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.
