As the ripples of Covid-19 pandemic are felt across the economy, the Reserve Bank of India on Friday said, "The priority is to undertake strong and purposeful action in order to minimise the adverse macroeconomic impact of the pandemic," and spelt out a host of measures to deal with the crisis.
Significant among it was the moratorium on term loans for a period of three months on payment of installments and deferment of interest on working capital facilities for a period of three months. The RBI said both the measures will not result in an asset classification downgrade. But has the central bank done enough for the beleaguered MSME sector?
"It is a good move as the main shock at such a time experienced by the economy is insufficient cash flows. It impacts enterprises as they are concerned about when they can pay back. Not having to pay at this time is the right thing," says Arun Maira, former member of the Planning Commission of India and the former India Chairman of Boston Consulting Group
Indian MSMEs were already feeling the brunt of a slowing economy and the 21 day lockdown across the country is expected to make the situation dire for millions of enterprises.
"People have got a breathing period and there will be more money available. The penalties, if any, should be waived off. It will be good, however, if the fiscal year can be extended to April 30 as then the debit won't show in the balance sheet. People will then have the time after April 14 to pay off loans," says Mahavir Pratap Sharma, Past Chairman, Carpet Export Promotion Council (CEPC).
It was not just term loans that the RBI touched on. In respect of working capital facilities sanctioned in the form of cash credit/overdraft, the central bank said lending institutions may recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes in credit terms, again, will not result in an asset classification downgrade.
"I think it is a wonderful move and will help the industry a lot. The three month moratorium on payment of installments of term loan outstanding, deferring of interest on working capital facilities by 3 months and not considering such deferment for NPA will benefit all and particularly the MSME sector. We hope that banks will interpret it in the same fashion as has been announced by the RBI," says Ajay Sahai, DG & CEO, FIEO.
So why is this moratorium a big deal? According to Cibil-Transunion, as of March 2019, Micro (exposure less than Rs 1 Crore) and SME (Rs 1 Crore- Rs 25 Crores) segments constitute Rs 15.8 lakh crore credit exposure (24.9% of commercial credit exposure). The number would have only risen this fiscal, which means banks have a very large exposure to the community and there was a real risk or many SMEs defaulting on their monthly payments.
RBI's move to prevent an asset classification downgrade is also important since it safeguards and MSME account from being a Non-Performing Assets (NPA). There has been an admission of more than 2000 corporate insolvency resolution processes between December 2016 and June 2019. The IBC process contributed to reducing the NPAs from 11.2 per cent of gross advances in March 2018 to 9.3 per cent in March 2019. However, the NPA ratio remains the same six months forward, at 9.3 per cent, in end September 2019. Without the RBI's announcement, there was fear there would have been a significant jump in the NPA ratio.
Saurabh Agarwal, Principal IIF College of Commerce and Management Studies (IIF CCMS), and member of industry chamber Assocham says what is interesting is that besides term loans, the breather may also apply to credit card dues, which is good news. "With a scarcity of cash and liquidity in the market due to lockdown, large segments of the population, including MSMEs and entrepreneurs, have been using credit cards for their working capital needs. However, until credit card customers also do not get any moratorium on interest due on credit bills, there is no real benefit for them, because that component is really very large. The government should have taken this into consideration," says Agarwal.
The time The problem with this crisis is, no one knows when it would be over. Even the RBI hopes the pandemic will fizzle out in three months, but that time frame is up in the air. In such a scenario, is the period of three months enough? "They are not writing off the loans yet, but asking banks and NBFCs to allow a moratorium of 3 months on repayment of term loans. The government will assess the situation as and when, but I think the time period of 3 months is fine for now," says Maira.
Nilesh Kothari, Co-Founder and Managing Partner of Trifecta Capital Advisors says while not everyone may need it, but wherever it was needed, the move will help. "I think the general expectation is that, post three months, normalcy will return and some sectors will return to normal operations immediately, with discretionary expanses taking a bit longer," says Kothari. Kothari adds that he thinks the three month reprieve gives a strong signal that the RBI and the government is supportive and if there is further need, they will do their bit. "But for now, I think the three month period is adequate and a significant part of the industry will return to normalcy by then," says Kothari.
There are, however, others who have a different view. "Providing moratorium on EMIs is an excellent measure, much needed at this point in time. However, since we are already in a slowdown and this lockdown phase is a non working one, I recommend that this breather should have been at least for 6 months. Just as the UK and the US governments are now planning to have a lockdown for 6 months, the Indian government should also plan on similar lines," says Agarwal.
Everyone in the sector has given thumbs up to the announcements, there are some lingering doubts. "There is definitely a place for such a moratorium as long as it's provided at the discretion of the lending institutions because they have a better understanding of which customers need it," says Alok Mittal, Cofounder and CEO, Indifi Technologies.
FIEO's Sahai adds that it is not clear whether this also applies to pre-shipment exports credit or not. "Also the entire export cycle has now been disrupted. Some relief to exporters from interest and penalties on overdue export bills and forward booking of foreign currency etc., can be of immense help to the community at this time," says Sahai.
There may also be, some unintended consequences of the announcement. "The move will affect the collections the NBFCs can make and hence there should be a corresponding facility where the whole term debt/ long term debt that NBFCs have raised are also provided a similar moratorium. Otherwise, there is a potential that this can create an asset liability mismatch for NBFCs," says Mittal.
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