Hyderabad: Amid the continuing collateral damage of the pandemic the trade and industry looks for respite from RBI in its upcoming monetary policy review slated for August 6, 2020.
Even opening up the economic activities up to unlock 2.0 did not infuse enough confidence for scaling up revival to a possible level due to fear psychosis when the number of infections are cruising fast towards 2 million mark.
Despite low mortality rates, its fear continue to cause immense damage keeping people away from economic activities delaying the potential revival. Unveiling unlock 3.0 from August 5, 2020 may not be able to add much to the buoyancy unless public confidence on health and safety can be assured.
Logically, in a continuing state of pandemic, the macroeconomic fundamentals tend to go awry. The retail inflation in June is above RBI glide path of 6 percent mark. With real interest rates (calculated as nominal interest rates minus inflation) nearing zero and is set to be negative if interest rates fall further indicating upward inflation headwinds. The core sector output is down 22 percent in May and has decline by 15 percent year on year (YOY) in June.
The international rating agencies, - ICRA and CARE peg slide in industrial production at 15-20 percent and 20-22 percent respectively. However, farm sector even in current crisis is supportive with expected close to 3 percent of GVA (gross value added) amid near normal monsoon.
The fiscal deficit has already widened during Q1 of 2020-21 to Rs. 6.62 trillion consuming 83 percent of full year target leaving huge uncertainty about the final state of fiscal deficit at the end of the year.
Growing disruptions in banking sector:
Among many supply side disruptions, the more significant factors could relate to labor, logistics and finance. But even among them, finance is considered the lifeline for revival and is more important when the industry tries to wriggle out of the economic distress. The temporary relief in the form of moratorium on loan repayments and deferment of interest on working capital that presently ends on August 31, 2020 is postponement of liabilities.
RBI has brought down repo rates to a historic low and injected enough liquidity using unconventional windows with continued accommodative stance of the policy. But its impact on the revival of the economy is limited, as it lacks enough power to provide quick cash flows to the industries that is a crucial differentiator to restart the activities.
The most innovative and handy Emergency Credit Line Guarantee Scheme (ECLGS) designed for MSME sector up to Rs. 3 trillion can be an effective tool to salvage ailing industry. It is estimated that banks have disbursed Rs.1.14 trillion till July 4, under the scheme to eligible borrowers.
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The flow of bank credit has to be directed to multiple sectors, including to Non-banks and mutual fund companies at a speed much beyond the past. But RBI data suggests that bank credit continue to grow in lower edge of single digit at 5.9 percent as on July 17, 2020 compared to 11.6 percent recorded a year ago.
Banking sector is groaning under the weight of rising Non-performing Assets (NPAs) with fragile capital base that cannot have enough risk appetite to extend credit to non-government guaranteed sectors.
Keeping capital needs, RBI has been impressing upon the banks to access capital from the market but they are unable to do so due to weak fundamentals. Hence, despite the fiscal constraints there is urgency for government to infuse capital to rebuild their risk appetite.
Restructuring of loan facilities:
Consensus is building against extension of moratorium beyond August 31. RBI known for its innovation can craft a one time ‘Covid loan restructuring scheme 2020’ with time line for restoration of normalcy to stretch up to March 2022 to provide enough latitude to the industry to focus on revival than on augmenting resources to repay accumulated dues of banks.
It will be contextual to refer to the guidance of Basel Committee on Banking Supervision (BCBS) – ‘Buffering Covid-19 losses – the role of prudential policy’ April 24, 2020 that highlights the need for banks to play a positive role in the supply of funding during recovery period that may prolong. Creating the ecosystem for banks to lend should be the handiwork of all stakeholders in the value chain.
Sector specific Relief:
While calibrating the relief measures in loan restructuring package, the terms can be made specific precisely aligned to the extent of economic damage suffered by the sector. For example, the non-essential sectors such as textiles, aviation, tourism, hotel industry, malls, multi-stores in market clusters, entertainment, passenger and goods transport, entertainment and many more such industries are hard hit.
A well-restructured loan scheme can load possible prudential relaxations aligned to the sector that should substitute the need for repeated grant of concessions and relieve immediate worries of entrepreneurs. It should combine the two components –
- Dealing with past outstanding dues as well as
- Providing immediate cash flows cushioning it with repayment schedules matching expected revenue streams of the enterprise.
More hard hit sectors can have more liberal terms for grant of additional limits, repayment holiday and tenor of loan to help the sector to bounce back and be able to repay the restructured loan facility.
Any disequilibrium in aligning to the extent of sectoral damage will again defeat the purpose and banks will have to face the wrath of disproportionately high bad loans with enhanced provision commitments further eating into the fragile capital base.
Expected line of action of RBI:
In view of continuing economic fallout of the pandemic and fragile recovery trends, RBI needs to be more enterprising in its approach. With repo rate cuts not gaining much traction to revive the economy, efforts for its more effective transmission will continue.
RBI is expected to continue its sway towards lower interest regime with a symbolic further rate cut of say 25 basis points on August 6. Some views of status quo in repo rate are under debate but keeping repo rate unchanged can be viewed as change in the interest rate curve that can be detrimental to the market sentiments.
Hence, at this point of time, RBI may stay ahead of the curve. However, RBI will continue to be accommodative in its policy stance and provide enough liquidity support as a handholding measure.
But more interesting for industry is to look at a broad loan-restructuring scheme to enable fighting the prolonged battle of pandemic. A holistic restructuring of loans along with ECLGS scheme can together create a supportive ecosystem for the industry to emerge out of the unprecedented economic disruption and stand on its feet.
Any reluctance of the central bank to take a pragmatic view will be a lost opportunity to resurrect the economy. Hence, it is critical that RBI realizes the plight of the economy in time, identifies the gaps, addresses them in right measure lest its limitations should erase the benefit of eventual success of India in flattening the infection curve, in near term.
Hence, it is time for RBI to be equally enterprising in bailing out the economy using its innovative and unconventional tools.
(Article by Dr K. Srinivasa Rao, Adjunct Professor, Institute of Insurance and Risk Management – IIRM, Hyderabad. Views are personal.)
