From Mint: Microfinance institutions (MFIs) could be heading for troubled times. If they don’t get a moratorium on their loans, their debt-servicing obligations could be severely impacted, according to a note released by credit rating agency Icra. The credit rating agency analyzed a sample of 29 MFIs, which makes up for 70% of the industry portfolio.
Collectively, these institutions have operation expenditures and repayment obligations of ₹8,000 crore in the first quarter of the financial year 2021. However, their on-balance sheet liquidity buffer stood at ₹5,400 crore. These institutions are facing a shortfall of ₹2,600 crore in the absence of any external funding support. “As the collections from borrowers could remain muted for some time post the lockdown is eased, the industry stares at a cash shortfall of ₹2,600 crore, according to our estimates," the Icra note said.
[...]The strain on borrowers’ cash flows will lead to a build-up of arrears, dilution of credit discipline, migration of borrowers owing to loss of livelihoods and the possibility of local, or political issues.
Sajjid Z. Chinoy writes in Mint: Fiscal-monetary coordination is often misconstrued to simply mean a monetization of the deficit. In India, any monetization remains an academic debate for now. Amid unprecedented uncertainty, without knowing the size of the economic shock, how automatic stabilizers on the budget will react, and what the absorptive capacity of the market will be, it’s virtually impossible to assess any funding gap. But that’s not to say fiscal and monetary don’t have other opportunities to co-ordinate in the interim. There are a plethora of opportunities and synergies.
The first task should be to enable the Centre and states to borrow from markets in a non-disruptive manner. Here, there’s some disquieting news. Three weeks after the Reserve Bank of India (RBI) unleashed its bazooka, monetary conditions have begun to tighten again. The glut of interbank liquidity (almost ₹7 trillion) has pushed interbank overnight rates to just 2-3%. Yet, the 10-year GSec recently hardened to a 2-month high of 6.5%. This is now the steepest yield curve in a decade. Meanwhile state yields have firmed to the 7.7-8% range—twice the typical spread over GSec yields.
Given the abundant system liquidity and weak credit growth, what explains this? It’s because in recent years, banks have revealed a growing aversion to long-dated government bonds (“duration risk"). This is because banks’ holding of bonds is much above statutory limits (the corollary of soft credit growth in recent years), exposing them to interest rate risk. The longer the duration, the greater the “mark-to-market" risk—losses which impinge upon (often scarce) banking capital. It’s this disinclination to buy “duration", a behaviour exacerbated by increased market volatility, that underpins the hardening of yields.
What can policy do?
- First, given the unprecedented uncertainty, policymakers could consider granting temporary forbearance to banks on their “mark-to-market" accounting (e.g. temporarily increase “hold-to-maturity" on which there is no interest rate risk).
- Second, the “ways and means" advances for states could temporarily be increased further so that states’ near-term market borrowing temporarily reduces.
- Third, RBI often needs to buy government bonds to create base money just to support activity in the normal course of events.As households begin to hoard cash, we expect “currency-in-circulation" to rise by 1% of GDP this year. So RBI will have potentially meaningful space to buy government bonds
- Expenditure will therefore have to be ruthlessly prioritized, akin to a “war-time" effort, and must focus squarely on boosting healthcare capacity, support for the needy (in cash and kind), funding automatic stabilizers like the Mahatma Gandhi Rural Employment Guarantee Act scheme, and back-stopping the financial sector (credit guarantee and re-capitalization funds).
