Companies & Sectors
Demonetisation could cause capital erosion for MFIs, NBFCs and SFBs in FY2018
Following demonetisation and political interference, microfinance institutions (MFIs), including non-banking finance companies (NBFCs) and small finance banks (SFBs) with exposure to states like Uttar Pradesh, Uttarakhand, Maharashtra and Madhya Pradesh, faced with asset quality overhang, are staring at significant credit costs and capital erosion in FY2018, says a research report.
 
In a note, India Ratings and Research (Ind-Ra) says, "The current upheaval has validated our earlier opinion of borrower overleverage and idiosyncratic and systemic risks (due to political ecosystem) prevalent in the industry. Furthermore, borrower discipline, a key ingredient for the smooth functioning of microfinance, has severely deteriorated in certain districts of affected states and may take years to be restored. In addition, MFIs need to structurally look beyond joint liability group (JLG) loans for loan growth and product diversification by building capabilities."
 
 
Ind-Ra says as per its interactions with borrowers, unintentionally defaulting borrowers are unlikely to clear four or more equated monthly instalments (EMIs). "...borrower interactions over the last six months indicate that earning members have lost one-three-month wages or income due to demonetisation in FY2017. However, business almost recovered in 1QFY2018. The analysis suggests that incremental incomes of such borrowers in FY18 would be enough to repay three missed EMIs at best. However, MFIs may need to take haircuts on borrowers that have missed more than three EMIs or are intentional defaulters. The extension of loans by three months may work if default is unintentional."
 
 
An analysis by the Fitch Group Company, indicates that aggregate collection efficiency of majority of MFIs with significant exposure to affected states on portfolio outstanding (as of December 2016) was 75%-80% higher in May 2017 compared with a low of 50%-60% in December 2016. "In case collections on portfolio as on 31 December 2016 do not increase from the current level, MFIs with significant exposure to affected states and with aggregate loans under management of Rs1,000 crore and above could incur credit costs and capital erosion and, thus, higher leverage," the ratings agency says.
 
 
 
According to Ind-Ra, collection pick-up is slower than expectation. Maharashtra was one of the worst affected states, with monthly collections in some districts being in single digits, it says, adding, during the revival period after December 2016, the intensity of political interference in affected states was such that demand for loan waivers did not die down in some districts even after local elections.
 
Ind-Ra's analysis indicates that in case collections (on portfolio as on 31 December 2016) do not increase from the current level, MFIs with significant exposure to affected states and with aggregate loans under management of Rs1,000 crore and above could incur credit costs and capital erosion and, thus, higher leverage. "At 80%, these MFIs could require equity of Rs100 -Rs300 crore, depending on loans under management, to ensure their capital levels remain over the regulatory minimum. The aggregate recovery level on the December 2016 portfolio should exceed at least 85% by 2QFY2018-3QFY2018 to prevent capital erosion beyond the regulatory minimum, without additional infusion for some MFIs. At 95% collections on portfolio at end-December 2016, MFIs are likely to witness marginal capital erosion," it added.
 
 
According to the ratings agency, lower-than-worse-case credit costs and equity erosions are supported by the fact that 15%-20% of assets under management of MFIs are off-balance-sheet, where credit enhancements, over-collateralisation and first loss default guarantees could range between 5% and 15% on an aggregate basis.
 
Ind-Ra feels that MFI should now look beyond JLG. "We acknowledge that JLG loans address an important credit need and have an important role in financial inclusion. However, borrower selection and operating processes need to be reassessed. Moreover, MFIs need to develop expertise in other secured and unsecured credit products and roll them out gradually (early experience not pleasant for most MFIs). Instead of pursuing growth, they need to adopt best practices of NBFCs, minimise employee churn, and innovate lending and risk sharing mechanisms," it concluded.
 

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COMMENTS

narasimha prasad

5 days ago

Sir my mom has deposited 2 12,000 rd on 28 Jan. 2017 but we have not received any of the amt.May I know when we will be getting back

Mahesh S Bhatt

6 days ago

Kejriwal is fighting defamation case against Jaitley who has sued him for few crores Ram Jetmalani defending Judge asking Kejriwal to explain word "CROOKED" FOR JAITLEY. Now Demon happened 8/11/16. On 3 years completion televised interview JAITLEY HAS AUDACITY TO tell audiences that RBI is still counting & accounting. Another news was Delhi deposited 55000 cr / Mumbai 22000 cr so it reflects where crooked more people stay Lastly with automatic note counting machine 1 lac denonimation of Rs 1000/would take 1 min, So God knows how is collected back last count was 14.6 lacs crores /Shivsena complaining that Coop Banks 2200 crores to be exchanged. So with this state of Democracy God also cannot support God Bless Mahesh Bhatt

Suresh Kadam

1 week ago

Demonetization was a useless attempt to curb the black money. It has sure slowed down the economy and the signs are visible everywhere from agriculturists protests to non creation of jobs.

Satyadev Verma

2 weeks ago

Agree that some negative implications r there with demonitisation.
Never the less,I appreciate the bold & couragious step of demonitisation.
No decision can b 100% correct on country level,there will b benefits & pains.
Demonitisation did not bring out desired results for corrupt bank officials & politicians.
It was with good intentions for the country.

SuchindranathAiyerS

2 weeks ago

As nothing was done about corruption, either in the form of legislation or in the farm of action, the continuing negative fall outs of demonetization will echo past the term of the Modi Sarkar

Do positive real interest rates impact financial savings?
Empirical evidence in economic literature in India is mixed regarding the impact of real interest on financial savings. Some economists have found savings to be insignificantly related to real interest rates, while others have found a very small but positive interest rate elasticity of savings. If indeed the empirical evidence is any indication, it seems that real interest rate may have to stay positive at much higher levels than 1.5% to have any meaningful impact on financial savings, says a research note.
 
In a report, State Bank of India (SBI), says, "The Reserve Bank of India (RBI) has also changed the goalposts often in so far as estimation of real interest rates are concerned. Even the RBI had admitted that the estimation of such rate of interest is highly sensitive to underlying assumptions and hence is a challenge for the conduct of monetary policy. The RBI had estimated this rate at 0.6-3.1% in Q4FY2015 that in itself is different from the 1.5% as laid in monetary policy."
 
 
Inflation adjusted deposit rate or real interest rate for FY2017 was at a 15-year high at 3.2% due to low inflation, and will remain high as the inflation scenario for FY18 is quite benign. Now the question arises whether these high real rates will impact financial savings, which was average 10.4% of GNI for the last five years, in some way or other, SBI wonders.
 
In 1973, economists Ronald McKinnon and Edward Shaw postulated a relationship between high interest rates and private savings. In theory, SBI says, high real interest rates have two opposing effects on private savings. The first is the substitution effect, in which saving increases as consumption is postponed to the future, and the second is the wealth effect in which savers increase current consumption at the expense of saving. "The impact of real interest rates on private saving is, therefore, ambiguous and can only be established empirically. Further, McKinnon and Shaw said that under conditions of financial repression, the substitution effect dominates the wealth effect, thus enhancing financial intermediation," it says.
 
More crucially, SBI says, in the Indian context, studies have shown the substitution effect of real interest rate is more than the wealth effect leading to overall negative impact of higher interest rates on savings rates. 
 
"However, the actual coefficients are significantly small and insignificant in most of the cases. The coefficient ranges from 0.1 to 0.3, suggesting a large change of as much as 3% to 10% in real deposit rates will be needed to change savings rate by 1% and small changes will hardly make any difference, if any. Additionally, causality analysis in India between income per capita and savings rates shows that such causality run mostly from income to savings. This implies that high gross domestic product (GDP) growth and increase in per capita income would significantly improve the savings rates in India," the report added.

 

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COMMENTS

Ramesh Poapt

2 weeks ago

is inflation really low? 'consumption ' is the only theme the govt
wants at 'any cost'! 'good guaranteed return' is hated by govt.
common man has to go to mkt/mf where risk awaits..catch 22
for savers!

Is India faced with a Rs3.1 lakh crore farm-loan waiver? And will it help?
As demands for farm-loan waivers grow across Punjab, Haryana, Tamil Nadu, Gujarat, Madhya Pradesh, and Karnataka -- after Uttar Pradesh and Maharashtra wrote off loans worth Rs 36,359 crore and Rs 30,000 crore, respectively -- India faces a cumulative loan waiver of Rs 3.1 lakh crore, or 2.6 per cent of its GDP in 2016-17.
 
A waiver of this scale could pay for the 2017 rural roads budget 16 times over or pay for 443,000 warehouses or increase India's irrigation potential by 55 per cent more than the achievements of the last 60 years.
 
While such waivers could provide succour for 32.8 million indebted farmers, an IndiaSpend analysis of the impact of previous farm-loan waivers indicates such bailouts are band-aids of uncertain efficacy and do not address a deeper malaise gripping the agrarian economy.
 
Over nine years to March 2017, the central and state governments waived Rs 88,988 crore in loans to 48.6 million farmers. The nationwide Rs 52,000 crore loan-waiver announced by the United Progressive Alliance (UPA) in 2008 occupies the bulk of this figure.
 
The waivers were primarily meant to discourage suicides by farmers, apparently caused by widespread indebtedness. However, our analysis shows this had little or no impact on suicide rates, probably because 32.5 per cent on average, or 79.38 million, small and marginal farmers across India (with farm holdings of less than 1 to 2 hectares in size) rely on informal sources of credit.
 
Meanwhile, loan waivers have led to a rise in the non-performing assets (NPAs) of banks, especially public-sector banks, and are likely to have a significant bearing on the state and national fiscal deficits. In 2013, agricultural NPAs accounted for about 41.8 per cent of "priority sector" (which also comprises micro and small enterprises, affordable housing, and student loans) NPAs in public and private banks -- up from 25 per cent in 2009, according to a 2015 study published in the International Journal of Science and Research (IJSR).
 
For example, Maharashtra's Rs 30,000 crore farm-loan waiver for small and marginal farmers will raise the state's fiscal deficit to 2.71 per cent, which is three-fourths (1.18 percentage points) higher than the budgeted deficit of 1.53 per cent of the GSDP for the current financial year, according to this 2017 report by ratings agency India Ratings and Research (Ind-Ra). Uttar Pradesh's Rs 36,359 crore farm-loan is 2.6 per cent of its GSDP. The 14th Finance Commission says fiscal deficits should not exceed 3 per cent of state budgets. 
 
About 85 per cent of all operational farm holdings in India are less than two hectares in size. Owners of these shrinking farms find it difficult to use modern machinery and are often too poor to afford farm equipment. Manual labour increases costs, and size and output further limits access to loans and institutional credit.
 
On average, a third of Indian small and marginal farmers have access to institutional credit. This means no more than 10.6 million of 32.8 million small and marginal farmers in the eight states demanding loan waivers could benefit from debts being written off.
 
The other 22.1 million farmers depend on moneylenders and relatives for borrowings, according to the 2011 agricultural census and the National Sample Survey Office's 2013 situation assessment survey of farm households, the latest available data.
 
In 2007, before the UPA's loan waiver for 30 million farmers across 18 states, 16,379 Indian farmers committed suicide, according to National Crime Records Bureau (NCRB) data.
 
A quarter of these suicides (4,238) were reported from Maharashtra. In 2009, the year after the loan-waiver was announced, the state government promised an additional waiver of Rs 6,208 crores. This led to a drop in farm suicides in India's richest state; but in 2010, suicides rose again, by 6.2 per cent. By 2015, seven years after the Centre's bail-out, Maharashtra recorded 4,291 suicides, its highest rate ever, accounting for 34 per cent of such deaths nationwide, according to the latest available NCRB data.
 
After the first major farm-loan waiver of Rs 10,000 crore in 1990-announced by a Janata Party government led by then Prime Minister V.P. Singh -- it took almost nine years for banks to recover.
 
Since the 2008 farm-loan waiver, agricultural NPAs rose three times, from Rs 7,149 crore in 2009 to Rs 30,200 crore in 2013, according to a 2015 study.
 
These NPAs affect the credibility of lending institutions. Shares of banks fell four per cent after Maharashtra announced its loan waiver. Further, with public-sector banks (PSBs) accounting for the major share of farm credit - 52 per cent in Maharashtra, followed by 32 per cent from co-operative banks and 12 per cent in private banks -- these PSBs are "more vulnerable", said a 2017 Kotak Institutional Equities report.
 
Indebtedness is a symptom and not the root cause of the farm crisis, according to a 2007 expert group report on agricultural indebtedness, chaired by economist R. Radhakrishna. The average farm household borrowing has not been "excessive", the Radhakrishna report said. The factors contributing to the farm crisis are "stagnation in agriculture, increasing production and marketing risks, institutional vacuum and lack of alternative livelihood opportunities", the report said.
 
It is clear a loan-waiver alone cannot solve India's agrarian crisis. The data reveal a more-than-necessary focus on agricultural credit, as other fundamental problems remain unaddressed.
 
Over a decade to 2014-15, as institutional credit in agriculture grew 547 per cent, from Rs 1.25 lakh crore to Rs 8.45 lakh crore, rural road construction -- which increases access and boosts agricultural income and productive employment -- grew just 10.5 per cent.
 
Roughly 7 per cent of total grain output, 10 per cent of seeds and between 25 and 40 per cent of fruits and vegetable -- overall a third of farm harvest spoils -- are wasted every year because there isn't enough storage and supply-chain infrastructure.
 
Irrigation, increasingly vital in an era of climate change, has failed Indian farming. No more than 47.6 per cent of India's farms are irrigated, and the decadal growth in net-irrigated area to 2010 was 0.3 per cent, according to Ministry of Agriculture data.
 
These low investments eventually make farming expensive and prices volatile.
 
To curb the impact of market fluctuations, Chief Economic Adviser Arvind Subramanian recommended improving the "procurement capacity" -- or money available to buy farm produce -- of states, lifting export bans, raising stock limit and including "risks and externalities" while framing the minimum support prices (MSP) for various produce. 
 
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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COMMENTS

jaideep shirali

5 days ago

The government's intention, rather that of the political class in this whole mess, is revealing. It would be far cheaper to improve irrigation, better logistics, have realistic prices that allow for a minimum profit level, set up cold storage chains for lower wastage and better prices for both farmer and consumer. But our politicians are worried that these measures would actually make our farmers smarter and better off. Hence the once in 5 years or less write offs with public money, because obviously no politician pays from his own pocket. It also keeps the farmers dependent on the government and hence less likely to oppose it

Simple Indian

2 weeks ago

With farm-loan waivers State Govts are trying to appease farmers rather than resolve the deeper malaise in our agrarian economy, as the article mentions. After all it's the middle-class taxpayers who will eventually have to compensate for such Govt largesse, through higher taxes. If the Govt robs Peter to pay Paul, it can always rely on Paul's support. This seems to be the thinking behind such waivers. But, some decisions can be both politically and economically disastrous, as we will know in 2019.

SuchindranathAiyerS

2 weeks ago

Nothing has changed from the days of the Hilton Young Currency Commission and the Radcliffe Committee Report other than the composition of the aristocracy wrought by the sham of a plagiarized "Animal Farm" Constitution.

How to strengthen agriculture: (1) Provide infrastructure: Last mile transportation, electricity, irrigation, transportation for produce including cold storage. (2) Tax agricultural income. Provide insurance cover for crop failure based on last five years agricultural income tax. (3) Ban chemical fertilizers, pesticides, ripeners etc. (4) Ban all agricultural "technologies" that are not natural.(5) avoid all other government interventions other than those that strengthen the farmers and their families such as primary and technical education and health services.

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