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Fiscal Policy – Revenue


Fiscal Policy – Revenue

Fiscal Policy – Revenue

FISCAL POLICY
• The government fiscal policy is used to stabilize the level of output and employment through changes in its expenditure and taxes. The government attempts to increase output and income and seeks to stabilize the ups and downs in the economy.
• In the process, fiscal policy creates a surplus (when total receipts exceed expenditure) or a deficit budget (when total expenditure exceeds receipts) rather than a balanced budget (when expenditure equals receipts).
• Fiscal policy deals with the revenue and expenditure decisions of the government.
• As far as fiscal resources are concerned, taxes, user charges (power, water, transport charges etc); disinvestment proceeds; borrowings from internal and external sources are the main channels.
• Fiscal policy can achieve important public policy goals like growth
– Equity
– Promotion of small scale industries
– Encouragement to agriculture
– Location of industries in rural areas
– Labour-intensive growth
– Export promotion
– Development of sound social and physical infrastructure etc.
Instruments of Fiscal Policy
The two main instruments of fiscal policy are:
(a) Government Expenditure
(b) Government Revenues
REVENUE AND ITS CLASSIFICATION
They are divided into
• TAX REVENUES
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.
Central Government levies taxes on
1. Income Tax (except tax on agricultural income, which the State Governments can levy) – Tax on income of a person
2. Customs Duties – Duties on import and export of goods
3. Central Excise – Taxes on Manufacturing of dutiable goods
4. Service Tax – Taxes on provision of services
5. Corporate tax: Taxes on firms and corporations
State Governments levies taxes on
1. Value Added Tax (VAT) – This is tax on sale of goods. While intra-state sale of goods are covered by the VAT Law of that state, inter-state sale of goods is covered by the Central Sales Tax Act. Even the revenue collected under Central Sales Tax Act is done so by the State Governments themselves and actually the Central Government has no role to play so.
2. Stamp duty – Since land is a matter on which only State Governments can govern, thus the Stamp duties on transfer of immovable properties are levied by State Governments
3. State excise – on Liquor and certain agricultural goods
4. Land revenue
5. Profession tax
Local bodies are empowered to levy tax on
1. Properties
2. Octroi and
3. For utilities like water supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is still ongoing in India.
Tax revenues are further divided as:
A. DIRECT TAXES
• In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.
• Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income of individuals and business entities as well as Non business entities also.
• The taxation level depends on the residential status of individuals.
• The thumb rule of residential status is that an individual becomes resident in India if he has remained in India for more than 182 days in a particular residential year.
• If he becomes resident in India, then his global income i.e. income earned even outside India is taxable in India.
Personal Income Tax
Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act.
Income Tax – Regressive, Proportional, or Progressive Taxation
Taxes can also be categorized as either regressive, proportional, or progressive, and the distinction has to do with the behaviour of the tax as the taxable base (such as a household’s income or a business profit) changes.
• Progressive tax—a tax that takes a larger percentage of income from high-income groups than from low-income groups.
• Proportional tax—a tax that takes the same percentage of income from all income groups.
• Regressive tax—a tax that takes a larger percentage of income from low-income groups than from high-income groups.
Corporate taxes
The taxability of a company’s income depends on its domicile. Indian companies are taxable in India on their worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India. Current rates of corporate tax.
Different kinds of taxes relating to a company
Minimum Alternate Tax (MAT)
• Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant.
• In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced in the year 1997-98.
Fringe Benefit Tax (FBT)
• The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained in Chapter XIIH of the Income Tax Act, 1961.
• Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of fringe benefits provided or deemed to have been provided to the employees. The FBT is payable by an employer who is a company; a firm; an association of persons excluding trusts/a body of individuals; a local authority; a sole trader, or an artificial juridical person. This tax is payable even where employer does not otherwise have taxable income. Fringe Benefits are defined as any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment and includes expenses or payments on certain specified heads.
Dividend Distribution Tax (DDT)
• Under the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. Only a domestic company (not a foreign company) is liable for the tax.
• Tax on distributed profit is in addition to income tax chargeable in respect of total income. It is applicable whether the dividend is interim or otherwise. Also, it is applicable whether such dividend is paid out of current profits or accumulated profits.
Wealth Tax
• Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income.
• Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following persons: –
– Individual
– Hindu Undivided Family (HUF)
– Company
B. INDIRECT TAXES
• In India, indirect taxes is a vast ocean as there are number of taxes to be paid on manufacture, import, sale and even purchase in certain cases. Further the law is governed less by the Acts and more by day to day notifications, circulars and orders by the Governing bodies. So an explicit understanding is very much essential.
• Indirect taxes is based on the nature of Activity as follows:
– Provision of services
– Manufacture of Excisable Goods
– Import of Goods
– Sale of Goods
Sales tax
Central Sales Tax (CST)
• Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state trade or commerce or, outside a state or, in the course of import into or, export from India.
Value Added Tax (VAT)
• VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is the most significant tax reform measure at state level.
• The state level VAT has replaced the existing State Sales Tax. The decision to implement State level VAT was taken in the meeting of the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a broad consensus was arrived at to introduce VAT from April 1, 2005. Accordingly, all states/UTs have implemented VAT.
Goods and Services Tax (GST)
• GST is one indirect tax for the whole nation, which will make India one unified common market. The GST intends to subsume most indirect taxes under a single taxation regime. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. This is expected to help broaden the tax base, increase tax compliance, and reduce economic distortions caused by inter-state variations in taxes.
Why GST has been proposed?
• Our Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas.
• This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry.
• In order to simplify and rationalize indirect tax structures, Government of India attempted various tax policy reforms at different points of time. A system of VAT on services at the central government level was introduced in 2002. The states collect taxes through state sales tax VAT, introduced in 2005, levied on intrastate trade and the CST on interstate trade. Despite all the various changes the overall taxation system continues to be complex and has various exemptions.
• This led to the idea of One nation One Tax and introduction of GST in Indian financial system. This is simply very similar to VAT which is at present applicable in most of the states and can be termed as National level VAT on Goods and Services with only one difference that in this system not only goods but also services are involved and the rate of tax on goods and services are generally the same.
Levy of GST
• The central government has the exclusive power to levy and collect GST in the course of interstate trade or commerce, or imports. This will be known as IGST (Integrated GST).
• A central law will prescribe the manner in which the IGST will be shared between the centre and states, based on the recommendations of the GST Council.
• Both, Parliament and state legislatures will have the power to make laws on the taxation of goods and services. A law made by Parliament in relation to GST will not override a state law on GST.
Excise Duty
Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods have been defined as those, which have been specified in the Central Excise Tariff Act as being subjected to the duty of excise.
Customs Duty
Custom or import duties are levied by the Central Government of India on the goods imported into India. The rate at which customs duty is leviable on the goods depends on the classification of the goods determined under the Customs Tariff. The Customs Tariff is generally aligned with the Harmonised System of Nomenclature (HSL).
Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz. general insurance, stock broking and telephone. Today the counter services subject to tax have reached over 100. There has been a steady increase in the rate of service tax. From a mere 5 per cent, service tax is now levied on specified taxable services at the rate of 12 per cent of the gross value of taxable services. However, on account of the imposition of education cess of 3 per cent, the effective rate of service tax is at 12.36 per cent.
• NON TAX REVENUE
Non-tax revenue mainly consists of:
1. Interest receipts on account of loans by the central government
2. Dividends and profits on investments made by the government
3. Fees and other receipts for services rendered by the government
4. Cash grants-in-aid from foreign countries and international organizations.

Economic Survey Chapter – 7


Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?: (Economic Survey Chapter – 7)

Context
India on one hand celebrates it’s favourable demographic dividend, however it fails terribly short in providing good jobs to its labor force. Hence taking cue from the success of China and other East Asian countries, who significantly benefitted from high labor intensive and low skill manufacturing sectors like Apparel and footwear, India must gear up with all policy measures such as subsidization, tax reform, labor law reform and favourable trade agreement, to seize the narrow window of opportunity, especially when it’s south Asian competitors are battle ready to fill the vacancy created by China in recent times (owing to its increasing labor cost).

Technical Terms
A. Labour Intensity: Number of jobs created per unit investment (rs 1lak).Measured for different sectors. e.g. Apparel sector generates 80 time more jobs than Auto sector for similar investment.
B. Female Labour Intensity: Number of female jobs created per unit capital investment(Rs. 1 lac).The more female labor intensive a sector is, the more is its potential for social transformation through women empowerment and financial inclusion.
C. Labour Force participation rate: The section of working population in the age group of 16-64 in the economy currently employed or seeking employment. People who are still undergoing studies, housewives and persons above the age of 64 are not reckoned in the labour force.
D. Low wage Employees: Wage less than Rs20000/month.
E. Free Trade Agreement: Such agreements involve cooperation between at least two countries to reduce trade barriers – import quotas and tariffs – and to increase trade of goods and services with each other.
F. Least developed Countries (LDC): The Least Developed Countries (LDC) is a list of the countries that, according to the United Nations, exhibit the lowest indicators of socio-economic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified among the Least Developed Countries if it meets three criteria
• Poverty – adjustable criterion based on GNI per capita averaged over three years. As of 2015 a country must have GNI per capita less than US $1,035 to be included on the list, and over $1,242 to graduate from it.
• Human Resource weakness based on indicators of nutrition, health, education and adult literacy and
• Economic vulnerability: based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, handicap of economic smallness, and the percentage of population displaced by natural disasters.
Gist of Economic Survey Chapter
Introduction
Creating jobs is India’s central challenge to achieve social transformation, which can be done by:
• Generating rapid economic growth
• Nurturing an enabling environment for investment is another; and
• Targeted action yet another.
Related to the latter, India needs to generate jobs that are
• Formal and productive,
• Provide bang-for-buck in terms of jobs created relative to investment,
• Have the potential for broader social transformation, and
• Can generate exports and growth.
The apparel and leather and footwear sectors meet many or all of these criteria and hence are eminently suitable candidates for targeting.
Why Clothes and Shoes?
Apparel and footwear sector offer a lot of opportunities which other sector does not. These are:
a) Growth and exports
There is a linkage between GDP growth rates and export growth rates of these two sectors, as was seen in East Asian countries.
• Take-off in economic growth in East Asia has been associated with rapid expansion in clothing and footwear exports in the early stages.GDP growth rate of around 7-10% was associated with around 20% (in some cases 50%) for apparel and 25% for footwear growth in exports of these two sectors.
• India has underperformed in these sectors, especially in leather sector during its take-off stage.
b) Jobs, especially for women
Apparels and Leather sectors offer tremendous opportunities for creation of jobs, especially for women.
• Apparel sector is the most labor-intensive, followed by footwear.
• Apparels are 80-fold more labor-intensive than autos and 240-fold more jobs than steel. The comparable numbers for leather goods are 33 and 100, respectively.
• With rapid exports growth about half a million additional direct jobs can be generated annually.
• The opportunity created for women implies that these sectors could be vehicles for social transformation. Women in Bangladesh, female education, total fertility rates, and women’s labour force participation moved positively due to the expansion of the apparel sector.
c) A historic opportunity – China vacating space filled by others and not India!
• India has an opportunity to promote apparel, leather and footwear sectors because of rising wage levels in China.

• India is well positioned to take advantage of China’s deteriorating competitiveness because wage costs in most Indian states are significantly lower than in China.
But the space vacated by China is fast being taken over by Bangladesh and Vietnam in case of apparels; Vietnam and Indonesia in case of leather and footwear, even Indian companies are relocating to these countries and Myanmar. India has to act fast if it does not want to lose in race.

Challenges
India still has potential comparative advantage in terms of cheaper and more abundant labour. But these are nullified by other factors that render them less competitive than their peers in competitor countries.
The Apparel and Leather sectors face a set of common challenges, which are:
a) Logistics
• The costs and time involved in getting goods from factory to destination are greater than those for other countries
• Further, few Very Large Capacity Containers (VLCC) come to Indian ports to take cargo so that exports have to be trans shipped through Colombo which adds to travel costs and hence reduces the flexibility for manufacturers.
b) Labour regulations
• Regulations on minimum overtime pay: There are strict regulations for overtime wage payment as the Minimum Wages Act 1948 mandates payment of overtime wages at twice the rate of ordinary rates of wages of the worker.
• Lack of flexibility in part-time work and high minimum wages in some cases.
• Onerous mandatory contributions that become de facto taxes for low-paid workers in small firms that results in a 45 per cent lower disposable salary.
One symptom of labour market problems is that Indian apparel and leather firms are smaller compared to China, Bangladesh and Vietnam, with 78% of firms employing less than 50 workers (same is just 15% in China).
c) Tax & tariff policy
• Globally demand is shifting towards man-made fibers, but Indian taxation (7.5% tax on cotton bases products and 8.4% tax on man-made products) and tariff policy (10 percent tariff on man-made fibers v/s 6 percent on cotton fibers.) Discriminates against it and favors cotton based exports.
• High tariffs on yarn and fiber increase the cost of production in clothing. Though duty drawback for tariffs on inputs is available, but that excludes purchase of domestically produced yarn and domestic sale making and thus making such Indian products un-competitive.
• A similar problem also afflicts footwear production with taxes of 20.5 per cent on leather and 27 per cent on non-leather footwear. There is a need for rationalization of these policies.
Globally demand in footwear industry is shifting from leather based to non-leather based, because of physical comfort, aesthetics and price affordability and various other factors. India has good share in leather based exports and must shift to non-leather footwear if it wants to gain from China’s slowdown in exports, which occupies important place in this segment.
d) Disadvantages emanating from the international trading environment compared to competitor countries.
• India’s competitor exporting nations for apparels and leather and footwear enjoy better market access by way of zero or at least lower tariffs in the two major importing markets, namely, the United States of America (USA) and European Union (EU). Bangladesh and Ethiopia, both emerging as major exporters and having significant share, have zero tariffs in case of apparel, whereas India will face 9.1% tariff in EU and 11.4% in US. Same is the case with footwear sector.
• An FTA with EU, UK can help India offset existing disadvantages in apparel sector and getting relative advantages in footwear sector.
e) Sector specific challenge
• Globally cattle bases leather products are preferred as compared to buffalo, goat or other animal based. But in India despite availability of large cattle population very less cattle is available for slaughter.
Responses needs
Several steps have been taken for textile and apparel sector:
• Apparel exporters will be provided relief to offset the impact of state taxes embedded in exports, which could be as high as about 5 per cent of exports.
• Textile and apparel firms will be provided a subsidy for increasing employment in the form of government contributing the employers’ 12 per cent contribution to the Employee Provident Fund (EPF).
But all these need to be complemented by further actions:
• FTAs with EU and UK must be negotiated after carefully weighing cost and benefits, with special focus on apparel and footwear sector and jobs in this sector.
• Introduction of GST will help in rationalization of taxes and removal of tax related disadvantage against man-made fiber based apparel and non-leather footwear.
• Third, a number of labor law reforms would overcome obstacles to employment creation in these sectors. Statutory deductions like Employee Provident Fund Organization (EPFO), Employee Pension Scheme (EPS), Employee State Insurance (ESI) etc. for low wage employees (salary less than Rs. 20,000/month) accounts to around 45%, which has been questioned on various accounts like:
– Low wage employees do not have a 45% saving rate, therefore would like to have money in hand rather than statutorily deducted.
– EPFO and ESI have many accounts with unclaimed balances. EPFO fees are also very high.
All these create hindrances in path of formalization of jobs in the sector. Formal employment could increase by offering employees three choices when they start employment:
• Decide whether they want 12 per cent employee contribution to be deducted;
• Decide whether their 12 per cent employer contribution goes to EPFO or National Pension Scheme (NPS);
• Decide whether their health insurance premiums go to ESI or a private health insurance of the employee’s choice.
All these choices should be exercised on the part of employee, thus giving him greater choice.
Conclusion
All industrial policy aimed at promoting a particular sector is not without risks. But the externality generating attributes-employment, exports, social transformation – of the apparel and footwear sectors, India’s potential comparative advantage in it, and the narrow window of opportunity available, make the risk worth taking. And, in any case, many of the proposed policy responses such as FTAs, tax rationalization, and labour law reform could have wider, economy-wide benefits.
Supplementary Readings
Apparel and Footwear sector in emerging economy
In apparel and footwear, the differences between emerging and developed markets are significant. Developed markets reported value and volume growth of 2 per cent, while emerging markets witnessed value growth of 8 per cent and volume at 3 per cent in apparel and footwear during 2015. Consumers remain cautious in developed markets as economic growth appears fragile, additionally, wider availability of trend-led products at low prices and impressive growth in e-commerce continue to impact unit prices and value growth. In contrast, emerging markets are benefiting from rising disposable incomes and aspirational purchases.
India is the second largest footwear producer in the world, with footwear production accounting for approximately 9 per cent of the global annual production – 22 billion pairs as compared to China, which produces over 60 per cent of the global production.
India annually produces 2.1 billion pairs of which 90 per cent are consumed internally while remaining are exported primarily to European nations which include United Kingdom, Germany, USA, Italy and France.
Footwear exports from India have grown at a CAGR of 20 per cent in Indian Rupee terms during the last five year backed by growing demand from European nations and increasing focus of main importing countries to shift sourcing from China to other low cost producing countries.
India is the third largest footwear consuming country in the world after China and USA, but with very little separating the three, India is very soon expected to be the second largest consumer as well.
In absolute terms, footwear exports from India have risen from Rs. 71.5 billion in FY10 to Rs. 180.0 billion in FY15.
The growth in Indian fashion and lifestyle market has given an impetus to the footwear industry as well. From a basic need-based industry, it has become an evolving fashion and style category.
The unorganised segment gains prominence in the Indian context due to its price-competitive products, which are more suitable and attractive to the price conscious Indian consumer. But with increased household income, shifting consumer behaviour from saving to spending, increasing brand consciousness amongst Indian consumers, influx of large number of global brands and penetration in tier – II and III cities by footwear companies, the organised retail in footwear market is rapidly evolving and expected to grow at a higher rate in the future.
The rural market of India is still largely untapped for footwear manufacturers. Companies are re-positioning themselves and launching specific products and price ranges to expand their presence and increase their consumer base in rural areas.

National Capital Goods Policy


National Capital Goods Policy

The National Manufacturing Policy envisaged manufacturing to contribute 25% to GDP and create 100 million jobs. In contrast, till date, manufacturing activity contributes to 17% of India’s GDP and only 4 million jobs are estimated to have been created in the sector since 2010. The gap to stated aspiration is large.
The Capital Goods sector is a critical element to boost manufacturing activity by providing critical inputs, that is, machinery and equipment.
Hence Government has come out with 1st ever policy for the country’s capital goods sector. It envisages carving out a roadmap to boost manufacturing in Capital Goods (CG) sector so that it becomes a part of global value chains apart from mere supply chains.
Vision: The National Capital Goods Policy is formulated with the vision to increase the share of capital 24 goods contribution from present 12% to 20% of total manufacturing activity by 2025.
Objectives of the Policy:
The objectives of the National Capital Goods Policy are to:
• Increase total production: To create an ecosystem for a globally competitive capital goods sector to achieve total production in excess of Rs. 750,000 Cr by 2025 from the current Rs. 230,000 Cr.
• Increase employment: Raising direct and indirect employment from the current 8.4 million to Rs.30 million by 2025.
• Increase domestic market share: To increase the share of domestic production in India’s capital goods demand from 60% to 80% by 2025 and in the process improve domestic capacity utilization to 80-90%.
• Increase exports: To increase exports to 40% of total production (from Rs 61,000 Cr to Rs 300,000 Cr) by 2025 from current 27%, enabling India’s share of global exports in capital goods to increase to 2.5% and making India a net exporter of capital goods.
• The policy also aims to facilitate improvement in technology depth across sub-sectors (increasing research intensity in India from 0.9% to at least 2.8% of GDP), increase skill availability (training Rs.50 lakh people by 2025), ensure mandatory standards and promote growth and capacity building of MSMEs
The objectives of the policy will be met by the Department of Heavy Industry in a time bound manner through obtaining approval for schemes as per the roadmap of policy interventions.

Concept of Willful Defaulter


Concept of Willful Defaulter

RBI has defined the ‘willful default’ to occur if the ‘unit’ has, inter-alia, defaulted in meeting its payment obligations or not utilized the finance from the lender for the specific purposes for which finance was availed or has siphoned off the funds.
Further, RBI has defined the term ‘unit’ to include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In case of business enterprises (other than companies), banks / financial institutions may also report (in the Director column) the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise.
Hence willful defaulter is when there is:
a) Default in repayment obligations by the unit to the lender even when it has the capacity to honour the said obligations.
b) Default in repayment obligations by the unit to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
c) Default in repayment obligations by the unit to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
d) Default in repayment obligations by the unit to the lender and has also disposed off or removed the movable fixed assets or immovable property given by it for the purpose of securing a term loan without the knowledge of the bank/lender.
How willful defaulters are affecting the economy?
The economy is facing the issue of Non-Performing Assets (NPAs) in Banking Sector especially in case of Public Sector Banks (PSBs). NPA is an asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. In these NPAs there are two categories of defaulters:
a) Those who are unable to pay back due to economic slowdown both in domestic and global market and other reasons outside their control.
b) Willful defaulters.
PSB’s NPAs have touched a whopping Rs 3.69 lakh crore by 2015. Of this, willful defaulters owe public sector banks Rs 64,335 crore, which constitutes about 21 per cent of total NPAs. If government is able to recover the default amount by such willful defaulters or restrict them for future, it could easily finance government’s MNREGA and health expenditure and other social sectors out of that amount.
Government initiatives
The Government has taken various measures to deal with both these categories of defaulters.
• In order to deal with default due to economic slowdown, the Government has taken various measures to revive the stressed sectors which mainly include steel, textiles, power and roads among others.
• The Government has also done recapitalization of banks by providing Rs. 25,000 crore in the last year Union Budget 2015-16 as well as in this year’s budget 2016-17.
• Transparency and professionalism has been brought in appointment process for top management positions in the PSBs including Chairmen and Managing Directors.
• The Government has taken various measures to make the management professional, has given full autonomy to the banks in taking commercial decisions without any interference from the Government.
• Bankruptcy Law has been cleared by the Parliament.
• The SARFAESI Act and DRT Act have been amended to make the recovery process more efficient and expedient. Wherever it was observed that number of cases in which action taken by the banks against guarantors for recovery of defaulted loans is insufficient, the Government has advised the banks to take action against guarantors in the event of default by borrowers under relevant Sections of SARFAESI Act, Indian Contract Act and RDDB & FI Act.
• A number of other steps have been taken by the Government and Reserve Bank of India. Government has decided to establish six new Debt Recovery Tribunals (DRTs), to speed up the recovery of bad loans of the banking sector. In addition, the Government has advised Public Sector Banks (PSBs) to constitute a Board level Committee for monitoring of recovery and to increase the pace of recovery and manage NPAs.

Marginal Cost of Funds based Lending Rate

Marginal Cost of Funds based Lending Rate

Marginal Cost of Funds based Lending Rate (MCLR) will be the internal benchmark lending rates. Based upon this MCLR, interest rate for different types of customers should be fixed in accordance with their riskiness.
MCLR is calculated using different components such as:
a) Marginal cost of funds:
The marginal cost that is the novel element of the MCLR. The marginal cost of funds will comprise of Marginal cost of borrowings and return on net-worth. According to the Reserve Bank of India, the Marginal Cost should be charged on the basis of following factors:
• Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
• Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
• Return on net-worth – in accordance with capital adequacy norms.
b) Negative carry on account of Cash Reserve Ratio (CRR):
It is the cost that the banks have to incur while keeping reserves with the RBI. The RBI is not giving an interest for CRR held by the banks. The cost of such funds kept idle can be charged from loans given to the people.
c) Operating Costs:
It is the operating expenses incurred by the banks.
d) Tenor Premium:
It denotes that higher interest can be charged from long term loans.
The MCLR applicable from 1 April, 2016 have to be revised monthly by considering some new factors including the Repo rate and other borrowing rates.

Sai Praveen

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