IN media

 https://www.timesnownews.com/videos/mirror-now/urban-debate/what-has-been-the-impact-of-the-covid-19-pandemic-on-indias-economy-the-urban-debate/67554

Mirror Now 16th July 2020

https://www.youtube.com/watch?v=VijIQo0XcaE&t=1629s

Free Press Journal and SIES Webinar on Milk 23rd July 2020

Pragmatic view taken by the RBI; still expect rate cuts going ahead: Business Standard August 6th

 This credit policy was always going to be of special interest for three reasons. The repo rate decision is of prime interest to the market, which normally wants it to come down. Hence, the MPC stance was important. Second, as we are now five months into the year, the Reserve Bank of India’s (RBI’s) take on gross domestic product (GDP) growth is something everyone was looking for. And third, after the moratorium and its extension, the central bank’s take on the future steps in terms of extensions, sector specific relief and restructuring of loans is something that was expected.

The third point mentioned above is normally done outside the policy but given the circumstances, a call on this aspect was justified in terms of expectations. While liquidity considerations are also a part of the announcements, affirmative action was not to be expected given the large surpluses going into the reverse repo market. The Governor has said that all measures have improved transmission with the last four months witnessing 90 basis point (bps) decline in weighted average lending rate on fresh loans.

The repo rate call was a tough one to take considering that inflation is high and at the upper level of the band. Going strictly by the book, a rate hike or change in stance could have been called for. However, if one goes back to March 2020 and the subsequent announcements in April and May, it is clear that the MPC was going to wear the bifocals and also look at growth which is definitely in the negative zone. The latest PMI numbers show that manufacturing is down, which can also be seen in other high frequency data. Therefore, growth considerations are of paramount interest. The call to leave all rates unchanged looks pragmatic on balance as food inflation is still high and core inflation has potential to move up. The accommodative stance is assuring. Quite importantly it has maintained that there is scope for further cuts, but also that it should be used judiciously to make it effective.

On growth, the RBI has still been conservative and not committed to a number but retained the view that it will be negative for the full year. The central bank is positive on the rural economy, providing a lot of support to this negative growth that would otherwise have been deeper. The RBI is still optimistic that if the pandemic comes under control in the next couple of months, recovery in economic activity will be quicker and can moderate this negative number. Inflation has been projected to be elevated in the second quarter and then come down in the third quarter when the kharif harvest comes in. Quite clearly, the next policy will consider both these aspects.

On the issue of stress resolution, the RBI has opened a window for banks to have resolution plans for companies which are otherwise strong, but facing stress under the June 7, 2019 circular. The restructuring of MSME debt till March 2021 would again be useful for this segment, which has been affected quite sharply by the lockdown. Here, the sectoral forbearance through such measures has not been included which can still be hoped for later.

Overall, the RBI’s policy has been reassuring on the tackling of stress in the system and kept hope for further cuts in interest rates in future if inflation comes down and a growth push is still required. This should satisfy the markets.

Managing the fisc won’t be easy at all: Business Line 4th August 2020

 

With tax collections below target, the Centre will possibly resort to higher market borrowings, thereby raising bond yields

One of the biggest casualities of the lockdown is the government. All governments need money to function and if revenue does not increase it is hard to meet committed expenditure. There is a solution in the form of higher borrowing, which is possible for the Central government, which must only ideologically steer away from FRBM. But States find it hard to manage, and end up cutting discretionary expenditure.

The given Table gives revenue collections for the Central government in the first quarter of FY21 along with the comparable figures for last fiscal. The revenue shortfalls this year can be directly linked with the shutdown.

Industry impact

First, income tax collections are lower by around ₹35,000 crore. There are three reasons for this. To begin with, there were job cuts by several corporates, especially in the service sector, which directly meant a lower salary bill and hence tax payments. Second, companies also have lowered the salaries of their staff by different scales for the year. This means that total payouts will be lower by 5-20 per cent for existing employees, which in turn will affect income tax collections. Last, all companies disburse their variable pay, which goes under performance-linked pay or bonus, to their employees in the first quarter. The fourth-quarter as well as FY20 results of companies showed decline in both the topline and bottomline. Hence, the payouts to employees were lower, which gets reflected in a one-time loss for the government.

Second, the preliminary results of companies that have been announced for Q1 FY21 indicate a continuation of the trend of falling sales and profits, which is understandable as April was a total washout for all. With profits declining, the tax outflow would also come down, which is reflected in the lower collections so far. While Q2 would also be lacklustre, it may be hoped that there would be some pick-up in Q3 and Q4, which can helpsteady collections and avoid a sharp fall in this period.

Shortfall in collections

Third, the major casualty is the GST, where there has been almost a 50 per cent decline. The GST is imposed on all goods and services and is a consumption tax. For tax collections to increase, it is necessary for consumption to go up. The lockdown has meant that people are not allowed to step out of their homes, a condition which persists with several restrictions even today. Further periodic lockdowns, which are localised, have ensured that households have not shopped for anything beyond essentials, which also have lower GST rates. For the first two months, e-commerce was not allowed to deliver non-essentials. The result was less spending and lower revenue for the government.

 

With limited removal of restrictions till September it is unlikely that there will be any pick-up and the government will witness sharp fall in GST collections. For the year, ₹5.8 lakh crore has been targeted and ideally at least ₹1.1 lakh crore should have been collected this quarter.

Fourth, while the trade deficit has been widening with imports declining faster than exports due to a sharply falling economy, which lowers demand as well as crude prices, customs collection too have declined by around ₹24,000 crore. This also does not look like it will compensated for in the future, as imports would continue to move in a downward trajectory.

The Central excise collections have more or less been maintained, and this can be attributed to the government increasing the duty on petrol and diesel as well as sin products. If these items were subsumed under the GST, the government would have had no control over the collections.

Economic effects

What are the implications of such sharp slippages in meeting targets? The first consequence is that the State budgets would get affected. Out of total tax revenue collections of ₹24.23 lakh crore, transfers to States should be ₹7.84 lakh crore. This is apart from the grants given to carry out Centre’s development programmes. During the first quarter, the transfers to States were ₹1.34 lakh crore as against ₹1.49 lakh crore last year. There is hence a ratchet effect here, where the shortfalls in the Centre’s revenue translate into the same for States, which in turn have to cut back on expenditure.

The second implication is that the Centre has to take a tough call on the expenditure side. So far this quarter, the total expenditure has been higher by around 13 per cent at ₹8.16 lakh crore. This is mainly due to the relief expenditure invoked, that was said to be outside what was budgeted in February. Two possibilities exist. One, there can be a cut in capex during the year even though so far, the government has enhanced such allocations to keep spending up. The second is that there could be some sharp cuts in subsidies. As the government has announced it is giving free foodgrains to the poor for six months, it would obviate the need to provide any food subsidy separately. This is why the food subsidy bill this time is much lower than that of last year.

The last implication is that higher borrowing will be necessitated due to a higher fiscal deficit. It should be borne in mind that with the government slashing interest rates on small savings drastically in April, there will be a lower allocation of funds. Hence higher market borrowing will be necessitated. It is probably keeping in mind this development that the government has already increased the borrowing programme from ₹7.8 lakh crore to ₹12 lakh crore for the year. Such borrowing will definitely have a bearing on bond yields, and this is why they are still quite intransigent in the downward direction, even though there is surplus liquidity and the RBI has brought in a new benchmark security that had a lower yield. The market remains uncertain.

A Wall Street View of Rural India: A book ...Financial Express 2nd August 2020

 When you pick up a book called A Wall Street View of Rural India, the first thought that occurs to you is that it will have something about how rural-focused companies can score over others in the market. This is a misnomer, as Sujit Sahgal, a career banker who has worked outside India, narrates his view of rural India based on his experiences. It is, hence, not a macro view of the rural economy, but a summation of micro interviews and discussions had with rural folk. It is, hence, different.

What Sahgal tells in his book is really interesting. He covers seven-eight states across the country and talks to hundreds of rural folk to grasp the ground-level reality over a decade. We are fed with a lot of information at the policy level and official documents about achievements in rural India and, as the author tells us, this is important, as it fetches votes. But the real story is different and this is what makes the reader turn the pages. The truth is somewhere in between.

Let us look at some of the good things that are silently happening. This is more in the social domain, where education is high-priority and, contrary to what we believe, rural folk want to give their children better education. Also, this holds for both boys and girls, which is a comfort. His observation is that, in government schools, there are more girls than boys and this is so because some of them are working on land with their parents, while others go to private schools. The revelation here is that villages, which are within a radius of a certain distance from cities, tend to have better performance. Schools are not as bad as we are normally told, as they do function and have teachers, and the infrastructure is satisfactory with computers also making their presence felt.

The reader feels nice when he talks of women empowerment in rural India, and the proliferation of news and media in general has brought about this change. Self-help groups work well and gone are the days when they remained in a state of disadvantage throughout their lives. Another important takeaway from his treatise is that a lot of development has happened on the social front in terms of having electricity connections, toilets and so on, which has improved lives in rural India, notwithstanding the limited coverage.

The book also provides a reality check on the economic story and this is where Sahgal actually opens the cans. The rural growth story should not be overstated and this is a message for all corporates in the B2C area who must read this book. The rural spending story developed due to both the income and wealth effects—not something which has been captured in macro analysis of this economy. High MSPs during the Congress regime, coupled with investments made by corporates and the government which entailed buying land from farmers, led to this increase in wealth, which led to spending. This was not sustainable, according to the author, as the chain had to break, which it did with the BJP coming to power. The halt in investment due to the scams, issues in selling land and lower increase in MSPs led to income coming down, which has made this story untenable.

Another revelation by Sahgal pertains to the extended leverage of this sector and the loan waivers, which are politically motivated. Interestingly, while the government talks about rural credit and the success of Kisan credit cards, given the structure of such credit, it has been used mostly for consumption rather than production, which is a problem. In fact, smart cards, which are becoming the norm, encourage such indiscretion. Also, thanks to loan waivers, it has entered the psyche of farmers not to repay their loans. On the other side, he also shows that it is not easy to qualify for the same, as the conditions put are quite stringent. So, there are two sides to this issue.

Sahgal also dwells on the flip side of the initiative taken by the government to make all benefit transfers online. This has actually led to lower employment because before the new system came about, there were people from the village employed to carry out these chores. With everything happening from above, these jobs became unnecessary. Similarly, post 2014, the NREGA programme did not have too many projects that were available for work to be made available to the farmers. Hence ironically, some reforms which were brought on to cut leakages were at the cost of job creation!

Sahgal does see problems going ahead in agriculture, as children of farmers do not want to do farming. While urban folk do have a penchant for reverse migration, it may not be sustainable. There will be more technology at play and the shared economy will dominate even in, say, the tractor business. People are getting savvier and can get progressively integrated in the technology web, where the eNAM will help.

Sahgal’s book is very readable as it takes us to the roots with his stories and conclusions. His approach is real as it is based on what has been experienced by him over the years in villages. Everything in this large economy is dualistic and there are surprises everywhere as myths are exposed (in economic domain) and pessimism moderated (in social area). It is definitely not based on secondary sources of data which normally commentators use sitting in their air-conditioned chambers. This is why it stands out.

Government and RBI should revisit all bank charges on deposits: Free Press Journal 1st August 2020

 Recently the author received a message from AXIS Bank that henceforth the bank would be charging Rs 15 a month for SMS messages. Quite predictably the savings bank account was debited for the same. There was no choice provided to the customer and the bank went ahead without the consent. As is normally the case with all bank charges it is possible that your bank might have had this in fine print in the account opening form which would have been exempted from a fee to begin with. Hence there was nothing amiss about such a charge being imposed after a decade. Should the RBI be worried about such developments?

In the Indian banking system, there are around 165 crore savings bank accounts in the country and if this charge of Rs 180 per month were to be applied to all, the system would be earning up to Rs 30,000 crore. If even 25% of these accounts are charged, the income would be Rs 7500 crore. Practically speaking, savings bank holders are normally salaried class which does not need such messages which are ‘pushed’ on them and then charged. The same bank earlier started charging Rs 300 per annum for debit cards issued which is mandatory for every customer. All those in the exempted category, like salary accounts, were also charged this fee. This is a personal experience with the bank. This practice has become universal now as a check across these banks show that all are charging customers for basic services. And the curious part is that the RBI has actually given freedom to banks on these accounts and the interest earned could be as low as 2.5% now for some banks.

The Financial Resolution and Deposit Insurance Bill, 2017 had also proposed deposit holders to partly bail out banks, meaning thereby that if NPAs increased and banks went bust, the deposit holders should bear part of the cost. The RBI has also approved all the charges which banks charge to customers—number of ATM withdrawals, cash deposits, entry into banks, and so on. Therefore, banks are merely working within the rules laid down by the regulator.

The broader questions are the following. First, deposits keep banking business going and hence the savers cannot be charged for basic banking services. Banks keep messing up on what they are supposed to do i.e. lending, and try and make up these losses by burdening the customer with these charges. As banks operate as an oligopoly, everyone does the same and hence deposit holders have no choice. Second, when a charge is imposed the deposit holder’s consent has to be mandatory and an ‘opt in’ facility has to be there. If a person does not want a debit card the choice should be given with the provision that the person has to go to the bank branch and make a transaction. While the charge may not be high, but with 165 crore accounts involved, the potential cost to the savers will be around Rs 50,000 crore. When the smart card concept came in, the idea was that customers did not crowd the branch and were given this facility. Once used to it, banks have started charging for the card. Often on security grounds there is a time stamp which means that new cards are issued and the customer can be made to pay for this issuance too. Third, the very idea of FRDI of making deposit holders also taking the burden of NPAs is abhorrent. Banks make money on the deposit holders’ money and hence the latter cannot be made responsible for something which the former is supposed to have the expertise.

There is definitely need for the RBI to revisit all these charges that are levied by banks and question the logic of each one of them. Basic bank services have to be free of cost and where there are charges the customer should be given the choice. In fact, even minimum balance rule, which is a good way for banks to earn money makes no sense as there are actually no costs in having an account which does not have this threshold. Banks continue to use these funds for their business and earn an income and hence the argument that this is a cost for the bank is fallacious.

There is also need for an association to be formed for deposit holders which works towards protecting their interests. Curiously all policies are biased heavily towards the borrowers and rarely talk of the interests of deposit holders. Hence the savers’ perspective is never looked at. As there is a large population that lives on a fixed income the anomaly is that while the government talks of the interests of this class, the same does not get reflected in policies.

The government also should look into this issue as on one hand it is trying to drive people away from cash holdings and forcing savers to put money in a bank where these practices can be interpreted as being exploitative.

Takeaways from RBI’s financial stability report on moratorium: Financial Express 28th July 2020

 

Takeaways from RBI’s financial stability report on moratorium

By: Madan Sabnavis | 

Published: July 28, 2020 7:15 AM

The moratorium has been extended by another three months and, hence, a clear picture, on whether these accounts will remain standard or not, will emerge only towards the end of the year

The moratorium, extended to all bank customers, as per RBI’s March announcement, had raised some issues; these have been answered, to an extent, in the latest Financial Stability Report (FSR). There was no firm data concerning how many loan-account-holders availed of the moratorium and the overall value of outstanding credit reserved for this. There was ambiguity regarding whether or not this was automatic or whether one had to opt for it. There was strong messaging from the government that it had to be automatically offered to all customers, while the borrowers often complained that they had to ask their bankers.

The data provided in the FSR is interesting. The accompanying table shows that around half of the outstanding loans were under the moratorium, which also covered 55% of customer accounts. Given that outstanding credit in the system was Rs  104 lakh crore (includes farm loans too) as of March 2020, a sum of up to Rs 45 lakh crore, or around 22% of India’s GDP, is, thus, under the moratorium. (this was offered to all standard assets as of March 1, which was above 90% as of March-end). This shows the effect of lockdown on the economy, with half the borrowers preferring to opt for this facility. Indeed, even the borderline companies that could have serviced their loans went for the moratorium owing to the uncertainty of future cash-flows, but this shows that such loans can be considered vulnerable to differing degrees.

The highest share of o/s loans is, quite expectedly, with the SMEs, and this should be a cause of worry. SMEs were adversely affected by demonetisation and GST, now lockdown has added to woes. Even after this scheme ends, the government will have to announce a restructuring scheme for this segment.

The other revelation is that, in all segments, the share of outstanding loans that have sought moratorium is higher than the share of accounts, which means that it is the relatively larger ticket-size borrowers that are under stress.
Only in the case of individuals is the differential low as the ticket-sizes tend to be normally homogenous across the board. Banks, hence, need to take a closer look at the bigger tickets in the corporate segment as they could potentially be trending towards becoming NPAs. And, as some segments like hospitality, airlines, media, tourism, construction, and real estate are still to recommence activity—some may even take another six months—a rigorous monitoring policy should be in place.

The retail loans would also be a concern as PSBs, in particular, had moved more aggressively into the mortgage segment with the pressure of affordable housing being an overriding factor. Now, anyone taking a moratorium here would be in an extremely challenging position compared to say a corporate. Job-loss or a salary-cut would typically increase the probability of not being able to service the loans. Here, the situation will not change during the year. In case of corporate loans, with the unlock phase being in force, it may be possible for companies to recover. In the case of personal loans, this may not be the case.

For FY20, RBI has pointed to an NPA ratio of 2%, which can rise sharply in the coming year once the classification norms are normalised. The affordable segment will be the most vulnerable section as the loss of jobs has already affected or will impact the lowest-income group. In fact, a section of the migrant labourers who have gone back to their hometowns in rural India would also be covered here.

The other interesting bit revealed by the data is the residency of these loans across the different categories of banks.
The overall picture on loans under moratorium has been skewed by the PSBs, as shown in the accompanying graphic. Two-thirds of their accounts and loan-value are now covered under the moratorium. This is much lower for the private and foreign banks. Several conclusions can be drawn from this.

First, the government may have nudged the PSBs to be more aggressive in getting customers to opt for the moratorium. Affordable housing, too, has been high on the agenda of the government. Second, PSB accounts are clearly more stressed than others, something that gets revealed in the NPA numbers as well. With a high impaired-assets ratio, it is but natural that the more vulnerable accounts would be in their portfolio relative to other banks. Third, for foreign and private banks, the difference between the percentage of accounts and outstanding loans is quite stark, with the share of customer accounts being higher than those held by debt. This means that typically the smaller tickets have gone for the extension and the bigger accounts have not.

Hence, the number of accounts seeking moratorium is higher than that by value. Fourth, a corollary, the non-PSBs have better quality of customers, which is buttressed by the fact that their NPA levels are much lower. Therefore, their customers tend to be financially stronger, and thus have not opted for this facility. They have been choosier when picking their customers.

Interestingly, for the small finance banks, 85% of the accounts covering 63% of the o/s are under moratorium. Here, it is the smaller tickets that are under pressure. For urban cooperative banks, it is the reverse with 57% of accounts and 65% of the value being under moratorium. The same is seen for NBFCs, where 29% of the accounts and 49% of outstanding have opted for this facility.

The moratorium has been extended by another three months and, hence, a clear picture on whether these accounts will remain standard or not will emerge only towards the end of the year. This is a global problem and can lead to an increase in the set of impaired assets at a later date. The clue is to restart the economy as soon as possible so that the enterprise can get back to work and start earning revenue. For individuals who are working with pay-cuts or are out of work, the situation is unsatisfactory, which will finally show on the books of banks. Will the government be forced to announce waivers in future?

Book Review — Sway: Unravelling Unconscious Bias: Financial Express 26th July 2020

 ‘Sway’ by Pragya Agarwal is quite a delightful book that gets into our subconscious and reveals the unconscious bias that exists in our mind that manifest in terms of behaviour or reactions even before we are aware of them. Agarwal is a behavioural and data scientist and while she is an Indian by origin, is a citizen of the UK. But her appearance and that of her children make her stand out for differential treatment even in her homeland.

Such biases are quite strong and also manifest in terms of conscious bias against a race or community and become all-pervasive. The ban on, say headgear for women, appears to be a conscious bias but is driven by the unconscious, which makes people generalise and come to certain conclusions.

The author takes us through various biases that exist when we deal with people. Gender bias has been spoken of, as it is very evident and almost all working women can testify to this disadvantage where there are certain preconceived notions when hiring people for certain jobs. The bias comes out further quite interestingly when we see the design of something like passenger cars where intrinsically the seats and positioning of the pedals are tuned to men rather than women. This means that women have to make the adjustments rather than men who have the vehicle tailormade for their physical stature.

She also gives an example of Microsoft’s gaming device that was to pick up commands from signalling of hands or voice. It was geared to men in a certain age group, and women and children got left out. The bias, hence, also enters AI, which, when running algorithms with data, would always reinforce the best selection as being men rather than women. This means that even technology is not free from such biases, probably because it is designed by people who reinforce the same in their work.

Race is another disadvantage in society and this holds true in all countries, especially where the mixed-race country is dominated by the local gene. There is typecasting of race everywhere and we can see it in India too where coming from a particular region makes one get bucketed under certain preconceived notions, which can either help one in a job interview or even work against the person by virtue of this unconscious bias.

Agarwal talks of other biases that come from something as rudimentary as looks. The so-called good-looking people stand a better chance at getting jobs and even credits in universities. Studies were conducted which showed how essays were marked when the person was not seen by the evaluator and when the face was shown. The better-looking ones performed better when the evaluator saw their faces. This is another bias which comes at the time of recruitment where looks matter. This can also be carried further to heads of states where often a less good-looking person could be at a disadvantage. The author again says that this is ‘unconscious’ because even experiments involving babies show that they tend to spend more time looking at what are considered to be good-looking things, including people, and could also offer smiles as a reward!

Another area where there can generally be a disadvantage is ageism, where older people are looked down upon. This is surprising because there was a time when age went with experience and people looked up to them with respect. But today when it comes to hiring people, age is a drawback as it is assumed that people slow down with age and several jobs require quick thinking and movement which does not go with age. Hence often even when jobs are advertised with an age range, the lower limit would be more attractive for potential employers compared with the elderly.

Agarwal gives several examples of experiments that have proved such biases which exist and hence this leads to stereotyping or type-casting. It affects all areas of our lives when we look for admission or a job or compete, as the other person is always typecasting us as being of a certain bucket, which may or may not be right. It can lead to prejudices and as seen in the western world, race and religion are often associated with certain negative qualities leading to discrimination and ostracisation. In fact, the concept of ghettoisation is a result of such prejudices that come for minorities in countries where they tend to live in clusters and for all purposes are looked upon as being ‘others’ even though they are citizens of the same country. Hence, the entire concept becomes self-fulfilling.

The challenge, according to the author, is to break these stereotypes, which is difficult because these are not conscious to begin with. Also, at times, this stereotyping is perpetuated by the persons concerned where women may not trust women directors, with the author giving the example of Anne Hathaway. Hence, every bucket of people who are typecast also follow this instinct, thus reinforcing the theories that have been informally set in the mind.

Pragya Agarwal does make everyone aware of these biases and leaves it to us as individuals to bring about changes. Some have been carried down the ages and have become conscious bias. Ideally a multicultural setting with no preconceived biases, whether it comes to subjects or games, where equal opportunities are provided, are a starting point. But exposure to culture outside the book like the company one keeps and the movies one watches and the news that one reads will make this task very difficult.

The author does not say so but one can conclude that maybe such things have to be finally taught in the classroom so that the future generations are consciously told not to develop such unconscious biases!

RBI rate cut: The outlook on inflation makes a strong case for a pause by MPC: Financial Express 23rd July 2020

 The outcome of the MPC meeting is always of interest to the market, as there is guesswork guesswork  The outcome of the MPC meeting is always of interest to the market, as there is guessworkgoing on all the time on what the committee may decide on interest rates. If the economic conditions now are compared with those in May, when a call was taken on interest rates, there is considerable uncertainty on the ‘unlock’ process the government has talked. This is so because, while most manufacturing activity and some services have been allowed to recommence operations, periodic lockdowns at the state- or district-level leaves companies wondering about the future. Basic problems, such as of labour and logistics, remain, while liquidity has been more than addressed by the central bank.

The first question in the current context is whether RBI will lower the repo rate again this time. It is at 4%, and there is room for further cuts. But, inflation is above 6% and will remain at elevated levels for some more time until the kharif harvest sets in. This basic indicator is justification for a pause on the accommodative stance this time. However, this is a judgment call to be taken. Looking ahead, the inflation dynamics are going to shift, with non-food inflation being the variable to look at. The services segment, which dominates the core inflation part, has shown signs of moving up; and as services open up, this will become all-encompassing. Airline rates are up, as are those for healthcare as providers of such services make up lost ground. Hence, notwithstanding a good kharif crop, price pressures will remain, and an average CPI inflation of 5% for the rest of the year looks likely.

In the last few meetings, the MPC held growth as the overriding objective, and, now, there is more clarity on negative growth expected. RBI will probably have its growth outlook number this time, as evolving conditions have gotten clearer. The first quarter has been a disaster of mammoth proportions for the economy, and, while conditions will get only better, the question is whether the interest rate cut is important now.

RBI has aggressively induced liquidity in the system, which, ironically, is getting reinvested in the reverse repo auctions at around Rs 6 lakh crore a day. This signals that RBI may pitch to lower this rate further, from 3.35% to 3% or 3.1% to dissuade banks. The positive development is, as stated by the FM, the flow of funds to the SMEs has increased sharply till mid-July, and data for the fortnight ending July 3 reveals around Rs 48,000 crore of incremental credit. Thus, it is logical to conclude that the economic package announced by FM, which includes guarantee of credit to SMEs, has taken off.

The interesting thing is that this increase in credit to SMEs comes at a time when they are still finding it hard to get back on their feet, and economic activity is just about recovering. Therefore, it does look like that the first round of credit flow would be more for sustenance rather than growth as this segment has been impacted by cessation of activity and a high level of receivables from the linked production. The second round of credit would probably be more for growth, and, hopefully, should be before the guarantee scheme ends in October 2020.

In terms of lending rates, the MCLR has moved down to 6.65-7.3%. At this juncture, it should be kept in mind that a large set of borrowers have used the moratorium allowed by RBI; this is primarily to tide over times when there is less revenue due to the lockdown. Lowering rates further would help, albeit again as relief. But, large-scale borrowing at such low rates could lead to mis-pricing in the market and result in higher leverage at a time when economic activity has not yet picked up. Therefore, there is a counter-argument for keeping rates unchanged for the time being and wait for the revival to take place. Theoretically, lowering rates when the economy is on the upward slope is more risk-compliant than when conditions are really downbeat.

A related issue that will definitely be deliberated in the context of banking is the moratorium, as the concept came as part of the policy in March, and again in May. At present, the moratorium is for 6 months, and at some stage, it will have to be rolled back. As has been seen even in the case of ‘unlocking’ over the last two months, there has been volatility with ground-level disturbances. Therefore, the central bank needs to have a plan in place as to how the system can be moved away from the moratorium and be brought back to normal. The definition of NPAs, too, would have to go back to normal as these two concepts run in parallel.

This is where RBI needs to have a roadmap defined for banks. Some of the scenarios that can be conjectured here are the following. First, the moratorium may have to be extended; we are in the second quarter of the financial year, and most firms are still operating at low capacity utilisation levels while some in services are barely operational. Therefore, an extension by another quarter or even a month or two can be considered. Second, there is a possibility that, based on the advice of the government, there can be a restructuring of certain loans. While those for SMEs are almost a given for inclusion if this happens, other categories, too, may be considered over time. Hence, a roadmap for the same is something that maybe expected in the policy statement.

As the economy is progressing in the right direction, even though the pace may be equivalent to a crawl, the market expectation is that there should be sectoral TLTROs. This will be of use to sectors that require funding for both survival and growth. Real estate, auto, hospitality, aviation, etc, are segments which would be looking for some support through the monetary system. The upcoming credit policy will be the first official policy since the economic relief package was announced in the last week of May. There has been time to take stock of earlier measures like liquidity, lower repo and reverse repo rates and TLTROs. Such a wish-list is hence not out of place.

There will be a lot of expectation from the credit policy this time, not restricted to just the repo rate. The policy measures beyond the development measures, which are normally put on the table, will be important.