Post on 19-Jul-2020
Editorial
Season’s Greetings!
In this edition we have Mr. Shantanu Mitra – MD & CEO, Fullerton India, articulating
his thoughts on NBFCs. He presents his views on how NBFCs are fueling economic
growth. We thank Mr. Mitra for his contribution to the newsletter.
For this month, APAS column has focused on monetary policy framework globally. It
talks about the Indian monetary policy and its transformation and the adaption of CPI
from WPI.
The economic indicators showed mixed performance. Manufacturing PMI dipped from
50.3 in November to 49.1 in December. India's core sector rose by 0.9% in December.
India's Index of Industrial Production (IIP) for the month of November has contracted
3.2% versus 9.8% growth in October. PMI services and composite PMI were
respectively at 53.6% and 51.6% from 50.1% and 50.2% in the previous month. Inflation
rose to 5.61% in December from 5.41% in November. Deflationary trend eased in
December with WPI inflation moving up to (-) 0.73% from (-) 1.99% in November.
The Reserve Bank of India announced sixth bi-monthly monetary policy statement,
2015-16. It released the amended circular on Gold Monetization Scheme. It also
released a circular on IFSC Banking Units (IBU’s) – Permissible activities. This newsletter
also presents a roadmap drawn by the government of India for implementation of
Indian accounting standards merged with International financial reporting standards.
This newsletter covers the 15th issue of MFIN Micrometer. It provides an overview of
the Indian microfinance industry, as on 30th September, 2015.
IRDAI released an exposure draft capping rewards for Individual insurance agents.
On the infrastructure front we have, the approval for Highway Annuity Model (HAM)
by the cabinet for implementing highway projects. Prime Minister Mr. Narendra Modi
with the president of France Mr. Francois Hollande laid the foundation of International
Solar Alliance (ISA).
In the capital markets, there was an announcement from the regulator on the buyback
of IIB’s linked to WPI.
We hope that this newsletter is insightful and welcome your inputs and thoughts and
encourage you to share them with us.
Ashvin Parekh
Table of Contents
Guest Column
Mr. Shantanu Mitra – MD & CEO –
Fullerton India
NBFCs fueling economic growth in
India
APAS Team
Fundamentals of Monetary Policy Framework
Economy
IIP update – November
Inflation update - December
PMI update – December
Core Sector update – December
Banking Sector
Sixth Bi-monthly Monetary Policy
Statement, 2015-16
Gold Monetisation Scheme 2015,
Amended
Setting up of IFSC Banking units –
Permissible activities
Roadmap drawn for
implementation of Indian
Accounting Standards
Microfinance
Micrometer – Issue 15
Insurance
IRDAI capping rewards for agents,
intermediaries.
Infrastructure
Hybrid Annuity Model for
implementing highway projects
International Solar Alliance
Capital Markets
Announcement of buyback if IIPs
linked to WPI
Capital Market Snapshot
Economic Data Snapshot
Draft regulations for Foreign Re-Insurers
GI Industry – Statistics
Ashvin Parekh – Managing Partner, APAS
Providing inclusive financial services, and stimulating
economic growth across the vast geography that is
India has been a long-standing priority and a
challenge. The hinterland of India comprises over
650,000 villages, is inhabited by over 850 million
potential consumers, and contributes to about half of
India’s GDP – a segment that has grown at a
compounded rate of 6.2% since 2000.
However, this segment remains substantially under-
penetrated, with the only 7.8 bank branches per
100,000 persons in rural and semi-urban areas,
against 18.7 bank branches in urban and metropolitan
areas. The Reserve Bank of India (“RBI”) has
undertaken a variety of initiatives – through the
introduction of Business Facilitators and Business
Correspondents, the launch of ‘no frill’ Basic Saving
Bank Deposit accounts, deregulation in the opening of
ATMs and allocation of rural bank licenses – to
develop banking in these areas. Even so, these
initiatives have primarily served to bring deposits and
savings into the formal banking system; provision of
credit and financing business and consumption needs
of the growing rural and semi-urban segments
remains marginal, with over 61% of households
sourcing cash loans from informal non-institutional
agencies.
It is here that the Non-Bank Finance Companies
(“NBFCs”) play an important role. NBFCs are vital
financial intermediaries and have driven the last mile
transmission of credit to sectors that have not had
meaningful access to formal banking credit. Over the
last few decades, they have developed and supported
vital infrastructural requirements driving economic
growth – especially in areas of transportation
(commercial vehicle and auto finance), rural industry
(tractors, commodities, small equipment) and rural
small-sector finance. Additionally, in the urban sector,
they have provided valuable credit to the small-scale
industry, and middle-class consumption financing.
A low-cost distribution infrastructure, ability to
provide credit through a deep understanding of the
market and the ability to deliver innovative solutions
has meant that this has both fuelled the economy and
Mr. Shantanu Mitra, Managing Director & CEO – Fullerton India
has helped provide profitable employment within the
industry.
The quality of the NBFC industry, too, has improved
substantially. Increased regulatory controls, tighter
accounting, provisioning, liquidity and capital
adequacy standards, a consolidation of the market
and an increasing presence of institutional investors
in major NBFCs has helped increase NBFCs’ financial
strength and stability, and today, the industry
represents a credible financing alternative.
The operating models in the industry are changing –
credit is delivered through a mix of traditional
underwriting policies and an intelligent use of
analytics based out of experience in providing credit
and observation of behaviours across credit cycles.
Technology is a key secondary differentiator – most of
the players operate to a fully networked backbone,
with mobility solutions across distribution and
collections channels, and a choice of platforms
(internet, mobile, voice, physical) for customers to
interact and find solutions to their financing and
servicing needs – this has both improved the quality
of the customer experience and driven down the cost
of delivery.
But above all, this is a people business. The success of
a company depends on the quality of its talent, the
culture and the environment. The truly differentiated
players operate with a strong mix of business, process
and risk professionals hired from foreign and
domestic banks and leading finance industry players
driving the business. Institutions that operating in a
culture that underpins integrity, meritocracy,
teamwork, process discipline and regulatory
compliance attract and retain better talent that helps
them leverage emerging opportunities.
The market is undergoing tectonic change –
digitization and disintermediation is gathering
momentum; financial technology solutions (FinTech)
is disrupting the financial ecosystem and newer
technologies such as BlockChain present both risks
and opportunities.
It is in riding these opportunities that progressive
NBFCs will need increasingly focus on – NBFCs have
the unique financial intelligence and insights that the
disrupters lack; adoption of these new technologies,
newer partnerships and leveraging mutual strengths
are opportunities that can further enhance the reach
and relevance of NBFCs, and more importantly
provide cheaper, higher quality solutions to
customers. These are exciting times for the industry,
and we are excited by the opportunities that the
market and the emerging trends have to offer us.
In the global context, slowdown of major economies,
weakening of China, plunge in manufacturing activity
coupled with a steep fall in commodity prices are
everyday news, and the situation is here to stay for
quite some time. Amidst this turmoil, India has been
the ray of hope with its sustained growth. To
capitalize this trend, RBI has maintained that an
effective monetary policy is vital to economic
performance, among other things.
Price stability refers to avoidance of prolonged
inflation and deflation and it has been foremost
priority for central banks of major economies in their
monetary policy. There have been claims that a loose
monetary policy was one of the main factors leading
to the debacle of 2008 crisis. Even though, this is
debatable, it cannot be ruled out. Post crisis, there has
been a renewed effort by central banks with the
support of multilateral agencies in bringing more
focus to monetary policy.
The monetary policy strategies utilize nominal anchor
to achieve its objectives, broadly there are three types
of nominal anchors 1) exchange rate 2) monetary
aggregates 3) inflation. Exchange rate is considered
the oldest form of nominal anchor, over the years it
has lost its sheen due to the exposure of economy to
external shocks and its vulnerability to speculative
attacks. Monetary aggregates, referring to the total
value of money supply within an economy, as an
anchor, has also been burdened with instability and
the unpredictability of the demand for money.
Inflation as an anchor has been successful, with strong
empirical and theoretical proof that low and stable
inflation is a suitable condition for economic growth.
Since 1980s, central banks of several countries have
adopted inflation as its nominal anchor. Inflation’s
qualities of having as domestic orientation and being
easily understood by the larger public, makes it stand
apart even though it is believed to limit the ability to
respond to financial crisis and potential instability due
to supply side shocks.
Adoption of inflation targeting has helped economies
move towards their goal of transparency. The benefits
of inflation targeting are that with a set objective the
central banks have more clarity and policies
implemented are in line with the targets. Second,
there is more discipline in achieving those targets and
scope for evaluation by other agencies and general
public. It has been considered more of a rule based
approach compared to other discretionary policies
and rules out decision made on individualistic beliefs.
India’s monetary policy
The Indian monetary policy has been transforming. It
has undergone three major changes over the past.
Prior to 1980s, the Indian economy was virtually
closed and was driven by subsidies and governmental
control. At that time ‘exchange rate’ was set as the
nominal anchor. The formal change to ‘monetary
targeting with feedback’ came in 1985 based on the
recommendations of the Chakravarty Committee. In
this approach, broad money became the intermediate
target and reserve money the main operating
instrument. During this period targets were rarely
met and the major drawbacks were the absence of
control of RBI’s credit to the government, which
accounted for the bulk of reserve money creation.
Structural changes and the liberalization in the 1990s
led to a shift in financing patterns in India. Interest
and exchange rates were increasingly market
determined, and the RBI could move away from direct
to indirect market based instruments leading to the
adoption of the ‘multiple indicator’ approach on 1st
April 1998. Factors considered under this approach
were money, credit, output, trade, capital flows, fiscal
position, rates of return in different markets, inflation
and exchange rate. Inflation was calculated using
Whole sale price index (WPI). The constituents of WPI
are categorized into three groups; Primary articles
20.12% (mostly food articles), Fuel &Power 14.91%
and manufactured products 64.97% - Metals & Alloys,
Food products, Machinery & tools etc.
This approach worked well from 1999 to 2009, as
reflected in an average GDP growth rate of 7.1%
associated with average inflation of about 5.5% in
terms of both the CPI & WPI.
Precedence was given to WPI over CPI due to multiple
reasons. First, at that point CPI was measured for four
different classes: CPI – Industrial workers, Agricultural
laborers, Urban non manual employee and Rural
laborers and then aggregated, while WPI is computed
on an all-India basis. Secondly, WPI was available with
a shorter lag than the CPIs. Third, WPI had a broader
coverage than the CPIs in terms of the number of
commodities, quotations, inclusion of non -
agricultural products etc.
But, in recent years high inflation and weakened
growth came to co-exist and use of multiple indicators
is highly criticized as it leaves ambiguity on what the
RBI accounts while taking policy decisions.
Ministry of Statistics and Programme Implementation
(MOSPI) in 2012 revised CPI and is now calculated in
terms of three parameters:
CPI for the entire urban population viz CPI
(Urban);
CPI for the entire rural population viz CPI
(Rural)
CPI Combined (CPI-C) for Urban + Rural will
also be compiled based on above two CPIs
The primary constituents of CPI are Food &
Beverages 45.86%, Housing 10.07%, Fuel &
Power 6.84%, Pan, tobacco &intoxicants
2.38%, Clothing & Footwear 6.53%,
Miscellaneous 28.32%.
In light of the drawbacks of multifactor approach and
recommendation from the Urjit Patel Committee
report, the use of inflation targeting was examined.
Officially on 1st April, 2014 the RBI adopted Inflation
targeting as its key strategy in monetary policy using
CPI-C as the metric.
Almost all central banks in advanced and emerging
economies use CPI as their primary price indicators.
The widespread use of CPI as the major price
indicators reflects its advantages – it is familiar to
large segments of the population and often used in
both public & private sector as a reference in the
provision of government benefits or in wage contracts
and negotiations.
The true inflation that consumers face is in the retail
market, price indices that relate to the consumer
expenditure are the close indicators of cost of living
which is communicated by the CPI. Importantly, CPI
includes cost of services, which accounts for more
than 60% of India’s GDP which WPI does not. Food
products also play an important role in CPI. The lag in
the data release of the CPI-Combined is only 12 days
as against one month for CPI-IW.
Over the years, RBI tried to adopt approaches that
best reflect price movements and have embraced
predictable policy framework that is rule based while
leaving room for some discretion in practice.
-APAS
IIP (Index of Industrial Production) – November
India's Index of Industrial Production (IIP) for the
month of November has contracted 3.2 percent versus
9.8 percent growth in October. It represents a four-
year low.
The core production and investment indicators too
have fallen sharply in November. The manufacturing
sector posted a contraction of 4.4 per cent in
November as against a growth of 10.6 per cent in
October. This decline has reflected in other segments
such as electricity (fell from 9 per cent to 0.7 per cent)
and mining (fell from 5.2 per cent to 2.3 per cent).
Within manufacturing, consumer non-durables is to be
blamed, which has fallen by 4.7 percent. But consumer
goods as a whole has seen 1.3 percent growth on the
back of durables doing well. Consumer durables has
clocked a 12.5 percent growth. Capital goods too has
done badly, contracting 25 percent.
Some of the important items showing high positive
growth during the current month over the same month
in previous year include Gems and Jewellery, Sugar
Machinery, PVC Pipes, Lubricating oil, wood furniture,
Transformers (small), Polypropylene (including co-
polymer) and Sugar.
Some of the other important items showing high
negative growth are: Cable, Rubber Insulated, Heat
Exchangers, Polythene Bags including HDPE & LDPE
Bags, Tractors (complete), Conductor, Aluminium, Rice
and Three-Wheelers (including passenger & goods
carrier.
4.2
6.4
3.6
9.8
-3.2
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15
IIP (%YoY)
Quarterly evaluation of IIP
3.83
1.13
0.43
3.233.53
4.73
Q1 14-15 Q2 14-15 Q3 14-15 Q4 15-16 Q1 15-16 Q2 15-16
IIP
%
Quarter
IIP Trend Mining activity recovered during 2014-15 from a
three-year slump, buoyed by a sharp increase in
the production of coal. Weakness in consumer
spending, sluggish investment activity and poor
external demand operated as drags on
manufacturing activity during 2014-15.
During April- June 2015, however, the growth in
IIP decelerated mainly on account of a sluggish
performance in capital goods, electricity and
food products.
IIP has experienced a downfall from 3.83% to
0.43% in Q1 to Q3 (14-15) respectively. Further
IIP rose to the level of 4.73% in 2015-16.
Consumer Price Index - December
CPI inflation rose for a fifth straight month high to
5.61 percent in December from 5.41 percent in
November.
The corresponding provisional inflation rate for rural
area was 6.32% and urban area 4.73% in December
2015 as against 5.95% and 4.71% in November 2015.
The core CPI inflation rose to 4.5% in December 2015
from 4.2% in November 2015.
Among the CPI components, inflation of food and
beverages increased to 6.3% in December 2015 from
6.1% in November 2015 contributing to the rise in CPI
inflation. Within the food items, the inflation moved
up for vegetables to 4.6%, pulses & products 45.9%,
cereals & products 2.1%, spices 10.8%, meat & fish
6.6% and oils & fats 7.1%. On the other hand, inflation
of fruits eased to 0.6% in December 2015.
The inflation for housing increased to 5.1%, while that
for miscellaneous items moved up to 4% in December
2015. Within the miscellaneous items, the inflation
for transport & communication rose to 1.3%, while
eased for personal care to 3.6% and education to 5.6%
in December 2015.
The inflation for clothing and footwear declined to
5.7% in December 2015, while the CPI inflation of fuel
and light rose to 5.4% in December 2015.
0
1
2
3
4
5
6
Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
CPI (%, YoY)
Quarterly evaluation of CPI
CPI moderated significantly since the second
quarter of 2014-15. It declined to an all-time low
of 5% in Q3 of 2014-15 after having remained
stubbornly sticky at around 9-10% for the last two
years.
During the third quarter of 2014-15, the CPI food
inflation declined considerably due to seasonal
softening of food and vegetable prices after the
late arrival of monsoon exerted some pressure on
vegetable prices during June-August, 2014. CPI
inflation in the fuel and light group registered a
consistent decline during 2014-15, touching 3.4%
in the third quarter following the sharp decline in
International Crude Oil prices.
CPI rose in December 2015, reaching the highest
since September 2014, in line with market
expectations.
India’s CPI continues to be relatively high and
“sticky”, despite the sharp fall in commodity
prices globally, especially crude oil.
8.117.38
4.97 5.22 5.09
3.95
5.34
Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16
CP
I %
Quarter
CPI Trend
WPI (Wholesale Price Index) – December
The country's wholesale price inflation fell for the
14th consecutive month in December.
Data released by the commerce and industry ministry
showed inflation, as measured by the wholesale price
index, declined an annual 0.73% in December
compared to a dip of 1.99% for the previous month
and a contraction of 0.50% during the corresponding
month of the previous year. The fuel and power fell
9.2% year-on-year in December reflecting the sharp
decline in global crude oil prices. But the increase in
food inflation stood out.
In December food inflation rose an annual 8.2%, rising
from November's 5.2% largely driven by a sharp spike
in price of pulses which rose 55.6% year-on-year in
last month. Prices of vegetables also firmed up rising
an annual 20.6% during the month, while onion prices
shot up an annual 26%. Potato prices fell nearly 35%
year-on-year during December.
The government also revised the October
WPI inflation upwards to -3.7 per cent from -3.81 per
cent due to revisions in prices of fish, onions and
crude. The declining deflation in wholesale prices is
consistent with the rise in retail inflation.
Quarterly evaluation of WPI
WPI has started showing a declining trend
during the year 2014-15 (April-December).
During the first quarter of 2014-15, WPI
inflation stood at 5.8% as mainly food and
fuel prices were high. In the second and
third quarters of 2014-15, WPI inflation
declined to 3.8% and 0.5% respectively.
Average WPI inflation declined to 3.4% in
2014-15. The WPI inflation even breached
the psychological level of 0% in November,
2014 and January, 2015. The decline was
majorly caused by lower food and fuel
prices.
However in 2015-16, WPI has been in
negative zone for all three quarters ending
December 2015.
Softening in oil prices is considered as the
cause for WPI to further go down in
December 2015 (i.e. -0.73%).
-6
-5
-4
-3
-2
-1
0
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15
WPI (%YOY,2015-16)
5.62
3.77
0.53-1.59 -2.47
-4.51
-2.18
Q1 14-15 Q2 14-15 Q3 14-15 Q4 14-15 Q1 15-16 Q2 15-16 Q3 15-16
WP
I %
Quarter
WPI Trend
PMI update
Service PMI – December
Rising from November’s five-month low of 50.2 to
51.6 in December, the seasonally adjusted Nikkei
India Composite PMI Output Index was indicative of a
rebound in growth of private sector activity. Whereas
manufacturing production decreased for the first time
since October 2013, services activity increased at an
accelerated pace.
The seasonally adjusted Nikkei Services Business
Activity Index climbed to a ten-month high of 53.6 in
December (November: 50.1). This indicated of a solid
expansion in output across the sector. Sub-sector
data indicated that output rose in four of the six broad
areas of the service economy, the exceptions being
Hotels & Restaurants and Transport & Storage. The
best performing categories in December were ‘Other
Services’ and Financial Intermediation.
Leading services activity to increase was a solid rise in
incoming new work, one that was faster than that
seen in November. Anecdotal evidence highlighted
strengthening demand conditions. Conversely,
manufacturing order books decreased, with panellists
indicating that demand had been suppressed by the
Chennai floods. Across the private sector as a whole,
new business inflows expanded at a faster pace that
was, however, modest.
After hiring workers in the previous month, service
companies left payroll numbers unchanged in
December. Evidence suggested an increasing degree
of cost consciousness. In contrast, goods producers
took on additional staff, although the rate of job
creation was only marginal. At the composite level,
staffing levels were broadly unchanged.
Half yearly evaluation of Service PMI
A stronger rise in new business and an
improvement in year-ahead expectations at
service providers are positive developments, but
the overall health of the economy remains fragile
amid a weak manufacturing sector.
Services PMI in India averaged 51.44 Index Points
from 2012 until 2015, reaching an all-time high of
57.50 Index Points in January of 2013 and a
record low of 44.60 Index Points in September of
2013.
While manufacturing production dropped at
solid pace, India’s services activity growth
quickened in December. Overall, it continues to
portray a struggling economy, weighed down by
weak underlying demand. Firm’s reluctance to
hire was evident throughout 2015, with
meaningful job creation last recorded in 2013.
Source: www.tradingeconomics.com
Manufacturing PMI - December
Indian manufacturers saw business conditions
deteriorate at the end of 2015. December’s incessant
rainfall in Chennai impacted heavily on the sector,
with falling new work leading companies to scale back
output at the sharpest pace since February 2009.
Inflation rates of both input costs and output charges
were at seven month highs.
The seasonally adjusted Nikkei India Manufacturing
Purchasing Managers’ Index dipped from 50.3 in
November to 49.1 in December. This pointed to a
deterioration in operating conditions across the
sector, with the PMI posting below the no-change
level of 50.0 for the first time since October 2013.
Consumer goods was the only category to see
improving business conditions in December as
production and new orders rose. Conversely,
incoming new work and output fell in both the
intermediate and investment goods market groups.
Having risen for 25 straight months, total
manufacturing production in India fell during
December. Furthermore, the rate of contraction was
the sharpest in almost seven years. Also, panellists
linked the decline in output to falling new orders and
the Chennai floods.
Ending a 25-month sequence of growth, incoming
new work decreased in December. New business from
abroad increased in December. Despite being
modest, the rate of expansion was the quickest since
August. The weaker rupee led to improved pricing
power in external markets.
Half yearly evaluation of Manufacturing PMI
Manufacturing PMI contracted for the first
time since October 2013, as incessant rainfall
in Chennai impacted heavily on the sector.
Meanwhile, falling new work prompted
companies to scale back output at the
sharpest pace since February 2009. On the
price front, inflation rates of both input costs
and output charges were at seven month
highs.
Manufacturing PMI in India averaged 51.96
from 2012 until 2015, reaching an all-time
high of 55 in June of 2012 and a record low of
48.50 in August of 2013.
PMI has slipped below the crucial level of 50.0
for the first time since October 2013. The rate
of decline was the sharpest in almost seven
years.
Source: www.tradingeconomics.com
Core Sector Growth – December
The combined output of eight crucial infrastructure
sectors rose by a slight 0.9% in December after
contracting 1.3% in the month before. This was the
first time in seven months or only the second time in
FY16 that it had fallen after maintaining steady
growth at 3.2% in the two months before
Data released by the ministry of commerce & industry
showed the eight core industries — coal, crude oil,
natural gas, refinery products, fertilizers, steel,
cement and electricity — grew a cumulative 1.9% in
the months up to December in the current financial
year against 5.7% in the corresponding period of the
previous year.
The December figures of the core sector were pulled
down by the continued and accelerating decline in
crude oil, natural gas which went down 4.1 and 6.1
per cent, respectively. However, coal production and
electricity generation both recovered significantly to
manage a slight uptick in overall figures. It went up by
6.1% and 2.7% respectively. Refinery products,
fertilizers and cement increased by 2.1%, 13.1% and
3.2% respectively. Steel production declined by 4.4%
in December 2015.
Monthly evaluation of Core Sector
The growth rate of the core sector for 2014-
15 was a mere 3.5%, even lower than the
4.2% growth notched up in the previous
year.
There has been a continuous slide in core
sector growth from 6.7% in November 2014
to 2.4% in December, 1.8% in January, 1.4%
in February and to a negative 0.1% in
March. It continued to remain in a negative
zone in April.
However, it continued to expand for six
months, before it contracted in Nov 2015 to
a negative 1.3% mainly driven by a decline in
steel production. During April-December
2015 period this fiscal, the output of these
eight sectors slowed to a 1.9% growth from
5.7% growth in the same period last fiscal.
1.831.45
-0.09 -0.42
4.4
3
1.1
2.63.2 3.2
-1.3
0.9
Co
re s
ect
or
dat
a %
Month
Core sector Trend - Monthwise
Sixth Bi-Monthly Monetary Policy Statement for the year 2015-16
The Reserve Bank of India announced Sixth Bi-
monthly Monetary Policy Statement, 2015-16 on 2nd
February, 2016. On the basis of an assessment of the
current and evolving macroeconomic situation, RBI
has decided to:
keep the policy repo rate under the liquidity
adjustment facility (LAF) unchanged at
6.75%;
keep the cash reserve ratio (CRR) of
scheduled banks unchanged at 4.0% of net
demand and time liability (NDTL);
continue to provide liquidity under overnight
repos at 0.25% of bank-wise NDTL at the LAF
repo rate and liquidity under 14-day term
repos as well as longer term repos of up to
0.75% of NDTL of the banking system through
auctions; and
continue with daily variable rate repos and
reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF
will remain unchanged at 5.75%, and the marginal
standing facility (MSF) rate and the Bank Rate at
7.75%.
Assessment (Highlights) of RBI
Since the fifth bi-monthly statement of
December 2015, global growth has slowed.
Activities in major emerging market
economies (EMEs) has weakened. World
trade has remained subdued. Manufacturing
activity is sluggish, however, reflecting
retrenchment in oil and gas drilling activity
and declining exports. EME commodity
exporters confront recessionary conditions,
falling currencies and sluggish exports.
Capital outflows from China triggered sell-
offs across AEs and EMEs, exacerbating
currency declines and heightening volatility.
Crude oil prices fell below US $ 30 per barrel
– a 12-year low –on expectations of Iran
which added to the supply glut.
On the domestic front, economic activity lost
momentum in Q3 of 2015-16, pulled down by
slackening agricultural and industrial
growth. Rural incomes will continue to be
supported by allied activities such as dairy
and horticulture, which now contribute as
much to GDP as food grains. However, in the
first two months of Q3 of 2015-16, industrial
activity slowed in relation to the preceding
quarter. This reflects weak investment
demand with the deceleration of capital
goods production. Due to low capacity
utilization, there has been a decline in new
investment intentions.
The Reserve Bank’s industrial outlook survey
suggests a modest expansion of activity likely
in Q4.
Lead indicators of the service sector are
mixed. Construction activity is still tepid, as
evidenced by weak growth in cement
production. The pick-up in road construction
bodes well for future activity. Railway freight
growth is still weak, though it may reflect
lower transport needs for inputs like coal,
and competition from roadways.
Liquidity conditions have tightened in the
second half of December with advance tax
outflows. It spilled over to January 2016 with
the back of seasonal pickup in demand for
currency, restrained spending by the
government and a pick-up in bank credit
growth, in relation to deposit
mobilization. To mitigate these, RBI injected
liquidity through variable rate term repos of
varying tenors ranging from overnight to 56
days, besides provision through the regular
liquidity windows.
The average daily liquidity injection
(including variable rate overnight and term
repos) increased from ₹ 1,200 billion in
December to about ₹ 1,345 billion in January.
In addition, the Reserve Bank also injected ₹
200 billion through open market purchase
operations on December 7 and January 20. In
response, money market rates remained
close to the policy rate with a marginal
downside bias. Bank credit in the form of
personal loans and non-bank flows from both
domestic and foreign sources grew strongly.
India’s exports remained in contraction
mode for the thirteenth successive month in
December. In volume terms too, the rate of
decline appears to be moderating.
The trade deficit widened during December
in relation to preceding months, though the
overall current account deficit is likely to
remain well contained and easily financed.
Net foreign direct investment (FDI) and non-
resident deposits have remained robust in
relation to last year. The persisting decline in
oil prices may, however, impact the flow of
remittances from the Gulf region where fiscal
positions are deteriorating rapidly. Portfolio
investment also recorded some outflows
since November. Nevertheless, as on January
22, 2016, foreign exchange reserves stood at
US$ 347.6 billion – an accretion of US$ 5.9
billion during the current financial year so far.
Structural reforms in the forthcoming Union
Budget that boost growth while controlling
spending will create more space for
monetary policy to support growth, while
also ensuring that inflation remains on the
projected path of 5% by the end of 2016-17.
Gold Monetization Scheme, 2015 (Amended)
Under section 35A of the Banking Regulation Act,
1949, the Reserve Bank of India directed that the
Reserve Bank of India (Gold Monetisation Scheme,
2015) to be modified.
The Amended circular on Gold Monetisation Scheme,
2015, details the modifications including the
following - In order to make Gold Monetisation
Scheme more customer-friendly the depositors will
be able to withdraw medium-term (5-7 year) and
long-term government deposits (12-15 years) pre-
maturely after the minimum lock-in period, though
with a penalty. The rate of interest on the deposits
will be decided by government and notified by the
RBI from time to time. The current rate of interest as
notified by the government on medium term deposit
s 2.25% per annum and on long term deposit is 2.50%
per annum. However, there will be penalty on
premature withdrawal.
Further in the case of large tenders of gold, the RBI
said the metal can be deposited directly with refiners
wherever they have the assaying capacity. The
government will pay the participating banks a total
commission of 2.5% (1.5% handling charges and 1%
commission) in the first year.
The RBI further said the principal and interest on
Short Term Bank Deposit (STBD) would be
denominated in gold. In the case of Medium and Long
Term Government Deposit (MLTGD), the principal
will be denominated in gold.
Resident Indians (Individuals, HUFs, Proprietorship &
Partnership firms, Trusts including Mutual
Funds/Exchange Traded Funds registered under SEBI
(Mutual Fund) Regulations and Companies) can make
deposits under the Gold Monetisation Scheme.
Joint deposits of two or more eligible depositors are
also allowed under the scheme and the deposit in
such case would be credited to the joint deposit
account opened in the name of such depositors. All
deposits under the scheme would be made at the
Collection and Purity Testing Centre (CPTC).
The government will notify the list of BIS certified
CPTC / refiners under the Scheme and would be
communicated to the banks through Indian Banks’
Association (IBA).
Setting up of IFSC Banking units – Permissible Activities
The Reserve Bank of India had issued a Circular dated
1st April, 2015, regarding setting up of IFSC Banking
Units (IBUs).
Further based on the feedback and requests received
from various stakeholders, certain provisions of the
directions have been reviewed and are modified -
Setting up of IFSC Banking Units (IBUs) – Permissible
activities.
RBI has allowed local banking units to open foreign
currency current accounts for companies and non-
resident Indians (NRIs) in the Gujarat based
international financial services centre (IFSC),
changing an earlier policy that did not allow for
any savings or current accounts in this centre.
However, these banking units will not be able to raise
deposits from retail customers like high net worth
individuals (HNIs).
RBI has also done away with the limit for raising
short-term liabilities for banks. However, these units
will have to maintain a liquidity coverage ratio (LCR)
on par with onshore banks. Liquidity coverage ratio is
the percentage of liquid assets a bank should hold in
order to meet its short-term obligations.
Also, with a view to providing greater flexibility to the
IBUs in their business transactions, it has been
decided that exposure ceiling for IBUs shall be 5% of
the parent bank’s Tier-I capital in case of a single
borrower and 10% of parent bank’s Tier-1 capital in
the case of a borrower group.
Roadmap drawn-up for implementation of Indian Accounting Standards (Ind AS) converged with
International Financial Reporting Standards (IFRS)
The government issued the roadmap for the
implementation of the Indian Accounting
Standards (Ind-AS) for commercial banks, non-
banking financial companies (NBFC) and insurance
companies. The Ind AS would be applicable to both
consolidated and individual financial statements.
Regional rural banks and urban cooperative banks
wouldn't need to implement these standards at
present. Scheduled commercial banks, all-India term-
lending refinancing institutions (such as Exim Bank,
NABARD,NHB and SIDBI) and insurance companies
would be required to prepare Ind-AS based financial
statements for accounting periods beginning from
April 1, 2018 onwards. Similarly, the holding,
subsidiary, joint venture or associate companies of
the commercial banks would also be required to
prepare Ind-AS based financial statements from the
financial year 2018-19.
NBFCs, having net worth of Rs. 500 crores or more,
would also need to need to prepare such financial
statements from 2018-19. Just like commercial
banks, the holding, subsidiary, joint venture or
associate companies of NBFCs would also be applying
these accounting norms from 2018-19. Listed NBFCs
and the ones which are in the process of listing in
India or outside India, would need to prepare Ind-AS
compliant financial statements from 2019-20. Here
too, the Ind AS would be applicable to both
consolidated and individual financial statements.
Unlisted NBFCs, which have a net worth between Rs
250 crores and Rs. 500 crores, would need to apply
Ind-AS from 2019-20. NBFCs, commercial banks and
insurance companies would not have the choice of
voluntarily preparing the Ind-AS compliant financial
statements.
This is the fifteenth issue of the Micrometer. It
provides an overview of the Indian Microfinance
Industry, as of 30th Sep, 2015 and a comparative
analysis with the corresponding quarter of previous
fiscal year (Q2 FY 14-15) and previous quarter (Q1 FY
15-16).
Key highlights include:
As of 30th Sep 2015, MFIs provided
microcredit to over 2.63 Cr clients, an
increase of 28% over Q2 FY 14-15
The aggregate gross loan portfolio (GLP) of
MFIs stood at Rs. 36,660 Cr (excluding non-
performing portfolio i.e. PAR > 180 days in
Andhra Pradesh). This represents a Y-O-Y
growth of 76% over Q2 FY 14-15 and an
increase of 16% over the last quarter
Disbursements (loan amount) in Q2 FY 15-16
increased by 66% compared to Q2 FY 14-15
Total number of loans disbursed by MFIs
grew by 44% in Q2 FY 15-16 compared with
Q2 FY 14-15
Portfolio at Risk (PAR) figures remained
under 1% for Q2 FY 15-16
Average loan amount disbursed per account
is now Rs. 16,738 The figure for Q2 FY 14-15
was 14,590
MFIs now cover 30 states/union territories
In terms of regional distribution (for GLP),
south is 36%, east at 15%, north at 24% and
west at 25%
Productivity ratios for MFIs continued to
move upwards. Average GLP per branch is
now at Rs. 4.25 Cr, up by 51% over Q2 FY 14-
15 and average GLP per loan officer is now
Rs. 81 Lakhs, 36% more from the last year i.e.
Q2 FY 14-15
Insurance (credit life) to over 2.33 Cr clients
with sum insured of Rs. 38,970 Cr was
extended through MFI network
Pension accounts were extended to over 16
Lakhs clients through MFI network
Capping rewards for agents, brokers and other intermediaries
Insurance regulator IRDAI issued an Exposure draft
capping the reward for individual insurance agents at
20 percent of first year commission and 40 percent
for intermediaries in an effort to provide level-playing
field across segments. The reward for individual
agents is over and above their commission or
remuneration.
As per the media reports, around 20 lakh insurance
agents and 10,000 insurance intermediaries working
for 24 life insurance companies are likely to be
affected by this regulation. Insurance intermediaries
include corporate agents, insurance brokers, web
aggregators, insurance marketing firms or any other
entity as may be recognized by IRDAI.
Corporate agents, brokers and other insurance
intermediaries are likely to get much higher rewards
than individual agents. Justifying higher rewards for
insurance intermediaries compared to insurance
agents, the draft said the former has higher
establishment costs and compliance requirements.
These regulations will be effective from 1st April,
2016. Every insurer shall have a Board approved
policy for payment of commission or remuneration to
insurance agents and insurance intermediary.
Hybrid Annuity model for implementing highway projects
The cabinet committee on Economic Affairs, chaired
by Prime Minister Narendra Modi, has given its
approval for the Hybrid Annuity Model (HAM) as one
of the modes of delivery for implementing the
Highway Projects.
The main object of the approval is to revive highway
projects in the country by making one more mode of
delivery of highway projects.
The HAM is a mix of engineering, procurement and
construction (EPC) and build-operate-transfer (BOT)
formats, with the government and the private
companies sharing the total project cost in the ratio
of 40:60 respectively.
By adopting the Model as the mode of delivery, all
major stakeholders in the PPP arrangement - the
Authority, lender and the developer, concessionaire
would have an increased comfort level resulting in
revival of the sector through renewed interest of
private developers/investors in highway projects and
this will bring relief thereby to citizens / travelers in
the area of a respective project.
It will mainly facilitate uplifting the socio-economic
condition of the entire nation due to increased
connectivity.
The need for improved road connectivity was a
continuing imperative, the Ministry of Road
Transport & Highways (MoRTH) including its
implementing agencies like the National Highways
Authority of India (NHAI) had to increasingly resort to
the public funded Engineering, Procurement and
Construction. Restriction of the financial resources
available with the government is an inherent
limitation in implementing projects on EPC model.
An important feature of the Hybrid Annuity Model for
highways development is the rational approach
adopted for allocation of risks between the PPP
partners - the Government and the private partner
i.e. the developer/investor. While the private partner
continues to bear the construction and maintenance
risks as in BOT (Toll) projects, it is required only to
partly bear financing risk. Further, the developer is
insulated from revenue/traffic risk and the inflation
risk, which are not within its control.
International Solar Alliance The Prime Minister of India Shri Narendra Modi, and
the President of France Mr. Francois Hollande, jointly
laid the foundation stone of the International Solar
Alliance (ISA) Headquarters and inaugurated the
interim Secretariat of the ISA in National Institute of
Solar Energy (NISE), Gwalpahari,
Gurgaon. International Solar Alliance is the India’s
“gift” to the world.
ISA will be India’s first international and inter-
governmental organization. It will be dedicated to
promotion of solar energy for making solar energy a
valuable source of affordable and reliable green and
clean energy in 121 member countries. It’s a part of
Prime minister’s vision to bring clean and affordable
energy within the reach of all and create a sustainable
world. It will accelerate development and deploy
solar energy.
Government of India has offered training support for
ISA member countries at NISE. Locating ISA in NISE
campus is a great value addition and both the
institutions will immensely benefit from each other’s
presence and establish vibrant linkages.
Indian Renewable Energy Development Agency
(IREDA) and Solar Energy Corporation of India (SECI)
announced contribution of US $ 1 million each to the
ISA corpus fund.
ISA will also contribute towards the common goal of
increasing utilization and promotion of solar energy
and solar applications in its member countries. The
Paris declaration on International Solar Alliance
states that the countries share the collective
ambition to undertake innovative and concerted
efforts for reducing the cost of finance and cost of
technology.
Finance Ministry announced buyback of IIBs linked to WPI
The finance ministry announced the buyback of
Inflation Indexed Bonds (IIBs) linked to the wholesale
price index (WPI). The government would repurchase
1.44% Inflation Indexed Government Stock-2023
through reverse auction for an aggregate amount of
Rs 6,500 crore (face value).
Sources: National Stock Exchange
Sources: Bombay Stock Exchange
The rupee, which performed relatively well against
most of its Asian peers in last two years, suddenly lost
its way and fallen 3% in January alone. The domestic
currency has fallen against the greenback in the past
three consecutive sessions to rule below the 68
mark. The rupee's performance in January was worst
for any major emerging market currency in Asia this
year. On 28th Jan, the domestic currency extended for
the third session and weakened by 15 paise to hit a
fresh 29-month low of 68.20 against the dollar.
Crude oil fell in Asian trade on 14th January 2016,
with Brent marking another 12-year low amid gloom
over a world awash with supply and concerns about
global economic growth hitting equity markets.
Sources: APAS Business Research Team
Sources: APAS Business Research Team
Sources: APAS Business Research Team
7791
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21
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25
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27
-Jan
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29
-Jan
-15
CNX Nifty (Jan-2015)
25623
24852
246822418824062
24486
24871
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5
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BSE Sensex (Jan-2015)
7.72
7.747.74
7.76
7.76
7.817.81 7.79
7.80
7.78
7.66
7.68
7.70
7.72
7.74
7.76
7.78
7.80
7.82
GIND10Y (Jan-2015)
66.4866.76
67.7867.55
68.14
65.00
65.50
66.00
66.50
67.00
67.50
68.00
68.50
$/₹ (Jan-2015)
16.84
18.96 18.61 18.82 17.90
0.00
5.00
10.00
15.00
20.00
25.00
Indian VIX (Jan-2015)
* The Economist poll or Economist Intelligence Unit estimate/forecast; ^ 5 year yield
Quarter represents a three month period of a financial year
Countries GDP CPI Current Account
Balance Budget Balance
Interest Rates
Latest 2015* 2016* Latest 2015* % of GDP, 2015* % of GDP,
2015* (10YGov), Latest
Brazil -4.5Q3 -3.4 -2.6 10.7 Dec 9.6 -3.7 -6.0 16.6
Russia -4.1 Q3 -3.8 -0.3 12.9 Dec 15.3 5.2 -2.8 10.8
India 7.4 Q3 7.2 7.5 5.6 Dec 5.0 -1.1 -3.8 7.76
China 6.8 Q4 6.9 6.4 1.6 Dec 1.5 3.0 -2.7 2.68^
S Africa 1.0 Q3 1.4 1.5 5.2 Dec 4.7 -4.1 -3.8 9.71
USA 2.1 Q3 2.5 2.4 0.7 Dec 0.2 -2.5 -2.6 2.04
Canada 1.2 Q3 1.1 1.9 1.4 Nov 1.2 -3.3 -1.8 1.16
Mexico 2.6 Q3 2.5 2.8 2.1 Dec 2.7 -2.6 -3.4 6.26
Euro Area 1.6 Q3 1.5 1.7 0.2 Dec 0.1 3.0 -2.1 0.49
Germany 1.7 Q3 1.5 1.7 0.3 Dec 0.2 8.1 0.7 0.49
Britain 2.1 Q3 2.4 2.2 0.2 Dec 0.1 -4.4 -4.4 1.80
Australia 2.5 Q3 2.3 2.5 1.5 Q3 1.6 -4.3 -2.4 2.66
Indonesia 4.7 Q3 4.7 5.0 3.4 Dec 6.2 -2.0 -2.0 8.59
Malaysia 4.7 Q3 5.4 6.1 2.7 Dec 2.5 2.5 -4.0 4.05
Singapore 2.0 Q4 2.9 3.0 -0.8 Nov 0.2 21.2 -0.7 2.38
S Korea 2.7 Q3 2.6 2.6 1.3 Dec 0.7 8.0 0.3 2.01
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