Facebook-Jio deal may see more foreign e-commerce firms flock to India

WhatsApp's integration into Jio's e-com platform holds the key: Experts

Some recent regulatory developments may have precipitated the Facebook-Jio deal. Going forward, this may increasingly prompt foreign e-commerce operators to consider setting up base in India, say legal and tax experts.

Pressure from the recently-expanded scope of Equalisation Levy that covers non-resident e-commerce platforms, the Reserve Bank of India’s (RBI’s) mandate that all data related to payments should be stored only in Indian systems, besides the rigours of an imminent Data Protection Law have played their part in shaping the Facebook-Jio deal, noted Tarun Jain, partner, BMR Legal.

The deal may not throw up any major tax issues, other than tax complexities associated with e-commerce business, said Abhishek Rastogi, partner at Khaitan & Co. The expanded scope of Equalisation Levy, as per the Finance Act 2020, is unlikely to influence the deal since most Jio platforms are likely to qualify as Indian e-commerce operator.

ALSO READ: Jio Platforms now more valuable than rest of RIL businesses put together

“It will, however, be interesting to watch the manner in which WhatsApp is integrated with these platforms and facilitates online transactions,” said Lokesh Shah, partner, L&L Partners.

Given the wide scope of Equalisation Levy, which also includes a facilitator such as WhatsApp service, the applicability will need to be examined based on the actual role of WhatsApp/ Facebook, Shah added.

Experts, however, point out that becoming an Indian tax resident could turn out to be a double-edged sword for foreign e-commerce players as it would expose the global income of such operators to tax in India.

Coronavirus impact: Credit growth likely to remain modest, says RBI

MPC report says better transmission of rates would remain priority.

With the Covid-19 pandemic posing huge risks for the Indian economy, the credit growth is likely to remain modest, reflecting weak demand and risk aversion, said the Reserve Bank of India (RBI) in its monetary policy (MPC) report.

“Better transmission of monetary policy impulses to the credit market would remain a priority,” the RBI said.

Credit offtake in the economy has been fairly slow with non-food credit growing at 6.1 per cent in FY20 (up to March 13), compared to 14.4 per cent growth in the same period last fiscal year.

According to RBI, the slowdown in credit growth was spread across all banks, especially those in the private sector. However, in the recent period (December 2019-March 2020), the public sector banks (PSBs) have seen a slight uptick in credit offtake.

The data shows that of the incremental credit extended by scheduled commercial banks (SCBs) during the year (March 15, 2019 to March 13, 2020), 62.6 per cent was provided by private sector banks, 36.6 per cent by PSBs, and 0.8 per cent by foreign banks.

The report says banks’ investment in commercial papers (CPs), bonds, debentures, and shares of public and private corporates, which is a part of non-SLR (statutory liquidity ratio) investment, has gone down in the second half of FY20 (up to March 13) than a year ago because of lower investments, resulting non-food credit growth being lower.

“With credit offtake remaining muted and non-SLR investments declining, banks increased their SLR portfolios. Banks held excess SLR of 8.4 per cent of net demand and time liabilities (NDTL) on February 28, as compared with 6.3 per cent of NDTL at the end of March 2019,” RBI said.

Das meets heads of PSBs, discusses transmission of rates, stressed assets

The meeting focused on credit flow to the 'productive sectors' which include micro, small and medium enterprises and non-banking financial companies.

The Reserve Bank of India (RBI) Governor Shaktikanta Das (pictured) on Wednesday met the chiefs of major public sector banks (PSBs) to get their feedback on transmission of rates. He also asked them to improve coordination for swift resolution of stressed assets.

The meeting focused on credit flow to the ‘productive sectors’ which include micro, small and medium enterprises and non-banking financial companies (NBFCs). The governor discussed the progress on deepening digital payments through focused outreach activities planned by banks to make identified districts in each state and Union Territory digitally enabled.

“There has been some improvement in the banking sector. It remains resilient, even though the current economic conditions may pose certain challenges,” said Das.

The governor urged banks to proactively tackle emerging challenges swiftly, particularly with regard to stressed asset resolution in a coordinated manner, the RBI said in a release.

Das has been meeting PSB chiefs at periodic intervals. The RBI has been nudging banks to pass on rate-cut benefits to consumers, so that there is sufficient credit offtake. He had a similar meeting with bank chiefs in October and discussed transmission and credit delivery to important sectors.

The monetary policy committee (MPC) has so far cut the benchmark policy rates by 135 basis points (bps) since February this year. Against a 135-bps cut by the MPC, in the credit market, the one-year median marginal cost of funds-based lending rate has declined by 49 bps and the weighted average lending rate on fresh rupee loans sanctioned by banks declined by 44 bps.

The MPC last week kept the policy rates unchanged, while it was anticipated that the committee would cut rates to boost growth. But the governor said they wanted to allow some more time for the previous rate cuts to play out. Therefore, the MPC decided to hit ‘pause’.

The governor in his statement during the monetary policy had said, “Going forward, transmission is expected to improve with the introduction of the external benchmark system, as most banks have linked their lending rates to the policy repo rate of the RBI.”

Business Standard

Explained: Why RBI's repo rate cuts are not enough to bolster GDP growth

Transmission of rate cuts by banks has been slow because any lowering of interest rate, with deposit rates unchanged, will reduce banks' net interest income spread, affecting their revenue.

Business Standard : In order to boost the country’s sagging economy, the Reserve Bank of India’s (RBI’s) monetary policy committee, holding its fifth bimonthly meeting from Dec 3 to 5, is widely expected to again cut the key repo rate by 25 basis points (bps).

Official data released by the government last week showed that India’s gross domestic product (GDP) growth in the July-September quarter of 2019-20 slowed to a 26-quarter low of 4.5 per cent, on a year-on-year basis, for a number of reasons. Weak manufacturing growth, a fall in consumer demand and private investment, and lower exports due to a global slowdown were cited as some of them.

For its part, the RBI has lowered the repo rate — at which commercial banks borrow from it — by a cumulative 135 bps so far this calendar year to 5.15 per cent, the lowest in nine years. Even so, there has been little recovery in the economy during this period. Let’s understand why.

Relation between interest rate and GDP

For any bank, its net interest income (NII) — the difference between the interest it receives on loans given and the interest it pays on deposits — is the main source of its revenue.

A change in lending rate affects the cost of raising funds in the economy. For instance, a cut in lending rate makes loans cheaper. This prompts industrialists to borrow more for, say, capacity expansion (investment), and households for private consumption. This has a direct bearing on the country’s GDP, which, by definition, is the sum total of private consumption, private investment, government investment/spending, and net exports.

However, any cut in banks’ lending rate, should they continue paying interest on deposits at the same rate as before, would reduce their NII spread. That would have a negative impact on their revenues. So, that should explain why banks have shied away from transmitting RBI’s repo rate cuts to borrowers in the form of lending rate cuts.

During its fourth bimonthly review in October, the MPC noted that policy “transmission has remained staggered and incomplete”. In response to a 110-bp cumulative cut in repo, the weighted average lending rate cut on fresh loans had been only 29 bps, it said.

No special liquidity window for NBFCs, says RBI deputy governor

The NBFC issue started after Infrastructure Leasing and Financial Services defaulted on a loan last year.

Business Standard : Extending a special liquidity facility to non-banking financial companies (NBFCs) is not being considered, said the Reserve Bank of India (RBI).

In a teleconference with researchers and analysts, N S Vishwanathan, deputy governor at the central bank, said: “The RBI’s position is that there is adequate liquidity in the system and it is for the lenders to take a view on which borrower to give money to.”

He was responding to an observation on there being an extreme lack of confidence in financial markets to lend to entities with a credit rating below ‘AAA’. And, that the liquidity problems faced by such entities could create further stress on the financial system, impede monetary transmission and affect growth.

The NBFC issue started after Infrastructure Leasing and Financial Services defaulted on a loan last year. The fallout impacted other major NBFCs, like Dewan Housing Finance which defaulted in July and then Reliance Capital. Last month, Altico Capital was added to the list of defaulters.

In May, RBI issued draft guidelines on a liquidity risk management framework for NBFCs and core investment companies (CICs). It is still in consultation with stakeholders on further action in this regard.

To a question on RBI’s plans regarding changes in the annual review process of banks or NBFCs, and if such changes would impact the ongoing annual review of financial year 2019, M K Jain, another deputy governor, said: “RBI has decided to revamp its regulatory and supervisory structure, and is creating a specialised cadre. Offsite supervision, as well as the analytical vertical, is being strengthened. For NBFC supervision, we have also strengthened all the core pillars — onsite supervision, offsite, market intelligence and the statutory auditor angle.”

On steps to ensure stability of the financial system and on solvency at some housing finance companies, he said: “RBI makes periodic assessment of risk and vulnerability of the financial system to shocks emanating both from domestic and external adverse developments, and takes mitigating steps to enhance its resilience. Such assessments are published twice a year in the financial stability report. The vulnerability arising out of interconnectedness between banks and non-banking financial institutions forms part of the assessment.”