Economy Turns Around For Diwali, Amidst Deep Fiscal Fissures

Time to give Payments Banks a simpler, stable regulatory regime

November 2020

Monthly Financial Inclusion News and Analysis by Sumita Kale

Data on high frequency indicators has been pouring in, with sparkles in the Indian economy for October, hitting highs on a number of points - GST collections, e-way bills, auto sales, Google mobility tracker, power generation. The PMI Markit for Manufacturing showed the strongest monthly-rate of expansion since 2007, with firms reporting confidence in sustained sales growth ahead. The PMI Markit for Services moved into expansion for the first time in eight months! Rural India has had a buffer, with a bumper kharif crop ( paddy procurement has been 21.6% higher than last year). With labour in villages during the lockdown, cement sales surged with home expansion. SBI has some interesting in-house research that shows that remittances are back to pre-Covid levels, pointing to the return of migrants to employment hubs, and this is backed by an increase in payroll in EPF data. CMIE data shows that unemployment rates have dropped back to levels lower than seen last year. The surge in unemployment over the lockdown has now abated.

Of course, all is not well with our world. The pandemic is far from over. India’s exports have faltered in October, with another surge and lockdowns in Europe. Air and rail passenger traffic remain at extremely diminished levels. While complete lockdowns are now unlikely in India, we are bearing the brunt of the shutting down for a quarter of the year - the fiscal deficit at the end of September stands at 114.8% of the annual budget estimate. The news on our state governments is quite dire, with the latest RBI report noting that their gross fiscal deficits are set to double in 2020-21. And households have sold (that is, recycled) the highest amount of their most trusted asset, gold, in eight years! Going ahead, full opening is also unlikely as the risk of repeated waves cannot be ruled out (Read Mihir Sharma on why India cannot take it easy on Covid).

Despite the sparkle in data points, businesses continue to reel under uncertainty and basic financial stress. While the government has extended the Emergency Credit Line Guarantee for MSMEs by another month, of the provided funds of Rs. 3 lakh crore, so far only 1.93 lakh crore has been sanctioned, and 1.45 lakh crore disbursed. As Chandrakant Salunkhe, founder chairman of the SME Chamber of Commerce notes, just 45 lakh MSMEs have bank loans, out of over 6 crore registered MSMEs- clearly, despite government mandates, banks remain risk averse and financial inclusion has a long way to go in addressing small business credit needs (See Latha Venkatesh, CNBC TV18). 


When it comes to credit to small businesses, this year has seen unprecedented pressure on both borrowers and financial service providers. Two reports from CGAP look at the ongoing experiences with moratoria in India, Pakistan, Peru and Uganda ( summary available in this post). One of the papers, “ Consumer Protection and COVID-19: Borrower Risks as Economies Reopen” is a must read as it puts together recommendations for policy makers, regulators, and service providers on keeping the borrower financial needs upfront, without putting excessive stress on the service providers. The report looks at current moratoria terms and restructuring and at the responsible provision of new credit.


The pandemic has helped push digital payments as small vendors across the country have adopted cashless modes through their phones. So we find UPI transactions crossing one more milestone in October, passing the 200 crore mark. For a roundup of relative performance, read this data story, “ Where India leads in digital payments, and where it lags”. Looking beyond the numbers, as digital transactions catch on, the potential from open banking regimes to enhance financial inclusion increases. CGAP has a Working Paper out, identifying twelve design components that are critical to any open banking regime and five specific considerations that regulators and policy makers in emerging economies should consider, if they want an open banking regime that will support financial inclusion, by design, as a policy objective.

Some Other Highlights

RBI has notified the Centre’s scheme for ex-gratia payment of difference between interest on loans of upto Rs 2 crore, directs banks and NBFCs to comply with interest waiver scheme.
Bank credit to micro, small businesses up 5.4% in August from year ago but contracts 3.9% in FY21 so far
•The payments industry in India is set to get a self-regulator, in accordance with RBI guidelines. The Indian Banks Association and Payment Council of India are coming together to form a self-regulatory body for digital payments ecosystem services.
Sushil Prasad, a former banker, writes about the need to rethink and redesign the entire banking interface with customers afresh for financial inclusion, but doesn’t believe these skills lie with traditional banks.
•Even though digital payments are catching on rapidly, Rustom Irani, MD and CEO, Hitachi Payment Services, talks of the infrastructure needed to meet the Indian consumers’ everlasting need for cash.
•Sharad Bangari, Anil Gupta and Pritam Patro of MicroSave have looked at the transformation of business correspondents in India and the rise of new-age Business Correspondent Network Managers.
•The International Financial Services Centre Authority (IFSCA) introduced the framework for a Regulatory Sandbox to tap into innovative fintech solutions, under RBI guidelines. MicroSave’s Arshi Aadil and Graham Wright have highlighted the challenges around communication that recipients and frontline workers face, using PMKGY, the relief package launched by the Government of India amid the COVID-19 outbreak, as a case study.

Editor: The Indicus Centre for Financial Inclusion was launched in 2011 to distil and disseminate information on accelerating the poor’s access to high-quality financial services. ©Indicus Centre for Financial Inclusion. All rights reserved. 4thJanuary 2019

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