RISING NPAS IN INDIAN BANKING SECTOR: CAUSES, EFFECTS, IMPLICATIONS AND REMEDIES

By Charudutt Sehgal

Introduction

The economic progress of a nation and development of its banking sector is invariably interrelated. The banking sector is an indispensable financial service sector supporting development plans through channelizing funds for productive purpose, intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of the government. Banks serve social objectives through priority sector lending, mass branch networks and employment generation. Maintaining asset quality and profitability are critical for banks survival and growth. In the process of achieving such objectives, a major roadblock to banking sector is prevalence of Non-Performing Assets (NPA). In India, the problem of bad debts was not taken seriously until it was mandated by the Narasimham and Verma committee. The committee mandated the curbing of the particular issue because NPA direct towards credit risk that bank faces and its efficiency in allocating resources.

The aim of this research paper is to study the current trend of NPAs in Indian scheduled banks (up to 2013-14 only). The paper further examines the critical reasons behind the rise of this issue, its impact on Indian banking sector and Indian economy. In order to understand the criticality of the problem an effort has been made to study what impact NPAs have on ease of doing business rankings. Furthermore, the paper concludes with some of the important measures which if implemented then can improve the current scenario of NPAs in SCBs.

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EFFECTS OF DEMONETIZATION ON INDIAN AGRARIAN ECONOMY

By Pushkar Moni and Purvee Khandelwal

Introduction

The currency (notes) is the most liquid legal tender issued by the RBI which can be used to extinguish a public or private debt. The Indian economy, until 8th November 2016 had an estimated ₹14.18 trillion worth of currency notes in circulation, making India predominantly a cash-based economy. The Indian agrarian economy which is also primarily cash based, and is highly unorganized, has emerged as a source to route black money, back into the system both in terms of tax exemptions and channelling funds to create legitimate funds [1]. According to the Central Board of Direct Taxes, only 3.81% of the total Indian population pay income taxes and it is suspected that enormous sums of money are tied up in illegal transactions that are unaccounted for. These illegal transactions not only form a parallel economy in the country but also distort the actual Indian economy. As a countermeasure, the Government of India hitherto referred to as GoI, enacted to demonetize (strip a currency of its legal status) its currency notes of 500 and 1000 denomination. These denominations accounted for 86% [2] of the total currency in circulation. This paper intends to highlight the effects of demonetization on the Indian agrarian economy.

Impact of Cash Crunch on Agriculture

Agriculture is primarily a cash based sector with large capital input. This sector contributes about 15% to the Indian GDP and employs about 49% of the total workforce. The real growth rate of the sector is reported to be 1.3% [3]. This low growth rate is usually attributed to the droughts experienced in the past two years.

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Budget Impact on Construction Sector

By Akshay Chaudhury

Challenges faced by the Industry:

  • Low-cost finance via FDI, ECB, and domestic banking assistance: Both the Centre and state must work together to remove bottlenecks for faster implementation of the reform measures in order to promote FDI in real estate. The ECB route should be opened for developers and FDI must be permitted in limited liability partnership (LLP) realty firms
  • A little clarity on land titles: Cross purchase shouldn’t suffer tax. So if the proceeds from the sale of commercial property are used to buy residential property or vice versa, capital gains tax shouldn’t apply. This exemption should be extended to cases where properties in both categories, residential and commercial, are from the proceeds of a single property.
  • The tedious process of getting project approvals: The red tape and time involved to approve real estate projects has caused the sector much grief. This issue can be addressed by a single-window clearance mechanism that will not only reduce the gestation period of projects but will also insulate them from cost escalations and delays in handing over possession.

Expectations from the Budget:

  • Industry status to the sector which contributes almost 15% to the Indian GDP
  • Clarity on GST and a raise in HRA deduction allowance
  • Single-window clearance mechanism which would ramp up supply and help rationalize prices and ensuring construction quality norms are not compromised
  • Clarity on entry and exit norms of FDI and reduce the lock-in period
  • Digitize all land records
  • Confidence-boosting measures to put more money in people’s hands in order to bring back the sales to pre-demonetisation levels

Budget Announcements:

  • 64,000 crore allocated for highways
  • A total allocation of Rs. 39,61,354 crore has been made for infrastructure
  • ‘Infrastructure’ status for Affordable housing aligned with the government’s agenda of ‘Housing for All by 2022’
  • PM Awas Yojana allocation raised from Rs. 15,000 crore to Rs. 23,000 crore
  • 27,000 crore on to be spent on PMGSY; 1 crore houses to be completed by 2017-18 for homeless
  • PM Kaushal Kendras will be extended to 600 districts; 100 international skill centers to be opened to help people get jobs abroad
  • National Housing Bank will refinance individual loans worth Rs 20,000 crore in 2017-18
  • Dispute resolution in infrastructure projects in PPP mode will be institutionalized
  • Trade Infrastructure Export Scheme to be launched in 2017-18; total allocation for infra at record Rs 3.96 lakh crore
  • Holding period for immovable assets reduced from 3 years to 2 years and indexation to be shifted from 1.4.1981 to 1.4.2001
  • Abolition of Foreign Investment Promotion Board (FIPB)
  • Dairy processing infrastructure fund to be set up

Trends after Announcements:

  • The BSE Realty index gained 4.7%, the highest among sectoral indices for the day.
  • Realty stocks such as Godrej Properties Ltd, Housing Development and Infrastructure Ltd and Prestige Estates Projects Ltd rose by around 6% on easier access to low-cost funds.
  • DLF rose by 6.7%, although it has little exposure to the affordable housing category.
  • Construction firms with a greater exposure to roads, such as IRB Infrastructure Developers Ltd, rose by 2.5%.
  • GMR Infrastructure Ltd gained due to the sops for roads and airports.
  • Larsen and Toubro Ltd gained as it is the largest player in infrastructure.

Conclusion:

Overall, it was a positive budget for the sector and the government has done well to create awareness for the need to increase tax compliance. Demonetisation was a temporary setback and the economy must bounce back. In particular, we look forward to the gains once GST is rolled out later this year.

Budget Series 2017-18 #7 Impact on IT Sector

By Anil Shankar & Divya Ramesh

The famous Greek scholar Heraclitus one said: “change is the only constant”. There was a perception that nothing can hinder the phenomenal growth of Indian IT sector. But for the past couple of years, that image has taken a dent due to various factors. In this article, we analyze major factors that have affected the Indian IT sector and the effects of the same.

BREXIT

The volatility in the British pound was one of the major points of concern which the IT sector had post BREXIT. Also, there is a lot of uncertainty regarding the structure of the financial and banking sector. One of the early victims of BREXIT was the deal between Infosys and RBS to float a new standalone bank called Williams and Glyn. The move to abandon this project forced Infosys to shift nearly 3000 of its employees to other projects. It also affected their bottom line and also had to reduce the revenue guidance subsequently. On the other hand, if structural changes are to be carried out on financial sectors, then this might actually result in more contracts.

TRUMP PRESIDENCY

The uncertainty revolving around the Trump presidency is one of the main factors which might have a detrimental effect on the Indian IT sector. More than 60% of the revenues that the IT industry generates comes from the US. Recently, a bill was introduced in the US House of Representatives which seeks to double the minimum wage of H1B visa holders to $130,000. If passed, the Indian IT companies would be forced to hire more Americans than Indians and thereby affecting their bottom line.

During the campaign, Trump made his intentions clear about the possible repeal of Obamacare. Since healthcare has been one of the areas which have been growing fast for the IT sector, implementation of such actions would have a negative impact. Also, Trump has plans to cut back on regulations and compliance related spending by Banking and Financial services sector. Since about 40% of the revenue is generated from these clients, lowering the regulations would have an adverse impact on the revenue generated.

BUDGET 2017

From the graph below, we can observe that 35% of the domestic revenue that the IT sector makes comes from government projects followed by the banking and financial sector. With the Budget 2017 containing schemes to digitalize India, the domestic IT sector would witness a lot of government opportunities knocking on its door. The Government’s motive to weed out corruption through digitalization has been shown in the Budget 2017 with a push to a digital economy. Budget 2017 has acted as a foundation for India to technologically transform and evolve into a digital economy.

picture1

Fig 1: Shows the contribution of various sectors to the domestic IT Revenue

The e-governance portal’s traffic has been on the rise from 2060 million transactions in 2013 to 4940 million transactions in 2016 which is a 140 % increase. TCS, Infosys, Mind-tree and few other players in this sector have been handling government projects like automation of immigration system by TCS, application development and maintenance of unique identification authority of India by Mindtree and implementation of GSTN by Infosys which is crucial for the implementation of GST which was also a highlight of the Union Budget 2017. The programs like:

  1. BHIM app promotional schemes
  2. Aadhaar pay app for cashless transactions
  3. Political parties entitled to receive donations through digital mode
  4. Aadhaar based smart cards to monitor health for senior citizens
  5. High-speed internet for gram panchayats

have provided a platform full of government IT projects.

AUTOMATION

There has been a big emphasis on automation by the IT industry in the recent past. The idea is to improve efficiency and productivity of firms. Automation can lead to a smaller workforce and more revenues. Although there is a point of debate as to whether this move is good for the economy in the entirety, big companies are going all out to automate their products. Some companies build their own products to realize this goal while others take the route of inorganic expansion to acquire these capabilities. For example, Infosys acquired US based automation technology company Panaya to bring about automation in several of Infosys’s service lines. Automation, hence, would play a big role in the IT companies profitability in the coming future.