Govt-guaranteed COVID-19 crisis liquidity bridge from banks for sustainable businesses: FICCI Deloitte Report
May 12, 2020
New Delhi [India], May 12 : The government, the Reserve Bank of India (RBI) and banks need to collectively take measures to ensure that businesses do not collapse en masse due to COVID-19 impact and in turn push banks into a systemic failure, according to a study by lead industry body FICCI and consulting major Deloitte.
Almost 50 days of lockdown and a near-complete halt in operations have pushed many businesses into a precarious position. Going forward, critical cash position could result in a breach of lending covenants, the possibility of ratings downgrade and accelerated redemptions in some cases, compelling companies to incur an increased cost of capital.
Businesses across industry sectors are likely to go through an extended though a finite period of reduced revenues and continuing fixed costs, said the study released on Tuesday. While some businesses may seem resilient and some may even do better. But most businesses are likely to suffer large costs and losses.
Amid mounting apprehensions that collapse of businesses en masse can precipitate a systemic lockdown and failure of the banking system, FICCI and Deloitte said they 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-19 on businesses and moving the losses from profit and loss 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 (FITL) and other relevant facilities that businesses may require.
"The only way to ensure the sustainability of businesses post-lockdown and safeguard the economy is by neutralising the Covid-19 impact and supporting businesses that have the potential to bounce back," said FICCI President Sangita Reddy.
"Ensuring business continuity of large businesses is important to put the economy back on track as nearly 50 per cent of MSMEs are dependent on such businesses." She said this can be done with a concerted response from the government, the RBI and banks with minimal expense to the exchequer.
Sumit Khanna, Partner at 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 Rs three lakh to four 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 non-performing assets in check. The government guarantees this credit and the RBI along with banks work together to ensure that sustainable businesses and their value chain is preserved."
The FICCI-Deloitte report highlights that the redeeming feature of the proposal is that the government does not undertake any fund outflow upfront. The government is only required to provide guarantee on bank loans based on an assessment by lending banks, guided by parameters set by the RBI.
While there may be defaults despite continuous and rigorous monitoring, they are expected to be contained within 10 per cent, necessitating support of Rs 30,000 crore to 40,000 crore to banks over a period of five years by the government.
