MID-SEM ASSIGNMENTS

NANDA RAJESH
(2018 036)

MAHARASHTRA NATIONAL LAW UNIVERSITY, MUMBAI

ECONOMICS III.

ECONOMICS MID-SEMESTER ASSIGNMENTS

SUBMITTED TO- Prof. Rohit Jadhav

SUBMITTED BY – Nanda Rajesh

ENROLLMENT ID- 2018 036

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ECONOMICS MID-SEM

ASSIGNMENT 1 : IS NPA A PROBLEM FOR THE COUNTRY? EXPLAIN IN DETAILS

THE NPA PATTERN OF THE INDIA

A Non-Performing asset (NPA) refers to a classification for loans or advances that are in
default or in arrears. A loan is in arrears when principal or interest payments are late or
missed. A loan is in default when the lender considers the loan agreement to be broken and
the debtor is unable to meet his obligations to pay back the amount taken on loan. Any asset
which stops giving returns to its investors for a specified period of time is known as a Non-
Performing Asset (NPA).

Generally, the specified period of time is 90 days in most of the countries and across various
lending institutions. However, there is not mandatory standard time limit provided, and it
may vary with the terms and conditions agreed upon by the financial institution and the
borrower.

Possible reasons for NPA are in the banking system, particularly in India. Some important
reasons among them include

1. Funds being lost when diversified into unrelated business which might have a
probability of leading to fraudulent activities.
2. Lapses caused to diligence.
3. In case of an unexpected change in business regulatory environment, losses may be
caused leading to inability to pay off loans.
4. A lack of morale, caused particularly due to government schemes which had written
off loans.
5. Global, regional or national financial crisis which results in erosion of margins and
profits of companies, therefore, stressing their balance sheet which finally results into
non-servicing of interest and loan payments. A suitable example of this would be the
2008 Global Financial Crisis.
6. If a specific industrial segment faces a loss or slows down companies in that specific
industry beat the heat and some may become NPA.

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THE SARFAESI ACT 2002

Prior to this act of 2002, prevalent was the Recovery of Debt due to Banks and Financial
Institutions Act, 1993. This act came into existence on recommendation of the Narasimham
Committee-1. The act had created forums such as Debt Recovery Tribunals and Debt
Recovery Appellate Tribunals for expeditious adjudication of disputes with regard to ever
increasing non-recovered dues. This act however was not very effective and successful
considering that it had abundant loopholes which were often miss-used by the borrowers and
the lawyers. It was under this circumstance that the government began to introspect and
another committee under the leadership of Mr. Andhyarujina was appointed to examine the
banking sector reforms and consideration to changes in the legal system.

It was under the recommendation of this committee; a new legislation was enacted for the
establishment of securitisation and reconstruction companies to empower the banks and
financial institutions to take possession of the Non performing assets. Via SARFAESI ACT
2002, for the first time, the secured creditor were empowered to recover their dues without
legal intervention. The implementation of this act, was challenged in the court though it was
passed which held it from coming into force for almost 2 years. Later, it was in the case of
Mardia Chemicals v. Union of India, the Supreme Court upheld the validity of SARFAESI
ACT.

 RIGHTS OF BORROWERS UNDER SARFAESI ACT

1. The borrowers can at any time before the sale is concluded, remit the dues and
avoid losing the security. In case any unhealthy/illegal act is done by the
Authorised Officer, he will be liable for penal consequences.
2. The borrowers will be entitled to get compensation for such acts.
 PRE-CONDITIONS
The act puts forward mainly four conditions for enforcing rights by a creditor.
1. The debt must be secured.
2. The debt must be classified as an NPA by the banks
3. The outstanding dues must be one lakh and above.
4. It must be more than 20% of the principal loan amount and interest there on.

NON-PERFORMING ASSET IMPACTS ON BANKING SYSTEM

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The problem of NPAs in the Indian banking system is one of the foremost and the most
formidable problems that had impact the entire banking system. Unplanned expansion of
corporate houses during boom period and loan taken at low rates later being serviced at high
rates, therefore, resulting into NPAs. Higher NPA ratio trembles the confidence of investors,
depositors, lenders etc. It also causes poor recycling of funds, which in turn will have
deleterious effect on the deployment of credit. The non-recovery of loans effects not only
further availability of credit but also financial soundness of the banks.

Profitability

NPAs put detrimental impact on the profitability as banks stop to earn income on one hand
and attract higher provisioning compared to standard assets on the other hand. On an average,
banks are providing around 25% to 30% additional provision on incremental NPAs which has
direct bearing on the profitability of the banks.

Asset (Credit) contraction

The increased NPAs put pressure on recycling of funds and reduces the ability of banks for
lending more and thus results in lesser interest income. It contracts the money stock which
may lead to economic slowdown.

Liability Management

In the light of high NPAs, Banks tend to lower the interest rates on deposits on one hand and
likely to levy higher interest rates on advances to sustain NIM. This may become hurdle in
smooth financial intermediation process and hampers banks’ business as well as economic
growth. Capital Adequacy: As per Basel norms, banks are required to maintain adequate
capital on risk-weighted assets on an ongoing basis. Every increase in NPA level adds to risk
weighted assets which warrant the banks to shore up their capital base further. Capital has a
price tag ranging from 12% to 18% since it is a scarce resource.

Capital adequacy

As per Basel norms, banks are required to maintain adequate capital on risk-weighted assets
on an ongoing basis. Every increase in NPA level adds to risk weighted assets which warrant
the banks to shore up their capital base further. Capital has a price tag ranging from 12% to
18% since it is a scarce resource.

Shareholder’s confidence

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Normally, shareholders are interested to enhance value of their investments through higher
dividends and market capitalization which is possible only when the bank posts significant
profits through improved business. The increased NPA level is likely to have adverse impact
on the bank business as well as profitability thereby the shareholders do not receive a market
return on their capital and sometimes it may erode their value of investments. As per extant
guidelines, banks whose Net NPA level is 5% & above are required to take prior permission
from RBI to declare dividend and also stipulate cap on dividend payout.

Public confidence

Credibility of banking system is also affected greatly due to higher level NPAs because it
shakes the confidence of general public in the soundness of the banking system. The
increased NPAs may pose liquidity issues which is likely to lead run on bank by depositors.
Thus, the increased incidence of NPAs not only affects the performance of the banks but also
affect the economy as a whole.

Our banking system is robust and based on strong foundation. The Reserve Bank of India as a
central bank of India has been continuously doing great job. In 2008 sub-prime crisis when
banking system in rest of the world is in danger of collapse, our domestic banking system
was secured. It was due to solid foundation of our banking system. But the situation has
changed a lot. As economy has slowed down due to global slowdown and structural problem,
it has indirect impact on credit disbursement. When mining sector was in boom, a lot of iron
industries were open up in India. So other ancillaries industries were also mushroomed as a
result. Banking sector has invested a lot in these industries, but due to crash in global
commodity market and subsequent slowdown in the economy has affected the credit
worthiness of the bank. There are other industries like aviation sectors, infrastructure sectors ,
telecom sectors which has shown early promise but slowdown in the market has negative
impact on these sectors as a result banks cannot recover their due and it became a NPA.
Established and willful defaulters like Vijaya Mallya have created tremendous loss to the
banking sector. Another reason is debt written off by successive state governments and
central government on agricultural loan and industrial loans. It has very bad effect on fiscal
discipline of state finance and major reason of increasing NPAs.

PROBABLE SOLUTIONS

The Reserve Bank of India has identified growing NPAs is the major problem of our
economy. The then Governor of the RBI Raghuram Rajan has taken a number of steps to

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cleared the NPAs. The public sector banks has twin balance sheet problem. Therefore the
RBI has clearly directed the banks to clear off old NPAs. It was expected that
demonetization would solved the NPAs problem of banks. But the result has not been so
success full. Another solution is recapitalization of banks and merger of the banks. Therefore
from our above analysis it was proved that NPAs are detrimental to our economy. There are
different solution tried by the government, but it couldn’t solve the main problem. So a strong
political will the all-round effect of all these steps can solve NPAs problem.

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ECONOMICS MIDSEM

ASSIGNMENT II - EXPLAIN IN DETAIL THE BASAL NORM OR ACCORD 1, 2, 3 AND

CRITICALLY ANALYZE INDIA’S STAND ON EACH OF THE NORM OR ACCORD.

Banks lend to different types of borrowers and each carries its own risk. They lend the
deposits of public as well as money raised from the market- equity and debt. The inter-
mediation activity exposes the bank to a variety of risks. Cases of big banks collapsing due to
their inability to sustain the risk exposure are readily available. Therefore, banks keep aside a
certain percentage of capital as security against the risk of non- recovery. Basel committee
has produced norms called Basel norms for banking to tackle the risk.

Basel guidelines refer to broad supervisory standards formulated by groups of central banks-
called the Basel committee on banking supervision (BCBS). The set of the agreement by the
BCBS, which mainly focuses on risks to banks and the financial system called Basel accords
or the Basel norms. The purpose of the accord is to ensure that financial institutions have
enough capital on account to meet obligations and absorbs unexpected losses. India has
accepted Basel Norms of Banking. In fact, on a few parameters, the RBI has prescribed
norms as compared to the norms prescribed by BCBS.

OBJECTIVES OF BASEL COMMITTEE

 Basel accord basically is set of agreement by the BASEL COMMITTEE ON

BANKING SUPERVISION, which mainly focuses on risks to banks and financial
system.
 Having the accord ensures that financial institutions have enough capital on account
to meet the obligations and absorb unexpected losses.
 India has accepted Basel accords for the banking system and it has provided us with
three BASEL NORMS which are BASEL 1,2,and 3.

BASEL-I

Basel-1 was introduced in the year 1988. It focussed primarily on credit (default) risk faced
by the banks. As per Basel-1, all banks were required to maintain a capital-adequacy ratio
of 8 %. The capital adequacy ratio is the minimum capital requirement of a bank and is
defined as the ratio of capital to risk-weighted assets.

The capital was classified into Tier 1 and Tier 2 capital.

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 Tier 1 capital is the core capital of a bank which is permanent and reliable. It includes
equity capital and disclosed reserves.
 Tier 2 capital is the supplementary capital. It includes undisclosed reserves, general
provisions, provisions against Non-performing Assets, cumulative non-redeemable
preference shares etc.

The risk-weighted asset is the bank’s assets weighted according to risks. The assets of
the bank were classified into 5 risk categories of 0 % or 0, 10 % or 0.1, 20 % or 0.2, 50 %
or 0.5 and 100 % or 1. Example- cash into 0 % risk category, home mortgage into 20 % risk
category and corporate debt into 100 % risk category.

If we consider a bank has Rs.100 as cash reserves, Rs.200 as home mortgage and Rs.300 as
loans given out to companies. The risk-weighted assets= (Rs.100 * 0 ) + (Rs.200 * o.2) +
(Rs.300 * 1) = 0 + 40 + 300 = Rs340

Therefore, this bank has to maintain 8 % of Rs.340 as minimum capital. (atleast 4 % in tier-
1 capital)

The two principal purposes of the Accord were to ensure an adequate level of capital in the
international banking system and to create a "more level playing field" in competitive terms
so that banks could no longer build business volume without adequate capital backing. These
two objectives have been achieved. The merits of the Accord were widely recognised and
during the 1990s the Accord became an accepted world standard, with well over 100
countries applying the Basel framework to their banking system. According to Section 17 of
the Banking Regulation Act (1949) every bank incorporated in India is required to create a
reserve fund and transfer a sum equal to but not less than 20 per cent of its disclosed profits,
to the reserve fund every year. The RBI has advised banks to transfer 25 percent and if
possible, 30 per cent to the reserve fund. The First Narasimham Committee Report
recommended the introduction of a capital to risk-weighted assets system for banks in India
since April 1992.This system largely conformed to international standards. It was stipulated
that foreign banks operating in India should achieve a CRAR of8 per cent by March 1993
while Indian banks with branches abroad would comply with the norm by March 1995. All
other banks were to achieve a capital adequacy norm of 4 per cent by March 1993 and the
8per cent norm by March 1996.

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Advantages of Basel I
 Substantial increases in capital adequacy ratios of internationally active banks;
 Relatively simple structure;
 Worldwide adoption;
 Increased competitive equality among internationally active banks;
 Greater discipline in managing capital;
 A benchmark for assessment by market participants.
Weaknesses of Basel I
 In spite of advantages and positive effects, weaknesses of Basel I standards eventually
became evident:
 Capital adequacy depends on credit risk, while other risks (e.g. market and
operational) are excluded from the analysis;
 In credit risk assessment there is no difference between debtors of different credit
quality and rating;
 Emphasis is on book values and not market values;
 Inadequate assessment of risks and effects of the use of new financial instruments, as
well as risk mitigation techniques.
BASEL II
It was on June 26, 2004, The Basel Committee on Banking Supervision released
“International Convergence of Capital Measurement and Capital Standards: A revised
Framework”, which is commonly known as Basel II Accord. Basel 1 initially had Credit Risk
and afterwards included Market Risk. In Basel 2, apart from Credit & Market Risk;
Operational Risk was considered in Capital Adequacy Ratio calculation. The Basel 2 Accord
focuses on mainly three aspects:
 Minimum Capital Requirement
Banks should continue to maintain a minimum capital adequacy requirement of 8% of risk-
weighted assets. However, the definition of capital adequacy ratio was refined. Also, Basel-II
divides the capital into 3 tiers. Tier-3 capital includes short-term subordinated loans.
(subordinated loans means lower in ranking. It is repaid after other debts in case of bank
liquidation.)
 Supervisory Review by Central Bank to monitor bank’s capital adequacy and
internal assessment process.

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According to this, banks were required to develop and use better risk management
techniques in monitoring and managing all the three types of risks that a bank faces,
viz. credit, market and operational risks
 Market Discipline by effective disclosure to encourage safe and sound banking
practices
It increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk
exposure, etc to the central bank.
BASEL III
The financial crisis of 2007-08 revealed shortcomings in the Basel norms. Therefore, the
previous accords were strengthened.

Basel-III was first issued in late 2009. The guidelines aim to promote a more resilient
banking system.

 Capital: ‘The capital adequacy ratio is to be maintained at 8 %. The common equity

(which is a component of Tier-1 capital) and the Tier-1 capital has to be maintained at
4.5 % and 6 % respectively. In addition, banks have to maintain a capital conservation
buffer of 2.5%. So, total minimum capital requirement is 10.5%
 Counter-cyclical buffer is also to be maintained at 0-2.5%.
 The leverage rate has to be at least 3 %. The leverage rate is the ratio of a bank’s
tier-1 capital to average total consolidated assets.
 Liquidity: The liquidity coverage ratio (LCR) will require banks to hold a buffer of
high quality liquid assets sufficient to deal with the cash outflows encountered in
an acute short term stress scenario as specified by supervisors. The minimum LCR
requirement will be to reach 100% on 1 January 2019. This is to prevent situations
like “Bank Run”.

How is Basel III an improvement over Basel II?

The enhancements of Basel III over Basel II come primarily in four areas: (i)
augmentation in the level and quality of capital; (ii) introduction of liquidity standards;
(iii) modifications in provisioning norms; and (iv)better and more comprehensive
disclosures.

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 (i) Higher Capital Requirement: Basel III requires higher and better quality capital.
The minimum total capital remains unchanged at 8 per cent of risk weighted assets
(RWA). However, Basel III introduces a capital conservation buffer of 2.5 per cent of
RWA over and above the minimum capital requirement, raising the total capital
requirement to 10.5 per cent against 8.0 per cent under Basel II. This buffer is
intended to ensure that banks are able to absorb losses without breaching the
minimum capital requirement, and are able to carry on business even in a downturn
without deleveraging. This buffer is not part of the regulatory minimum; however, the
level of the buffer will determine the dividend distributed to shareholders and the
bonus paid to staff.
 (ii) Liquidity Standards: To mitigate liquidity risk, Basel III addresses both potential
short-term liquidity stress and longer-term structural liquidity mismatches in banks’
balance sheets. To cover short-term liquidity stress, banks will be required to maintain
sufficient high-quality unencumbered liquid assets to withstand any stressed funding
scenario over a 30-day horizon as measured by the liquidity coverage ratio (LCR). To
mitigate liquidity mismatches in the longer term, banks will be mandated to maintain
a net stable funding ratio (NSFR). The NSFR mandates a minimum amount of stable
sources of funding relative to the liquidity profile of the assets, as well as the potential
for contingent liquidity needs arising from off-balance sheet commitments over a one-
year horizon. In essence, the NSFR is aimed at encouraging banks to exploit stable
sources of funding.
 (iii) Provisioning norms: The Basel Committee is supporting the proposal for
adoption of an ‘expected loss’ based measure of provisioning which captures actual
losses more transparently and is also less pro cyclical than the current ‘incurred loss’
approach. The expected loss approach for provisioning will make financial reporting
more useful for all stakeholders, including regulators and supervisors.
 (iv) Disclosure requirement: The disclosures made by banks are important for
market participants to make informed decisions. One of the lessons of the crisis is that
the disclosures made by banks on their risk exposures and on regulatory capital were
neither appropriate nor sufficiently transparent to afford any comparative analysis. To
remedy this, Basel III requires banks to disclose all relevant details, including any
regulatory adjustments, as regards the composition of the regulatory capital of the
bank.

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ECONOMICS MIDSEM

ASSIGNMENT 3 - CRITICALLY ANALYSE THE IMPACT OF THE COVID-19 ON

DEVELOPING ECONOMY? SPECIALLY REFERING TO THE IMPACT ON
ECONOMIC ACTIVITIES.

The Corona virus Disease 2019 (COVID-19) is a respiratory illness caused by a novel corona
virus, namely severe acute respiratory syndrome corona virus 2 (SARS-CoV-2), first detected
in December 2019 in the city of Wuhan in Hubei province, China

Fear abounds regarding the novel corona virus pandemic and the consequences. There are
increasing numbers of confirmed deaths. These numbers are expected to surge when indirect
costs due to lost productivity are taken into consideration. The economic implications are
thus detrimental not only to public health systems but to trade and travel, food and agriculture
industries, various market types and retail chains, among others.

 EFFECT OF COVID-19 ON THE ECONOMY OF A DEVELOPING COUNTRY

LIKE INDIA.

The economic impact of COVID-19 on India will depend on a number of factors: the virus
spread itself, the effectiveness of the, policies and how the abrupt shifts in supply and
demand further compound the economic damage.
India declared a self-imposed quarantine on March 12 and went under a complete lockdown
from midnight of March 24. The country is now at the beginning of the critical stage 3, the
community transmission stage.
 MOUNTING ECONOMIC DAMAGE
With the implementation 21 day lockdown which was further extended for 2 more weeks,
almost 75% of the Indian Economy is also under a lockdown. The state borders being shut,
labor movement curtailed, educational institutions suspended across the country. Major
companies in India have temporarily suspended or significantly reduced operations in a
number of manufacturing facilities. Nearly all two-wheeler and four-wheeler companies have
put a stop to production until further notice.
Certain estimate figures by the Asian Development Bank states that the lockdown would take
about 2.3% of GDP. The 21 day lockdown and the extended term could cost India
approximately $140 Billion. A loss of around $600 million is estimated as all airlines have

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grounded their domestic and International flights. In India, the service sector accounts for
55% of GDP. It is estimated that the loss to the tourism and hospitality industry will
be $2.1 billion for March and April alone.
 IMPACT ON INDIA DUE TO SLOWDOWN IN CHINA.
At the global level, India is among the 15 economies most impacted by the corona-related
production slowdown in China. For example, 18% of auto-component imports, 45% of
consumer durables and 67% of electronic components come from China. The trade impact is
estimated to be greatest for the chemicals, textiles, apparel and automotive sectors. The
Indian stock market on March 23 suffered its, worst single-day rout in history, with investors
stuck in a selling frenzy as the corona virus disrupted businesses and forced several states
into lockdown. The NSE Nifty 50 index sank 12.98% to a near four-year closing low, while
the S&P BSE Sensex fell 13.15% to 25,981.24. The rupee hit a record low of 76.16 against
the U.S. dollar.
Coordinated action on a global level to remove the trade restrictions on medical and food
supply to India, financial market stabilization and coordinated rate cuts are immediately
required. It necessitates India taking a lead role within the G-20 to lessen the lasting
economic and financial market damages from the pandemic.
 WHAT DOES RECOVERY LOOK LIKE?
Recovery from this unexpected large economic crisis India is facing, the path back to growth
will depend on a range of drivers. It could be attempted to understand this using three broad
scenarios.
1. V-shaped – the classic real economy shock recovery. A displacement of output, but
growth eventually rebounds.
2. U- Shaped- in this model, shock persists but some initial growth is resumed.
3. The third is the scenario where significant structural damage is done with some
permanent damage to India’s labour market and capital formation abilities.
The International Labor Organization, in its recent study, predicts about 5.3 million more
people will be pushed into unemployment at a global level by the COVID-19 outbreak alone
under the worst case scenario. Self-employment in India, which so often serves to cushion the
impact of economic shifts, might not do the same this time due to the severe restrictions
being placed on the movement of people, goods and services within and across the borders.

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 A STEP BACK AT THE LONG STRIVED INDIA’S GENDER EQUALITY
The vast majority of the nurses, teachers, flight attendants and restaurant workers in India are
female, and their jobs put them on the frontlines of their virus outbreak both at work and
home. In the long-term, some groups will be disproportionately impacted by the labor market
crisis, including youth, older workers and migrants. With GDP growth rate crashing to a six-
year low of 4.5% and non-performing assets rising to 10%, India needs to be innovative in
the coming months to have a V-shaped recovery. It should borrow ideas from other countries
such as the U.S., which has implemented a $2 trillion disaster relief package.
A gradual opening up of the lockdown in a phased manner will be critical to avoid a second
wave or peak in the viral spread. This can be done by first opening schools, universities,
educational institutions and businesses, while gatherings such as sporting events, conferences
and other large-scale gatherings are relegated to the last depending on the characteristics and
behaviour of the virus.
The public and private sector in India should plan for the best and prepare for the worst
scenarios, keeping in mind that a V-shaped recovery is not guaranteed. The next few months
could be horrible, but things should improve after that. It will be the responsibility of
everyone — government, businesses, educational institutes and citizens — joining together to
implement the, procedures outlined by national leaders.

FIGURE PREDICTIONS FOR INDIA POST COVID-19

Real GDP of India decelerated to its lowest in over years in 2019-20, and the unexpected
outbreak of the novel corona virus posed fresh challenges. The standstill condition of will
have an impact on both consumption and investment. Three major contributors to GDP-
private consumption, investment and external trade will be gravely affected.
There are 3 possible scenarios that could take place in Indian economy due to this outbreak:
SCENARIO I- Quick retraction across the globe including India; by end April to mid-
May.
If China significantly brings down the number of new cases and its manufacturing sector is
all set to resume normalcy. Other nations also largely contain the spread of covid pandemic
and large fiscal and monetary stimulus unveiled will start to work sooner than expected,
which will raise hopes of a solid recovery in the second half of 2020. In such a circumstance,
India’s growth for 2020-21 may be in the range of 5.3 to 5.7%

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SCENARIO II- While India is able to control COVID-19 spread, there is a significant
global recession.
Even under this scenario, the impact on India’s growth in term of global economy will be
meaningful, owing to India’s integration with the global economy. So India’s growth will be
lower than scenario 1: the expected range is 4-4.5%
SCENARIO III- COVID -19 proliferates within India and lockdowns get extended;
global recession.
This would be double whammy for the economy, as it will have to bear the brunt of both
domestic and global demand destruction. Prolonged lockdowns would exacerbate economic
troubles. India’s growth may fall below 3% under this scenario.

CONCLUSION;
In sum, this crisis is a story with an uncertain ending. However, what is clear is COVID-19
has introduced new challenges to the business environment which cal for measured, practical
and informed approach from the political and business leaders. We also need to realise that
COVID-19 is likely to lead to a new normal- being aware of and preparing for these shifts
will help businesses and economies navigate in the post COVID-19 world.

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