Tag: States

States need to take credible steps to address debt sustainability concerns: RBI report

Banking & Finance

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As the impact of the second wave of the Covid pandemic wanes, the State governments need to take credible steps to address debt sustainability concerns, according to a Reserve Bank of India (RBI) report.

The report “State Finance: Study of Budgets” noted that the combined debt-to-GDP ratio of States, which stood at 31 per cent at end-March 2021, is expected to remain at that level by end-March 2022 and is worryingly higher than the target of 20 per cent to be achieved by 2022-23, as per the recommendations of the Fiscal Responsibility and Budget Management (FRBM) Review Committee, chaired by NK Singh.

In view of the pandemic-induced slowdown, the 15th Finance Commission expects the debt-GDP ratio to peak at 33.3 per cent in 2022-23 (given the higher deficits in 2020-21, 2021-22 and 2022-23), and gradually decline thereafter to reach 32.5 per cent by 2025-26.

The report observed that the budgeted gross fiscal deficit (GFD) of 3.7 per cent of GDP for States for the year 2021-22 – lower than the 4 per cent level as recommended by the 15th FC – reflects the State governments’ intent towards fiscal consolidation.

The report said in 2021-22 so far (April-September 2021), the gross and net market borrowings by State governments have been 13 per cent and 21 per cent lower than in the corresponding period of the previous year, respectively.

States have preferred to borrow from the financial accommodation provided by the RBI through short-term borrowing via the special drawing facility (SDF) and ways and means advances (WMA).

Additionally, in recent years, the States have been accumulating sizeable cash surpluses in the intermediate treasury bills (ITBs) and auction treasury bills (ATBs), although they involve a negative carry of interest rates for the States. The report underscored that this warrants improvements in cash management practices.

Power sector reforms

The report emphasised that in the medium term, improvements in the fiscal position of State governments will be contingent upon reforms in the power sector as recommended by the 15th FC and specified by the Centre – creating transparent and hassle-free provision of power subsidy to farmers, preventing leakages, and improving the health of the power distribution companies (DISCOMs) by sustainably alleviating their liquidity stress.

The report opined that timely payments of State dues to DISCOMS and, in turn, by them to generation companies (GENCOS) hold the key to the sector’s financial health.

As per the assessment of the RBI’s Department of Economic and Policy Research, undertaking power sector reforms will not only facilitate additional borrowings of 0.25 per cent of GSDP by the States but also reduce their contingent liabilities due to the improvement in the financial health of the DISCOMs.

Third-tier front

On the third-tier (urban local bodies) front, the report recommended increasing the functional autonomy of civic bodies, strengthening their governance structure and financially empowering them via higher resource availability through self-resource generation and transfers, as they are critical for building resilience and effective interventions at the grass-root level.

The State governments should set up State Finance Commissions (SFC) at regular intervals, in line with the recommendations of the 15th FC. The report said States may also urge rural and urban local bodies to make audited accounts available online in a timely manner to access grants.

In addition, States should undertake local body reforms as stipulated by the Centre to improve the financial autonomy of third-tier governments. “Overall, the sub-national fiscal positions are at an inflection point.Empowerment of the third-tier government presents an opportunity that can result in better and more effective pandemic crusaders in the future,” the report said.

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HFCs’ AUM to grow 8-10 per cent in FY22 against 6 per cent in FY21: ICRA

Banking & Finance

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Housing Finance Companies’ (HFCs) growth is expected to pick up in the rest of FY2022 despite headwinds in the first quarter (Q1) of FY2022, but weak asset quality is likely to keep their profitability subdued, according to ICRA.

The credit rating agency estimated that HFCs’ portfolio is likely to grow by 8-10 per cent in FY2022 against 6 per cent in FY2021.

ICRA expects gross non-performing assets (GNPAs) to improve marginally from June 2021 level (of 3.6 per cent), but to stay elevated and higher by 40-70 basis points as on March 31, 2022, as compared to March 31, 2021 (of 2.9 per cent).

The agency opined that though the portfolio growth is expected to drive an improvement in revenue, the expected elevated credit costs are likely to keep the profitability subdued in FY2022.

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ICRA observed that healthy demand in the industry, increasing level of economic activity and increasing vaccination in the country are expected to result in a steady growth in disbursements and improvement in collection efficiency (CE) in FY2022.

Covid impact

Sachin Sachdeva, Vice-President and Sector Head, Financial Sector Ratings, ICRA, said: “Overall on-book portfolio of HFCs in India is estimated at ₹11.0 lakh crore as on June 30, 2021, with exposures across home loans (HLs), loan against property (LAP), construction finance (CF), and lease rental discounting (LRD).

“The Covid-19-induced disruptions moderated the portfolio growth to 6 per cent in FY2021. Nevertheless, despite nil sequential growth in Q1 FY2022, aforementioned favourable factors provide hope for better growth prospects in FY2022 with an estimated growth rate of 8-10 per cent.”

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The agency noted that HFCs’ asset quality metrics weakened quite sharply in Q1 FY2022 because of the localised lockdowns imposed by various States/Union Territories (UTs) on account of the second wave, which impacted the borrowers’ cash flows and hence the CE.

“The jump in overdues was the sharpest in the recent past, as borrower-level liquidity got stretched in the absence of loan moratorium. The marginal borrowers, therefore, slipped into the NPA (non-performing asset)/overdue category in Q1 FY2022,” ICRA said.

Consequently, the Gross NPAs increased to 3.6 per cent as on June 30, 2021, from 2.9 per cent as on March 31, 2021 (2.3 per cent as on March 31, 2020).

Per the agency’s assessment, though the asset quality deteriorated across segments, CF was worst hit followed by LAP and HL. Thus, entities with high exposure to CF witnessed a higher impact than the industry average.

The headline asset quality numbers are expected to moderate slightly from current level as the trend in the CE continues to remain encouraging.

Nevertheless, ICRA expects a 40-70 basis points (bps) increase (net of recoveries and write-offs) in GNPAs by March 31, 2022, from GNPAs as on March 31, 2021, assuming there are no further Covid-19 induced lockdowns. One basis point is equal to one-hundredth of a percentage point.

Sachdeva said the pre-tax return on average managed assets (profit before tax/PBT per cent) for FY2022 is likely to remain similar to FY2021 level (1.9-2.0 per cent). Optimistically, if the collection efficiency trends post a steady and healthy revival and if slippages remain contained, then PBT per cent may also benefit from reversals in provisions.

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States with higher PMJDY a/c balances see significant fall in crime: SBI Ecowrap

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States with higher Pradhan Mantri Jan Dhan Yojana (PMJDY) account balances have seen a perceptible decline in crime, as per an assessment by the State Bank of India’s economic research department.

The department also observed that there is both statistically significant and economically meaningful drop in consumption of intoxicants such as alcohol and tobacco products in States where more PMJDY accounts are opened.

“This could be because of Jan Dhan-Aadhaar-Mobile (JAM) Trinity which has helped in better channelising of government subsidies and helped in curbing the unproductive expenditure such as alcohol and tobacco expenses in rural areas,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, in the Bank’s economic research report “Ecowrap”.

Multiplier effect

The report emphasised that sound financial inclusion policies have a multiplier effect on economic growth, reducing poverty and income inequality, while also being conducive for financial stability.

“India has stolen a march in financial inclusion with the initiation of PMJDY accounts since 2014, enabled by a robust digital infrastructure and also careful recalibration of bank branches and thereby using the BC model judiciously for furthering financial inclusion,” the report said.

Such financial inclusion has also been enabled by use of digital payments as between 2015 and 2020, mobile and internet banking transactions per 1,000 adults have increased to 13,615 in 2019 from 183 in 2015.

The number of bank branches per one lakh adults rose to 14.7 in 2020 from 13.6 in 2015, which is higher than Germany, China and South Africa.

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