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4 April 2017 Question Bank


4th APRIL 2017 


(2 Questions)

Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.

Links are provided for reference. You can also use the Internet fruitfully to further enhance and strengthen your answers.


1.      What are bad loans? What are the factors responsible for them? How can the bad loan problem in India be resolved?


Bad loans:

  • Bad loans - or non-performing assets (NPAs) - were 9% of total loans of all Indian banks in September 2016.
  • At public sector banks (PSBs), bad loans were 12% of all advances. Another 3% of loans in the aggregate (and 4% at PSBs) have been restructured.
  • TheEconomic Survey(2016-17) quotes market analysts as saying that 4-5% of loans are bad loans that have not been recognised as such. Thus, total stressed assets - NPAs, restructured loans and unrecognised bad loans - would amount to a staggering 16% of all loans and nearly 20% of loans at PSBs.

Reasons for accumulation of bad loans:

  • Today's bad loan problem has arisen from the lending boom that India's banks embarked on in the period 2004-08, a period that saw economic growth reach the 9-10% range.
  • It is the failure to resolve the bad loan problem over the past several years that has exacerbated the problem.
  • The best solution to a bad loan problem is to simply grow your way out of it. This can happen in two ways.

1.      One, banks keep financing projects that are not making repayments in full and would qualify as NPAs. They do so in the hope that, once growth revives, cash flows in the projects will improve.

2.      Two, banks grow their loan portfolio at a brisk rate. As the denominator in the ratio of bad loans to total loans grows, the bad loan problem automatically diminishes in significance.

  • That's how India's banking sector came out of the bad loan problem in the early 2000s.
  • Rapid growth in the world economy and the Indian economy provided a painless solution.
  • This time around, however, the global economy has been in a prolonged slump consequent to the financial crisis of 2007-08. The "financing" strategy of continuing to make loans to unviable projects has come unstuck.
  • A committee appointed by the RBI and headed by P.J. Nayak submitted its report in late 2014.
  • The committee asserted that majority government ownership of PSBs was the root cause of the bad loan problem as it meant political and bureaucratic interference with commercial decisions.
  • However, theEconomic Surveyof 2016-17 point outs, the bad loan problem is "an economic problem, not a morality play... the vast bulk of the problem has been caused by unexpected changes in the economic environment: timetables, exchange rates, and growth rate assumptions going wrong."
  • In other words, factors extraneous to bank management and governance are primarily responsible for the problem.

Plodding towards a solution

  • The government appointed a Bank Board Bureau (BBB) as suggested by the Nayak committee and tasked it with appointing Chairmen and Managing Directors of PSBs. The BBB was also assigned the role of advising banks on restructuring and raising capital.
  • There is clarity now that banks must be empowered to resolve the relatively small number of bad loans that account for a big chunk of the total in terms of value. In many cases, this would mean that banks write off a portion of the loans owed to them.
  • Managements at PSBs have been reluctant to do so for fear of inviting action from the Chief Vigilance Commissioner, the Comptroller and Auditor General, the Central Bureau of Investigation and other bodies.
  • We need an oversight committee or, as the Finance Ministry has proposed, multiple oversight committees to speedily vet loan write-offs. It makes sense to constitute a Loan Resolution Authority by an Act of Parliament.
  • This must be complemented with other measures. Banks must develop the discipline of keeping thorough minutes of the proceedings related to resolution of bad loans. The rationale for particular decisions along with the pros and cons must be properly articulated. This will serve to give bank management a measure of protection.
  • The government must provide adequate capital to the banks to cover write-offs and also facilitate fresh loan growth.
  • It must end the delays in appointing Chairmen and Managing Directors of various PSBs. It must also revamp the boards of PSBs by bringing in independent directors of high quality.



2.    It's a tangled web of problems in Manipur. Discuss.


  • As theBharatiya Janata Party (BJP) formed the governmentin Manipur after winning only 21 seats in a 60-member House, the crippling blockade of two highways leading to the State, called by the United Naga Council (UNC) last November, on creation of new districts, ended.

The Naga issue

  • The UNC operates under the patronage of the National Socialist Council of Nagalim (Isak-Muivah) with which the Centre signed a "framework agreement" in 2015 to solve the decades-old Naga insurgency.
  • Though the "agreement" is shrouded in secrecy, the Nagas have never kept their demands secret.
  • They want all Naga-inhabited territories in Manipur, Assam, Arunachal Pradesh and Nagaland to come under "Greater Nagalim" which all States barring Nagaland vehemently oppose.
  • Even if the problem with the NSCN(I-M) is sorted out, there's the NSCN (Khaplang) faction, which broke the ceasefire with the Centre, to contend with - and a host of other insurgent groups each fighting their own cause including the valley-based People's Liberation Army.

The balancing act

  • A rollback of the creation of new districts will obviously appease the Nagas in the hills, but not the Kukis, the other major tribal group living in the hill districts, who have got a new district, Kangpokpi (culled out from areas of Naga-dominated Senapati district, and a fact which hasn't gone down well with the Nagas).
  • The Meiteis in the valley comprise roughly 60% of the population but live in a tenth of the area of Manipur.
  • The hill tribes are roughly 40% of the population and they live in hill districts which are spread over 90% of Manipur's total area.
  • It's a Meitei demand, that outsiders be allowed access to the State only by using Inner Line permits, and since they, despite being in a majority, already feel constricted in their own State, their voice has to be heard.
  • On the other hand, the Nagas and Kukis, who have long complained that the administration is leaning towards Meiteis, are uneasy about it, and there have been widespread protests for and against it.
  • The Armed Forces (Special Powers) Act, which has been in place in the State since 1980, and against which Irom Sharmila recently ended a 16-year hunger strike.
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