RBI Keeps Repo Rate Unchanged at 6.5%
The Reserve Bank of India (RBI) on Wednesday maintained status quo on repo rate (short-term lending) at 6.5% in its fifth monetary policy review for 2018-19.
 
Following the move, the reverse repo rate (short-term borrowing) stands at 6.25%. Subsequently, the marginal standing facility (MSF) and the Bank Rate have also remain unchanged at 6.75%.
 
In a statement, the Reserve Bank said, "The decision of the monetary policy committee (MPC) is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2 per cent, while supporting growth."
 
Even as inflation projections have been revised downwards significantly and some of the risks pointed out in the last resolution have been mitigated, especially of crude oil prices, the MPC felts that several uncertainties still cloud the inflation outlook.

"First, inflation projections incorporate benign food prices based on the realised outcomes of food inflation in recent months. The prices of several food items are at unusually low levels and there is a risk of sudden reversal, especially of volatile perishable items. Secondly, available data suggest that the effect of revision in minimum support prices (MSPs) announced in July on prices has been subdued so far. However, uncertainty continues about the exact impact of MSP on inflation, going forward."

"Thirdly, the medium-term outlook for crude oil prices is still uncertain due to global demand conditions, geo-political tensions and decision of OPEC which could impinge on supplies. Fourthly, global financial markets continue to be volatile. Fifthly, though households' near-term inflation expectations have moderated in the latest round of the Reserve Bank's survey, one-year ahead expectations remain elevated and unchanged. Sixthly, fiscal slippages, if any, at the centre or state levels, will influence the inflation outlook, heighten market volatility and crowd out private investment. Finally, the staggered impact of housing rent allowance (HRA) revision by state governments may push up headline inflation. While the MPC will look through the statistical impact of HRA revisions, it will be watchful of any second-round effects on inflation," it added.
 
While the decision on keeping the policy rate unchanged was unanimous, Dr Ravindra H Dholakia voted to change the stance to neutral. 
 
The next meeting of the MPC is scheduled between 5th to 7 February 2019.
 
Here are the latest policy rates following MPC review… 
 
Repo Rate: 6.50%
Reverse Repo Rate: 6.25%
Bank Rate: 6.75%
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The NBFC Real Estate Crisis After IL&FS Defaults – What, Why and What Next?
  • NBFCs account for over 50% of total developer financing - close to Rs4 trillion in FY2018
  • Real estate has already exhausted over 75% of available credit
  • Consolidation of not only developers but also NBFCs on the cards
 
As an alternative to the main banking sector, non-banking finance companies or NBFCs have had few peers, which makes the perfect storm that has gathered around them now all the more worrisome. While the Reserve Bank of India (RBI) and the Government have taken steps to ring fence the NBFC crisis and support its financing needs by providing additional liquidity to banks and credit enhancement for refinancing needs, there are speculations over spill-over concerns in the market in the near-term.
 
How did the current crisis play out?
 
The ongoing liquidity crisis in the NBFC industry is the result of asset-liability mismatch (ALM). Since the NBFCs cannot raise retail deposits from the general public, they depend on wholesale lending for their capital requirements. As a result, the cost of funds for NBFCs is higher than that of banks.
 
The biggest error that the majority of NBFCs and housing finance companies (HFCs) committed with regards to the real estate sector is that they ventured into long-term lending to builders and also into underwriting loans with very long-term repayment tenures.
 
As a result, the NBFCs short-term borrowing was channelised towards financing long-term loans. They were heavily dependent on banks, mutual funds and private placements to meet their capital requirement as well as for refinancing of loans. 
 
However, post the IL&FS default, banks and mutual funds have stopped refinancing the loans of NBFCs and also stopped the disbursal of sanctioned loans to them, since there is still no clarity regarding the spill-over impact of the IL&FS default.
 
How bad is the situation for real estate?
 
NBFC loans to developers have seen a phenomenal rise since 2014, particularly due to the slowdown in bank loan disbursals. Interestingly, as per the current fiscal, NBFCs alone account for more than 50% of the total developer financing, which is somewhere close to Rs4 trillion in FY2018 as on date.
 
However, the recent NBFC crisis has clearly spelt intense gloom - if not outright doom - for Indian real estate. Nearly $34 billion of mutual funds debt in NBFCs and HFCs is maturing between October 2018 and March 2019. Prior to the crisis, the sector was already dealing with a massive cash crunch and subdued demand, due to which more than 75% of the available credit facility was already exhausted.
 
With the rise in banks’ NPAs to Rs10 lakh crore (as on March 2018), up Rs1.39 lakh crore in a quarter, further funding from banks to NBFCs and HFCs (currently have an exposure to bank lending of more than 40%) seems extremely difficult.
 
The liquidity crunch has been a major pain-point for Indian real estate over the last two to three years owing to tepid sales, banks’ refusal to disburse loans due to rising NPAs and the widening debt-equity ratio even with the biggest developers. The recent NBFC crisis in September has only exacerbated the pain for the real estate sector and its major stakeholders – the developers.
 
Post the IL&FS crisis, some NBFCs even halted the disbursal of earlier sanctioned loan amounts to developers for fear of widening the funding crisis even further. The worst phase came when some NBFCs urged developers to return the money that was disbursed to them so that they can repay their dues.
 
As per the S&P BSE realty index data, the debt-equity ratio of the top 10 listed players (on a stand-alone basis) in FY2014 ranged anywhere between 0.10 to 0.85, which has increased in the current fiscal to range anywhere between 0.17 to more than 1. This may not seem overly alarming, but the situation is worse in the case of small and mid-size developers whose debt-equity ratio is much higher.
 
The major bailout option for most of these small developers is to possibly consolidate. It also needs to be highlighted that out of the approximately 10,000 developers in the country today, only 35-36 are listed. Hence, the financial numbers could be even worse.
 
What next?
 
The Government’s consistent assurance of ensuring credit to NBFCs is some sort of a relief, particularly for skittish investors who started panic selling in the equity market post the IL&FS default. Sensing trouble, even the RBI came forward to aid NBFCs by relaxing liquidity norms and allowing banks to lend more. Vey recently, the apex bank relaxed asset securitisation norms for the NBFCs in a bid to ease the persistent stress on the sector.
 
Only time will tell whether or not we feel this heat in the near term. However, one major outcome visible in the coming year will be the consolidation of several small NBFCs.
 
What ARE NBFCs anyway?
 
NBFCs are financial institutions that are essentially engaged in the business of providing loans and advances primarily to retail customers. Unlike the formal banking sector, they cannot accept deposits from the public; they depend solely on wholesale lending and banks for their operations. Two-wheeler loans, consumer durable loans, gold loans, vehicle finance and loan against property are the segments where NBFCs have a very strong presence across the country and enjoy a much larger share than the public sector banks.
 
Which sectors do they fund?
 
After agriculture, the MSME sector is heavily dependent on NBFCs for loans and working capital. Since banks cannot be present in every nook and corner of the country, NBFCs have capitalized on their highly localized presence to grow their business on the back of strong rural demand and the thriving SME and MSME sectors. Their local network and understanding of customer profiles at a local level give them an edge over the banks when it comes to lending at the micro level.
 
Due to these advantages, NBFCs could rapidly scale their businesses where the formal banking system was slow in lending. Also, the rising non-performing assets (NPA) crisis in the overall banking sector made banks reluctant to lend to the perceived riskier sectors like SME and MSME, thus helping NBFCs to gain market share. Real estate, also considered a high-risk sector, depended heavily on NBFC funding as well.
 
(Shobhit Agarwal is managing director and chief executive of ANAROCK Capital)
 
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COMMENTS

Ramesh Poapt

2 weeks ago

march19 will be mischievous/mysterious! beware!

Demonetisation Is Massive, Draconian, Monetary Shock: Arvind Subramanian Breaks His Silence
Arvind Subramanian kept a studied silence on demonetisation as long as he was Chief Economic Adviser but six months after quitting the job, he has described the note-ban as a massive, draconian, monetary shock that accelerated economic slide to 6.8% in the seven quarters after the decision against the 8% recorded prior to it.
 
Breaking his silence on the 8 November  2016 decision of prime minister Narendra Modi, he says that he does not have a strongly-backed empirical view apart from the fact that the welfare costs, especially on the informal sector, were substantial.
 
Though Dr Subramanian, who quit the post earlier this year after a four-year tenure, has devoted a chapter in the upcoming book "Of Counsel: The Challenges of the Modi-Jaitley Economy", published by Penguin, has kept to himself on whether he was consulted in the decision-making process of demonetisation. 
 
The detractors of the government had said that the prime minister had not consulted the CEA on the crucial decision.
 
"Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86% of the currency in circulation was withdrawn. The real GDP growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated. 
 
"In the six quarters before demonetisation, growth averaged 8% and in the seven quarters after, it averaged about 6.8% (with a four quarter window, the relevant numbers are 8.1% before and 6.2% after)," Dr Subramanian says in the chapter "The Two Puzzles of Demonetisation—Political and Economic".
 
The former CEA says he does not think anyone disputes that demonetisation slowed growth. Rather, the debate has been about the size of the effect— whether it was 2% points, or much less. 
 
"After all, many other factors affected growth in this period, especially higher real interest rates, GST implementation and oil prices."
 
"...But when a shock like demonetisation occurs, that primarily affects the informal sector, relying on formal indicators to measure overall activity will overstate GDP. This hypothesis goes only a small way towards explaining the puzzle since any squeeze in informal sector incomes would depress demand in the formal sector, and this effect should have been sizable.
 
Searching for other explanations, Dr Subramanian says one possibility was that people found ways around the note ban with the possibility that the production was sustained by extending informal credit.
 
Finally, to a certain extent, people may have shifted from using cash to paying by electronic means such as debit cards and electronic wallets.
 
"Or, there may be other, completely different explanations that have eluded my understanding of demonetisation, one of the unlikeliest economic experiments in modern Indian history," he says.
 
From the political aspect, the former CEA says that demonetisation was an unprecedented move that no country in recent history had made in normal times. 
 
The typical pattern had been either gradual demonetisation in normal times or sudden demonetisation in extreme circumstances of war, hyperinflation, currency crises or political turmoil (Venezuela in 2016).
 
According to him, the Indian initiative was, to put it mildly, unique. 
 
Referring to the BJP's victory in Uttar Pradesh assembly elections, shortly after demonetisation, he says it was widely seen as a verdict on the note-ban.
 
One answer to the demonetisation puzzle has been that the poor were willing to overlook their own hardships, knowing that the rich and their ill-begotten wealth were experiencing even greater hardship: 'I lost a goat, but they lost their cows', he says. In this view, the costs to the poor were unavoidable collateral damage that had to be incurred for attaining a larger goal.
 
Dr Subramanian says this is not entirely convincing. After all, the collateral damage was, in fact, avoidable.
 
"Understanding the political economy of demonetisation may require us, therefore, to confront one overlooked possibility—that adversely impacting the many, far from being a bug, could perhaps have been a feature of the policy action.
 
"Not necessarily by design or in real time, but in retrospect, it appears that impacting the many adversely may have been intrinsic to the success of the policy," he says.
 
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

Krishnan Hariharan

3 weeks ago

People occupying positions like CEA failed to advise the government at the right time. When they move out they gather energy and strength to criticize. CEA never offered concrete proposals to boost economic activity but write \'stories\' upon relinquishing positions. They may have acquired knowledge but lack wisdom. As rightly commented Rajan and Arvind failed to deliver while occupying their civeted positions.

Amit Kumar

3 weeks ago

See Meera Sanyal's take on how demonetisation was a lethal attack on traditional Indian industries and without warning destroyed thousands and more of SMSEs: https://www.thequint.com/videos/news-videos/meera-sanyal-demonetisation-book-the-big-reverse-msmes-impact .

B. Yerram Raju

3 weeks ago

It is unfortunate that these stalwarts wear kid gloves when holding positions of responsibility, go abroad and acquire courage to write!!

Dayananda Kamath

3 weeks ago

Do we need an expert to tell that demonitisation effects growth. Operations are done to cut cancerous growth. There also growth was cut. Yes the data they have is not used to take follow up action. If that has been taken immedietly it could have done more harm to the economy, but those who are creating noice about demontisation failure would not have been there to give their barbs and mislead and silenced for ever.
The results will come in future a healthy growth. An anchor of a reputed business tv chanel was arguing about the low growth on adjusting prior period GDP data when credit growth was more during that period. The credit growth was misdirected and over financing that is the reason for present crisis. And the conspirators are the same in both the cases.

Amit Kumar

3 weeks ago

"Impacting the many adversely may have been intrinsic to the success of the policy"--totally unclear if the policy stood for anyone's benefit or for everyone's misery. What is the policy?

Meanwhile, bhakts are blaming each and every one from Nehru to Sonia Gandhi, but are unable to reconcile with the fact that it is Modi himself who dealt the most severe blow to the economy in the last many years.

Suketu Shah

3 weeks ago

It is due to people like Rajan and AS that MOFinance is the worst performing division of Modi government.They never had interest of India at heart.

REPLY

Dayananda Kamath

In Reply to Suketu Shah 3 weeks ago

Well said.

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