India’s GDP-GST Deficiency from COVID-19

In this year of the pandemic of coronavirus, the world’s economic activity has been halted for a brief period and it broke the linkages of globalized trade which has impacted every countries’ economic growth. In the financial year of 2020-21, the majority of developed countries and emerging economies have reported negative economic growth. Which has been worse than the 2008 crisis. 

In India, it has been reported that the GDP growth rate in Q1 of the financial year 2020-21 has fallen by 23.9% compared to the same Q1 of financial year 2019-20. If compared with the other countries, this is worse than in European countries. One of the reasons may be that India had imposed one of the most stringent lockdowns in the world according to Oxford which was something unpredictable for a country with over 1 billion people. And due to this lockdown, economic activity came to a standstill which gave rise to its second problem, which was GST revenue. In the first quarter of the financial year 2020-21, GST revenue had fallen by 41%.

Both problems are closely linked to each other and how both of them from COVID have created the crisis in India will be explained in this article.

Economic decline

The release of Q1 GDP growth for the financial year 2020-21 stated that there was a decline of GDP by 23.9% compared to the previous year’s Q1. The only sector which has seen positive growth is in agricultural sector which had reported 3.4% growth, better than previous year’s Q1 which recorded 3%. The worst sectors are construction and non-financial service sectors which have reported -50.3% and -47% respectively. Whereas the manufacturing sector witnessed a 39.3% decline in growth.

The nationwide lockdown which was imposed on 25 March 2020 till 31 May 2020, halted the majority of economic activity in one night and had caused a great disturbance. Barring essential services, all others were unable to work normally. After which employees had no work, and businesses were witnessing lower orders leading to a decrease in incomes for every citizen. Unlike the 2008 crisis which was caused due to failure of financial institutions and limited countries had faced effectively, this crisis is from the pandemic which has covered almost the world. The lockdown, which was seen necessary to control the pandemic caused a disturbance in the supply chain of goods and services which further affected the income of people.

In this lockdown, many people had to face problems with no or less income. Workers had stopped receiving wages, employed people were facing salary cuts, self-employed people didn’t get new orders. This all leads to a decrease in income for households which further reduced their consumption. 

Source –

In the above photo from the article of Mint in April describes the consumption behavior across all classes based on their occupation. In this picture, casual labour in both rural and urban areas are going to be affected the most, and overall, the poorest families had to suffer from this lockdown. The reason for the casual labours to be affected the most is because of no employment that has stopped the income for them. Now with no income, these people will shift to poverty which can affect India’s growth. After casual labour, it is salaried and self-employed families which will be affected by COVID lockdown. Although they would be less affected than casual labour, they are still at risk due to chances of salary cuts and a decrease in turnovers.

Moreover, household expenditure contributes around 60% of total GDP. This is an important point which the government needs to see to revive the economy. They need to make policies in the favour of household expenditure which will help in increasing their consumption and increasing economic growth.

After 2 months of strict lockdown, the central government had started to unlock the country from June but in a phased manner. This has made relief for firms to normalize its functioning but still, it has not normalized to its previous levels. Some manufacturing facilities are not working in its full capacity. One of the reasons is the hindrance in inter-state transportation and another is the absence of migrant workers who left their place of work and moved to their native places which are far away.

In this period of lockdown, the change in consumption patterns is also one of the reasons for the decline in GDP growth. With the decrease in income, people are spending on essential needs and are avoiding non-essential consumption. Although restaurants and malls have opened, people are avoiding going there and they are preferring to spend only on those things which they need the most. Today, many things such as marriage functions, amusement parks, theatres, transport have still not opened and opened, it is still limited.

This can be seen in the consumption of fuel in India, in August 2020, fuel consumption has seen a decrease of 16% compared to the previous month. In diesel, the main indicator of economic activity, decreased by 12%, from the previous increase by 5% in July.

GST Revenue fall

Due to the lockdown and economic decline. India has to face another problem which is a fall in GST revenue. In the first Quarter of the financial year 2020-21, the GST revenue has fallen by 41% to ₹1.54 lakh crore compared to ₹3.14 lakh in the previous year. Although Monthly GST revenue has improved from June onwards, compared with its previous year’s revenue, it has reduced. But the point which should be noted id that the firms having an annual turnover of fewer than ₹5 crores is getting relaxation to file GST returns till September 2020.

Source –

The problem with the reduced revenue has caused a deficit in both state and central’s balance sheet. They are facing a scarcity of funds to fight against pandemic and expenditure on health and other social expenditures. The situation has so much worsened that the states have to adopt austerity measures. So, the finance ministry had proposed credit schemes for states to borrow for meeting their deficits.

In the first option, the Central government will provide a loan of ₹97000 crores through RBI special window. This option only takes into account shortfall due to GST implementation. This loan will not be considered in the state debt and can be repaid from the compensation cess fund. The central government will also pay for the yield up to 0.5% through subsidy if the cost of borrowing goes higher than the G-sec yield.

In the second option, the states will get a loan of ₹2.35 lakh crore (including ₹97000 crores from option 1) by borrowing from the market through the help of the Central government and RBI. This borrowing considers both the shortfall from GST implementation and the impact of COVID lockdown. But, this borrowing (2.35 lakh crore – 97000 crore = 1.38 lakh crore) will be considered in their respective state’s debt. 13 states have opted for option 1 whereas, only 1 state (Manipur) has opted option 2.

With GST falling, state and central government have resort to those items which are not under GST and both of them have autonomous power to impose Excise duty on them. These items are fuels and liquor. So, for a brief time, some states imposed a special COVID tax on liquor. While most of the states increased VAT and the central government increased excise duty on the sale of fuel, which stabilized the price of petrol and diesel even though the price of crude oil had decreased.

Now let’s see the breakup of GST revenue by slabs. There are 5 GST rate slabs and the items Under it are as follows:

Source –

The majority of items are in 18% slab followed by 288 items under 5% slab. Now, how much revenues come from these slabs; it is given in the chart below:

Source –

18% GST slab contributes nearly 60% of total GST revenues. Now under 18% slab, the items include petroleum products, services in hotels & restaurants, and metal items. In the 12% GST slab, the items included are FMCG and agro-based items. And white goods in 28% GST. So, in April 2020 when the GST revenue had fallen by 72%, the main reason was a decrease in e-way bills and providing moratorium to small businesses till September.

Due to the closure of hotels, amusement parks, theatres, and people not spending on white goods which comes mainly under 18% and 28% slab, GST revenue is going be lower than the previous year in the coming months.

Government response

Central and state governments started to unlock the country in a phased manner starting from June to restart its economy. During the lockdown, the central government in May 2020 announced a ₹20 lakh crore stimulus package that focused on land, Labour, Liquidity and Laws. This package mainly focused on rural, labours, MSMEs and working-class people. For MSMEs, the definition was revised and the collateral-free loan is going to be provided. Global companies will be barred from participating in government tenders upto ₹200 crores. For employees, contribution to EPF has reduced from 12% to 10%. For migrant labours and poor families, free rations, rental accommodation under PM Awaas Yojna and loans to street vendors will be given.

Recently the government will give half a salary to those people who lost their jobs in the COVID pandemic and lockdown. An estimated 40 million people will benefit from this scheme but it will be for those who have a monthly salary up to ₹21000 and who are under ESIC (Employees’ State Insurance Corporation).

For migrant and rural workers, the central government launched “Garib Kalyan Rozgar Abhiyaan”, similar to MNREGA, which is implemented in states where migrant labours have returned, mainly in BIMARUO states. This will provide labour jobs for migrants who have come back to their native places in infrastructure projects and rural development schemes. This will help the government to complete their pending projects and the beneficiaries will get income to sustain themselves. 

By providing these relief plans, the government needs to check their debt levels and avoid cross the limit of thresholds to avoid country to go in debt crisis.

Looking forward

Although the government has started to unlock its economy in a phased manner, it is still not enough because India still has stringent lockdown according to Oxford. Transportation such as railways is still not running to its full potential. This can be seen in diesel consumption in the august month which has decreased by 14% compared to the previous month.

With announcing unlocks, the central government has transferred power to states or declaring lockdowns in their respective states. This is a bad idea because if some states impose lockdown every now and then which is still happening, it will impact in the production cycles of factories and supply chain which will cause disturbance in working capital and expenditure on restarting the factories. This is happening in some states where they impose weekend lockdown, week lockdown and weekday lockdown which is causing big impact in normal functioning of state economy.

With the rural economy thriving during the pandemic, India’s economic downturn may revive in the coming months but time will say. As rural areas are more responsive in the unlocking phase, it is solving unemployment problems as people have started working in the new sowing season and participating in government employment schemes.

In urban areas, some of the things have still not opened such as theatres, amusement parks, and other mass gathering places in the time when festive seasons are coming which will likely remain the same. With these ongoing restrictions, the coming months which is an important period for India due to the number of festivals will go dull. People are still restricting their spending on un-necessary things mostly white goods and spending on those things which are necessary.

With this type of situation currently prevailing in the country, the GDP growth in the next quarter will be better than its previous quarter but it will be worse than the previous year’s same quarter. And overall GDP growth in this financial year 2020-21 will be negative. The sector which will affect most in this situation will be the service sector. Similarly, in GST revenue collection, it will improve compared to the previous month but is will be worse when compared with the previous year’s same month. With this, the government’s fiscal deficit will widen. Until the vaccine for COVID-19 doesn’t come, people will not freely move around and spend on other things which is essential for the economy to grow.

The Solution

One of the solutions for reviving the economy is to make policies for the rural economy first. As urban areas are prone to pandemic due to high population density, the government needs to start the rural economy first for time being as they are less prone to the pandemic and can be easily restarted. Moreover, pending infrastructure projects due to the absence of migrant workers can be replaced my nearby local people to complete the projects which will help local people to earn income and restart the economy. Moreover, providing agricultural infrastructures such as water supply, cold storage, and warehouses can increase efficiency and reduce economic losses for rural people. Rural areas will be prosperous with these policies which will make them self-sufficient and also reduce migration which will further reduce pressure on urban infrastructure. As rural migrant workers may be reluctant to go back to work in other places, the government should provide permanent employment opportunities to these people by promoting rural and cottage industries. If the rural economy is in good condition, most of India’s economic problems will be solved as 65% of the total population in India lives in rural areas.

Other solution is to redefine GST slabs. Current average of tax rate is lower than the tax rate which was prevailing before implementation of GST. Current average weighted tax rate is 11.6% compared to 16% before GST as mentioned by RBI. The tax slabs should be reduced and tax rate on some goods and service should be change in order to reduce complications and increasing the revenues. Other than GST, state governments should avoid imposing temporary lockdowns now and then. This will help in smooth functioning of activity and firms wont have to bear the loss in shut-downs.

Another solution for solving these problems is to promote MSMEs. MSMEs, if supported by government policies can be a strong backbone for India’s Economy. MSMEs in India is the second-largest employer employing 124 million people according to CII. This can help in reducing income inequalities and increasing middle-class households by encouraging entrepreneurship. It can also generate employment easier than other policies. Moreover, they contribute to 45% of India’s total exports. MSMEs can be of great help for the Aatmanirbhar Bharat mission as they can easily set up to make indigenous products. Also, if there is a healthy MSMEs, it can be a strong forward linkage to other companies therefore making smooth economic growth. For that government needs to streamline finance, regulations, and special clusters for these industries.


Siddharth Dholaria
M. Sc. Finance
NMIMS, Mumbai
Batch of 2019-21
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Is RLLR the long lost saviour?

Before we get into the topic lets know what repo rate is. It is the rate at which the central bank of a country (RBI) lends money to the commercial banks in event of any shortfall of funds.

Now people are excited about the new repo linked lending rate (RLLR) which has come into the market but let’s just roll back a few months back to December 2018. RBI in its fifth bi-monthly monetary policy review on December 5th made a big announcement (by N.S. Vishwanathan – Deputy Governor) that many bank customers were waiting for and that retailed loans will be linked to external benchmarks instead of various internal benchmarks produced by banks.RBI had instructed the banks to start the process the linking the new repo rates from 1st April 2019.

By adopting a single benchmark, the home loans for example which are linked to the marginal cost of funds will now be linked to the repo rates. This makes the banks bound to revise the rates of the home loans instantly as and when there is a change in the RBI repo rate. These changes are welcomed by the customers because it has been long sought out as RBI reduced the repo rates to control the inflation but the benefit never reaches the consumers but now because of this, the consumers will get the benefit of at least some lower interest rate to be paid. The benefit of Repo-rate linked home loan scheme is that it is transparent compared to existing loans linked to marginal-cost-of-fund based lending rate (MCLR). The interest rates on loans will change upwards or downwards in line with the movement of the repo rate announced by RBI.

The RBI had stated that banks should benchmark the rates to either the RBI policy repo rate or Government of India’s 91 or 182 days Treasury bill yields as developed by the Financial Benchmarks India Private Ltd (FBIL) or any other external benchmark developed by the FBIL but still several banks opposed the decision of linking lending rates to an external benchmark, indicating that their cost of funds was not linked to those external benchmarks and delayed the implementation indefinitely.

By March 2019 the only bank to realize this directive was SBI, the largest public sector bank but it too took some time and made it effective from July 2019. Following the same footsteps, Bank of Baroda too introduced RLLR home loan scheme from 12th August 2019 and Syndicate Bank. Allahabad Bank, Canara Bank & Union Bank of India and other banks will announce their plans to launch RLLR soon.

To be eligible for the SBI repo rate linked home loan scheme, the borrower should have a minimum annual income of Rs 6 lakhs and tenure of the loan is up to 33 years. In the case of under-construction projects, the maximum moratorium period up to two years is offered over and above maximum loan tenor of 33 years. So, in such cases, the total loan tenure cannot exceed 35 years.

In this home loan scheme, the borrower needs to repay a minimum of 3 per cent of the principal loan amount every year in equated monthly instalments. If you take a home loan of Rs 50 lakhs, you need to repay a minimum of Rs 1.50 lakhs as principal plus the interest cost every year.

The interest rates in this scheme are not directly linked with the repo rate figure announced by the RBI. The interest on the loan is 2.25% points more than the repo rate. On July 1, the repo rate was 5.75 per cent, so the repo-linked lending rate is 8 per cent. But, the repo-linked lending rate may change effectively from September 1 as we had a repo rate cut of 35 basis points (bps) announced by the RBI in August.

Currently, RLLR is at 8 per cent. Banks will maintain a spread over and above RLLR of 40 to 55 bps. So, the effective rate for home loans up to Rs. 75 lakhs range from 8.4 per cent to 8.55 per cent. For home loans above Rs 75 lakhs, the effective rate is 8.95 per cent to 9.10 per cent (i.e. spread of 95 to 110 bps on RLLR of 8 per cent). With effect from 10th August, the home loan rates linked to MCLR would be 8.6 per cent to 8.85 per cent at SBI, which is more than RLLR.

Similarly, for Bank of Baroda MCLR linked home loan rate starts at 8.45 per cent, while the repo-linked rate starts at 8.35 per cent. At present its 5 bps cheaper than SBI’s repo-linked home loan scheme. Repo rate linked home loan scheme will be beneficial to borrowers with immediate savings when the interest rate goes down.” For instance, with a further 50 bps rate cut as expected in the next year, there will be further savings for borrowers on interest.

Let aside the interest rates alone, if you choose to switch for an RLLR home loan there are more added costs to be noticed, for instance, SBI levy’s transfer and processing charges of 0.35% on the amount of loan plus GST. The minimum fees shall be Rs 2,000 and the maximum can go up to Rs 10,000 plus GST. These charges may vary from bank to bank

One should wait a bit longer as other banks are also coming up with this scheme so one can choose a home loan from the bank of his choice and preference but also take into consideration the charges and extra paperwork, hassle and time to keep a tab on both accounts one home loan and other accounts (savings, joint etc). One has to take into consideration the fact that if you choose another bank apart from your savings bank look at the spread (margin) the bank is charging over and above RLLR. Check the impact of the spread between RLLR and the final rate of interest offered. Stick to the ones which offer the least spread as it reflects RBI’s repo rate policy correctly.

It’s also to be noted that the RLLR is effective from the following month after RBI monetary policy announcement. But, the borrowers also need to be aware and prepared that RBI can increase the repo rate due to the economic factors.

As far as the private banks are concerned; from Axis Bank, Mr Rajiv Anand, executive director for corporate lending said, “It’s not necessary to use only external benchmarks; there are multiple avenues to meet the requirement that the RBI wants us to do… What RBI is essentially looking at is that the rates are being cut and there should be better transmission”. More details on this weren’t revealed whether Axis bank is planning to offer RLLR but he did mention “Axis Bank’s asset-liability committee will take a call on the same.”

Hence, this scheme is to target customers & borrowers who reside in Tier 1 or Tier 2 cities and having an annual steady income of Rs.6 lakh. So before switching your home loan take note of the above points as to charges, the spread between RLLR and final interest rate and also if the central bank may increase the repo rate due to economic scenario.

Rishi Khanna
Team Member- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2019-21)

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Impact of MSME on Indian Economy


The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector the Indian Economy over the last 5 decades. MSME Sector has been one of the most focused sectors in prospects of Investments and has contributed significantly for our country’s Social Development as well as Economic development. MSME has also promoted women empower and has helped in generating largest employment opportunities at lower capital cost, next only to agriculture. It has helped abundantly by promoting the term ‘Entrepreneurship’. MSME have merged as complementary to large industries as ancillary units and they are widening their domain across all sectors of the Indian Economy as well as producing a range of Products and Services which will help to meet the needs of not only domestic market but International markets also. Government of India has never failed to support MSME in all ways possible and have promoted MSME sectors by starting a number of Schemes and other Incentives for them. The Ministry of MSME runs Various Schemes aimed at financial assistance, Infrastructure development, technology assistance and Upgradation, skill development and training, enhancing competitiveness and market assistance of MSMEs.


The ministry of MSME is doing its best to help MSMEs reaching new high and contributing more and more to The Indian Economy. The ministry recently came up with some Policy Initiatives like:

  • Ease of Registration Process of MSMEs- Udyog Aadhaar Memorandum
  • Framework for Revival and Rehabilitation of MSMEs
  • MSME Data Bank
  • MyMSME
  • Direct Benefit Transfer in the M/o MSME
  • GST rollout & Ministry of MSME
  • Digital Payments
  • Grievance Monitoring
  • MSME Samadhaan: To Address Delayed Payments to MSEs
  • MSME- Sambhandh
  • Technology Centre Systems Programme(TCSP)
  • Partnership with Industry
  • International MoUs
  • MoU with NSIC for provision of services for MSMEs
  • Swachhta Pakhwada by Ministry of MSME
  • National Scheduled Caste / Scheduled Tribe Hub

These Policies are being formulated to help MSME reach new heights and contribute more in Economic and Social Development of the Country. The Schemes by Government help MSMEs Financially/in-kind for their betterment. Government of India has Supported and Promoted MSME Sector not only on Domestic Levels but in International Markets also. The contribution made by MSME in development of Economy and Social Life in backward areas has been spectacular.


The MSMEs have been a great contributor to the expansion of entrepreneurial endeavours through business innovation. Since past 9 Years MSME have contributed around 29% in GDP of India(Source: CSO, Ministry of Statistics & Programme Implementation). The Gross Value added by MSMEs in contribution to Indian Economy as on 2015-16 was INR 1,24,58,642 Crs.

In India 324.88 Lakhs MSMEs are located in Rural Areas whereas 309 Lakhs MSMEs are located in Urban Areas. Shockingly 630.52 Lakhs of these MSMEs falls under Micro Sector whereas 3.31 Lakh MSME falls under Small sector and only 0.05 Lakh falls under Medium Sector(Data as per MSME Annual Report 2017-18). MSMEs have a big impact on Micro Sector helping small entrepreneur’s achieving their dreams.

Not only was these, it also seen that 22.24% of the ownership of these Enterprises in rural areas were of female. In urban areas Female ownership of these enterprises came around 18.42%. MSME have led a movement in supporting Female entrepreneurs and have helped them in achieving their dreams. One more interesting fact is that 50% of MSMEs in India have ownership of OBCs followed by 12.45% of SCs and ST having ownership of 4.10%. In total ~66% of MSMEs in India are owned by Socially Backward Groups.

Estimated number of MSMEs (Activity Wise) is as follows:

Activity Category

Estimated Number of Enterprises (in Lakh)















Other Services















*Non-captive electricity generation and transmission and distribution by units not registered with the Central Electricity Authority (CEA)

MSMEs have helped women entrepreneurs, socially backward groups in excelling and have been a major player in generating employment. Truly Micro Sector has been a major contributor in Social and Economic development of our nation.

Following Table shows how MSME helped in Employment Generation:

Activity Category

Employment (in Lakh)















Other Services















*Non-captive electricity generation and transmission

Interestingly, out of the total Estimated Employment Generated around 97% are generated by Micro sector which shows how it has been aiding in development of our nation and shaping a bright future.

MSME Sector has always been supported by Government and Big industries in every ways possible and MSME have returned the favour.

“No dream is too big and no dreamer is too small” these saying have been proved right as the smallest of enterprises have supported millions of peoples dream by providing them with employment.

*The figures were taken from the government MSME Annual Report of 2017-2018

Aditya Majmudar
Volunteer- Equity Research & Valuation
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

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Non-Performing Assets (NPA) of India: Journey so far and the road ahead!

“The failure of a loan usually represents miscalculations on both sides of the transaction or distortions in the lending process itself.”

— Radelet, Sachs, Cooper and Bosworth (1998)

In the recent times the newspapers have been filled with some or the other news, issues, policies, regulation or resolution of NPAs. The NPA ratio has come down to 9.3% in March, 2019 from 11.5% in March,2018 according to mention by RBI Governor Shaktikanda Das. 

Source: SCB’s GNPA Ratio,Financial Stability Report, RBI

According to RBI, the definition of NPA is: ‘An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.’

A non-­performing asset (NPA) is a loan or an advance where the payment of principal/interest is due (in default) for 90 days or above.First, when there is a default of payment, till 90 days, the accounts are subsequently classified as Special Mention Accounts (SMA): SMA 0/1/2. Then after 90 days, these accounts are classified as NPAs.Further NPAs are classified into sub­standard,doubtful and loss assets.Any income for standard assets is recognized on accrual basis, but income from NPAs is recognized only when it is actually received.

Reasons for accumulation of NPAs:

Increasing cases of wilful defaults and frauds are often considered as the primary reason behind the accumulation of bad loans in the Indian banking system.

When an economy experiences healthy GDP growth, a substantial part of it is financed by the credit supplied by the banking system. As long as the GDP keeps growing, the repayment schedule does not get substantially affected. However, when the GDP growth slows down, the bad loans tend to increase due to macroeconomic factors, primarily among them are interest rate, inflation, unemployment and change in the exchange rates.Hence, bad loans accumulate as borrowers are unable to repay due to stalling/closure of the big development projects

Bank-related micro indicators such as capital adequacy, size of the bank, the history of NPA and return on financial assets also contribute to the accumulation of bad loans. NPAs, specifically in the Public Sector Banks (PSBs), have adverse effects on credit disbursement. Increasing amounts of bad loans prompt the banks to be extra cautious. This in turn has caused drying up of the credit channel to the economy, particularly industries, making economic revival more difficult.

Need for Solution

Reviving industrial credit is crucial for the health of the overall economy, because industry (particularly manufacturing) tends to create more employment.

Mounting bad loans suggests vulnerability in the system, wherein short-term deposit-taking banks have to extend credit for long-term big development projects. And this model is visibly failing. Hence NPAs put several small depositors of the banks, particularly in the PSB, at risk.

Also an improvement in the recovery rate and reduction in timeline for resolution for insolvent companies will increase investor confidence in Indian Bond Market.

Recognition of the problem and the solution:

NPAs story is not new in India and there have been several steps taken by the GOI on legal, financial and policy level reforms. In the year 1991, Narsimham committee recommended many reforms to tackle NPAs.

SICA Act, The Debt Recovery Tribunals (DRTs) – 1993, CIBIL: Credit Information Bureau (India) Limited-2000, LokAdalats – 2001, One-time settlement or OTS- compromise settlement-2001, SARFAESI Act- 2002, Asset Reconstruction Company (ARC), Corporate Debt Restructuring – 2008, 5:25 rule – 2014, Joint Lenders Forum – 2014, Mission Indradhanush – 2015, Strategic debt restructuring (SDR) – 2015, Asset Quality Review- 2015, Sustainable structuring of stressed assets (S4A)- 2016 were some of the techniques applied to tackle the problem by government and RBI.

Every method was entangled, rules were not that clear, there were lot of cases pending in front of DRTs owing to limited infrastructure, not enough field experts and hence, it took years for creditors to recover their money. India needed a structured process; thereby Insolvency and Bankruptcy Code (IBC) -2016 came into existence.

It sets a time limit of 180 days which can be extended by another 90 days to complete the entire process. Some of the features of the code include the allocation of a new forum to carryout insolvency proceedings, setting up a dedicated regulator, creating a new class of insolvency professionals and another new class of information utility providers.

The forum where corporate insolvency proceedings can be initiated is the National Company Law Tribunal (NCLT) and appeals against its decisions can be made in the (National company Law Appellate Tribunal) NCLAT. The IBC vests the NCLT with all the powers of the DRT.

Insolvency professionals will have the task of monitoring and managing the business so that neither the creditors nor the debtor need worry about economic value being eroded by the other.On acceptance of the application by NCLT for proceeding for Corporate Insolvency Resolution Process (CIRP), Board of Directors of the company has to step down and Insolvency Professional takes the charge and the plan for revival or liquidation of the company, approved by majority of creditors is put in the action according to the IBC rules and timeframe.

It is predicted that the NCLT is focused on the legal process while the insolvency professional is focused on business matters.RBI listed out the 12 major accounts in India, which has the largest share of NPAs in the country.

Source : ICRA

Some great results have fared in: Ranking for ‘Resolving Insolvency’ But still there is a long way to go: Suggestions

As mentioned above, there is a mismatch of assets and liability for the banks. Banks’ assets are long term loans, whereas banks liabilities are short term deposits, which have landed banks in failures. Hence, it makes sense to say that commercial banks should be focusing on short term assets to match their short term liabilities. And for Long term projects, special purpose vehicles (SPV) should be created to fund a particular sector project and financial institution should be created to fund these SPVs and should be given incentives and proper regulation from the government.

Also, as recapitalization of PSBs is going on, a bank should first divide its assets into good and bad, meaning viable and unviable asset. Banks should be recapitalized according to viable assets to revive with its positive core rather than just giving out public money. By this, banks can also focus on their core business rather than managing NPAs and not contribute to slowing of the economic growth.

SICA Act in India was a ‘Debtor in Possession’ (DIP) Model just like U.S. Chapter 11. But there were flaws in the act compared to the U.S.model. There was also a problem in the assessment of viability of the company as only a few accounts were revived. ‘Another relevant fact is the definition of insolvency or ‘sickness’ under the SICA. The N.L. Mitra committee criticized the definition provided by SICA i.e. ‘at the end of any financial year, accumulated losses equal or exceed its entire net worth’ stating that this is the end rather than the initial point where the company’s problems begin.’

Time has changed, India made a comeback with ‘Creditor in Possession’ (CIP) Model of IBC inspired by U.K. owing to similarities in the judicial process and SMEs culture, but there is one problem. In SICA, debtors were made liable to take the proceeding to court if it is identified by them that company is in trouble. Under IBC there is no such amendment and hence there is a ‘problem of initiation’ which was clearly seen in the case of Jet Airways. Just because directors didn’t want to step down, they dragged the process, rejected lot of revival bids in early insolvency phase. And be it any reason, even the financial or operational creditor did not initiate the process.

Australia also followed CIP model, but faced the same problem and added the amendment to make directors liable for any default under their directorship, directors became scared to default and didn’t take any risky decision to grow the company making them stagnant. This also should not happen with India. But then Australia laid ‘Safe Harbor’ provision to ease out the rules. Hence still amendment in the IBC is required to make directors take help from outside professional for the revival of their company in the early insolvency stage itself.

On June 7,2019, RBI laid provision pertaining to rules for creditors to enter into a ‘review period’ in the first 30 days of default by the debtor account, and make a resolution plan for the concerned account and apply the plan in next 180 days to revive it. If the plan is not put into implementation, provision for this account is required to be increased more and more as days pass. This might lead the banks to initiate the CIRP of the account under IBC and may overcome the ‘Initiation Problem’ from the side of creditors. According to this new frame work for stressed assets, the above mentioned rule is now applicable to Small Finance Banks and NBFCs, as they have become an integral part of the economy and needs to be properly regulated to retain the trust of investors.

There can be a solution to mitigate the problem of NPA by forming a‘Bad bank’. But this is a very risky model as it requires extensive research and cross-country analysis as the taxpayers’ money is on table.

In India Secondary Market for Corporate Loans, particularly distressed loan is in the making, taking inspiration from U.S. and European market. But there is a problem of transfer pricing of these distressed assets. India will have to design a proper mechanism, a platform and regulation of valuation techniques using DCF method, so that there isn’t much of a gap between the bid and the ask price of the assets and so the market remains active and transparent.

India and the banking system requires a major turn around and all the financial professional will have to put in the work.

Vishwa Parekh
Volunteer – Fixed Income & Risk Management
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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Gaining the edge: Parallel banking for Indian economy

India is going to emerge as the fourth largest economy in the world by 2025 with a GDP of about $5 trillion. With that, India needs to address financial credit access to its rural population that today constitutes about 66% but having an economic contribution of 15%. To achieve a figure like this, the country needs to create 10 million jobs a year, which can be best achieved by meeting the credit needs of small businesses. Moreover, meeting the gap requirements of infrastructure investments, of over US$ 526 billion over the next 20 years is another challenge. Fact scan, check. Problem Statement, check.

Figure 1 – India’s GDP growing at a CAGR 20.83%
Source – RBI

Now let’s look at what the parallel banking sector has in store for us

A quick google check tells us that it is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations. A simple solution. Empower NBFC’s. Check.

It is likely that the next 5-year period will be marked by corporate CAPEX cycle as well as continued Government spending in the Infrastructure sector. Assuming a steady Credit-GDP ratio of 85% and a nominal GDP CAGR of 10-11% suggests that the banking cum NBFC credit can increase by 12-13% CAGR to touch levels of US$ 2.7 trillion by 2025. The question arises, can our present banking infrastructure support this requirement or do we need more vibrant participation by NBFC’s?

Figure 2- Credit-to-GDP ratio
Source – RBI
Figure 3 – GDP Contribution
Source – DBEI

In the last few years, the ratio of Manufacturing & Industry – Credit to GDP has consistently fallen from 79% (2013-14) to 72% (2018-19). Indeed, this was the period marked with NPA’s that fettered the bank’s ability to lend to the manufacturing sector. On the other hand, the NBFC’s share of credit-GDP ratio has gone up substantially from 6.5% in FY-08 to 19.1% in FY-18. Participation of NBFC’s has been across the value chain from high-risk and un-collateralised credit to mortgage financing for salaried class.

Clearly, the approach going forward will require a massive expansion of a banking network, re-tooling the NBFC’s for expansion of credit especially to small businesses, creation of a dedicated Rural banks, specialised NBFC’s for diverse assets, and other measures that would stimulate private investment and provide mechanisms to  promote project financing and infrastructure development.

In India, we have the situation that banks finance large businesses, medium and small businesses, home mortgages, auto loans, personal loans, and credit cards, each of which have totally diverse risk management requirements. Should we not adopt the model of the developed economies where there are specialised financial institutions for different assets? While we do have housing finance companies, NABARD for Agri-credit, NBFC’s for auto loans etc, the need is to allow a larger number of NBFC’s specialised in the diverse asset class. This enables focused risk management, relevant to the nature of the asset being financed.

Presently, the NBFC’s balance sheets are pre-dominantly funded from the banking sector. NBFC’s access to public deposits is very tightly regulated by the RBI due to issues of the past.

Moreover, the rising importance and the geographic reach of the NBFC’s especially to the small businesses requires a refreshing look on the allowing the NBFC’s to tap the public deposits and making them as cost-effective competitors to the banking sector. The fear of default or misuse of public funds by NBFC’s can be managed by the deployment of technology to manage the risks on a real-time basis.

Another challenge for India is to finance its massive infrastructure requirements estimated at US$1.5tn over the next 20 years (“Around US$4.5trillion worth of investments is required by India till 2040 to develop infrastructure to improve economic growth and community wellbeing. The current trend shows that India can meet around US$ 3.9trillion infrastructure investment out of US$ 4.5trillion. The cumulative figure for India’s infrastructure investment gap would be around US$ 526bilion by 2040.” – Economic Survey 2017-18).

The key issue plaguing the financing of infrastructure is a lack of long-term debt market in India. Perhaps, the time has come to allow a relaxation of the present rating norms for the investment of 5-10% of the corpus of pension funds, insurance funds and provident funds to invest in A-rated infrastructure finance companies.

The banking sector has limited ability to provide project finance, which acts as a barrier to attract private investments in new projects. Perhaps, we need to once again revive the old concept of development financial institutions (DFI’s) that will take the lead in providing project finance. The business model could be that the DFI’s are owned by the Government and international financing institutions – investment funds. The proceeds of bank privatization could partly offset the capitalization requirement of the DFI’s from the  Government.

Let us now look at what could be done to the existing banking sector:

In the 1970s and 80’s the nationalization of the banking sector was to support and promote the socialistic economic ideology. Since 1992 India has been on a path of private capitalization and has aborted the socialistic pattern of economic development. This being so, why is our banking sector still Government-owned? We have also evidenced that Governmental control of the banking sector necessarily implies that the banks must fall in line with Government guided lending directives whether they make economic sense or not. The saga of NPA’s and loan waivers proves the above and establishes the basis of Government divestment in the commercial banks. The privatization proceeds so received by the Government should be used to capitalize the launch of rural banks. Ideally, the State Governments should join hands with the Centre – RBI for capitalization of the rural banks.

In conclusion, if in the next 11-12 years India is to emerge as a $7 trillion economy thus being the third largest in the world, and if we are to ensure an economic development percolates to the bottom of the pyramid, we will need banking reforms which lead to:

  1. Privatization of existing PSU commercial banks
  2. Expanding the participation of Small Finance Banks, as well as allowing a level playing field for the NBFC’s to raise public deposits
  3. Establishment of Rural banks with technology support
  4. Establishment of Development Financial Institution’s to provide project financing support to private and PPP projects
  5. Creation of a long-term debt market, and
  6. Commercial banks to focus on doing short to medium term loans and consumer loans.
Anushka Chordia
Team Member– Alternative Investment Funds
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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Rate Cut, Who is the Winner?

In the recent Bimonthly Quarterly statement, RBI Governor announced a rate cut of 0.25 basis points, thereby shifting the rate from 6% to 5.75%. Who is going to benefit from the same ? Let’s do Economics! Like, Share & Subscribe to Areesha Fatma on YouTube!
Areesha Fatma
(M.Sc. Economics, NMIMS – Mumbai 2018-20)

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