Summary

Economics Class 38

THE CLASS STARTED WITH A BRIEF OVERVIEW OF THE PREVIOUS TOPICS (01:04 PM)

MSMEs (01:06 PM)

Data and Facts:
MSMEs contribute around 40% of total exports.
86% of MSMEs are unregistered (formalization)
Women ownership: Women won about 20% of all MSME businesses across India.
Rural Base: 60% of MSMEs belong to rural India.
Significance of MSMEs:
A) Economic Significance:
Employment transition, MSME is a key driver for the transition from an agrarian to an industrialized economy.
Inclusive Growth: Women ownership, traditional craftsmen and 60% of MSMEs belong to rural India ensuring inclusive growth.
Export potential: MSMEs contribute around 40% of total exports playing an instrumental role in maintaining trade balance and forex reserves.
MSME is the largest employer after agriculture in rural India and this promotes rural economic growth.
Building Brand India: Participation in the global market will not only help MSMEs to grow their business but also become globally competitive enterprises.
Indigenous growth: MSMEs can help develop India's domestic strength and substitute foreign products.
Strengthen the domestic supply chain: They can create an environment where MSMEs act as ancillaries to larger industries and integrate the whole supply chain.
Value-added services: There is clear-cut demand for value-added products and services.
Reduce Import bills: By strengthening the domestic industry they reduce the need for imports of industrial parts and requirements.
B) Social Significance:
Social justice: It can give marginalized groups a chance to participate in the economic growth of the nation. for example, Tribal handicrafts generate a flow of revenue to underdeveloped tribal areas.
Balanced regional development: With an almost even distribution of MSMEs across the length and breadth of India, They can ensure balanced regional development.
Reduce work-based migration: Inclusive development is a main feature of MSMEs and MSMEs have a strong rural base thereby reducing work-based migration.
Tribal development: Tribal products have seen huge demand in the recent past.
Removes income inequality.
Challenges of the MSMEs:
Poor insolvency: The insolvency process takes around 7.9 years according to World Bank.
Around 90% of MSMEs operate in the organized sector (Lack of social security, low economies of scale, inadequate branding and advertisement expenditure, entry red tape.
Regulatory hurdles: MSMEs require government permissions and approval making it difficult for smaller entrepreneurs.
Low production capacity.
Lack of access to institutional credit.
Increased international competition.
Lack of adequate infrastructure.
Non- availability of skilled labour.
Poor digital presence.
MSMEs turning out to be dwarf i.e. 10 years of existence but less than 100 permanent employees.
Automation and artificial intelligence i.e. Risk of industrialization.
Government Initiatives:
The government has doubled budgetary allocation.
Stand up India programme to promote entrepreneurship and innovation.
Udyog Adhar memorandum: It replaces the filling of manual entrepreneurs memorandum with online facilities for filling.
Labour Reforms: Introduction of Shram Suvidha Portal to comply with labour laws.
Credit-linked Capital subsidy scheme for the upgradation of technology.
Focus on skill development: Entrepreneurs' skill development program and assistance to training institutions.
Following U K Sinha committee recommendations (Restructuring stressed loans by creating a government-sponsored fund of funds worth 10,000 crores, promoting collateral-free loans.
Way Forward:
Focusing on cluster manufacturing i.e. to develop self-sufficient clusters to improve manufacturing competence.
Focusing on E-commerce and marketing.
Collaborations between MSMEs and E-Commerce.
Promoting the culture of innovation.
Leveraging the industrialization.
Classification of MSMEs:

Types	Micro	Small	Medium
Manufacturing and Services Sector	Investment less than 1 crore and Turnover less than 5 crore	Investment less than 10 crore and Turnover less than 50 crore	Investment less than equal to 50 crore and Turnover less than 250 crore

BANKING AND MONEY SUPPLY (01:52 PM)

Issues faced by the Banking system in India:
Interest margins of the bank are getting reduced.
Challenges of Asset liability mismatch. ( Infrastructure loans)
Challenges of double financial repression. ( Financially repressed from assets and liability side)
The twin balance sheet problem and the problem of overleveraging by banks, Were the biggest threats the Indian banking system faced between 2011 to 2016.
NPAs are loans given by banks and financial institutions whose principal and interest are delayed beyond 90 days.
In simple terms, Any asset that ceases to provide returns to its investor for an extended period is referred to as NPA.
Classification of NPAs:
Substandard: less than or equal to 12 months
Doubtful Assets, If the asset is in the substandard category for a period of more than 12 months.
Lost Assets: when the banks or auditors mentioned the loss but it is not been written off.
Impact of NPAs:
Negative impact of economic growth.
NPAs can lead to high inflation.
Credit lending to small-scale sectors is affected.
Indirect impact on inclusiveness due to increased cost of borrowing for priority sector.
BASEL Norms:
The BASEL committee on banking supervision issues BASEL Norms for international banking regulations.
Basel is a city in Switzerland and it is the headquarters of the Bureau of International Settlements. (BIS) which promotes cooperation among the central banks with the common goal of financial stability and banking regulatory standards.
The Basel Accord refers to a set of agreements by the BCBS that primarily address risk related to banks and the financial system.
The agreement's goal is to ensure that financial institutions should have sufficient capital to meet obligations and absorb expected losses.
The Basel Accord for the banking system has been accepted by India in fact RBI has imposed more stringent standards on a few parameters than the BCBS.
A) BASEL-I:
BCBS introduced a capital measurement system called the Basel Capital Accord in 1988.
It was also known as Basel I and was entirely concerned with credit risk.
It established the capital and risk-weighted structure for the banks in the form of the Capital adequacy ratio.
Capital Adequacy Ratio = Total Capital/ Risk Weighted assets.
RWA refers to Assets with varying risk-weighted profiles.
For Example, An asset backed by collateral could be less risky than a personal loan with no collateral security.
Capital is divided into two categories:
1) Tier-1 Capital:
It is the bank's core capital because it is the primary measure of the bank's financial strength.
The majority of the core capital is made up of disclosed reserves and common equity.
2) Tier-2 Capital:
It is used as supplemental funding as it is less reliable.
It consists of undisclosed reserves, preference shares, and sub-ordinate debt (Settled after Senior debt is settled, less liquid).
In 1999, India adopted BASEL-1 guidelines.
B) BASEL-II Guidelines:
BCBS published BASEL-II guidelines in June 2004, which were considered to be refined and reformed versions of BASEL-I Accord.
The guidelines were founded on three pillars.
1) Capital adequacy requirement:
The bank should keep a minimum capital adequacy requirement of 8 percent of the risk-weighted assets (Risk weightage includes three types of risks: Credit, operational, and Market risk)
2) Supervisory review: As per this banks were required to develop and implement better risk management techniques for monitoring and managing all three types of risks.
3) Market discipline: It requires strict disclosure requirements. i.e. Banks must report their CAR, Risk exposure, and other information to the central bank on a regular basis.

THE TOPIC FOR THE NEXT CLASS: BASEL III NORMS.