Dear Readers,

Bharat Economy: The ferocity of the COVID-19 second wave appears to be diminishing as the national vaccination drive speeds up. Active cases have been falling.

Throughout the country clamp down has been imposed off and on. Even factories are closed. MSME has been affected greatly. State Governments have not reduced charges for power maximum demand and guaranteed power off take. Large factories positions have been different.

RBI Governor Shaktikanta Das said that RBI remains committed for pro-active conventional and unconventional measures to elevate the stress of critical sectors. In reality many companies in sectors like hospitality, MSME, health, NBFCs and others are in severe stress. Their survival is at stake. These sectors could access to liquidity which were made available by the government and RBI during the first wave it was like “water, water everywhere and not a drop to drink”. Recently a separate liquidity window of `15,000 crore has been announced which will remain open till March 31, 2022 with tenors of up to three years at the repo rate. This on-tap Liquidity Window will provide support to hotels and restaurants, tourism, aviation support services and other services under this programme.

Instead of restructuring and giving moratorium, banks are taking haircut up to 95% through NCLT resolution. If the banks restructure the loans their haircut will be much less provided they do away with the penal interest and other punitive charges.

RBI governor Shashikant Das said that the second wave of the pandemic took a grievous toll on India, but economic activities have started recovering. New risks have emerged amidst high uncertainty. It is now important to prepare for 3rd wave, as it seems quite inevitable now given the irresponsible behaviour of people going out on holidays paying least attention to COVID protocols.

FM Nirmala Sitharaman said that the centre and the states need to borrow and spend. Debt to GDP ratio will definitely go up.

The retail and wholesale traders are very much affected by the pandemic.The government has included retail and wholesale traders under MSME classification making them eligible for priority sector advances by banks and financial institutions as per RBI guidelines.

Government is making efforts to contain prices particularly essential commodities. Import of pulses is being permitted.

The forex reserve of around USD 610 billion is capable of covering imports of 15 months whereas Switzerland forex reserve covers 39 months imports. India has large external liabilities than external assets.Therefore, the recent idea mooted by RBI to avail services of foreign fund managers to use part of our forex in order to earn better returns is a bad idea and we should not proceed on that path.

Moody’s Investors Service said that the virus resurgence in the second wave has once again created uncertainty in India’s growth story. It expects India’s real GDP to grow at 9.6% in 2021 instead of 13.9% forecasted earlier. Its forecast is 7% for 2022. S&P Global Ratings forecast India’s growth for the ongoing fiscal to 9.5% from 11% earlier.

Stock Market: Stock market is on the wave of the bulls and due to inflow of FPI. Stock market is at an all-time high and attracting lot of retail investors and FII investment too.

With India’s market capitalisation recently topping the USD 3 trillion mark, a note by Elara Securities says that anytime between 2025 and 2031 depending on how the economic growth and valuations pan out, our stock markets can touch the USD 5 trillion mark. New tech companies could be a big driver. Market capitalisation-to-GDP ratio has globally expanded over the past decade. Rakesh

Jhunjhunwala is of the view that India has the potential for long term growth. We are in the middle of a bull phase which can last for a very long time. Annual equity returns from the stocks will be about 5% points on top of the economic growth of 7-10% in the coming years.

Medium and Small cap companies stocks have also risen. FIIs’ investment in equity recorded a high of ` 2.6 lakh crore in 2020-21.

However, with developed nations now considering an end to easy money supply, the FII flows may slow down and may also reverse in the not-so-distant future. RBI has warned in its annual report that the surge in local shares poses the risk of bubble. Overall market sentiment is bullish.

Hospitality sector is severely stressed. There has been virtually no business during the second wave. Some hotels are on sale. The third wave as predicted by the experts may emerge more dangerous. Consumer confidence is unlikely to revive, and middle class people would prefer to save keeping in mind the future uncertainty.

Total global wealth grew by 7.4% in 2020, but overall wealth of the country’s super-rich dipped by 4.4% to $12.83 trillion in the year.

NBFCs: Government should direct all PSUs and other public organisations to make the outstanding payments and awards of NBFCs instead of further litigating. Due to the clampdown in several states collection from borrowers has sharply dropped. At Cholamandalam Finance, the collections dipped significantly as 74% of its customers opted for moratorium relief. On an aggregate level, Chola’s disbursements declined by 58% on a yearly basis. Lenders i.e. banks and financial institutions should realise the realistic position of NBFCs and should not become paranoid and take drastic action. They should recast the debts granting moratorium and giving relief of penal interest and high rate of interest. They need liquidity support to continue to support their small contractors and borrowers. Except for a few large NBFCs with strong institutional backing, all are pressing for a loan moratorium to tide over their financial misery. As the business revives they will start paying to their lenders. It is a matter of few months only.

NBFCs have been boosting the growth of the economy by catering to the financial needs of MSMEs, small and medium construction and infrastructure companies. Due to the outbreak of COVID-19 pandemic and aggravating second wave, most of these companies have got severely affected. Infrastructure activities have slowed down significantly. Claims and arbitration awards are not being paid. As a result NBFCs are not getting payment from their borrowers while they have very little leeway to defer their own payment obligations to their lenders. It does not mean that the assets against which the finance was given are bad assets; they are real, physical assets and their fundamentals remain strong and they are bound to be become productive and back in demand (like a sick person recovering from an illness and becoming healthy) once the economy revives. It is not good to write off these assets leading to the mismatch in assets and liabilities. It is essential to extend the moratorium with restructuring option. ICRA, the credit rating agency, reported that NBFCs sector will require crores of additional funding for the growth of the economy. Blanket and show off action by the lenders will severely affect their operation. Good assets which have become temporarily non-performing will become dead assets and cause a national loss.

Medium and small wealth creators do not have the courage and strength to invest in new ventures risking their existence.

Corporate Sector: India Inc. are on the spree of reducing the debts. A State Bank of India analysis of 1,000 publicly traded firms from the top 15 sectors shows that these companies have reduced debts of more than 1.7 trillion rupees during FY21. They are raising funds through bonds to repay the high cost loans. Investment is marginal. Business failures are global affairs due to external factors, rarely within the control of the promoters. Some failures are temporary which can be revived. It is intrinsic to lending. Lenders should ideally avoid being high-handed on their borrowers and honestly assess business problems and come out with workable resolution plans. Delayed recognition of defaults and associated delays in provisioning often hound the lenders and stop them from working out resolution plans for stressed borrowers. Regulators and agencies need to instil less fear in lenders so that lenders are able to actively restructure debts. A small loss in restructuring is far better than a large loss haircut up to 95% in bankruptcy. It is essential to consider how to survive/revive the stressed sectors like hospitality, health care, new ventures, MSMEs, NBFCs by restructuring moratorium and allowing to manage operations and cash flows with guidelines instead of having control of every issue resulting in layoffs and resignations of employees which can be de-motivating for all.

Economy should have to fully support the worst affected sectors. Urban poor also need support. FM Nirmala Sitharaman announced a ` 6.28 lakh crores stimulus package for the economy spread out over 5 years. Within this package the Emergency Credit Line Guarantee Scheme entails ` 3 lakh crore under which loans to be extended will be guaranteed by central government. Validity of ECLGS now stands extended to 30.09.2021 or till guarantees for an amount of `3 lakh crore are issued, whichever earlier. Disbursement under the scheme is permitted up to 31.12.2021. Under this extended scheme, special emphasis has been laid on the healthcare sector and 100% guarantee cover is provided to loans up to ` 2 crore to hospitals/nursing homes/clinics/medical colleges for setting up on-site oxygen generation plants, with interest rate being capped at 7.5%.

Bank credit has grown just 5.7%. Bank credit need to be higher for growth of economy


Dr. H.P. Kanoria

Editor in chief     

 

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