Tag: pandemic

SBI Report, BFSI News, ET BFSI

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Mumbai, The digitisation drive and pandemic-induced emergence of the gig economy have led to a faster formalisation of the economy, with the share of the informal sector shrinking to just 15-20 per cent in 2021 from 52.4 per cent in 2018, according to an SBI Research report. Share of the informal economy has fallen drastically to 15-20 per cent of the gross value added (GVA) or the formal GDP in 2020-21 from 52.4 per cent in 2017-18 due to digitisation and the rapidly expanding gig economy, said Soumya Kanti Ghosh, the group chief economic advisor at SBI.

The share of the same had stood at 53.9 per cent in 2011-12.

According to Ghosh, many measures since the note-ban in November 2016 have accelerated digitisation of the economy, and the pandemic-induced emergence of the gig economy has facilitated higher formalisation of the economy, at rates possibly much faster than most other nations.

The note ban hit hardest the informal sector which then constituted 93 per cent of the workforce. The second blow to the informal economy was the GST and the final and the hardest hit came from the pandemic.

At least Rs 13 lakh crore has come under the formal economy through various channels over the past few years, including the recent scheme on the E-Shram portal, the report said.

Real GDP was estimated at Rs 135.13 lakh crore in FY21 but lost 7.3 per cent of that in FY22 after the worst economic contraction on record due to the pandemic.

The 2011 Census pegged the size of the informal sector in trade, hotels, transport, communication and broadcasting at 40 per cent; in construction at around 34 per cent; 16 per cent of public administration; and 20 per cent of manufacturing and almost 100 per cent formalisation in finance, insurance and utilities, and to a large extent in real estate and agriculture.

The formal financial sector has even expanded by 10 per cent post-the pandemic, with the DBT transfers gaining traction and that of formalised utility services size expanded by 1 per cent during the pandemic, according to the report.

The report, quoting the monthly EPFO payroll data, said that since FY18, almost 36.6 lakh jobs have been formalised till July 2021 and the report expects that this fiscal formalisation rate will be higher than FY20 but lower than the FY19 level.

Since FY18, the agriculture sector has been formalised by 20-25 per cent due to the increasing penetration of KCC credit and now the informal agriculture sector is 70-75 per cent.

Over the years, usage of Kisan credit cards has also increased significantly as the per card outstanding has gone up from Rs 96,578 in FY18 to Rs 1,67,416 in FY22, an increase of Rs 70,838. And there are 6.5 crore such cards, the amount formalised is Rs 4.6 lakh crore, the report noted.

It also said payments worth Rs 1 lakh crore have been made at petrol pumps alone in the past five years.

A sizeable informal economy is not just an emerging and developing economy feature, and according to the IMF, 20 per cent of the European GDP is an informal economy.

On the impact of the just-launched E-Shram portal, a first-ever national database of unorganised workers, on the formalisation of the economy, the report said as much as 5.7 crore unorganised workers have registered in the first two months after its launch in August, with 62 per cent of workers belonging to the 18-40 age-group and 92 per cent of the registered workers having monthly income of under Rs 10,000.

Ghosh considers the E-Shram portal to be a big step towards employment formalisation as to date the rate of formalisation of unorganised labour due to E-Shram is around 17 per cent or Rs 6.8 lakh crore, which is 3 per cent of GDP in just two months.

He also called for more rationalisation of indirect taxes like GST and excise, saying just 11.4 crore tax-paying households or 8.5 per cent of the total population contribute Rs 75 lakh crore or 65 per cent of the private final consumption expenditure and cross-subsidies to 91.5 per cent of the population.

As of the 2014 NSSO survey, as much as 93 per cent of the workforce earned their livelihoods as informal workers, who were hit the hardest by the pandemic too.



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RBI board reviews economic situation, BFSI News, ET BFSI

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The Central Board of Directors of the RBI on Friday reviewed the current domestic and global economic situation and challenges.

The board also deliberated upon possible measures for addressing the emerging challenges, the Reserve Bank of India (RBI) said in a release.

The 591st meeting of the board was held under the Chairmanship of Governor Shaktikanta Das. His tenure as the Governor has been extended by three years up to December 2024.

“The board also congratulated the Governor on his reappointment,” the central bank said.

According to the release, the board also discussed the working of sub-committees of the central board and activities of a few Central Office Departments, including the nationwide survey among bank customers regarding banks’ grievance redress system and the functioning of the Ombudsman schemes.

Deputy Governors Mahesh Kumar Jain, Michael Debabrata Patra, M Rajeshwar Rao, and T Rabi Sankar attended the meeting. Other directors on the board — N Chandrasekaran, Satish K Marathe, S Gurumurthy and Sachin Chaturvedi — were also present.

Besides, Debasish Panda, Secretary, Department of Financial Services and Ajay Seth, Secretary, Department of Economic Affairs, attended the meeting.

Das was appointed the RBI’s 25th Governor on December 11, 2018 for a period of three years after the abrupt resignation of his predecessor Urjit Patel.

He is the first RBI Governor to get extension after the BJP-led government came to power in 2014.



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Moody’s upgrades outlook for Indian banking system

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Moody’s Investors Service has revised the outlook for the Indian banking system to “stable” from “negative” on the back of stabilising asset quality and improved capital drive.

The global credit rating agency, in its Banking system outlook for India, observed that the deterioration of asset quality since the onset of the coronavirus pandemic has been moderate, and an improving operating environment will support asset quality.

Moody’s upgrades India’s rating outlook to ‘Stable’ from ‘Negative’

Declining credit costs as a result of improving asset quality will lead to improvements in profitability. The agency assessed that capital will remain above pre-pandemic levels.

Moody’s expects India’s economy to continue to recover in the next 12-18 months, with GDP growing 9.3 per cent in the fiscal year ending March 2022 and 7.9 per cent in the following year.

The agency opined that the pick-up in economic activity will drive credit growth, which it expects to be 10-13 per cent annually. Weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded.

Asset quality will be stable

According to Moody’s, the deterioration of asset quality since the onset of the pandemic has been more moderate than it expected despite relatively limited regulatory support for borrowers.

The agency noted that the quality of corporate loans has improved, indicating that banks have recognised and provisioned for all legacy problem loans in this segment.

Covid second wave raises asset risks for banks: Moody’s

“The quality of retail loans has deteriorated, but to a limited degree because large-scale job losses have not occurred. We expect asset quality will further improve, leading to decline in credit costs, as economic activity normalises,” Moody’s said.

Raising equity capital

Capital ratios have risen across rated banks in the past year because most have issued new shares, per the agency.

Moody’s said public sector banks’ ability to raise equity capital from the market is particularly credit positive because it reduces their dependence on the government for capital.

However, further increases in capital will be limited because banks will use most of retained earnings to support an acceleration of loan growth, according to the agency.

The agency estimated that banks’ returns on assets will rise as credit costs will decline while banks’ core profitability will be stable.

If interest rates rise, net interest margins will increase, but it will also lead to mark-to-market losses on banks’ large holdings of government securities, it said.

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RBI extends three-year SLTRO facility to SFBs

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The Reserve Bank of India has extended the three-year special long-term repo operations facility for Small Finance Banks by two months till December-end 2021.

This facility, which is available at the repo rate of 4 per cent, aggregating ₹10,000 crore was announced by the central bank in May 2021 to help SFBs provide last mile credit to individuals and small businesses.

Liquidity drawn from this facility has to be deployed by SFBs for fresh lending of up to ₹10 lakh per borrower.

“Recognising the persisting uneven impact of the pandemic on small business units, micro and small industries, and other unorganised sector entities, it has been decided to extend this facility till December 31, 2021.

“Further, this will now be available on tap to ensure extended support to these entities,” RBI Governor Shaktikanta Das said.

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Term insurance premium set to rise as reinsurers tighten norms due to pandemic

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The term insurance premium is set to rise by anywhere between 15 per cent to 40 per cent after reinsurers tightened underwriting norms in the wake of the Covid-19 pandemic.

While Munich Re has tightened underwriting norms, GIC Re had hiked rates earlier this year.

“GIC, which is our reinsurance company, had hiked rates in March and it came into effect from April. While till now we have not passed on the increased rates to customers but now we feel the need to increase rates on term plans taking into consideration our profitability. We will be increasing our rates on the term side this calendar year in the range of 15 to 20 per cent, depending on age, sum assured and quality of life of the individual,” said Rushabh Gandhi, Deputy CEO, IndiaFirst Life Insurance.

Vighnesh Shahane, MD and CEO, Ageas Federal Life Insurance, pointed out that over the last 18 months of the pandemic, and especially during the second wave, reinsurers have been badly hit by the surge in claims, and there has been a lot of pressure on them to hike rates.

“We estimate that term plan prices are likely to rise by around 20 per cent to 40 per cent across the board. However, the exact rise will vary from company to company, and from reinsurer to reinsurer. It will also depend on the amount of business that the life insurance company does with the reinsurer,” he said.

Wait and watch mode

Meanwhile, some life insurers are still on a wait and watch mode in the expectation that reinsurers’ rates would come down later once the pandemic passes in six months to a year.

While the pandemic has increased awareness and demand for life insurance products, particularly term life products, insurers have also paid out high claims, especially after the second wave of the pandemic. Claims for the sector in the second wave were up by two to three times of the first wave of the pandemic.

“The life insurance sector witnessed significant claims in the first quarter of the fiscal due to the second wave of the pandemic and profitability suffered as companies made provisions or reserves to alleviate the impact of the claims,” Care Ratings had said recently, adding that the life insurance premiums are expected to witness significant movement over 2021-22.

However, key risks such as a delay in the economic recovery and resurgence of Covid cases with a third wave could negatively impact premium growth, and rise in term plan premium rates.

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UPI records 365 crore transactions worth ₹6.54-lakh cr in September

Banking & Finance

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Digital payments continued to register robust growth in September amidst the festival season and normalisation of economic activities.

The Unified Payments Interface (UPI) registered 365 crore transactions worth ₹6.54-lakh crore in September, as per data released by the National Payments Corporation of India on Friday.

The UPI platform had clocked 355 crore transactions amounting to ₹6.39-lakh crore in August.

This was the third consecutive month where UPI transactions remained well above the 300-crore mark.

Immediate Payment Service (IMPS) also registered a rise in transactions and processed 38.44 crore payments of ₹3.24-lakh crore in September. As many as 37.79 crore transactions amounting to ₹3.18-lakh crore took place through IMPS in August.

Transactions on NETC FASTags, however, declined to 19.36 crore in September amounting to ₹3,009.3 crore in value terms compared to 20.12 crore transactions worth ₹3,076.56 crore in August.

AePS transactions also decreased. As many as 9.09 crore transactions amounting to ₹23,292.33 crore took place through AePS in September against 10.84 crore payments worth ₹27,333.87 crore in August.

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Securitisation pool collections improve as restrictions ease: Crisil Ratings

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With the gradual phasing out of social restrictions, there has been an improvement in the monthly collection ratios of securitised pools rated by Crisil Ratings.

These had declined between April and June 2021 following the second wave of the Covid-19 pandemic.

₹1 crore, minimum ticket size to issue securitisation notes: RBI

“The trend in improving collection efficiencies has been seen across asset classes and in a number of segments the levels are quite close to pre-pandemic levels.

Resilience across cycles

Collection ratios in mortgage-backed securitisation (MBS) pools have rebounded to near-100 per cent ― their pre-pandemic normal ― in the pay-out months of July and August 2021,” Crisil Ratings said on Monday.

Securitisation volume improves in Q3 on revival in economy: Crisil

MBS pools, with home-or property-backed loans as underlying, have shown extremely high resilience across economic cycles.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, “In asset-backed securitisation (ABS) pools, collection ratios are set to reach January-March 2021 pay-out levels after dipping to 84 per cent in the first quarter this fiscal.”

Median collection ratios for vehicle loan pools for August pay-out reached 100 per cent, just a tad short of the March collection ratio of 101 per cent, he further said.

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A six-step strategy for every company to develop a supply chain finance plan, BFSI News, ET BFSI

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To thrive in any economy businesses must create new offerings, optimize existing processes and invest in employees’ upskilling. For this, cash is king, and a strong working capital management strategy is central to growth. However, managing liquidity effectively and strengthening balance sheets is a struggle that businesses face. The ongoing pandemic has only intensified these challenges.

Traditionally, corporates have been following a singular strategy – maintaining a high credit periods (or DPO – Days Payable Outstanding), where they negotiate longer time to pay creditors and in the interim use any excess available cash for short-term activities. Now, while higher DPO and longer credit period may be seen as beneficial, the pandemic is forcing many corporates to expedite payments to vendors in order to keep them afloat.

According to the PwC research of the largest global listed companies in the last five years, GBP 1.2tr excess working capital is tied on global balance sheets and for two consecutive years a decrease of 3.8% in DPO has been witnessed. This indicates that use of DPO may not be a sustainable approach in the long term. This makes it difficult for cash-strapped buyers who don’t have any ready cash available to pay and hence need a long credit period. The only way to solve this is corporates need to re-look at their entire working capital strategy and cash cycles. .

Supply Chain Financing – An Underutilized Lever
Supply Chain Finance (SCF) is an underappreciated lever to optimize working capital strategies. SCF isn’t a new concept. It’s been around and practiced for more than two decades now. While some corporates have been able to modernize and automate their SCF operations, it still has a a one-size-fits-all approach. This method does not address issues around the lack of liquidity. However, other real challenges such as high transaction costs along with structural barriers such as paper invoices, lack of an integrated data flow that can provide real-time visibility on the end-to-end cash conversion cycle and lack of organizational guidelines are rarely addressed either.

So, while most business leaders understand the value delivered by SCF, the depth of it remains unexplored. Research says that a Fortune 100 company can potentially generate $2 billion in additional cash by simply optimizing working capital management, at par with the performance of top companies in the sector.

To achieve results such as these, every SCF program must align with unique business objectives that doesn’t just ensure business continuity and production planning but also plays a key role in uplifting sales and earning risk free high returns as well.

The key advantages of a well-defined SCF strategy are aplenty. It can speed up sales by injecting capital to the distributors, can create direct bottom line benefit and stretch working capital by extending longer credit periods to vendors who have the capacity to bear the extension, while paying struggling vendors before time. To enable these benefits, corporates need to have a unified supply chain and working capital strategy that is fully aligned with evolving business objectives; and look to modernize practices to achieve scale operations in SCF.

A six-step plan for a holistic SCF strategy

  1. Set up a 5-year working capital goal that will form the bedrock of the strategy. The goal needs to have a dual lens – profitability for the corporate, and health, resilience and ability to grow for the vendors.
  2. It’s critical for the corporate to understand their supply chain end-to-end and identify where exactly working capital is trapped and how much is trapped. Often, this occurs in multiple places – delayed payments by customers, early or excess capital made available to vendors, or simply, a slow-moving inventory – a harsh reality of the ongoing pandemic.
  3. Calculate potential material gains across each of these places, and cumulatively for the organization as a whole. This will help prioritize action areas with immediacy.
  4. Corporates need to undertake in-depth risk modelling – for this, one needs to deep dive into vendor specifics such as – how many vendors is the corporate working with? Of these, how many are financially strong and how many need support immediately or in the near future. This should also cover vendors and dealers in the second and third tier of network.
  5. They need to create a data-driven scenario analysis by looking into vendors’ past business performance and relationship with the company, and then create a customized vendor financing program that’s a win-win for both, the corporate and the vendor. Similarly, this needs to be done for all vendors. Here, corporates also need to model the plan in a way that there is flexibility of funding sources, allowing a corporate to dynamically switch between internal and external funds as needed, ensuring overall profitability for the corporate.
  6. Corporates need to have a contingency plan in plan and periodically assess and re-strategize their approach to suit all. After all, an entire strategy can never be locked into a single course of action – as a corporate’s goals evolve, so must the supply chain financing model.

(The writer is Founder and CEO, CashFlo)



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Sundaram Finance presents favourable near-term outlook amid caution

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The adverse economic impact of the Covid second wave is expected to be limited to the first quarter of this fiscal, said S Viji, Chairman, Sundaram Finance.

“The tapering of the second wave coupled with aggressive vaccination drive has brightened the near-term prospects for the economy, with the adverse economic impact expected to be limited to the first quarter of FY22,” Viji said while addressing the 68th annual general meeting of the company virtually on Monday.

“The agricultural sector has turned buoyant with a near-normal monsoon, robust procurement by the government and improved Kharif sowing,” he added.

The re-establishment of GST collections to ₹1 lakh+ crore levels, increase in fertiliser sales, improved e-way bill activity, increase in power and fuel consumption, and growth in eight core industries all point to a sequential improvement in economic activity from the disruptions induced by the Covid second wave.

Also read: Sundaram Finance posts 16 per cent rise in Q1 net profit at ₹192 crore

However, the country’s ability to mobilise vaccines at scale, maintain the pace of vaccinations, and containment of the virus spread, especially as new variants emerge, will all be determinants of consumer confidence sustaining and consequently of economic recovery,” he said.

Festival season for auto

“While the automotive sector has been facing production constraints due to the global shortage of semiconductors, the recent pandemic-driven lockdowns in East Asia are compounding the challenge. This, coupled with higher input prices on fuel and commodities, presents the risk of a dampener to the upcoming festival season”, said Viji.

Focus areas

Given the level of uncertainty and volatility, Sundaram Finance to focus on striking a judicious balance between growth, quality and profitability (GQP), the time-tested trinity that has served the company well.

“Key priorities will be to support loyal customers tide over the aftermath of the Covid crisis by deploying all measures made available by the regulator and the government, drive collections and recovery efforts with a view to maintaining the traditional asset quality levels and preserving capital, and prudently pursuing growth opportunities that emerge as economic activity resumes post second wave across the well-understood and diversified asset class base that Sundaram Finance has established.” he stated.

Emerging growth areas

As the economic activity revives, the company expects the commercial vehicle segment to bounce back strongly. “In the CV space, in addition to growth in the M & HCV space, we believe that the SCV and ICV segments will continue to offer growth opportunities. In the passenger vehicle segment, we see a long run way as the consumer market matures and grows in India,” said Rajiv Lochan, Managing Director, Sundaram Finance.

The company also sees favourable growth opportunities in construction equipment and tractor segments due to heightened activities across infrastructure and the rural and agricultural sectors on the back of government push.

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