7th March – Editorials/Opinions Analyses

Contents:

1. Making the Environment conducive for Justice
2. Banking on Bailouts
3. Monetary Policy can’t combat the COVID-19 Impact
4. Double-edged sword: On Supreme Court’s cryptocurrency ruling

MAKING THE ENVIRONMENT CONDUCIVE FOR JUSTICE

Focus: GS-II Governance

Why in news?

Some of the areas affected by the recent riots in Delhi resemble a battlefield — and more than 50 people have died.

Judiciary’s moral authority

• The role of the judiciary in riot situations is extremely important, in that it could prevent a slide into chaos.
• The judiciary does not wield a sword nor does it control the purse strings of the state.
• But it is possessed of a more powerful alloy — moral authority, public trust and confidence. What the judiciary says or does has tremendous influence, regardless of who wields the sword or controls the purse strings.
• Intervention by the court can, more often than not, make the environment conducive on occasions where all wings of the state, particularly the police, need whatever muscle is given to them in the Constitution and the law.

BANKING ON BAILOUTS

Focus: GS-III Indian Economy

Why in news?

• Just one day after it placed the financially troubled Yes Bank under a moratorium, the Reserve Bank of India announced a draft ‘Scheme of Reconstruction’ that entails the State Bank of India (SBI) investing capital to acquire a 49% stake in the restructured private lender.

Views on the Moratorium on Yes Bank and SBI Takeover

• The alacrity with which the bailout has been proposed is commendable, however, the decision to suspend normal business operations raises several worrying questions, both about the health of the banking sector, and the adequacy of the oversight role that regulators essay.
• The fact that the lender ended up at the resolution stage, without ever being placed under the central bank’s Prompt Corrective Action (PCA) framework, also raises a question mark over how and why Yes Bank eluded the specifically tailor-made solution to address weakness at banks.
• India’s banking sector is still far from out of the woods and the RBI and Centre have their task cut out in ensuring that the need for such bailouts is obviated.

Prompt Corrective Action (PCA)

• Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI.
• The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability.
• It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.

Significance of PCA

• As most bank activities are funded by deposits which need to be repaid, it is imperative that a bank carries a sufficient amount of capital to continue its activities.
• PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble.
• The idea is to head off problems before they attain crisis proportions.
• Essentially PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
• On breach of any of the risk thresholds mentioned above, the RBI can invoke a corrective action plan.
• Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation.
• Only in an extreme situation, breach of the third threshold, would identify a bank as a likely candidate for resolution through amalgamation, reconstruction or winding up.

MONETARY POLICY CAN’T COMBAT THE COVID-19 IMPACT

Focus: GS-III Indian Economy

Why in news?

• The huge 50 basis points cut in rates by the U.S. Federal Reserve on 3rd March 2020, to lift economic sentiment hit by COVID-19 has disrupted central banking worldwide.
• Even as analysts debate whether a monetary policy response is the right strategy, central banks across the world are feeling the pressure to follow suit to the largest rate cut by the Fed since 2008.
• Central banks of Australia and Malaysia have cut rates already while others such as the Bank of Japan, Bank of England and the European Central Bank are contemplating joining the caravan.

Will the Rate Cut be effective?

• Monetary policy is excellent to address demand shocks but is a blunt tool when it comes to addressing supply-side issues.
• A rate cut can, at best, help to boost sentiment but that again will be transient as the market’s reaction after the Fed rate cut proves.

What are RBI’s Options?

• With monetary policy turning out to be the de facto first line of economic defence against the ill-effects of the virus, the focus in India has turned to the Reserve Bank of India’s response.
• Unlike other countries, the legal framework in India after the setting up of the Monetary Policy Committee (MPC) is such that the RBI cannot unilaterally adjust rates.
• The MPC will have to meet and deliberate on the situation before the call to cut rates is taken and such a call will have to be based on an assessment of inflation in the economy.
• Given the MPC constraint, the RBI may well choose to do what it did in the February 2020 monetary policy – announcing another tranche of long-term repo operation.
• That will mean that banks will gain access to three-year funds at the repo rate of 5.15%, much lower than the market rate.
• And then, there’s Operation Twist which the RBI employed to good effect in December, softening rates at the long end of the yield curve.

Operation Twist

• ‘Operation Twist’ is when the central bank uses the proceeds from sale of short-term securities to buy long-term government debt papers, leading to easing of interest rates on the long term papers.
• This is expected to lead to a flattening of the yield curve. Long-end rates are expected to come off, while short-term rates could rise

DOUBLE-EDGED SWORD: ON SUPREME COURT’S CRYPTOCURRENCY RULING

Focus: GS-III Science and Technology

Why in news?

The Supreme Court has struck down a 2018 circular by the Reserve Bank of India (RBI) that directed entities not to provide services to those trading in “virtual currencies” (cryptocurrencies), as “disproportionate”.

What was done about Cryptocurrencies?

• Ministerial committee recommendations, and warnings by institutions such as the RBI were: The problematic nature of their payment and exchange methods.
• The use of virtual currencies over the Internet, despite the warnings and recommendation continued to remain legal in India.
• The RBI circular was to choke the agencies that sought to provide a platform to facilitate trading in cryptocurrencies by cutting them off from banks.
• This went against the entrepreneurial right to operate a business enshrined in Article 19(1)(g).

Issue with Bitcoin

• Volatility came to be associated with Bitcoin (because of it being traded at a peak of $20,000 in mid-2018 before crashing to $3,000 by the end of the year) limiting its original purpose of becoming an alternative and stable currency that is not backed by any central institution but derives trust from its intricate blockchain ledger system.
• Moreover, reports suggest that bitcoins, with their assured anonymity, remain popular with currency speculators, and in use in illicit transactions over the “dark web”.

Why did the Supreme Court strike down the Order

RBI has not come out with a stand that any of the entities regulated by it have suffered any loss on account of [cryptocurrency] exchanges.