Budget bats for key policy measures in the banking sector: Implementation is the key

Editor: Samir Pius George
February 5, 2021

The Union Budget for FY 2021-22 presented on February 1, 2021 has the distinction of being the first budget after Covid-19 devastated much of the world, including India. India registered a historic contraction of nearly 24% in its Gross Domestic Product (GDP) in the first quarter of the current financial year, unemployment surged, small enterprises suffered acutely and vulnerable households slipped into poverty. During the course of the year, the government announced a series of measures to alleviate the Covid-19 induced stress. Since then, there have been signs of a nascent recovery in the economy. In this context, there has been tremendous anticipation around this budget to put India firmly back on the growth path. 

Towards this end, the budget has made many noteworthy announcements. Two key announcements stand out viz., a push to the privatisation agenda by announcing the privatisation of two public sector banks and an insurance company, and the establishment of an asset reconstruction company to take over the Non-Performing Assets (NPAs) of banks. 

Privatisation of public sector banks

Signalling a clear and key policy shift, the government has announced an ambitious and strategic privatisation policy by proposing to disinvest/strategically sell public sector entities (PSEs). Towards this end, the government has approved four sectors as strategic, where it will retain a minimum number of entities. It will pare down its presence above this minimum in strategic sectors, and completely in non-strategic sectors. Notably, banking, insurance and financial services have been identified as  strategic sectors.  

A number of central PSEs (including Air India, Shipping Corporation of India and the Container Corporation of India) have also been identified by the budget for divestment this fiscal year. Further, the NITI Aayog has been tasked with identifying the next pipeline of central PSEs for disinvestment.  Within this overall context, the current budget has also proposed to privatise two public sector banks (PSBs) in addition to Industrial Development Bank of India (IDBI), and a general insurance company.  

Privatisation of PSBs is not a new idea. It was attempted earlier as well.  The former Finance Minister, Yashwant Sinha, proposed to bring government stake below 51% in PSBs in early 2000s. However, this did not garner enough support. Given the burgeoning requirement of capital by PSBs and the limited fiscal space with the government, it has now become imperative to find other avenues to bridge the gap.  The proceeds of the disinvestment could help release government resources to more productive uses, particularly as government finances too have come under tremendous pressure in the wake of the pandemic.  

Moreover, with the approval of banking as a strategic sector, and the maintenance of public sector presence, the government should be able to avoid any compromise on its social agenda – a key concern that has been flagged earlier on privatisation of banks. 

Resolution of bad assets

Flow of credit is an imperative to meet the needs of a growing economy. A surge in bad or non-performing assets impedes the flow of credit. This is because banks must make higher provisioning to cover their bad assets, reducing the overall credit available to firms and households. It also makes banks risk averse. 

Measures to provide relief to borrowers such as the moratorium on loans – could exacerbate the problem of bad loans. An improvement in the NPA ratio of the banks was visible before the pandemic but the policy support extended to borrowers could impact the asset quality of banks through postponement in recognition of bad assets. 

The Financial Stability Report released by the Reserve Bank of India (RBI) in January this year estimates a sharp rise in the stressed assets on the banks’ books, particularly in the case of public sector banks. A number of measures were taken by RBI to improve the flow of credit by banks; however, the offtake of credit is still slow. The need of the hour therefore is to resolve these bad assets and clean up banks’ balance sheets so they can begin to lend more freely. 

The budget tries to address the problem of bad loans by announcing an asset reconstruction company (ARC) and an asset management company (AMC). This mechanism is expected to take over the stressed assets from banks, manage and eventually dispose them for value. The assets may be disposed of to potential buyers which include alternative investment funds (AIFs).  

The idea of a “bad bank” has apparently been inspired by the experience of countries such as the US and Malaysia. The Malaysian government, for instance, set up “Pengurusan Danaharta Nasional Burhad” – a government-backed AMC – that successfully bought and resolved bad assets in the Malaysian financial system in the aftermath of the Asian Financial Crisis in late 90s. 

While details on the Indian initiative are sparse at this point, the proposed mechanism is understood to not be a government owned entity. Instead, this mechanism would be primarily led by banks, with the government offering some support – perhaps in the form of a guarantee. The success of this proposal would depend on how well the proposed entity is managed. It will also depend on the capital allocation strategy by banks and how much money the government sets aside for this entity.

The reference to Alternate Investment Funds (AIFs) and other entities as potential buyers perhaps hints at measures for improving the efficiency of the stressed assets market – an important step that must go hand in hand with the creation of a “bad bank”.  However, a pitfall that the proposed mechanism must guard against is the potential “moral hazard”. It must disincentivise, rather than incentivise, poor decision making by the banks that led to the bad assets in the first place. 

Both the above announcements mark important interventions in the banking sector. Their success will however depend on the actual details – of the institutional structures and enabling frameworks put in place. Implementation will also be key, given the competing interests when it comes to privatisation and the government’s own poor track record on divestment.  This will, therefore, be a keenly watched space in the coming year.  

The views expressed in the post are those of the author and in no way reflect those of the ISPP Policy Review or the Indian School of Public Policy. Images via open source.

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In the 1860s, England was facing an acute shortage of coal. Some experts contended that improving technology would reduce coal consumption. But contrary to this, technological improvements that increased the efficiency of coal led to the increased consumption of coal in a wide range of industries. English Economist William Stanley Jevons argued that technological progress could not be relied upon to reduce resource consumption. Maharashtra is facing a similar issue in 2020 with water.

The Paradox of water

In 2014, the then Chief Minister, Devendra Fadnavis, launched a flagship project to make rural Maharashtra drought-free. The program aimed to make 5000 villages free of water scarcity every year. Nearly 52% of the state’s geographical area is prone to drought, either naturally or due to poor rainfall. The project targeted strengthening and streamlining existing water resources like canals, bunds, and ponds by arresting maximum run-off rainwater during the monsoon. The key aim of this project, Jalyukta Shivar Abhiyan, was to establish the belief in a farmer that “every drop of rainwater is owned by me and it should percolate on my land”. Despite the efforts made by the State Government and several NGOs working in the sector, the groundwater level has continued to decrease in 245 Talukas since 2014-15.

Despite a lot of work and spending more than 9000 crores on the supply-side of water, villages are still facing drought-like scenarios. This is mainly due to unprecedented rates of extraction, the sudden availability of abundant water leading to use of more water and erratic rainfall. 

This is a classic example of Jevon’s Paradox. The fault lies not with the farmers but with the policy’s design and implementation. Jevon’s paradox is a widespread phenomenon that most of us have experienced at some point or the other. For example, when we get a salary increment, we end up saving the same amount or sometimes even less than before.

Indian laws treat water as private property. It is often attached to the land. As a result, only a privileged few have access to groundwater. There is a limit to harvesting water in any location.  With only 23% irrigated land, Maharashtra is heavily dependent on the monsoon. Due to climate change, rainfall is also becoming erratic. Despite this, the areas under sugarcane plantations, a water-intensive crop, are increasing every year. If this continues, we will see a huge crop failure and mass migration in the coming years.

Farm pond after rains. Credits: Narendra Kulkarni

Understanding the Water Bank

To address this the focus needs to shift from the supply-side to the demand-side of water. Implementation of water budget plans can help to deal with this challenge. The preparation of village water charts, water budget, aquifer mapping and their management was proposed back in the Maharashtra Groundwater Act, 2009. 

Water budgeting is similar to balancing a bank account. In simple terms, the water budget is a process of calculating water requirements for overall different needs (domestic, irrigation, etc.) against the total water available from different sources (eg: rainfall, groundwater).

Managing water is similar to managing finances. First, similar to knowing how banks and money work, villagers need to know how aquifers and groundwater work. To understand this a 3D model of topography and aquifer map can be made available for all villages. This map can be used to convince villagers to look at groundwater as a common good.

Secondly, managing finances requires information about the inflow and outflow of money. In the same way, villagers need to measure rainfall, water level and its use. In order to achieve this, villagers should be trained in making rain gauges and measuring and maintaining the rainfall record. There is also a dire need to spread awareness about the water requirements of different crops. Water availability and water requirement of different crops will help villagers plan their crop cycles to maximise profits giving first preference to drinking water.

Finally, like a bank manager, we need to develop local leadership who will act as watershed managers. These managers need to be educated about the benefits of the water budgeting process and have the capacity to have systematic, well-planned discussions with all stakeholders to make water budgets implementable.

With climate change looming around the corner, the government needs to relook at the water crisis at the earliest. A good start would be implementing the Maharashtra Groundwater Act and incentivising water-efficient crops.  We need to realise that if this crisis continues and the water banks fail, no one will be able to bail us out, as in the 2008 financial crisis.

References

WoTR. (2020b, March). Water Stewardship and Water Budgeng: A Pathway to manage the water available in a me of growing water scarcity in rain fed Maharashtra. https://wotr.org/. Retrieved March 31, 2022, from https://wotr-website-publications.s3.ap-south-1.amazonaws.com/Policy_Brief_WSI_2_Mar_2020.pdf 

WoTR. (2019). Water Budgeting Tool for improving water governance at local level. https://wotr.org/. Retrieved March 31, 2022, from https://wotr-website-publications.s3.ap-south-1.amazonaws.com/Water_Budgeting_Brochure_English.pdf 

Paani Foundation. (2016, June 1). Water Budgeting [Video]. YouTube. https://www.youtube.com/watch?v=svGirbOuWhQ 

The Swachh Bharat Mission (SBM) was initiated in 2014 to achieve universal sanitation coverage. The cleanliness drive aimed to make citizens health-conscious by providing financial incentives for solid/liquid waste management (SLWM), toilet construction, technical assistance, and capacity building (Aijaz, 2017).

The Swachh Bharat Mission has successfully executed its target of toilet construction with about 99% of Indian cities declared Open Defecation Free (ODF) (Jadhav, 2021). However, toilet usage is still reported to be low. There are drawbacks to the policy that can only be mitigated when citizens and the government work in collaboration and co-design the policy. Behavioural interventions can come in handy to bring about this transformational shift. According to Sharma, by 2021 a very small percentage (about 3%) of the SBM Budget is allocated to behavioural change. 

The potential solution area to improve the policy’s adoption is to reframe the policy for better outcomes using the principles of behavioural science.

Administrative Problems

Apart from the behavioural challenges mentioned above, there are certain administrative issues in the implementation of the program. It is observed that toilets are not properly constructed, either they are left halfway or constructed at far-off places and not in close vicinity creating challenges, specifically for women. Problems concerned with lack of adequate water supply, small and dingy toilets, also hinders the use of the toilet. Many areas even struggle to maintain the Open Defecation Free (ODF) status owing to seasonal and technological challenges (Sharma, 2021). 

To address these challenges, consistent physical availability of functional toilets must be a critical first step to induce latrine-use habits. This can be done by ensuring that toilets are constructed in social contexts beyond the homes such as in schools, hospitals, market places, thereby maximizing the physical availability of enabling infrastructure. It is equally important to map the existing OD locations and reduce the physical availability by repurposing common OD sites for alternate use. 

By making the existing toilet infrastructure easily accessible and user-friendly and by reducing the availability of the products/infrastructure supporting OD, we can correct the barriers hindering toilet usage.

Challenges in the Swachh Bharat Mission (SBM)  

India, with its vast and diverse population, experiences a number of challenges in getting people to use toilets and stop defecating in open spaces. Some of these challenges are listed below: 

  • Status Quo Bias – 100% toilet coverage yet low toilet usage 

According to the IHHL (Individual Household Latrine), there has been an overall 100% household toilet coverage in India, as of 2nd October 2019 (Swachh Bharat Mission (Gramin), n.d.). However, the policymakers underestimated the amount of time it would take to bring in desired behavioural change among the people who largely defecate in the open. 

People have a status quo bias wherein due to the preference for the current state of affairs, individuals do not wish to exercise an active choice but simply stick to the age-old practices and therefore, individuals in India continue to defecate in the open. In the rural areas of 5 northern Indian states, Coffey et al. (2014) found that 21% of individuals continue to defecate in the open, despite owning a latrine. In rural Tamil Nadu, a study by Yogananth & Bhatnagar (2018) reported that 54% of respondents defecated in the open despite having a household latrine.

Individuals are also driven by present bias wherein the inclination towards a smaller present reward (gains from open defecation) dominates larger later reward (gains from toilet usage). This occurs due to a lack of knowledge about the future benefits of using toilets. 

  • Limited awareness:

Even in places where toilets are functioning, citizens lack awareness in terms of the importance of sanitation and hygiene. Construction of toilets is not enough, the government should stress on effective communication to induce behavioural changes as well as focus on the differential usage and access to these facilities (Sharma, 2021).

Recommendations

It can be noticed from the above discussion that individuals often stick to what is the default setting due to limited cognitive abilities and biased perceptions. In his book, Thinking Fast and Slow, Daniel Kahneman points out several biases and heuristics that limit our ability to make the best decisions for ourselves and others. Such decisions not only impact us but also those around us, leading to negative externalities. It is the need of the hour to change the behaviour of individuals through appropriate interventions to eliminate the negative outcomes. These interventions, by enabling reflective thinking, can nudge people to start using toilets and bring in desired changes.

Using the learning from behavioural science, some policy recommendations can be enacted for the effective implementation of SBM:

  1. Behavioural changes and nudges would be able to facilitate a shift that would build upon existing social norm bias and induce citizens to make rational choices. To encourage citizens to stop defecating in the open, individuals can be informed of how their neighbours are making the best use of toilets. Using messages such as ‘9 out of 10 households in your vicinity use toilets ’, ‘no toilet, no bride’ can induce people to positively change their behaviour.
  2. Linking the existing cues with desired changes can yield effective results. Open defecation (OD) is a part of the morning routine and ‘piggybacks’ on daily rituals of a time to walk and socialize. Measures can be taken to enable latrine use to piggyback on these established, daily behaviours. For example, shaded areas near community toilets can be constructed to provide space to socialize.
  3. Effective monitoring, surveillance, regular reminders, and ground-level checks can help in examining the use of toilets. Incentivization can be another measure to encourage people to make the best use of toilets. Households making use of toilets can be awarded as the “Best Household” and can be given badges as a token of appreciation for supporting the cause. This could be publicly visible and generate a badge effect, motivating others to participate in the drive. Moreover, techniques like campaigning, social messaging, priming, can be used to bring desired behavioural change.

Conclusion 

Experiments around the world have shown how behavioural principles can be used to design policies that address development and policy challenges. Good data and good analysis are thus very essential for being informed about issues and making good policy recommendations. Open Defecation (OD) is a deep-rooted socio-cultural concern. Thus, without intervention in behaviour, the use of toilets will not increase even where latrines are available. To transform India into a truly ODF society, it will call for significant interventions to design latrines amenable to sustained daily use and to induce significant behavioural change.

‘Open defecation is a battle with the mind and hence must be won mindfully’

References

 About Us | Swachh Bharat Mission—Gramin, Ministry of Drinking Water and Sanitation. (n.d.). Retrieved October 25, 2021, from https://swachhbharatmission.gov.in/SBMCMS/about-us.htm

Aijaz, R. (2017, July 19). Swachh Bharat Mission: Achievements and challenges. ORF. https://www.orfonline.org/research/swachh-bharat-mission-achievements-challenges/

Coffey, D., Gupta, A., Hathi, P., Khurana, N., Spears, D., Srivastav, N., & Vyas, S. (2014). Revealed Preference for Open Defecation. 38, 13.

Jadhav, R. (2021, January 28). Flush with success, Swachh Bharat scheme on path to sustainability. https://www.thehindubusinessline.com/data-stories/data-focus/flush-with-success-swachh-bharat-scheme-on-path-to-sustainability/article33686833.ece

Kahneman, D. (2003). Maps of Bounded Rationality: Psychology for Behavioral Economics. The American Economic Review, 93(5), 1449–1475.

Sharma, A. (2021, October 28). Here’s Why India Is Struggling to Be Truly Open Defecation Free. The Wire. https://thewire.in/government/heres-why-india-is-struggling-to-be-truly-open-defecation-free

The  Behavioural  Insights  Team  (2015),  ‘ FAST:  Four  simple  ways  to  apply  behavioural  insights ’,  http://38r8om2xjhhl25mw24492dir.wpengine.netdna-cdn.com/wp-content/uploads/2015/07/BIT- Publication-EAST_FA_WEB.pdf

Yogananth, N., & Bhatnagar, T. (2018). Prevalence of open defecation among households with toilets and associated factors in rural south India: An analytical cross-sectional study. Transactions of The Royal Society of Tropical Medicine and Hygiene, 112(7), 349–360. https://doi.org/10.1093/trstmh/try064

India has successfully improved school enrolment in recent decades yet failed to deliver actual learning. The ASER Survey by NGO Pratham (2020) spotlights large learning deficits in students’ foundational learning. For instance, only 50% of Class V students can read texts of Class II level. More than half the students in Class VIII struggle to do simple division. The pandemic has deepened this crisis, especially because of the physical closure of 15.5 lakh schools that has affected more than 248 million students for over a year. These learning gaps are becoming critical with the emergence of the Fourth Industrial Revolution, which is emphasising digital technology, artificial intelligence and other allied technologies. Thus, it is integral to redefine education and structure it to suit the evolving technological transformation.

In response to this situation, the National Education Policy 2020 sounds like a clarion call to integrate technology at every level of education. It envisions the establishment of the National Education Technology Forum (NETF) to spearhead efforts towards the use of education technology. It recommended employing EdTech through app-based learning, online student communities, and lesson delivery beyond ‘chalk and talk’. By envisioning schools as nodal agencies, through which the underserved can access internet-powered devices, the NEP recognizes artificial intelligence (AI), virtual reality (VR), and blockchain as requisites in India’s education ecosystem. Thus, EdTech becomes a crucial link between enrolment and enhanced learning outcomes

CHALLENGES

The Indian EdTech ecosystem has a lot of potential for innovation. With over 4,500 start-ups and a current valuation of around $700 million, the market is geared for exponential growth — estimates project an astounding market size of $30 billion in the next 10 years. Eg. Byju’s, Unacademy. Despite the early implementation of technologies in the education system, India still faces teething problems.

Firstly, there are institutional obstacles. The lack of a dedicated unit to coordinate digital infrastructure, content and capacity building within the Education Ministry to look after the online learning needs of both school and higher education. Institutions need to be strengthened and made responsive to the evolving trends to ensure the dissemination of quality education.

Secondly, gender bias needs to be addressed as the gendered availability and access to technology and tools such as smartphones, laptops and internet connection is very common, especially in rural areas. Girls often face suspicion if they are demanding a phone. Education technology may not reach half of the population. A ‘Gender-Inclusion Fund’ should be set up to build the country’s capacity to provide equitable quality education to all girls and transgender students.

Thirdly, a wide digital divide. In India, the biggest obstacle to education technology integration is the prevalent digital divide and associated challenges of equity. Many view technology and associated opportunities as contradictory to equity and inclusion. Only 32% of the rural population are internet users. A national study carried out at the National Institute of Educational Planning and Administration showed the gaps in inclusive learning mediated by technology. A high level of urban-rural disparity in online classes was found. Not everyone who can afford to go to school can afford to have phones, computers, or even a quality internet connection for attending classes online. NSS data for 2017-18 showed that only 42% of urban and 15% of rural households had internet access. Thus, planning for education technology integration needs a broader lens of student diversity in contemporary campuses where a large share of students are from lower social strata (Scheduled Castes, Scheduled Tribes and Other Backward Classes and from poor households). Many are from government schools, under-developed regions, remote villages and urban margins. Bharat Net Project to connect all the 2,50,000 Gram panchayats in the country and provide 100 Mbps connectivity to all gram panchayats should be implemented. Opportunities provided by education technology can promote egalitarianism if access to technology is democratised and inclusion is institutionalised.

Fourthly, the pace of change & increasing cost makes it tough for marginalised communities to keep up with the rapidly changing technology. Even for private schools upgrading technology presents a major financial challenge, let alone government schools that are usually frequented by such groups. For harnessing full potential, the education curriculum and mode of instruction need to be aligned with technology tools. This requires increased governmental budgeting, planning, design thinking and improving teacher training.

Next, the resistance to change and low professional development hampering success. The lack of adequate professional development for teachers, who are required to integrate new technologies into their classrooms, are unprepared or unable to understand new technologies. Teachers and school leaders are comfortable with the status quo and often see technological experimentation as outside the scope of their job descriptions. School schedules often don’t have time for projects involving the use of technologies. Rigid learning and testing models are failing to challenge students to experiment and engage in informal learning. Integration of technology-based non-traditional classroom models, such as flipped classrooms and self-paced MOOC (massive open online course) are integral (suggested in NEP 2020).

Lastly, a very significant concern comes from the privacy risks associated with EdTechs. Since the pandemic hit, online education has replaced conventional classroom instruction. For learning customisation, apps collect large quantities of data from the learners (minor students). Private data collected can be misused or sold to other companies with no legal oversight or protection. It is necessary to formulate an ethics policy for EdTech companies. Issues of safety, confidentiality and anonymity of the user would be central to building a healthier learning ecosystem and ensuring the privacy of students.

WAY FORWARD

The true potential of EdTech will require collaborative efforts between the government, private sector, and NGOs. There is a need to realise that public educational institutions play an important role in social cohesion and building relations. Therefore, technology cannot substitute schools or replace teachers. Thus, it should not be “teachers versus technology” rather “teachers and technology”. 

Thorough mapping of the EdTech arena (scale, reach, and impact) is needed to bridge the digital divide at two levels – access and skills – is required to effectively use EdTech. Moreover, EdTech policy formulation and planning must align with other schemes (education, skills, digital governance, and finance). Fostering integration through public-private partnerships, factoring in voices of all stakeholders, and bolstering cooperative federalism across all levels of government is integral. The NITI Aayog’s India Knowledge Hub, Digital India Program, Government of India’s Aspirational Districts Programme on tech-enabled monitoring and implementation and the Ministry of Education’s DIKSHA and ShaGun platforms are great steps in the promotion of EdTech to transform India into a digitally empowered society and knowledge economy.

Learning from successful models as a repository of the best-in-class technology solutions, good practices and lessons from successful implementation must be curated. Some examples are:

  1. Grassroots innovation in EdTech –
    1. The Hamara Vidhyalaya in Namsai district, Arunachal Pradesh, is fostering tech-based performance assessments;
    2. Assam’s online career guidance portal is strengthening school-to-work and higher-education transition for students in grades 9 to 12;
    3. Samarth in Gujarat is facilitating the online professional development of lakhs of teachers in collaboration with IIM-Ahmedabad;
  2. International Cases –
    1. Mindspark, a computer-assisted learning software, delivers lessons through videos, games and questions on computers and tablets. The software analyses each student’s learning level, pitches content suitable for their level and adjusts the difficulty according to the student’s progress.
    2. Kenya’s literacy program Tusome, uses coaches equipped with tablets who visit classrooms, evaluate student reading skills, provide tailored advice to teachers and upload assessment data to administrators.

Author Bio:

Himanshi Bahl is a Political Science Graduate from the University of Delhi. Her research interests include emerging technologies and foreign policy.

References:

Kant, A. (2021, June 30). The future of learning in India is ed-tech. The Indian Express. https://indianexpress.com/article/opinion/columns/the-future-of-learning-in-india-is-ed-tech-pandemic-online-classes-7381782/

Malish, C. M. (2020, August 21). Technology as an enabler. The Hindu. https://www.thehindu.com/opinion/op-ed/technology-as-an-enabler/article32407777.ece

Mohammad Naciri & Atsuko Okuda. (2021, June 24). The gender technology gap has to end. The Hindu. https://www.thehindu.com/opinion/lead/the-gender-technology-gap-has-to-end/article34939814.ece

Vincent, V. (2021, May 13). EdTech needs an ethics policy. The Hindu. https://www.thehindu.com/opinion/op-ed/edtech-needs-an-ethics-policy/article34545004.ece