March 2020 Economic Affairs

Sakshi Education

RBI extends restrictions on PMC Bank for three more months
Reserve bank of India extended the regulatory restrictions on Punjab and Maharashtra Cooperative Bank (PMC) Bank by another three months.

The central bank also added that it has been in talks with various authorities for the quick sale of securities and recoveries of loans.

The validity of the directive dated 23rd September 2019, stands modified from 23rd March 2020 to 22nd June 2020.

RBI imposed restrictions on PMC bank under Section 35A of the Banking Regulation Act. This was aimed at preventing a run on the bank that could end up endangering the stability of the entire financial system because of a contagion effect.

These curbs were put in place after the central bank saw gross under-reporting of bad loans, financial irregularities by the bank’s officials, and failure of internal controls and systems.

RBI superseded the board and the management of the bank and appointed an ex-RBI official as the administrator at the bank.RBI has offered a plan where depositors can invest in a bond called innovative perpetual deposit instrument (IPDI) with a lock-in period of 10 years.

The extension of the restrictions comes at a time when RBI and government put in place a bailout package for Yes Bank in no time, while it still has not succeeded in doing so in the case of PMC due to the constraints of dual regulation.

Regulation of urban cooperative banks is split between the RBI and the Registrar of Co-operative Societies. In contrast, that of smaller co-operative banks are divided between National Bank for Agriculture and Rural Development (Nabard) and RCS. RCS reports to the central government.
RBI chalks out contingency plan for smooth functioning of services
Reserve Bank of India (RBI) put in place a contingency plan to ensure that crucial information technology (IT) services for the delivery of digital banking, treasury services.

It includes measures to prepare for anticipated disruptions, ensure smooth flow of operations and staffing, identify critical resources, and form crisis management groups while keeping all staff insulated from exposure to the virus.

NEFT
This plan launched to ensure continuity of critical services like National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS), e-Kuber for government transactions, and so on.

The BCP ensures that all critical functions of the financial system continue to be available to individuals, businesses, and governments under all circumstances.
Deadline for GST returns extended to 30 June
Finance Minister Nirmala Sitharaman has extended the last date for filing GST returns for March, April, and May to 30 June.

The previous date for filing of GST returns was March 31, 2020. The deadline for composition returns on GST has been also been extended to 30 June 2020.

Highlights:
The companies with less than Rs.5 crore turnover will not be charged interest or penalty for the late filing of GST. Bigger companies with a turnover of more than Rs.5 crore will have have to pay the interest amount at 9% for delayed filing of GST. No late fee or penalty will be levied.

Also, the last date to opt for the compensation scheme has been extended to 30 June 2020.

The last date to file income tax returns (ITR) for Financial Year 2018-2019 has been extended to 31 June.

The deadline for Aadhar-PAN linking has also been extended to 30 June.

Centre has made customs clearance an essential service. Hence, it will continue to operate 24/7 till 30 June 2020.
Aviation sector might face losses up to USD 3.6 billion in June quarter
Aviation consultancy Capa India reported that India's aviation industry is expected to post losses of $3-3.6 billion in the June quarter in its report titled 'Projecting the potential financial impact of COVID-19 on Indian aviation'.

The loss is because the airlines have shared the bulk of the hit after the series of travel restrictions due to the COVID-19 pandemic.

Highlights:
As per the forecast, the domestic carriers are to incur losses of about $1.75 billion next quarter. The airports and concessionaires are to incur losses of between $1.50 billion and $1.75 billion.

The ground handling industry is expected to report a loss of $80-90 million during the same period.

The estimates for the potential sectoral losses assume that all domestic and international operations remain grounded until 30 June.

It also stated the entire sector is now in a state of crisis, which will certainly impact FY2021 and quite possibly well beyond.

It highlighted that the Indian airlines are not prepared for such a severe systemic shock.
Cabinet approved the continuation of recapitalization of RRB scheme
The Cabinet Committee on Economic Affairs (CCEA) chaired by Prime Minister Narendra Modi approved to continue the process of recapitalization of Regional Rural Banks (RRBs).

Highlights:
The Cabinet approved to provide minimum regulatory capital to RRBs for another year, that is, up to 2020-21 for those RRBs which are unable to maintain minimum Capital to Risk-weighted Assets Ratio (CRAR) of 9% which was set as per the regulatory norms prescribed by the Reserve Bank of India (RBI).

The CCEA also approved the RRB's to utilize Rs.670 crore as central government share for the scheme of Recapitalization of RRBs that are subject to the condition that the release of the Central Government’s share will be contingent upon the release of the proportionate share by the sponsor banks. Earlier, it was decided that 50% of the total recapitalization support of Rs.1340 crore will be shared by the government.

Background:
RBI introduced disclosure norms for CRAR of RRBs with effect from March 2008. Based on the recommendation of Dr. K.C. Chakrabarty chaired the committee, a Scheme for Recapitalization of RRBs was approved by the Cabinet on 10 February 2011.

As per the scheme, the National Bank for Agriculture and Rural Development (NABARD) will identify the RRBs that require recapitalization assistance to maintain the mandatory CRAR of 9%. The scheme will provide recapitalization support of Rs.2,200 crore to 40 RRBs.

Also, an additional amount of Rs.700 crore will be given as a contingency fund to meet the requirement of the weak RRBs, particularly in the North-Eastern and Eastern Region.
RBI announced 3 month moratorium on repayment of term loans means for borrowers
The Reserve Bank of India (RBI) has announced that all banks and Non-bank financial institutions (NBFCs) have been permitted to allow a moratorium of 3 months on repayment of term loans outstanding on 1st March 2020.

As per RBI's move, the tenure or time period of the loans will be increased by 3 months.

Highlights:
All lending institutions including banks and NBFCs will allow a moratorium on loan repayments for 3 months.

A moratorium of this kind generally implies that the Equated monthly installments (EMI) repayment of loans of individuals will not be deducted from their bank accounts till the moratorium period is over.

The loan EMI payments will resume only when the moratorium time period of 3 months expires.

RBI stated that the moratorium will enable the borrowers to balance the economic fallout from COVID-19.
CRISIL cuts GDP growth forecast to 3.5 percent
CRISIL has cut its base-case Gross Domestic Product (GDP) growth forecast for fiscal 2021 to 3.5% from 5.2% expected earlier.

Highlights:
The global growth forecasts have reduced geometrically due to the COVID-19 pandemic spread geometrically.

It highlighted that the world economy, unlike the Global Financial Crisis of 2008, has jeopardized financial stability and brought enormous human suffering.

CRISIL has cut its early forecast of 5.2% GDP growth to 3.5% for fiscal 2021. But it has worsened notably.

The pandemic in India poses a material risk to the India economic outlook.

It also reported that the slump in growth will be concentrated in the first half of the next fiscal, while the second half should see a mild recovery.

It highlighted that the inability to control the pandemic and extension of the lockdown will aggravate supply and demand shocks.
RBI revised exposure limits for UCBs
Reserve Bank of India (RBI) revised exposure limits for urban cooperative banks (UCBs) to a single borrower and a group of borrowers to 15% and 25%, respectively, of tier-I capital.

Highlights:
Previously, the UCBs were permitted to have exposures of up to 15% and 40% of their capital funds to a single borrower and a group of borrowers, respectively.

The revised exposure limits will be applicable to all types of fresh exposures taken by UCBs, and they will have to bring down their existing exposures, which are in excess of the revised limits, by 31 March 2023.

The preceding financial year will be considered for the purpose of fixing the exposure limits, tier-I capital as on 31 March.

Tier-I capital will remain the same as that prescribed for computation of capital adequacy of UCBs. The banks can have at least 50% of their aggregate loans and advances comprising loans of not more than 0.2% or Rs.25 lakh of their tier 1 capital, as per the borrower.
The 39th GST Council meeting was held
The 39th GST Council meeting was held under the Chairmanship of Union Finance & Corporate Affairs Minister Smt Nirmala Sitharaman on 14 March in New Delhi.

Union Minister of State for Finance and Corporate Affairs Anurag Thakur, along with Finance Ministers of States/UTs and seniors officers of the Ministry of Finance, participated in the meeting.

Highlights:
The officials discussed the issues faced by the taxpayers in the GST system. A summary of the recently observed IT issues, and the way forward to resolve them was submitted.

The meeting focused on smoothening the rollout of the new return system and ensured the transition to the new return system is made in an incremental manner.

The meeting addressed the compliance-related issues so that the problem of tax evasion and gaming of the system due to non-linking of FORM GSTR-1 and FORM GSTR-3B is addressed immediately.

The officials stated that in order to tackle and prevent the gaming of the system, implementation of Aadhaar authentication and spike rules would be initiated.
SBI reduced FD rates, MCLRs rates for a second time in a month
State Bank of India (SBI) has announced a reduction in its Marginal Cost of Funds based Lending Rates (MCLR) upto15 basis points (bps) across tenors.

This is the second time the lender is announcing the rate cut in its fixed deposit (FD) interest rates. This is the second reduction in a month and the tenth cut in the current fiscal year.

Highlights:
SBI has reduced retail term deposits (less than Rs.2 crore) by 10 to 50 bps for a few tenors. The new rates for home loans and FDs took effect from 10 March.

The one-year MCLR reduced to 7.75% from 7.85% with effect from 10 March 2020.

EMIs on eligible home loan accounts that are linked to MCLR will come down by around Rs.7 per 1 lakh on a 30-year loan. It also said that EMIs on car loans would also be reduced by Rs.5 per 1 lakh on a seven-year loan.

SBI's FD rates have been reduced by 10-50 bps due to adequate liquidity in the system. It had reduced the interest rates applicable to retail term deposit by 10 bps for maturities of one year and above, and by 50 bps for the rates up to 45 days. SBI also reduced FD rates by 15 bps for deposits with tenors of 180 days and above.
RBI to use swap transactions, LTRO to infuse liquidity
The Reserve Bank of India (RBI) has announced that, in the wake of the epidemic Covid-19, the central bank would use Forex swap and long-term repo operations (LTROs) to mitigate the effects of the Covid-19 on the Indian Economy.

Highlights:
RBI will conduct a sell/buy swap auction worth $2 billion to provide dollar liquidity. RBI also stated that it would not hesitate to persist with LTROs to infuse long-term rupee liquidity, amounting to Rs.1 lakh crore.

RBI is to undertake another six-month US dollar sell/buy swap auction that aggregates to $2 billion on 23 March. The move by RBI aims to provide liquidity to the foreign exchange market.

RBI is to conduct LTRO in multiple tranches of appropriate sizes up to a total amount of Rs.1 lakh crore at the policy repo rate. It aims to counterbalance the domestic liquidity effects of the swap and to improve monetary policy transmission further.
Gulf stocks nosedive after oil prices crash
Stock markets in the energy-rich Gulf States nosedived at the start of trading today after oil prices crashed amid a price war in the global market.

Kuwait's Premier index tumbled 9.5 per cent and trading was suspended, while Dubai Financial Market dropped 9.0 per cent and Abu Dhabi Securities Exchange shedded 7.1 per cent.

Oil prices crashed at the opening today after OPEC and its allies failed to reach an agreement on production cuts.
UN economists forecast drop of up to 15 % in FDI worldwide due to Novel Corona virus outbreak
The rapid spread of the deadly Novel Corona virus is expected to take a serious toll on foreign direct investments worldwide, with UN economists forecasting a drop of up to 15 percent.

A fresh report from the United Nations Conference on Trade, Investment and Development (UNCTAD) warned that regardless of how quickly the COVID-19 outbreak lasted, it would significantly drag down global FDI, which is a measure of cross-border private sector investment.

Efforts to halt the spread of the virus, which has killed more than 3,500 people and infected more than one lakh people around the world, have wreaked havoc on international business.

The UN agency pointed to estimates that growth in the global economy will slow between 0.5 and 1.5 percent this year, depending on whether the outbreak is reined in during the first half of this year or if it rages through the end of 2020.
RBI assures safety of bank deposits in wake of Yes Bank crisis
The Reserve Bank of India (RBI) has assured depositors that there is no concern regarding the safety of their deposits in any bank. The Reserve Bank of India said that as Yes bank's financial matter came up, a concern raised in certain sections of media about the safety of deposits of certain banks. This concern was based on analysis which is flawed.

The RBI stated that the solvency of banks is internationally based on Capital to Risk Weighted Assets Ratio (CRAR) and not on market capitalization. The Apex bank added that it closely monitors all the banks and hereby assures all depositors that there is no such concern of the safety of their deposits in any bank.

Earlier, Chief Economic Adviser K V Subramanian also said that the m-cap ratio is an incorrect way to measure the safety and solvency of a bank. He further added that Capital to Risk (Weighted) Assets Ratio (CRAR) is the standard measure for the safety of a bank. Pointing out figures, the CEA said that Indian banks have 80 percent more capital than the globally mandated norm for CRAR. He stated that the global norm for CRAR is eight percent. Compared to that, Indian banks have on average 14.3 percent CRAR which indicates that Indian banks have 80 percent more capital than the globally mandated norm.
Centre imposes withdrawal limit for depositors of Yes Bank
The government of India has imposed a withdrawal limit of Rs.50,000 for depositors of Yes Bank for one month.

The notification regarding this was issued by the Ministry of Finance. The cap will be in effect till 3rd April.

GoI has allowed a few exemptions in cases like higher education, medical emergency, marriage, and unavoidable emergency for the limit on withdrawal.

RBI's announcement:
Reserve Bank of India (RBI) stated that Yes Bank's board has superseded for a period of 30 days that owes to a serious deterioration in the financial position of the bank. Former Chief Financial Officer (CFO) of SBI Prashant Kumar has been appointed as administrator for Yes Bank.

RBI assured depositors of Yes Bank that their interest would be fully protected. RBI stated that it would explore and draw up a scheme for the bank's reconstruction or amalgamation in terms of the provisions of the Banking Regulation Act.
SBI announced rate cuts on FD
State Bank of India (SBI) has announced a rate cut of the fixed deposit rates across multiple tenors for general customers and senior citizens.

It has reduced a rate cut up to 50 basis points (bps) in some tenors, and for some tenors, it has announced a reduction of 10 bps.

Highlights:
The new rates were made effective from 10 March.

The fixed deposit (FD) rate for a period of 7 days to 45 days has been reduced to 4% from the earlier 4.50%, while it has been reduced to 4.50% from 5% for senior citizens.

For the FD rates for 1 year to less than 2 years, 2 years to less than 3 years, 3 years to less than 5 years, and 5 years to up to 10 years tenors, the rates have been reduced by 10 bps.

For general customers, the interest rate has been reduced to 5.90% from the earlier 6%. For senior citizens, in this case, it has been reduced to 6.40% from 6.50%.

The last rate cuts on FDs were made applicable on 10 February.
World economy faces worst performance since the past decade
Bank of America Corporation (BAC) economists stated that the world economy is heading for its worst performance since the 2009 financial crisis.

The decline is due to the increasing spread of coronavirus across the world. The economists stated that they are expecting 2.8% global growth in 2020, which is the weakest since 2009.

The forecast did not include a global pandemic that would basically shut down economic activity in many major cities.
‘India among most dollarized countries in terms of invoicing’
Lecture on ‘financial globalization and international financial markets’ as part of the Export-Import (EXIM) Bank of India’s 35th Commencement Day celebrations.

Details:
Professor Hélène Rey, Professor of Economics at London Business School delivered the lecture.

By the measures of internationalization, the dollar is largely ahead of other currencies with the euro as a distant second.

International reserves are held in dollars and dollar is an important vehicle currency on the foreign exchange market.

According to a survey by the European Central Bank, the dollar constituted 62.2% international debt, 56.3% international loan and 62.7% global exchange reserves, whereas the euro had acquired much less global market.

India is one of the most dollarized countries in the world, following Brazil, Pakistan and Indonesia, in the share of imports and exports invoiced in dollars.

The role of the dollar in international markets:
Notably, the value of the U.S.’s external dollar liabilities such as Treasury bills and U.S. government bonds held by the rest of the world tend to appreciate in bad times, pointing to the indirect role of the U.S. as an insurer.

Given the dominance of the U.S. dollars, the U.S. gets seigniorage as people from different countries use dollars.

Seigniorage is the difference between the value of currency/money and the cost of producing it. It is essentially the profit earned by the government by printing currency.
NABARD infused Rs 1.46 lakh crore in the rural banking system during current fiscal
National Bank for Agriculture and Rural Development (NABARD) has infused Rs. 1.46 lakh crore in the rural banking system during the current fiscal.

The bank stated that it had given Rs. 66,397crore in short-term credit and Rs. 6,704 crore in long-term credit to rural cooperative banks.

Regional rural banks (RRB) have availed Rs. 14,141crore in short-term credit and Rs. 8,417 crore in long-term credit. Also, other small finance banks have obtained long-term refinance of Rs. 37,895crore.

Short-term refinance is essentially production credit, and long-term refinance aimed at supporting sectors like dairy, poultry, fishery, farm mechanization, irrigation, and non-farm sectors, etc.
Luxembourg became the world’s first country to offer public transport, entirely free
Luxembourg has become the first government to have made public transport free. The move came with effect from 1 March.

As per the move, buses, trams, and trains in the country became completely free of charge.

Aim:
The move aims to encourage Luxembourg's inhabitants to use it and curb the continued traffic problems the country is experiencing.

Highlights:
The country aims to achieve its vision of free mobility. The move focuses on alleviating constant traffic issues and finding a more suitable model for sustainability.

Luxembourg aimed to transform into a mobility laboratory and to start making the people move around with public transport.

The estimated cost of the project is around $46 million.

The government has assured no layoffs and public transport staff members who are left without roles will be transferred to new positions.
EPFO lowered the interest rate on PF deposits to 8.5 percent
Employees' Provident Fund Organisation (EPFO) has lowered the interest rate on PF deposits to 8.5% for the current financial year 2019-20.

EPFO's rate cut:
For the financial year 2018-19, EPFO provided a 6.85% rate of interest on EPF.

The decision was made at the Central Board of Trustees (CBT). The announcement was made by Union Labour Minister Santosh Gangwar in New Delhi on 5 March 2020.

The interest rate cut by the Labour Ministry requires concurrence from the Finance ministry. The Ministry will examine the proposal for EPF interest rate cut in order to avoid liability on the account of shortfall in the EPFO income for a fiscal as the Government of India is the guarantor.

Earlier, the Ministry of Finance has been pushing the labour ministry to align the EPF interest rate with other small saving schemes run by the post office saving scheme and public provident fund.