Banks are resisting the growing clamour for much-needed working capital to breathe life into a moribund economy by refusing to relent on their creditworthiness criteria while approving loan applications.
The intransigent stand has scuppered efforts by the Reserve Bank of India mandarins to devise measures to ease the pain of cash-starved small and medium businesses that are at grave danger of shuttering operations because of the prolonged lockdown.
On Tuesday, these businesses faced a grim battle for survival after the Modi government extended the lockdown to May 3.
With revenues having shrunk over the past three weeks, industry needs a huge injection of working capital to ramp up production as quickly as possible and stave off the losses on account of their fixed capital — but banks are looking to play hardball.
Credit growth in the last fiscal slowed down to just 6.1 per cent. The sharp decline in credit growth — from a level of 10 per cent last year (2018-19) — has triggered a rising clamour for working capital credit.“It will be important to simultaneously focus on industry and target increasing credit offtake to at least 14 to 15 per cent by the year end,” the CII said in its recent paper titled Exit from Lockdown.
The 54-page document added: “Our recommendation therefore is for all banks to provide additional working capital to all companies, equivalent to their three-month salary/wage bill at interest rates between 4 per cent to 5 per cent. This would need to be guaranteed by the government so that it can step in and backstop the banks in case the companies fail to pay up and RBI can provide a refinance guarantee on the same.”
But the big question is: where will the money come from?
SBI chairman Rajnish Kumar for one has sought government guarantees on loans. Addressing a webinar on Tuesday organised by real estate industry body Naredco (National Real Estate Development Council), Kumar said banks can play a critical role of intermediation by lending to corporates if the government provides them with the risk capital or extends guarantees against corporate loan defaults and the RBI gives them liquidity support for the purpose.
Speaking at the webinar, HDFC chairman Deepak Parekh said banks would continue to be risk averse towards sectors such as real estate, given the massive non-performing assets (NPA) they generate.
Speaking to The Telegraph, Ananth Narayan, associate professor at S.P. Jain Institute of Management and Research, said the problem was two-fold when it came to bank credit.
“The people who need credit were not seen as being credit worthy (by banks) and sectors that needed credit like power, real estate, shipping, telecom are also stressed. On the other hand, people or companies who are credit worthy have not been making any fresh investments as they did not see much investment opportunities,” he said.
Narayan said compounding the problem was the fact that banks and non-banks have elevated bad loans and they were more worried about preserving their balance sheet.
The RBI is looking at options to increase the financing available to MSMEs, including relaxed collateral norms and extension of the loan moratorium. The focus is on the MSME sector as they account for nearly one-quarter of India’s nearly Rs 200 lakh crore economy and employ more than 50 crore.
With the lockdown extended, companies are increasingly finding it hard to raise cash to give salaries and spend on other necessities. Working capital is the money that companies need to run day-to-day operations such as paying suppliers and holding inventories as they await payments from customers.
Analysts said while the current lockdown has impacted everyone, it has hurt the labour- and raw material-intensive manufacturing sector the most, prompting many to stop payments. That is creating a domino effect on other industries.
The MSME package could include increases in the limits of bank loans for working capital needs, hiking threshold limits for availing of tax exemptions, and relaxing rules for deposits of income tax and other dues, officials said.
N.R. Bhanumurthy of the National Institute of Public Finance and Policy said “India need to undertake a survey of the MSME sector before any meaningful stimulus is proposed for the sector.
“The system is flush with liquidity but there is no demand for it. Lack of statistical data over the years is resulting in policy formulations in vacuum.”
He suggested that the Centre should provide additional resources to the states in the economic revival measure and also in fighting the pandemic as they bear the brunt of the situation.
“Things will now get worse due to Covid-19 as only one-third of the economy is functioning due to the lockdown and with every passing day, livelihood and businesses are getting affected. The asset quality will get worse in coming days,” Narayan warned, while adding that the need of the moment is a “big package” and that the authorities must not stop at that and take additional measures. These include quarantining existing NPAs, government infusing more capital in banks and the RBI coming out with relief measures to enable the resumption of borrowing from banks.
For the revival of the economy, former finance Minister P. Chidambaram told a television channel that the central government should borrow and lend to the states. “If states borrow, cost will be very high, the centre must borrow and lend to the states….Let deficit rise to 4-4.2 per cent and then look to monetise part of the deficit.”
The government, meanwhile, is working on a second stimulus package focussed on MSMEs. Finance ministry officials said the amount of the package and support steps were being worked out taking into account the extent to which they are impacted by the lockdown and whether the stimulus should be in a phased manner or at one go.
The ministry has held a review meeting with the heads of public sector banks, and instructed them to extend all possible help to all sectors of the economy within prudential guidelines to tide over the crisis.