Showing posts with label Monetary Policy. Show all posts
Showing posts with label Monetary Policy. Show all posts

Saturday, April 30, 2022

Inflation - the hydra

 

Inflation – the hydra

B. Yerram Raju

Times of India Blogpost dated 29.04.2022.

Sweltering heat makes us look to June’s first monsoon showers as much as the monetary policy of the RBI looking at taming the inflation as its uppermost task. When Bloomberg mentions that the world is experiencing a synchronised inflation outbreak that previously seemed related to the US and Europe, and that producer prices are rising in Japan, South Korea, India, and all economies are feeling the heat of fuel and food prices, it has to be viewed seriously.

I tried to look at it from what is happening in the working class both in urban and rural areas in our country. Several state governments are indulging in competitive populism, notwithstanding the ever-rising fuel prices.

My house cleaner has a couple of acres of land in Mahbubnagar district of Telangana. She gets her minimum wages when she abstains from the work in our house, at least four days a month and seven days at least once in a quarter. Her logic: Every office has one Sunday and two second Saturdays as holidays. Why should I not get the same? She works as house cleaner for ten houses with an average income of Rs.2000 per month per household. She gets free ration; free medical treatment in the government hospital if she or her family members have illness or accident. Her husband is a fruit-seller on bicycle. His net income is Rs.15000 a month and recently he got a loan of Rs.10000 under the street vendors’ scheme that helped him buy a cooler to the house. She has put both her sons in a social welfare residential school. She is also not bothered about income tax though her family income exceeds the taxable income. She has Aadhar card and felt needless to have PAN card! She is least bothered about inflation.

In a chat with her, I and my wife realized that most house cleaners are in the same boat as her and they only have to pay rent. Some of them are also expecting to move to their own two-bedroom flat promised by the government. I went to a village on the way to a temple in Sangareddy district. That was a shandy day. Hence most villagers are in shandy either as buyers or sellers. I got down from the car, a little uncared for the anger of my wife. She knows that when I get down on such errand, I would take at least thirty to forty-five minutes to be back.

I enquired from around twenty persons regarding the price-rise. They mentioned only two things: one, Fuel price and two, Oil price. No others mattered to them. At least one person in every house has a motorcycle. Every family has a piece of land either owned or leased. They are bothered about the wages for the farm labour. They sky-rocketed. They are planning to go for farm machinery either in groups or go for hiring it to reduce farming costs. They are bothered more about increasing unrest in villages due to family feuds.

Inflation therefore has not figured much in the conversation. Rise in wages is an issue but related to inflation. Not that the rising inflation indices – consumer price indices crossing the RBI headline boundaries – is not a worry. The fact is that there are several factors that do not get into inflation accounting. The rents in urban areas are on the rise despite a boom in real estate and housing and cheap housing loans.

If interest rates rise, the cause will not be so much the inflation as the non-performing loans in the retail sector, protracted corporate loan recoveries after severe haircuts, under the most permissive route of Indian Bankruptcy Code proceedings.

Union government has a responsibility to look at the fuel prices beyond the revenues that are earned out of them. Most of the states have genuine concerns over the cess and it is time to be transparent and remove all the cess as the purpose for which cess is levied and spent are never coordinated. For example, look at the similar rise in fuel prices globally in 2014 and 2015 and the domestic prices. Can we get back to the comparable barrel prices and retail prices of fuel and gas?

Once the interest rates rise, the scope for real interest rates to pare up and comfort the savers exists and the hapless senior citizens will have a sigh of relief. Real interest rates are currently negative and hopefully the June monetary policy of the RBI will bend the hydra.

*Author is an economist and risk management specialist and the views are his own.

https://timesofindia.indiatimes.com/blogs/fincorp/inflation-the-hydra/

 

 

Sunday, August 9, 2020

Monetary Policy Statement 6 August 2020

 

Some Healthy Deviation and Unfulfilled Expectations

The twin objectives of Monetary Policy – Containing Inflation and Promoting Growth – have largely been addressed in the latest Monetary Policy Statement of the Governor released on the 6th August, 2020. Economy continues to face unprecedented stress in the backdrop of unabated pandemic. Inflation of 6.1% is +2% over the inflation target of RBI.

RBI says that inflation objective is further obscured by (a) the spike in food prices because of flood ravage in the north and north-east and ongoing lock down related disruptions; and (b) cost-push pressures in the form of high taxes on petroleum products, hikes in telecom charges, rising raw material costs. These factors led the Monetary Policy Committee to hold to the existing policy rates undisturbed.

Fitch and other rating institutions say that global growth tumbles in the face of pandemic growing uncertainty. ‘All manufacturing sectors remained in the negative territory excepting pharmaceutical sector. Manufacturing PMI remained in contraction at 34.2. Rural demand increase is the only silver line in the economy. Services sector indices show modest resumption of the economy. Yet tourism and aviation, passenger traffic in trains and buses do not show any signs of recovery. There is broad realization that monetary policy should drive credit in sectors that need most and the Banking sector requires more attention.

Liquidity pumped into the banking sector is of the order of Rs.9.57trillion or 4.7% of GDP with no show of risk appetite among banks. This has only assured the Depositors that the money is safe with banks and there is no need for hurried withdrawals for consumption needs.

CREDIT POLICY

The main driver of the consumption, credit activity of banks is mooted. Lot has been expected from the RBI on the credit policy front. Let me first deal with the best things first: Priority sector lending guidelines have been revised reducing regional disparities in the flow of credit and broadening the scope of priority sector to include credit to the Start-ups in the areas of renewable energy, including solar power and biogas compression plants; and, increasing the targets for lending to ‘small and marginal farmers and weaker sections.’ Incentives for lending to these sectors is related to credit flow to the lagging districts and assigning lower weight to incremental credit to priority sectors in districts where comparatively higher flow of credit had already taken place.

MSME Sector:

RBI Bulletin July 2020 indicates that during the current financial year so far, year-on-year growth is -7.6% for manufacturing MSEs and -5.4% for medium enterprises.

MSME Pulse Report indicates covid vulnerability high among 63 percent of the MSMs. Only 31 percent are strongly positioned to come back. It is these that will be pepped up by Banks and not the vulnerable even if they are standard assets. The outbreak of the Covid-19 pandemic will impact the profitability of MSMEs due to the declining market demand and rising operating costs in the new way of working.

Number of Studies, notably, ITC, Skoch Foundation, RGICS, CII, FICCI etc reveal that 59-74 percent of the MSMEs are highly risky and would be on the brink of closure if cash inflows do not support them upfront. GoI took the stand that they will be supported by Credit while those that are weak will be supported by sub-ordinated debt or Equity. This Equity product is yet to roll out from the government although Rs,20000cr guarantee backed fund is allocated in the package.

The Policy nowhere referred to the credit-driven Covid-19 Atma Nirbhar Abhiyan packages. Package one related to the standard assets at 20% additional working capital under Automatic Emergency Credit Relief Guarantee from National Credit Guarantee Trust. Against the Rs.3trn target under this window for standard asset ( Units that are performing or continuing their manufacturing activity) to be achieved by the end of September 2020, Banks have so far sanctioned around Rs.1.6trn of which 60% is disbursed. There are field reports that Banks are seeking to extend the existing collateral and/or guarantee to the additional working capital. The disadvantage for the borrowers is on two counts: one fresh documentation involving stamp duty of Rs.1000 and 2) their existing collateral will get extended for the additional working capital and this is quite contrary to the intentions of the scheme.

The second scheme, involving stressed assets under the category of Special Mention Accounts-2. The broad guidelines released are:

¡  Account shall be -

Ø  Standard as on 31.03.2018

Ø  In regular operations during 2018-19/2019-20

Ø  SMA2 later or NPA as on 30.04.2020 , and;

¡  Commercially viable enterprises post revival

¡  7-yr moratorium for principal amount of subordinated debt/equity

¡  Interest payable every month

¡  Subordinated Debt amount up to 15% of Debt O/s or Rs.75 lakh, whichever is lower will be given as personal loan to the promoter for a 10-year tenure. This amount should not be used for recovery of NPA. Entrepreneur can use this to meet his cash deficit, for meeting the payments to labour and making the unit covid-19 compliant.

¡  Unit should revive in 5 years –RBI Guidelines of March 17, 2016.

¡  Unit should be on growth path for 10 years

¡  Scheme Valid till 30th September 2020.

Banks have not rolled out this package so far. RBI Master Circular of 2016 on Revival and Restructuring (RBI/16-17/338 dated March 17, 2016) stipulates: 1. Corrective Action Plan; 2. Revival and Restructuring of all viable manufacturing enterprises and 3. Recovery of the unviable through legal means. Banks have not implemented most of these instructions, save rare exceptions. Under the Subordinate Debt scheme, the enterprise should be first viable; it should be currently running whatever be the capacity utilization, and then, it should be restructured to see it as a standard asset in a year’s time and additional revival package and sovereign obligations if any to be recovered fully before the five year period concludes. Initial moratorium for the revival package would depend upon the viability arrived at. District Committees had to be formed and they should decide on the viability.

For all such units with outstanding liability of Rs.10lakhs and below, the Branch Manager is the deciding authority for reviving the unit while for the units over and above this limit, appropriate authority as decided by the Bank will take the call and place it before the District Committee. Though several Banks committed to the RBI that all such District Committees were set up even by December 2017, most of them are dysfunctional.

Under these circumstances, RBI announcing MSME revival and restructuring of enterprises falling under the category of GST-registered Standard Assets as on 1.3.2020 before 31st March 2021 looks ambivalent.

The virtuous thing about the current instruction is that the asset classification as standard may be retained as such, whereas the accounts that may have slipped into NPA category between March2, 2020 and date of implementation may be upgraded as ‘Standard asset’ from such date of implementation. Banks are expected to maintain additional provisioning of 5% over and above the provision already held by them for such assets.

RBI should have allowed such forbearance for all the assets revived under the Atma Nirbhar Bharat Abhiyan -2 (Equity-driven revival). While Banks are aware that such any additional loan consequent to revision will be treated as standard asset, their reluctance to revive the viable enterprises is absolute risk aversion.

The only saving grace is that sale of securities to the ARC will now attract higher provisioning. This should trigger the thought that by reviving the asset instead of sale to ARC they would gain in provisioning as the asset is likely to be standard asset at the end of one year of revival. 

Monetary Policy viewed from the MSME perspective, is like what GoI proposes, RBI disposes. Apathy towards MSMEs still continues.  It is suggested that the RBI and GoI be on the same page in so far as MSME revival is concerned and second, shorten the period of decision making to just two weeks as against 55 days’ process indicated in the Master Circular of 2016 referred above.

Government of Telangana seems to be taking the lead in the revival of MSMEs. Telangana Industrial Health Clinic Ltd., set up by it, has put on its website, the Learning Tool for Revival and a Revival Pre-pack online for the enterprises to log in and post the details for quickly deciding on the prospects of viability.

Retail Loans:

As regards personal loans, RBI recognising that these loans falling under Retail Loan portfolio will be the next NPA balloon that will blow off, has accommodated the Banks through a resolution plan. It has been the practice of several Banks both in the Public and Private sector as also a few NBFCs to grant the personal loans wherever the related corporate accounts are held by them. Because of slow growth and the pandemic, several have lost their jobs and personal loan segment has come under severe pressure. RBI left it to the wisdom of Banks concerned to invoke the resolution plan by December 31, 2020 and shall be implemented within 90 days thereafter. There will be no requirement of third party validation or Expert Committee, or by credit rating agencies. Board Approved Policy will be necessary, and the resolution plan shall not exceed two years. Banks will have big relief on this score.

This Monetary Policy recognized the economic environment as tough to recover in the immediate short term. At the same time, it failed to provide the real growth impulses in invigorating the MSMEs to the required degree and failed to generate the risk appetite among banks. It looks more worried about the capital of banks than credit to the required sectors at the required speed.

The views are personal. This is an invited article from Skoch Foundation.

 

 

 

Monday, August 5, 2019

Is rate cut desirable?


Is Rate Cut Desirable?

Monetary and Fiscal Policies are the two engines of growth. While the fiscal policy is annual and out with the Union Budget, Monetary policy is more dynamic and adaptive to the economic environment and conditioned by the inflation target. It matters little either for the FM or the RBI Governor whether tomatoes are sold at Rs.80/kg or potatoes Rs.12/kg. Inflation target of 4% still appears to leave headroom for the RBI to go in for further rate cut – a policy of continuity.

US Federal Bank opted for rate reduction signaling the need for buttressing the US economy in the wake of another impending recession, much to the chagrin and disappointment of Europe and UK. Will India have to follow suit or should it go on its own? What is desirable?

Exports are on the decline. Complacence in forex reserves at the present level at around  $450bn would appear misplaced viewed against the China’s reserves even against their declining growth rate and current trade war with the US. With the UK on Brexit mode for certain going by the promise of present Prime Minister by October 2019 would further alter the trade balances globally. The present trade balance looks only a temporary comfort.

Our careful management of exports and continuous search for new markets for Indian goods call for an aggressive manufacturing policy and prevention of asset deterioration in the corporate and MSME sectors. Export of culture related products and traditional artisan products would hold good prospect and this can happen in dynamic credit markets at affordable rates of interest and not so much the subsidies.

View this in the backdrop of major central banks’ similar exercises this season: whether US or Canada and Basel warnings. Financial columnists like Ian Mcguan warn the Federal Bank against further rate cut. Eric Lascelles, Chief Economist at RBC Global Asset Management says: “the longer that people go in an environment of lower rates, the more accustomed they get to them – and the more difficult it is to raise borrowing costs.” This should explain the reason for the Indian banks going slow on rate cut transmission to the borrowers.

Further, their net interest incomes of banks have been looking south for the last five years. On top, their off-balance sheet exposures are more than the balance sheet trending to a danger that the world economy saw in 2007 and 2008.

Stock markets largely influenced by global trends and the announcements in the Union Budget over the FPI are tottering. Bond yields are also not so attractive unless they are of longer duration than 10years. Increase in minimum public shareholding could trigger a sale of shares – but not when the market is poised for decline. Company valuations are causing a serious concern at the moment.
Major Banks including SBI transmitted Central Bank rate cut on deposits. Domestic Savings already on decline could slide down further. Depositors and investors looking for safe returns year after year are a disappointed lot, for they are at their near-zero return of the money held.

Consumer index and business confidence index for June 2019 are on the disappointing numbers. Indian economy is not on a borrowing spree during the last five years. Instances like Amrapali, Hiranandini, DHL, have enough caution on hold for lending aggressively for real estate. Real Estate and housing finance, if pushed beyond limits, would put the lending institutions in a more beleaguered position than now. Priority sector lending is any way on low yields.

IMF downgrade of global growth rate to 3.2% in 2019-20 is a pointer to bolstering growth through debt route with interest rate cuts by the central banks. It should however be kept in mind that Central Banks and Governments have actively encouraged debt-driven consumption and investment in order to prop up growth. Such policies alter the dynamics of credit markets.

Climate risks are accentuating credit risks. Indian banks are yet to poise themselves to cushion against such risks. When global banks take the climate risks seriously and Indian banks delay, the impact on Indian credit markets is going to be high risk driven.

Budget lines amply indicate the necessity of more private investments to flow to key infrastructure sectors like roads, railways, airways, ports and such investments need to come from more debt than savings and investments in the emerging low rate scenario. With the uniform corporate tax rate at 25% government expects that there will be more corporate participation. But the emerging context does not elude much confidence among several well meaning economists.

If growth is a concern and if it should look only to credit markets then, infrastructure for lending needs to improve and this calls for re-positioning and reforming banks and setting up Development Banks where long term funds will be spent for long term purposes. Structural reforms should follow any impending rate cuts.

August first week is with expectation of a further rate cut to bolster the staring decline in growth. Is growth contingent upon debt or investment? This is a question that should deserve serious consideration in the context of risk-starved banks yet to recover from the self-built shocks of the NPA-overhang.

Published in Telangana Today, 5th August 2019


Wednesday, June 19, 2019

Banking Reforms


 Banking Needs New Direction


Monetary Policy breathed a fresh air and for once customers felt that some comfort existed for them too. Post-liberalization Banks went on investing in technology and realizing the costs of such investments through various types of charges. Even after realizing the cost of investment in technologies over the last two decades and over, it is time to pass on the benefits to the customers in whose name and style they infused technologies. Waiver of electronic transaction charges for a year at least to start with, has been viewed as a big relief.  ‘No Frills’ accounts norms also changed. Though interest rate changes disappointed the depositors, borrowers expect some rate reduction transmission soon.

Prudential norms underwent change giving comfort to the banks and borrowers alike. Resolution process provided leeway for the corporates running after Bankruptcy Courts to resolve their debt and start production/services to their full capacities sooner than later. The present environment of banking is transiting from dissatisfaction to hope for the better. But the real challenge still remains: public sector banks realizing their raison de ‘etre of their existence: emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. While retail banking, home loans, real estate and the failed infrastructure loans held sway during the last two decades the change should be in lending for agriculture, allied activities, MSME finance and segmentation of retail sector loans to the needy.

PSBs heaving a sigh of relief over their bad debt portfolio coming under control, should now be looking for new ways of doing businesses. But do they? Huge disappointment, however, is in the increase in bank frauds reaching >Rs.71500cr in 2018-19. Is technology facilitating frauds coupled with inability of banks to supervise staff and control them? Cultivating the technology to customers requires investment by banks in customer education, both online and offline.

Indian economy targeting double digit growth ere long has competing clientele bases in the current milieu of banking. Domain banking has moved to high tech banking. Men at counters have now become slaves of the machine instead of being masters.

Apex institutions like three and half decades’ old NABARD and almost thirty-year old SIDBI are yet to deliver the intended benefits to the sectors they are meant for. Major earnings of these institutions come from treasury business. Multiple funds held with SIDBI are yet to reach the micro and small enterprises. Both these institutions that have wealth of knowledge in their human resources, need thorough revamp and restructuring. Delaying the process would end up further wastage of huge organizational resource.

Manufacturing MSMEs are in negative growth for almost decade and half now. Several NBFCs focused on small business finance but the IL&FS and consequent failure of mutual fund promises left disappointment. PSBs have the option of exploiting the co-finance window but they are bogged by the mindset of collateralized loans. It is here they need change. Interestingly, one of the senior bureaucrats recently rued: ‘when did the banks fall in line with the aspirations and goals of the government – whether DRI loans, IRDP loans, SEEUY etc., until they were forced? Now is the time to look at the way to culture the banks into new ways of thinking and acting. This can come of only through change in governance and regulation.

With over 38% of the population still illiterate, Jan Dhan and Mudra Yojana as instruments of financial inclusion Banks are yet to treat them voluntarily favoured agenda. Institutional innovations like the Small Finance Banks, Small Payment Banks, India Post and the likes as also the MFIs have also proved inadequate to meet the needs of the present leave alone the future banking needs of the population.

India’s future still lies in rural areas; agriculture and allied activities and providing value addition to agriculture at the doorstep of the farmer; weaning away unproductive labour from farm sector to non-farm sector; revamping agriculture marketing with infusion of technology so that price discovery takes place at the source of production and building new skills and upscaling skills in farm sector with measurable outputs of such investments. Government, owner of over 82 percent of banking, should drive the sector towards this agenda.

The reach of banking should be tested in rural areas. Several PSBs are winding up rural branches. Regional Rural Banks that are supposed to cross-hold institutional risks with their principals and do social banking are set to merge with their principals. Institutions thus created for the rural areas will soon become extinct. The big question that RBI should think is – will double digit growth target of the Indian economy possible without mainstreaming rural banking efforts? Should there not be a rethinking on maintaining balance between proximate physical banking and digital banking? A committee of either RBI or GoI could look into this aspect and arrive at the future course of action.

The whole incentive system in HR in Banks should move towards such agenda. Selection of Managing Directors and Directors on the Board should discerningly look at the perceptions of such persons with such agenda.

Kisan Bank for farmers, allied agriculture and agriculture marketing; Udyog Mitra Bank for lending to micro and small manufacturing enterprises and small business finance, Vanijya Bank for retail banking, home, education and transport loans, Moulika Vitta Vitarana Bank ( revive the Development Finance institutions for lending to infrastructure) would make banking portfolio banking with capacities to cross-hold inherent risks of lending. GoI would do well to have brainstorming sessions on these areas as the sector is trying to breath fresh air now.


































































Tuesday, April 5, 2016

Bi-monthly Monetary Policy can lower borrowing rates

RBI Governor in his first Monetary Policy during the current financial year has cut the key policy rate by 0.25 percent to 6.50 percent and sends the message louder than ever that banks should pass on the rate cut to their clients to pump prime the economy.



In the backdrop of a supporting fiscal policy and pressures built on the cut in interest rates by the government on its savings schemes all the eyes were on the RBI for a cut in key policy rates. The Governor proved that he is not going to be political but economic.

Growth of domestic savings has hit the lowest rate during the last three years. Inflation - particularly food inflation - still is a cause for anxiety in the backdrop of series of monsoon failures. Weather is weather and the hopeful forecast for the current year by the Met Department has to be taken with a grain of salt.

Banks have been provided a liquidity window should they need to use it, easier than ever. He recognized also the inability of banks to go beyond a point in lowering the interest rates due to their pile of NPAs, which he stressed shall move down southwards day after day if not hour after hour.

Banks should discipline themselves and discipline their borrowers and promote growth is the clear message of the policy.