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Economic Development - 1 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC

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Discoms: Present Status, Challenges and Strategies
India has made rapid strides in power sector. It is the third largest producer of electricity and almost every citizen has access to grid electricity. However, power distribution continues to be the weakest link in the supply chain of the power sector. Most of the DISCOMs incur huge losses, which in turn reduces their ability to pay dues to the power generating companies and repay loans to the Banks. The poor financial health of the DISCOMs can cause negative domino effect on the economy.

  • Reasons For Poor Financial Position of DISCOMs: The DISCOMs have incurred heavy losses
  • Cost of Power Procurement: Power procurement accounts for almost 80% of the expenditure of the discoms. Discoms have entered into expensive and long-term thermal Power purchase agreements (PPAs) based on incorrect estimates of power demand. So, even though, the cost of electricity in the open market has reduced, the DISCOMs continue to purchase electricity from the thermal power companies at higher cost due to PPAs.
  • Lack of Independence and Autonomy: The Electricity Amendment Act, 2003 has provided for State Electricity Regulatory Commissions (SERCs) to ensure independence and autonomy in fixing electricity tariffs. However, there is political interference in fixing tariffs leading to lower tariffs on electricity.
  • Cross-Subsidization of Tariffs: The DISCOMs have increased the electricity tariffs for the industries to compensate for the losses. This in turn has forced the industries to avail benefits under the Open Access Policy. Under the Open Access Policy, bulk consumers (> 1 MW) can purchase electricity directly from the open market (Power exchanges, direct agreement with the power generating companies etc.). So, since the DISCOMs supply electricity to Industries at higher tariffs, the industries have shifted to buying electricity at cheaper rates directly from open market.

Economic Development - 1 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC

  • Higher AT&C losses: The higher losses have reduced the ability of the DISCOMs to upgrade their infrastructure and provide reliable and continuous electricity. The Aggregate Technical and Commercial (AT&C) losses of the DISCOMs has increased to 22% on account of Transmission losses, Commercial losses due to power theft, absence of metering and inefficiencies in bill collection etc. The global average for AT&C losses is much lower at 8% (USA- 6%; China- 8%).
  • Higher Dependence on State Governments: The DISCOMs depend on the state governments for the subsidies. Delays in receiving subsidy reimbursements from the government add to the liquidity stresses of discoms.
  • Monopolisation: Presently, DISCOMs enjoy monopoly in distribution of electricity leading to absence of discoms.
  • UDAY Scheme: Aims at improving the financial position of DISCOMs. Under the scheme, states are supposed to take over 75% of the discoms’ debt and the DISCOMs were required to reduce AT&C losses to 15%.
  • Saubhagya Scheme: Free electricity connection to all households (both APL and poor families) in rural areas and poor families in urban areas. Reforms based Results linked Revamped
  • Power Distribution Scheme: Help DISCOMs improve their operational efficiencies and financial sustainability by providing result-linked financial assistance to DISCOMs to strengthen supply infrastructure based on meeting pre-qualifying criteria and achieving basic minimum benchmark. Under this scheme, the DISCOMs are required to reduce AT&C losses to 12-15% by 2024-25. Private Participation and Competition in competition, higher inefficiencies and poor service delivery.

Distribution Sector Reforms

Electricity Amendment Act, 2003

  • Established regulatory bodies - Central Electricity Regulatory Commissions (CERCs) and State Electricity Regulatory Commission (SERCs). 
  • Appellate tribunal for dispute resolution. 
  • Introduction of competition through Open Access policy 
  • Delicensing of Thermal Generation 
  • Introduction of Renewable Purchase Obligation Policy (RPO) which requires DISCOMs to procure certain percentage of their electricity needs from Renewable energy.

Deen Dayal Upadhyaya Gram Jyoti Yojana–DDUGJY: Focuses on feeder separation (rural households and agricultural) and strengthening of sub-transmission and distribution infrastructure in rural areas. It is meant to provide round-the-clock power to rural households and adequate power to agricultural consumers.

Distribution: Some states have promoted private participation in the DISCOMs through (a) Franchise Model and (b) Privatisation of DISCOMs. (a) Under the Franchise model, the private entity has no ownership of distribution grid assets. The private party manages billing and revenue collection. Example: Bhiwandi, Maharashtra. (b) In case of privatisation, the private entity not only manages the billing and revenue collection but also owns the distribution grid. Example: Privatisation of Delhi Vidyut Board in 2002.

Retail Choice to Consumers: Presently, the DISCOMs enjoy monopoly in distribution of electricity which in turn leads to lack of consumer choice and higher inefficiencies. Hence, the Union Budget 2021-22 has sought to introduce competition in the distribution sector and provide retail choice to the consumers.

Privatisation of DICOMs: The Centre has announced that it would privatise the DISCOMs in all the Union Territories.

Strategies to Improve the Distribution Sector

Economic Development - 1 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSCPM Mitra Scheme

The Government has recently launched the PM MITRA Scheme, which was earlier announced in the Union Budget 2021-22. The scheme enables the textile industry to become globally competitive, attract large investments, boost employment generation and exports.

Factsheet of Indian Textile Industry

  • India’s textiles sector is one of the oldest industries in the Indian economy, dating back several centuries. 
  • The Indian textiles and apparel industry contributed 2% to the GDP, 12% to export earnings and accounted for 5% of the global trade in textiles and apparel in 2018-19 
  • It is the second largest producer of MMF Fibre after China and sixth largest exporter of Textiles & Apparel in the world. 
  • Provides employment to around forty-five million people.

Details About PM Mitra Scheme

  • Vision: 5F vision PM Modi. The '5F' Formula encompasses - Farm to fibre; fibre to factory; factory to fashion; fashion to foreign. 
  • Scope: Set up 7 PM Mega Integrated Textile Region and Apparel (PM MITRA) Parks in Greenfield/Brownfield sites in partnership with the willing State Government.

Nature of Incentives

  • Incentives to MITRA Parks: Government to provide capital support of 30% of the project cost in Greenfield/Brownfield parks. The support would lead to creation of Core Infrastructure such as Developed Factory Sites, Plug & Play facility, Incubation Centre, Roads, Power, Water and Wastewater system etc. 
  • Incentives to Industries: Up to 3% of the total sales turnover. This is only available to those manufacturing companies who are not availing benefits under Textile PLI scheme. Operational Model: Public Private Partnership (PPP) model based on Design-Build-Finance-Operate-Transfer (DBFOT) format. SIGNIFICANCE OF SCHEME 
  • Reduce Logistics Cost: The logistics cost accounts for 12-14% of the GDP, which is higher in comparison to global benchmarks. The higher logistics cost reduces the manufacturing competitiveness of Indian textile Industry. The PM MITRA Scheme will reduce logistics cost and strengthen the value chain of the textile sector making it globally competitive. 
  • Employment Opportunities: Higher GDP growth rate in India has failed to translate into higher employment opportunities. In this regard, Economic Survey 2017-18 has highlighted the need to focus on Labour Intensive Industries such as Textiles and Leather. The Economic Survey had highlighted that Apparels are eighty times more labour-intensive than automobiles and create 240 fold more jobs than steel. 
  • Women Empowerment: Textile Industries employ more women and hence are considered as vehicles for socioeconomic transformation. For example, in Bangladesh, female education, total fertility rates, and women’s labour force participation have improved due to the rapid expansion of the textile sector. 
  • Historic Opportunity: India has an opportunity to promote Textile Sector because of rising wage levels in China. India is well positioned to take advantage of China’s deteriorating competitiveness because wage costs in most Indian states are significantly lower than in China. 
  • Sustainable growth: help India in achieving the UN Sustainable Development Goal 9 (“Build resilient infrastructure, promote sustainable industrialization and foster innovation”).

Gati Shakti- National Master Plan

PM has recently launched the Gati Shakti Master Plan – National Master Plan for Multi-modal Connectivity. The Gati Shakti platform would provide Gati (Speed) and Shakti (Strength) for integrated planning and coordinated implementation of infrastructure connectivity projects.

Current Problems in Infrastructure Lack of Coordination between different Ministries/ Departments.

Most of the Government ministries work in silos without adequate coordination with other agencies. For example, once a road is constructed, other agencies dug up the constructed road again for activities like laying of underground cables, gas pipelines etc.

  • Time and Cost overruns: According to Ministry of Statistics and Programme Implementation, one out of every five infrastructure projects have a delay of over five years. Further, delays in execution of projects have led to increase in cost by almost 4.5 lakh crores, amounting to 80% of our capital expenditure in 2021-22.
  • Huge difference between macro planning and micro implementation: Different departments are not even aware which department is preparing to start which project and where. Similarly, the private sector is also not aware about the new infrastructure projects being planned and executed. Prior idea about such infrastructure projects can lead to higher private sector investment.

About PM Gati Shakti PM
Gati Shakti is supposed to break departmental silos and institutionalize holistic planning for stakeholders across major infrastructure projects. The PM Gati Shakti will ensure that India of the 21st century does not waste money or time due to lack of coordination in infrastructure projects. Under the PM Gati Shakti National Master Plan, everything, from roads to railways, from aviation to agriculture, various ministries and departments would be linked.

  • National Master plan for Multi-modal connectivity 
  • Seeks to bring 16 Ministries together for integrated planning, design and execution of infrastructure projects. 
  • Monitor projects worth Rs 100 lakh crores. 
  • Incorporate the infrastructure schemes of various Ministries and State Governments like Bharatmala, Sagarmala, UDAN etc. 
  • Economic Zones like manufacturing clusters, defence corridors, electronic parks, industrial corridors, fishing clusters, agri zones will be covered to improve connectivity & make Indian businesses more competitive. 
  • Leverage technology including spatial planning tools with ISRO imagery developed by BiSAG-N (Bhaskaracharya National Institute for Space Applications and Geoinformatics).

Note: An empowered group of secretaries, headed by the Cabinet secretary, will be formed to review and monitor the implementation of PM Gati Shakti. The Department for Promotion of Industry and Internal Trade (DPIIT) will be the nodal ministry.

How is Gati Shakti Different From National Infrastructure Pipeline?
Under the National Infrastructure Pipeline (NIP), the Government has identified infrastructure projects worth Rs 111 lakh crores which it will be constructing in the five years between 2021-2025. The Implementation of NIP requires coordination and integrated planning between multiple ministries and departments. Such an integrated and holistic approach to infrastructure creation would be provided through the Gati Shakti.

RBI's Report on Functioning of ARCS

According to RBI's financial stability report, the gross NPAs of the Banks is set to increase to 9.8% by end of March 2022. Higher NPAs of the Banks can further accelerate growth of credit in the economy and can potentially undermine the financial stability. Recently, the Government has established ARC-AMC Model ('Bad Bank") to solve the NPA mess. Apart from that, India has also introduced Asset Reconstruction Companies (ARCs) under the SARFAESI Act, 2002. However, the private ARCs have not been successful in India. In this regard, recently, a committee appointed by the RBI has highlighted constraints and challenges faced by ARCs and has accordingly given its set of recommendations.

Evolution of The Asset Resolution Mechanism with Special

REFERENCE TO ARCs Debt Recovery Tribunals (DRTs): Recovery of Debts due to Banks and Financial Institutions (RDDBFI) Act,1993 provides for Debt Recovery Tribunals (DRTs) to deal with recovery of bad loans of more than Rs 20 lakhs. The DRTs were also authorised to form Lok Adalat. Initially, the DRTs were successful with recovery rates increasing to 81% in 2008-09. However, in 2019-20, recovery rates reduced to just 4% in 2019-20 due to inadequate infrastructure, delays etc. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002:

  • If a borrower defaults on a loan, the Banks can give a notice period of 60 days to the borrower to repay the loans. If the borrower fails to repay within 60 days, the Banks can take the following actions: 
    • Take possession of the pledged assets and then lease or sell it off to recover the loan amount. 
    • Take over the management of the business of the borrower. 
    • Appoint a person to manage the assets. 
  • Provides for Asset Reconstruction Companies (ARCs) to be registered and regulated by the RBI. 
  • Provides for issuance of Security Receipts (SRs) by the ARCs.

Economic Development - 1 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC

Insolvency and Bankruptcy Code, 2016: Provide for time-bound resolution of NPAs through DRTs (for Individuals) and National Company Law Tribunals (For companies)

Difference Between Sarfaesi Act And IBC, 2016

  • SARFAESI- Applicable only for secured financial creditors; IBC- Applicable for both secured and unsecured financial creditors. 
  • Unlike IBC, SARFAESI is not applicable to Operational Creditors. 
  • Minimum threshold for invoking IBC: Individuals (Rs 1000); Companies (Rs 1 crore); Minimum threshold for SARFAESI: Rs 1 lakh. PERFORMANCE ANALYSIS OF THE ARCs The ARC industry began with the establishment of the Asset Reconstruction Company India Limited (ARCIL) in 2003. Presently, there are around 28 ARCs, registered and regulated by RBI. Some of these ARCs are ARCIL, Suraksha Asset Reconstruction, Indiabulls asset reconstruction, ASREC Ltd., IndiaRF etc. As on March 31, 2021, the ARCs had cumulatively taken over NPAs worth Rs 5 lakh crores. 
  • Poor Recovery rates compared to IBC: The recovery rates of ARCs were significantly higher in the initial years of their inception. However, in recent years, it has dropped to just 26% in 2019-20. This is significantly lower than recovery rates under IBC (45%). 
  • Low Percentage of NPAs with ARCs (26%) in comparison to DRTs (33%) and IBC (31%). Remaining 10% NPAs are under Lok Adalats. Since the introduction of IBC, the Banks have started preferring IBC over the DRTs due to time-bound resolution and higher recovery rates. 
  • Low Capital Base of ARCs: Majority of ownership of ARCs lie in the hands of Banks and Financial Institutions. Even though, the Government has allowed 100% FDI through automatic route, ARCs have failed to attract foreign capital.
  • Higher Borrowings: The ARCs tend to rely heavily on borrowings from Banks for their funds. The poor financial position of ARCs could have negative domino effect on Banking sector. 
  • Nature of Resolution: The ARCs have relied more on recovery of NPAs through selling-off assets and less on revival of business. ARCs have rarely used change or takeover of management of business of the borrowers or conversion of borrowers’ debt into equity as measures for reconstruction. 
  • Conflict of Interest: Considering that banks are not just the major shareholders of and lenders to ARCs but also sellers of NPAs to ARCs, there could be circuitous movement of funds between banks and these institutions.


  • Sale of NPAs at an early stage: Delays in sale of NPAs to ARCs not only leads to erosion in the asset value, but also reduces the probability of reviving genuine companies. Hence, at the start of every year, Banks must compile and share the list of NPAs to be sold to ARCs. This would increase predictability in the amount and quality of stressed assets flowing into ARC sector and improve the lenders’ recovery on these NPAs. 
  • Bring ARCs under IBC: Under IBC, Banks are required to invite applications from different entities for the resolution of NPAs. However, the current regulatory and legal framework does not allow ARCs to act as Resolution Applicants (RA) under IBC i.e., they cannot apply for resolution of Bad loans under IBC. This is in spite of the fact that ARCs can use tools such as change in/takeover of management, debt to equity conversion, etc. Hence, regulations should have to be changed to enable ARCs as Resolution Applicants under IBC. 
  • Enhanced Financing Options: The RBI must permit ARCs to raise finances from all regulated entities such as FPIs, Alternate Investment Funds (AIFs), NBFCs as well as retail investors. 
  • Liquidity and Trading of Security Receipts (SRs): Presently, only the Qualified Institutional Buyers (QIBs) such as Banks, Pension fund, Insurance and Mutual fund companies are allowed to invest in Security receipts (SRs) issued by the ARCs. To broaden the investor base of SRs, the list of eligible qualified buyers may be further expanded to include High-net worth individuals (HNIs), corporates, NBFCs/HFCs etc.

Corporates As Banks

  • Earlier, in November 2020, the IWG had submitted 33 recommendations to the RBI with respect to ownership structure of Banks. One of the most contentious recommendations submitted by this committee is to allow large corporate/Industrial houses to be the promoters of the Indian Banks. 
  • In November 2021, the RBI stated that it has accepted around 21 recommendations of IWG. However, it has decided to put on hold the recommendation to grant Banking licences to Corporates.

Evolution in Banking Policy

  • Phase of Nationalisation (1969-1991): India's public sector banks (PSBs) were initially set up as Private Banks and later Nationalised in two waves in 1969 and 1980. 
  • Entry of New Private Banks (NPBs) post 1991 Reforms: Based upon the recommendations of Narasimhan committee, the RBI issued policy guidelines to facilitate the entry of new private Banks (NPBs) on a large scale. Subsequently, it led to the entry of large-sized private Banks such as HDFC, ICICI, Axis Bank etc. 
  • Guidelines for Licensing of Universal Banks in the Private Sector: The minimum initial paid-up capital for setting up new private Bank was set at Rs 500 crores. Resident individuals and professionals having 10 years of experience in banking and finance were also eligible to promote universal banks. However, Large corporate/industrial houses were not allowed to set up Banks but were permitted to invest in the banks up to 10 per cent. 
  • Consolidation of Public Sector Banks (PSBs): Based upon the recommendations of Narasimhan Committee (1991) and P.J. Nayak Committee (2014), the Government has focussed on consolidation/merger of PSBs. After a series of mergers, currently there are 12 public sector banks, including the SBI. 
  • Present Phase: Shift towards greater role of Private Sector in Banking industry as evident in the new public sector enterprise policy.

Present Status of Banking Sector Underdeveloped Banking Sector

  • Total balance sheet of banks in India constitutes less than 70% of the GDP, which is lower in comparison to China (170%), Japan (110%) etc. 
  • Low credit-GDP ratio in India 
  • Banking sector has remained dwarf in comparison to size of Indian economy (Eco Survey 2019-20). India's largest Bank, SBI is placed at 55th position globally. Government's monopoly in Banking sector: Public sector Banks (PSBs) account for almost 70% of the market share in the Banking sector. However, PSBs account for 80% of the overall NPAs of the Banking sector. Higher efficiency of Private Sector Banks: According to the Economic Survey 2019-20, every rupee of the taxpayers' money which is invested in PSBs fetches a market value of 71 paise. On the other hand, every rupee invested in NPs fetches a market value of Rs 3.70 i.e., more than five times as much value as that of a rupee invested in PSBs.

Should Corporate/ Industrial Houses Be Allowed to Set Up Banks?
A large corporate/industrial/business house is defined as a group having total assets of Rs 5000 crore or more wherein the non-financial business of the group accounts for more than 40 per cent in terms of total assets or gross income.

Economic Development - 1 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC

Way Forward
We need to be extra-cautious in issuing licenses to corporate houses as the problems may outweigh the benefits. The issue of licences to the corporate houses should be preceded by number of reforms: 

  • Strengthen Banking Regulation Act, 1949: The Federal Reserve Act in USA prohibits financial transactions of Banks with their affiliates. Hence, amendments to Banking Regulation Act, 1949 should be done to prevent Inter-connected lending. 
  • Consolidated Supervision: The RBI must be empowered to carry out the consolidated supervision of the Banks and their non-Banking entities to avoid any conflict of Interest. 
  • Strengthen Supervisory Cadre: The RBI has set up Specialised Supervisory and Regulatory Cadre (SSRC) in November 2019 to strengthen and consolidate the supervision functions, which were scattered across different departments. The SSRC needs to be strengthened and given proper training. 
  • Reforms in PSBs: The failure of Yes Bank and Laxmi Vilas Bank (LVB) has highlighted that it is not the ownership structure, but quality of corporate governance which determines the efficiency of banks. Hence, the Government must also give due amount of emphasis on governance reforms in the PSBs as highlighted by P.J. Nayak Committee.

Proposal For Digital Banks in India

NITI Aayog has recently released a concept paper highlighting the need for Digital Banks in India. The digital Banks will help us leverage ICT to improve the credit creation and financial inclusion. PRESENT STATUS Presently, only those entities which are licensed by the RBI can undertake banking related operations. As of now, the RBI does not allow Banks to be 100% digital. Hence, even though Banks can provide banking services by leveraging technology (such as Imobile of ICICI), the Banks must have physical branches.

About Digital Banks Proposed by Niti Aayog

  • To be licensed under Banking Regulation Act, 1949. 
  • Provide banking services- Acceptance of Deposits, giving loans, provide insurance etc. without the need to have physical branches. 
  • No physical branches. 
  • Leverage technology to provide banking service. 
  • Also called ‘Challenger Banks’- Newly created Banks which compete with longer established Banks through use of Digital Technology. Global Examples: Challenger Banks such as Starling Bank, Monese Banks in UK.

Models of Digital Banks

  • (Front-End Only) Neo-banks: These neo-banks partner with existing Banks to offer Banking services such as deposits and loans. These neo-Banks do not have funds of their own, but they collaborate with traditional banks to offer various banking related services. Ex: RazorPayX, InstantPay, Open, Niyo etc. 
  • (Licensed) Digital banks: These entities are fully functional banks, regulated by the banking regulator and issue deposits and make loans on their own balance sheet. Presently, RBI does not allow such fully digital Banks to operate in India. NITI Aayog has argued in favour of such banks in India. 
  • (Autonomous) unit of traditional banks: These entities are essentially neo-banking operations of traditional banks that function autonomously and compete with stand-alone neobanks. In. SBI Yono, 811 of Kotak Mahindra, DigiBank of DBS etc.

Need For Fully Licensed Digital Banks in India
Under-developed Banking sector: As highlighted by Economic Survey 2019-20, Indian Banking sector has remained dwarf in comparison to the size of our economy. Take for instance, India's largest Bank i.e., SBI is ranked at 55th position globally. The growth of large sized economies such as USA, China etc. has been supported by large-sized global banks. Poor status of Public Sector Banks: PSBs account for 80% of the overall NPAs of the Banking sector. The digital banks would infuse competition and improve the performance of PSBs. Constraints faced by traditional banks:

  • High Operational costs due to the need to maintain physical branches. 
  • Limited focus on innovation, particularly on delivering banking services by leveraging technology. 
  • Low risk appetite in giving loans to MSMEs leading to credit gap of around Rs 25 lakh crores. Higher Efficiency: Unlike normal banks, Digital Banks need not maintain physical branches, which in turn enables them to reduce their operational costs and provide loans at cheaper rates of interest. Improve financial inclusion: India has made rapid strides in financial inclusion by leveraging digital technology such as JAM Trinity, UPI etc. 
  • Digital Banks can leverage technology to provide banking services in rural and unbanked areas leading to further fillip to financial inclusion. Empirical Evidence: Digital Banks like Starling Bank (UK) & MyBank (China) has emerged as challenger banks and have been able to compete with bigger banks leading to positive disruption in banking sector.
The document Economic Development - 1 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC is a part of the UPSC Course Current Affairs & Hindu Analysis: Daily, Weekly & Monthly.
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