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Insights Daily Current Events, October 28, 2013


October 28, 2013


Kashmiris observe Black Day

  • Even as United Nations Secretary-General Ban Ki-moon offered to facilitate a dialogue between India and Pakistan, there were protests all over the city, as people observed Black Day, demanding that Kashmiris be allowed their “right of self-determination.”

  • Kashmiris throughout the world observe October 27 as Black Day to mark the day in 1947 when Indian forces entered the Kashmir Valley.

  • All-Party Hurriyat Conference chairperson Syed Ali Geelani said the United Nations had failed to give the “right of self-determination” to Kashmiris through plebiscite and added that the political front did not accept the ‘Indian occupation.’

Steep cut in funds allocation to Central police forces

  • Ambitious modernization plans of the Central Armed Police Forces (CAPFs) will suffer yet another setback as the Ministry of Home Affairs (MHA) has decided to make a steep cut in allocation of funds for 2013-14, with the Indo-Tibetan Border Police (ITBP) and the Central Industrial Security Force (CISF) not getting even a single penny.

  • The CAPFs had sought Rs. 2,360 crore from the Ministry for 2013-14 to buy latest weaponry, gadgets and surveillance equipment to meet threats and challenges posed by terrorists, Maoists, anti-national elements and foreign forces along the border.

  • But the MHA has agreed to give just Rs. 90 crore to fund modernization plans of five CAPFs. Significantly, in 2012-13, the CAPFs were sanctioned Rs.128 crore for modernization, but the forces could utilize only Rs. 35 crore.

  • Significantly, in May, 2012 the Prime Minister-headed Cabinet Committee on Security (CCS) had approved Rs.11,000 crore for modernization of the CAPFs that is to be sanctioned and utilized in the next five years.

  • Apart from procuring latest machine guns, automatic pistols, guns and rifles, rocket launchers, the shopping list of the CAPFs include night vision devices, patrolling and special vehicles.

Functions of Cabinet Committee on Security (CCS)

  • to deal with all Defence related issues;

  • to deal with issues relating to law and order, and internal security;

  • to deal with policy matters concerning foreign affairs that have internal or external security implications including cases relating to agreements with other countries on security related issues;

  • to deal with economic and political issues impinging on national security;

  • to review the manpower requirements relating to national security including proposals concerning creation of posts carrying the pay scale or pay band plus Grade Pay equivalent to that of a Joint Secretary to the Government of India and higher, and setting up new structures to deal with

  • security related issues;

  • to consider all cases-involving capital expenditure related to defence(Example: the Department of Defence Production; the Department of Defence Research and Development)

  • in respect of the Services Capital Acquisition plans, schemes, projects, procurement of security related equipment, non-scaled and new items in respect of Department of Defence; and

  • all matters relating to atomic energy;

  • CCS is chaired by the Prime Minister of India and comprises the Minister of Defence, the Minister of Finance, the Minister of Home Affairs, and the Minister of External Affairs.

Central Armed Police Forces (CAPFs) constitutes-

  • Central Reserve Police Force (CRPF), the Border Security Force (BSF), the National Security Guard (NSG), Assam Rifles (AR), Sashastra Seema Bal (SSB), the ITBP and the CISF

Courtesy- NIC website


Developed countries pledge only meager emission cuts till 2020

  • According to the U.N. Framework on Convention on Climate Change (UNFCCC), the developed countries have committed to cut greenhouse gas emissions by a meagre 3% from 2011 to 2020.

  • It is less than one-third of the emission cuts the rich countries have achieved between 1990 and 2011.

  • The UNFCCC analysis shows that, the countries have collectively committed themselves to a reduction of only 13-19 % by the 1990 levels. This falls far short of the 25-40% reduction expected of the developed countries so as to keep temperatures from rising more than two degrees above the pre-industrial era, above which would lead to dangerous climate change consequences.

  • The EU (which has always projected itself as a leader on the issue) has set such a low target for 2020 that it has almost achieved it. By 2011, it had already achieved 18% cut from its promised 20% emission cut below the 1990 levels.

  • The U.S. on the other hand, which has the highest accumulated emissions and the highest per capita emissions in the world, increased emissions by 8% between 1990 and 2011 because it refused to sign the Kyoto Protocol. Now it has committed to cut emissions by 5% from the 1990 levels by 2020.

  • And it is also difficult to ascertain whether the reduction emissions committed by the developed countries would be actually achieved since many of these countries have not explained or clarified their dependence on offsets (i.e., buying credits for work done to cut emissions in the developing world)

The UNFCCC negotiations had two agenda:

  • to persuade the countries to make higher emission cuts between 2013 and 2020 so as to prevent the atmosphere from accumulating higher levels of emissions.

  • to come up with a new deal by 2015, which will put in place a formula for all to cut emissions from 2020.

  • While the U.S. has made it clear that it will not increase its target to cut carbon dioxide emissions in the pre-2020 period, the EU has made it conditional on countries such as China and India to make commitments immediately.

  • With the carbon space being limited and almost two-thirds occupied by the developed countries, the low commitments of these countries would push the developing countries to commit to a higher level of reduction post-2020.

What is Kyoto protocol?

  • The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change, which commits its Parties by setting internationally binding emission reduction targets.

  • Recognizing that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol places a heavier burden on developed nations under the principle of “common but differentiated responsibilities.”

  • KP sets binding emission reduction targets for 37 industrialized countries and the European community in its first commitment period. Overall, these targets add up to an average five per cent emissions reduction compared to 1990 levels over the five-year period 2008 to 2012 (the first commitment period).

  • The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. The detailed rules for the implementation of the Protocol were adopted at COP 7 in Marrakesh, Morocco, in 2001, and are referred to as the “Marrakesh Accords.” Its first commitment period started in 2008 and ended in 2012.

  • In Doha, Qatar, on 8 December 2012, the Doha Amendment to the Kyoto Protocol was adopted. This launched a second commitment period, starting on 1 January 2013 until 2020.

Courtesy- UNFCC website

Georgia Elections and its repercussions on Russia-U.S. relationship

  • The Georgian President Mikheil Saakashvili will end his 10-year rule, as the citizens vote in the presidential election.

  • Georgia elections will be a key to the relationship between US and Russia.

  • As this may see a renewal of rivalry between Russia and US for control of the strategically located post-Soviet state.

  • The departure of the President has bought mixed feelings in Russia.

  • On the one hand, Mr.Saakashvili is the man who triggered a short but fierce war with Russia, when he tried to regain control over the separatist region of South Ossetia in August 2008.

  • On the other hand, Mr.Saakashvili’s adventurism enabled Russia to strengthen its foothold in the Caucasus after routing the U.S.-trained Georgian army.

  • Russia had extended political recognition to Georgia’s breakaway regions and has since set up military bases on their territories. Despite Georgia’s importance to the West as a gateway to Caspian oil and gas, NATO put on hold plans to grant it membership in the alliance, partly because Western leaders feared that the erratic Georgian leader could drag them into a conflict with Russia.

  • Prime Minister Bidzina Ivanishvili, tipped to win presidency, has promised to rebuild ties with Russia, but has also reiterated Georgia’s ambition to join NATO and the European Union (EU). In November, 2013 Georgia, along with Ukraine and Moldova, is expected to sign an association pact with the EU.

Significance of the election to Georgia

  • The election will mark Georgia’s transition from a presidential to a parliamentary republic, with key powers of the President transferred to the Prime Minister. Uncertainty associated with the constitutional reform may be further heightened by the decision of Mr.Ivanishvili to step down as Prime Minister in November, 2013.

More about Georgia

  • Georgia is a sovereign state in the Caucasus region of Eurasia. Located at the crossroads of Western Asia and Eastern Europe, it is bounded to the west by the Black Sea, to the north by Russia, to the south by Turkey and Armenia, and to the southeast by Azerbaijan. The capital of Georgia is Tbilisi.

  • At the beginning of the 19th century, Georgia was annexed by the Russian Empire. After a brief period of independence following the Russian Revolution of 1917, Georgia was occupied by Soviet Russia in 1921, becoming the Georgian Soviet Socialist Republic and part of the Soviet Union.

  • After independence in 1991, post-communist Georgia suffered from civil unrest and economic crisis for most of the 1990s.

  • This lasted until the Rose Revolution of 2003, after which the new government introduced democratic and economic reforms.

  • It contains two de facto independent regions, Abkhazia and South Ossetia, which gained limited international recognition after the 2008 Russo-Georgian War. Georgia considers the regions to be part of its sovereign territory under Russian military occupation

Courtesy – Wikipedia

62 more killed in Iraq’s continuing ‘war of genocide’

  • The Iraqi capital Baghdad continues to reel under a fresh wave of car bombing.At least 62 people were killed.

Reason behind the War:

  • The Shias were the main targets. These blasts were meant to further inflame the sectarian strife. In the composite social fabric that Iraq has – Sunnis, Shias, Christians and Kurds have been pitted against each other, in the aftermath of the country’ s invasion by the United States and its allies in 2003.

  • Prime Minister Nouri al-Maliki has described this as “war of genocide”.

  • The statistics regarding the mounting death toll in Iraq in 2013 make a dismal reading.

  • More than 5,250 people have been killed in 2013 so far, with 600 perishing in October alone

  • A study undertaken by academics from the US, Canada and Iraq has revealed that war-related incidents have claimed half-a-million lives since the U.S.-led invasion of the country over a decade ago.

Iran-Pakistan Gas pipeline unviable

  • Pakistan is demanding U.S. to ease sanctions on Iran, so that the two countries can go-ahead with their long pending natural gas pipeline.

  • A recent report by Sustainable Policy Development Institute (SDPI), titled “Rethinking Pakistan’s Energy Equation: Iran-Pakistan Gas Pipeline” claims that the gas purchase agreement and pricing of the Iran-Pakistan Gas Pipeline (IPGP) should be renegotiated or else the project could prove fatal to country’s economy.

  • Pakistan has blatantly ignored the energy dynamics and its pricing while going for this deal. The price of the gas purchased under the IPGP project is linked to crude oil prices and this has not been taken into account.

  • The report also notes that, IPGP project is not the panacea for Pakistan’s energy problem, but more of a bailout plan. Pakistan will have to look out for other options other than the unconventional and alternate energy sources. Nearly 50% of the energy needs are met through natural gas.

  • Pakistan has a combined power generation capacity of 24000 MW which it is unable to meet due to scarcity of natural gas supply.

  • According to the 2013 agreement with Iran, Pakistan will import an amount of one billion cubic feet a day (BCFD). This would last for 20 years with an option to extend it for another five years.

  • Iran has offered $500 million and has already constructed more than 900 km (out of 1100 km) of the pipeline on its territory at a cost of $700 million.

  • But Pakistan needs a total of $2 billion to complete its share. Moreover, Pakistan had not taken any substantial step to initiate the process of tapping the country’s shale gas potential except developing a framework.

  • The agreement with Iran stipulates construction of Pakistan’s side of the pipeline by December 2014. If Pakistan fails to meet this deadline it will be liable to pay heavy daily penalties, which can run into a million dollars per day.

U.S. quietly ramping up military presence in Africa

  • The attack on the Westgate mall in Kenya in September, 2013 by al-Qaeda-affiliated militants has underscored the need for enhancing U.S. engagement with the African continent.

  • Hitherto, the U.S. has focused on providing training, building military capacity of African countries contributing troops to the African-led Mission in Somalia (AMISOM), and providing intelligence to partner nations.

  • With the exception of high profile commando missions, like the simultaneous raids in Somalia and Libya earlier in October, 2013 the U.S. military presence in Africa has attracted relatively little international attention.

  • On the question of Kenya’s participation in the International Criminal Court (ICC), the U.S. has urged Kenya to cooperate with the ICC and in the meantime it would look into AU recommendation to the U.N. Security Council (UNSC) regarding the deferral of the trial of Kenyan President Uhuru Kenyatta.

What is AFRICOM?

  • AFRICOM was set up five years ago and has since provided training, logistics and infrastructure to countries across Africa with the aim of boosting interoperability between American forces and host countries.


Weak economy exerts asset quality pressure on banks

  • The profitability of Indian banks is under increasing pressure due to subdued growth in interest income, sharp slowdown in deposit growth, and an increase in credit costs led by a rise in non-performing assets (NPAs).

  • Credit growth has been far ahead of deposit growth over the last three years, and this trend has continued in the first-half of 2013-14 as well. Between 2009-10 and 2012-13, banking credit grew at a compounded annual growth rate (CAGR) of 19 %, with deposit growth lagging behind at 16 %.

  • The slowdown in economic growth and entrenched inflation have adversely impacted savings with household savings rate (as percentage of gross domestic product (GDP)) declining to an estimated 22% in 2012-13 from 25.2 % in 2009-10.

  • More disturbing is the proportion of financial savings (of which bank fixed deposits form 56 per cent) has declined. High inflation has severely impacted inflation-adjusted returns from financial instruments such as deposits, leading retail investors to turn towards physical savings avenues.

  • For banks, this worrisome decline in deposit growth has severely impacted their liquidity, which is reflected in the sharp rise in borrowings from RBI’s liquidity adjustment facility (LAF) window.

  • Average daily borrowings increased to Rs.74,000 crore during 2013-14 (till October 11, 2013), which is more than double the Rs.35,000 crore borrowed in 2010-11. Borrowings have been especially high in recent months, due to the liquidity draining measures announced by the RBI to shore up the rupee. These measures led to a spike in short-term money market rates, pushing corporates to resort to bank borrowings for funding their working capital requirements. Although some of those measures have been gradually withdrawn, the situation still remains strained for many banks, especially as there are no signs of deposit growth picking up ahead of the busy season. The systemic credit-deposit ratio as of September 2013 was at an all-time high of 78.3 per cent, clearly pointing towards the need to attract deposits.

Many banks are responding to the situation by hiking deposit rates, especially on shorter-term deposits, by 50-100 basis points even though credit pricing is also under pressure. The fall in CASA (current account savings account) deposit base — 33 per cent as of June 2013 compared to 34.1 per cent as of March 2013 — is not helping matters.

  • Due to rising cost of funds, it is expected that, net interest margins (NIMs) of banks to decline by 20-25 basis points in 2013-14. The drop in NIMs is expected to be far more sharper in the case of public sector banks (PSBs), given the higher proportion of non-interest earning weak assets and lower increase seen in their lending rates.

  • Due to weak economic conditions, the asset quality of the banking system is expected to deteriorate sharply. The gross NPAs are expected to increase to 4.4 per cent by March 2014, from 3.3 per cent a year ago, propelled by weak demand and liquidity constraints being faced by corporates.

  • Also there would be sharp increase in slippage from restructured assets. Despite restructuring, the inherent weakness in restructured assets will be accentuated by the fragile economic environment. Consequently, this would lead to over 30% of restructured assets (excluding state power utilities, which are likely to receive sovereign support from the Central and State governments) to slip into NPAs in the next two years. (By contrast, during the two-year period, following the global financial crisis of 2008, only 15 per cent of restructured assets turned NPAs.) Therefore, the total weak assets in the banking system (gross NPAs plus likely slippage of restructured assets) will shoot up to 5.7 % by the end of this fiscal (2013-14) from 4.3 % a year ago.

  • Weakening asset quality as well as increased provisioning on restructured assets (announced in May 2013) will significantly increase the credit costs for banks. On account of increased provisioning on restructured assets alone, Crisil Research anticipates that banks will have to make additional provisions to the tune of Rs.13,000 crore between April 2013 and March 2016. Again, PSBs will bear the brunt of the increase in provisioning.

  • In the wake of slow accretion to deposits, rising delinquencies, stricter provisioning norms and implementation of Basel-III norms, Indian banks’, particularly PSBs, will need significant capital infusion over the next five years.


The banking sector will face tough times for the next 12 months, with upward pressure on cost of funds and lower profitability. To protect the downside in profitability, banks’ will have to focus on garnering retail deposits and minimising slippages from restructured assets by closely monitoring them. In the long-term as well, with capital requirements all set to shoot up with the stage-wise implementation of Basel-III, providing adequate returns to equity shareholders by judiciously deploying capital would become a critical differentiator across banks.

Courtesy – Hindu Newspaper

What is LAF, Repo rate (RR), reverse-repo rate (RR)?

  • Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money through repurchase agreements.

  • LAF is used to aid banks in adjusting the day to day mismatches in liquidity (Basically it is used to moderate short-term liquidity fluctuations)

  • LAF consists of repo and reverse repo operations.

  • Repo or repurchase option is a collaterised lending i.e. banks borrow money from Reserve bank of India to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into the system.

  • Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore absorbs the liquidity in the system. The collateral used for repo and reverse repo operations are Government of India securities. Oil bonds have been also suggested to be included as collateral for Liquidity adjustment facility.

Courtesy -Wikipedia

What is NPA (also known as “non-performing loan”)?

  • A classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset.

  • Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs.

Courtesy- Investopedia

What are Basel-III norms?

  • Basel III is part of the continuous effort made by the Basel Committee on Banking Supervision to enhance the banking regulatory framework. It is a global, voluntary regulatory standard on bank capital adequacy, and seeks to improve the banking sector’s ability to deal with financial and economic stress, improve risk management and market liquidity risk (strengthen the banks’ transparency)

  • It builds on the Basel I and Basel II documents.

  • A focus of Basel III is to foster greater resilience at the individual bank level in order to reduce the risk of system wide shocks.

Courtesy- Investopedia

For more information on Basel III norms refer the below link:

The tough task ahead for new bank licences

  • The process for issuing new bank licences is gathering pace. Reserve Bank of India (RBI) Governor Raghuram Rajan has said that a few licences will be issued by January 2014. An important step towards that end has been the setting up of a committee headed by former RBI Governor Bimal Jalan to vet the 26 eligible applications, after the RBI has scrutinized them initially.

  • This external scrutiny was built into the procedure. It has been the intention of the RBI to keep the process as free from controversy as possible.

  • The committee has three other members, former RBI Deputy Governor UshaThorat, former SEBI Chairman C. B. Bhave, and NachiketMor, former ICICI Bank official, who is into financial inclusion in a big way.

Stringent norms:

  • The applicants, drawn from the public and private sectors, had to meet the RBI’s stringent norms for setting up new banks.

  • The banks should have a minimum capital of Rs.500 crore and sound credentials &financial track record of 10 years. Foreign capital will be allowed to an extent of not more than 49 %

  • Obviously, it is not the quantifiable target as much as the subjective criteria that will pose daunting challenges. Checking the credentials of promoters is not going to be easy at all, and will lend itself to controversy. For instance, an FIR filed against Kumar Mangalam Birla, in his capacity as the chief promoter of Hindalco in the coal scam, has led to speculation, whether the A. V. Birla group, one of the top eligible contenders for a bank licence, will be disqualified. There being no precedent, it would be interesting to see whether a totally extraneous development can derail the bid of one of India’s most admired groups.

Controversial issues

  • In any case, the process of awarding a new bank licence was never expected to be smooth. Among the several controversial issues, allowing large industrial houses to start a bank has been the most contentious. A very large number of respondents to RBI’s discussion paper were not in favour of awarding licences to big business houses.

  • However, such policy issues have been decided. A few large industrial houses will be given permission to start banks. Amidst the riveting interest on the subject, two related developments merit attention.

  • Another development that clouds the picture is the settlement one of the biggest global banks JP Morgan Chase reached with authorities in the U.S. to earn a reprieve from civil prosecution though not criminal cases. The bank agreed to pay a record $13 billion to federal and state agencies in settlement of cases relating to its role in the sub-prime home loan crisis of 2008 which morphed into a global economic crisis. Five years on, the U.S. regulators are sending out a tough message after being accused of going soft on banks initially.

  • There may not be banks of the size of JP Morgan Chase in India. Nor has any bank, foreign or Indian, been guilty of alleged acts of misdemeanor of gargantuan proportion.

  • Yet, the question is do we have a regulator and rules to regulation to take on such banks should such an eventuality arise.

Role for foreign banks

  • Dr.RaghuramRajan has said that foreign banks will be allowed in India, provided they incorporate themselves under Indian laws. Equally importantly, their governments must follow the principle of reciprocity, meaning that they must allow Indian banks to open branches there. Further, these banks will be allowed to buy a few local banks. It is the last point that has created some confusion. There is no hint of such a radical move in a policy paper that RBI has put up on its website.

Courtesy Hindu Newspaper