Some food for thought
"Oh, how fine it is to know a thing or two."
—Moliere (French Playwright, 1622-1673)
Word for the day
Ratiocinate (v)
To reason; carry on a process of reasoning.
First thought this morning
Surprisingly, the mainstream media, especially business media,
has started discussing the Union Budget for FY20. Traditionally, the outgoing governments
have usually refrained from presenting a full budget during the election years.
The idea behind this practice is to maintain a semblance of ethics in politics.
The incumbent government is mandated to rule for only five years (in the
current case May 2014 to April 2019). Ethically, it should not commit the next
government to any policy measure, which is not urgent and related to national
security or international relations.
No matter how confident the incumbent regime is about its
victory in the forthcoming elections, it should refrain from breaking this set
tradition for whatever reason. And there is absolutely no reason to believe
that the incumbent government is going to break this tradition when the finance
minister rises to seek the vote on account and approvals for demand for grants
on 1 February 2019.
The media conjecturing therefore sounds mostly undesirable and
speculative.
However, in case the government does decide to break the
tradition and present a full budget for the next year, it would be interesting
to see whether the Finance Minister will have the courage to raise taxes to
meet the tighter fiscal targets for FY20, or he will loosen the purse strings
keeping the elections in sights, and thus squandering the four years of painful
fiscal consolidation.
Chart of the day
MSME Credit conundrum
Recently, RBI raised concerns over deterioration in the asset
quality of loans given to marginal and small entrepreneurs under the PM MUDRA
Yojna (PMMY).
As per media reports (for example see
here), RBI has cautioned the finance ministry that the scheme might
turn-out to be the next big source of NPAs, which have plagued the banking
system for past many years. As per RBI bad loans under PMMY have already risen
to Rs 11,000 crore.
As per the annual report of PMMY, 2017-18, total disbursements under
the scheme stood at Rs 2.46 trillion in FY 18. Out of this, 40 per cent were
disbursed to women entrepreneurs and 33 per cent to social category.
Interestingly, the observations of banking regulator come at a
time, when it has formed an expert committee to—
(a) Review the
current institutional framework in place to support the MSME sector;
(b) Study the impact
of the recent economic reforms on the sector and identify the structural
problems affecting its growth;
(c) Examine the
factors affecting the timely and adequate availability of finance to the
sector;
(d) Study the global
best practices with respect to MSMEs and recommend its adoption in India,
wherever appropriate;
(e) Review the
existing MSME focused policies and its impact on the sector;
(f) Propose measures
for leveraging technology in accelerating growth of the sector; and
(g) Suggest
long-term solutions for the economic and financial sustainability of the MSME
sector in India.
While expressing concerns about the deteriorating health of loans
to MSME sector, RBI has recently taken steps to facilitate meaningful
restructuring of MSME accounts that have become stressed. Under the latest
scheme, RBI has decided to permit a one-time restructuring of existing
loans to MSMEs that are in default but ‘standard’ as on January 1, 2019,
without an asset classification downgrade.
All accounts with a gross exposure upto Rs25crores as on 1
Januatry 2019 are eligible for the scheme. The restructuring is to be implemented by March 31,
2020. The banks have been directed to make a provision of 5% in addition to the
provisions already held, in respect of accounts restructured under this
scheme.
Prima facie, there appears to be some incongruence in the RBI's
recent words and actions in respect of overall MSME loans. It is distinctly
possible that RBI has taken some decision that may not be prudent purely from
the regulatory viewpoint. These might have been taken to suit the political
expediency of the government.
In this context, it is pertinent to take note of December 2018
report of CRISIL titled MSME Pulse. The report highlights a number of
interesting data points.
The most
disturbing data point for me is that the industry NIMs for MSME credit range
between 4-7%. Given that this segment has historically had a lower credit cost
(ranging between 1-2%), the pricing of loans to MSME seems exorbitant and
unsustainable. The question is how the balance will get restored? Will credit
cost rise or the NIMs come down? We would know this in couple of years.
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