By CA S S Nayak

Mangaluru, Mar 30: Business enterprises devise their strategy based on optimism and economic conditions. Although these decisions and actions have to be pragmatic, there is always a hope for achieving more. In pursuit of these goals, many enterprises would have committed to make large investments, recruited workforce, spent on automation and offered attractive buying terms to its customers. Under normal conditions these are appreciated as aggressive strategies. However, today world is faced with two significant challenges, a health concern and economic downturn.

The scale of health concern is an un-precedent one. Coronavirus (COVID–19) presents an extremely challenging situation to Governments around the world. In order to contain the spread of disease, the first phase would be a lockdown which most Governments have already implemented. The spread of disease can be contained only through contact tracing, testing, isolation and enabling recovery of effected patients. These are steps that will follow the lockdown.

CA S S Nayak

The lockdown has resulted in nearly one-third of the global population being in some way or other being confined to their homes. This includes the 1.3 billion persons in India as well. All business enterprises are under closure except for very essential goods and services. In such case, it is imperative that some economic decisions including changes in monetary policy have to be taken to reduce the economic costs and to mitigate hardship to business and citizens.

Indian businesses have traditionally relied on bank borrowings. Irrespective of scale of business operations – small MSMEs to Listed Enterprises have found it easy to go with bank finance rather than to raise money from other sources. Therefore, the Reserve Bank of India issued a monetary statement on 27-3-2020 to ease the situation arising out of this global health crisis that has led to a lockdown.

Here are some of the highlights of the statement:

1. RBI will also do a repo operation to Infuse Rs 1 lac crore (Repo is the rate at which RBI lends money to Commercial Banks). The rate has been also slashed by 75 basis points making it cheaper for banks to borrow.

2. Reverse Repo rate has been cut by 90 basis points – this makes it unattractive for banks to deposit excess funds with RBI. So banks will have more funds with them which can be used for lending to commercial borrowers rather than parking it with RBI.

3. The Cash Reserve Ratio – which is a certain percentage of bank deposits which banks are required to keep with RBI in the form of balance – is also reduced to 3%. This is expected to release Rs 1.37 lac crore rupees into the system.

4. The GDP forecast of 5%, as per RBI, is already at risk and therefore to overcome the challenge, the liquidity in financial system is being increased to infuse at least Rs 3.74 lac crore.

However, there is some upside that is also going to be complementary to ease the situation that is arising out of the current economic scenario.

• The crude oil prices have been reducing and this is an upside for the country which imports more than 80% of its oil requirement.

• Food prices are expected to soften in the backdrop of record food grain production.

These things alone would not help the ordinary citizens or businesses from the immediate cash flow crunch arising from unexpected slowdown of economic activity. Businesses have to pay for the salary, the employee benefit schemes like EPF/ESI, pay the taxes, rent and also to pay their creditors. The most important of all being salary. When businesses have loans coupled with these payments, it becomes nearly impossible to satisfy all the things at once. So, the RBI has announced that there will be a 3-month moratorium on payment of instalments of term loans and deferring of interest on working capital.

These steps have the dual advantage of – bank loans not being classified as NPA due to non-payment of interest or instalments and businesses having sufficient liquidity to pay the priority outflows like salary and vendor payments to keep the supply channel open.

Relaxation on term loan instalments and interest

All term loans, including agricultural term loans, retail and crop loans will be having a 3 month moratorium period. Working capital interest will also have a moratorium period. Banks will have the discretion in deciding limits the limits on working capital. Any miss in payments will not be considered as a default and not reported to credit information companies. This will be a relief to all sections of society, public and businesses. This applies to banks and NBFC’s as well as all-India Financial Institutions. This will provide relief to all borrowers who have instalments falling between 1-March-2020 and 31-May-2020.

It is also important to note that RBI has specifically clarified that the repayment schedule and residual tenor of such loans will be shifted across the board by three months after the moratorium period.

Further, it is also to be noted that this is an option that will be given to borrowers who have genuine financial difficulties and they will have to approach bank with a request for the moratorium period.

This concession would be most required for businesses operating in the hospitality, tourism and other sectors like service providers where the business lost during this period of lockdown will not be recouped after the end of lockdown. Manufacturing and export entities may also face loss of orders/sales but the hit on service sector, transport including cabs and buses and entertainment sector could be large as these businesses have time utility factor.

Personal and housing loan repayment, credit card dues

The RBI has clarified that the moratorium benefits are available for personal and housing loans, car loans etc. It is applicable for instalments or interest, credit card dues, EMI’s and bullet repayments (one time repayment or large single payment)

Working capital loan interest condition

For working capital loans sanctioned in the form of overdraft or cash credit, lenders are permitted to defer the recovery of interest applied on such loans. The accumulated interest accrued interest shall be recovered immediately after completion of this period.

Economic package announced by the government

The central government has also announced earlier in the week economic package of Rs 1.7 lac crore for relief of the poor. This includes both cash and non-cash benefit transfer. Some of these measures are strengthening of existing schemes and some are additional schemes. This is likely to address some of problems that arise from both demand and supply factors. Cash benefit transfer will give the benefit for demand side of economy and the supply will be taken care of Public Distribution System thus minimizing the effect of the poor section of society.

The road ahead

The events of the last few days are some of most challenging and taking us to certain uncharted future. A global action coupled with economic package will help a quicker recovery. It is time to think of new action and decisions in business. A careful and thoughtful act is the need of the hour.

CA S S Nayak is the chairman of Mangaluru branch of The Institute of Chartered Accountants of India.