Others

RBI’s Monetary Policy

The RBI’s monetary policy Conundrum: It is no news that the central bank’s responsibilities pile up whenever a disaster struck a market. This scenario is especially true for pandemics like the covid. The problem of being economically destitute is something that the public in India and around the world is emphatically facing. With policy measures trying to restore normalcy in the market, consumer and producer confidence aren’t actively inspiring confidence in the economic recovery.

Not only has consumer confidence affected trade severely but also the crippled global supply chains are adding to the detestable attribute of the pandemic. This has led the RBI to maintain an accommodative stance in the economy, so as to infuse enough liquidity in the market.

This is being done to revamp the business and the financial sector of the economy. Since crippling lockdowns were placed in the economy, manufacturing and economic activity had contracted at an unprecedented level, so much so, that the economy had contracted by 23.4 percent in decades.

But such easy credit necessarily isn’t helping the economy. As a simple rule of economics, banks usually face two short-term tradeoffs. These are trade-offs between growth and inflation in the economy.

Given that the RBI has maintained an accommodative stance, supporting the growth for quite some time, inflation signs in the economy are starting to appear. These have been more persistent and significant in the consumer price index due to the burgeoning crude prices in the economy. Given, that OPEC has yet again decided to restrict the supply of crude, stating that demand is not robust, such woes are bound to be exacerbated.

RBI, in fact, has recently deciphered that inflation had hovered above its tolerance limit. The inflation of 6 percent was obliviously an uncomfortable range for the RBI given it tends to keep inflation in the 2-4 percent range (+- 2percent). Thus, the RBI now faces a conundrum, whether to prioritize the growth or inflation monitoring in the economy.

The Conundrum

The RBI right now faces a tough challenge between growth and inflation monitoring. This is due to the very crucial fact that the economic recovery is still in its nascent stage of recovery. The impetus or momentum that is needed to bring it on track can only be provided through excess liquidity in the economy.

As unemployment is on the rise, the manufacturing sector needs its engine oil to revamp in order to take on the world demand and to increase exports.

But, it is to be noted that this excess liquidity does not only pose a threat to inflation but also to bad debt in the economy. Given that the financial standing of many has been crippled by the pandemic, there are effectively high chances of default of repayment on loans. On the other hand, the USA is robustly considering and signaling toward the tightening of the monetary policy. This can lead to a taper tantrum and reversal of FDI in India. Thus, growth prospects can seem bleak for the country.

It is no news that when India had gone into lockdown back in the month of March last year, inflation was not even a blip on our anxiety radar. But in comparison to last year, today, the fiscal and monetary policymakers need to give serious attention to the concept of “stagflation”. This effectively means that the government will have to decipher early odious signs that signify any odd rise in prices amid economic stagnancy.

According to the reports, Retail inflation had effectively broken away from the Reserve Bank of India’s tolerance limit of 6% in the month of June. Consequently, it had risen to just above 6.73% for the month of July. But, for the month of August, it had taken a dip to 6.69%, which emphatically points towards its persistence in the economy. A closer look at the data shows that the immense contributor to inflation is the increasing food prices. Of these, protein-rich items are especially getting dearer.

Though to point down one reason is not feasible, it can be rightfully stated that an obvious culprit can be the snapped-off supplies. Though most of the restrictions have been eased, however not all supply chains have been fully restored.

Lastly, it is to be noted that as long as the inflation stays above the 6% mark, which marks the uncomfortable range for the RBI, it would face the policy conundrum and will be definitely wary of easing money any further. But if the rate cuts might actually stoke prices, so could a fiscal stimulus by the Central authorities, which can be a sagacious alternative. With the economy in a dire state of need of funds and state spending, the expansionary policy of the RBI is important.

Thus, this effectively means that the government will have to make important and crucial decisions now. An alternative could be that RBI can swerve to control the rupee’s internal rather than external value. With India largely acting open to capital flows, it can attract investments. Thus, what stance the Indian authorities will take will depend on what RBI perceives as a priority.

Best Banking Lawyers in Mumbai

Tags: rbi monitoring policy, rbi monetary policy 2021, recent monetary policy of rbi, rbi monetary policy today, latest monetary policy of rbi, current monetary policy of rbi, monetary policy of reserve bank of india, rbi and monetary policy, rbi monetary, new monetary policy of rbi, monetary authority of rbi, rbi’s monetary policy, recent monetary and credit policy of rbi

Changes To ECB Policy

ECB Policy: Given the current market conditions in India, Indian corporations have had difficulty obtaining overseas finance. Credit from debt capital markets and onshore lending markets has been tough to come by given the current situation. The Securities and Exchange Board of India’s recent policies has effectively attempted to increase India’s debt capital market. This was also started in order to reduce corporate India’s reliance on loans from the Indian banking industry.

This is due to the fact that certain Indian corporations must absolutely, without exception, fund a specific percentage of their debt by effectively issuing bonds in order to obtain loans from the Indian banking sector.
The upcoming SEBI new standards for the Indian banking sector on single and group exposures have effectively driven some of the larger corporations to look at other choices. For satisfying their debt funding needs, these choices will look beyond their normal, conventional, favored relationship with onshore banks.

Significant sources of onshore debt in India, such as the mutual fund business and the non-banking sector, are apparently dealing with their own set of problems, which doesn’t help the situation. Given the current state of the onshore debt market, the proposed changes to the External Commercial Borrowing framework have been greeted with optimism.

The moves have been applauded since they will enable Indian enterprises to explore. This has also been done to ensure that Indian businesses are able to meet their financing requirements successfully.

This will go a long way toward easing the resolution of stressed assets in the Indian banking system, which is currently under strain. It should also be emphasized that the bad debt financing in India will ease off during the peak of the country’s crisis, with enormous potential to grow in the future. Due to the epidemic that has destroyed the financial situation of many people and businesses, numerous debt financing techniques and channels are required.

The Reserve Bank of India liberalized the framework that had previously governed ECBs in 2019. End-use restrictions were relaxed, and domestic lenders were allowed to transfer and assign their existing INR loans offshore.

What has changed with ECB revenues is that they can now be used to repay onshore INR loans and meet working capital requirements as needed. Non-banking financial companies that are registered with the RBI, on the other hand, will now be able to raise ECBs.

Companies in the infrastructure and manufacturing sectors, for example, can successfully raise ECBs to pay back INR loans. These can be used to fund INR targets that were obtained onshore and when the revenues of such loans were used to fund capital expenditure. Companies that are currently classed as SMA-2 or NPA (according to RBI rules) as a result of a settlement or agreement reached with the company’s lenders.

However, international branches and subsidiaries of Indian banks are not permitted to offer ECBs. The SEBI’s relaxations are expected to become more relevant for higher-rated Indian firms. Those who can get the best ratings. ECBs will be allowed to access offshore markets at a set price.

The RBI treats ECB funds that are utilized by borrowers in the infrastructure and manufacturing sectors to repay onshore loans, including stressed assets and NPA loans, more positively. Because the RBI’s latest move is designed to help resolve stressed assets. As a result, this is the most significant development in the Indian NPA market. This is because it allows Indian banks to sell nonperforming loans. The loans can be offered directly to ECB-approved offshore lenders.

Notably, this will very definitely lead to increased foreign direct engagement in the Indian distressed credit market. However, this is a major paradigm shift from the previous method. The current framework restricts investments to onshore vehicles and security receipts.

As a result, this innovative idea should enable onshore banks to allocate troubled loans to eligible offshore lenders. However, these foreign lenders should be immune from the RBI’s securitization rules. Resolving stressed assets in this creative way reduces the possibility of certain difficulties. Concerns emerge from the securitization procedure according to the RBI’s securitization requirements.

Notably, SEBI and RBI’s creative measures will allow troubled Indian firms to access foreign financial markets. To refinance their existing INR debt or to meet their specific working capital needs. The option will only be offered to higher-rated Indian firms. Using this approach, other Indian corporations will be able to receive considerable debt finance from the domestic debt markets.

The changes, on the other hand, are quite progressive, allowing direct assignment or transfer of current INR loans to foreign lenders. This will help to struggle Indian enterprises since it will help resolve stressed loan assets in India.

Tags: external commercial borrowings, ecb policy india, ecb monetary policy, ecb policy, ecb external commercial borrowing, external commercial lending rbi, external commercial borrowing rbi, external commercial borrowing guidelines, economic commercial borrowing, impact of external commercial borrowing on indian economy, external commercial borrowing regulations.

Securitization of Financial Assets

With the burgeoning of globalization & liberalization, there has been a paradigmatic shift in the role of the banking and financial sector in monetized economies. There is an important reason to believe that a large number of non-performing assets in financial institutions is an important reason for the causation and deterioration of financial crisis. But is the NPA crisis an invincible enemy which cannot be mitigated? Thankfully, Asset securitization is the answer to the detestable NPA problem in the economy which can significantly help to bring the NPA crisis to its knees.

Asset securitization is considered an effective way to deal with NPA. The key issue in restricting securitization is the selection of NPA. It is to be noted, that many NPAs are significantly caused by a short-term cash flow shortage. But an opportunity can be presented to a bank if a significant quantity of funds can be committed to asset securitization which can emphatically have a good chance to covert NPAs into quality assets.

In financing terms, the advantages of asset securitization are tremendous. First and foremost, the financing costs are low. It is no news that disposing of NPAs requires huge cash flows, additionally, management of the same incurs humungous costs. Alternatively, in asset securitization, the user costs of the financing proceeds are relatively low. Compared to bank loans, relatively high-interest rates can be significantly avoided.

Additionally, compared to equity financing, the financing costs can be reduced while the enterprise’s organizational structure is maintained. Further, through asset securitization, the limit imposed by the credit rating of the NPAs themselves may be overcome through credit enhancement, to issue securities of a higher rating.

One of the biggest problems with lending out loans is the high risks associated with it. Consequently, NPAs too pose a huge risk to a banking structure. In contrast, an asset portfolio can reduce the risks of a single NPA. According to the investment portfolio theory, without reducing the anticipated return rates, combining negatively correlated securities can cause the risks of the securities portfolio to be less than the risks of any one type of security held.

As aforementioned, the credit rating of NPAs is relatively poor and the risks of default are quite high, but due to securitization, assets are of different risk levels which can be combined into an asset pool. Securitization allows different types of NPAs to enter one asset pool to achieve risk hedging; and, through accelerated transfer, separation, and centralized disposal of the NPAs by the capital market, the percentage of non-performing loans can be directly reduced.

Additionally, Risk remoteness emphatically eliminates the risks of the payment of the returns associated with the financed party. This leads to the major development in the design of an asset securitization structure i.e. establishment of a special purpose vehicle (SPV). This particular financed party removes the underlying assets from its hands by transferring the same to the SPV through a “genuine sale”. Subsequently, the SPV can use these as security to issue the securities. This emphatically helps in raising additional capital and a chance to gain profit through its gains.

Securitization, can additionally also allow the rapid removal of NPAs from the balance sheet. It allows quick sanitization of the on-balance-sheet assets and digestion of the accumulated risks from the sliding economy. This in turn leads to optimization of the asset-to-liability structure and strengthening of business operation capabilities, risk management capabilities, and core competitiveness.

Additionally, the market-based and mass disposal method has a scaling effect, reducing the economic and time costs of disposing of NPAs. As it is known, a huge percentage of NPA on the balance sheet of the bank speaks ill of its management and mitigation policy and in return hurts its credibility. Thus, asset securitization provides an ideal and profitable way of clearing the bad bank books.

NPA securitization can also increase an organization’s capital sources. Asset securitization can provide enterprises with a new means of financing. This effectively allows enterprises to break their current over-reliance on bank borrowing. Thus, Securitization effectively expands enterprises’ revenue sources. Through NPA securitization, an enterprise generally can revitalize existing funds, without in general increasing liabilities. Additionally, mitigating liabilities, it helps secure a low-cost fund source, increasing asset liquidity for a bank.

Is asset securitization a potent solution solely for the banking sector? Certainly not. Asset management companies too can profit from such lucrative ventures. Thus, specializing in the disposal of NPAs can present asset management companies with even greater opportunities.

Through NPA securitization, asset management companies can earn asset management fees, handling fees, and other such intermediary service fee income. This will deeply satisfy capital regulations and leverage the regulatory requirements of an asset management company.

Unlike in some countries where Assets Reconstruction Companies have been set up for the purpose of the bailout, in India, the Government has proactively initiated certain measures to control its burgeoning Non-Performing Assets crisis. In order to mitigate the Non-Performing Assets and quicken recovery, the Government of India in 1985 had set up SICA/BIFR, Debt Recovery Tribunals, and Debt Appellate Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

In an environment where market risks are relatively huge, currently, a pandemic struck the economy presents such a picture, that non-performing loan securitization products can provide new investment products for the capital markets.

In addition to capital markets, it emphatically can also provide products like open investment channels and increased product choice. While helping enterprises in effectively resolving non-performing loans, such products can satisfy different investors’ risk appetites and their ever-diversifying investment demands.

Top Real Estate Law Firm Mumbai

Tags: financial assets, non performing assets, financial asset management, real assets and financial assets, liquid financial assets, npa non performing assets, non performing assets of banks, securitization of financial assets, non performing assets in banking sector, npa in banking