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All eyes on RBI amid rising Covid-19 cases, shrinking GDP, sluggish demand

Author: Dasari Sreenivasa Rao/Wednesday, July 29, 2020/Categories: Exclusive

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All eyes on RBI amid rising Covid-19 cases, shrinking GDP, sluggish demand

At a time when Indian economy is reeling under severe pressure amid rising retail inflation, sluggish industrial output and negative growth rate-- all sections of the society are looking to the outcome of next RBI meeting. Economists forecast a possible reduction of 25 basis points (bps) in Repo Rate, which is at four per cent, and 35bps in Reverse Repo Rate, which is at 3.35 per cent. On the other hand, India Inc is suggesting the Centre to take up the loan restructuring for the banks and borrowers. Now, the question is that whether rate reduction provides the much-needed fillip to the industry as there's ample liquidity in the domestic banking sector. Further, the India Inc is suffering from poor demand in the domestic economy. In total, it would take two years for Indian economy to reach pre-Covid-19 level, majority of economists opine.

The Monetary Policy Committee (MPC) of RBI is scheduled to meet on August 4 and may announce its policy decision on key rates on August 6. The MPC held meetings in March and May this year announced rate cuts, cumulative repo rate cut of 115bps, and few supportive measures as the Indian economy slipped into worst phase ever seen in the recent history. Further, the accommodative stance of RBI resulted in repo rate cut to the tune of 135bps since February 2019.

In its off-cycle meeting in May as against the scheduled one in June, RBI slashed Repo Rate by 40bps to four per cent from 4.4 per cent. The MPC further reduced the Reverse Repo Rate from 3.75 per cent to 3.35 per cent.

An economist raises doubt over benefit of rate reduction as there’s low demand for credit. This is further confirmed with surge in bank deposits, he said. On the other hand, business firms have excess capacity and may not borrow for their investment requirements, he maintained.

Since the GDP is in negative growth rate, the government and the banking sector are positive on revival of economic activity as the Unlock 3.0 is in progress.

According to a latest survey by Reuters, the Indian economy, which already suffered 30 per cent drop in growth rate in April-June quarter, may further suffer 10 per cent drop in July-Sept quarter, four per cent in October-December quarter and over nine per cent in January-March quarter.

The much-publicised $266-billion rescue package for revival of the Indian economy didn’t offer any tax breaks, cash support or new spending boost. Considering this, India Inc and retail businessmen are expecting much more from the Centre.

On May 12, Prime Minister Narendra Modi announced a Rs 20-lakh crore economic package, equivalent to 10 per cent of India’s gross domestic product or Gross Domestic Product (GDP) to boost the economy. The Central government has also pushed several key reforms in the ‘factor markets’, which roughly denote five economic determinants: land, labour, capital, technology and infrastructure.

The Prime Minister's meeting with banks and NBFCs assumes significance in efforts to boost the economy which was already tumbling before Covid-19 struck on January 30. The GDP grew just 4.71 per cent in the October-December 2019 period, the slowest pace in six years.

“India is facing a difficult situation as our country is the third-worst-hit in terms of number of Covid-19 infections after US and Brazil. Now, entering the Unlock 3.0 may raise the risk factor for the nation. India has to strike a balance now. We have to keep the number of Covid-19 cases low as much as possible till we get the vaccine, while reopening economy to reach the normal level. The uncontrolled Covid-19 outbreak coupled with failure of stimulus package will put more pressure on the revival of economy. Industry observers suggest the Centre to immediately fill the gap created by absence of demand from the private sector,” observes a Hyderabad-based CEO.

PM takes a call on credit growth, risk aversion with banks, NBFCs

Prime Minister Narendra Modi on July 30 (Wednesday) held a meeting with the stakeholders of banks and NBFCs and discussed several factors pertaining to credit growth and risk aversion. The meeting largely talked about the vision and roadmap for the future.

According to a release from the Prime Minister’s Office (PMO), the Centre discussed the crucial role of the financial and banking system of supporting growth. It was noted that the small entrepreneurs, SHGs and farmers should be motivated to use institutional credit to meet their credit needs and grow.

“Each bank needs to introspect and take a relook at its practices to ensure stable credit growth. Banks should not treat all proposals with the same yardstick and need to distinguish and identify bankable proposals and to ensure that they get access to funding on their merit and don’t suffer in the name of past NPAs,” it said.

Risk aversion by banks has been a major concern of late as credit and liquidity are the need of the hour amid the Covid-19 pandemic.

The Reserve Bank of India's latest Financial Stability Report said that heightened risk aversion has pulled the overall credit growth rate of scheduled commercial banks to 5.9 per cent on a year-on-year (y-o-y) in March 2020.

“Bank credit, which had considerably weakened during the first half of 2019-20, slid down further in the subsequent period with the moderation becoming broad-based across bank groups,” the report said.

During the discussion, the Prime Minister Narendra Modi said the government was firmly behind the banking system and is ready to take any steps necessary to support it and promote its growth.

“Banks should adopt fintech like centralised data platforms, digital documentation and collaborative use of information to move towards digital acquisition of customers. This will help increase credit penetration, increase ease for customers, lower costs for banks and also reduce frauds,” the statement said.

It was stressed that India has built a robust, low cost infrastructure which enables every Indian to undertake digital transactions of any size with great ease and banks and financial institutions should actively promote the use of RUPAY and UPI among its customers.

Further, the Prime Minister also reviewed the progress of schemes like emergency credit line for MSME, additional KCC cards, liquidity window for NBFC and MFI.

“While it was noted that significant progress has been made in most schemes, banks need to be proactive and actively engage with the intended beneficiaries to ensure that the credit support reaches them in a timely manner during this period of crisis,” the statement said.

PSBs need more capital as safeguard against stress

The public-sector banks (PSBs) in India are in the process of mobilizing capital from private sources. However, it will not be sufficient to mitigate the anticipated risks unless supplemented with additional capital support from the Centre, observes Fitch Ratings.

The assessment comes after several large state banks have recently announced plans to raise a total of around $6 billion in fresh equity from the capital market.

Fitch Ratings said: “State banks already face significant execution risks in raising equity due to depressed stock market valuations and weak investor interest.”

The Centre’s plan to reduce the number of state banks to five from 12, while selling majority stakes in several others, including Bank of India to raise resources.

“A reduction in the state’s majority shareholding in some of its banks may dent depositor confidence and potentially lead to negative rating action as their long-term ratings are anchored to state support. It may also reduce investor appetite at a time when government capital support has stuttered, and an acceleration in new coronavirus cases is hampering a meaningful economic recovery and increasing risks for banks’ balance sheets,” remarked Fitch Ratings.

According to Fitch, the proposed stake sales will be very challenging in the current economic climate and in light of the potential capital shortfalls “we calculate at the state banks in our stress test. It could also require amendments to the banking company acts, which currently prescribe a minimum government shareholding of 51 per cent for the state banks, thus adding to execution risk,” the statement said.

The ratings agency expects state banks will remain reliant on fresh equity injections from the Centre as the proposed capital amounts, if raised fully, will likely add only around 100-150 bp to banks’ existing common equity a Tier-1 (CET1) ratios.

“Under our high stress scenario, this may provide some interim capital relief, testing the banks’ ability to raise fresh equity on their own, but will not be enough to stave off heightened solvency risks. It would also increase the prospect of further regulatory forbearance.”

As per the statement, recapitalisation requirements might be substantially higher once pandemic-related asset quality deterioration starts manifesting on bank balance sheets when regulatory forbearance ends, in which case raisin equity from the market will be more difficult.

“Recent comments by the central bank governor highlighting the need for recapitalisation further underscores this imperative, emphasising the risks that deteriorating asset quality will pose to state banks’ limited capital and earnings buffers,” the statement said.

“This is consistent with the outcome of our stress test on individual banks, whereby the state banks have significantly larger capital shortfalls than their private counterparts.”

Who’s responsible for mess up in banking sector?

The Narendra Modi sarkar has been facing a strong criticism over how public-sector banks (PSBs) and other financial institutions in India were destroyed. Further, it led to mess up the $2 trillion banking sector and the NDA government is also protecting willful loan defaulters.

RBI’s latest report on ‘Financial Stability’ July 2020 warned that bad loans in the banking sector can reach a 20-year high. According to former RBI Governor Urjit Patel’s revelation, while the RBI wanted to be tough against loan defaulters, the Narendra Modi government wanted him to go soft. Former RBI Deputy Governor Viral Acharya’s tell-all book's disclosure on the government's mismanagement in making the entire financial sector ‘unstable’, ‘risky’ and on the ‘verge of collapse’.

The NPAs had increased to Rs 9,35,000 crore as in September 2019 (9.1%) as against NPAs of Rs 2,16,739 crore (3.8% of total loans) in March 2013-14. The RBI report reflects that bad loans in the banking system can reach a whopping 14.7 per cent, a 20-year high.

All Indian Bank Employees’ Association (AIBEA) has listed 2,496 ‘willful defaulters’ with default amounts totalling a whopping Rs 1,47,000 crore. As such huge amounts are being technically written off by the NDA government, there is zero effort to investigate or punish the defaulters.

With the banks not allowed to recover loans from defaulters, all further lendings have come to a halt. Bank credit growth was 14 per cent when the Modi government assumed power in 2014. Bank credit growth is now down to just four per cent and will become zero soon, as per RBI’s own report, Congress party voiced concerns.

Further the BJP government the government came up with a proposal for mega merger of banks, as a cover-up for non-recovery of loans. “Ten PSU Banks were merged in the hope of covering up the bad loans. Two bad banks’ merger does not make one good bank. It only makes a larger bad bank,” said an analyst.

Another strong criticism the Modi government is facing that demonetisation and its impact continues to haunt the Indian economy even after over three years.

“The Modi government’s response during Covid-19 pandemic was a hogwash about the Rs 20 lakh crore package, which ended up as an empty formality. Non-food credit growth is almost zero and bank credit growth is reducing from 4 per cent to the baseline zero. Banks are just redepositing the money back with the RBI,” the Congress leader added.

Economists strongly advise the Centre to restore the RBI autonomy to allow it to go after bank defaulters, restore confidence in banks through a promise of ‘no witch-hunt’ and allowing them to lend prudentially as per their risk norms, and expand credit guarantee programme for MSMEs to stimulate credit offtake and propel investment.


Timeline extension for Jun qtr earnings till Sep 15

In what could be a great breather to listed companies amid spreading pandemic, the Securities and Exchange Board of India (Sebi) has extended the timeline for submission of financial results for the quarter ended June, till September 15. As per the norms, the original deadline for submitting the financial results for the period ending June was August 14.

The market regulator considered several representations requesting extension of time for submission of financial results for the quarter or half year ended June 30, 2020, due to the shortened time gap between the extended deadline for submission of financial results for the period March -- July 31 -- and that for the period ending June, which was originally August 14.

“After consideration, it has been decided to extend the timeline for submission of financial results under Regulation 33 of the LODR Regulations, for the quarter/half year/financial year ended 30th June 2020, to September 15, 2020,” said Sebi.

The market regulator has asked the stock exchanges to bring the provisions of the circular to the notice of all listed entities and also disseminate on their websites.

RBI Seeks Price Control

Reserve Bank of India (RBI) Governor Shaktikanta Das said that the country now requires policies to ensure a sustained increase in the income of farmers along with maintaining reasonable food prices for the consumers. Das said that price incentives have been costly, inefficient and distortive.

RBI noted that shifting the terms of trade in favour of agriculture is the key to generating positive supply responses in agriculture. Experience shows that in periods when terms of trade remained favourable to agriculture, the annual average growth in agricultural gross value added (GVA) exceeds three per cent.

“Hitherto, the main instrument has been minimum support prices, but the experience has been that price incentives have been costly, inefficient and even distortive. India has now reached a stage in which surplus management has become a major challenge. We need to move now to policy strategies that ensure a sustained increase in farmers' income alongside reasonable food prices for consumers,” observes Das. According to him, an efficient domestic supply chain becomes critical in such circumstances.

He said that the focus must now turn to capitalising on the major reforms that are underway to facilitate domestic free trade in agriculture including the amendment of the Essential Commodities Act (ECA).

Das was of the view that Indian agriculture has witnessed a distinct transformation as the total production of food grains reached a record 296 million tonnes in 2019-20, registering an annual average growth of 3.6 per cent over the last decade, along with production growth in horticulture.

He also noted the changing pattern of energy production in favour of renewable energy and shifts in supply chains, domestic and global.

“In a competitive market economy, an efficient supply chain can enhance economic welfare. Investment in sectors with strong forward and backward linkages in the supply chain can generate higher production, income and employment,” Das said.

The writer is a business journalist with 27 years of experience



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