Letters to the editor dated April 30, 2020

With reference to the editorial ‘Basic mismatch’ (April 30). The booster shot given by the regulator to stimulate the liquidity of the debt funds in the aftermath of the Franklin Templeton fiasco would be an ad-hoc approach. In a perpetual falling interest rate scenario, the credit rating of debt securities with fixed maturity plans are bound to underperform, and banks may be reluctant to take high exposures in low-rated bonds. The only solace for banks would be if there is an upward market momentum in India post the pandemic.

From a provisions point of view, irrespective of the category of investment viz, hold to maturity or marked to market, if banks are empowered to have controlling interest by exercising special veto rights over the mutual funds, it would enable them to have long-term investment interest in the fund and derive the market benefits.

Bengaluru

Refers to ‘Healthy economy can cure financial sector’ (April 30). As all the segments of the economy function in close coordination with each other, any weakness in one segment creates a contagion effect on the whole economy. The economy is suffering from the catastrophic impact of the swiftly spreading epidemic. Prolonging the lockdown is injurious to the health of the economy, and as such, the policymakers and administrators have to find a mid-way remedy to save the precious lives of the human race and simultaneously support the revival of economic activities.

The financial sector, although not an exception to the economic crisis, is flooded with liquidity. However, the demand for credit is dim due to stagnant economic activities. The lenders are equipped to lend, but the borrowers are lacking the capacity to absorb the credit. The inevitability of rise in bad assets are dissuading lenders, and therefore the financial health of these institutions are deteriorating. At this juncture, the government and the banking regulator have to keep the financial sector robust and resilient to enable the sector to function as drivers of growth. To induce the lenders to speed up the financial intermediation activities and to enable and equip the financial intermediaries, the Reserve Bank must remove the liquidity crunch as and when it appears.

Kottayam

Apropos ‘SMEs need I-T relief’ (April 30). Just as the RBI came out in support of retail borrowers and asked banks to provide three months’ moratorium, the government must offer a comprehensive relief package for MSMEs, which should cover all sectors. Even though such a package can not please everyone, the one thing must feature prominently is relief in income tax provisions. The treatment of trade receivables and provisions is never smooth for both entrepreneurs and their accountants. Hence permitting a deduction for impairment of trade receivables due to Covid-19 is warranted. This relief will be huge for all small businessmen who do not know as to when their trade receivables will be realised into cash.

Noida

This is with reference to ‘Why investors in wound-up Franklin funds may have to wait 3-4 years to see their money again’ (April 30). The Franklin Templeton episode is an outcome of the virus outbreak, and aggravated by a long-drawn battle between the Indian and foreign banks in the bond market. While Indian banks have to categorise a portion of their bond portfolio as held to maturity, the foreign banks are allowed to trade their bond portfolios. Foreign banks have high-risk appetite and therefore short sell in the market, driving yields further down and erasing the value of Indian banks’ HTM portfolio. Therefore, some of the big banks formed a cartel and stopped supply of low-rated bonds to foreign banks. Asset management companies such as Franklin Templeton were caught unawares as they make substantial investments in low-rated bonds chasing higher interest rates. Now retail investors are on the receiving end.

Chennai