Microfinance Institution (MFI) Sector Stress and Asset Reconstruction Companies (ARCs)

The microfinance sector is experiencing significant stress due to unchecked credit growth and borrowers' overleveraging, leading to increased delinquencies. This situation has prompted banks and microfinance-focused NBFCs to sell non-performing loans, creating opportunities for ARCs.

Opportunities for ARCs

• ARCs see potential value in acquiring non-performing loans, especially if sold on a cash-to-security receipts (SRs) basis.
• IndusInd Bank has invited bids for Rs 1,573 crore of non-performing microfinance loans, aiming for a 5.04% recovery rate.
• Ujjivan Small Finance Bank and Utkarsh Small Finance Bank are also selling non-performing loans with targeted recovery rates of 14.64%.

Challenges and Considerations

• ARCs would consider acquiring portfolios if the selling price is not more than 10% of the outstanding loans.
• If collections remain with the banks, the saleability of portfolios increases, as ARCs lack infrastructure for recovering unsecured loans in rural areas.
• ARCs predominantly use third-party agents for recoveries, which poses challenges like high costs and potential regulatory violations.

Shift in ARC Focus

• With banking sector NPAs at historical lows, ARCs are focusing more on retail NPAs, particularly secured retail pools.
• Challenges in acquiring microfinance portfolios include ensuring compliance, limited borrower data, and servicing numerous accounts.

Future Directions

• Advanced technology and artificial intelligence are expected to enhance predictive analytics and compliance in the future.

Indian Economic Growth Forecast

The Indian economy is anticipated to grow by 6.6% in 2025 and 6.7% in 2026, as per the UN's World Economic Situation and Prospects 2025 report.

Key Growth Drivers

• The public sector plays a crucial role in funding infrastructure, digital connectivity, and social infrastructure.
• Strong investment growth is projected to continue into 2025.
• Expansion in the manufacturing and services sectors will drive the economy.
• Robust export growth in services and specific goods like pharmaceuticals and electronics is expected.

Agricultural Outlook

The 2024 favorable monsoon rains have boosted summer sowing, improving agricultural output expectations for 2025.

Regional Economic Projections

South Asia's economy is expected to grow at 5.7% in 2025 and 6% in 2026, primarily driven by India.

Risks to Economic Outlook

• Potential escalation of geopolitical tensions.
• Deceleration in external demand and ongoing debt challenges.
• Social unrest and vulnerability to climate hazards.

Inflation and Global Growth

Consumer price inflation is forecast to decrease from 4.8% in 2024 to 4.3% in 2025, within the RBI's medium-term target range of 2–6%.

Global growth is projected to remain steady at 2.8% in 2025.

Opportunities and Challenges

India and other resource-rich developing countries have opportunities to boost growth and create jobs through rising demand for critical minerals.

However, these opportunities come with risks, necessitating forward-looking policies, fair benefit-sharing, and sustainable resource extraction practices.

UN Secretary-General António Guterres emphasized the need for global cooperation to manage economic shocks and climate risks effectively.

Introduction of Self-Attestation Facility by EPFO

The Employees Provident Fund Organisation (EPFO) is set to introduce a self-attestation facility beginning in June, which will allow its 80 million active members to complete the Know Your Customer (KYC) process without requiring employer approval.

Current KYC Process

• KYC is a one-time process that verifies members' identities by linking their Universal Account Number (UAN) with KYC details.
• Currently, the process requires employer approval, causing delays and potential issues if a firm has closed.

The new self-attestation facility will eliminate paperwork and decrease claim rejections.

EPFO 3.0 and IT Infrastructure Upgrade

EPFO is upgrading its information technology (IT) infrastructure to accommodate the influx of new subscribers from three employment-linked incentive (ELI) schemes.

Features of EPFO 3.0

• Focus on scalability to provide enhanced services to members.
• Expected increase of active members to potentially reach 100 million.

New Withdrawal Facility

EPFO is considering a partnership with banks to introduce a new facility enabling members to withdraw money up to a certain limit without filing claims.

Union Labour Minister Mansukh Mandaviya mentioned efforts to develop a robust platform for hassle-free money withdrawal, akin to the banking system.

Planned EPFO 3.0 Launch

The EPFO aims to launch EPFO 3.0 by March, with a goal to resolve nearly all user queries through an effective redressal system.

India's Defence Procurement Policy Reforms

India's defence procurement policy, often criticised for its delays and inefficiencies, is set to undergo significant reforms within six months to a year, as announced by Defence Secretary Rajesh Kumar Singh. This follows the Ministry of Defence's decision to deem 2025 as the "Year of Reforms" and an anticipated revamp of the Defence Acquisition Procedure (DAP) 2020.

Key Issues and Planned Reforms

• Current Challenges:
  • Singh described the procurement system as "broken," highlighting consistent failures to meet timelines.
  • He noted issues such as "gold-plated" requirements and lengthy evaluation processes.
• Reform Focus:
  • Streamlining timelines and addressing procedural inefficiencies.
  • Ensuring more pragmatic and timely preparation of Requests for Proposal (RFPs).

Economic and Industrial Considerations

• Resource Allocation:
  • Despite a 1.9% GDP allocation to defence, full utilisation is hampered by domestic absorptive capacity.
• Self-Reliance Challenges:
  • Self-reliance in aerospace is limited by the absence of critical technologies such as jet engines.
  • India's industrial base remains narrow, affecting mass production capabilities.

Competition and Market Dynamics

• Encouraging Competition:
  • The defence sector is described as the "last vestige of the license-permit Raj," with industrial licensing needing acceleration.
  • Efforts are needed to level the playing field for new entrants and support MSMEs in climbing the manufacturing value chain.
• Startups and Innovation:
  • India's position as the world's third-largest startup ecosystem requires providing these startups with visibility and support for orders.

Foreign Direct Investment (FDI) and Global Collaborations

• FDI Policies:
  • A liberal policy allows up to 74% FDI through the automatic route, with hopes for increased investments like Saab's 100% FDI.
• Strategic Partnerships:
  • Models such as the strategic partnership framework and collaborations like Tata and Airbus are encouraged.

Way Forward and Long-term Goals

• Technology and Capability Development:
  • Short to medium-term reliance on technology transfer, with long-term goals focused on indigenous development with DRDO support.
• Public Policy and Indigenous Supply Lines:
  • Optimization of policy-making amidst constrained choices, with an aim to develop a large manufacturing ecosystem for 'Aatmanirbharta'.

Illegal Online Pharmacies

According to the US Trade Representative's annual report, nearly all of the world's 35,000 online pharmacies are operating illegally. Consumers using these pharmacies risk obtaining ineffective or dangerous drugs. The report reveals that 96% of these pharmacies violate laws, often lacking licenses and selling medications without prescriptions or safety warnings.

• The websites of these illegal pharmacies often resemble legitimate e-commerce platforms.
• They falsely claim approval from entities like the Food and Drug Administration (FDA).
• The FDA and US Drug Enforcement Administration have issued warnings about these risks.

A survey by the Alliance for Safe Online Pharmacies' Global Foundation found that nearly 25% of Americans using online pharmacies encountered substandard or harmful medicines.

Counterfeit Drug Operations

Federal prosecutors reported operations involving illegal drug sellers from the US, Dominican Republic, and India. They packaged synthetic opioids into pills disguised as legitimate prescription drugs, resulting in at least nine deaths from narcotics poisoning between August 2023 and June 2024.

Global Counterfeit and Piracy Concerns

The report highlights the issue of counterfeit or pirated products in 19 countries, with specific emphasis on online retailers in China and Asia engaged in illegal activities.

• Examples include cracked down operations in places like Vietnam and Brazil.
• Cyberlockers and bulletproof ISPs are problematic as they enable piracy.

Challenges and Progress in Counterfeit Goods

The report acknowledges progress in fighting counterfeit goods. Notably, US authorities collaborated with industry groups to shut down a piracy ring in Hanoi, Vietnam.

• The site had over 6.7 billion visits from January 2023 to June 2024.

Concerns with Online Platforms

Several platforms like Avito, Baidu Wangpan, Pinduoduo, Douyin Mall, and Shopee were named for hosting counterfeit goods or enabling piracy.

• IndiaMART was specifically highlighted for offering counterfeit products.

Physical Markets and Intellectual Property Theft

The report also identifies real-world locations notorious for selling counterfeit products, such as markets in Turkey and the UAE. Bangkok's MBK Centre was noted for attempting to reduce counterfeiting, though challenges remain.