INDINOMICS

NONE OF YOUR BINNESS

-By:
Divyansh Thakre
Sanskriti Pathak
Shubhangi
Suyash Tripathi
 India in a Recession

● Recessions are officially recognized after two

consecutive quarters of negative GDP growth
1
rates : for April-September 2020 negative GDP
growth rate was witnessed
● 5 Economic indicators considered: Gross
1
Domestic Product (GDP), income, employment,
manufacturing, and retail sales
● Decline in GDP Growth Rate & Manufacturing
Growth Rate with increase in Unemployment
Rate suggest a period of Recession

Graph data from:

GDP: https://statisticstimes.com/economy/country/india-quarterly-gdp-growth.php
Manufacturing: https://pib.gov.in/PressReleasePage.aspx?PRID=1701119
Unemployment: https://tradingeconomics.com/india/unemployment-rate, https://unemploymentinindia.cmie.com/
1. https://www.thebalance.com/what-is-a-recession-3306019
2020 & Post-Independence Recession Comparisons

● From the graphs, it is evident that the Gross

Domestic Product(GDP) was most severely
affected by the most recent recession caused
as a repercussion of the pandemic
● The constituent of the Gross Value
Added( GVA ) from the agricultural sector had
negative growth rates in all but the most
recent recession
● The inflation rate was off the charts in the
1979-80 recession owing to the oil debacle
that lead to the balance-of-payments crisis

GDP:
https://www.businesstoday.in/current/economy-politics/india-stares-at-5th-recession-how-is-it-different-from-the-past-downturns/story/406518.html#:~:text=Since%20independence%2C%20India%20has%20witnessed,1958%2C%201966%2C%201973%20and%201980&text=In%20indepen
dent%20India's%20history%2C%20four%20such%20years%20of%20negative%20GDP,%2D5.2%25%20(FY80)
.
GVA Agriculture: https://www.iasparliament.com/current-affairs/role-of-agriculture-economic-slump
Inflation: https://www.indiatoday.in/india/story/did-indira-gandhi-impose-emergency-to-escape-economic-crisis-1269992-2018-06-26#:~:text=Inflation%20was%2022%20per%20cent,It%20affected%20all
Comparative Study of Current and Previous Recessions

Year 1957-58 1965-66 1972-73 1979-80 2020-21

Cause High increase in Drop in food The OAPEC Oil shocks Covid-19
import bill and, grain production proclaimed an leading to BoP Pandemic and
subsequently due to severe oil embargo for crisis subsequent
resulting in BoP droughts nations who lockdown
crisis supported Israel
in the war

Severity India's trade Food grain Oil prices shot India's exports The rate of
deficit widened produce fell 20 up 400 per took a hit as it unemployment
massively while percent. In fiscal, cent from $3 to contracted by reached
gold stock and India received 1 $12 and India’s 8%, which led to unprecedented
foreign reserves crore tones of oil import bill a balance of numbers and
were reduced food aid skyrocketed payment crisis consumers’
spending
plummeted
Steps Taken to Revive Economy
● Recovery Plan (India)
Budget: 2.65 Lakh Crore INR under numerous channels. Some of which are:
- Self sufficient economy: Production Linked Incentive to boost manufacturing capabilities
- Planned Urbanisation: Employment generation through infrastructural development
- Credit measures: Extend the Emergency Credit Line Guarantee Scheme to provide liquidity support
- Atmanirbhar Bharat Package: A special economic and comprehensive package of Rs 20 lakh crores -
equivalent to 10 percent of India’s GDP with an aim to encourage business, attract investments and
strengthen the resolve for ‘Make in India’
● Direct benefit transfer related
This includes benefits in terms of monetary transactions and welfare funds to be given to farmers,
MGNREGA workers, senior citizens, women from BPL families etc
● Liquidity measures
Included relief measures announced by RBI to increase liquidity in the system; liquidity measures will
inject liquidity of INR 4.74 lakh crore (~USD 63 billion) to the system
● Tax and other reforms
- With timeline extensions for furnishing audit reports, assessments getting barred, and due date of
income tax returns, PM also announced a special package for economy revival including reduction
of rate of Tax Deduction at Source
● Others
Relief for MSMEs, NBFCs, power utilities for more liquidity infusion along with reforms in Insolvency
Source: https://home.kpmg/xx/en/home/insights/2020/04/india-government-and-institution-measures-in-response-to-covid.html
and Bankruptcy code including loans for covid-19 being excluded from defaults
Ways for Downfall Prevention of Economic Activity in the Second Wave

● Urgent fiscal support for vaccines, drugs: Designating a larger proportion of financial resources through
federal channels, incorporating the relief fund from the IMF and liasoning with the State Governments of the
worst affected states to combat the virus through getting people vaccinated
● Focus on healthcare infrastructure: Infrastructural development in terms of setting up of drugs and
oxygen plants in the scenario of aggravating situations through MGNREGA labourers
● Financial Relief Measures for the adversely affected: Special focus on utilising the unskilled labour and
prevention of mass migration along with allocating more funds for the workers. senior citizens, farmers;
insurance coverage for workers in the healthcare sector; and wage increase for MGNREGA workers and
construction workers, collateral free loans to self-help groups and MSMEs
● Enhancing liquidity: Implemented by devoting funds to special liquidity schemes for different MIFs/HFCs
catering to fiscal and private support for the stakeholders involved
● Certain Relaxations/Reliefs: Announcing certain regulatory measures wherein, in respect of all term loans
(including agricultural term loans, retail and crop loans) outstanding as on March 1, 2021, all regulated
lending institutions were permitted to grant a moratorium of six months on payment of all instalments falling
due between March 1, 2021 and August 31, 2021

https://pib.gov.in/PressReleasePage.aspx?PRID=1656925
 Analysis of the current situation of NPAs

An asset that ceases to give any return to its investors for a specific period of time
What are NPAs?

● Slow and uneven legal system & weak bankruptcy law.

● Political pressure on PSBs to lend to big corporates.
Why do they exist? ● Irrational lending by banks to business houses
● Slow growth in sectors where maximum loans are granted like: Infrastructure, Mining, Aviation
● Slowdown in global economy.
● Incompetence of traditional banks to make long term loans ( 20-25 years) for big Projects.
● Unforeseen economic shocks like Demonetization and COVID-19

● 1 The
GNPA of the banking sector is expected to be 13.5% ( or can worsen to 14.8%) by
September, 2021 from 7.5% in September, 2020.
How has COVID-19 ● The contraction faced by the economy and problems faced by various sectors would cause
the number of bad loans to increase.
affected them? 1
● The overall capital adequacy (CRAR) of banking system may fall from 15.6% in September,
2020 to 14%.
2
● The Gross bad loans may rise to 17.6% for PSBs, 8.8% for private banks and 6.5% for foreign
banks.

1 : https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50949
2 : https://www.cnbctv18.com/finance/gross-npa-of-banks-may-rise-to-135-by-september-2021-states-rbi-financial-stability-report-7967061.htm
 Explaining the current Bad Banks model
ARCs or AMCs that take over the bad loans of commercial banks, manages them and finally
What is a Bad Bank? recover the money over a period of time.

The bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance
Utility of a Bad Bank? sheets and resolve bad loans

The bad bank tries to recover using its expertise in stressed asset resolution, according to flexible
Working of Bad Bank rules and mechanism.

The presence of the government is seen as a means to speed up the clean-up process.
Support of Government
● To free up management bandwidths of banks, enable them to focus on credit growth
● Banks will find it tough and exorbitantly expensive to raise capital from the market if the asset-
Why do they exist?
quality trajectory remains uncertain, delaying and even jeopardizing, economic growth.

1 ● Commercial banks will witness a spike in the number of bad loans,NPAs due to the pandemic
Why do we need them ● Corporate sector debt worth Rs 15.52 lakh crore has come under stress due to COVID-19
with Rs 22.20 lakh crore already under stress before the pandemic.
NOW?
● Companies in sectors like retail trade, wholesale trade & textiles etc. are facing stress and
sectors such as the NBFCs (Non-Banking Financial Companies), steel & real estate etc. were
facing stress even before the pandemic
1 : https://indianexpress.com/article/explained/npa-bad-bank-balance-sheet-loan-rbi-shaktikanta-das-7151841/
 Explaining the current Bad Banks model

● An ARC-AMC structure , the ARC will aggregate the debt and the AMC will act as resolution manager i.e Setting up
an NARC for acquiring stressed assets (in an aggregated manner) from lenders and NAMC for their resolution.

● A set up dedicated to Stressed Assets Resolution, supported by attracting institutional funding in stressed asset
funds, AIFs & strategic investors etc. for resolution process

● Transfer of stressed assets to bad banks will necessitate 15% recovery in cash and 85% in sovereign guaranteed
security receipts

● Build up an open architecture and vibrant market for stressed assets

It’s a challenge that requires a response on multiple fronts. A bad bank cannot be
Is Bad Bank the perfect the sole response. The most efficient approach would be to design solutions tailor-
made for different parts of India’s bad loan problem and use Bad Bank only as a last
solution?
resort once all other methods fail.

Source; https://indianexpress.com/article/explained/npa-bad-bank-balance-sheet-loan-rbi-shaktikanta-das-7151841/
Advantages and disadvantages of the current model

● Provide lending leverage to banks by-

- freeing capital from less than completely provisioned bad assets
- freeing capital from security receipts because of sovereign guarantee
- freeing up provisions from bank receipts
Advantages
● There are various global examples that have proven the utility of bad banks , for eg. the
Troubled Asset Relief Program (TARP) implemented by the US
● According to experts, bad banks can help free up capital of around Rs. 5 lakh crore that is
locked in the banks as a provision to combat bad loans

● Without any fundamental reforms, the banks will become just a warehouse of bad loans
● There is concern for mobilizing the capital. The economy is pandemic hit and hence, it
becomes difficult to find buyers for distressed assets also the Government is itself in a
tight fiscal position
Disadvantages ● There is a lack of procedure to decide which loans would be transferred to a bad bank,
this causes political problem for the Govt. and as stated by the former Governor of the
RBI, bad banks can enable other banks to continue with reckless lending practise and
further increase the NPAs
 Alternate Solutions

● Improve the quality of lending by the PSBs. As long as the PSBs are associated with politicians and
bureaucrats, they will lack in professionalism and the lending norms will suffer. The set up of bad
banks must be preceded by proper reforms in the banking sector. One such reform that can be
implemented is providing PSBs with greater autonomy and reducing the shareholding of the Govt.

● Tackle the structural problems related to the current banking system and use Specific solutions
for specific problems and not relying on the bad banks completely. It is suggested to consider bad
banks as the last option.

● Although the Indian Banking Association has set up a 6-member panel to overlook the activities of the
major lenders, just the set up of panels is not enough. A separate authority that specifically looks
over the resolution of loans can be set up. This shall make the process more vigilant, efficient and
can reduce the no. of NPAs

● Former RBI Deputy Governor Viral Acharya has proposed 2 models to combat the situation, one of
them is the set up of Private Asset Management Companies for sectors with assets that have value
in the short run and moderate level of debt forgiveness
● Non-performing assets is among the top pain points for financial institutions. AI and Machine Learning
based technology can help banks with smarter NPA management.

Source;
https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Risk/Our%20Insights/Bad%20banks%20finding%20the%20right%20exit%20from%20the%20financial%20crisis/Bad%2
0banks.pdf
THANK YOU!