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Summary
Economics Class 39

BASEL-III NORMS- 5:02 PM

  • In the wake of the Lehman Brothers collapse in 2008 and the financial crisis BCBS decided to update and strengthen the accord.
  • The guidelines were intended to promote a more resilient banking system by focusing on four critical banking parameters.
  • That is capital, leverage, funding, and liquidity.
  • Basel-III was focusing on better capital quality i.e. higher loss-absorbing capacity, it also suggested additional capital conservation buffer and counter-cyclical buffer.
  • Capital conservation buffer- Another key feature of Basel-III is that banks are required to hold a capital conservation buffer of 2.5%.
  • The focus of this buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress.
  • Counter-cyclical buffer- This buffer has been introduced with the objective of increasing capital requirements during good times and decreasing the same during a crisis.
  • The buffer will slow down banking activities when the economy overheats (more demand in the economy) and will encourage lending during a crisis.
  • The buffer will range from 0-2.5% consisting of common equity or other loss-absorbing capital.
  • Leverage ratio- It is the ratio of banks' good capital to the total consolidated assets.
  • Funding and liquidity- Basel re-established two liquidity ratios LCR and NSFR.
  • Liquidity coverage ratio (LCR)- It will require banks to maintain a buffer of high-quality liquid assets sufficient to deal with cash outflows encountered in an acute short-term scenario.
  • The goal is to ensure that the banks have enough liquidity to handle a 30 days stress scenario if it occurs.
  • Net stable funding ratio (NSFR)- It requires banks to fund their operations with stable sources of funding for a minimum period of one year and above.
  • LCR checks short-term resilience (30 days) and NSFR will access medium to long-term resilience.

Insolvency and bankruptcy code (IBC)- 6:00 PM

  • It is the one-stop solution for resolving insolvencies which was formerly a time-consuming process.
  • IBC tries to protect small investors' interests along with making the business process easier.
  • IBC is India's bankruptcy law which unifies the existing framework by establishing a single structure.
  • Insolvency is a condition in which a debtor is not able to pay his debt and bankruptcy is a legal process that involves an involved person or company that is unable to pay its debt.
  • IBC establishes a faster insolvency procedure to assist creditors such as banks in recovering debts and avoiding bad loans which are a major drag on the economy.
  • The code establishes a new legal structure focusing on a time-bound resolution process and a faster liquidation mechanism.
  • The framework consists of the following elements-
  • 1. Adjudicating authority - They will start the resolution process, appoint insolvency professionals and also sign on the creditor's ultimate judgment.
  • NCLT is the deciding authority for the corporations and the debt recovery tribunal handles individual and partnership firms.
  • 2. Insolvency professionals- They will be in charge of the resolution procedure, they also handle the debtor assets and provide information to creditors to help them make appropriate decisions.
  • 3. Insolvency professional agency- Insolvency practitioners will be registered with professional agencies.
  • A code of behavior would be enforced by these agencies.
  • 4. Information utility center- They will maintain track of debts owed to creditors as well as repayment and debt defaults.
  • 5. Insolvency and bankruptcy board- It will oversee insolvency experts, professional agencies, and information utility centers.
  • It is a regulatory authority for insolvency and bankruptcy proceedings.
  • The goal of IBC is to address insolvencies within a prescribed time limit.
  • The company is subject to 180 days moratorium which can be extended up to 270 days. (330 days).
  • The resolution time frame for startups and small businesses is 90 days which can be extended by another 45 days.

BENEFITS OF IBC- 7:03 PM

  • 1. Addressing Problems of NPA 
  • 2. Faster resolution mechanism 
  • 3. Prevent job losses to some extent 
  • 4. It ensures credit discipline 
  • Ease of credit flow is necessary for the attainment of ease of doing business and economic growth.
  • Under the IBC regime, Rs 2.5 lakh crore has been brought back into the banking system as a result of the resolution of insolvency.
  • Challenges of IBC-
  • Huge delays in resolution. 
  • It took 772 days to resolve cases involving companies owning more than a thousand crores and the average number of days taken for resolution increased rapidly over the past five years.
  • Hair cut- it is the debt forgone by the lender on the total outstanding claim.
  • Poor approval rate- According to the insolvency board NCLT approved just 15% of the corporate insolvency cases in 2016-2020.
  • Greater emphasis on liquidation rather than revival.
  • Lack of digitalization - This has led to delays beyond the prescribed statutory limit in the insolvency resolution process.

MONEY- 7:30 PM

  • Concept of money and money supply-
  • Barter system- In earlier times when there was no concept of money and banking people use the barter system for exchange.
  • They exchange commodities.
  • Major problems 
  • 1. Double coincidence of bonds- Everyone must find the person who is willing to buy what they are willing to sell and a person who is willing to sell what they want to buy.
  • 2. Difficulty to buy standard units - absence of a standard unit of account for example how many apples must I give in return for how much clothing will always be a issue.
  • 3. Store of value become difficult
  • Money- Money is the most commonly accepted medium of exchange, currency in the form of notes or coins is one type of money.
  • Functions of money-
  • 1. It acts as a medium of exchange. 
  • 2. Any commodity can be bought with money. 
  • 3. A common measure of value - All commodities have their value that is expressed in terms of money.
  • 4. Acts as a standard or a deferred payment- Future monetary obligations can be settled using the money for example- a loan that is taken today is settled in installments. 
  • 5. Store of value.
  • Types of money-
  • Full-bodied -Money whose face value is equivalent to the intrinsic value
  • Value is embedded in the currency itself i.e. money value = commodity value.
  • Token money- its value as money is much more than its value as a commodity (money value>commodity value).
  • Paper money-
  • a. Representative full-bodied money (convertible money)- it is a type of paper money that is issued against an equivalent amount of gold/silver by the issuing authority.
  • Anyone who holds this paper can go to the central bank and get that converted to an equivalent amount of gold or silver and hence it is also termed as convertible money.
  • b. In convertible money- This type of paper money cannot be converted to an equivalent amount of gold or silver.
  • There is no obligation on the central bank to convert it.
  • India currently has token money and RBI has no obligation to convert representative paper money to an equivalent amount of gold/silver.

The topic for the next class- COntinuation of the topic 'Money'