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Top 5 Game changers for the Indian Financial System in 2020

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As 2020 draws close to an end, we review some of the top developments in the financial sector and summarise the dominant trends that have emerged from this challenging yet eventful year.

Loan Moratorium

In India, a nationwide lockdown was announced to contain the spread of COVID-19 from March 24, 2020, to April 14, 2020, resulting in massively adverse effects on the livelihoods of low-income households (LIHs). To mitigate the resultant economic distress, the Reserve Bank of India (RBI) on March 27, 2020, permitted all Commercial Banks, Co-operative Banks, India Financial Institutions, and Non-Banking Financial Companies (NBFCs) to defer all term loan instalments for three months starting from March 1, 2020. Further, as the COVID-19 induced lockdown was extended beyond its initial expectations, RBI announced an extension of the loan moratorium on May 23, 2020, for another three months up till August 31, 2020.

While RBI’s loan moratorium helped mitigate the distress, a few fallouts impacted the LIHs. The Frequently Asked Questions (FAQ), which were circulated by the Ministry of Finance (put together by the Indian Banks’ Association) on loan moratorium, excluded NBFCs, Micro-finance Institutions (MFIs), and Housing Finance Companies (HFCs). This had an adverse impact on LIHs and Businesses as NBFCs serve as a last-mile link in the supply of credit. Besides, RBI’s loan moratorium did not stop the clock on interest payments, which were added to the principal amount and then became the basis for the charging of Interest on Interest (IOI), thus making loan moratorium a costly affair for LIHs. The situation was ameliorated to some extent when the Central Government announced a waiver of IOI on October 2, 2020, as a response to a plea filed by a resident of Agra in the Supreme Court.

Atmanirbhar Bharat Abhiyan

On May 12, 2020, the Prime Minister (PM) of India announced Atmanirbhar Bharat Abhiyan, a financial package of Rs. 20,000 crores to revive the economy from the COVID-19 induced economic distress. Following the PM’s announcement, the Finance Minister of India provided details of the financial package through five press releases on subsequent days. The financial package comprised sixteen broad measures to buttress Micro, Small, and Medium Enterprises (MSMEs), NBFCs, migrant workers, farmers, etc. While the measures under this financial package were steps in the right direction, issues relating to the delivery of benefits remained unaddressed for informal sector workers.

Prior to this financial package, the Central Government (under Pradhan Mantri Garib Kalyan Yojana) and State Governments had also announced several welfare measures in response to the COVID-19 outbreak. The effectiveness of these measures has been, at best, uneven.

A Rise in Digital Payments

During the course of 2020, the volume of digital payments rose significantly, with the RBI data showing a growth from Rs 920.38 trillion in FY16 to Rs 1,623.05 trillion in FY20, amounting to a Compound Annual Growth Rate (CAGR) of 15.2%. Recently, the National Payments Corporation of India (NPCI) reported that Unified Payments System (UPI) transactions reached the 2 billion mark in October and further increased to 2.21 billion in November. One reason for this rapid growth has been COVID-19-related health concerns as consumers have preferred contactless payments. Besides, this upward trend is speculated to sustain in the coming days, as WhatsApp Pay has now received the regulatory approval to start UPI operations in India, and as NPCI plans to add more features in the future. It should be noted, however, that the rapid increase in digital transaction volumes was accompanied by a rise also in the volume of UPI failures, as reported by banks.

As in the case of UPI after lockdown conditions were eased, the Aadhaar enabled Payment System (AePS) witnessed a surge in transactions in the very early months of lockdown, with 403 million transactions reported for April by NPCI. Worryingly, again, the rise in transactions was accompanied by reports of a spike in transaction failures (39% failure rate), with potentially serious consequences for consumers who desperately needed to access and remit cash to stay afloat during the lockdown months. In this policy brief, released in May, we identified the most serious categories of AePS transaction failures and provided some immediate and medium-term solutions. It is not clear whether the NPCI has acted on these recommendations, but it is reported that the AePS failure rates have reduced in August and September.

Gross Domestic Product (GDP) Contraction in Q1 and Q2

India’s GDP contracted by 23.9% in Q1 of the current financial year, marking the first GDP contraction in 40 years. It is speculated that the contraction happened despite the enormous increase in Government expenditure implicit in all of the relief packages and schemes that were announced, because that increase was still not enough to cover the very large decreases in consumption demand from individuals and private entities. 

In November, the RBI now-casted a further contraction in GDP during Q2 and stated that the country had entered a technical recession in the first half of the year for the first time in history. The actual quantum of the contraction became known on November 27, 2020, as having been 7.5% in Q2, via a release of data by the National Statistics Office. Though the country’s GDP contraction narrowed in Q2, India still performed poorly amongst a group of 24 major countries.

Labour Codes 2020

The Central Government drafted four labour codes on (a) wages, (b) social security, (c) industrial relations, and (d) occupational safety, health, and working conditions in 2019. While the Code on Wages was passed in 2019, the other three codes were referred to a Standing Committee on Labour. This Committee submitted its report this year, and subsequently, in September 2020, Parliament passed all three pending codes. Together, the four labour codes consolidate all 29 existing central laws on labour.

The Code of Wages, passed in 2019, provisions for minimum and timely payment of wages to all workers in India. We argue, however, in this post, that the code lacks appropriate means to identify the minimum consumption needs of individuals, and as such, the question of what minimum wage would be appropriate remain largely untouched by the code. The Code on Social Security, 2020, extended social security benefits to the informal sector workers for the first time. But in this post, we mark that the code lacks clarity on the definition of an informal sector worker, and therefore, once again, falls far short of what it could have accomplished.

On behalf of everyone at Dvara, we would like to wish you a very happy New Year, and we look forward to your continued readership in the coming year.


*This post is written by Kamesh Shekar, Dvara Research

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