee.

Expenditure List
  • Skill training of 14 lakh youth - Rs. 1,120 crore
  • Recognition of prior learning - Rs. 220 crore
  • Awareness building and mobilization efforts - Rs. 67 crore (Mobilization through Skill melas organized at the local level with participation of State governments, Municipalities, Panchayats, community-based organizations, etc.)
  • Mentorship support and placement facilitation - Rs. 67 crore
  • Training of youth from the North-East region - Rs. 150 crore

Focus on
Skill training under this scheme will primarily be focused on a first time entrants to the labor market and primarily target Class 10 and Class 12 drop outs.

Other flagship schemes
The target for skilling would be aligned to demand from other flagship programmes launched in recent times, such as Make in India, Digital India, National Solar Mission and Swachh Bharat Abhiyan.

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Friday, March 20, 2015

SARFAESI Act, 2002

Before reading this article, go through the article on - Non-performing Assets (NPA)

SARFAESI Act, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 was enacted to empower the banks and financial institutions (lenders) to recover their bad loans / NPAs from the borrowers, without the intervention of the court.

Applicability of the Act

  • Secured Loans - SARFAESI Act is applicable only for the secured loans (meaning loans backed by underlying securities). In this case, banks or financial institutions can seize and/or sell the underlying securities, like hypothecation, pledge, mortgage, etc and recover the loan amount.
  • Unsecured Loans / Agricultural lands - For unsecured loans (not backed by underlying securities) or agricultural loans (where agricultural land is the underlying security), banks cannot seize or sell by itself. In these case, banks need to move to court and file Civil case against the defaulters.

Earlier to recover the bad loans / NPAs, banks needed to move to the courts - Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunals (DRAT), which made the recovery a long-term process, and there were several loopholes which could be misused by the borrowers.

Then Andhyarujina committee recommended to enact a new legislation for the establishment of Securitization and Reconstruction companies and empower the banks and financial institutions to take possession / seize the securities without moving to the courts.

Provisions of the Act
If any borrower fails to discharge his liability in repayment of any secured debt within 60 days (2 months) of Notice, the secured creditor is conferred with powers under the SARFAESI Act to -
  • Take possession of / seize / auction /sell the secured assets of the borrower
  • Takeover of the management of the business of the borrower
  • Appoint any person to manage the secured assets, etc.
Note that agricultural property is exempted from the provisions of the Act.

Some Securitization Companies and Reconstruction Companies in India
  • Asset Reconstruction Company (India) Ltd. (ARCIL)
  • Assets care & Reconstruction Enterprise Ltd. (ACRE)
  • ASREC (India) Ltd.
  • Pegasus Assets Reconstruction Pvt. Ltd.
  • Phoenix ARC Pvt. Ltd.

If you have any query regarding this article, please feel free to ask in the comment section

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Thursday, March 19, 2015

Non Performing Assets (NPA)

Bank Assets
Assets are something that you own, meaning you are the legal owner of the asset. Similarly, bank assets are those things that a bank owns. It can be physical property (like land, equipment, buildings, etc.) or financial property.

Banks generally have four types of assets - Physical Assets, Loans/Advances, Reserves and Investments. (Read the topic - Bank Assets and Liabilities for detail).

Among the above four types, loans or advances are the most important and risky asset of a bank. It is most important because, it can generate maximum profit, and at the same time, it is the most risky because if the borrower fails to repay the loan amount, then the bank will face loss.

Non-Performing Assets (NPA)
If the borrower (of a loan/advance from a bank) is unable to repay the interest and principal repayments to the bank, for a considerable amount of time, then the loan/advance will be called non-performing. Since loans/advances are assets of the bank, it will be known as Non-performing Assets (NPA).

In Indian context, if the borrower has failed to make interest or principal payments for 90 days (3 months), then the loan/advance is considered NPA.

(In layman's terms NPA refers to - you lend money, but you don't get it back when you expected)

Recovery/Non-recovery of NPA
Interests earned on loan repayments are the most important income of a bank. Therefore, due to default in repayment, banks will suffer loss. Though, by selling the collateral securities (if any) against the loan - banks could recover the loan amount, the process of selling the securities (with the help of Asset Reconstruction Companies, and they will charge fee) is a tedious and long term job, and even the seizure of mortgage or hypothecation, etc is difficult process.

Moreover, if the company or individual borrower becomes bankrupt, then the loss will be catastrophic for the lender bank. Even in some cases, there could be some corrupted bank officials who would sanction loan to uncreditworthy borrowers for bribes, or ministerial / political pressures!

Conditions to become NPA
An asset becomes NPA when it ceases to generate income for the bank -

  1. Term Loan - Interest and/or installment of principal amount remain overdue for more than 90 days
  2. Overdraft / Cash Credit - The account remains 'out of order' for 90 days
  3. Bill - The bill remains overdue for more than 90 days in the case of bills purchased and discounted
  4. Short duration crops - The installment of principal or interest remains overdue for 2 crop seasons
  5. Long duration crops - The installment of principal or interest remains overdue for 1 crop season
  6. Securitisation transaction - The amount of liquidity facility outstanding for more than 90 days
  7. Derivative transaction - The overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for 90 days from the specified due date for payment.

NPA Classification
Banks are required to classify NPAs into the following 3 categories, based on the nonperforming period and the realisability (recoverability) of the dues -

  1. Substandard Assets - (90 days - 12 months)
    Assets remained NPA for less than or equal to 12 months (1 year) are Substandard Assets.

    Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
  2. Doubtful Assets - ( > 12 months)
    Assets remained Substandard assets for 12 months (1 year) are Doubtful Assets.

    Such an asset will have all the weaknesses inherent in substandard assets, with the added characteristic that the weakness make collection or liquidation in full - on the basis of currently known facts, conditions and values - highly questionable and improbable.
  3. Loss Assets -
    Assets where loss has been identified by the bank or internal/external auditors or the RBI inspection, but the amount has not been written off wholly.

    Such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Upgradation of NPA to Standard
If arrears of interest and principal are paid by the borrower in case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as 'standard' accounts.

Current NPA status in India
According to Moody's analyst ICRA, the percentage of gross NPAs (GNPAs) for the banking sector (both PSBs and private banks) is expected to worsen from 3.9 % of advances in fiscal 2013-14 to about 4 - 4.2 % in 2014-15.

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Tuesday, March 17, 2015

BRICS vs. Fragile Five

BRICS Nations
BRICS acronym is given to 5 major emerging economies of the world - Brazil, Russia, India, China and South Africa, which was formerly known as BRIC (excluding South Africa). In 2010, South Africa is added to the group.

These 5 major emerging economies have the following characteristics in common -

  • developing countries, or newly industrialized countries
  • large and fast-growing economies
  • have significant influence on their regional and global affairs

Some statistics (as of 2014)
  • Combined GDP - USD 16.039 trillion (approx. 20 % of combined GDP of world)
  • Population - approx 3 billion (41.4 % of world population)
  • Combined Forex reserve - USD 4 trillion
  • Land area - more than 1/4th of world land

BRICS summit
Since 2010, BRICS summit is being held annually. Russia will host 7th BRICS summit in July, 2015. 6th BRICS summit was held in Brazil in 2014.

New Development Bank BRICS (NDB BRICS)
In 2014 BRICS summit, member countries came together to form a multilateral development bank as an alternative to World Bank and IMF (which are US-dominated). 

Each member country will have single vote and there will be no Veto power* for the members (In contrast, World Bank assigns votes based on capital share, meaning voting power is proportional to capital!).

Some points regarding NDB BRICS (will start lending in 2016) -
  • Initial Capital - USD 100 billion (China USD 41 billion, Brazil + Russia + India = 3 x USD 18 billion = USD 54 billion, South Africa USD 5 billion)
  • Reserve Currency Pool - USD 100 billion (apart from the initial capital)
  • Headquarter Shanghai, China
  • Regional Center - Johannesburg, South Africa
  • First President - from India
  • First Chairman of the Board of Directors - from Brazil
  • First Chairman of the Board of Governors - from Russia
(Note that each member country got something!)

Fragile Five
In contrast to the 5 major emerging countries (BRICS), Mr. Jim O'Neil, a research analyst from Morgan Stanley, has coined the term 'Fragile Five'. As the name suggests, these are 5 developing countries, which are much dependent on foreign investment (into their economies) to finance their growth ambitions. 

The Fragile Five economies are -
  • Turkey
  • Brazil
  • India
  • South Africa
  • Indonesia

Latest situation of Fragile Five (as of March 2015)
Morgan Stanley had identified the 5 major emerging markets with the most vulnerable currencies
  • India - inflation halved since the end of 2013; Current-Account Deficit (CAD) shrunk; investor friendly policies of PM Shri Narendra Modi; Governor Shri R.Rajan won a legal mandate for RBI to target inflation; Rupee 1 % gained versus Dollar this year, etc.
  • Indonesia - scrapping gasoline subsidies by new President Joko Widodo; target to cut budget deficit to 1.9 % of GDP
According to Morgan Stanley economists, India has completed 85 % of the necessary adjustment, whereas Indonesia has completed 65 %.
Other countries - Turkey 10 %, Brazil 15 % and South Africa barely anything of recommended reforms.

(It seems Fragile Five came down to Fragile Three!)

*Veto power - It gives power to stop changes, or not to adopt them. For an example, in UN Security Council (UNSC), permanent member countries have veto power, meaning if any of them wants to stop any resolution, they can use their veto power.

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Monday, March 16, 2015

Asia Infrastructure Investment Bank (AIIB)

The Asian Development Bank Institute (ADBI) published a report in 2010 pointing out that the Asia-Pacific region requires approx. USD 8 trillion from 2010 to 2020 for its infrastructure and economic development. For the very purpose of development, Chinese government has proposed Asia Infrastructure Investment Bank (AIIB), which will look after the developmental requirements specifically for this region.

The other international financial institutions, like World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB) - are dominated by US, Europe and Japan (according to China) with their own interests. Also, the long demanded (by developing countries, like BRICS nations) voting rights and quota reform has been pending in IMF, which also helped in the creation of an alternate solution.

Therefore, China proposed the bank (AIIB) with authorized capital of USD 100 billion , with initial subscribed capital of USD 50 billion

Establishment and Member countries
A signing ceremony was held in Beijing on October 24, 2014, where 21 countries signed the bill for establishment of the bank -

China, India, Thailand, Malaysia, Singapore, Pakistan, Bangladesh, Philippines, Brunei, Kazakhstan, Kuwait, Cambodia, Laos, Myanmar, Nepal, Vietnam, Mongolia, Oman, Qatar, Sri Lanka and Uzbekistan.

In 2015, more countries have joined - Jordan, New Zealand, Saudi Arabia, Tajikistan, United Kingdom (UK), etc.

Founding members
China's Finance Ministry said, "any country that signs and ratifies the articles can still officially become a 'founding' member", though they need to be accepted by the existing members first. In that sense, all the signatories before March 31, 2015 deadline will be considered as "founding" members.

India in AIIB
Smt. Usha Titus, Joint Secretary of Economic Affairs division of Ministry of Finance, signed the MoU on behalf of India at the signing ceremony on October 24, 2014.

Secretary-General of AIIB
China's Vice Finance Minister Jin Liqun has been appointed as the Secretary General of Asia Infrastructure Investment Bank (AIIB).

Headquarter of AIIB
The bank is to be headquartered in Beijing, China, and is to be operational from end of 2015.
Note the bank will be backed by China, as it will hold the majority stake of the bank.

Voting rights
The AIIB will have voting rights based on benchmarks, which will be a combination of GDP and Purchasing Power Parity (PPP). Based on these China and India will be the largest stakeholders of the bank.

US pressure on some states
However, due to the pressure of USA, some countries like Australia, South Korea and Japan are yet to join the bank.

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Sunday, March 15, 2015

Land Acquisition Laws in India - Part II

(First read this post - Land Acquisition Laws - Part I)

Land Ordinance, 2014
After the regime change, BJP government led by PM Shri Narendra Modi, tried to amend the LARR Act, 2013. But due to several reasons, like disruptions by opposition parties, having minority in Rajya Sabha, etc. could not pass the Land Bill

Government then decided to pass a Presidential Ordinance in December 2014 (Land Ordinance, 2014), without waiting for next Parliamentary session to debate on the issue.

Provisions of Land Ordinance, 2014

1.  Conditions for acquiring landsIn the Ordinance, those mandatory conditions of 70-80 % consent of the affected families, were no longer required for 5 types of projects -
  • National Security and Defense
  • Rural Infrastructure and Electrification
  • Infrastructure and Social Infrastructure
  • Industrial Corridors
  • Housing for the poor
2.  Social Impact Assessment (SIA) - SIA was not needed for the above 5 types of Public-Private-Partnership (PPP) projects, where government owns the land

3.  Compensation - same as LARR, 2013

4.  Private ProvisionsBuilding private hospitals, education institutes would also count as 'public purpose'. 

5.  Accountability - Head of the department could not be prosecuted without prior sanction of government (under Criminal Procedure Code - Sec 197)

Problems with Land Ordinance, 2014

1.  Bureaucrat immunityimmunity could be misused by them by playing mischief in land acquisition

2.  Exemptions (a big list!)Those 5 types of projects are enough to cover almost any type of projects (specially the infrastructure category) (meaning 70-80 consent is almost invalidated with clever words!)

3.  Social Impact Assessment (SIA) - SIA ignored for those 5 types of projects. So, local laborers, artisans, small traders, etc. would get little or no relief package (even if their livelihood affected)

4.  Food Security ProblemsAcquisition of agricultural lands without giving proper consideration could create food security problems

5.  Private Colleges and hospitalsIn the name of 'public purpose', these two categories could acquire land, even if they charge high fees (and serving little 'public purpose' in rural areas)

Land Bill, 2015
In the Budget Session, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015 (LARR Bill), also known as Land Bill, 2015 has been passed by the Lok Sabha on March 10, 2015. Now it needs to be passed by Rajya Sabha, and get Presidential assent to become an Act.

Ordinance has a validity of max. 6 months, and should be used only in emergency cases (when parliament is in recession, and emergency action needed). Therefore government needs to pass the bill in both of the Houses of Parliament (Lok Sabha and Rajya Sabha) within due time.

Apart from that, the Land Ordinance of 2014 was too rigid for land owners, and almost any land could be acquired by the government without much consideration of the affected people. Therefore, it needed to change some of its provisions.

Provisions (9 Amendments) of Land Bill, 2015
Government adopted 9 amendments to the Land Ordinance, and passed in the Lok Sabha -

1.  Removed exemptions for Social Infrastructure projects in Public-Private-Partnership (PPP) mode.

2.  Land that will be acquired for Industrial Corridors will be limited to 1 km on either side of the highways or railway lines.

3.  Compulsory employment to 1 member of the affected family of farm laborers.

4.  Panchayat's nod may be compulsory for acquiring tribal land.

5.  Replacing the term 'private entity' with 'private enterprise'

6.  Government may acquire land for government bodies, corporations

7.  A hassle-free grievance redressal mechanism for land losers

8.  Farmers may get right to appeal / complain over land acquisition hearing and redressal of grievances at the district level

9.  Ceiling on land acquisition in Industrial corridors

Note that government refused to bring back the Consent clause (70-80) and Social Impact Assessment (SIA) for the 5 types of projects.

Opposition of the Bill and Anna Hazare
The Land Bill is likely to be opposed in the Rajya Sabha by the opposition parties (where the BJP-government has a minority state).

Also the veteran anti-corruption crusader Anna Hazare kept up a combative tone over the allegedly 'anti-farmer' bill, remarking that a "second freedom struggle" would erupt if the bill is passed in the Rajya Sabha.

He wrote in his blog, "A second freedom struggle would erupt if this Bill, in its current version, gets the approval of both Houses of Parliament. The people would then have to show that the 'People's Parliament' is supreme in this country." 

He is also planning to start his 'Kisan Sangharsh Yatra' in protest against the Bill on March 30, 2015.

Summary and my view
The LARR Act of 2013 was too rigid for land acquisition, that made the land acquisition process infeasible (blocking industrial growth). On the other hand, the Land Ordinance of 2014 was too rigid for the land owners, that almost ignored them in the whole process (we cannot deprive the land owner in the name of industrial growth!)

Even in the Land Bill of 2015, the SIA and 70-80 consent clause is not applicable for the 5 types of projects (read 'not present'). It means that the situation is not improved for the affected people.

Now, we can just wait and watch, whether the Bill is passed in Rajya Sabha. Or, we can raise our concerns in appropriate means.

You can present your views regarding this topic in comments section.

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