About: Purchasing Manager Index (PMI) and It’s significance

Headline : Manufacturing PMI improves

Details :

In News:
  • The Nikkei India Manufacturing Purchasing Managers’ Index rose in November from October, indicating an increase in manufacturing activity November.
About: Purchasing Manager Index (PMI)
  • The Nikkei India Manufacturing PMI is based on data compiled from monthly survey responses by purchasing managers in more than 400 manufacturing companies, on various factors that represent demand conditions.
  • PMI measures activity at the purchasing or input stage. It is very different from industrial production which is indicative of actual production. For example, the Index of Industrial Production (IIP) measures output
  • The PMI is constructed separately for manufacturing and services sector, but the manufacturing sector holds more importance.
  • PMI does not capture informal sector activity.
Significance:
  • The Index is considered as an indicator of the economic health and investor sentiment about the manufacturing sector.
  • PMI is also the earliest indicator of manufacturing activity and economic health, as the manufacturing PMI report for any given month comes out without any delay – either on the last day of that month or on the first day of the next month.
How it is captured:
  • The PMI is derived from survey responses from purchasing managers to a a series of qualitative questions.
  • PMI is composite index based on five individual sub-indices:
    • New orders
    • Output
    • Employment
    • Suppliers’ delivery times
    • Stock of items purchased
Reading the PMI:
  • A figure above 50 denotes expansion in business activity and anything below 50 denotes contraction.
  • Higher is the difference from this mid-point, greater is the expansion or contraction.
  • The rate of expansion can also be judged by comparing the PMI with that of the previous month data. If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.
News Summary:
  • The October Nikkei India Manufacturing Purchasing Managers’ Index, at 50.6, was a two-year low.
  • Now, in November, the Index rose to 51.2. In comparision, the survey average is 53.8.
  • This indicates that, although business conditions in the Indian manufacturing sector improved in November, the upturn remained subdued compared to earlier in the year and the survey history.
  • The rates of expansion in factory orders, production and exports remained far away from those recorded at the start of 2019. Subdued underlying demand is being seen as a major reason for this.
Performance of sub-indices:
  • Good: The Index rise was driven by a modest increase in the growth of new orders and production.
  • Bad: On the other hand, it was concerning that firms shed jobs (for the first time in 20 months) and continued to reduce input buying.
Various segments:
  • The consumer goods segment growth mainly propped up the growth in the overall manufacturing sector.
  • The intermediate goods segment also returned to expansion.
  • However, the capital goods segment reported a deterioration in the operating conditions.
Section : Economics

Explained: Why interest rates aren’t falling

Headline : Explained: Why interest rates aren’t falling

Details :

Context for the article:
  • This article explores why, despite significant repo rate cuts by the RBI, the interest rates in the banking system are not falling much.
Rate cuts by the RBI:
  • Since February, the Reserve Bank of India (RBI) has aggressively cut the repo rate.
  • Repo rate is the interest rate that the RBI charges the banks when it lends them money.
Why does RBI want lower interest rates?
  • Since February, India’s economic growth momentum has rapidly decelerated.
  • Projections of GDP growth rate have come down from roughly 7.2%-7.5% in February to 5.8%-6.0%.
  • There are two key problems in the economy – Consumption and Investment – and a lower interest rate regime is expected to help in resolving both.
  • To this end, RBI has been cutting repo rates, especially since overall retail inflation has been well within the RBI’s comfort zone of 4%.
Lower interest rates could revive consumption:
  • The main issue is that people are not consuming at a high enough rate.
  • Some economists argue that if banks reduce their lending rates, they would also have to reduce their deposit rates (the interest rate banks pay when we park our money with them in a savings bank deposits or a fixed deposit).
  • This, in turn, will incentivise people to save less and spend more.
Lower interest rates could revive private investment:
  • The other problem in the economy at present is that businesses are not investing in existing or new facilities.
  • Part of the reason is also that the interest rate charged on loans is quite high.
  • If banks reduce the interest rates on loans, more businesses are likely to be enthused to borrow new loans for investment.
  • This is particularly relevant with the recent corporate tax rate cuts done in the hope that it will boost the corporate sector’s profitability and get it thinking of investing more.
 
The ‘transmission’ of rate cuts by RBI to the banking system is not happening:
  • By cutting the repo rate, the RBI has been sending a signal to the rest of the banking system that the lending rates in the system should come down.
    • Lending rates are the interest rates that banks charge from their customers.
  • This process of repo rate cuts leading to interest rate cuts across the banking system is called “monetary policy transmission”.
  • The transmission process in India is quite inefficient:
    • For example, between February and August, the RBI cut repo rate by 110 basis points — 100 basis points make a percentage point — from 6.5% to 5.4%.
    • But, the interest rate charged by banks on fresh loans that they extended during this period fell by just 29 basis points – that is just 27% of the amount by which the repo rate came down.
To force transmission, RBI is linking bank lending rates to repo rate:
  • Concerned by the sluggish transmission, the RBI in October 2019 (after cutting the repo rate by another 25 basis points) took steps to make banks link their lending rates to the repo rate.
  • The RBI made it mandatory for all banks to link certain loans to external benchmark rates like Repo Rate, Yields on treasury bills etc.
Only few banks have cut rates:
  • For the most part, the banking system has ignored RBI’s signalling and only some banks have reduced lending rates on new loans by 10 basis points.
  • In essence, while the RBI has cut its lending rate to the banks by 135 basis points (or 1.35 percentage points) in the nine months since February, the interest rates being charged to the common consumer have come down by only about 40-odd basis points.
Why aren’t interest rates in the banking system coming down?
  • The interest rates in the banking system are not coming down despite repo rate cuts by the RBI.
  • This is because repo rates have little impact on a bank’s overall cost of funds, and reducing lending rates just because the repo has been cut is not feasible for banks.
Difference between lending and deposit rates allows banks to function:
  • For any bank to be viable, there must be a clear difference between the lending rates (interest rates it charges from borrowers on loans it provides) and the deposit rates (interest rate it gives to consumers on deposits it accepts).
  • The difference between these two sets of interest rates has to be not only positive but also big enough for the bank to make profits.
Banks can be profitable only if they cut deposit rates also:
  • To attract deposits, banks pay a high deposit rate. Such deposits make up almost 80% of all banks’ funds from which they then lend to borrowers.
  • Banks borrow only a small fraction under the repo.
  • So even sharply reducing the repo rate doesn’t change the overall cost of funds.
  • Unless banks reduce their deposit rates, they will not be able to reduce their lending rates.
Why are banks not reducing their deposit rates?
  • Others could offer better rates: That’s because if a bank were to reduce its deposit rates, depositors would shift to a rival bank that pays better interest rates or invest in small saving instruments such as public provident fund, Sukanya Samriddhi Yojana etc that pay much higher interest rates.
  • Can’t reduce rates immediately: Even if banks wanted to reduce their deposit rates, they can’t always reduce them immediately. This is because 65% of total deposits are “term” deposits (fixed for a certain duration) and take, on an average, up to two years to get repriced at fresh rates.
What hasn’t linking the lending rate to the repo rate worked?
  • This is not a viable solution for the banks.
  • The banks cannot link their lending to the repo rate because repo doesn’t determine their cost of funds.
  • For a repo-linked regime to work, the whole banking system would have to shift to that – in other words, along with banks’ lending rates, their deposit rates too must go up and down with the repo.
  • But if such a regime were in place, depositors would have earned 1.10 percentage points less interest rate on their savings account.
Is this problem of weak transmission new?
  • As per some experts, this is not a new issue.
  • Never even in the past has monetary transmission been better than 50% (that is, only half the rate cuts by RBI were passed through by the banking system).
  • The reason for weak transmission, too, has been largely the same.
Why doesn’t this happen in developed countries?
  • The slow transmission does not happen in developed countries because the financial system is far more developed and diversified.
  • Banks are not burdened to fund everyone:
    • Most importantly, the banking system there doesn’t have to bear the burden of providing loans to everyone in the economy – from farmers to small businesses to large businesses, like in India.
  • Developed bond market:
    • Most demands for big loans are directed towards the corporate bond market – wherein a company floats bonds (or IOUs) and borrows money from the public by paying whatever interest rate the market demands.
  • Better grasp of borrowing and lending dynamics:
    • Depositors there are not in the habit of getting a fixed interest rate on their savings while expecting a variable interest rate on their loans.
    • The savers there are far more willing to take risk and to invest in higher-risk instruments other than bank deposits.
    • On the other hand, at the current low levels of per capita income, Indian savers are risk averse and prefer saving in banks.
  • Government borrowing does not impact interest rates much:
    • The overall borrowing by the public sector – that is the government and government-owned institutions – is not so high so as to drive up the interest rates in the economy, as it happens in India.
Section : Economics

Bank merger announcement is a needless distraction Editorial 5th Sep’19 IndianExpress

Headline : Bank merger announcement is a needless distraction Editorial 5th Sep’19 IndianExpress

Details :

Public Sector Bank (PSB) merger:

  • In a major reform measure, the Union Finance Ministry has announced the merger of 10 public sector banks (PSBs) into four entities.

Seen as a response to slowdown:

  • The announcement comes in the wake of growth sinking to a six-year low, and was meant to be seen as a big bang response to arresting the slowdown.

Criticism of the move

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In the short term, it will not help in improving the growth rates:

  • Some critics of the move say that the merger is actually a needless distraction.
  • In the short-term, the mergers will contribute nothing towards engineering a turnaround of the economy.
  • Divert banks’ attention from NPAs and Credit growth: Worse still, the administrative and logistic challenges of mergers will divert the mind space of bank managements away from their most pressing task at the moment — of managing the NPAs and aggressively looking for lending opportunities.
  • Divert resources away from actual banking: Also, at the lower levels, bank staff will be worrying about their jobs and career prospects while adapting to a new banking culture and new practices at a time when they should be giving their undivided attention to scouting for borrowers and improving service delivery.

In the long term, will the mergers be a net positive?

  • It is not unambiguously clear if the mergers will be a net positive in the long term. 
  • While mergers of banks motivated purely by business considerations lead to efficiency gains, it remains debatable whether the government forced bank mergers are a good thing .

Long-term benefits of mergers:

  • Cost efficiency: On the positive side, large banks will entail cost advantages by way of economies of scale such as centralised back office processing, elimination of branch overlap, savings in IT and other fixed costs etc.
  • Finance large projects: Large banks will also be able to finance large projects on their own even while staying within the prudential lending norms imposed by the regulator.

Shortcomings of mergers:

  • Creation of more banks too big to fail:
    • The biggest argument against big banks is that they can become too big to fail (this means government will be forced to bail them out in every crisis and it encourages irresponsible behaviour by big banks).
    • The financial sector is all inter-connected and a risk in any part of the system is a risk to the entire system. If a large bank were to fail, it could bring down the whole financial sector with it, as was evident from the collapse of Lehman Brothers in 2008, which triggered the global financial crisis. No country can therefore afford the failure of a big bank.
    • The proposed mergers will increase this “too big to fail risk”.

PSBs played an important role in independent India:

  • Banks were nationalised 50 years ago in a different era, in a different context.
  • PSBs rendered commendable service to the nation by deepening bank penetration into the hinterland and implementing a variety of anti-poverty programmes.
  • Financial intermediation by PSBs is one of the factors responsible for India moving from low income to a low middle income country.

But are Public Sector Banks needed anymore?

  • While acknowledging the contribution of PSBs, it needs to be asked if we still need PSBs.
  • Some experts say that the financial sector is wide enough and deep enough to take care of financial intermediation without the government at the steering wheel.
  • Meanwhile, the government could use its mind and time on more important things.

Way towards $5-trillion economy

  • There is wide consensus that today’s economic slowdown is due both to cyclical and structural factors.

Cyclical response:

  • By way of cyclical response, the RBI has cut rates and the government has announced a few measures like frontloading expenditures and cutting some taxes.
  • The RBI will probably cut rates further and the government will follow on with some more measures.
  • However, the most these can do is to lift the growth rate to its potential but that will not make us a $5-trillion economy.

Structural reforms:

  • We will become a $5-trillion economy not by growing at our current potential growth rate but by raising it.
  • That requires structural reforms.
  • Structural measures will take time to work their way through the system.
  • But even the announcement effect of structural reforms can have a big impact.
  • Taking PSBs out of government control:
    • For example, the government can put out a roadmap for giving up its majority stake in PSBs.
    • It will go a long way in shoring up sentiment and getting us off the block to a $5-trillion economy.

Importance:

GS Paper III: Economics

Section : Editorial Analysis

Fintech committee recommends new legal framework for consumer protection

Headline : Fintech committee recommends new legal framework for consumer protection

Details :

In News:

  • A panel on issues related to financial technology (fintech) has recently submitted its recommendations to the Finance Ministry.
  • The committee has suggested putting in place a comprehensive legal framework to protect consumers of digital services.

What Is Financial Technology (Fintech)?

  • Financial technology (Fintech) is used to describe new technologies that seeks to improve and automate the delivery and use of financial services. ​​​
  • At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.

Background:

  • The fintech panel was announced by former finance minister Arun Jaitley in his 2018-19 Budget.

Committee on issues related to financial technology

Objectives of the committee:

  • To consider various issues relating to development of Fintech space in India with a view to make Fintech related regulations more flexible and generate enhanced entrepreneurship in an area where India has distinctive comparative strengths vis-à-vis other emerging economies. 
  • The Steering Committee also focused on how Fintech can be leveraged to enhance financial inclusion of MSMEs.

Key Recommendations of the committee:

  • Examining the suitability of virtual banking system:
    • The committee suggested the Department of Financial Services (DFS) and Reserve Bank of India to examine the suitability of ‘virtual banking system’ in the Indian context.
  • Adoption of RegTech:
    • The committee has recommended adoption of regulation technology (or RegTech) by all financial sector regulators to develop standards and facilitate adoption by financial service providers.
  • Use of Financial Technologies:
    • The committee suggested usage of fintech to improve access of financial products for MSMEs, farmers and poorer sections of the society.
  • Change in the form of RBI adopting open data access approach:
    • RBI may consider making available banking data (such as transaction and account history data) for use by the financial sector, including fintech firms, (based on consumer consent and with other appropriate safeguards)
  • Study the Potential of Open data access:
    • It also recommends that all financial sector regulators study the potential of open data access among their respective regulated entities, for enhancing competition in the provision of financial services
  • Use of drones and remote sensing technologies by Insurance companies and lending agencies:
    • The panel has also recommended that insurance companies and lending agencies be encouraged to use drone and remote sensing technology for crop area, damage and location assessments to support risk reduction in insurance/lending business.
  • Coordination among Department of Financial Services (DFS) and PSU banks:
    • The Department of Financial Services (DFS) should work with PSU banks to bring in more efficiency to their work and reduce fraud and security risks.
    • Significant opportunities can be explored to increase the levels of automation using artificial intelligence (AI), cognitive analytics and machine learning in their back-end processes.
  • Digitization of land records:
    • The committee also suggested digitisation of land records across the country on a war footing.
  • Setting up a Inter-Ministerial Steering Committee:
    • The report favoured setting up of an Inter-Ministerial Steering Committee on fintech applications in the Department of Economic Affairs (DEA) to monitor progress, including exploring and suggesting the potential applications in government financial processes and applications.
  • Common fintech platform
    • The panel suggested usage of common fintech platform for MUDRA loans, small saving schemes, pension schemes and provident fund.
    • It recommended creating a common digital platform for all micro-pension schemes and government pension schemes, including EPF, through which pension subscribers can subscribe to specific schemes seamlessly.
    • It would also reduce access barriers by allowing payments through various modes such as Jan Dhan Yojana accounts, debit card, credit card, internet banking, mobile wallets etc.
  • Explore permitting digital alternatives:
    • The government should undertake a campaign to convert all financial assets held, especially by entities under its control like post offices, in demat form as far as possible but certainly in electronic form
  • Reducing the cost of KYC:
    • The committee recommended need to reduce the costs of KYC to promote financial inclusion among the weaker sections.
    • The panel suggested that there should be no charge for uploading KYC data, while every download can be priced based on the user pays principle and this will enable Central KYC to take off early.
  • Creation of a nodal agency:
    • A nodal agency to coordinate developments across ministries and regulators in the area of financial technology (fintech).
    • A dedicated team on digital economy and fintech is being set up in the Investment Division, Department of Economic Affairs for coordination on fintech with relevant ministries.

Section : Economics

Deceleration in economy: Cyclical downswing, not a deep structural slowdown, says RBI

Headline : Deceleration in economy: Cyclical downswing, not a deep structural slowdown, says RBI

Details :

In News

  • The Reserve Bank of India has released its annual report for the year 2018-19.
  • The report confirms that several sectors are undergoing a deceleration in the economy.
  • However, it states that the deceleration could turn into cyclical downturn rather than a deep structural slowdown.

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From RBI annual report

Slowdown in growth

  • India’s real GDP growth was an average of 7.7 per cent during 2014-18 and 8 per cent in the first quarter of 2018-19, however, it has slowed down in the remaining quarters of 2018-19.
  • The growth slowed down to a five-year low of 5.8 per cent in the March quarter of 2018-19.
  • Several sectors, including auto and consumer goods, have witnessed demand slowdown, production cuts and lay-offs.

Private Consumption moderated in the second half

  • Private final consumption expenditure, accelerated in the first half of the year, supported by higher disposable income due to lower food expenses. However, the demand has seen moderation in the second half of the year.
  • The pick-up in activity in labour intensive sectors like construction provided additional push to household consumption demand.
  • Rural demand, however, was affected by moderation in agricultural growth which reflected in tractors and two wheelers sales.
  • Passenger vehicles sales were the lowest in five years on account of increase in insurance costs, volatile fuel prices, and lack of financing options due to the liquidity stress in the non-banking sector.
  • The production of consumer non-durables slumped to its lowest level in the past three years.
  • Going forward, public expenditure through the Pradhan MantriKisanSamman Nidhi (PM-KISAN) and farm loan waivers by some states are expected to sustain rural demand.

Reasons for the slowdown

  • Protectionist policies and actions like escalation of trade tensions; volatile crude prices; uncertainty over Brexit also had its effect on the slowdown in the economy.
  • Structural issues in land, labour and agricultural marketing are holding the economy back.
  • Bank credit is yet to become broad-based and flow of resources from nonbank financial intermediaries is also quite slow.
  • The delayed onset and skewed distribution of the south-west monsoon has created risks in crop production and has led to a decline in rural consumption demand.

Credit Delivery and Financial Inclusion

  • The Reserve Bank has made sustained efforts during the year to increase the penetration of formal financial services in unbanked areas.
  • Moreover it has continued with its policy of ensuring adequate flow of credit to all productive sectors of the economy.

Initiatives

  • Setting up of an expert committee/working group to examine the issues relating to credit flow to MSMEs and agriculture sectors.
  • Allowing SCBs to co-originate loans with non-deposit taking NBFCs for credit delivery to the priority sector.
  • The National Strategy for Financial Inclusion 2019-24 was prepared, besides ongoing measures to strengthen financial literacy and inclusion in the country.

Monetary Policy Operations

  • Inflationary pressures from volatile international crude oil prices, and currency depreciation in the first half of the year, reduced significantly in the second half.
  • The monetary policy committee has cut the policy repo rate by 75 basis points during February-June 2019.
  • Forex operations by the Reserve Bank increased the pressure on system level liquidity, necessitating active liquidity management.

Payment and Settlement Systems

  • The Reserve Bank has made efforts to ensure that the country has a ‘state-of-the-art’ payment and settlement systems that are not just safe and secure, but are also efficient, fast and affordable.
  • It has also continued with its emphasis on innovation, cyber security, financial inclusion, customer protection and competition.
  • Going forward, Vision 2021 aims to achieve a ‘highly digital’ and ‘cash-lite’ society to empower every citizen with an access to a variety of e-payment options.

Efforts in Financial markets

  • The Reserve Bank conducted liquidity management operations for maintaining an appropriate level of liquidity in the financial system
  • Intervention operations were conducted in the foreign exchange market to contain volatility.
  • In order to facilitate trade and payments, efforts were made to streamline regulations and align them with the current business and economic environment.
  • The external commercial borrowings regime was also rationalised during the year.

Bank NPAs

  • Several measures have led to a decline in gross non-performing assets of the banking system to 9.1% in March 2019, from 11.2% in the previous year.
  • After initial difficulties the insolvency and bankruptcy code is proving to be effective.
  • Recoveries have gradually improved and as a result, blocks in the path of the investment cycle are easing. 

Frauds in the banking system

  • Frauds in the banking system has increased by 74 per cent to Rs. 71,543 crore in compared with frauds worth Rs. 41,167 crore committed last year.
  • The average lag between the date of occurrence of frauds and its detection by banks was 22 months.
  • Public sector banks constitute the largest share of the frauds, followed by private sector banks and foreign banks.
  • Frauds related to loans constituted the majority share of the total amount involved in frauds in 2018-19.
  • Frauds relating to card/internet banking and deposits constituted only 0.3 per cent of the total value of frauds in 2018-19, the central bank’s report added.

Section : Economics

Supreme Court upholds homebuyers’ rights as financial creditors under IBC

Headline : Supreme Court upholds homebuyers’ rights as financial creditors under IBC

Details :

Why in News:

  • The Supreme Court has upheld the validity of an amendment to the Insolvency and Bankruptcy Code (IBC) that treats homebuyers as financial creditors, thus giving homebuyers the right to take legal recourse against developers under three key laws.

Background:

The IBC amendment in relation to homebuyers:

  • In August, 2018, the government of India has amended the Insolvency and Bankruptcy Code (IBC) to grant the status of a “financial creditor” to a homebuyer.
  • The amendment allowed home buyers, as financial creditors, to trigger bankruptcy proceedings under the Insolvency and Bankruptcy Code of 2016. It had brought the home buyers on par with the creditor banks of the property builder.
  • The Committee of Creditors (CoC), by voting, makes important decisions on the future of the bankrupt builder. These calls include what to do with his assets and who should finish the pending housing projects.
  • Thus amendments have given home buyers their “rightful place” on the (CoC).

Need of Amendments in the Act:

  • Prior to the law, the home buyers were often left in the difficult situations. They were made to wait blindly for a solution to come up, either in the form of a completed apartment or a refund.
  • Before the Amendment, the assets of the bankrupt builder were divided among his employees, creditor banks and other operational creditors. Home buyers had hardly figured, though their hard-earned savings may have provided a major chunk of the housing project.
  • It was needed to protect the rights of homebuyer, who have a huge stake in real estate projects, having invested in them.
  • The Centre said recognizing homebuyers as creditors was essential since they get duped by some real estate developers.

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Amendment challenged in the SC:

  • India’s real estate sector is witnessing a prolonged slowdown, with several developers who have been dragged to courts over project delays facing bankruptcy or insolvency.
  • Over 180 batch petitions were filed before the Supreme Court by real estate firms earlier this year, challenging the amendment to the IBC.
  • In their petitions, developers had contended that homebuyers were already given enough protection under RERA and consumer forums, and making them a part of the IBC proceedings was not required.
  • The builders argued that homebuyers can initiate proceedings on the basis of any “default”, as the definition was very vague, and the delay in completion of the project could also be due to delays in payments by the homebuyer.
  • The builders said home buyers were a large, amorphous group. Their presence in the CoC would be a nuisance.

 

Summary of SC judgment:

  • A three-judge Supreme Court has now confirmed the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018, which gave home buyers the status of “financial creditors”.
  • The bench said the Real Estate (Regulation and Development) Act, or RERA, has to be read in harmony with the Consumer Protection Act and IBC and, in case of any conflict, IBC will prevail.
  • The court further directed the Centre to fill up the vacancies in the NCLT and its appellate tribunals so as to deal with the rising number of bankruptcy litigation in the real estate sector.
  • Both central and state government was ordered to file compliance affidavit in this regard within three months.

 

Points made by SC while upholding the amendment:

  • Home buyers finance from 50% to even 100% of a housing project. Their absence from the CoC and denying them a voice on future plans would be “manifestly arbitrary.
  • The judge reasoned that the IBC and the RERA operate in different spheres and can be used harmoniously for the interest of home buyers.
  • The court further reasoned that no home buyer would frivolously move the National Company Law Tribunal under the IBC. This is because ironing out a resolution plan under the IBC is a long-drawn process. Also, under the Code, home buyer may never get a refund of the entire principal, let alone interest. Thus, only that home buyer who has completely lost faith in the management of the developer, would come before the NCLT under the Code hoping that some other developer takes over and completes the project.
  • The amendment was only aimed at defaulting real estate giants. The court said there were adequate mechanisms to check misuse and only a genuine homebuyer will be able to invoke insolvency proceedings against a builder.

 

Possible impact of the judgment:

  • The judgment gains significance as many real estate builders have been under fire for incomplete projects leaving home buyers in dire straits.
  • The apex court verdict empowers homebuyers by expanding the scope of the IBC, treating them on a par with banks and institutional creditors, besides protecting their rights.
  • It will empower harassed home buyers to initiate bankruptcy proceedings against errant real estate builders. Home buyers will be given priority while recovering dues from bankrupt or insolvent real estate companies.
  • Now an aggrieved homebuyer has the option to seek relief under three laws—RERA, Consumer Protection Act and IBC.
Section : Economics

About Protocol on Inland Water Transit and Trade (PIWTT), Navigable Inland Waterways, IWAI

Headline : India connects Bangladesh to Bhutan, through waterway

Details :

The News:

  • In a first-ever development, Indian waterways is being used to transport cargo between 2 countries i.e. Bhutan and Bangladesh.
  • The inland waterways vessel containing cargo from Bhutan to Bangladesh will move via River Brahmaputra ( NW 2) and the Indo Bangla Protocol Route

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News Summary

  • The stone aggregates were transported by trucks from Phuentsholing in Bhutan which is 160 KMs from IWAI’s Dhubri jetty in Asaam.
  • The first ship carrying crushed stones from Bhutan started its journey from Dhubri river port in Assam to Narayanganj in Bangladesh
  • India’s Inland Waterways Authority of India (IWAI), which is responsible for developing and maintaining national waterways, has carried out dredging on Brahmaputra to maintain an assured draft in navigation channel.
  • At least 10 other National Waterways are under development currently.
  • India is increasingly using its rivers to transport cargo which is cheaper than transport on roads.

Significance of the development

  • The exports through Inland Waterways mode will serve as an alternate mode of transportation which will save 30% transportation cost, almost 50 per cent time and more environment friendly
  • It also offers larger shipment size as compared to road, avoiding congestion on land routes.
  • The move will facilitate Bhutan and Bangladesh trade through Brahmaputra as a part of Indo-Bangladesh protocol route.
  • This will help in promoting Inland Waterways in India.
  • It will also help India access the North-East States from Kolkata, Haldia through the inland waterways via Bangladesh.
  • This will also give an impetus to trade and tourism in these countries.

 

About Protocol on Inland Water Transit and Trade (PIWTT)

  • In 1972, India and Bangladesh signed the Protocol on Inland Water Transit and Trade (PIWTT).
  • It is a bilateral protocol connecting the inland waterways of India and Bangladesh for the transportation of goods and keeping their respective waterways navigable, while providing infrastructure facilities.
  • The protocol further states that both countries will mutually decide the proposed expenses; voyage permissions shall be taken at least four days prior to the actual journey; and the vessels shall share equal tonnage.
  • The India-Bangladesh  Protocol  Routes  include  parts  of  rivers  Ganga,  Hooghly, Brahmaputra,  and  Barak,  and  the  Sundarbans

Note: In 2018, India and Bangladesh signed an agreement for inclusion of Dhubriin India and Pangaonin Bangladesh as new Ports of Call in PIWTT.

 

About Navigable Inland Waterways:

  • A stretch of water, not part of the sea, over which craft of a carrying capacity  not  less  than  50  tonnes  can  navigate  when  normally
  • Rivers, lakes, canals, backwaters and reservoirs primarily constitute the source for inland waterways.

National Waterways:

  • National Waterways   means   an   Inland   Waterway   of   India   designated   as   a   National   Waterway by the Government.
  • In order to increase significance and efficiency of inland waterways, government has identified 10 important waterways which being given status of national waterways. Some of the declared waterways are –

About IWAI

  • The Inland Waterways Authority of India (IWAI) came into existence in 1986 for development and regulation of inland waterways for shipping and navigation.
  • The Authority primarily undertakes projects for development and maintenance of Inland Water Transport infrastructure on national waterways through grant received from Ministry of Shipping.
  • The head office of the Authority is at Noida.

 

Section : Economics

RBI: Monetary Policy and Monetary Policy Committee, Important Terminology [Repo rate, MSF, LAF, Reverse repo rate ]

Headline : RBI takes offbeat tack to help reverse growth slowdown

Details :

The News:

Telegram: https://t.me/MrunalsEconomy

  • In its monetary policy review, the Monetary Policy Committee of the RBI has decided to cut the repo rate by 35 basis points (bps).
  • In addition, the RBI also announced some measures to boost economic activity.

Important Terminologies:

  • Risk Weight: Risk weight is capital required to be set aside, stipulated by RBI for banks, or National Housing Bank for housing finance companies, that has to be made by banks for giving the loan.
    • The bank or housing finance company has to keep aside money, based on the risk weight.
    • A higher risk implies the bank will have to set aside a higher amount as loan provisioning. As a result, banks could be averse or less enthusiastic to lend to a particular sector.
  • Real Interest Rate: The real interest rate is the difference between the repo rate and retail inflation.
    • When making an investment decision, it is this interest rate that matters.
  • The real interest rates in India have been rising, and that is one of the biggest reasons why investments are not happening.

 

 

News Summary:

  • Repo Rate cut by 35 basis point: The Reserve Bank of India typically cuts or raise interest rates in increments of a quarter percentage point or multiples. However, this time, it has opted to break with convention by reducing the key policy rate, the repo rate, by 35 basis points (bps) to 5.4% .
    • A 25 basis-point rate cut was deemed inadequate, while a 50 basis-point cut was excessive. That is why RBI took a balanced call.
    • This would reduce the real interest rate and hopefully attract more investment.
    • The move is also expected to revive demand to tackle a deepening economic slowdown.
    • Note: With this rate cut, RBI has now reduced the repo rate by 110 bps in 2019.
  • Reduction in risk weight for consumer loans: RBI has reduced the risk weight for consumer loans, except credit cards, from 125% to 100%.
    • This move will encourage banks to extend loans to retail consumers segments such as individual vehicle loans and personal loans, amid a sharp slowdown in demand.
  • Banks get more headroom for lending to NBFCs: The central bank has decided to increase the cap on a bank’s exposure to a single NBFC from 15% to 20% of its tier-I capital. Also, RBI has decided to give ‘priority sector’ tag for banks lending to NBFCs, for on-lending to farm, small and medium enterprises and housing sector.
    • Banks have been allowed to lend to the NBFCs for on-lending to the agriculture sector up to Rs 10 lakh, up to Rs 20 lakh to micro and small enterprises, and for housing, up to Rs 20 lakh per borrower. These will be classified as priority sector lending.
    • This will improve the available sources of funding, especially for new-age mid and small-sized NBFCs, at a relatively lower cost, while improving banks’ ability to meet their priority sector lending targets.

Why the interest rate for consumer loans has not reduced by 110 bps since February?

  • To cover the earlier losses from non-performing assets (NPAs), the banks have to use their existing funds, which would have otherwise gone to common consumers for fresh loans.
  • The reduced repo rate applies only to new borrowings of banks. The banks’ cost of existing funds is higher. Thus, the funding costs would take time to eventually come down.
  • It could take anywhere between 9 and 18 months for the full effect of an RBI decision to reflect in interest rates across the economy.

 

In Focus: Monetary Policy and Monetary Policy Committee

Economic Activities in an economy:

  • Private individuals and households spend money on consumption.
  • The government spends on its agenda.
  • Private sector businesses “invest” in their productive capacity.
  • The net exports i.e. difference between what all of them spend on imports as against what they earn from exports.

About Monetary Policy

  • For spending money, knowing cost of money is important and the central bank is mandated to decide the cost of money, which is more commonly known as the “interest rate” in the economy.
  • Monetary policy is the macroeconomic policy laid down by the central bank.
  • It is a set of economic policies that manages the size and growth rate of the money supply in an economy and regulates macroeconomic variables such as inflation and unemployment.
  • Monetary policies are implemented through different tools, including the adjustment of the interest rates, purchase or sale of government securities, and changing the amount of cash circulating in the economy.
  • In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.

What is Marginal Standing Facility (MSF) ?

  • Marginal standing facility is a window for banks to borrow from Reserve Bank of India in emergency situation when inter-bank liquidity dries up completely.
  • Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short

What is Liquidity Adjustment Facility (LAF) ?

  • Reserve Bank of India’s liquidity adjustment facility of LAF helps banks to adjust their daily liquidity mismatches.
  • LAF has two components: repo (repurchase agreement) and reverse repo.

Repo Rate:

  • When banks need liquidity to meet its daily requirement, they borrow from RBI through repo. The rate at which they borrow fund is called the repo rate.

Reverse Repo Rate:

  • When banks are flush with fund, they park with RBI through the reverse repo mechanism at reverse repo rate.

How does the RBI decide the interest rate?

  • The RBI continuously maps prices, inflation (which is the rate of increase in prices), and expectations of inflation (of households) to decide if it should increase or decrease interest rates.
  • For example: the RBI has marked inflation rate to be 4%. So, every time the retail inflation rate rises above the 4% mark, the RBI raises the cost of money i.e. the interest rate.
    • When it does that, some people find it more advisable to put the cash out of the market and into banks. This way, inflation falls.
    • The reverse process applies when the inflation is below the 4% mark.
  • Also, to spur anaemic economic growth. The RBI cuts interest rates to incentivise people to consume more and businesses to invest more.

 

About Monetary Policy Committee in India

  • On the recommendation of Urjit Patel Committee, Monetary Policy Committee was created in 2016 to bring transparency and accountability in fixing India’s Monetary Policy.
  • The Monetary Policy Committee of India is responsible for fixing the benchmark interest rate in India, which was earlier decided by the Governor of Reserve Bank of India alone prior to the establishment of the committee.
  • Composition:
    • Three officials of the Reserve Bank of India (Governor of RBI: chairperson ex officio)
    • Three external members nominated by the Government of India
  • Decision: On the basis of majority with Governor having the casting vote in case of a tie.
  • Meeting: At least 4 times a year and it publishes its decisions after each such meeting.
  • The current mandate of the committee is to maintain 4% annual inflation until March 31, 2021 with an upper tolerance of 6% and a lower tolerance of 2%, while supporting growth.
  • The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months

 

Section : Economics

Economy: Sovereign Bonds, Borrowing, Policy, Rationale

Headline : The name is dollar bond Editorial 3nd Aug’19 IndianExpress

Details :

 

Sovereign Bonds:

  • During the recent Budget, the Indian finance minister announced plan of the government of India to borrow in foreign currency to finance the fiscal deficit.
  • The plan is to raise up to 10-15% of government borrowing — $10 billion — from the first overseas sovereign bond.

The difference is that this is offshore borrowing from foreign parties:

  • There are other ways the government borrows from foreign parties. For example, foreign portfolio investors are allowed, within some limits, to buy the government’s onshore rupee bonds.
  • The difference now will be that the bonds will be offshore, denominated in hard currencies. Here, the government, rather than the investor (like in case of FPI involvement in India), will bear the exchange risk.

 

Questions raised:

  • The announcement has become quite contentious with many critics panning the decision as needless adventurism.
  • The move has triggered two broad questions:
    • Why this attempt at something totally new to India?
    • Why now?

 

Rationale given by the government:

  • Availability of cheaper credit:
    • The budget proposal claims that the ratio of India’s external debt to GDP, at 5 per cent, is among the lowest in the world.
    • But this, the government implies it can raise cheap money by tapping into the global savings glut at a time when interest rates are at historic lows.
  • Making more Indian savings available for private players:
    • The other rationale advanced by the government is that by moving a part of its borrowing offshore, it will leave space in the domestic capital market for corporates and thereby stimulate much needed private investment.
    • This could have been a major motivation, as India’s total public sector borrowing today, on and off budget, not only takes up the entire financial savings of households but also eats into corporate savings.

Other benefits

Signalling the opening up of economy:

  • From a purely objective point of view, a persuasive case can be made for the dollar bonds
  • By far the biggest benefit will be the intangible impact of the government signalling its confidence about opening up the economy.
  • We will attract not just larger foreign portfolio flows but, in time, also larger foreign direct investment.

Costs of borrowing:

  • Critics have argued that the cost of borrowing in external markets will not be any cheaper than borrowing in rupees in the domestic market.
  • It is true up to an extent. The lower coupon rate on bonds offered in foreign markets will be offset by the cost of hedging against the foreign exchange risk.
  • But viewed from the larger perspective of the overall economy, there will in fact be cost savings. This is because the sovereign will command a lower interest rate than any other entity.

Reduced yields for private sector:

  • The policy shift will also pave the way for Indian bonds entering global indices which will draw in index-tracking funds and reduce yields overall.

Ratings upgrade:

  • Further, a dollar bond will enable India’s risk premium to be more accurately estimated, potentially leading to a rating upgrade.

 

Concerns over the move

Indian economy will be exposed to global economic sentinment:

  • The biggest fear is that this sovereign foreign borrowing will make India exposed to the volatile global economic sentinment.
  • Investors lend liberally when the going is good, but swiftly back out at the slightest hint of trouble, exposing the country to volatile exchange rates and market turmoil.
  • For a country that had a devastating external payments crisis in 1991 and came close to another one during the taper tantrums of 2013, these are dire warnings.

Needless move:

  • Critics have also contended that issuing debt in foreign currencies is a route followed by countries which are unable to issue debt in their own currency.
  • India is certainly not in that category.
  • If the idea is to attract more foreign inflows, it could be done by raising the ceiling for foreigners into onshore rupee bonds.

Could end up as a shift in location of borrowing foreign funds:

  • Critics say the proposed dollar bonds may not raise overall foreign funding.
  • Many investors who are now buying rupee bonds in the domestic market will happily pass on the currency risk to the government and switch to dollar bonds in the external market.

Government may end up overborrowing:

  • There are concerns that cheap foreign money will be too attractive for governments and they may borrow too much.
  • This could lead to balance of payment crisis, currency depreciation and greater difficulty in paying back the loan.
  • Such moves have brought many emerging markets to grief, including Argentina and Turkey.
  • There is no guarantee that India will not succumb to this temptation.

 

Conclusion:

  • Given India’s still fragile fiscal and financial sector situation, the costs of irresponsibility can be intolerably heavy.
  • The government’s proposal is the right way forward but it’s an idea whose time has yet to come.

 

Importance:

GS Paper III: Economy

 

Section : 

In Brief: About National Housing Bank (NHB), About National Bank for Agriculture and Rural Development (NABARD)

News : RBI divests its entire stake in Nabard, NHB

News Analysis

  • Reserve Bank has divested its entire stake in National Housing Bank (NHB) and the National Bank for Agriculture and Rural Development (NABARD), with this the government is now cent percent holder of both these financial institutions.
  • RBI had 100% shareholding in NHB, which was divested for ₹1,450 crore.
  • RBI had 72.5% stake in NABARD which was divested in two phases.
  • This divestment was based on the recommendations of the Narasimham Committee-II and the Discussion Paper prepared by RBI on Harmonizing the Role and Operations of Development Financials Institutions and Banks.

 

About National Housing Bank (NHB)

  • NHB was set up in July, 1988 under the National Housing Bank Act, 1987.
  • It is the apex level financial institution for housing.
  • It registers, regulates and supervises Housing Finance Company (HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-ordinates with other Regulators.
  • As a result of the revision in the composition of share capital between Government of India and RBI, NHB now is fully owned by Government of India.

Aim: To harness and promote the market potentials to serve the housing needs of all segments of the population with the focus on low and moderate income housing.

Objectives:

  • To promote a sound, healthy, viable and cost effective housing finance system to cater to all segments of the population and to integrate the housing finance system with the overall financial system.
  • To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups.
  • To augment resources for the sector and channelise them for housing.
  • To make housing credit more affordable.
  • To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act.
  • To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country.
  • To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.

 

About National Bank for Agriculture and Rural Development (NABARD)

  • NABARD was established on the recommendation of the Sivaraman Committee in 1982 under a parliamentary act.
  • It was given the agricultural credit functions of RBI and refinance functions of the then Agricultural Refinance and Development Corporation (ARDC).
  • It is one of the premier agencies providing developmental credit in rural areas and a specialised bank for Agriculture and Rural Development in India.
  • Consequent to the revision in the composition of share capital between Government of India and RBI, NABARD today is fully owned by Government of India.

Functions

  • Providing refinance support and building rural infrastructure
  • Preparing district level credit plans and guiding and motivating the banking industry in achieving these targets
  • Supervising Cooperative Banks and Regional Rural Banks (RRBs) and helping them develop sound banking practices and onboarding them to the CBS platform.
  • Designing new development schemes and the implementation of Government of India’s development schemes
  • Training handicraft artisans and providing them a marketing platform for selling these articles.
Section : Economics