Tag: budget

A ‘Shakthi’ dose from the RBI

Banking & Finance

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Finance Ministers generally look for endorsement of their Budget exertions from two entities — the stock market and the central bank. The first comes right away, practically simultaneously, alongside the Budget. The second, from the central bank, comes in its monetary policy announcement immediately following the Budget.

Various stakeholders draw their cues from the signals that come from these two informed assessments. While market reactions are easily gauged by index and individual stock movements, the central bank’s statement and the Governor’s comments are carefully parsed. They are read to detect if the central bank is fully on board with the government plans or whether there are any reservations. Of course, even when there are misgivings, they are always couched in mild and respectful language.

The Finance Minister’s Budget has got the unequivocal thumbs up from both this time. The market was up by a whopping 5 per cent in a single day — impressed apparently by the focus on growth, infrastructure spending, privatisation plans and the attempt at transparency on the fiscal deficit numbers.

Today, the RBI monetary policy committee has provided its own support. It has left the key repo rate unchanged at 4 per cent. The RBI has already cut this rate by 250 basis points over the past two years, with about 115 bps of this coming in the past year in response to the pandemic. The policy guidance is in line with its stance of remaining ‘accommodative’ as long as necessary. Inflation numbers as evidenced by the movement in consumer price index (CPI) are relatively mild and within the comfort zone for the central bank. The projected CPI for the first half of the next year also reflects an easing to a range of 5 per cent and moving further down to 4.3 per cent in the third quarter.

Facilitating massive borrowing

The key question in this policy was what the RBI would say about the government borrowing programme. The government is set to borrow about ₹12 lakh crore or about ₹25,000 crore every week in the next year. The RBI has provided an assurance that it will manage it in a non disruptive manner. This was par for the course.

And then the RBI pulled out a rabbit from its hat by announcing direct retail participation in government bonds buying through the RBI. This is no doubt a very important step — and at least in theory, helps diversify the lender base for the government. In the long run, this may help provide more stable interest rates for both the government and the entire economy. This is also a good option for high networth individuals who may be uneasy with the vertiginous climb of the stock market indices currently.

However, it bears remembering (even as one receives the news with optimism) that past experience with regard to fostering retail participation through various other agencies have been lukewarm. Also, these measures, welcome as they are, will take time to fructify. It may be a bit too much to expect that retail investors are going to queue up and jostle outside RBI doors to buy government bonds this year (like they did to return old currency notes four years ago !)

The economy is set to begin recovering from the troughs of the past two years. As the Governor put it succinctly in his concluding remarks, the only way for the economy to go now is — up. How the RBI handles the massive borrowing programme as well as rising corporate demand for credit — without letting interest rates get out of hand — is going to be it’s biggest challenge in the year ahead. The bond markets remain sceptical if the initial movements are any indication.

(The writer is a Mumbai-based freelance journalist)

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Will RBI’s MPC take the Budget 2021 route?, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India’s Monetary Policy Committee (MPC) began its meeting on Wednesday, and it is expected that the committee would maintain the interest rates and continue with an accommodative policy stance to push the growth.

Meanwhile, the Budget has revised the fiscal deficit to 9.5% for FY21 and 6.8% for FY22, indicating that the government’s borrowings would be high and in such a scenario it would be difficult for the RBI to maintain low interest rates — to encourage banks to lend more.

Jyoti Prakash Gadia, Managing Director, Resurgent India, said, “We expect a status quo to be maintained by RBI, in policy rates, with a pause for the 1st quarter of the next fiscal… A shift from the accommodative stance may not emerge in the short run, as the position gets cleared on the inflation and interest rate benchmarks. The continued tilt in favour of growth, in the growth – inflation tradeoff is need of the hour and basic expectation.”

Since the last three meetings, the MPC has kept the rate unchanged at a record low of 4%, and the reverse repo rate is 3.35%.

Aditi Nayar, principal economist, Icra, said that despite a drop in inflation in December 2020, the trajectory remains unpalatable. “We expect an extended pause for the repo rate, with the stance to be changed to neutral in the August 2021 policy review or later, once there is clarity on the durability of the economic recovery,” she said.

Inflation is now back within the MPC’s target band, despite concerns over rising input costs, and the economy appears well poised for a growth recovery, believes Rahul Bajoria, Chief India Economist, Barclays.

“While the MPC will likely draw comfort from the favourable developments on growth and inflation, it will wait to gauge the sustainability before signalling a change in approach. Liquidity guidance may take precedence over policy guidance in the interim,” he added.

Meanwhile, the price pressures have also been softening and with retail inflation posting successive downward surprises for November and December, the MPC may draw some comfort from this situation. Against the central bank’s estimate of 6.8% in Q4 2020 inflation averaged around 6.4% YoY. In addition, the price decline in vegetables has continued in January, which may drive CPI inflation closer to 4% YoY.

Softening of CPI inflation also reflects easing of supply side constraints that affected food inflation.

Experts believe the MPC may ensure availability of adequate liquidity to stimulate investments in the infrastructure sector after the Finance Minister Nirmala Sitharaman, in her Budget 2021 speech, announced that the government would set up a dedicated infrastructure financing body.

The Gross Domestic Product (GDP) is projected to contract by 7.7% per cent in the ongoing fiscal year but is likely to rebound with a 11% growth in FY22, making for a “V-shaped” recovery, noted the Economic Survey 2021, taking cues from resurgence in high frequency indicators such as power demand, e-way bills, GST collection, etc.

It is also expected that the RBI may continue to hike banks’ held to maturity limits (HTM) till FY24 to fund high fiscal deficits without hardening yields. The RBI has already hiked banks’ HTM limit by 2.5% of book till FY22 to support recovery by enabling the Centre to run higher fiscal deficits.

“Banks will buy G-secs without fearing maturity to market (MTM) hits. RBI contains yields/lending rates by incentivising banks to invest the $80 billon money market surplus in G-secs without fear of MTM hits. As banks raise deposits at 5%, they would invest in G-secs at, say, 5.9% if exempted from MTM hits. It is fairly reasonable to assume that yields will rise over the next 12 months as growth normalises. Although we expect the RBI MPC to cut 50bp in 1H21, as inflation abates to the RBI’s 2-6% inflation mandate, we also see a 100bp hike in FY23. We are tracking December inflation at 5.2%,” said, Indranil Sen Gupta, India Economist, BofAS India.



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Budget proposes tax neutral benefit for conversion of UCBs into banking company

Banking & Finance

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In a move that will help cooperative banks to convert to banks, the Budget has proposed tax exemptions.

It has provided tax neutral benefit for conversion of urban cooperative bank into banking company.

“It is proposed to expand the scope of business reorganisation to include conversion of a primary co-operative bank to a banking company and the deductions available under Section 44DB of the Act shall also be made applicable in relation to such conversion,”said the Memorandum to the Financial Bill.

The Budget has also proposed that transfer of a capital asset by the primary co-operative bank to the banking company as a result of conversion shall not be treated as transfer under Section 47 of the Act. Consequently, the allotment of shares of the converted banking company to the shareholders of the predecessor primary co-operative bank shall not be treated as transfer under the said Section of the Act, it further said.

These amendments will take effect from April 1, and will accordingly apply to the assessment year 2021-22 and subsequent assessment years, it said.

The Reserve Bank of India had, in September 2018, permitted voluntary transition of primary cooperative banks [urban co-operative banks (UCB)] into small finance banks through transfer of Assets and Liabilities.

However, players say that the scheme has till now enthused few cooperative banks.

Vidyadhar Anaskar, President, Maharashtra Urban Cooperative Bank Federation, said the proposal aims to help cooperative banks that have applied to convert to an SFB.

The RBI had in January granted an “in-principle” approval to Shivalik Mercantile Co-operative Bank, an Uttar Pradesh-based multi-state urban co-operative bank, to transition into a small finance bank.

According to a recent statement, Shivalik Small Finance Bank (SSFB) will start its banking operations from April.

With the developments at Punjab and Maharasthra Cooperative Bank, the government and RBI have been working to improve governance and oversight of the co-operative banking system.

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Tax ombudsman on the cards: Will it have adequate teeth?

Personal Finance

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If you are a taxpayer, you sure would have a tale to tell about your tryst with the tax department. While there are some mechanisms to help taxpayers resolve their grievances, the Economic Survey offers a new ray of hope by emphasising on the need for reintroducing the tax ombudsman, independent of tax administration, to fulfil taxpayers’ rights. It states that a dedicated institution to take up issues from taxpayers’ perspective helps in developing trust of the taxpayers.

Background

For direct taxes, the Institution of Income-Tax (I-T) Ombudsman was created in the year 2003 to deal with grievances related to settlement of IT complaints.

Issues that were allowed to be filed with the ombudsmen include delay in issue of refunds beyond the time limits prescribed by law, lack of transparency in identifying cases for scrutiny, non-communication of reasons for selecting the case for scrutiny, non-adherence to prescribed working hours and unwarranted rude behaviour by tax officials. The ombudsman aimed to deal with cases independent of the jurisdiction of the income-tax department.

However, in February 2019, the institutions of Income-Tax Ombudsman as well as Indirect-Tax Ombudsman were abolished on the grounds that they failed to achieve their objectives. A possible reason may have been inadequate independence from the tax department.

Existing alternatives

Taxpayers can currently use ‘e-Nivaran’, a single window to address all grievances received through various channels. Through e-Nivaran, taxpayers can submit grievances related to e-filing, TDS, refunds, differences with the assessing officer and other partner institutions such as NSDL.

The other option is to approach Aaykar Sewa Kendras (ASK) centres, which provide taxpayer-related services, including grievance redressal in several towns and cities. Applications to the centre can be filed in person as well as through a drop-box facility.

Meanwhile, Taxpayer Charter, introduced in 2020, lists out a taxpayer’s rights and obligations. As per this, there should be a courteous, fair and reasonable treatment to taxpayers. Taxpayers who are unhappy or perceive the handling of their assessment proceedings to be contrary to the Taxpayer Charter can approach the Principal Chief Commissioner of Income Tax in their respective zones.

While the above are for grievance related to income tax, for GST complaints, the government has established an online grievance redressal system through the GST Portal (selfservice.gstsystem.in).

Finally, one can also file a complaint through Centralised Public Grievance Redress And Monitoring System (CPGRAMS), an online web-enabled system, that aims to enable submission of grievances by the citizens to Ministries/Departments/Organisations who scrutinise and take action for speedy and favourable redress of these grievances.

Possible framework

The grievance mechanisms stated above are not independent (entirely) of the tax jurisdiction.

Thus, to avoid conflict of interest, ensure fair dealings and consequently build the trust between taxpayers and the concerned tax authority, the Economic Survey suggests that it is imperative to have a redressal organisation with adequate teeth and which is independent of the tax department..“The earlier Ombudman framework was ineffective. One hopes the new framework provides enough power and independence for it to be effective in resolving taxpayers complaints,” says Sunil Gidwani, Partner, Nangia Andersen.

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Non-life insurance: Budget should help increase penetration

Personal Finance

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Insurance is an important social security tool that plays a crucial role in mitigating uncertain risks by providing financial support in case of any loss/ damage. However, the importance of this tool is not realised by many. It’s only when some unfortunate event occurs that people understand its significance. Hence, a few steps by the Government will help in making insurance a pull product and increase its penetration in the country.

GST rate reduction

Since non-life insurance is considered a dead investment by many as there are no returns, there is no motivation for people to opt for it. Also, most people look at premium rather than the coverage while buying a policy. Hence, GST rate of 18 per cent acts as an additional dampener as the cost of insurance goes up drastically. The reduction in GST rates on insurance premium will encourage more people to opt for it.

Importance to home insurance

With increase in the frequency of natural calamities, there is a dire need for people to realise the importance of having home insurance, the penetration of which is less than 1 per cent in the country. Today, there are many people who are not even aware that such a cover even exists, and some opt for it only because of loan requirements. Hence, a tax exemption can be provided to those opting for home insurance, wherein the limit for deduction under section 80C can be increased to Rs. 1,75,000, with a separate deduction made available for home insurance up to Rs. 25,000.

In order to further bridge the gap between economic loss and insured loss due to natural calamities, the Government should introduce an index-based insurance scheme (Parametric Insurance) throughout the country that can cover property losses due to natural calamities. Few States have implemented it so far, but there is a need to further institutionalise it and structure it for a better uccess rate. Under this scheme, compensation can be given for the damage caused due to the catastrophic event as per the pre-defined triggers for such events. The premium for the same can be collected along with the property tax and once the claim is triggered, the amount can be directly transferred to the beneficiary’s Jan Dhan Account linked to the home insurance policy.

Increase association with Government

Large scale collaboration between the Government and insurers can lead to increased awareness and penetration of insurance in our country. For instance, PMFBY has helped us support the backbone of our economy i.e. the farmers through crop insurance. Similarly, PMJAY scheme is evolving and looking at how PMJAY-SEHAT covers all citizens of J&K UT, this scheme should further enhance its coverage by not limiting it to specific strata of people, but should provide health insurance to all citizens of our country. Such an association would not only lead to the growth of our economy, but also of our society as a whole.

(The writer is MD & CEO of Bajaj Allianz General Insurance)

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Shyam Srinivasan on why Federal Bank restructured book is half of estimates, BFSI News, ET BFSI

Banking & Finance

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Customers who have gone for loan restructuring between December and March 31 will be roughly about 1-1.2% of our portfolio, says Shyam Srinivasan, MD & CEO, Federal Bank

Earlier, you had projected that Rs 3,500-crore loans will need to be restructured but the request has come for only Rs 1,500 crore. It is great news but how did this drastic fall come about?
The big difference between last quarter and this quarter is the reality. People have started seeing businesses doing better and generally the preference is not to be a restructured customer. December end is one milestone as in the retail and corporate customers had a chance to seek restructuring and we have seen experientially people have not opted to. Either they have paid or the situation is too bad for restructuring. I think this has worked out quite well. Customers who have the ability and belief that they will do well and will recover have sought restructuring and that number thankfully for us between December and March 31 will be roughly about 1-1.2% of our portfolio as opposed to our original belief that it might be higher.

We are largely out of recovery mode and are in growth mode now. Credit growth has increased. How do you think retail demand will play out – home loan, personal loan, auto loans? Also how will corporate side fare in comparison?
Retail has done well on a year on year basis. In terms of growth, it has been quite encouraging, particularly some products. If you really anchor January 2020 as one and then December 2020 as the other, in most businesses. it is running at about 100-120% of the January run rate. I believe the run rate will pick up from here as things improve and the economy shapes up more constructively. Thankfully for us, our gold loan business is doing remarkably well and our erstwhile SME business (captured as both commercial banking and business banking) has registered very strong sequential growth and YoY growth is almost nudging early teens.

Other than core large corporates where we saw de-growth, we believe all the other businesses have started seeing a very positive trajectory and that should continue. The corporate will be a little more muted. Also, there is probably an irrational pricing exercise. We are watchful about that.

Do you think a recovery in the corporate growth could be delayed? Will the budget play a vital role? Is it linked to a new capex cycle?
The pick up in corporate growth is probably going to be a little more delayed. We are all hoping the Budget sets the tone. It could give some fillip in certain areas. There may be a more meaningful demonstrative action around the longer tenure infra and nation building activities which typically create downstream exercises as projects go on-stream. I believe that maybe by the second half of this calendar year, a pick up will come through and that will filter through the system.

On the asset quality front, once the SC judgement is lifted, will it bring pain to light or will we have further normalisation of irregular accounts?
I think it is likely and I do not know if the Supreme Court has heard everybody a judgement may be passed sometime in this quarter, this month or next and that will bring to a close the lack of clarity on how to deal with this whole standstill but from a business point of view, we have all ensured that the treatment is to be given exactly the way if the accounts were to slip or otherwise. We all hope that some clarity emerges in the next few days and that overhang goes away so that people know where they stand and how to progress.

But will the environment pick up and things improve? There is vaccine-led optimism and there is a certain sense of comfort that the Budget may provide stimulus. A bunch of stuff is happening and could lead to a more encouraging recovery if not immediately but certainly by the second half of 2021.

Does a low rate environment pose a risk to the bank’s deposit franchise because people will now look to switch to higher yielding assets?
This is a little in the realm of speculation, We do not know which situation plays out but I have seen for many years that these theories come but the market and the banks and the system are mature enough to find that almost everything coexists. There may be minor tweaks here and there, but I do not believe that we will come to a day where banks deposits would not grow but all other categories will grow exponentially. That maybe a little far fetched.

There may be minor shifts in trajectory but not material. The banking system for a country like ours which is relatively unbanked even today is a very deep opportunity. I do not think deposits will evaporate and all gravitate to one asset category which typically tends to be the riskier category, I do not think that is a reality, at least I cannot foresee this for many, many years.

What is the outlook when it comes to digital marketing? What is Federal Bank doing to tap that opportunity?
For the first time we have dedicated five pages to outline the various things that happen digitally, just to point out we are now truly a meaningful player with digital capabilities. Over 86% of our transactions are digital whether it is account opening or transaction banking. Our digitally originated business is now a very material part. Products like personal loans are originated digitally. There is no hand touch, no human involvement, it is all technology driven and is completely automated.

In terms of transaction banking, our range of offerings compete with absolutely the best and we are seeing volume pickup on that count. That is how we have seen sharp growth in CASA and all this is driven by the digital capabilities and that will remain a focus area. We are the first and only bank probably to do facial recognition for our employees to log into our systems and the first and only bank probably. So all our staff show their faces and log into the system.

The RBI stability report says that NPAs could go as high as 14% system wide. However, the results from private banks seem to suggest otherwise. What is your outlook?
I do not think it is a question of who has got it right or wrong. It is actual scenario planning versus what happens on the ground. If every scenario planned were to happen, then that is one outcome but the reality on the ground sometimes tends to be better and sometimes adverse.

In a stressed situation, people may react very differently. When the forecasts were made, some assumptions were made but thankfully we are doing better than the assumptions and all of us hope that it continues to do better. Within this also, there will be a spectrum. Some will be at the better end of the spectrum and some for historic reasons could be on the other side of the spectrum. So you cannot generalise on this.



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Samiran Chakraborty, Citi, BFSI News, ET BFSI

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2021 could be a year when both the RBI and the government will have to plan for at least some amount of normalisation, says Samiran Chakraborty, Chief Economist (India), Citi in conversation with ET NOW.
Digitisation and work from home has changed fortunes of Indian IT sector in terms of availability and optimisation. When the real economy shapes up in the post Covid world, are these factors which could surprise us and create a lot of upside?
It is quite possible. It could work both ways. On the positive side, we have seen a significant improvement in profitability in the September quarter numbers for companies. Even if you adjust for factors like travel cost or advertisement and promotion costs or to some extent even wage cost, there still seems to be a residual element which could be attributed to productivity improvement.

On the other hand, because of all these physical distancing protocols to be maintained in different kinds of services and in some cases even may be in manufacturing, there is a decline in productivity which has led to somewhat higher prices — part of the reason why inflation has picked up during the Covid period. It is not just simply because of the lack of mobility issue but it could also be due to the fact that companies are being forced to abide by these physical distancing protocols leading to some productivity decline.

Both the things are working simultaneously but my sense is that over the next couple of quarters, looking at the productivity data and for wage cost, travel cost etc. we will have a much better sense of how much permanent improvement in productivity is contributing to this profitability.

We have got three important data points which are different. Bond yield is at a multi-year low, forex is at a multi-year high and rising fiscal deficit. We do not know how things will move in the Budget. How important are these three variables to judge the economy?
At least for the first two, there is a strong element of RBI intervention which is keeping those two variables where they are. Fiscal deficit is more in the control of the government to decide where they want to put it. Now while we are all discussing the nascent economic recovery, we have to keep in mind that this recovery is to some extent on the crutches of the fiscal and monetary stimulus and 2021 could be a year when both the RBI and the government will have to plan for at least some amount of normalisation.

It may not be done immediately but in the latter part of the year, normalisation will probably become a necessity and that is where these variables will start playing an important role in the economy. We are not thinking of any policy rate hikes in 2021 but to some extent surplus liquidity in the banking system might get normalised which means that rates in the system go up a little bit. So, the 10-year government bond yields can move up to about quarter over the course of the year. On the exchange rate side, the big dilemma is that because we are having a current account surplus or at least a much lower current account deficit and huge amount of capital inflows, there is a constant pressure on the currency to appreciate which the RBI does not want to do because we are simultaneously following a self-reliant India campaign and putting some sort of import curbs to promote domestic manufacturing.

If the RBI is intervening so much that it is creating surplus liquidity that will militate against the RBI bid to tighten liquidity at the latter part of the year, how RBI manages between the two is going to be very critical for 2021.

On fiscal deficit we think it is possible for the government to target about a 4.5% fiscal deficit in the Budget this year on the back of slightly lower than 7% fiscal deficit and GDP last year and that is possible by so much of expenditure compression. But if the economic growth is normalising, then the revenue side will improve on the tax revenue side while on the non-tax revenue side, a lot of divestment proposals which could not fructify in FY21 might be carried over to FY22 and help the FY22 revenue collection. 4.5% fiscal deficit and GDP in our view is quite possible for next year.



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