On December 27, 2019, RBI released Financial Stability Report.
The report is biennial and reflects the collective assessment of the Sub-committee of Financial Stability and Development Council.
The report said that the non-performing asset ratio of banks is increasing. It was 9.3% in September 2019 and may rise to 9.9% in September 2020.
Highlights of the report
The Provision Coverage Ratio of banks increased to 61.5% in September 2019 from 60.5% in March 2019. It is the ratio that gives an indication about the provisions made against bad loans.
When the PCR is higher, the unexposed part of bad loans is lower. Therefore, higher PCR is good for an economy.
The report also stated that capital to risk weighted assets ratio (CRAR) improved to 15.1% in September 2019 from 14.3% in March 2019.
The credit losses have jumped by 7.33% as compared to June 2019.
Highlights: Sector wise The report stated that only 4 banks had Gross Non-Performing Asset ratio (GNPA) higher than 20%. On the other hand, around 24 banks had GNPA ratio under 5%.
The GNPA measure was used to measure asset quality of agricultural and industrial sectors
The report said that asset quality of agriculture deteriorated to 10.1% in September 2019 as compared to 8% in March 2019.
In case of industrial sector, GNPA declined to 3.79%.
Pulicat Lagoonis the second largest brackish water lagoon in India, after Chilika Lake.
Pulicat Lagoon is considered to be the second largest brackish water body in India measuring 759 square kilometres (293 sq mi).
The Lagoon is one of the three important wetlands to attract North-East Monsoon rain clouds during October to December season to Tamil Nadu.
The lagoon comprises the following regions, which adds up 759 square kilometres (293 sq mi) according to Andhra Pradesh Forest Department: 1) Pulicat Lake (Tamil Nadu-TN & Andhra Pradesh-AP) 2) Marshy/Wetland Land Region (AP) 3) Venadu Reserve Forest (AP) 4) Pernadu Reserve Forest (AP)
The lagoon was cut across in the middle by the Sriharikota Link Road, which divided the water body into lake and marshy land.
The lake encompasses the Pulicat Lake Bird Sanctuary.
The barrier island of Sriharikota separates the lake from the Bay of Bengal and is home to the Satish Dhawan Space Centre.
Major part of the lake comes under Nellore district of Andhra Pradesh.
RBI directs large co-op banks to report all exposures above Rs.5 crore
Reserve Bank of India (RBI) has directed large cooperative banks to report all aggregate exposures of Rs.5 crores and more to Central Repository of Information on Large Credits (CRILC).
The move is aimed at early recognition of financial distress.
Earlier in its bi-monthly monetary policy review in December 2019, the RBI had announced to bring Primary (Urban) Co-operative Banks (UCBs) having total assets of Rs.500 crore and above under CRILC reporting framework maintained by the Reserve Bank.
The Aggregate exposure will include all fund-based and non-fund based exposure (such as partial credit enhancement) including investment exposure on borrower.
To start with, UCBs will be required to submit CRILC report on quarterly basis with effect from 31 December 2019.
The central bank has created a CRILC of commercial banks, certain Non-Banking Financial Companies (NBFCs) and All India Financial Institutions (AIFIs) with multiple objectives, which, among others, include strengthening offsite supervision as well as early recognition of financial distress.
Impact on tax revenues
It has to give lead to the economy since the private sector, in its reaction to the slowdown, has lost confidence and is investing less, which is only aggravating the economic crisis. An RBI report suggests that business confidence, consumer confidence and capacity utilization are down. So, there is no escaping the fact that the government has to garner resources and give a boost to the economy by increasing its investments. But the slowdown has adversely impacted growth of tax revenues.
The government calculated tax revenues on the assumption of a 12% nominal growth. But, it has been around 9%, both last and this year. So, in 2018-19, tax revenue was short by about ₹1.5 lakh crore. But this was not reflected in the planning for the 2019-20 Budget. Therefore, given that the base for calculating tax revenue this year was wrong and the rate of growth is incorrect, the revenue shortfall for the Centre will be even larger than last year — around ₹2 lakh crore.
The States get 42% of this revenue so they will get ₹84,000 crore less. Further, the concessions in corporate taxation of ₹1.45 lakh crore will also mean ₹58,000 crore less revenue for the States. While the Centre has obtained ₹1.76 lakh crore from the RBI’s reserves, no such succour is available to the States. The Centre will also get the proceeds of disinvestment but that is not shared with the States. In brief, the States will have a larger shortfall in resources than the Centre. So, what can they do?
The Goods and Services Tax (GST) Council met on December 18, where it was expected to help raise more indirect taxes by raising rates. Mercifully, that did not occur. So, revenue from indirect taxes cannot fill the resource gap. The States have also been complaining that they are not getting the funds that are due to them from the Centre. The Centre has partly responded to this by transferring more, but that raises its deficit.
The Centre is required to give the States: their share of Integrated Goods and Services Tax (IGST) and compensate them if the revenue growth of State Goods and Services Tax is less than 14%. This last is to come from the cess collected on sin goods and luxury goods. One of the big contributors to GST has been the auto sector, but with sales falling over the last 10 months collections have declined. The Centre is apparently holding back the States’ share of IGST and arguing that the cess collection is inadequate to compensate the States for their shortfall.
The dilemma is that if the GST rates are increased, priceswould rise and demand would further slump, further aggravating the slowdown and shortfall in revenues. One of the suggestions has been to raise the 5% slab to 6% or 10%. It has also been suggested that taxes on petro goods and liquor for human consumption are under the purview of the States, and they can raise tax rates on these items. But these will be inflationary moves and demand would fall.
The problem is compounded by the shortfall in direct tax collections. This is both the result of corporate tax concessions and the slowing economy. Income-tax rates cannot be raised now since that would be seen as inequitable — rich corporates will pay a lower tax rate than the middle classes, who pay income-tax.
Effect of I-T reduction
There is pressure to reduce income-tax rates to boost demand in the economy. But a cut in income-tax rates will largely benefit less than 2% of the citizens who pay a significant amount of income-tax. They are well-to-do and unlikely to increase consumption.
Similarly, the cut in corporate tax rates will not boost demand since neither investment nor consumption will rise. Investment will rise only when capacity utilization improves.
Much store is being laid at the doors of multi-national corporations relocating their factories from China to India but this will be too small to arrest the current declining trend in investment in India.
Unorganized sector missed
The problem has been that government has been in denial and delayed action till after the Budget in July 2019. Even then it catered to the corporate sector slowdown and not where the problem originated from: The Unorganized Sector. The concessions to the corporate sector have narrowed the fiscal space available without raising demand.
If the unorganized sector is separately accounted for, the economy is in a recession — it is not just a slowdown as official data based only on the organized sector indicates.
The fiscal deficit at all levels of government is already high so a policy decision is needed on how much more it can be. If the fiscal deficit is allowed to rise further, extra resources can be used to boost incomes in the unorganized sectors through greater public investments. In the 150th year of Gandhiji, his talisman, “last person first” is the need of the hour.