Demonetisation a double whammy for microfinance sector
The demonetisation of high-value currency notes has come as a double whammy for micro finance institutions (MFIs), which have temporarily stopped providing credit to their customers while loan repayments have also taken a major hit, industry sources said.
 
The institutions have deferred the repayment schedule of their borrowers for the next few days. In the last four-five days, repayment collections of about Rs500 crore to Rs600 crore ($74-89 million) has been deferred and with the lack of currency supply, the MFIs' disbursement was also down by around Rs600 crore.
 
"A lot of microfinance institutions put disbursement on hold because we need some clarity and it is currently quite ambiguous. We need clarity whether the institutions can collect Rs500 or Rs1000 notes from their borrowers as repayments of loans or not. We are not sure about it," Gurugram-based Microfinance Institutions Network (MFIN) CEO Ratna Viswanathan told IANS on the phone.
 
The microfinance industry is cash-intensive. Most of the borrowers take loans in cash and they repay loans in cash, particularly in Rs500 or Rs1,000 notes. Even many of the borrowers who have bank accounts do not know how to transact through them. Thus, cash transactions in the rural economy, where most of the MFIs operate, become inevitable.
 
"The MFIN asked institutions to consider putting collections on hold for the next five-seven days. They have deferred the repayment schedule. Repayment collections of about Rs500-Rs600 crore have been deferred. Disbursement was also down by around the same amount in the last few days as there is lack of currency supply to advance loans," Viswanathan said.
 
MFIs record a repayment rate of 99% but it took a blow after demonetisation. The sector is worried about taking the business forward in view of the increasing risk of defaults.
 
"With the scrapping of Rs500 and Rs1,000 notes, the industry has been facing a challenge. We are neither able to disburse, nor taking repayments from borrowers with old notes. Our repayment rate fell to 60% on Wednesday after the demonetisation was announced on Tuesday night.
 
"We have started deferring repayments and on Friday, the repayment was down to 70% from nearly 100%," Village Financial Services' Managing Director and CEO Kuldip Maity told IANS.
 
"Fresh and repeat disbursements have completely been put on hold temporarily," he added.
 
It is a double whammy for the industry as borrowers do not possess much cash in hand with new currency to repay loans in time and due to lack of liquidity in the system, MFIs are not able to disburse loans.
 
"The situation is not expected to be prolonged beyond November 14 or so as we are in discussions with the regulator (Reserve Bank of India) and the Finance Ministry. We need to review the industry's stance of deferring repayments if the situation prolongs," Grameen Koota Financial Services' Managing Director Udaya Kumar told IANS.
 
The industry, meanwhile, has approached the RBI and the Union Finance Ministry seeking a clarification on how the MFIs should deal with repayments.
 
"The notification regarding the demonetisation of high currency notes primarily talked about retail customers and there is no clarity about institutional customers.
 
"We want to know whether it is applicable to institutional customers. As far as repayment is concerned, we want a clear idea on how we can deal with it because the institutions are also in the loan repayment business. Institutions share each and every client's data with the credit bureau," Viswanathan pointed out.
 
The industry is yet to receive any clarity from the RBI and the Finance Ministry, she added.
 
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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Trump victory augurs well for India and US: Report
In a bitterly fought election, Donald Trump emerged victorious by garnering a vote share of 48%. An analysis by State Bank of India (SBI) Ecowrap shows that candidates who in the past have scraped through in US elections, for example, George W Bush and Trump today, seemed to have performed better in terms of managing the economy. "If this is statistically significant, it augurs well for US and India in the coming years," the report says.
 
In the research note, SBI says, "The change of guard in the US gives India an opportunity to rethink how it will manage the US-China-India triangle which at this juncture is possibly tilted towards the US. India will have to develop its capability internally without reliance on the US if there is US withdrawal. Internal capability and vigilance will be important for Government of India to develop and strengthen mechanisms of oversight notably in the non-governmental organisation (NGO) sector. Where there is a possibility to strike an alliance, the exchange ratio is to be on 50-50 basis unlike in the past when it was tilted in favour of the US. It may be advisable to put this message across as a troubled global economy, with rising Indian prospects; it cannot be ignored by the US president."
 
 
According to the Ecowrap, this year’s US Presidential election is important for a number of reasons, with the foremost reason being that by the coming of 2016, the idea of 'American Exceptionalism' (AE) and myths associated with it were crumbling under pressure from both inside and outside the US. 
 
The US economy has not done as well as it did prior to the 2008 crisis. The core American identity is under anxiety and stress as reflected in the works of Nobel Laureate Angus Deaton. After all, they were the creators and custodians of the ‘American Dream’ which has steadily been lost to China, Mexico and the likes. American needs to be great again!
 
It is in this context that the election campaign was kick-started; a campaign that saw many lows and bigger lows in terms of language used, cloudy economic debates, accusations and counter accusations. 
 
India has become important in this election due to several reasons, the reports pointed out. The present crisis of AE is not the first one in history. In terms of gravity, it is no less than a similar crisis that occurred after the Vietnam War. In the past, the crisis wave had marched eastwards to India in search of answers and those journeys brought ideas like yoga, the divine nature of the feminine and vegetarianism to the US. These forces are subtly gaining momentum. 
 
"But there is an additional critical factor this time, which is - “Indian Americans’ - the most educated, highest income group of all immigrants in the US and in various lobbies in Washington can make its presence felt through its financial muscle. This makes India important in a unique way in the campaign stage of the US elections, but not beyond that. Trade and immigration are the two most significant issues being debated in the campaign where India has serious differences with US," the report says.
 
Here is the impact of the US election as analysed by SBI Ecowrap…
 
As per SBI Ecowrap, the impact of this election has to be assessed at two levels – the global level and the bilateral level.
 
Global Level:
Geopolitics: There is a possibility that there can be a change in the US approach to its foreign policy. This is because both Congress and Senate will have a Republican majority. Bipartisan nature of the White House does not exist during the tenure of this presidency. However, there is considerable uncertainty how this reasoning materialises. Going by the election rhetoric, the US gaze will turn inwards implying less involvement in the Middle East, South China Sea and mending ties with Russia.
 
How far will the three core assumptions of US policy—capitalism, foreign intervention and free trade and open borders be dealt with. How far the US is willing to go, needs to be seen. What will be the future of TTIP and TPP needs to be watched.
 
For instance, despite becoming self-sufficient in energy, it is unlikely that the US will be unable to withdraw itself from the affairs in the Middle East completely and reduce its stake in oil politics because many of its key allies are dependent on the oil for their energy. Then there is another contradiction as talks of withdrawal in Middle East gives Russia a free hand as largest non-OPEC oil producer. The language between Washington and Moscow has become aggressive and NATO forces may approach an eyeball to eyeball situation with Russia in Europe. Lastly, it may be of interest to India as to how the US-Pakistan policy gets shaped. For the US, what matters with Pakistan includes three factors—its proximity to China, its geography and terrorism.
 
Federal Reserve: One of the most important aspects of the debate during the election, which has not received much attention, is the position of the new President on issues surrounding Federal Reserve. On Federal Reserve, the new President holds that it should be audited, Dodd-Frank should either be amended or repealed, and he favours dovish low interest rates policy unless there are inflationary forces. Hence, in a nutshell the monetary policy signals from the Fed will be uncertain for some time and rate hikes in the near future may be ruled out.
 
Climate deal: An outright climate skeptic, what will be his approach to Climate Change going forward and the US commitment under the Paris Agreement are all unclear. A lot is at stake and it is unclear if the election promise will be followed in totality. US has already taken India to WTO for its domestic procurement clause under the National Solar Mission. Thus there is an inherent contradiction at this juncture.
 
Bilateral Level:
Since trade and immigration were the two most significant issues being debated in the campaign, flowing from the rhetoric there are many concerns between the two countries notably – IPR, H1B visa and unnoticed antipathy faced by Indian expertise in space and pharma – that need to be sorted out to the satisfaction of both sides.
 
The export of Indian labour to the US has always been a pressure point. The US has continued to aggravate the H1B visa issue and in response, India in May 2016 approached the WTO after a steep rise in Visa fee for India.
 
Despite the contention on H1B visa, which has benefitted the US corporations with cheap labour, the US position of strict labour standards under the TTIP stands in strong contrast. It needs to be seen how this tussle gets resolved in the future. But the US may not leave this tool of engagement with India in near future.
 
Indo-US trade has suffered despite its growth over the decades. This is due to the caution of US Corporation on the Intellectual Property Rights (IPR) regime in India. As early as 2016, USTR Special 301 Report kept India on Priority Watch List. This has resulted in lesser foreign direct investment (FDI) flows from US into India. However, in May this year India unveiled a National Intellectual Property Rights policy to promote the IP regime and to encourage creativity, innovation and entrepreneurship in India. The policy seeks to put in place a legal framework that will encourage the IPR regime and reduce the time taken by the government to approve a trademark to a month by 2017.
 
The US Chamber of Commerce in a statement said: “We welcome the Government’s understanding that India’s innovative economy requires effective IP protection and hope this commitment will lead to decisive legal reforms. India must provide enhanced certainty for the rights of innovators in line with international best practice. We will be carefully reviewing this policy to determine whether this document creates the foundation for such steps. Regardless, IP will continue to be a central issue for any discussions between India and the international business community”. 
 
US government in its preliminary assessment of India's IPR policy in the same month commented that it includes "positive aspects, including centralising the copyright and patent regimes under DIPP and improving co-ordination between the Centre and states on compliance". Thus, the change of guard in Washington will have no immediate impact on this issue either, as the general election rhetoric was pro-business.

 

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COMMENTS

Ravindra Shetye

2 years ago

It is one thing to talk something before election and another to act on those after being elected. The talk before election is to garner the votes but after election one, especially a President has to be practical in order to run the country. So, we will be able to see only in may be six months the direction of USA.

Ravindra Shetye

2 years ago

It is one thing to talk something before election and another to act on those after being elected. The talk before election is to garner the votes but after election one, especially a President has to be practical in order to run the country. So, we will be able to see only in may be six months the direction of USA.

SuchindranathAiyerS

2 years ago

Interesting insights. Worth a read, but, not the best of analysis. Let us take up just one issue. All indications are that a Trump Presidency will mean a rapprochement between Russia and the United States. This will mean a joint action against Islam in the Middle East to undo the mischief of the Obama-Hilary and Bush - Colin Powell-Condoleeza Rice visited there, strengthening India's hand against Pakistan. This will mean an end to NATO sanctions against Russia bringing Russia closer to Germany in economic ties. This will cool down the relationship between Russia and China strengthening US hands in dealing with China in collaboration with Japan, and India in an adze. This will also justify Mr. Modi's foreign and defence procurement policy initiatives as friend to both the US and Russia and strengthen India's hand in dealing with China and Pakistan on all fronts. All in all a happy augury.

Universal Basic Minimum Income: Are we clear about the concept?
Article 39 of the Indian Constitution mentions certain principles of policy to be followed by the State, including providing an adequate means of livelihood for all citizens, equal pay for equal work for men and women, proper working conditions, reduction of concentration of wealth and means of production from the hands of a few, and distribution of community resources to ‘sub-serve the common good’, Constitutional objectives of building an egalitarian social order and establishing a Welfare State by bringing about a social revolution assisted by the State. Policy decisions would also be taken to support the nationalisation of mineral resources as well as public utilities. Further, several legislations pertaining to agrarian reforms and land tenure have been enacted by central and state governments, in order to ensure equitable distribution of land resources.
 
Universal basic minimum income
 
The proposal to accept Universal Basic Income (UBI) as one of the themes for the forthcoming Economic Survey should be seen as an effort to pursue further the spirit of the directive principles of state policy referred to above and re-dedicate budget exercise as a tool for ensuring distributive justice, which is a responsibility emanating from the constitutional provisions. Once the debate on UBI picks up, various components of such a concept, adequacy of the present levels of minimum wage, the path towards ‘living wage’, the relationship between wage and savings, savings and social security, wage and healthcare and education expenditure in low income groups and so on will surface.
 
So far, discussions on such issues were isolated or confined to academia or research efforts.
 
For India, once the political leadership gets convinced about a realistic UBI, resources will not be a problem. One possibility is, some vested interests will hijack the proposal of UBI to mix it with “unemployment dole”, an unhealthy practice existing in developed countries. While this should be avoided, care should also be taken to ensure that where employment assurance schemes are implemented, the compensations should be realistic.
 
There are several pockets in India, including many in states like Kerala, where the local population has successfully eliminated poverty and come up with regard to crucial human development indicators. Attribute it to militant trade unionism or the colour of the flags held by parties in power, the credit for this goes to the insistence by workers for a minimum basic wage. 
 
Hopefully the concept of Universal Basic Minimum Income, as the debate picks up, will result in healthy deliberations on the need for grassroots level improvements in income distribution to ensure sustainable economic growth. A pragmatic approach to the sharing of wealth can reduce several security concerns world over and ensure better living conditions, not only for the deprived class, but for many from the rich and the powerful who feel insecure today. 
 
Writing in The Hindu on 1 September 2016, G Sampath raised the question, “Do we need a minimum wage law?” He went on to explain the concepts of living wage, fair wage and minimum wage and debated the seriousness with which stakeholders are approaching these concepts. One has to concede that it is a farce to retain the concept of minimum wage, which does not ensure an income for the worker (who works full-time) that helps him and his dependents survive with some savings left for the family’s social security needs. The present levels of minimum wages ranging from Rs1,650 per month (Puducherry, agriculture) to Rs9,100 per month (The minimum wage of Rs350 per day for unskilled non-agricultural worker announced by GOI in August 2016), do not reach anywhere near the cost of five components mandated by the 15th Indian Labour Conference (1957) which were:
i)   The wage must support three consumption units (individuals)
ii)  Food requirements of 2,700 calories per day
iii) Clothing requirements of 72 yards per year per worker’s family
iv)  Rent for housing area similar to that provided under the subsidised housing scheme and
v)   Fuel, lighting and miscellaneous items of expenditure to constitute 20 per cent of the minimum wage.
 
It may be recalled that the Seventh Central Pay Commission (CPC) had fixed the minimum wage for central government employees at Rs18,000. 
 
Viewed in the above context, GOI will have to concede at some stage the demand for some reasonable relativity for wages of the workers in the unorganised sector with the entitlements of workers in the organised sector having comparable responsibilities. Whenever specific issues relating to job security and compensation are raised by unions or external agencies in the context of human development indicators in India showing uncomfortably low levels in comparison with similarly placed developing countries, some sporadic initiatives are taken by Centre or state governments. 
 
One such initiative is the introduction of the concept of ‘full-benefit fixed-term jobs’ in the labour-intensive garment sector by the Narendra Modi government recently. However, a comprehensive legislation covering all aspects of service in the unorganised sector is not yet thought of. 
 
To answer the brief question “Do we need a minimum wage law?”, the answer is in the affirmative, as we need it to know the extent of aberrations and violations and for further refinements to think of a ‘living wage’ at the appropriate time. During 20th Century, we used Railway Time Tables to know the number of hours by which some trains were running late!
 
Time is opportune to revisit the prices, wages and income policy. If we do not do this, labour migration issues within the country and flight of skills and expertise from India may rise to unmanageable levels giving rise to several social problems. The revamp of prices, wages and income policy need to be done quickly and for making the processes transparent and findings and subsequent action plans acceptable for the stakeholders, there should be meaningful debates in legislatures and with users of services of workers. 
 
Strikes like the one on 2 September 2016 should be seen as symptoms of growing labour unrest and should be an ‘eye opener’ for initiating corrective action. Protests like this should not be evaluated based on success and failure or losses and gains. Simmering discontent in the workforce emanating from the feeling that there is exploitation by the users of services, taking advantage of the helplessness of the workers, affect productivity and can have long term negative impact on economic growth. Sooner the governments and corporates amend the present approach, the better for the country.
 
(MG Warrier is former general manager, RBI, Mumbai and author of the 2014 book “Banking, Reforms & Corruption: Development Issues in 21st Century India”.)
 
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