maggubhai op-ed

Op-Ed Volume 1 ( for RBI/SEBI/IBPS 2020)

This the first volume of Op-Ed for year 2020. These volumes will be updated once in a week and it will be helpful in building an opinion towards core economic issues. If any aspirant wants to volunteer and help in preparing these op-eds he/she can submit her article to us. Contact on [email protected] to know more.

A bold economic relief package needed as lockdown eases

When lockdown process will be loosened a meaningful economic relief package is needed to position the economy in the line again.

As we can see that a massive number of labours (or contract workers) are moving back to their villages so directly paying firms to retain their contract workers is not an option, nor is direct payment to their unemployed workers. Only universal cash transfer is feasible.

With the lowering of crude oil prices, depreciation would not be inflationary. Further investments into India would flow more in response to the return of growth. Another concern with raising the deficit has been of inducing inflation. The high deficit now is needed to get the economy to recover from an unprecedented shock. The risk of high inflation may be far greater if normal production and supply is not restored at the earliest.

            As the MSME sector has been badly hit so all of them will be needing measures like tax breaks, grants, state guarantees for debt, concessional loans, capital infusion etc.

            The government, the RBI and the banks, need to act together. As the firms will be trying to survive and recover, hence not putting their loans into NPA or not declaring them as bankrupt will be also a bold step. A hair cut is also needed to the restructuring of debt with repayment spread over a longer period. An interest subsidy by the government for such debt given during the current financial year would be one way for keeping banks healthy.

Repo, Reverse Repo, CRR, LAF, and why are RBI steps significant?

The RBI Monetary Policy Committee (MPC) reduced the repayment rate by 75 basis points to 4.4% versus 5.15% earlier. When the RBI lowers the repayment rate, banks receive money at a lower interest rate, the interest of which is usually transferred to borrowers – individuals, industries or institutions. Therefore, lowering the repayment rate effectively means cheaper home loans, car loans or any other type of loan.

The cash reserve ratio (CRR) fell to 3% from March 28, 2020 at 100 bps. A sharp drop in the base 100 points in the CRR basically means that banks now have to block a smaller portion of their deposits with the RBI, and more money can be directed to increase credit. In this way, they can make more profit by converting more non-income deposits into income loans.

The central bank on Friday cut the reverse repayment rate to 4 percent. Reducing the reverse repayment rate means that commercial banks receive lower interest rates in parking lots with the central bank, thereby encouraging them to move money in the market to earn more money. The governor of the RBI said that the reversal of the repayment rate was higher so that the banks were “stimulated to borrow” and not “distinct to raise money.”

Tough times ahead for new borrowers

1. Loan processing requires bank representatives to visit the borrower for KYC, which is not possible during the lockdown, so most lenders have not been able to issue any new loans.

2. Banks use several parameters to evaluate a loan application including the sector and company in which the applicant works, as well as their age, income, existing loans, credit score, and so on. Banks may now look at applicants with a higher credit score than before.

3. Lenders could also give preference to high-income earners, as they are less likely to suffer job losses or have trouble servicing their loans, and lower fixed obligation to income ratio (FOIR). Under FOIR, a lender considers the applicant’s fixed obligations like current EMIs to determine the eligibility.

4. With RBI reducing the repo rate most major banks passed the benefit to existing customers whose loans are linked to the external benchmark. Existing customers whose loans are linked to MCLR can shift to the repo rate if the interest rate difference between their existing loan and the new one is 50 bps or more.

Toothless trade unions have meant helpless workers

Trade unions can be partially blamed for the ongoing migrant movement crisis. At this situation unions are supposed to play role in providing food, shelter and healthcare, negotiate with their employers for a fair severance, offer them some reassurance about their future, and provide education on covid-19 and the coronavirus. Eventually they would also need reskilling to get ready for changes in their workplaces, whenever they return. But the existing unions don’t seem to be doing so.

          The trade union movement has been in decline over the past three decades, ever since liberalization modified some of the rules of doing business in India. The results are visible in the form of both falling union numbers as well as their waning influence. The blame for an apparent failure to protect workers’ rights must ultimately rest with trade unions, which have failed to adapt to the changing nature of work.

           What is needed is a new institutional structure that is modelled on the unions of old but configured to operate in an entirely new context.

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