Monetary policy cautious

By Nagaland Post | Publish Date: 12/9/2018 12:29:24 PM IST

 The RBI monetary policy is cautious, speaks of the broad spectrum,  apprehensive of the future course and is silent on rising NPAs beyond the known sectors.

It speaks of GDP growth around 7.1 percent, 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 – even crisis hit real estate – centric. It expresses a veiled concern about the banking finances but overtly does not speak it out.

Does it mean it may be considering a rate hike after April 2019? It 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. 

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 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 stabilize, 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 banking sector health check 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 scrutinized.

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 – Rs 28000 crore - by  March 2019.

Many political parties have promised waivers during the recent state assembly elections. 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.

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 belongs 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. It is 103 percent 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 percent of the people. Arguably, it is difficult to imagine what a start-up can do with Rs 23,000. Tarun – mid-size – upto Rs 5 lakh, loans, as per 2016-17 annual reports is 1.36 percent 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 note-ban. 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.

Launched on December 3,1990. Nagaland Post is the first and highest circulated newspaper of Nagaland state. Nagaland Post is also the first newspaper in Nagaland to be published in multi-colour.

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