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ECONOMIC SURVEY VOLUME 2

CHAPTER 3

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CHAPTER -3

MONETARY MANAGEMENT AND FISCAL INTERMEDIATION

INTRODUCTION

MONETARY DEVELOPMENTS DURING 2017-18

• In the third bi-monthly Monetary Policy Statement for 2017-18 in August 2017, the MPC decided
to reduce the Policy Repo Rate by 25 basis points to 6.0 %. The Reverse Repo Rate under the
Liquidity Adjustment Facility (LAF) stood at 5.75 % and the Marginal Standing Facility (MSF) rate
and the Bank Rate at 6.25 %
• Analysis of Reserve Money Y-o-Y Growth:

- Increased till Nov 10, 2017 but remained in negative territory - lingering impact of
demonetization
- From Nov 17, 2017 it turned sharply positive– As a favorable base effect set in.

• Expansion in M0 during the financial year 2017-18 was driven by the decline in LAF reverse repo
(net) and increase in RBI’s net foreign assets. However, net RBI credit to government declined
owing to net open market sales as well as an increase in government deposits.
• The Y-o-Y growth of M3 had slackened post-demonetization, but remained positive– in contrast
to the contraction in M0 – because the reduction in Currency with Public (CwP) was partially
offset by an upsurge in aggregate deposits.

LIQUIDITY CONDITIONS AND ITS MANAGEMENT

• After demonetization in early November 2016, RBI had scaled up its liquidity absorption
operations using a mix of both conventional and unconventional instruments ( LAF, issuance of
Treasury Bills under the Market Stabilization Schemes, Open Market Operations sale )

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• Liquidity conditions remain in surplus mode even as its magnitude moderated gradually with
progressive re-monetization.

DEVELOPMENTS IN THE G-SEC MARKET

• During 2017-18, the direction of movement of the 10-year generic G-sec yield altered
significantly. (The G-sec yield as on January 11, 2018 stands at 7.26 %)
• Fall in yield due to factors - Announcement of new benchmark security index, lower inflation,
positive monsoon forecast, dovish stance of monetary policy and Moody’s rating upgrade.
• Rise in yield due to factors - Higher CPI inflation, additional supply of securities through OMO
sales, rise in oil prices leading to concerns of higher inflation, and higher government
borrowings.

BANKING SECTOR
The performance of the banking sector, Public Sector Banks (PSBs) in particular, continued to be
subdued in the current financial year. Many PSBs have continued to record negative profitability ratios
since March 2016.

Categories Mar 2017 (in %) Sep 2017 (in %)

Gross Non- Performing Advances (GNPA) ratio of SCBs 9.6 10.2
Restructured Standard Advances (RSA) ratio 2.5 2.0
Stressed Advances (SA) ratio 12.1 12.2
GNPA ratio of PSBs 12.5 13.5
SA ratio of PSBs 15.6 16.2
Capital to Risk- weighted Asset (CRAR) ratio 13.6 13.9
SCBs’ Return on Assets (RoA) 0.4 0.4
SCBs’ Return on Equity (RoE) 4.3 4.2

CREDIT GROWTH
Bank credit lending to Services and Personal Loans (PL) segments continue to be the major contributor
to overall Non Food Credit (NFC) growth. Credit growth finally picked up in industrial sector after
remaining persistently negative from October 2016 to October 2017. However, growth of credit to
medium scale industries has remained negative since June 2015.

NON-BANKING FINANCIAL SECTOR

• Non-Banking Financial Companies (NBFCs) bring in diversity and efficiency to the financial sector
and make it more responsive to the needs of the customers.
• The NBFC sector, as a whole, accounted for 17 % of bank assets and 0.26 % of bank deposits as
on September 30, 2017.

Ratios within NBFC sector Mar end 2017 Sep end 2017
CRAR 22.8 22.5
Gross NPA 6.1 5.5
Net NPA 4.1 3.4
RoA 1.6 2.0
RoE 7.0 9.0

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• New categories of NBFC introduced : Peer to Peer(P2P) and Account Aggregators

Account aggregator: Financial entity that provides information on various accounts held
by a customer in different NBFC entities. The account information will be a consolidated,
organized and retrievable data about the various types of financial engagement by a
customer among different NBFC products.

Peer to Peer (P2P): a non-banking institution which carries on the business of a Peer to
Peer Lending Platform (an intermediary providing the services of loan facilitation via
online medium or otherwise, to the participants)

DEVELOPMENTS IN CAPITAL MARKET

Primary Market

Witnessed a steady increase in resource mobilization with launch of many IPOs. The Indian mutual fund
industry also registered a robust growth.

Resource mobilization through issuance of corporate bonds (public issuance and private placement) also
rose rapidly. However, it is not a substitute for bank credit as- the maturity period of bonds is much
shorter compared to bank credit and if banks subscribe to corporate bonds then it may lead to double
counting.

Secondary Market (represented by BSE and NSE) witnessed healthy growth (touched their highest levels
in January 2018) due to increased investor confidence.

INSURANCE SECTOR
The potential and performance of the insurance sector should be assessed on the basis of two
parameters - Insurance Penetration and Insurance Density.

Insurance penetration is defined as the ratio of premium underwritten in a given year to the gross
domestic product (GDP).
Insurance density is defined as the ratio of premium underwritten in a given year to the total
population (measured in US$ for convenience of international comparison).

Parameters 2001 2016

Insurance Penetration 2.71% 3.49% (Life 2.72% and General 0.77%)
Insurance Density US$11.5 US$59.7 (Life 46.5 and General 13.2)

Globally insurance penetration and density were 3.47% and US$ 353 for the life segment in 2016 and
2.81% and US$ 285.3 for the non-life segment respectively.

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REVIEW OF THE NEW INSOLVENCY AND BANKRUPTCY REGIME

The Insolvency and Bankruptcy Code, 2016 (IBC) was passed in May 2016. Since then, the
entire mechanism for the Corporate Insolvency Resolution Process (CIRP) has been put in
place.
A major factor behind the effectiveness of the new Code has been the adjudication by the
Judiciary. Due to strict time limits, NCLT benches (in spite of large inflow of cases) have been
able to admit or reject applications for CIRP admissions with few delays. Appellate courts have
also disposed appeals quickly and decisively.

The Insolvency and Bankruptcy Code (Amendment) Bill, 2017 was passed recently. In the
CIRP the Committee of Creditors (CoC) invites resolution plans from resolution applicants, and
may select one of these plans.
The Bill has declared that some persons are ineligible to submit resolution plans (such as an
undischarged insolvent, a “wilful defaulter”, a person disqualified as a director under the
Companies Act, 2013, a person prohibited from trading in securities)
Thrust of the bill: to prevent a range of undesirable persons from bidding for the debtor.
This is to avoid a situation of moral hazard, where incompetent or fraudulent promoters are
effectively rewarded with the control of their company, leaving the creditors to write off their
debts.
The Bill seeks to achieve a balanced approach, enabling the CoC to avoid imprudent
transactions while preserving its freedom to choose the best resolution plan from amongst all
the applicants.

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