Coronavirus: Middle-class gives a thumbs-up to RBI’s deferment of EMI for 3 months, SMBs wait on the sidelines for a bailout

By Vishal Krishna|27th Mar 2020
While interest rates on term loans and working capital have been deferred by the RBI, SMBs still face uncertainty with coronavirus pandemic prolonging their comeback.
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The coronavirus pandemic has businesses screaming over the current lockdown in the country as they have to manage the impact on their workers, their interest payments, and their production.


To give them relief, Reserve Bank of India (RBI) Governor Shaktikanta Das has deferred working capital payments by three months and has also asked banks to continue with working capital financing by reassessing the working capital cycle of borrowers.


The RBI has reduced the reverse repo rate and the repo rate to 4 percent and 4.4 percent, respectively. The reduction in the repo rate means banks will have access to more funds to lend to the needy during this crisis.


SMB

Small Business needs a bail out, but, RBI for now has focused on keeping liquidity in the system.




The RBI has reduced the repo rate and reverse repo rate by 75 and 90 basis points. It has also reduced the CRR by 100 basis points. The central bank also reduced the cash reserve ratio, which is cash that banks have to maintain with the RBI, and it believes that the monetary measures will infuse Rs 3.74 lakh crore into the system.


“The purpose of reversing repo rate is to make it relatively unattractive for banks to passively deposit funds with the RBI and instead use these funds for on-lending to productive sectors of the economy,’’ says Shaktikanta Das.


The Governor added that this decision and its advancement have been warranted by the destructive force of the coronavirus. This move is intended to: (a) mitigate the negative effects of the virus (b) revive growth, and (c) preserve financial stability.


In respect of working capital facilities sanctioned in the form of cash credit/overdraft and lending, lending institutions are being permitted to allow a deferment of three months on payment of interest with respect to all such facilities outstanding as on March 1, 2020. The accumulated interest for the period will be paid after the expiry of the deferment period.


The measures being undertaken by the government come as good news for the middle class and the more established businesses. However, most startups are equity funded or bootstrapped, because banks require robust collateral and a three-year profitable balanced sheet. The sector is hoping that the government will address the roadblocks faced by the startups at the earliest. 

Some of the demands of the SMBs are:

1. Collateral-free loans up to Rs 30 lakh for MSMEs.

2. Waiver on six months of GST payment, starting March 2020. 

3. Invoice discounting by government/large banks to help smaller businesses support cash flow.

4. Grants for businesses under the annual turnover of Rs 3 crore which will help businesses pay at least 75 percent salaries to their employees. This will help retain individuals in employment which may be difficult otherwise. 

5. Help in improving liquidity with bank discounting of current invoices, interest-free loans, or enforcing the MSME act so that cash liquidity can be improved for small businesses. Otherwise, early-stage startups will need to actively dilute equity at low valuations for business continuity.

Why are they asking for the above? 

According to RBI, in respect of 2020-21 outlook, apart from the continuing resilience of agriculture and allied activities, most other sectors of the economy will be adversely impacted by the pandemic, depending upon its intensity, spread, and duration. 


‘’If COVID-19 uncertainty is prolonged and supply chain disruptions get accentuated, the global slowdown could deepen, with adverse implications for India. The slump in international crude prices could, however, provide some relief in the form of trade gains. Downside risks to growth arise from the spread of COVID-19 and prolonged lockdowns,’’ says Shaktikanta Das.


According to KPMG, there are close to 50 million SMBs in India and they contribute nearly 30 percent of our GDP.


“The news from the RBI Governor today definitely indicates that there are efforts to support several sections of the society. The moratorium on term loans will create some relief for the broader community and few businesses, and we really appreciate that. There is still need for specific measures to be taken for the MSME sector, and we are hopeful that in the coming days, this will be addressed as MSMEs are the lifeline of our economic growth, and employ millions of individuals. Short-term drastic steps may be essential to support startups and MSMEs to get through these tough times,” says Paras Fatnani, Co-founder of Honey Twigs.


All commercial banks (including regional rural banks, small finance banks, and local area banks), co-operative banks, all-India financial institutions, and NBFCs (including housing finance companies and micro-finance institutions), and lending institutions, are being permitted to allow a moratorium of three months on payment of instalments with regard to all term loans outstanding as on March 1, 2020.


“The moratorium on term loans and the deferring of interest payments on working capital will not result in asset classification downgrade,” says Shaktikanta Das.  

On working capital financing

There is more good news. In respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions are allowed to recalculate drawing power by reducing margins and/or by reassessing the working capital cycle for the borrowers. Such changes will not result in asset classification downgrade. 


The moratorium on term loans, the deferring of interest payments on working capital and the easing of working capital financing will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. Hence, there will be no adverse impact on the credit history of the beneficiaries. 


“The government and RBI are announcing relief measures and support packages to help stabilise economic activity. Besides this, small businesses that don’t have deep cash reserves are in need of immediate liquidity to tide through the next few months. Interest-free working capital loans are the need of the hour for SMBs,” says Surabhi Talwar, Cofounder of Happy Jars.


In the end, the large Indian middle-class segment, which makes up to 300 million of the total population, has relief for the next three months, but, small businesses need a different package to be saved because there is going to be a slowdown due to the coronavirus spread and many jobs and businesses are going to go away as consumption is coming down.


The economy is in trouble. 


(Edited by Javed Gaihlot)

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