Daily Current Affairs : 18th and 19th May 2023

Daily Current Affairs for UPSC CSE

Topics Covered

1. Transitioning from LIBOR
2. Green Deposit
3. Facts for Prelims

1 . Transitioning from LIBOR

Context: RBI stated that some banks and financial institutions were yet to facilitate an absolute transition away from the London Interbank Offered Rate (LIBOR) benchmark. They had not inserted fallback clauses into all their financial contracts that reference U.S.$ LIBOR or the corresponding domestic Mumbai Interbank Forward Outright Rate (MIFOR). Both LIBOR and MIFOR would cease to be a representative benchmark from June 30 this year. The regulator urged the entities to incorporate the clauses to avert any “last-minute rush to insert fallbacks”.

What is LIBOR?

• LIBOR is a global benchmark interest rate that combines individual rates at which banks opine they may borrow from each other (for a particular period of time) at the London interbank market.
• It is used as a benchmark to settle trades in futures, options, swaps and other derivative financial instruments in over-the-counter markets (participants engaging directly without using an exchange) and on exchanges globally. Further, consumer lending products including mortgages, credit cards and student loans, among others, too use it as a benchmark rate.
• How is LIBOR determined by the banks? Every business day before 11 a.m. (London time), banks on the LIBOR panel make their submissions to news and financial data company. Following the submission, the contributed rates are ranked. Extreme quartiles, on the top and bottom, are excluded and the middle quartiles are averaged to derive the LIBOR. The idea is to be as close to the median as possible.
• Before December 31, 2021, LIBOR was calculated for five currencies (U.S. dollar, Euro, Pound, Swiss Franc and Japanese Yen) for seven tenors (overnight, one-week, one-month, two months, three months, six months and 12 months). Thus, totaling to 35 individual rates on each business day. Only U.S.-dollar LIBOR, excluding one-week and two-month tenor, were allowed to be published after U.K. Financial Conduct Authority (FCA) announced its phased rollback in March 2021.

What was the controversy around it?

• The central flaw in the mechanism was that it relied heavily on banks to be honest with their reporting disregarding their commercial interests.
• It must be noted that the rates were made public. Therefore, it would not be particularly useful to impress upon potential and current customers the various disadvantages in obtaining funds.  
• Another observed phenomenon was the tendency to alter (higher or lower) the submission as per the entities’ trading units’ derivative positions to acquire more profits.  
• Prior to February 2014, LIBOR was administered by the British Bankers’ Association (BBA). However, in April 2013, the maintenance of the benchmark was brought under the purview of the FCA.

What is alternative to LIBOR?

• The U.S. Federal Reserve announced the Secured Overnight Financing Rate (SOFR) as a preferred alternative to LIBOR. Accordingly, in India, new transactions were to be undertaken using the SOFR and the Modified Mumbai Interbank Forward Outright Rate (MMIFOR), replacing MIFOR.
• As stated by the International Finance Corporation (IFC), it is based on observable repo rates, or the cost of borrowing cash overnight, which is collateralised by U.S. Treasury securities. Thus, making it a prevailing transaction-based rate and drifting away from the requirement of an expertise judgement as in LIBOR. This would make it potentially less prone to market manipulation.
• MMIFOR would use adjusted SOFR (compounded in arrears for varied tenors and obtained from the Bloomberg Index Services) among other components.
• SOFR is published on each market business day at 8 a.m. ET.

How to respond to the regime change?

• There were many products linked to LIBOR which had to be redesigned with an alternate reference rate (ARR) as the base.
• Two working groups constituted by the association, receiving guidance from the RBI, helped develop the same. Further, another set of challenges were related to technology and legal aspects.
• As for the essential systemic and technical changes banks have to identify the products that are linked to Libor and the total exposure. Intimation to customers about the transition, insertion of fallback clause in the contracts, assessment of the impact on their P&L, changes in the technology platform etc. are needed to facilitate the transition.

2 . Green deposits

Context: The Reserve Bank of India (RBI) came up with a regulatory framework for banks to accept green deposits from customers. Under the new framework, banks that accept green deposits will have to disclose more information on how they invest these deposits.

What are green deposits?

• Green deposits are not very different from the regular deposits that banks accept from their customers. The only major difference is that banks promise to earmark the money that they receive as green deposits towards environment-friendly projects.
  • For example, a bank may promise that green deposits will be used towards financing renewable energy projects that fight climate change. A bank may also avoid using green deposits to invest in fossil fuel projects that are considered harmful to the climate.
• A green deposit is just one product in a wide array of other financial products such as green bonds, green shares, etc., that help investors put money into environmentally sustainable projects.

What does the RBI’s regulatory framework say?

• The RBI’s framework for the acceptance of green deposits lays down certain conditions that banks must fulfill to accept green deposits from customers.
  • Firstly, banks will have to come up with a set of rules or policies approved by their respective Boards that need to be followed while investing green deposits from customers.
  • These rules need to be made public on the banks’ websites and banks will also have to disclose regular information about the amount of green deposits received, how these deposits were allocated towards various green projects, and the impact of such investments on the environment. A third-party will have to verify the claims made by banks regarding the projects in which the banks invest their green deposits as well as the sustainability credentials of these business projects.
  • The RBI has come up with a list of sectors that can be classified as sustainable and thus eligible to receive green deposits. These include renewable energy, waste management, clean transportation, energy efficiency, and afforestation.
  • Banks will be barred from investing green deposits in business projects involving fossil fuels, nuclear power, tobacco, gambling, palm oil, and hydropower generation.
  • The new rules are aimed at preventing greenwashing, which refers to making misleading claims about the positive environmental impact of an activity. For example, a bank may advertise that their green deposits will have a huge positive impact on the environment, while the actual impact may be minimal. A bank could also invest in projects that are not environment-friendly, perhaps because such projects offer higher returns, under the guise of green investing.

Will green deposits help depositors/investors and the environment?

• Depositors who care about the environment may get some satisfaction from investing their money in environmentally sustainable investment products. However, there are challenges, for the range of projects in which green funds can be invested by the bank is limited by design.
• When it comes to protecting the environment, green investing enthusiasts believe that putting money into green projects may be one of the best ways to help the environment.
• Critics, however, argue that green investment products are often just a way to make investors feel good about themselves and that these investments don’t really do much good to the environment.
• In a complex world where any action involves second-order effects that are difficult to see, it can be extremely hard to know if a project is environmentally sustainable.

3 . Facts for Prelims

Hysterectomy

• Hysterectomy, a surgical procedure to remove all or parts of the uterus, is advised for women suffering from fibroids and heavy periods or severe problems such as endometriosis or pelvic inflammatory disease.
• When only the uterus is removed, it is called a partial hysterectomy. When the uterus and cervix are removed, it is called a total hysterectomy.
• When the uterus, cervix, part of the vagina, and a wide area of ligaments and tissues around these organs are removed, it is called a radical hysterectomy.
• These procedures may be done through the vagina (with no incisions in the abdomen) or through an incision (cut) in the abdomen. (Source: National Cancer Institute)
• Removal of the uterus renders the patient unable to bear children (as does removal of ovaries and fallopian tubes) and has surgical risks as well as long-term effects, so the surgery is normally recommended only when other treatment options are not available or have failed.
• Hysterectomy is a major surgical procedure that has risks. It affects the hormonal balance and overall health of patients. Because of this, hysterectomy is normally recommended as a last resort after pharmaceutical or other surgical options have been exhausted to remedy certain intractable and severe uterine/reproductive system conditions.
• The National Family Health Survey (NFHS) 2019-21 had found that three in every 100 women aged between 15 and 49 years had undergone hysterectomies. The median age at hysterectomy ranged from 34 years among the least-educated and poorest women to 37 years among the highest-educated and richest.

Liberalised Remittance Scheme

• The Liberalised Remittance Scheme (LRS) is part of the Foreign Exchange Management Act (FEMA) 1999 which lays down the guidelines for outward remittance from India. Under LRS, all resident individuals, including minors, are allowed to freely remit up to USD250,000 per financial year (April – March). This can be for any permissible current or capital account transaction, or a combination of both.
• The Scheme is not available to corporates, partnership firms, HUF, Trusts, etc.
• Remittances under the Scheme can be consolidated in respect of family members, subject to individual family members complying with its terms and conditions. However, clubbing is not permitted by other family members for capital account transactions. Further, a resident cannot gift to another resident, in foreign currency, for the credit of the latter’s foreign currency account held overseas under LRS.
• The limit of USD 250,000 per Financial Year (FY) under the Scheme also includes/ subsumes remittances for Current Account transactions

Kohinoor diamond

• The Kohinoor has a long and storied history in pre-partition India and the British Raj.
• It is one of the largest cut diamonds in the world.
•  It is said to have been mined in what is present-day Andhra Pradesh, while an account of Mughal Emperor Babur claimed that Allauddin Khilji stole it from the Indians in the 14th century. Eventually, the gem landed in the hands of Ranjit Singh in Lahore of present-day Pakistan.
• The diamond then continued to change hands and was eventually acquired by Queen Victoria in 1849, following the second Anglo-Sikh war, during which Punjab was brought under the East India Company. The diamond was taken by the British after the signing of the Last Treaty of Lahore.
• Under the British Raj, the diamond underwent a major recutting as the original Kohinoor had failed to appeal to viewers in London, shaping it into the form that is known to everyone today.

Lumpy Skin Disease

• Lumpy skin disease is caused by the lumpy skin disease virus (LSDV), which belongs to the genus capripoxvirus, a part of the poxviridae family (smallpox and monkeypox viruses are also a part of the same family).
• The LSDV shares antigenic similarities with the sheeppox virus (SPPV) and the goatpox virus (GTPV) or is similar in the immune response to those viruses.
•  It is not a zoonotic virus, meaning the disease cannot spread to humans. It is a contagious vector-borne disease spread by vectors like mosquitoes, some biting flies, and ticks and usually affects host animals like cows and water buffaloes.
•  According to the United Nations Food and Agriculture Organisation (FAO), infected animals shed the virus through oral and nasal secretions which may contaminate common feeding and water troughs. Thus, the disease can either spread through direct contact with the vectors or through contaminated fodder and water. Studies have also shown that it can spread through animal semen during artificial insemination.
• Symptoms- LSD affects the lymph nodes of the infected animal, causing the nodes to enlarge and appear like lumps on the skin, which is where it derives its name from. The cutaneous nodules, 2–5 cm in diameter, appear on the infected cattle’s head, neck, limbs, udder, genitalia, and perineum. The nodules may later turn into ulcers and eventually develop scabs over the skin.
•  The other symptoms include high fever, sharp drop in milk yield, discharge from the eyes and nose, salivation, loss of appetite, depression, damaged hides, emaciation (thinness or weakness) of animals, infertility and abortions.
• The incubation period or the time between infection and symptoms is about 28 days according to the FAO, and 4 to 14 days according to some other estimates.
• Morbidity- The morbidity of the disease varies between two to 45% and mortality or rate of death is less than 10%, however, the reported mortality of the current outbreak in India is up to 15%, particularly in cases being reported in the western part (Rajasthan) of the country.
• Studies say that it has not been possible to ascertain the presence of viable and infectious LSDV virus in milk derived from the infected animal.

Economic Implications

• The spread of the disease can lead to “substantial” and “severe” economic losses according to FAO and the World Organisation for Animal Health (WOAH).
• The disease leads to reduced milk production as the animal becomes weak and also loses appetite due to mouth ulceration.
• The income losses can also be due to poor growth, reduced draught power capacity and reproductive problems associated with abortions, infertility and lack of semen for artificial insemination.
• Movement and trade bans after infection also put an economic strain on the whole value chain.