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.

 

 

 

RBI treats obesity and anorexia with the same medicine

http://www.moneylife.in/article/rbis-move-to-restructure-msme-loans-amounts-to-treating-obesity-and-anorexia-with-the-same-medicine/46410.html?utm_source=PoweRelayEDM&utm_medium=Email&utm_content=Subscriber%2312914&utm_campaign=Daily%20Newsletters%2007%20April%202016

RBI’s move to restructure MSME loans amounts to treating obesity and anorexia with the same medicine

Dr. B. Yerram Raju

The units having sanctioned limits of Rs10 lakh and above, but up to Rs25crore areall bracketed for treatment with a single brush and this is unfortunate

In the din and bustle of mounting non-performing assets (NPAs) that attracted world-wide attention, the Reserve Bank of India (RBI) in its 17 March 2016 circular took up the unfinished agenda of KC Chakrabarty Committee (2007) Report to remedy incipient sickness of the micro, small and medium enterprises (MSME) sector. 

The units having sanctioned limits of Rs10 lakh and above, but up to Rs25crore are all bracketed for treatment with a single brush and this is unfortunate.

The instructions also presumed that all is well with the banks and the MSMEs alone are responsible for their financial failures. Banks, with very few exceptions, stopped cash flow based or order-based lending for working capital of the MSMEs. 

The Nayak Committee norm of 20% of turnover as minimum working capital limit has been taken to be the maximum and not the minimum in the case of several micro and small enterprises.

Some of the reasons for the units falling into SMA-0 category are, inadequate or delayed bank finance, repayment obligations on term loans, which are incommensurate with the cash flows, inadequate startup period for repayment of term loans. Banks would be averse to review their own inadequacies.

The other uncovered area is the adverse effects of (a) long drawn agitations in the States leading to failure of infrastructure like power and water; (b) units affected by natural calamities like the floods, cyclones, and earthquakes that result in partial or full damage to the assets financed. Remedies are not possible within 90 days.

MSME units broadly fall into – stand-alone enterprises; ancillary enterprises and cluster based enterprises. While those in the former category could be having wider markets, ancillary enterprises and even some cluster based enterprises operate in narrow markets. If the anchor industries failed, the dependent MSEs would be a pack of cards in spite of themselves.

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme extends guarantee cover to units availing limits up to Rs1 crore within certain threshold if the primary lender extends loans sans collateral. It is mandatory to lend up to Rs10 lakh without seeking collateral security. 

Several banks take collateral for term loans and grant collateral free advances up to Rs10 lakh working capital. Once installment or interest becomes overdue beyond 90 days, both working capital and the term loan, the unit becomes NPA and the collateral security gets invoked for realization of all the loans. There is no mention of the treatment of CGTMSE covered loans in the latest circular.

Where the MSE with Rs10 lakh limit are vendors to the large scale, corporate, and medium enterprises also financed by the same bank or the consortium of banks, the failure of these could lead to the failure of the MSMEs within the naked eye of the banks. This is because such MSEs fail to get their bills paid in due time (from large clients) calling for repeated extension of period for repayment. In most such cases, neither the product nor the processes can take the blame. Madhav Lal Committee (GoI, 2013) suggested treating such delayed payment for accepted goods as income in the hands of the company and taxed. This suggestion is worth pursuing.

It is time that the banks incorporate in their loan agreements a clause to recover the MSE dues for accepted goods by debit to the purchaser’s account if the bills remain unpaid beyond the tenor of the bill. In case there are legalities coming in the way, the banks should negotiate for quick resolution of such dues as mediators between the MSE vendors and the large enterprises.

It is obvious that the SMA-0 required 30 days under the extant instructions in which case the NPA for MSMEs need to be redefined to those falling due beyond 120 days and not 90 days. Basel III dispensations provide enough leverage to the regulator to be malleable in the case of SMEs that the RBI can take advantage. Prudential norms and asset classification needs a review.

Further the fees to be paid for the Techno Economic Viability (TEV) study has also been left for the bank concerned to decide. An ailing enterprise may find it difficult to pay for it unless it comes as an interest-free loan repayable as part of the restructured loan installments.

Treatment of dues to the government by way of taxes, cess and duties require coordination with the state governments. This is obviously left for the Board appointed committee to decide. 

The Boards are expected to appoint such committee by June 2016 and the Indian Banks’ Association (IBA) to roll out the needed application forms in the next few weeks. Hopefully, the banks would see the intent of the RBI in expeditious processes in sanitizing the sector.

The most admirable part of the current instruction is the review mechanism highlighted in the annexure that provides opportunity for the aggrieved enterprise to revisit the recovery proceedings for any required correction.

About 14% of the total manufacturing sector credit is reported for the MSEs while 5.9% of the MSE credit has been declared as NPA. Banks mostly cover all the government sponsored accounts, most of which are in the services sector and transport sector under the CGTMSE. There is no information as to how many and how much of the manufacturing MSEs are covered under the CGTMSE and the amount covered under collateral securities. Banks proceeding against the collateral securities under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act seek 10% deposit from the bidders and this acts as a major deterrent for the bidders. The result is that most such bids exhaust all the three chances without bids. The whole process takes three months. The Banks thereafter start exploring other means of recovery or rehabilitation. There are quite a few cases where the banks scaled down the debt or agreed to rehabilitate the unit that was considered unviable three months ago. The new instructions would provide better opportunity for the units confident of revival to press their case without having to wait for the aforementioned rigmarole. 

In the light of these instructions the role and relevance of the State Level Inter-Institutional Committee (SLIIC) needs review by the RBI. The disease is not cured by not naming the medicine but by administering it in right time. Treating obesity and anorexia with the same medicine.