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Industry suggests innovative liquidity measures- Govt guaranteed COVID crisis liquidity bridge from banks for sustainable businesses

Almost 50 days of lockdown and a near complete halt in operations has pushed many businesses into a precarious position. Going forward, critical cash position could result in breach of lending covenants, possibility of ratings downgrade and accelerated redemptions in some cases, compelling companies to incur increased cost of capital.

Amidst mounting apprehensions that collapse of businesses en masse can precipitate a systemic lockdown / failure of the banking system, FICCI and Deloitte have co-developed a win-win solution to the logjam situation that is impeding business continuity. It suggests a simple two step approach. The first is to isolate the impact of COVID on businesses and moving the losses from P&L to the balance sheet. The second step 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 (FIT L), and other relevant facilities that businesses may require to overcome the COVID impact.

Dr Sangita Reddy, President, FICCI 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% of MSMEs are dependent on such businesses.” She further explained 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 INR 3– 4 lakh crores 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 is 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%, necessitating support of INR 30,000 – 40,000 crore to banks over a period of 5 years by the Government.

The suggestion has many positives:

–  Speedy recovery of economy and preservation of employment

–  Faster growth of GST and Income Tax collections for government: Assuming monthly GST collections have declined by 50% to INR 50,000 crore p.m. post COVID, and with proposed liquidity support through banks, the GST collections revive at an accelerated rate, Government would be able to collect more during the 5 year period.

–  Assuming a 1% spread over banks’ borrowing and other costs, banks’ annual earnings will improve by INR 3 to 4 thousand crore and provide cushion to absorb potential default by businesses.

The report emphasizes that the benefits far outweigh the estimated limited exposure.  The proposal also mitigates significant potential exposure of banks towards NPA of >INR 3 lakh crore (@10% default on bank credit to industry), and subsequent government support towards capitalization of banks to address their capital erosion on account of loss of interest and additional provisioning. This can be mitigated by providing a relatively low fiscal support of INR 30,000 – 40,000 crore to banks over a period of 5 years. The consequences of not undertaking any resuscitation measure to support businesses would be much higher.

―CT Bureau

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