Amidst almost 50 days of lockdown due to the coronavirus pandemic, and businesses in a precarious position, a FICCI and Deloitte report suggests a simple, two-step approach to tackle the current liquidity crisis.

The first is to isolate the impact of Covid on businesses and moving the losses from P&L to the balance sheet; the second requires the banking sector to step in and provide focussed relief in the form of Crisis Liquidity Bridge through additional Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL) and other relevant facilities that businesses may require to overcome the Covid impact.

Neutralising Covid impact

Sangita Reddy, President, FICCI, in a statement, said, “The only way to ensure sustainability of businesses post-lockdown and safeguard the economy is by neutralising the Covid impact and supporting businesses that have the potential to bounce back. Ensuring business continuity of large businesses is important to put the economy back on track, also since 50 per cent of MSMEs are dependent on such businesses.”

She said this can be done with concerted response from Government, RBI and banks, with minimal expense to the exchequer.

Sumit Khanna, Partner, Deloitte India, said, “Even sustainable businesses are starved for liquidity. We suggest a deferment of Covid-related losses by businesses and estimate a Crisis Liquidity Bridge support for the industry of ₹3-4 lakh crore to fill the gap created, through the banking system. Given a sharp fall in revenues, breach of lending covenants and possible defaults threaten the banks, which gain by keeping resultant NPAs in check. The Government guarantees this credit and the RBI, and the banks work together to ensure that sustainable businesses, and their value chain, are preserved.”

The report highlights that the redeeming feature of the proposal is that government does not undertake any fund outflow upfront. Government is only required to provide guarantee on bank loans based on assessment by lending banks, guided by parameters set by RBI. While there may be defaults despite continuous and rigorous monitoring, they are expected to be contained within 10 per cent, necessitating support of ₹30,000-40,000 crore to banks over a period of five years by the Government.

The report believes that the suggestions will ensure speedy recovery of economy and preservation of employment and faster growth of GST and Income Tax collections for government.

Assuming monthly GST collections have declined by 50 per cent to ₹50,000 crore per month post Covid, and with proposed liquidity support through banks, the GST collections would revive at an accelerated rate, government would be able to collect more during the five-year period.

Assuming a 1 per cent spread over banks’ borrowing and other costs, banks’ annual earnings will improve by ₹3,000-4,000 crore and provide a cushion to absorb potential default by businesses.

The report emphasises that the benefits far outweigh the estimated limited exposure.

Related Topics
comment COMMENT NOW