UPSC Essentials | Key terms of past week with MCQs & Points to ponder

3. What is green hydrogen’s potential?

4. What is the role of the private sector in space?

5. Why the RBI has directed lenders not to levy penal interest on borrowers?

Dear Aspirants,

Luna-25

WHY IN NEWS?

— Luna-25, modern Russia’s first attempt to land a spacecraft on the Moon, has ended in failure with the spacecraft crashing onto the lunar surface, Russian space agency Roscosmos said on Sunday.

— The failure once again highlights the risks involved in getting a spacecraft to soft-land on the Moon.

— Even though a successful landing has been achieved more than 20 times, including six times with human beings on board, the technology clearly has not been mastered yet.

— Amazingly, except the three Chinese landings in the past 10 years, all the successful landings on the Moon happened within a decade between 1966 and 1976.

KEY TAKEAWAYS

Amitabh Sinha Explains:

What is “15 minutes” of terror ?

— Ahead of the Chandrayaan-2 mission in 2019, the then chairman of Indian Space Research Organisation (ISRO), K Sivan, had referred to the final phase of landing as “15 minutes of terror”. That remark captures the essence of the complexity involved in making a descent from the lunar orbit to the Moon’s surface. Quite clearly, this is the most difficult part of the Moon mission.

— In the past four years, government and private space agencies from four countries — India, Israel, Japan and now Russia — have tried to land their spacecraft on the Moon, and failed. Each of these missions encountered problems in the very last stage — during the landing process — and crashed on the Moon’s surface.

— The exact problem with Luna-25 is not yet known, though the statement from Roscosmos said that the change in momentum that the spacecraft had experienced while moving into the pre-landing orbit was different from what it should have been.

— In the case of the other three — ISRO’s Chandrayaan-2, Beresheet from Israel, and Hakuto-R from Japan — different kinds of malfunctions resulted in desired levels of speed not being achieved.

— China has been the sole exception in this, having landed on its very first attempt in 2013 with Chang’e-3. It has repeated the feat with Chang’e-4 in 2019 and Chang’e-5, a sample return mission, in 2020.

— Among the countries that have tried and failed, India is the only one which is already in the process of making a second attempt.

— Having learnt from its previous failure, it has incorporated several safety features in Chandrayaan-3, and added layers of redundancy so that if one particular feature develops problems, something else will work.

What to we know about the earlier landings ?

— Out of the 42 attempts to land between 1963 and 1976, only 21 succeeded, giving a success ratio of just 50 per cent. The motivations for going to the Moon at that time were very different. It was mainly the Cold War rivalry, and the desire to gain geopolitical advantage, that was pushing the United States and the erstwhile USSR to send these Moon missions. They were dangerous, extremely expensive, and energy inefficient. But some of these were also wildly successful, achieving feats that were in the realm of science fiction just a few years ago.

— Also, the technologies being used for the current round of Moon missions are very different. They are safer, cheaper and more fuel efficient. But that also means that these cannot be compared with those used in the 1960s and 1970s, and are being tested only now. That is the reason why even the United States, which landed as many as six crewed missions on the Moon, has started almost from scratch — by sending Orbiters — in the current round of Moon missions. Even with its Artemis programme, it has not begun by sending human beings. The crewed mission would go only on the Artemis-3 mission.

What is the future of Luna missions ?

— Luna-25 was just the resumption of Russian interest in the Moon. It was named to signify the continuation of the Luna series which the then Soviet Union used to reach the Moon 50 years ago. Luna-24, launched in 1976, was the last spacecraft to land on the Moon’s surface, before lunar missions came to an abrupt halt and remained suspended for almost two decades.

— Russia has already announced that there are more lunar missions to follow Luna-25. At least three more in the Luna series are planned in this decade.

How did Luna-25 differ from Chandrayaan-3 mission?

— Apart from being lighter than the Indian mission, Luna-25 did not carry a rover. Chandrayaan-3 has a rover capable of moving around 500 metres. The Russian lander had eight payloads mainly to study the soil composition, dust particles in the polar exosphere, and most importantly, detect surface water.

— The Indian mission also has scientific instruments to study the lunar soil as well as water-ice. The location near the southern pole was chosen because of the presence of craters that remain in permanent shadow, increasing the likelihood of finding water-ice.

— The lander will carry four experiments on-board. The Radio Anatomy of Moon Bound Hypersensitive ionosphere and Atmosphere (RAMBHA) has a Langmuir probe used to study properties of electrons and ions such as temperature and density. It will study these properties near the surface of the moon and how they change over time.

— The Chandra’s Surface Thermo physical Experiment (ChaSTE) will study the thermal properties of the lunar surface near the polar region. The Instrument for Lunar Seismic Activity (ILSA) will measure the lunar quakes near the landing site and study the composition of the moon’s crust and mantle.

— The LASER Retroreflector Array (LRA) is a passive experiment sent by NASA on-board the mission. LRAs are optical instruments that act as a target for lasers and can be used for very precise tracking by spacecrafts in the lunar orbit. As per the US space agency, such markers can also be used for precision autonomous navigation and landing of future missions.

— There are two scientific experiments on the rover. The LASER Induced Breakdown Spectroscope (LIBS) will determine the chemical and mineral composition of the lunar surface. The Alpha Particle X-ray Spectrometer (APXS) will determine the composition of elements such as Magnesium, Aluminium, Silicon, Potassium, Calcium, Titanium, and Iron in the lunar soil and rocks.

— The main difference, however, is that the India mission is built to last only one lunar day or 14 earth days. This is because it does not have a heating mechanism to keep the electronics safe from the extreme cold temperatures during the lunar night.

— The Russian mission, on the other hand, had to work for a year, meaning it had heating mechanism as well as a power source other than just solar panels.

JUST FYI : Why is it so difficult to land on the Moon?

Getting to the Moon

— Long before you can even think of landing on the Moon, you will have to figure out how to get there. On an average, the Moon is about 3,84,400 kilometres away from our planet and depending on the path taken by the spacecraft, that distance can be much higher. A failure can occur anywhere on this long, long journey.

— And that is true even for missions that just want to travel the Moon without landing. NASA had to terminate the Lunar Flashlight mission because a failure in the spacecraft’s propulsion system meant that it could not enter the lunar orbit.

Slowing down on the Moon

— Spacecraft returning back to our planet, like NASA’s Orion after the Artemis 1 mission, can rely on the Earth’s thick atmosphere providing enough friction to slow down before touching down safely. But spacecraft entering the Moon do not have that luxury because of its extremely thin atmosphere.

— In such a scenario, the only thing that can slow down a spacecraft is its propulsion system. This means that it will have to carry a lot of fuel just so that it has enough to slow itself down quickly enough to make a safe landing. But carrying more fuel means the spacecraft is heavier, requiring more fuel. This problem is a bit similar to what is known as the “Tyranny of the Rocket Equation.”

Navigating on the Moon

— Needless to say, there is no GPS on the Moon. Spacecraft cannot rely on a network of satellites to precisely land at a particular location because that simply does not exist on the Moon. This means that onboard computers will have to make quick calculations and decisions to land itself precisely on the Moon.

— This becomes especially complicated when a spacecraft gets within the crucial last few kilometres, according to a report in the journal, Nature . At that point, the computers on board will have to autonomously react quickly to last-minute issues. For example, sensors could become confused by the large amounts of dust kicked up by the propulsion systems.

— This is made even more difficult by the fact that the Moon has an uneven surface littered with craters and boulders. Landing on either could prove catastrophic for the mission.

Point to ponder: Luna-25 is a reminder of setbacks that space-faring nations suffer. But they also pick up pieces, accomplish spectacular things.Discuss.

1. MCQ:

In the questions given below, there are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the codes provided below:

(A) The main difference between Chandrayaan 3 and Luna-25 is that the India mission is built to last only one lunar day or 14 earth days whereas Luna-25 had to work for a year.

(R) Chandrayaan 3 does not have a heating mechanism to keep the electronics safe from the extreme cold temperatures during the lunar night whereas Luna-25 had heating mechanism as well as a power source other than just solar panels.

(a) A is true but R is false.

(b) Both A and R are true and R is the correct explanation of A.

(c) A is false but R is true.

(d) Both A and R are true but R is not the correct explanation of A.

The ‘new non-poor’

WHY IN NEWS?

— Prime Minister Narendra Modi said in his Independence Day address that in the first five-year term of his government, “13.5 crore of my fellow poor brothers and sisters have broken free from the chains of poverty and entered the new middle class”.

— Later in the speech, he said, “When poverty reduces…the power of the middle-class section…increases manifold… Today the 13.5 crore people who have come out of poverty have in a way become the middle class. When the purchasing power of the poor increases, the power of the middle class to carry out business grows too…”

KEY TAKEAWAYS

Udit Misra Explains:

— The 13.5-crore number cited by the PM appears in the second National Multidimensional Poverty Index report that was published by Niti Aayog on July 17. The first such report was published in 2021.

— The 2023 edition of the index uses data from the latest round of the National Family Health Survey (2019-21), and captures changes in multidimensional poverty between the survey periods of NFHS-4 (2015-16) and NFHS-5 (2019-21).

— The poverty headcount ratio, that is, the proportion of multi-dimensionally poor in the country, fell from around 25% to just under 15% between the two rounds of NFHS. In absolute terms, this implies that 135 million (or 13.5 crore) Indians escaped multidimensional poverty in this period.

What is the Multidimensional Poverty Index (MPI), and how does it estimate poverty?

— The national MPI measures deprivations across the three dimensions of health and nutrition, education, and standard of living.

— Within health, it tracks three variables: nutrition, child and adolescent mortality, and maternal health. In education, it tracks two variables: years of schooling, and school attendance. And in standard of living, it tracks seven variables such as sanitation, drinking water, bank account, etc.

— The index is based on the methodology used by the Oxford Poverty and Human Development Initiative (OPHI) and United Nations Development Programme (UNDP) to construct the Global MPI. OPHI and UNDP are technical partners in the formulation of the national index.

— But India’s MPI is not exactly the same as the Global MPI. For instance, India’s MPI has 12 variables, while the Global MPI has 10. The two additional variables in India’s MPI are maternal health and bank account.

How does this reduction in poverty (13.5 crore in the period between the two NFHS rounds) compare with India’s past record?

— It must be noted that this is a multidimensional poverty index and, as such, is not comparable to India’s traditional and official way of estimating poverty.

— However, the Global MPI 2023 report, which too was released in July, states that 415 million people in India moved out of poverty between 2005-06 and 2019-21.

— The Global MPI pegs India’s poverty ratio at 16.4% as against 14.96% in Niti Aayog’s MPI. This difference is on account of the two additional metrics, and some differences in definitions.

How has poverty been estimated in India traditionally?

— From the time of Dadabhai Naoroji’s 1901 book Poverty and Un-British Rule in India, poverty has been estimated using a monetary measure. The idea has been to arrive at an amount of money that is considered necessary to either eat a subsistence diet (Naoroji’s approach) or to achieve a minimum standard of living.

— Since data on income was difficult to collect, India used regular (five-yearly) consumption expenditure surveys (which showed how much people were spending on consumption).

— Based on this data, several expert committees — led by D T Lakdawala (1993), Suresh Tendulkar (2009), and C Rangarajan (2014) — drew a “poverty line”. The line is the level of consumption expenditure (stated in rupees) that divides those who are poor from those who are not.

— India’s last official poverty statistics are from 2011. The data have not been updated because the government junked the consumption expenditure survey of 2017-18. That survey showed a decline in rural consumption and, as such, pointed to an increase in abject poverty.

— Several economists have tried to work around the absence of consumption data — by using NFHS data or data from the think tank Centre for Monitoring Indian Economy (CMIE) — and provided estimates of poverty. But the uncertainty around the data continues to undermine a wide-ranging debate.

Does the reduction in poverty add to India’s middle class?

— There is no official definition of the middle class in India. It is, therefore, difficult to say whether those who escape poverty necessarily join the middle class, or to what extent.

— Estimates of India’s middle class provided by private research organisations peg the middle class at income levels that are considerably higher than those of the people who are coming out of poverty.

— For instance, in a report, ‘The rise of India’s middle class’, published in July, People Research on India’s Consumer Economy (PRICE) divided all households into four categories: Destitutes, Aspirers, Middle Class and Rich. “…Households which are classified as Middle Class have an annual income in the range of Rs 5 lakh to Rs 30 lakh (at 2020-21 prices),” the report said. Destitute households were those with an annual income less than Rs 1.25 lakh.

— According to PRICE’s survey, as of 2021, out of a population of 1,416 million, 196 million Indians were categorised as ‘Destitutes’, 432 million were the ‘Middle Class’, and 732 million were ‘Aspirers’.

Point to ponder: Can you suggest a roadmap to eliminate poverty in India.?

2. MCQ:

In a given year in India, official poverty lines are higher in some states than in others because (UPSC CSE 2019)

(a) poverty rates vary from State to State

(b) price levels vary from State to State

(c) Gross State Product varies from State to State

(d) quality of public distribution varies from State to State

Green hydrogen standards

WHY IN NEWS?

— The ministry of New and Renewable Energy on Saturday notified the green hydrogen standard for India, outlining the emission thresholds for production of hydrogen that can be classified as ‘green’. India became one of the few countries to have a definition for green hydrogen.

KEY TAKEAWAYS

— “After discussions with multiple stakeholders, the ministry has decided to define green hydrogen as having a well-to-gate emission of not more than two kg carbon dioxide (CO2) equivalent per kg hydrogen (H2),” the ministry said in a statement.

— The well-to-gate emission includes water treatment, electrolysis, gas purification, drying and compression of hydrogen. The scope of the definition encompasses both electrolysis-based and biomass-based hydrogen production methods.

— In general, Green hydrogen is hydrogen gas produced through electrolysis of water — an energy intensive process for splitting water into hydrogen and oxygen— using renewable power to achieve this.

— The notification specifies that a detailed methodology for measurement, reporting, monitoring, on-site verification and certification of green hydrogen and its derivatives will be specified by the ministry of new and renewable energy.

— The notification also specifies that the Bureau of Energy Efficiency (BEE) under the ministry of power will be the nodal authority for accreditation of agencies for the monitoring, verification and certification for green hydrogen production projects.

— The government launched National Green Hydrogen Mission early this year with an aim to produce 5 million metric tonne (MMT) green hydrogen per annum with an associated renewable energy capacity of about 125 giga watt (GW) by 2030.

— The mission has an outlay of Rs 19,744 crore up to 2029-30. The Strategic Interventions for Green Hydrogen Transition (SIGHT) programme is a major financial measure under the mission with an outlay of Rs 17,490 crore.

— The programme proposes two distinct financial incentive mechanisms to support domestic production of electrolysers and production of green hydrogen. These incentives are aimed at enabling rapid scale-up, technology development and cost reduction.

How is the green hydrogen policy set to boost domestic production of green hydrogen production?

— The new policy offers 25 years of free power transmission for any new renewable energy plants set up to supply power for green hydrogen production before July 2025. This means that a green hydrogen producer will be able to set up a solar power plant in Rajasthan to supply renewable energy to a green hydrogen plant in Assam and would not be required to pay any inter-state transmission charges.

— The move is likely going to make it more economical for key users of hydrogen and ammonia such as the oil refining, fertiliser and steel sectors to produce green hydrogen for their own use. These sectors currently use grey hydrogen or grey ammonia produced using natural gas or naphtha.

Hydrogen as a fuel

— Hydrogen, the most common element in nature, exists only in combination with other elements, and has to be extracted from naturally occurring compounds like water (which is a combination of two hydrogen atoms and one oxygen atom). Hydrogen is a clean molecule, but the process of extracting it is energy intensive.

— While hydrogen’s potential as a clean fuel source has a history of nearly 150 years, it was only after the oil price shocks of the 1970s that the possibility of hydrogen replacing fossil fuels came to be considered seriously. Three carmakers — Japan’s Honda and Toyota, and South Korea’s Hyundai — having since moved decisively to commercialise the technology, albeit on a limited scale.

— The sources and processes by which hydrogen is derived are categorised by colour tabs. Hydrogen produced from fossil fuels is called grey hydrogen, which constitutes the bulk of the hydrogen generated today. Hydrogen generated from fossil fuels with carbon capture and storage options is called blue hydrogen, while hydrogen generated using electrolysers powered by renewable power sources is called green hydrogen.

Green hydrogen potential

— Green hydrogen has specific advantages. One, it is a clean burning molecule that can decarbonise a range of sectors including iron and steel, chemicals, and transportation. Two, renewable energy that cannot be stored or used by the grid can be channeled to produce hydrogen.

— Green hydrogen is not commercially viable at present. The current cost in India is around Rs 350-400 per kg; it is likely to become viable only at a production cost of under Rs 100/ kg. This is what the Hydrogen Energy Mission aims for.

— With implicit subsidy support and a government-backed R&D push, the plan is to target lower costs of renewable power generation and to bring down the costs of electrolysers to make the production of green hydrogen cost-competitive. Green hydrogen could eventually potentially replace fossil fuels and fossil fuel-based feedstocks in fertiliser production, petroleum refining, steel production, and transport applications.

— The United States and European Union have already pledged incentives worth several billions of dollars for green hydrogen projects. India’s Mission was first announced by the Prime Minister in his Independence Day speech in 2021.

— The Ministry of New and Renewable Energy is in the process of formulating guidelines for the scheme that seeks to promote the development of green hydrogen production capacity of at least 5 million metric tonnes (MMT) per annum with an associated renewable energy capacity addition of about 125 gigawatts (GW) by 2030.

— A major part of this is a proposed Strategic Interventions for Green Hydrogen Transition Programme (SIGHT), under which two financial incentive mechanisms — targeting domestic manufacturing of electrolysers and the production of green hydrogen — will be promoted to achieve a reduction in fossil fuel imports and abatement of annual greenhouse gas emissions by 2030.

Point to ponder: What is India’s green hydrogen challenge?

3. MCQ:

With reference to ‘fuel cells’ in which hydrogen-rich fuel and oxygen are used to generate electricity, consider the following statements : (UPSC CSE 2015)

(1) If pure hydrogen is used as a fuel, the fuel cell emits heat and water as by-products.

(2) Fuel cells can be used for powering buildings and not for small devices like laptop computers.

(3) Fuel cells produce electricity in the form of Alternating Current (AC).

Which of the statements given above is / are correct?

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Agnibaan SOrTeD

WHY IN NEWS?

— Chennai-based space-tech startup Agnikul Cosmos announced on Thursday (August 17) that it had taken a rocket that it has developed to a launchpad in Sriharikota to “commence integration checks” for a proposed suborbital space flight.

KEY TAKEAWAYS

— A successful flight will make Agnikul the second Indian space-tech company to send a vehicle to space after Hyderabad-based Skyroot Aerospace. The launch of Skyroot’s 545-kg rocket named Vikram-S in November 2022 marked the launch of India’s private space industry.

— After the space sector was opened to private companies in 2020, Skyroot signed a Memorandum of Understanding with the Indian Space Research Organisation (ISRO). Several dozens of space-tech startups have since entered the fray. Skyroot and Agnikul are among the companies that are already working on launch vehicles, satellites, and their applications.

What is Agnikul’s space vehicle?

— Agnikul said its Suborbital Tech Demonstrator (SorTeD) single-stage launch vehicle, called Agnibaan, is driven by the company’s patented Agnilet engine. “Agnibaan SOrTeD will lift off vertically & follow a predetermined trajectory,” the company said in a post on the social media platform X, formerly known as Twitter.

— According to Agnikul’s website, Agnibaan can carry payloads up to 100 kg to a low Earth orbit (LEO) up to 700 km. The vehicle is 18 m in height, 1.3 m in diameter, and has a liftoff mass of 14,000 kg. The payload envelope measures 2m x 1.5m and can carry one or more satellites.

What sort of engine does Agnikul have?

— The Agnilet engine is an entirely 3D-printed, single-piece, 6 kN semi-cryogenic engine, the company said in its X post. The engine, which uses a mixture of liquid kerosene at room temperature and supercold liquid oxygen as propellant, was tested last year at the Vikram Sarabhai Space Centre in Thiruvananthapuram.

— Srinath Ravichandran, co-founder and CEO of Agnikul, had told The Indian Express in an interview earlier that “3D printing is a sweet spot for launch vehicles”, and emphasised it can be used to manufacture multiple iterations of complex and customised designs, speeding up the research and development process.

— “When you use older manufacturing techniques, there is a lot more complex hardware and manpower involved. With 3D printing, you can make hardware nearly as fast as you can make software. This is why we were able to make hundreds of iterations of the design so that we could finally reach a stage where we can 3D print an entire engine in one shot,” Ravichandran had said during a video interaction.

— In 2021, Skyroot had successfully demonstrated the country’s first privately developed cryogenic engine, Dhawan-1, which too was completely 3D printed, using a superalloy, by a process that cut the manufacturing time by 95 per cent.

Are there any concerns about 3D printing?

— 3D printing has some disadvantages. While it does allow engineers to reiterate designs faster than with conventional manufacturing techniques, it is not as scalable. With conventional techniques, once a design has been set, multiple copies can be made much faster.

“3D printing is still slow if you compare it to injection moulding or planar-based manufacturing where you can manufacture millions of pieces every month. So it is not meant for manufacturing in large volumes. But rocket engines and a lot of the components of launch vehicles can be manufactured using this method,” Ravichandran had told The Indian Express in last year’s interview.

— That said, “The engine is very complex and it functions at very high temperatures,” Ravichandran had said. “So if we can 3D print an engine successfully, that makes us very confident about manufacturing simpler, static parts for the rest of the launch vehicle.”

FYI: What is the role of the private sector in space?

— In June 2020, the government approved the creation of the Indian National Space Promotion and Authorisation Centre (IN-SPACe) to ensure greater private participation in India’s space activities. Then chairman of ISRO K Sivan had said the initiative was part of an important set of reforms to open up the space sector and make space-based applications and services more widely accessible to everyone.

— Sivan had told The Indian Express at the time that Indian industry had a barely 3% share in the rapidly growing global space economy, which was already worth at least $360 billion. Only 2% of this market was for rocket and satellite launch services; 95% related to satellite-based services and ground-based systems.

— Indian industry was, however, unable to compete, because its role has traditionally been to supply components and sub-systems, Sivan had said. Indian industries did not have the resources or the technology to undertake independent space projects of the kind that companies such as SpaceX have been doing in the United States.

— At the same time, Sivan had said, ISRO was unable to keep up with the growing demand for space-based applications and services even within India. The space agency would provide all its facilities to private players whose projects had been approved by IN-SPACe. Private companies, if they wanted, could even build their own launchpad within the Sriharikota launch station, and ISRO would provide the necessary land, Sivan had said. Agnikul said in its X post that it was “excited to be attempting this flight from our own Launchpad at Sriharikota”.

Point to ponder: A larger role for private sector in new space policy is a step in right direction.Discuss.

4. MCQ:

Which one of the following statements best reflects the idea behind the “Fractional Orbital Bombardment System” often talked about in media? (UPSC CSE 2022)

(a) A hypersonic missile is launched into space to counter the asteroid approaching the Earth and explode it in space.

(b) A spacecraft lands on another planet after making several orbital motions.

(c) A missile is put into a stable orbit around the Earth and deorbits over a target on the Earth.

(d) A spacecraft moves along a comet with the same speed and places a probe on its surface.

Fixed rate regime

WHY IN NEWS?

— The Reserve Bank of India (RBI) on Friday asked all regulated entities (REs), including banks and NBFCs, to give personal loan borrowers an option to switch over from a floating rate to a fixed rate regime at the time of resetting interest rates. In a circular on ‘Reset of floating interest rate on equated monthly instalments (EMI) based personal loans’, the central bank said the borrowers will also be given the choice to opt for enhancement in EMI or elongation of the tenor.

KEY TAKEAWAYS

Hitesh Vyas , George Mathew Explain:

What are the new changes?

The RBI on Friday asked banks to implement the following regulations:

— At the time of sanction, REs will have to clearly communicate to the borrowers about the possible impact of a change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both. Any increase in the EMI/ tenor or both will have to be communicated to the borrower immediately through appropriate channels.

— SWITCHOVER: At the time of reset of interest rates, REs will have to give the option to borrowers to switch over to a fixed rate as per their board-approved policy. The policy will also specify the number of times a borrower will be allowed to switch during the tenor of the loan.

— REs will have to disclose all applicable charges for switching loans from floating to fixed rate and any other service charges/ administrative costs in the sanction letter and also at the time of revision of charges or costs from time to time.

— ELONGATION: The borrowers will also be given the choice to opt for enhancement in EMI or elongation of tenor or for a combination of both options, and to prepay, either in part or in full, at any point during the tenor of the loan, with foreclosure charges.

— REs should ensure that the elongation of tenor in case of a floating rate loan does not result in negative amortisation. REs will have to share or make accessible to the borrowers, through appropriate channels, a statement at the end of each quarter which will enumerate the principal and interest recovered till date, EMI amount, the number of EMIs left and annualized rate of interest.

— The RBI said REs will have to ensure that these instructions are extended to the existing as well as new loans by December 31, 2023.

Why has RBI issued new regulations?

— The supervisory reviews undertaken by the RBI and the feedback and references from members of the public have revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper consent and communication to the borrowers.

— Banks can change the interest rate by changing the internal benchmark rate and the spread during the term of the loan which could harm the interest of the borrower and also impair monetary transmission. Borrowers have complained that banks normally change or reset the EMIs in an arbitrary manner and tenors are extended without informing the borrowers. Further, borrowers are not informed about the foreclosure charges. The RBI has also observed that unduly long elongation of tenor has camouflaged stress in banks.

— Theoretically, the borrower can refinance the floating rate loan by going to another bank, but in practice, this does not work well.
Floating rate loans of different banks with internal benchmarks are not identical even if spreads are identical at loan origination and in future, given that different banks change or reset internal benchmarks differently. The borrower in such a situation is more often left with no choice, but to remain captive to the original bank and pay higher charges on existing loans rather than refinance.

What are personal loans?

— As per the RBI definition, personal loans are the loans given to individuals and consist of consumer credit, education loan, loans given for the creation or enhancement of immovable assets (such as housing loans), and loans given for investment in financial assets (shares and debentures). The total outstanding under the personal loan category was Rs 42.60 lakh crore as of June 2023, which is almost 30 per cent of the non-food bank credit.

What’s the interest rate reset?

— When a customer takes a home loan, the interest rate reset clause in the loan agreement allows the lender to review the interest rate after a certain period, as per the occurrence of a scheduled reset date of the loan. The reset rate is the new interest rate that a borrower must pay effective from the scheduled reset date. EMI of a floating rate loan changes with periodical changes in reset interest rates. These rates and the calculation are not uniform for all the banks as the cost of funds differs from banks.

What banks say?

— According to banks, when an external benchmark rate – banks use Repo rate now – is adopted for fixing the lending rate, the reset period should be linked to the tenor of the underlying external benchmark. While longer reset periods increase transmission lags, shorter resets increase interest rate risk for banks.

Why the RBI has directed lenders not to levy penal interest on borrowers?

— Banks have indicated that retail customers would resist a shorter (quarterly) reset, particularly in a rising interest rate cycle, because of the increase in equated monthly instalments (EMIs) or longer repayment period with uniform EMIs. Conversely, in a falling interest rate regime, borrowers prefer shorter resets.

Point to ponder: Banks must heed this timely warning on hiding bad loans and take corrective action. Discuss.

5. MCQ:

In the context of Indian economy, Open Market Operations’ refers to (UPSC CSE 2013)

(a) borrowing by scheduled banks from the RBI

(b) lending by commercial banks to industry and trade

(c) purchase and sale of government securities by the RBI

(d) None of the above

ANSWERS TO MCQs: 1 (b), 2 (b), 3 (a), 4 (c), 5 (c)

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