16 Mar 2023 : The Indian Express

Editorial 1: Banks that are too big to fail

Recent Context:

India remained a safe haven during the global financial crisis triggered by the collapse of investment bank Lehman Brothers in 2008, with domestic banks, backed by sound regulatory practices, showing strength and resilience.
Recently, Indian banks remained unaffected by the failure of Silicon Valley Bank (SVB) and Signature Bank in the US last week, despite the global interconnectedness in the financial sector.
How safe are banks in India, especially the domestic systemically important banks (D-SIBs) that have operations overseas, in the era of startups and digitisation?

What is the basis for the confidence in the resilience of Indian banks?

SVB-like failure is unlikely in India as domestic banks have a different balance sheet structure. As “In India we don’t have a system where deposits are withdrawn in such bulk quantities,”
And household savings constitute a major part of bank deposits in India this is different from the US, where a large portion of bank deposits are from corporates.
A large chunk of Indian deposits is with public sector banks, and most of the rest is with very strong private sector lenders such as HDFC Bank, ICICI Bank, and Axis Bank.
Customers need not worry about their savings, the banker said, adding the government has always stepped in when banks have faced difficulties.
In India, the approach of the regulator has generally been that depositors’ money should be protected at any cost. The best example is the rescue of Yes Bank where a lot of liquidity support was provided.

Which banks are classified as D-SIBs?

RBI has classified SBI, ICICI Bank, and HDFC Bank as D-SIBs.
The additional Common Equity Tier 1 (CET1) requirement for D-SIBs was phased-in from April 1, 2016, and became fully effective from April 1, 2019.
The additional CET1 requirement was in addition to the capital conservation buffer. It means that these banks have to earmark additional capital and provisions to safeguard their operations.
Under the D-SIB framework announced by RBI on July 22, 2014, the central bank was required, from 2015, to disclose the names of banks designated as D-SIBs, and to place them in appropriate buckets depending upon their Systemic Importance Scores (SISs). Depending on the bucket in which a D-SIB is placed, an additional common equity requirement is applicable to it.
Based on data collected from banks as on March 31, 2017, HDFC Bank was classified as a D-SIB along with SBI and ICICI Bank. The current update is based on data collected from banks as on March 31, 2022.
At global level, The Basel, Switzerland-based Financial Stability Board (FSB), an initiative of G20 nations, has identified, in consultation with the Basel Committee on Banking Supervision (BCBS) and Swiss national authorities, a list of global systemically important banks (G-SIBs).
There are 30 G-SIBs currently, including JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, BNP Paribas, Deutsche Bank, and Goldman Sachs. No Indian bank is on the list.

How does RBI select D-SIBs?

The RBI follows a two-step process to assess the systemic importance of banks.
First, a sample of banks to be assessed for their systemic importance is decided. All banks are not considered many smaller banks would be of lower systemic importance, and burdening them with onerous data requirements on a regular basis may not be prudent.
Banks are selected for computation of systemic importance based on an analysis of their size (based on Basel-III Leverage Ratio Exposure Measure) as a percentage of GDP.
Banks having a size beyond 2% of GDP will be selected in the sample.
Since the sample of banks is selected, a detailed study to compute their systemic importance is initiated. Based on a range of indicators, a composite score of systemic importance is computed for each bank. Banks that have a systemic importance above a certain threshold are designated as D-SIBs.
Next, the D-SIBs are segregated into buckets based on their systemic importance scores, and subjected to a graded loss absorbency capital surcharge, depending on the buckets in which they are placed.
A D-SIB in the lower bucket will attract a lower capital charge, and a D-SIB in the higher bucket will attract a higher capital charge.

Why was it felt important to create SIBs?

During the 2008 crisis, problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the global financial system, which negatively impacted the real economy.
Government intervention was considered necessary to ensure financial stability in many jurisdictions.
In October 2010, the FSB recommended that all member countries should put in place a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions.
SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’, due to which these banks enjoy certain advantages in the funding markets.
However, this perception creates an expectation of government support at times of distress, which encourages risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future.
It is therefore felt that SIBs should be subjected to additional policy measures to guard against systemic risks and moral hazard issues, the RBI note on D-SIBs says.
While the Basel-III Norms prescribe a capital adequacy ratio (CAR) — the bank’s ratio of capital to risk — of 8 per cent, the RBI has been more cautious and mandated a CAR of 9 per cent for scheduled commercial banks and 12 per cent for public sector banks.

What is the need to take these precautions? (Conclusion)

The failure of a large bank anywhere can have a contagion effect around the world.
Impairment or failure of a large bank is also likely to damage confidence in the banking system as a whole. As a measure of systemic importance, size is more important than any other indicator and size indicators are assigned greater weight.
The impairment or failure of one bank could potentially increase the probability of impairment or failure of other banks if there is a high degree of interconnectedness (contractual obligations) between them.
This chain effect operates on both sides of the balance sheet there may be interconnections on the funding side as well as the asset side.
Therefore, The larger the number of linkages and size of individual exposures, the greater is the potential for the systemic risk getting magnified, which can lead to nervousness in the financial sector.
Therefore, D-SIB provides the financial sustainability in the economy and also get the support from government during the time of stress as it is essential for financial viability of the economy.

Editorial 2: How to use technology to track crime

Context:

There is significant rise in frauds and cyber crime with the rise of digital technology.
Recently, A person posed as the Central Commandant of Crime and Criminal Tracking Network Systems (CCTNS), Acting as CCTNS officials, he and other scamsters extracted money from gullible young men, who were issued fake IDs, promising them jobs as investigating officers in CCTNS.

CCTN and its role

CCTNS is a Mission Mode Project under the National e-Governance Plan (NeGP) of Govt. of India.
CCTNS aims at creating a comprehensive and integrated system for enhancing the efficiency and effectiveness of policing through adopting of principle of e-Governance and creation of a nationwide networking infrastructure for evolution of IT-enabled-state-of-the-art tracking system around 'Investigation of crime and detection of criminals'.

Cheating, forgery, impersonation and other crimes — one will now be able to search for the scamsters on CCTNS.
CCTNS has been a work in progress for some time, with earlier initiatives like Crime and Criminals Information System (CCIS) and Common Integrated Police Application (CIPA) as precursors. Among precursors, there are some state-specific initiatives too
CCTNS feeds into the Interoperable Criminal Justice System (ICJS).
- The latter covers e-courts, e-prisons, forensics and prosecution, leveraging technology to make criminal justice delivery more efficient. Other than a national database of crime and criminals, CCTNS connects police stations and digitises FIR registration, investigation and charge sheets. In a broader sense, this is about better e-governance.

CCTN aims to bring reform in Justice delivery

The criminal justice system is meant to be a deterrent against crime, punishing mala fide (and criminal) acts and protecting the bona fide. If a crime is committed, this requires
1. investigation;
2. FIR;
3. a charge-sheet;
4. prosecution; and
5. successful conviction.
Of these five, the last two have to do with ICJS and the way courts work. But the other three links have to do with the police.
There are weaknesses in each link and rates vary, depending on the state and the nature of crime.
Figures are also a function of the year. Roughly, for IPC (Indian Penal Code) crimes, investigation rates are around 65 per cent.
An investigation need not necessarily lead to an FIR or charge-sheet, but what happens to the remaining 35 per cent? The Northeast has other issues.
For IPC crimes, the all-India average is just over 72 per cent. But, it can be over 90 per cent in Andhra Pradesh, Gujarat, Kerala and West Bengal, while it is less than 40 per cent in Assam.
In such situation, CCTN provide the uniformity through digitisation and better investigation in given time period.

Standardization of criminal justice systems

The criminal justice systems should also be standardised, harmonised and integrated. After all, a citizen should be entitled to the same level of law and order, regardless of residence. CCTNS is designed to achieve that.
There are around 17,000 police stations and more than 97 per cent (a slightly old figure, it may be higher now) have CCTNS software and connectivity.
What does one do with this? Digitise data, ensure data migration, feed FIR registration into CCTNS, launch citizen portals and so on. These are desirable objectives.
However, just as prefixing the letter “e” in e-governance does not automatically improve governance, the CCTNS tool facilitates, but does not automatically improve police performance

Hurdles to CCTN:

There are certain challenges related to CCTN as under-staffing (both vacancies and filling of vacancies) in the police department which hamper the adaptability to CCTN.
Adoptability by state government: Both police and prisons are in the State List of Seventh Schedule. In 2016, the MHA brought out a model prison manual.
Many states haven’t adopted this and have not updated their old prison manuals.
Using e-Prisons achieve?
- Aadhaar cannot be made mandatory, since being a prisoner cannot be interpreted as being a recipient of government welfare benefits.
- However, even when it is not mandatory, authentication through the voluntary use of Aadhaar has taken off in assorted services.
- More broadly, the agenda of police reforms has been stuck for years. Like the model prison manual, nothing much emerged through Model Police Acts (Bills).
- We are far away from the principles of one country – “one police” and “one prison”. In this aspect of governance, if states belong to two different worlds, no matter how good a tool CCTNS is, the benefits will fall short.

Conclusion:

CCTN plays a significant role in justice delivery system while strengthening the police department.
It will also lead to maintaining the crime record digitally throughout the nation as a result it will uniformity which will lead to faster, efficient and affordable justice to common people .