Editorial 1 : A Bigger BRICS
Context: Expansion of the group is in offing, challenge for founder members is to ensure it does not become a Chinese bandwagon.
Introduction
- BRICS is an acronym for the grouping of the world’s leadin economies, namely Brazil, Russia, India, China, and South Africa.
- The rush to join BRICS, the grouping that brings together Brazil, Russia, India, China and South Africa and represents 40 per cent of the world’s population and 23 per cent of global GDP, has sometimes been explained as triggered by FOMO, a fear of missing out.
Recent events
- The geopolitical shifts in the world from the time of Russia’s invasion of Ukraine, have set off frenetic group shopping as middle-sized countries with decent economies in the global south look for both voice and leverage. Both are potentially possible in BRICS, made up of five regional heavyweights.
- More than 20 countries are in the queue. If media reports are correct, five applicants — Saudi Arabia, Indonesia, the UAE, Egypt and Argentina — may be granted membership this August at the Cape Town summit.
Desirability of a bigger BRICS
- While it is always desirable to have bigger groupings than small clubs, especially when the stated aim of the group is to project the interests of the non-monolithic global south, an increase in membership is also likely to weigh the group in favour of China, the world’s second largest economy. Other than the five possible new entrants this year, those waiting to join are also part of the Chinese Belt and Road Initiative.
- Inherent in this is the likelihood of such a grouping being projected as a Chinese-led anti-American bloc.
India’s concerns
- Understandably, Delhi, which has in recent days demonstrated a new resolve in taking the bilateral relationship with the US to a new level, has been wary of expansion. Indeed, the long line of aspiring members is seen already as fueled by China, with the tacit backing of Russia.
- Last year’s BRICS declaration reflects India’s concern that any addition of new members must follow the carefully thought-out objective criteria for membership, mutually discussed among the present members, so that all are on the same page regarding the logic of expansion.
India’s stand
- At the BRICS foreign ministers’ meeting last month, external affairs minister S Jaishankar called BRICS expansion a “work in progress” that had to take into consideration how the present BRICS countries worked with each other, and how BRICS works with non-BRICS countries.
- Realizing perhaps that it may not be able entirely to stave off an expansion — many of the candidates are friends of India too — Delhi appears to have come to terms with a limited addition of five members.
Conclusion
- The challenge would be for the original BRICS members — India, Brazil and South Africa (remember IBSA?) — and the new entrants to ensure that the group does not become a Chinese bandwagon.
Editorial 2 : Welcome Turnaround
Context: Banks have seen an improvement in asset quality, but areas of stress in retail loans require close monitoring
Introduction
- As per the Reserve Bank of India’s latest financial stability report, banks’ gross non-performing assets have fallen to a 10 year low of 3.9 per cent in March 2023.
- The improvement has been across the board with bad loans falling in both public and private sector banks, and in major sectors of the economy.
Non-Performing Assets
- A loan becomes an NPA when the principal or interest payment remains overdue for 90 or more days.
- Types of NPA:
- Sub Standard: A sub-standard asset is one that is classified as an NPA for a period not exceeding twelve months.
- Doubtful: A doubtful asset is one that has remained as an NPA for a period exceeding twelve months.
- Loss: A loss asset is one where loss has already been identified by the bank or an external institution, but it is not yet completely written off, due to its recovery value, however little it may be.
Other highlights of the report
- There has also been a steady improvement across key financial parameters of the corporate sector. As per the report, private non-financial companies have managed to bring down their debt-to-equity ratios further, and have seen an improvement in their debt servicing capacity.
- As a consequence, unlike in the past when the balance sheets of both banks and firms were impediments to investment activity, they are now “engendering a twin balance sheet advantage for growth” as per RBI Governor Shaktikanta Das. These are encouraging signs for the economy.
- The improvement in the asset quality of banks is likely to continue. Stress tests by the central bank suggest that bad loans are likely to decline further to 3.6 per cent by the end of March 2024.
Area of Concerns and sigh of relief
- However, this trend could be disrupted if the macroeconomic environment worsens.
- In the retail loan category, even though NPAs are low, loans where the principal or the interest payments or any other amount wholly or partly overdue has remained outstanding for a specified time (special mention accounts), were high at 7.4 per cent.
- For public sector banks they were even higher in both the secured and unsecured loan category, amounting to almost a tenth of their retail portfolio. For public sector banks, 6.1 per cent of education loans have turned bad, as have 18 per cent of credit card receivables.
- The share of unsecured retail loans has also risen from 22.9 per cent to 25.2 per cent. Further, under the emergency credit line guarantee scheme, one-sixth of accounts have turned non-performing, with the distress being majorly seen in micro enterprises, in the services and trade sectors.
- In the case of industry, while bad loans have fallen, they remain high in segments such as gems and jewellery, construction, food processing and textiles. These areas require close monitoring.
Conclusion
- The Banks have managed to sustain the momentum in their profitability as their net interest margins continue to grow, their provisioning coverage ratio is high, and their capital position is healthy.
- In fact, the capital to risk-weighted assets ratio has touched a high implying that banks are well capitalized and can absorb macroeconomic shocks. As per the RBI’s assessment, they will be able to comply with the minimum capital requirements even under adverse stress scenarios.