Economy continues to face unprecedented stress in the backdrop of unabated pandemic. Inflation of 6.1 per cent is +2 per cent over the inflation target of RBI.
RBI says that inflation objective is further obscured by: (a) the spike in food prices because of flood ravage in the north and north-east and ongoing lockdown related disruptions; and, (b) cost-push pressures in the form of high taxes on petroleum products, hikes in telecom charges and rising raw material costs. These factors led the Monetary Policy Committee to hold to the existing policy rates undisturbed.
Fitch and other rating institutions say that global growth tumbles in the face of pandemic growing uncertainty. All manufacturing sectors remained in the negative territory excepting pharmaceutical sector. Manufacturing PMI remained in contraction at 34.2. Rural demand increase is the only silver line in the economy. Services sector indices show modest resumption of the economy. Yet, tourism and aviation, passenger traffic in trains and buses do not show any signs of recovery. There is broad realisation that monetary policy should drive credit in sectors that need most and the Banking sector requires more attention.
Liquidity pumped into the banking sector is of the order of Rs 9.57 trillion or 4.7 per cent of GDP with no show of risk appetite among banks. This has only assured the Depositors that the money is safe with banks and there is no need for hurried withdrawals for consumption needs.
The main driver of the consumption, credit activity of banks is mooted. A lot has been expected from the RBI on the credit policy front. Let me first deal with the best things first: Priority sector lending guidelines have been revised reducing regional disparities in the flow of credit and broadening the scope of priority sector to include credit to the Start-ups in the areas of renewable energy, including solar power and biogas compression plants; and, increasing the targets for lending to ‘small and marginal farmers and weaker sections.’ Incentives for lending to these sectors is related to credit flow to the lagging districts and assigning lower weight to incremental credit to priority sectors in districts where comparatively higher flow of credit had already taken place.
RBI Bulletin July 2020 indicates that during the current financial year so far, year-on-year growth is -7.6 per cent for manufacturing MSEs and -5.4 per cent for medium enterprises.
MSME Pulse Report indicates COVID-19 vulnerability high among 63 per cent of the MSMs. Only 31 per cent are strongly positioned to come back. It is these that will be pepped up by banks and not the vulnerable even if they are standard assets. The outbreak of the COVID-19 pandemic will impact the profitability of MSMEs due to the declining market demand and rising operating costs in the new way of working.
Number of Studies, notably, ITC, SKOCH Foundation, RGICS, CII, FICCI etc reveal that 59-74 per cent of the MSMEs are highly risky and would be on the brink of closure if cash inflows do not support them upfront. Government of India (GoI) took the stand that they will be supported by credit while those that are weak will be supported by sub-ordinated debt or equity. This Equity product is yet to roll out from the government although Rs 20,000 crore guarantee backed fund is allocated in the package.
The policy nowhere referred to the credit-driven COVID-19 Atmanirbhar Abhiyan packages. Package one related to the standard assets at 20 per cent additional working capital under Automatic Emergency Credit Relief Guarantee from National Credit Guarantee Trust. Against the Rs 3 trillion target under this window for standard asset (units that are performing or continuing their manufacturing activity) to be achieved by the end of September 2020, banks have so far sanctioned around Rs 1.6 trillion of which 60 per cent is disbursed. There are field reports that banks are seeking to extend the existing collateral and/or guarantee to the additional working capital. The disadvantage for the borrowers is on two counts: one fresh documentation involving stamp duty of Rs 1,000; and, two, their existing collateral will get extended for the additional working capital and this is quite contrary to the intentions of the scheme.
The second scheme, involving stressed assets under the category of Special Mention Accounts-2. The broad guidelines released are:
- Account shall be –
- Standard as on 31/03/2018;
- In regular operations during 2018-19/2019-20;
- SMA2 later or NPA as on 30.04.2020, and;
- Commercially viable enterprises post revival
- 7-yr moratorium for principal amount of subordinated debt/equity
- Interest payable every month
- Subordinated Debt amount up to 15 per cent of Debt O/s or Rs 75 lakh, whichever is lower will be given as personal loan to the promoter for a 10-year tenure. This amount should not be used for recovery of NPA. Entrepreneur can use this to meet his cash deficit, for meeting the payments to labour and making the unit COVID-19 compliant.
- Unit should revive in 5 years – RBI Guidelines of 17 March 2016.
- Unit should be on growth path for 10 years.
- Scheme valid till 30 September 2020.
Banks have not rolled out this package so far. RBI Master Circular of 2016 on Revival and Restructuring (RBI/16-17/338 dated 17 March 2016) stipulates: 1. Corrective Action Plan; 2. Revival and Restructuring of all viable manufacturing enterprises; and, 3. Recovery of the unviable through legal means. Banks have not implemented most of these instructions, save rare exceptions. Under the Subordinate Debt scheme, the enterprise should be first viable; it should be currently running whatever be the capacity utilisation, and then, it should be restructured to see it as a standard asset in a year’s time and additional revival package and sovereign obligations if any to be recovered fully before the five year period concludes. Initial moratorium for the revival package would depend upon the viability arrived at. District Committees had to be formed and they should decide on the viability.
For all such units with outstanding liability of Rs 10 lakh and below, the Branch Manager is the deciding authority for reviving the unit while for the units over and above this limit, appropriate authority as decided by the Bank will take the call and place it before the District Committee. Though several Banks committed to the RBI that all such District Committees were set up even by December 2017, most of them are dysfunctional.
Under these circumstances, RBI announcing MSME revival and restructuring of enterprises falling under the category of GST-registered Standard Assets as on 1/3/2020 before 31 March 2021 looks ambivalent.
The virtuous thing about the current instruction is that the asset classification as standard may be retained as such, whereas the accounts that may have slipped into NPA category between 2 March 2020 and date of implementation may be upgraded as ‘Standard Asset’ from such date of implementation. Banks are expected to maintain additional provisioning of 5% over and above the provision already held by them for such assets.
RBI should have allowed such forbearance for all the assets revived under the Atmanirbhar Bharat Abhiyan-2 (Equity-driven revival). While Banks are aware that such any additional loan consequent to revision will be treated as standard asset, their reluctance to revive the viable enterprises is absolute risk aversion.
The only saving grace is that sale of securities to the ARC will now attract higher provisioning. This should trigger the thought that by reviving the asset instead of sale to ARC they would gain in provisioning as the asset is likely to be standard asset at the end of one year of revival.
Monetary Policy viewed from the MSME perspective, is like what GoI proposes, RBI disposes. Apathy towards MSMEs still continues. It is suggested that the RBI and GoI be on the same page in so far as MSME revival is concerned and second, shorten the period of decision making to just two weeks as against 55 days’ process indicated in the Master Circular of 2016 referred above.
Government of Telangana seems to be taking the lead in the revival of MSMEs. Telangana Industrial Health Clinic Ltd set up by it, has put on its website, the Learning Tool for Revival and a Revival Pre-pack online for the enterprises to log in and post the details for quickly deciding on the prospects of viability.
As regards personal loans, RBI recognising that these loans falling under Retail Loan portfolio will be the next NPA balloon that will blow off, has accommodated the banks through a resolution plan. It has been the practice of several banks both in the public and private sector as also a few NBFCs to grant the personal loans wherever the related corporate accounts are held by them. Because of slow growth and the pandemic, several have lost their jobs and personal loan segment has come under severe pressure. RBI left it to the wisdom of banks concerned to invoke the resolution plan by 31 December 2020 and shall be implemented within 90-days thereafter. There will be no requirement of third party validation or Expert Committee or by credit rating agencies. Board Approved Policy will be necessary and the resolution plan shall not exceed two years. Banks will have big relief on this score.
This Monetary Policy recognised the economic environment as tough to recover in the immediate short term. At the same time, it failed to provide the real growth impulses in invigorating the MSMEs to the required degree and failed to generate the risk appetite among banks. It looks more worried about the capital of banks than credit to the required sectors at the required speed.
(B Yerram Raju is an Economist and Risk Management specialist. He is the author of The Story of Indian MSMEs. The views and opinions expressed in this article are personal and do not reflect the views of INCLUSION.)