The RBI and the Indian government together have worked out some measures like relief funds and free ration to the poor, cut in the repo rate, relaxation in repatriation of export proceeds, increase in the state-wise Ways and Means Advances credit limit and a moratorium of 3 months to alleviate, to some extent, the economic distress caused by the COVID-19. On April 17th, the RBI once again announced a slew of measures directed towards SMEs, banks and NBFCs with an intention to improve credit supply and enhance liquidity.
Let us now explore the various measures thus introduced to understand the possible impact on the beneficiaries of these lending institutions, which is, businesses.
A long-term repo lending operation targeted to banks investing in NBFC’s debt means more relief in terms of liquidity and a reduction in interest rates for borrowers.
Refinance of banks in the housing, agricultural and rural development and small industries sectors have been announced, which means small (rural) businesses, housing finance companies and agriculture-based lenders will have more flexibility in seeking loans.
Reverse Repo rate has been reduced by 25 basis points. This would enable banks to utilize the 6.9 lakh crore worth rupees parked with the RBI to extend their lending support.
Stressed borrowers holding non-NPA loans would be spared from being classified as defaulters even if they failed to clear their dues on 1st March, before the 90-day moratorium was announced. These accounts get a relief from being classified as bad debts for 180 days as the moratorium period would be excluded from the count of the 90-day NPA norm.
To ease out the impact that stressed borrowers will have on bank credits, the RBI has advised banks to maintain a higher provision of 10% on moratorium loans over two quarters. This will also help banks to distinguish borrowers with long-term liquidity problems.
Till 30th September commercial banks and cooperative banks would not have to pay dividends.
RBI pumps liquidity to commercial banks in terms of relaxation of cash coverage ratio to 80% from 100%.
Completion date for commercial real estate projects have been extended by a year which also means that NBFCs get the benefit of a relief of one year from classifying stressed accounts as NPAs.
Let us now look at what experts think must be done to foster economic recovery in addition to the measures that have already been announced. Information source: https://home.kpmg/in/en/home.html
Travel/Airlines and the hospitality & entertainment sectors were the first to bear the brunt of the pandemic and post-lockdown they would be the last to recover. Some small players in these fields would be even forced to shut their gates forever. To prevent a situation of near extinction government bailouts made separate for these industries is necessary. Apart from that the industries should be allowed relaxations such as these:
12 months moratorium on all interests, covenants, principals
12 months GST waivers including property and excise taxes
Salary subsidy for 1 year provided by the government
Deferment of GST dues before the COVID-19 curb
In general, after proper evaluation of the affected industries the following measures/renewal of existing norms should be put in place.
Micro and macro-level industries, all combined, require a fiscal stimulus within the range of Rs 6 – 10 trillion for which the RBI needs to print new money.
Increase of input credits and GST relaxation in sectors where input credits are not applicable (for example eateries and restaurants).
The current moratorium does not provide interest waive-off. However, experts feel that the deferred loans must not accrue interests for the interim to make the measure more effective.
Insolvency limit for SMEs and MSMEs must be increased.
Re-evaluation of taxes and extension of tax compliances including tax relief deadline to strengthen businesses and encourage consumerism.
Relaxation in project delays in the real estate sector and facilitation of lending rate by fixing a reduced repo rate.
An all-inclusive financial package along the lines of the U.S and Germany must be announced in the due course including wage subsidies.
Affected dealers and manufacturers in the automobile sector should be provided a repayment support scheme.
Exporters should receive an adhoc reimbursement with an added 5 – 10 percent concession against the recently approved Remission of Duties or Taxes on Export Products.
The economic situation that we are currently facing is new, like the virus itself, and this has caused financial reforms to be in a state of flux. Latest measures exist along with speculations and opinions about reforms that must be introduced in addition. Time will tell which measures will be ultimately implemented and how will they impact the demand and the supply side.
Tune in for more information on businesses that stand a chance of recovering faster owing to their configuration. Continuity would be a challenge in the coming days, but we will tell how with the right mindset a clearer vision could be attained.