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 6^th 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 30^th 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 31^st 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.

 

 

 

MSMEs and the Union Budget

MSMEs and the Union Budget 2019-20

The time is ripe for expectations on a few counts: The first time Woman FM would be compassionate; since she combines in her portfolio the Corporate Affairs as well, the B2B can expect some reliefs for the micro and small manufacturing enterprises; fiscal reliefs will have a slant towards production and employment to push growth and would deal harshly the wilful defaulters both on tax and loan fronts.

Banks bit by huge corporate loan defaults started looking at MSMEs afresh as windows of opportunity although their attitude towards funding manufacturing enterprises still hangs on the unforeseen risks. This is so mainly because of the need for monitoring and supervision of these fledgling enterprises who will continually need mentoring, counselling and handholding and these involve manpower and related costs.

Post liberalization Banks have cut down costs on this count but at the same time charge for them in their books of accounts to ward off accountability. Banks can be legitimized to outsource such tasks at a small price from a few accredited institutions provided the banks do not charge their clients on this count. This is a non-budgetary intervention that the FM can make.

The cascading effect of large corporate defaulters on their vendors in the small sector and the banks’ unwillingness to buy this argument before applying their sledge hammer of SARFAESI Act action needs a novel treatment to the defaults arising therefrom.The allowable leeway for corporates that June 7, 2019 circular of RBI could be extended to MSMEs in the following areas: firstly, the lenders should have a Board approved policy for Resolution Plan; second, they should conform to transparent timelines for implementing Resolution Plan; third, they shall require independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. Fourth, the cost of such independent credit evaluation should be borne by the lender and not the borrower.

Because of the large numbers requiring such effort, Union Ministry of MSMEs can accredit institutions like the Industrial Health Clinics wherever promoted by the State Governments and at least one more Accounting Firm that should pass the independent test of legitimacy with passion for the MSME sector.

Several units where power itself a major input like induction furnaces is, rubber, rolling mills, etc., the reforms in the power sector jacked up the price of this input by as much as 100% making them uncompetitive. Hence in the interest of the employment intensive manufacturing micro and small enterprises, the cost of power can be subsidized linked to GST as it will enable sharing the cost of subsidy equal with that of the state government.

Start-up manufacturing MSEs find it almost impossible to invest in land because of its prohibitive cost. Building rural industrial townships by the States with the required infrastructure like, safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for the workers on lease basis with industry participation, primary and upper primary schools, crèches, play grounds and cultural spaces would be the best alternative to boost this sector. Fiscal incentives like income tax exemption for a five-year period for investments in such infrastructure would be in order.

Hand looms and handicrafts cost the consumer high and leave little margins for the producers. Therefore, there is need for providing safe havens at both the ends to maintain production demand-driven. Present incentive system needs revisit to rationalize them.

Existing urban industrial estates should be up-scaled and modified to provide all the logistic facilities closer to the MSEs under PPP mode. It is important for India that has competing demands on land space to develop lease markets in a big way sooner than later to keep double digit growth moving sustainably.

Industrial work space should be made available on leasehold basis for 15-20 years with permission to mortgage leasehold rights in favour of lending institutions. The caveat should be that the lending institutions should be ordained to take recourse to this security only if it is sold to a frim of similar manufacturing facility and not for real estate or housing purposes.

To provide comfort to the micro and small enterprises in mainstreaming themselves into the economy, both ease of doing business and exit should be of greater comfort than now. Enterprises should be incentivized for vertical growth and all perverse incentives that led to spawning of enterprises horizontally should end. Lately, MoCA is seen to be over-regulating, making small and medium enterprises shun equity markets. There is need for extending regulatory reprieve for SMEs to access bourses.

IBC-like code for micro and small enterprises is imperative for providing easy exit route. Invariably apart from the debt overhang, sovereign dues pose severe problem for those that would like to exit the enterprise sector. Accommodative stance in this regard would be dis-allowing Banks to attach and to sell the only dwelling house of the entrepreneur under SARFAESI Act provisions.

If the enterprise has availed state incentives either while establishing or running the enterprise (like the interest rate pegged to 3 percent per annum in some states), such enterprises shall be eligible for exit route only after ensuring that they have not been diverted to building non-manufacturing assets: wherever capital subsidy has been availed by the unit, the State shall have the first right of recourse to such asset if the enterprise seeks winding up within five years of establishment.

In order that unorganised MSEs become organised and employment is truly reflected in the musters, even zero-based GST-applied manufacturing MSEs should be ordained to submit the GST returns quarterly. Firms that offer cloud-based but customised ERP solutions to the MSEs should be incentivised so that the MSEs embrace this accounting solution at least cost.

MSEs with turnover of up to Rs.10cr that engage accounting consultancy services should be provided fiscal incentive by way of income tax reduction. Tax compliance in the process will be incentivized.

Guarantees of CGTMSE did not provide the much-needed comfort as banks did not buy the scheme for enterprises drawing credit for more than Rs.10lakhs. MSEs look to the budget in terms of the banks sharing the guarantee premium on 50:50 basis with the MSEs or reduced premium for those buying the higher guarantee cover. Wherever the banks take collateral to hedge the uncovered guarantee risk, units should secure credit at lower rate of interest than otherwise.

The FM would do well to include in the budget tax incentives for strategic partners’ investments in the organisations meant for revival of the potentially viable units. This can be by way of exempting them from income tax for the first three years up to a limit of R.500lakh per unit. This will speed up restructuring of viable enterprises faster and in larger numbers.

MSEs particularly suffer from the absence of responsible and credible consulting services. Hence dedicated consulting firms with stakeholder participated – either promoted/partnered by the state governments or NBFCs through a separate Corpus Fund dedicated to the cause of MSEs should be qualified for GST exemption for five years, provided they work on low-yielding assets.

Government departments of both union and state governments should mandatorily become members of the Registered Trade Exchanges to deliver the advantages of e-commerce to the MSMEs and facilitate online payments of bills drawn on the former. It is pertinent to mention that so far trading has not moved significantly in this direction and most delayed payments are by the government departments and PSUs. MSE Facilitation Councils have inherent conflict of interests and the best would be to do away with them and the costs saved can move to incentivise e-commerce.

https://knnindia.co.in/news/newsdetails/msme//msmes-and-the-union-budget-2019-20