Covid-19 crisis: More big bang measures on cards as recession looms large

Pratim Ranjan Bose | Updated on March 28, 2020 Published on March 28, 2020

Desperate times call for desperate measures. The big bang measures announced by Reserve Bank of India (RBI) on Friday, may be just the beginning of it. A lot more may be coming to help Indian economy stay afloat in the face of an unprecedented global emergency.

According to banking professionals, among the list of expected decisions, in the days to come, are: Extension or selective extension of moratorium on payment of instalments to stressed industries; allowing greening of loans through restructuring; and offering rupee loan to meet oversees borrowing obligations.

It means, the central bank has to deviate from the existing set of regulations - which are stricter than not only the developing world, but also some developed nations. However, that is unavoidable in the face of economic destructions unleashed by COVID-19 and is in line with the government’s outlook to save lives first, to avoid longer term impact on the economy.

TLTRO: a masterstroke?

While taking decisions on Friday, RBI’s primary aim was to ensure money supply to prevent the economy from slipping into recession, a threat that is looming large worldwide.

This is targeted from both ends. Firstly, by imposing a three-month moratorium on payment of instalment on loans. Secondly taking measures that would force banks to lend money rather than parking it in the safe custody of RBI.

Reduction in cash reserve ratio (CRR), drastic cut in reduction in repo rate and reverse-repo are indirect measures to achieve this goal. CRR will free cash.

Banks were already flushed with deposits. After these policy cuts, it will be imperative for them to cut retail lending rates to attract borrowers. This apart, RBI also brought in a new instrument, Targeted Long-Term Repo Operations (TLTRO), as a direct measure to inject liquidity.

Under TLTRO, RBI will auction funds worth up to Rs 1,00,000 crore at a floating rate to banks for targeted investment in corporate bonds, commercial paper and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020.

The first auction of Rs 25,000 crore was held on Friday.

More support needed

The measures taken to improve cash availability, however, will not solve the problem of a wide array of companies to be affected by corona virus outbreak. RBI granted three moratorium from March to May. But the decision came at the fag end of March, when most or many have already paid their instalments.

Moreover, COVID has just struck the Indian economy with services sector – like hospitality, travel and tourism, aviation, transport - being worst affected (as in the rest of the world). The destruction trail will be more visible in the days to come with sectors like IT and ITeS likely to be impacted.

With economic activity coming to near standstill, except in farm and allied sectors, collections are dropping dangerously. Auto and auto-ancillary sector is witnessing huge inventory, with immediate need to cut production.

Electricity generation is down by only four per cent but the revenues have taken a hit as the commercial (shopping malls, offices) and industrial sectors, which offered high premium are closed. The bill collection from household sector, majority of which, are cross subsidized by the commercial and industrial subscribers have stopped too.

Disruption in the distribution sector started impacting the gencos, which were already in weak health, in terms of piling dues. The longer the Indian and the world economy will remain under lock down, troubles will only increase manifold.

All these might result into job cuts and further impact on the sentiments, which will keep haunting business and commerce for months after the outbreak subsides. The net result is too many companies might fail to pay their dues to bank even after the current window of moratorium.

Deviation from set norms

Under the current set of rules, this will only lead to piling up of NPAs. Use of insolvency and bankruptcy (IBC) proceedings is no solution as there should not be as many buyers. Also delay in settlement will magnify economic woes.

According to banking professionals, the only solution at hand is allowing banks to get into loan restructuring, which is now barred.

Start-ups who availed structured private equity finance are apparently safe as lenders are likely to offer a leeway. But those who have borrowed from overseas sources may face trouble too. Such borrowings come either from foreign banks or from overseas arm of Indian banks.

Allowing Indian banks to offer rupee loan to mitigate such liabilities is a probable solution.

“I am expecting RBI to extend moratorium on loan repayments to select sectors or companies in the days to come. Relaxation in Basel norms is also a clear possibility to allow loan to be restructured,” said a banker.

Published on March 28, 2020

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