25 January 2021: The Hindu Editorial Analysis

1. After the storm: On tightening scrutiny of large NBFCs.

The RBI’s plan to tighten scrutiny of large NBFCs is critical for financial stability.

GS-2 : Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential.

GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development

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CONTEXT:

1. The Reserve Bank of India (RBI) plans to four-layered regulatory and supervisory framework for non-banking finance NBFCs as it embarks on the path of a scale-based regulation in the backdrop of the recent stress in the sector.

2. Its implementation could be the biggest machinery of the regulatory framework for finance companies or shadow banks in over two decades.

3. It is hoped that the blueprint for the regulation of NBFCs which can lend for activities banks often do not support, be it micro-loans or infrastructure projects, is formalized soon.

 

RBI Suggestion on “Bank-Like Regulation”:

It suggested in Four Categories of NBFCs, depending on their size and systemic relevance of NBFCs.

1. NBFC-BL (base layer): These will be NBFCs with an asset size of up to Rs 1,000 crore. The largest share of NBFCs will fall in this category. According to the RBI discussion paper, 9209 out of 9425 non deposit taking NBFCs fall into this category. These non-bank lenders will have the least stringent regulation.

2. NBFC-ML (middle layer): This category will include all non-deposit taking NBFCs classified currently as 'systemically important' and all deposit taking NBFCs. Based on the discussion paper, it will see the least disruption in terms of regulatory changes.

3. NBFC-UL (upper layer): This layer will be made up of the top 25 to 30 NBFCs identified as systemically significant. This is the category where regulation will move towards what is followed in the case of banks.

4. Top Layer: This layer will be empty for now and will populated with NBFCs where the RBI may see elevated systemic risk.

                 

 What is a Non-Banking Financial Company (NBFC)?

1. A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956

2. It is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

3. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

 

What is difference between banks & NBFCs?

1. NBFC cannot accept demand deposits but bank do.

2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

3.  Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

 

Why Regulation need to change. (issues in previous regulation):

1. The scale and nature of the problem has changed, NBFCs had debt-equity ratio of 5.4 times at the end of March 2018 and banks had twice that much in last 20 years,
2. NBFCs had borrowed short term from banks and mutual funds while lending to developers of long-term projects, which got held up because of various factors.
3. Trillions of rupees are locked in real estate, construction and infrastructure projects.
4. Banks want NBFCs to promise higher returns on the loans they buy from them.
5.  The consequently higher interest rates offer by NBFCs could hurt the construction sector, auto and jewellery firms, and consumption in fast moving consumer goods.
6. There is a huge mistrust in the financial market with mutual funds and banks are reluctant to lend to NBFCs
7. An RBI report showed that 7% of shadow banking in India makes long-term loans against short-term funding, primarily carried out by NBFCs and housing finance companies.
8. In 2012, the Usha Thorat committee had highlighted the risks that NBFCs carry by being dependent on money market instruments like CD and CP, having little flexibility covering for their long-term assets under situations of stress.

 

Solution:

1. The central bank has pumped a huge amount of liquidity into the system over the last eight months. It has also eased some norms to give NBFCs more room in fundraising.
2. The market share that had moved to Banks  may go back to NBFC, which have since raised capital
3. NBFCs normally borrow from banks at MCLR, or the marginal lending rate.RBI may eases MCLR policy in fevers of NBFCs.  
4.  NBFCs can allow by RBI to borrow more from banks. It will benefit NBFCs that operate in segments such as SME lending and housing." RBI allowed banks to classify some types of advances to NBFCs as priority-sector loans.
5. NBFCs also may allow to have access to RBI’s liquidity operations, which are restricted to commercial banks, a temporary systemic mismatch, which should have been nipped in the bud, snowballed into a crisis.
6. RBI should initiate conversations with senior bankers and provide assurances, so that banks can start feeling more confident of funding NBFCs

 

Measures by the Government:

7. Government has introduced a  25,000 Crore special window to revive stuck projects, subject to certain conditions.
8. In Budget 2019-20, the government provided a one-time partial credit guarantee to PSBs to buy high-rated (basically less risky) pooled assets of financially sound NBFCs.
9. Though NBFCs are still waiting for these funds, as risk-averse banks have not followed up.
10. There is also lack of clarity weather such dealings between banks and NBFCs should be considered as ‘securitisation’ deals or as ‘pass-through certificates’ (PTC).

 

Way Forward: (by Shaktikanta Das)

1. A holistic reboot of the oversight mechanism for NBFCs and banks is critical to retain confidence and maintain financial stability which central bank Governor Shaktikanta Das has termed a ‘public good’
2. It is hoped that the blueprint for the regulation of NBFCs which can lend for activities banks often do not support, be it micro-loans or infrastructure projects, is formalised soon.
3. This would ensure the fledgling economic recovery is not hampered by funding constraints.

 

2) In agri-credit, small farmers are still outside the fence

The agriculture sector’s performance has not been commensurate with the increasing subsidised credit it receives.

GS-3: marketing of agricultural produce and issues and related constraints; e-technology in the aid of farmers.

GS-3:  Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System-objectives, functioning, limitations, revamping; issues of buffer stocks and food security;

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CONTEXT:

1. The agriculture reforms have again occupied centre stage not just in the minds of the politicians but also policymakers.
2. To enable small farmers to diversify their crops or improve their income, they must have access to credit at reasonable rates of interest.
3. India is a country of Small and marginal farmer but policymaker left out most small farmers in agriculture credit, for indirect loans, and direct credit with many irregularities.
4. Where is the credit and subsidy going and are they really benefiting the farmers, to improve effective institutional credit delivery then Technology as a solution.

Agricultural Subsidies in India:

1. Annual central government subsidies to farmers would be of the order of Rs. 120,500 crores as the sum of fertilizer subsidies (Rs. 70,000 crores, 2017/18), credit subsidies (Rs. 20,000 crores, 2017/18), and crop insurance subsidies (Rs. 6500 crores, 2018/19) and expenditures towards price support (Rs. 24,000 crores estimated for 2016/17).

2. Annual State government subsidies are almost of an equal amount of Rs. 115,500 crores to as the sum of power subsidies (Rs. 90,000 crores, 2015/16), irrigation subsidies (Rs. 17,500 crores, 2013/14), and crop insurance subsidies (Rs, 6500 crores, 2018/19). In addition, in the year 2017/18, state governments announced loan waives totaling to Rs. 122,000 crores. Overall farm subsidies amount to 2-2.25% of GDP.

3. On February 1,2020, Budget day, the Union Finance Minister will again set a new agricultural credit target for 2021-22. In 2011-12, the target was ?4.75-lakh crore; now, agri-credit has reached the target of ?15-lakh crore in 2020-21 with an allocated subsidy of ?21,175 crore.

 

Most small farmers left out:

1. As per Agriculture Census 2015-16, the average size of operational holding has declined to 1.08 hectare in 2015-16 as compared to 1.15 hectare in 2010-11. The small and marginal holdings (<2 ha) now constitute 86%, while the large holdings (>10 ha) are merely 0.57% of the total land holdings.

2. In the last 10 years, agriculture credit increased by 500% but has not reached even 20% of the 12.56 crore small and marginal farmers.

3.  Despite an increase in agri-credit, even today, 95% of tractors and other agri-implements sold in the country are being financed by non-banking financial companies with 18% rate of interest, benefit large farmer only.

4. The lowest land holding (up to two hectares) getting only about 15% of the subsidised outstanding loan from institutional sources (bank, co-operative society).

5.  The credit beneficial of 79% households belonging to the highest size land holder class of land possessed (above two hectares), beneficiaries of subsidised institutional credit at 4% to 7% rate of interest.

6. As in the Agriculture Census, 2015-16, the total number of small and marginal farmers’ households in the country stood only 12.56 crore.

7. In 2017, 53% of the agriculture credit that the National Bank for Agriculture and Rural Development (NABARD) provided to Maharashtra was allocated to Mumbai city and suburbs, where there are no agriculturists, only agri-business.

 

Many irregularities:

1. RBI found that in some States, credit disbursal to the farm sector was higher than their agriculture gross domestic product (GDP) and the ratio of crop loans disbursed to input requirement was very unevenly distributed.

2.  Some Examples are show irregularities in Kerala (326%), Andhra Pradesh (254%), Tamil Nadu (245%), Punjab (231%) and Telangana (210%).

3.  This shows the diversion of credit for non-agriculture purposes. One reason for this diversion is that subsidised credit disbursed at a 4%-7% rate of interest is being refinanced to small farmers, and in the open market at a rate of interest of up to 36%. Subsidized credit.

4. Appraisal and accounting irregularities affecting a segment of the Association’s lending portfolio also increases irregularities in farm credit.
5.  The volume of rural credit in the country is still insufficient as compared to its growing requirement arising out of increase in prices of agricultural inputs.
6. Rural credit agencies and its schemes have failed to meet the needs of the small and marginal farmers.
7. The problem of over-dues in agricultural credit continues to be an area of concern. The recovery of agricultural advances to various institutions is also not at all satisfactory.

Technology as a solution:

1. With mobile phone penetration among agricultural households in India being as high as 89.1%, the prospects of aggressive effort to improve institutional credit delivery through technology-driven solutions can reduce the extent of the financial exclusion of agricultural households.

2. The apps use satellite imagery reports which capture the extent of land owned by farmers in States where land records are digitised and they grow the crop to extend the Kisan Credit Card loans digitally.

3.  With technology farmers have not  to produce or the certified land record copy from the revenue department, which is much time consuming.

Other Solutions

1. The according to RBI suggestion  net bank credit, 18% must go to the agriculture sector, and within this, 8% must go to small and marginal farmers and 4.5% for indirect loans, bank advances routinely breach the limit.

2. To empower small and marginal farmers by ‘giving them direct income support on a per hectare basis rather than hugely subsidising credit. Streamlining the agri-credit system to facilitate higher crop loans to farmer producer organisations, or the FPOs of small farmers against commodity stocks can be a win-win model to spur agriculture growth’.

3. The reforming the land leasing framework and creating a national-level agency to build consensus among States and the Centre concerning agriculture credit reforms to fill the gap and reach out to the most number of small and marginal farmers.

4. Procedural simplification for credit delivery has been made (as per R.V. Gupta Committee Report) through rationalization of internal returns of banks.

5. The Dalwai committee report on the issue of doubling farmer's income, has also pitched for placing farm marketing in the Concurrent List to enable the Centre to revamp agricultural mandi’s, improve their functional efficiency and expand the rural marketing infrastructure

Conclusion:

1. A recent report (OECD, 2020) estimates the taxes to be larger than the aggregate of input subsidies. These estimates can, however, be disputed.

2.  India is 47 a large country in international trade and a simple comparison of domestic prices with world levels is not an adequate guide to the extent of taxation.

3.  It is not clear whether the depressed domestic prices are due to policy or because of high transport costs from the hinterland to the ports. This is relevant for a large continental economy such as India.

4. For the 141 million workers in agriculture who own no land and for the majority of 118 million cultivators that own less than 1 hectare of land, incomes from farming will continue to be low and precarious, no matter how much we spend on subsidies.

 

3) The shipping sector is at sea:

Sagarmala provides hope for improving carrying capacity and developing infrastructure and ports.

GS-3: Infrastructure: Energy, Ports, Roads, Airports, Railways etc. and Investment models

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CONTEXT:

1. Vision of the Sagarmala Programme is to reduce logistics cost for EXIM and domestic trade with minimal infrastructure investment.

2. The major economies of the world have always realised the potential of shipping as a contributor to economic growth. For example control of the seas is a key component of China’s Belt and Road Initiative (BRI). China is trying to take control of the Bay of Bengal and the Indian Ocean Region.

3. Sagarmala, a government programme to enhance the performance of the country’s logistics sector, provides hope. Its aims are port-led industrialisation, development of world-class logistics institutions, and coastal community development.

Why Maritime transport?

1. Maritime transport actually accounts for roughly 80% of international trade, as opposed to other modes of transportation, according to UNCTAD in 2020.

2. Transport by water is cheaper than transport by air, despite fluctuating exchange rates and a fee placed on top of freighting charges for carrier companies known as the currency adjustment factor (CAF).

 

Vision of the Sagarmala Programme:

1. Reducing cost of transporting domestic cargo through optimizing modal mix
2. Lowering logistics cost of bulk commodities by locating future industrial capacities near the coast
3. Improving export competitiveness by developing port proximate discrete manufacturing clusters
4. Optimizing time/cost of EXIM container movement

 

Components of Sagarmala Programme are:

1. Port Modernization & New Port Development: De-bottlenecking and capacity expansion of existing ports and development of new greenfield ports

2. Port Connectivity Enhancement: Enhancing the connectivity of the ports to the hinterland, optimizing cost and time of cargo movement through multi-modal logistics solutions including domestic waterways (inland water transport and coastal shipping)

3. Port-linked Industrialization: Developing port-proximate industrial clusters and Coastal Economic Zones to reduce logistics cost and time of EXIM and domestic cargo.

4. Coastal Community DevelopmentPromoting sustainable development of coastal communities through skill development & livelihood generation activities, fisheries development, coastal tourism etc.

5. Coastal Shipping & Inland Waterways TransportImpetus to move cargo through the sustainable and environment-friendly coastal and inland waterways mode.

 

China factor

1. China’s growth is strong merchant marine and infrastructure to carry and handle merchandise all over the world.
2. The seas are a key component of China’s Belt and Road Initiative (BRI). China is trying to take control of the Bay of Bengal and the Indian Ocean Region.
3. China marine growth may imbalance  regional power balance and threat to Indian growth and security .

 

Helping foreign shipping liners

1. Starting from the establishment of new ports in independent India to the establishment of the present-day Chabahar Port in Iran, all of India’s actions on the shipping front have been counter-effective.

2. This is due to a visionless administration. All the shipping infrastructure in peninsular India only helps foreign shipping liners. India has concentrated only on short-term solutions.

3. India also developed optimum shore-based infrastructure with road and rail connectivity to facilitate their trade

4. There was balanced infrastructure onshore and at sea. Shore-based infrastructure was developed to cater to the carrying capacity. This needs to be understood with a clear economic sense.

5. Foreign carriers and their agents continue to ransack EXIM trade with enormous hidden charges in the logistics cycle. Much of foreign currency is drained as transhipment and handling cost every day.

6. India, the bureaucracy has repeatedly allowed infrastructural developments in multiple cargo-handling ports. As a result, Indian ports compete for the same cargo.

7. India need to only concentrate on developing the contributing ports to serve the regional transshipment hubs for which improving small ship coastal operations is mandatory.

8. India need quality products to be available in global markets at a competitive price. This will happen only if we develop balanced infrastructure onshore as well as at sea.

 

A ray of hope( Sagarmala):

1. Sagarmala, a government programme to enhance the performance of the country’s logistics sector, provides hope. Its aims are port-led industrialisation, development of world-class logistics institutions, and coastal community development.

2. Sagarmala initiates infrastructural development on the shorefront; this will also get reflected in domestic carrying capacity.

3. The solution for, shipbuilding, repair and ownership are not yet preferred businesses in peninsular India.

4. The hope or ‘Make in India’ growing louder and with simultaneous multi-folded cargo growth in the country, we need ships to cater to domestic and international trade.

5. Short sea and river voyages should be encouraged. The ship-owning spirit of the Indian merchant marine entrepreneur has to be restored.

6. Sagarmala should include coastal communities and consider evolving schemes to harness the century-old ship-owning spirit and sailing skills of peninsular India

7. Coastal communities should be made ship owners. This will initiate carriage of cargo by shallow drafted small ships through coast and inland waterways.

8. All minor ports in peninsular India will emerge as contributing ports to the existing major ports and become transhipment hubs on their own. Old sailing vessel owners should be encouraged to become small ship owners.

 

Point of concern (Sagarmala):

1. The youth population is merely a number, not a skill-based strength,india need skill and innovation to compete with china.
2. According to an ICRA study, the program is being impeded due to lack of timely investment mobilization and budgetary support.
3. Another challenge is the creation of an environment favourable for businesses and tangible incentives to attract the private sector.
4. There has been resistance from the fishing communities and environmental activists in certain areas. The Karnataka High Court recently stayed the work on Karwar Port following protests by the local fishermen.
5. At the end of 2018, the centre diluted the Coastal Regulation Zone Notification- a move that is favourable to the Sagarmala Program but highly dangerous for the fragile coastal ecosystem.
6. This is because Sagarmala, along with Bharatmala, were declared as ‘strategic projects’– i.e. exempt from the provisions of CRZ. This implies that land can be reclaimed from ecologically sensitive CRZ-I zones and roads can be built here.
7. Apart from this, there have been instances of Sagarmala projects triggering accelerated coastal erosion and increased pollution from the industrial clusters.
8. Port expansions involve massive dredging into the sea that destroys vast stretches of fertile fishing grounds and destabilises jetties.
9. Over the years, there is reduced parking space for small artisanal boats, curtailed access to fishing harbours and unpredictable fishing catch. This is significantly affecting the fishing communities, who are already suffering due to the impacts of living next to mineral handling facilities and groundwater exhaustion.
10. There has been less than the ideal allocation for the coastal community development pillar of the project.
11. There is also suspicion among the fishing community that this ambitious programme would lead to displacement and would adversely affect their fishing trade.
12. Fishermen are of the view that the programme has been designed to privatise sea and to uproot fishermen from their hamlets.
13. The Health Crisis (corona) has greatly affected the trade projects that form the basis for the Sagarmala program. This has led to the need for fresh blueprints (Maritime Vision 2030).

Conclusion:

There is a need for increased funding for the welfare of the local fishing communities. Their traditional livelihoods must be safeguarded while promoting communities’ growth and development. There must be increased modernization with emphasis on sustainability.