Impact of Covid -19; Review of Measures taken

RBI in its Monetary Policy statement on the 27^th March 2020 front-ended the effort of banks through pumping liquidity, 3-month moratorium on term loan instalments, working capital while interest will continue to accrue during the moratorium period with a further clarification that instalments will include the payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues; review of working capital limits of all enterprises. 3% CRR recommended by Narasimhan Committee, Tarapore and Ashok Lahri at different points of time has been announced.

Interest will continue to be charged on the EMIs and they would to that extent enlarge the instalments that follow the moratorium. To expect the industry to recover immediately after the lockdown period is over will be an overestimation. McKinsey says:” Restarting production facilities can be more challenging than shutting them down. It requires a thoughtful approach to revive the supply chain, match volume to actual demand, and, most importantly, protect the workforce.” They require minimum six months to get back into the full supply chain. Banks’ sagacity to reassess working capital lies here. Banks should not cut down the limits because the size of the Balance sheets of all firms will be downside of the previous years including their own.

Future lending shall be cash flow based and not Balance sheet ratio based or even just turnover based (Banks are asked to extend minimum of 20% of projected turnover while most have adopted this as the maximum and this includes SIDBI).

RBI February data indicates that as of January 2020 credit growth to agriculture and allied activities decelerated to 6.5% from 7.6% in January 2019; to industry more than halved during the same period; to services sector decelerated to 8.9% from 23.9% whereas for personal loans it grew by 16.9%. This position prevails despite liquidity infusion measures during the last two monetary policy initiatives. Therefore, risk aversion and not liquidity is the problem with banks.

The already risk-averse banks can hardly lend during this period of lockdown seeing temporary shutdown of 90% enterprises. They can only provide online comfort following the policy announcement, al bait for three months! For a running industry to increase capacity is easier than a re-opened industry after lockdown. Further, investment required after re-starting is also going to be much more than now. Therefore, banks must prepare to lend more aggressively immediately after the current period. But can they move away from aversion to appetite in taking legitimate credit risk, without improving their lending infrastructure?

A few special efforts that still beg attention are:

·       Banks to stop all SARFAESI proceedings and developing forbearance for the manufacturing MSEs.

·       Extension of NPA threshold to 180 days, effective January 2020 quickly that will keep accounts standard for any further booster doses to flow to the industry.        

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Special Mention Accounts 1 & 2 categories will also need uniform forbearance.

·       Unfunded limits – LCs, Guarantees, ECGs falling due between January and May 2020 should not be revoked for non-compliance but their periods extended by another six months. RBI directive is imperative.

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A       All viability tests shall be done by State Government accredited agencies

·       GST should be reduced to 5% till the end of December 2020 for all the enterprises that would submit their quarterly returns as required under law, even if at exempted thresholds. Review of impact should be based on an evaluation study by all the Industry Chambers.

·       All MSMEs that maintain record of manpower employed verifiable with EPF and ESI registrations.

·       All MSMEs may be permitted to engage contract labour with the social security burden absorbed by the State Government on reduced commitments annually by 20% provided they all are digitized for all transactions.

·       Power Tariff should be cut by 50% for all the manufacturing enterprises provided they are all digitized and registered under Udyog Aadhar or TSiPASS.

·       All MSME Funds should be maintained and monitored by the DC-MSME through NSIC instead of SIDBI.

GoI may focus more on cleaning up the financial sector with a sense of urgency to render its services effectively in tackling this uncertainty effectively. At one end, cash relief from the exchequer should flow to all digitized Jan Dhan and Mudra loan accounts and at the other end, credit shall pump prime the economy with responsible and timely deployment post lockdown.

More digitized developed economies are redirecting their efforts to containing the spread and holding people in discipline using WhatsApp, digital alarms at the Carona Control Rooms etc.

South Korea has transferred cash to all the SMEs to pay for their labour for one month. US has announced a $2 trillion package to combat the new war. Several nations across the world – with 196 affected by this monster Carona - are seriously contemplating the relief packages. G-20 announced $5trn relief package. For once everyone stopped thinking of fiscal deficit. Extraordinary problems require extraordinary solutions.

No time for Hobson’s choice. Saving lives is more important than saving the economy, no doubt. But preparing the economy to respond to the post COVID-19 very effectively also brooks no let-up in efforts.

*This is part of the article published on the 30^th March in Telangana Today with some additions.  A Response write up to the CII.

How to redefine and rebuild the banks in India

How to redefine and rebuild Banks?

‘Banks are basically meant to allocate capital to businesses and consumers efficiently.’ Post demonetization, customers feel the pain more than gain in banks. Farmers getting inadequate and untimely credit from banks take to huge private debt only to commit suicides later.

Manufacturing micro and small enterprises, the seed beds of employment and entrepreneurship, are being shown the door by the banks notwithstanding the CGTMSE guarantee up to Rs.2crore. Banks never went beyond the mandated Rs.10lakh guarantee cover for the MSEs.

Large number of customers is slapped with irrational minimum balances in their accounts and levy of penalties at will. RBI is averse to regulate such overtures in the name of micro management of banks being not their role.

With over 38% of the population still illiterate, Jan Dhan and Mudra Yojana as instruments of financial inclusion have only become compulsive agenda for the banking sector. Banks- Public sector or private sector, have their eyes set only on profit. Such profits are dwindling with net interest margins declining following the growing NPAs.

Institutional innovations like the 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.

Cashless banking leading to poor inflow of deposits during the last four months and cashless ATMs demonstrate the erosion of faith in banking in India. Bad banking and good economy cannot co-exist and therefore, it is imperative that innovative institutional solutions should be thought of.

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. Public sector banks have long back forgotten their purpose and their owner proving no better.

Emerging context requires that banking is redefined to meet the specificities of farming, employment, entrepreneurship, infrastructure, and international finance as distinct entities. In fact, Narasimham Committee (1991) suggested consolidation and convergence of the PSBs into six to serve the needs of the service sector, holding government securities, and retail lending; Local Area Banks to cater to the farmers and small entrepreneurs; International Bank to cater to the needs of exports and imports. Development Finance institutions, left untouched, would fund the infrastructure sector. FSLRC also echoed the same in its Report. This is the time to look at the spirit of such recommendations and rebuild the banks to regain the fast eroding trust in banking by the larger customer base of this country.

KISAN BANK:

Breaking the nexus between the farmer and politician can happen only when there is mutual trust between the bank and the farmer. Farm sector, consisting of crop farming (organic, precision, green technologies etc.), dairy farming, shrimp farming, poultry farming, sheep farming and agricultural marketing by itself is inherently capable of cross holding risks, save exceptions like the tsunamis, severe drought for long spells, huge typhoons. It is only in the event of such natural calamities that a Disaster Mitigation Fund should come to the rescue.

The existing commercial banks should shed this portfolio in favour of RRBs and merge all the rural branches with the RRBs. RRBs should be redesigned to take to farm lending in a big way – from farm machinery to crop farming and allied sectors on a project basis. Insurance plays a vital role in mitigating credit risk and therefore, the insurance products should be redesigned and modified on the lines of South Korean model.

All the Rural Cooperative Banks could continue their lending to the farm sector parallel to the RRBs as the lending requirements are huge and farmers require multiple but dedicated lending institutions.

RBI has not been comprehensive in regulating the sector. It is better that NABARD is restructured to play an exclusive refinance and regulatory role over the entire farm and rural lending consistent with its purpose of formation. Its other functions like the RIDF can be relegated to a new institution hived off from the NABARD.

UDYOG MITRA Bank

Nurturing entrepreneurship and promoting employment in manufacturing are moving at snail space in the Start Up, Stand Up and Make-in-India initiatives. Prabhat Kumar Committee (2017) called for setting up a National MSME Authority directly under the PMO to correct the milieu.

All the MSEs should be financed by dedicated MSE Bank Branches. All the existing SME branches should be brought under a new regulatory institution. SIDBI has disappointed the sector. It has to first consolidate all its FUNDS into just five: Incubation Fund; Venture Capital; Equity Fund to meet the margin requirements of MSEs when and where required; Marketing Fund to meet the market promotional requirements; Technology Fund; and Revival and Rehabilitation fund.

SIDBI should reshape into refinance and regulatory institution for the MSME sector with focus on manufacturing and manufacturing alone. It should divest its direct lending portfolio to avoid any conflict of interest. Its present lending to real estate and non-manufacturing MSME lending should be transferred to the commercial banks. RBI which is not currently able to cope with the regulatory burden of this sector can transfer it to SIDBI,

Vaanijya Banks (Commercial Bank):

All the existing commercial banks – both in the public and private sector – would do well confining to the project finance, lending to real estate, services sector, housing, exports and imports etc. All the Banks should constitute at the Board level a sub-committee on Development Banking to work on the transition arrangements to the above functionality.

Maulika Vitta Vitharana Samstha (Infrastructure Bank)

Huge NPAs have come from the practice of lending long with short term resource base coupled with lack of experience in assessing the risks in lending for infrastructure projects. ‘All the perfumes of Arabia’ (RBI’s structural debt restructuring solutions) did not sweeten the bloody hands of banks. It is time to revisit the universal banking model and reestablish Infrastructure Bank to fund the infrastructure projects and logistic parks.

These measures would help achieving the growth like never before.

RBI and GoI could constitute a High Level Committee to work on the modalities for transiting to the new structural transformation of the financial sector.

http://www.moneylife.in/article/how-to-redefine-and-rebuild-banks-for-emerging-demands/50376.html

Still too many go hungry

http://www.thehindubusinessline.com/opinion/still-too-many-going-hungry/article7322506.ece

Despite the high growth years, malnourishment stalks the countryside. This calls for a small-farmer led focus

At a time when India’s GDP growth is hopefully pitched at 7.5 per cent this fiscal, touted to be higher than China’s, three global reports of significance also grabbed the headlines: The Global Findex Data Base 2014, The Global Food Policy Report of the UN and the State of Food Insecurity in the World, 2014.

Ahead of all these, the IMF and the World Economic Forum reported that 25 per cent of India’s population still remains poor.

The Global Findex Data measured the financial inclusion around the world. The other two reports dealt with the food insecurity and the measures to tackle them.

It must be remembered that the data is mostly up to March 2014. The findings are of great import to this government for designing policies tackling financial inclusion, hunger and malnutrition.

The government would like to measure the poor by the JAM method — Jan Dhan account, Aadhaar, and the mobile. It has been acknowledged universally that there were no deaths due to hunger. But the farmers who produced food committed suicide were burdened by excessive debt.

The undernourished poor, like the Jan Dhan accounts, showed an impressive decline in the reports and these are counted once every three years.

A range of indicators can be used to measure a nation’s food security. These include average dietary energy and protein supply, access in terms of road and rail line density, domestic food price index, prevalence of under-nourishment, stability measured in terms of cereal import dependence ratio, political stability as well as absence of violence and terrorism, undernourished children below five years, anaemia among pregnant women, and vitamin A and iodine deficiency in the population.

Measuring insecurity

Malnutrition is redefined to include obesity and overweight. In India, child stunting (under five years) is 47.5 per cent while undernourishment is 15.2 per cent; whereas overweight population is 11 per cent. The country witnessed an average GDP growth of 8.7 per cent in 2003-08, 6.7 per cent in 2008-09, followed by 8.6 per cent and 9.3 per cent in the next two years.

When the growth of GDP was high and food inflation was also high, there was a decline in the percentage of under-nourished population.