On a crash course PDF Print E-mail
Monday, 18 May 2020 00:00
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Shobhana column

The numbers tell the story. But, the Rs 20 lakh crore, the size of the government’s package to provide both relief to the vulnerable sections and also help jumpstart the economy, isn’t at all what it promises. Although a striking amount, the package doesn’t pack enough of a punch. Where economists prescribe a largish fiscal dose of Rs 20 lakh crore, or roughly 10% of GDP, the actual injection has been a fraction of that, at 0.8% of GDP. To be sure, the financial support extended via other means—credit guarantees for NBFCs, loans for MSMEs, credit for farmers and street vendors—will contribute. But as banks turn even more risk-averse, it is unlikely the cash crisis caused by the Covid 19 pandemic will be resolved.

The contraction in the economy in FY21, now estimated at minus 5-6%, could be sharper as demand does a deep dive. The biggest worry though is that the weakening economy, together with measures like putting the IBC on hold for a year and leaving defaults out of its purview, will deal the banking system a body blow. The sovereign may have saved itself a few blushes, but ratings agencies are unlikely to be lenient with the bulk of companies and NBFCs as they slip into a debt trap, the support from targeted liquidity measures notwithstanding. In the absence of any capitalisation commitments, state-owned lenders are expected to remain shy of buying assets from NBFCs, or lending to them, except when the loans are of top-quality; that will not help weaker businesses and NBFCs, and could lead to insolvencies.

Indeed, India’s already fragile financial sector could reel under mounting bad debts triggered by the Covid 19 shock. Against this backdrop, the suspension of insolvency proceedings for one year is troubling because every other debtor will claim his debt to be ‘Covid-related’ leaving bankers in an unenviable position. Already, the three-month repayment holiday for term loans will lead to a spike in NPAs.

Frightened by the relaxed IBC norms that allow defaults related to Covid 19 not to be recognised as defaults, banks could become even more risk-averse. Consequently, the partial credit guarantee scheme for PSU banks to buy investment-grade pooled assets from NBFCs from even lower-rated balance sheets might remain a non-starter, though they may be inclined to participate in the `30,000 crore government-guaranteed scheme, where they can buy investment-grade debt paper of NBFCs/HFCs/MFIs in the primary and secondary markets.

There is no denying corporate balance sheets are strained, but it would be imprudent to force banks to lend. It is also best they be given the discretion to extend the repayment moratorium beyond three months. Moreover, as much as there is a clamour for a one-time restructuring for stressed assets RBI shouldn’t give in; it is critical to know, at any point in time, what the true value of the assets in banks’ loan portfolios are and let the provisioning begin now.
It is possible weaker shadow banks—many of whom have very big exposures to commercial and residential real estate—will be wiped out. It is also possible banks will hold back from buying bonds floated by relatively weak state governments unless RBI allows these to be held to maturity so there is no capital loss. Indeed, banks may even resist disbursing additional loans to MSMEs, even though these are guaranteed by the government, for fear of not being speedily reimbursed for defaults. Also, there is virtually no fiscal support for services such as travel, tourism, hotels and restaurants—which will incur operating costs while generating nominal revenues. The lenient classification norms will camouflage the stress in thousands of the units; many of them will go belly up leading to huge job losses.
The fact is the strength of the Rs 20 lakh crore package lies in the impressive roster of reforms across agriculture, defence, mining, power and space. But, these policy changes will attract patient capital only over the long term, and that too if there are no hidden caveats. In the near term, post the Vodafone episode, it is unlikely that too many global corporations would be waiting to risk capital no matter how mouth-watering India’s market is. Even the package’s other measures—creating affordable rental accommodation or interest subsidies for home loan—can’t help immediately.

Right now, we could see a deceleration in private consumption—which fell to sub-6% in the nine months to December from about 7% in FY19—and this will preclude any case for creating extra capacity. The unfortunate truth is India’s industrialists, who were already short of equity capital, will now be short of cash flows as revenues slow. That means private sector capex is unlikely to accelerate for another five years, making it a decade of weak investments at a time when gross fixed capital formation (GFCF) is sub-30% of GDP.

To be sure, the Rs 4.8 lakh crore of additional borrowings by the Centre and a good part of the Rs 4.28 lakh crore allowed for the states will all help boost demand. So will the welfare measures of Rs 1.7 lakh crore—in round one—including direct cash transfers and the additional Rs 40,000 crore allocation to MGNREGA. Free foodgrains, too, are a stimulus. But all of this this is inadequate to support thousands of struggling businesses and to prevent job losses of an unimaginable number. The brunt of the pain will be borne by banks.


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