NEW DELHI: The Governor of the Reserve Bank of India, Shaktikanta Das, said last year that the Covid-19 crisis is the sort of event that occurs once every 100 years. Policymakers from North Block to Mint Street have been attempting to find an adequate response to a crisis of this magnitude.
The Chief Economist, South East Asia and India at ANZ Bank, has a contrarian view.
In a chat with ETMarkets.com, Sanjay Mathur, a veteran economist, said the need of the hour is not capital spending that generates long-term gains. “Rather, what is important now and for years to come, is to lift people out of poverty, as that would have a larger impact on the economy,” he said.
“Let me take a controversial stand here. Our thinking on the fiscal has become somewhat stereotyped – capital spending is good and revenue spending is bad. And for FY22, the focus has been on capital spending. But the nature of the current crisis is different: it is a humanitarian crisis that calls for more massive welfare measures. A large section of our population has slipped into poverty, income and wealth disparities are rising,” Mathur said.
The government and RBI have unveiled various spending schemes since the pandemic struck last year; the flagship programme being the ‘Atmanirbhar Bharat’ scheme, which essentially prioritises import substitution.
However, out of the Rs 20 lakh crore announced by Prime Minister Narendra Modi, the actual fiscal outgo is very small. A bulk of the programmes are reflective of RBI’s liquidity infusion in the banking system, while the rest are mostly credit guarantees.
One cannot exactly blame the government, as its finances have been under strain since well before the pandemic.
In the last Budget, the government put aside the prescriptions of the Fiscal Responsibility and Budget Management Act and announced a fiscal deficit of 6.8 per cent of GDP for this financial year. The Centre had earlier set a target of 3.0 per cent fiscal deficit by 2017-18 (Apr-Mar).
However, it will not be accurate to say that the entire strain was on account of the pandemic. A year before Covid-19 wreaked havoc on the economy, the government had already skipped the targets it had set for itself under the FRBM Act, as tax collections fell short of targets.
Mathur said the government and the central bank together have done what they could within their constraints. “There was very little fiscal headroom to start with,” he said.
“So while I do acknowledge that asset creation has a larger multiplier on growth, this crisis is also unique and requires a different response,” he added.
The Reserve Bank of India has formalised the framework for payment companies outsourcing payment and settlement related activities to third party operators. The central bank’s fresh guidelines come at a time when India’s tech ecosystem has seen several high-profile cyber attacks such as those at Juspay, Upstox and Mobikwik over last year targeting customers’ payments data.
As per the new rules, licensed non-bank Payment System Operators (PSOs), cannot outsource core management functions, including internal audits, and compliance with KYC norms to third-party service providers.
As defined by the central bank, core management functions include management of payment system operations such as netting and settlement, transaction management including reconciliation, reporting and item processing, managing customer data, risk management, information technology and information security management etc.
The central bank also added that the board of payment companies must “carefully evaluate” the need for outsourcing responsibilities.
“The PSO shall carefully evaluate the need for outsourcing its critical processes and activities, as well as selection of service provider(s) based on comprehensive risk assessment,” the central bank said. “The critical processes are those, which if disrupted, shall have the potential to significantly impact the business operations, reputation, profitability and / or customer service.”
The new rules also state that the liability of third-party losses would fall on the relevant board members and senior management of licensed payment operators. “Outsourcing of any activity by the PSO shall not reduce its obligations, and those of its board and senior management, who are ultimately responsible for the outsourced activity,” the central bank said.
The RBI had first announced the plan during the monetary policy announcement on 5 February 2021 with a view to enable effective management of attendant risks in outsourcing of payment and settlement activities.
“The resilience of the digital payment ecosystem to operational risks needs to be constantly upgraded,” RBI Governor Shaktikanta Das had said during his February MPC address.
“A potential area of operational risk is associated with outsourcing by payment system operators and participants of authorised payments systems,” he added. “To manage the attendant risks in outsourcing and ensure that code of conduct adhered to while outsourcing payment and settlement related service, RBI shall issue guidelines on outsourcing of such services by these entities,” RBI Governor has said.
In addition, the central bank has also asked non-bank PSOs to have clear contractual specifications on responsibilities being outsourced as well as conduct its own due diligence on technology and legal compliances when working with relevant third-party companies.
The Reserve Bank of India‘s new directions on raising interchange fee and making available the facility of bulk clearing round the clock have become effective from Sunday onwards.
The RBI in June raised the interchange fee for financial transactions from Rs 15 to Rs 17, while for non-financial transactions the increase was done from Rs 5 to Rs 6. These new rates have become applicable from August 1, 2021, as per the RBI’s direction.
An interchange fee is a fee charged by banks to the merchant who processes a credit card or debit card payment.
NACH, a bulk payment system operated by the National Payments Corporation of India (NPCI) facilitates one-to-many credit transfers such as payment of dividend, interest, salary and pension.
It also facilitates the collection of payments pertaining to electricity, gas, telephone, water, periodic instalments towards loans, investments in mutual funds and insurance premiums.
During the bi-monthly monetary policy review in June, RBI governor Shaktikanta Das had announced that in order to further enhance the convenience of customers, the NACH will be available on all days of the week.
The facility was available only when banks were open, usually between Monday to Friday. Auto-debit instructions given by the bank account holder were not processed on days the bank were closed like Sundays, bank holidays and even gazetted holidays. Further, since most companies use NACH for salary credits these also did not happen on bank holidays.
Meanwhile, ICICI Bank has revised charges for cash withdrawals from ATMs, cheque books and other financial transactions from August 1. The revised charges will be applicable for domestic savings account holders including salary accounts.
Small finance banks (SFBs) that got a push from the Reserve Bank of India in terms of special liquidity window have been slow to tap into it.
Under the Rs 10,000-crore liquidity facility announced by the Reserve Bank of India (RBI) in May as part of its pandemic relief measures, SFBs get funds at 4% for three years, which is significantly lower than their average cost of funds, for fresh lending to micro, small and medium enterprises (MSMEs). The new facility helps them to get about 1-1.5% positive carry on the borrowed funds, even after investing the same amount into government securities as mandated by the central bank.
However, in the Special Long-Term Repo Operations (SLTRO) conducted by the Reserve Bank of India in May, June and July, SFBs cumulatively borrowed only Rs 1,640 crore against the notified amount of Rs 10,000 crore. They can still borrow the unutilised amount of Rs 8,360 crore till October.
Experts says ample liquidity and muted credit demand from the micro, small and medium enterprise (MSME) segment.
SLTRO boost
Announcing the SLTRO in May, RBI governor Shaktikanta Das had said, “Small finance banks (SFBs) have been playing a prominent role by acting as a conduit for the last-mile supply of credit to individuals and small businesses.”.
“To provide further support to small business units, micro and small industries, and other unorganised sector entities adversely affected during the current wave of the pandemic, it has been decided to conduct special three-year long-term repo operations of Rs 10,000 crore at repo rate for the SFBs, to be deployed for fresh lending of up to Rs 10 lakh per borrower,” Das had said, adding that the facility will remain open till October 31, 2021.
Priority loans
The RBI had also allowed the classification of priority sector lending for loans given by small finance banks (SFB) to micro-finance institutions (MFI) for on-lending to individuals.
The decision has been taken to address the liquidity issues of MFIs amid the severe Covid crisis.
RBI Governor Shaktikanta Das said: “In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to Rs 500 crore) for on-lending to individual borrowers as priority sector lending.” This facility will be available up to March 31, 2022.
Mumbai: The Reserve Bank of India on Thursday said the next purchase of government securities for an aggregate amount of Rs 20,000 crore under the G-sec Acquisition Programme (G-SAP 2.0) will be conducted on July 22. On June 4, RBI Governor Shaktikanta Das had announced that the central bank will conduct the open market purchase of government securities of Rs 1.2 lakh crore under the G-SAP 2.0 in the second quarter of 2021-22 to support the market.
On July 22, the RBI will purchase four government securities of different maturities through a multi-security auction using the multiple price method.
The central bank said it reserves the right to decide on the quantum of purchase of individual securities, and purchase marginally higher/lower than the aggregate amount due to rounding-off.
The result of the auctions will be announced on the same day, it added.
The first purchase under G-SAP 2.0 aggregating to Rs 20,000 crore was conducted on July 8.
The RBI had conducted an open market purchase of government securities of Rs 1 lakh crore under the G-SAP 1.0 in the first quarter of 2021-22.
He strongly rebutted the notion that a sharper and sustained focus on the yield curve might be eating away at the central bank’s principal mandate, which is, inflation-targetting.
By KG Narendranath & Shobhana Subramanian
Direct financing of the government’s fiscal deficit by the central bank or creation of new money is fraught with several downsides, Reserve Bank of India (RBI) governor Shaktikanta Das said on Wednesday. The RBI’s role as the general government’s debt manager has only helped quicken the transmission of monetary policy during the pandemic period as lower funding rates co-existed with plenty of liquidity, Das said in an exclusive interview with FE.
The governor strongly rebutted the notion that a sharper and sustained focus on the yield curve might be eating away at the central bank’s principal mandate, which is, inflation-targeting.
Asked if the RBI had lately become a little more tolerant towards higher bond yields – at the last auction held on Friday, it set the cut-off yield for 10-year government securities (G-secs) at 6.1% after keeping it at below 6% for several months –, he said, “We’ve never had any fixation that the yield should be 6%, but some of our actions might have conveyed that impression. We are only interested in orderly evolution of the yield curve and market expectations seem to be converging with this approach.”
The RBI is seen by many as currently being burdened with its subsidiary function of meeting the government’s borrowing requirements, which were of an unprecedented order of Rs 21-22 lakh crore in FY21 and are likely to be of a similar magnitude in the current financial year also. Of course, it has so far ensured that the Centre and state governments have raised these funds from the market in an uninterrupted manner and at low costs.
Experts have said RBI may want to print money in order to monetise the fiscal deficit instead, since given the huge revenue shortfalls, even a far-larger-than-usual borrowing programme of the government isn’t producing any meaningful fiscal stimulus. Das said: “This (creating new money to finance deficit) was done away with as part of the economic reforms … and it was further repudiated when the FRBM Act was enacted.”
In 2020-21, the government’s borrowing costs were the lowest in 16 years, and private sector borrowing costs too substantially reduced, spurring economic activity, the governor said, adding that financial stability too was ensured across the board. “Housing loans have been available at all-time low rates for quite some time, facilitating a pick-up in the construction sector despite the second Covid wave”.
According to Das, the current spike in inflation was by and large transitory in nature and inflation could moderate by the third quarter. “What is transitory in nature needs to be watched very carefully. Any hurried or hasty action could completely pull down the economy, at a time when the revival is nascent and hesitant,” he said, when asked how serious a threat the unfolding inflation posed to the growth-supportive bias in the conduct of monetary policy. Many analysts have seen a build-up of price pressures in the economy, as inflation reading came above the upper band of the RBI’s target of 4+/-2%, for the second successive month in June.
Stating that the current inflation was largely influenced by “supply-side factors”, he cited the prices of diesel and petrol, including the Centre’s and states’ taxes on the two auto fuels. The governor reiterated that the Centre and states would do well to take more measures to soften the pace of inflation.
Asked whether the government’s reported plan to stand guarantor to the security receipts to be issued by the National Asset Reconstruction Company (bad bank), while acquiring stressed loans from banks, amounted to an untenable bailout of the banks, Das said internationally too, whenever there was systemic clean-up of bad assets, the sovereign played such important roles. “The US government came out with the policy of Troubled Asset Relief Program after the global financial crisis. There are other such examples from other countries. Coming to India, what is important is that this ARC framework that is being put into place should be driven by market principles. There are two aspects to it. One, the price at which the stressed assets would be transferred by the banks to the ARC should be linked to the market prices, based on fair assessments of the value. Second, when the ARC would want to dispose of the assets, it should again be driven by market principles”.
Government Securities’ (G-Sec) prices rallied on Thursday despite inflationary concerns from rising prices of petrol and diesel as the Reserve Bank of India Governor Shaktikanta Das observed that the inflation spike appears to be transitory.
The price of the widely traded 2035 G-Sec/GS (coupon rate: 6.64 per cent) rose 51 paise to close at ₹99.21 (previous close: ₹98.70) with its yield declining about 6 basis points to 6.73 per cent (6.79 per cent).
Bond prices and yields are inversely related and move in opposite directions. The price of the 5.63 per cent GS 2026 increased by 40 paise to close at ₹99.70 (₹99.30) with its yield declining about 10 basis points to 5.70 per cent (5.80 per cent).
Das, in an interview to a financial daily, said the current inflation spike appears to be transitory, driven largely by supply-side factors, and it is expected to moderate in the third quarter.
Financial stability report
The central bank’s latest financial stability report has cautioned that hasty withdrawal of policy stimulus to support growth before sufficient coverage of the vaccination drive can sap macro-financial resilience and have adverse unintended consequences. CARE Ratings Chief Economist Madan Sabnavis emphasised that the rising prices of petrol and fuel has spooked the market, which sees inflation climbing. This in turn has affected the bond market as the RBI has held on to the yield curve.
‘Bond market edgy’
“It (rising fuel price) enters transport costs which get embedded in the final prices of all commodities. The fact that fuel is not in the GST (goods and service tax) gives freedom to the government to increase taxes without any constraint.
“But allowing prices to increase has distorted inflation which in turn has kept the bond market edgy,” he said.
Sabnavis opined that the RBI’s resolve to manage the yield curve has caused a disconnection between monetary policy action and interest rate action.
Meanwhile, the first tranche of G-sec Acquisition Programme (G-SAP 2.0), entailing open market purchase of five G-Secs aggregating ₹20,000 crore, sailed through.
This sets the stage for banks and primary dealers to bid at Friday’s auction of three G-Secs, including a new 10-year GS.
The Government will be raising ₹26,000 crore via sale of these G-Secs. It will also have the option to retain additional subscription up to ₹6,000 crore against the securities being auctioned.
Notwithstanding the Reserve Bank of India projections of gross non-performing assets rising to 9.8% of total loans this fiscal, the bad loans may decline to at least 7.1 percent by March 2022, as against 7.6 percent at FY21-end.
The NPAs will go lower on higher recoveries and upgrades, and also faster credit growth, ratings agency Icra said, adding that the fresh accretion to the NPAs will be higher in FY22 due to the absence of any regulatory dispensations like moratoriums.
The GNPAs and NNPAs (net NPAs) are expected to decline to 6.9-7.1 percent and 1.9-2.0 percent respectively by March 31, 2022, it said.
What RBI said
The Reserve Bank’s financial stability report had said the GNPAs at March 2021 had come at 7.6 percent and estimated it to rise to 9.8 percent in FY22-end under its base-case assumptions. RBI Governor Shaktikanta Das had said the dent on balance sheets and performance of financial institutions in India has been much less than projected earlier, but a clearer picture will emerge as the effects of regulatory reliefs fully work their way through.
The new math
The rating agency said the fresh NPA generation declined to Rs 2.6 lakh crore or 2.7 percent of advances in FY21 compared to Rs 3.7 lakh crore or 4.2 percent in FY20 and added that the same will be higher in FY22. The headline asset quality numbers of banks do not reflect the underlying stress on the income and cash-flows of the borrowers impacted because of COVID-19 and various regulatory and policy measures such as the moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Emergency Credit Line Guarantee Scheme (ECLGS) had a positive impact on the reported asset quality of lenders.
In the absence of standstill on asset classification, we expect the fresh NPAs generation to be higher, however, we also expect the recoveries and upgrades to improve in FY22, it said, adding that the first half of the ongoing fiscal can see higher accretions due to the second wave of the pandemic. The credit provisions for the banks moderated to 2.5 percent of advances in FY21 compared to 3.7 percent in FY20, even as the core operating profits improved with the cost curtailment measures.
PSB turnaround
Within the sector, the turnaround was remarkable for public sector banks, which reported profits after five consecutive years of losses and with NNPAs at the lowest levels seen over the last six years (3.1 percent as of March 31, 2021), ICRA expects the public sector banks (PSB) to remain profitable going forward. After the capital raising exercises, the improved capital positions coupled with lower NNPAs mean a better solvency profile as well as an improved outlook on the ability to support growth and better future profitability.
“We believe that the banks are relatively better placed to handle the stress from the second wave and hence we continue to maintain a stable outlook on the sector.” the rating agency said.
The RBI said in a statement that it reserves the right to decide on quantum of purchase of individual securities, accept bids for less than the aggregate amount, purchase marginally higher/lower than the aggregate amount due to rounding off and accept or reject any or all the bids either wholly or partially without assigning any reasons.
On July 4, RBI Governor Shaktikanta Das had announced that the central bank will conduct the open market purchase of government securities of Rs 1.2 lakh crore under the G-SAP 2.0 in Q2 of the current financial year to support the market.
The next purchase under G-SAP 2.0 will be conducted on July 22 for Rs 20,000 crore. The government securities to be purchased in the auction will be communicated in due course, said the RBI.
The government raises money from the market to fund its fiscal deficit through dated securities and treasury bills.
The RBI has said it remains committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of Covid-19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability.
The Reserve Bank of India (RBI) will buy five Government Securities (G-Secs) aggregating ₹20,000 crore under its G-sec Acquisition Programme (G-SAP 2.0) on July 8.
This will be the first purchase of G-Secs under G-SAP 2.0. The central bank will be purchasing five G-Secs, maturing between 2027 and 2033.
Overall, in the second quarter, the central bank will conduct open market purchase of G-Secs of ₹1.2 lakh crore under the G-SAP to support the market.
Under G-SAP 1.0, RBI committed upfront a specific amount (₹1-lakh crore in the first quarter of FY22) of open market purchases of G-Secs to enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.
“The endeavour (of G-SAP) will be to ensure congenial financial conditions for the recovery to gain traction…The positive externalities of G-SAP 1.0 operations need to be seen in the context of those segments of the financial markets that rely on the G-sec yield curve as a pricing benchmark,” RBI Governor Shaktikanta Das said in a statement on April 7, 2021.
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