Economic Highlights
New Delhi, 10 December 2018
RBI Monetary
Policy
CAUTIOUS,
RATE HIKE OPTION
By
Shivaji Sarkar
The Reserve Bank of India monetary
policy is cautious, speaks of the broad spectrum, apprehensive of the future
course and is silent on rising NPAs beyond the known sectors. Further, it speaks
of GDP growth around 7.1 per cent, much less than in the first quarter. It has
maintained status quo on interest rates. But ideally it should have gone in for
a rate hike. The policy is more industry centric -- even crisis hit real estate.
It expresses a veiled concern about the banking finances but overtly does not
spell it out.
Does this mean it may be
considering a rate hike after April 2019? This may be necessary for two reasons
-- to safeguard banks and spur deposits. The low interest rates and high bank
charges on people’s own money are leading to a credibility crisis as NPAs do
not abet. It hints at not so stable market conditions.
The monetary policy has
pegged itself on inflation and its uncertainties. The RBI is not confident that
food inflation would remain low and is uncertain about the falling crude prices
and international geo-political tensions. Besides, the policy statement has
cited seven risks to inflation, including volatility in the food grain market.
The biggest risk it sees is in the unusually low food prices and in many cases
lower than July minimum support prices (MSP). It is a soft way of saying that
farmers are not able to sell their products even at the MSP.
The RBI apparently is seeing
a distress situation. Its food price volatility sensing may be based on a
crisis in the farm sector as logically such low prices are unaffordable for the
producers.
As GST collections are yet
to stabilise, it fears a fiscal slippage at the Centre and State levels. If
this were to happen, the policy outlook says it would heighten market
volatility and crowd out private investment as inflation may not be avoidable
for long. The statement should be taken as suggestion to the Government for
adopting a tight-rope fiscal policy -- something politically difficult to
accept in an election year.
The banking sector had gone
through an intense health check up in October-November. The loan portfolios,
including that of MUDRA, credit guarantee scheme for MSMEs run by Small
Industries Development Bank of India (SIDBI) and even kisan credit card had
been closely scrutinised. The sector had been particularly concerned about many
MUDRA loans turning bad, credit risk to SIDBI and the issues of waivers to
farmers. According to a Merrill
Lynch report waivers are likely to double to $40 billion i.e. Rs 28000 crore by
March 2019.
Many political parties have promised waivers
during the recent State Assembly elections, if voted into power. This is a
populist move ostensibly to help the farmers, but bankers view it as a way to
vitiate the credit culture. The banking sector found that in view of such
announcements many farmers who are capable to repay have stopped repayments. It
bodes ill for banking. And it is a strong suggestion for correcting the political
economy and populism.
In June, 2018, a joint study by SIDBI and Credit
Bureau TransUnion CIBIL revealed that while MSME NPA rates had remained stable
between March 2017 and March 2018, there was a looming threat. “The future NPA
in the segment may be driven by Rs 11,000 crore exposure, which are currently
tagged as ‘standard’ but belong to entities at least one or more exposures of
which are tagged as NPA by other banks or credit institutions,” read the
report. “Additionally, as of March 31, 2018, there is a system-wide exposure of
Rs 1,20,000 crore belonging to entities having risk exposures. These exposures
are expected to add Rs 16,000 crores in NPA by March 2019”.
In October, a study of the situation of MSME
and MUDRA creditors in banks all over the country has found the situation
difficult. This is a follow up of the parliamentary Estimates Committee
meeting. The NPAs of the 38 listed banks collectively crossed Rs 10.17 lakh
crore in the fourth quarter of the last fiscal, with the 21 public sector banks
(PSBs) accounting for the bulk of it.
In a written answer to the Rajya Sabha in
end-March, Minister of State for Finance Shiv Pratap Shukla had admitted that
the PSBs had collectively written-off over Rs 1,154 crore in NPAs in the last
fiscal till December 31. This is 103 per cent jump over the amount written off
in 2016-17.
The concern of MUDRA, a flagship programme,
is palpable. Some irregularities have reportedly been found and steps are being
contemplated. A major concern is the Shishu -- tiny loans where loans of up to
Rs 50,000 are given out, with an average loan size of Rs 23,316 crore.
This means that the majority of loans are small amount loans to almost 90 per cent
of the people.
Arguably, it is difficult to imagine what a
start-up can do with Rs 23,000. Tarun -- mid-size – up to Rs 5 lakh, loans, as
per 2016-17 annual reports is 1.36 per cent of the total credits disbursed. In
2018-19, so far, over 63 lakh loans have been sanctioned with a total disbursed
amount of Rs 26,600 crore. These are being closely monitored for repayments.
The banks are also not seeking much
refinancing, a factor necessary for the sector to grow. In 2016-17, 11 banks
sought Rs 1886.73 crore as against Rs 2432 crore availed a year bank. This is
attributed to slowdown following demonestisation. It has also led to a
repayment crisis.
A revelation is that mere loan disbursements
do not increase production though it causes depletion of bank assets. Deposits
are not growing the way it used to be as the depositors are less enthused about
the low interest rates.
For the survival of the banking sector, it is
looking for a critical balancing and is looking to work on a low spread between
lending and deposit rates. The monetary policy does not address these issues though
now it has to. It also needs to ponder over how long it could survive on the
low deposit interest rates as it prevents infusion of funds. Low lending rates
increase immediate offtake but the repayments are problems.
The banking sector has to go through an
overhaul and the industry could not thrive long on low rates. Banks have to act
for deposits’ safety and expansion, lest a decade-old Lehman-type crisis
develops, now in India.---INFA
(Copyright,
India News & Feature Alliance)
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