Covid Financial Stimulus
WILL THE FINANCIAL STIMULUS REACH NEEDY
AND REVIVE ECONOMY?
Lot of home work has gone behind Hon'ble Finance Minister’s series of
announcements made over five days, each day dedicated to particular
sectors. It really brought out the genuine intentions of the government
to reach to the needy and also convert the most challenging moments into opportunities
for revival. There is an on-going debate that much of the Rs.20 lac cr.
stimulus has been passed onto financial players like banks and public financial
institutions and the impact on the fiscal budget is minimal. Fiscal
Deficit increases when the expenditure is more than the estimates and also when
the revenue falls short of the estimates. In the first quarter, India's
GDP is expected to be only 45% of the estimates and consequently there will be
a huge shortfall in tax revenues (50% comes from direct taxes). However,
there is no indication that the expenditure will come down by that level as
main components like salary, pension, interest payments on borrowings,
subsidies on fertilisers, food, etc. remain constant. Hence in an
extraordinary situation like this, fiscal deficit is bound to scale up even in
the absence of any financial stimulus. In that scenario, we can expect only a
limited share from the fiscal side in any financial stimulus announced.
Again the role of leveraging is absent/ limited if the stimulus is in the form
of grants/freebies. Therefore, I do not intend to enter into that area as I feel that from wherever the
source is, if it can be channelled into intended uses efficiently, the economy
will revive and the people will benefit.
Amount Through RBI:
Since RBI measures in March and April were included in the financial package of
Rs.20.97 lac cr., prior to looking into the other aspects of the proposal, a
peep into the RBI initiatives, since lockdown, is necessary. RBI had three strategies:
(i) Reduce the repo rate considerably to force the banks
to reduce their lending rates and revive ‘loan availing interest’ in the borrowers
(Repo now stands at 4.40%, reduction of 75 bps.)
(ii) To pull out the banks from their 'safe and
idle earnings' approach by increasing the spread between repo and reverse repo
and force them to be lenders once again (reverse repo is now at 3.75%, less by 65
bps. vis-à-vis repo)
(iii) Make liquidity available in the hands of the
banks at nil/repo rates, so that increase in exposure to targeted and
other sectors by way of lending and investments takes place.
Comments: Repo rate reduction
has resulted in a few banks lowering their lending rates not by the same
quantum, but by a maximum of 25 bps. Reduction in reverse repo has not deterred
the banks and they continue to park their surplus in reverse repo only.
As far as liquidity measures are concerned, the following amounts are
already made available to the banks.
a. Through CRR reduction by 100 bps. - Rs.1.37 lac cr.
b. LTRO auctions 1/3 years
- Rs.1.50 lac cr.
However the other liquidity measures are yet to taste full success. RBI
could push only a limited amount of liquidity through the TLRTO window (Rs.50,000
cr. is the target) and the special liquidity window for purchasing the debt
securities by MFs (Rs.50,000 cr. target). Since it is mandatory on the part of
the banks, to invest the amount borrowed through the above windows only in CPs,
NCDs, Corp Bonds/purchase from MFs, bankers are reluctant to borrow through this
window. Even though the money is available at repo rate and the investments qualify
for being held under HTM category and priority sector target achievements, not enough
instruments are available, which indicate strong degree of safety till
maturity.
Similar is the case of Rs.1.37 lac cr. liquidity through the MSF window.
Even when the liquidity conditions were tight, the banks usually preferred term
repos of different tenors against their SLR securities, which were always much in
excess of regulatory stipulations. The same situation is likely to continue and
MSF window will remain untapped.
Rs.50,000 cr. is made available to NABARD, SIDBI and NHB at repo rate,
which can be passed on to RRBs, eligible MFIs etc. as a refinance facility
against the latter’s lending. This facility is likely to be availed only
when the demand side from the market improves.
Based on the above analysis, my sense is that a sum of Rs.2.87-Rs.3.87
cr. is the liquidity that will be available in the hands of banks, though RBI
has offered Rs.5.74 lac cr.
Making Money available through Banks: The above liquidity
and the fact that the banks are investing roughly around Rs.8 lac cr. in
reverse repo on a daily basis now, might have prompted the government to announce
the following facilities through the banks:
S.No.
|
Details
|
(Rs.)
|
(i)
|
Collateral-free loans to MSMEs
(100% guaranteed by Government)
|
3.00 lac cr.
|
(ii)
|
Subordinated Debt Assistance to MSMEs having stressed/NPAs
|
20,000 cr.
|
(iii)
|
Special Liquidity scheme for NBFCs/HCIs/MFIs
(Investment Grade debt instrument - 100% guaranteed by Govt)
|
30,000 cr.
|
(iv)
|
Partial Credit Guarantee for NBFCs
|
45,000 cr
|
(v)
|
Addl. Refinance for Crop Loans of RRBs /Rural Co-op Banks
|
30,000 cr.
|
(vi)
|
KCC concessional Credit facilities to additional 2.5 cr. farmers
(list includes fishermen and animal
husbandry farmers)
|
2 lac cr.
|
(vii)
|
Interest subvention of 2% to MUDRA - Shishu loanees
|
1,500 cr.
|
(viii)
|
Credit Facility to Street Vendors upto Rs.10,000
|
5,000 cr.
|
(ix)
|
Farm Gate Infra facility for farmers
|
1 lac cr.
|
(x)
|
Development loans to micro food enterprises for promoting local
agri produce
|
10,000 cr
|
(xi)
|
CLSS scheme linked affordable housing loans extended one year
|
70,000 cr.
|
Sub-total
-
|
8,11,500 cr.
|
Possible bottleneck for implementation: While the above schemes
announced by the government appears sound for implementation, based on RBI
initiatives and the current situation in the banks, the proposed increase in
central government and state governments’ borrowings, might crowd out the
proposed schemes. (Central
government borrowings will be higher by 4.2 lac cr. and State Governments’ can
avail addl Rs.4.28 lac cr. with the increase in their borrowings limits from 3%
to 5% of their GSDP). Central and State Governments need to plan and
phase out their borrowing programmes in such a way that the implementation of
the above schemes do not face liquidity hurdles.
Comments on the intended lending/investing through
banks:
1. Affordable housing loan scheme linked to CLSS will be the
easiest to implement for banks, as they have the expertise in security
creation, appraising skills and ensure prompt repayments. But the
implementation is bound to be slow this year, as no one is certain on some aspects
– when the construction activity will get revived, whether builders will be
enthusiastic as before, due to steep discount/decline in property values post
lockdown and availability of adequate labour
2. Collateral free loans to MSMEs (backed by 100% govt. guarantee) targeted
at Rs.3 lac cr. appear to be the best bet for revival of MSMEs, from the point of
view of both thelenders and borrowers. Grant of loans for a period of 4 years, with
a 12 month moratorium and emergency credit line
of upto 20% outstanding as on 29.02.20, will give enough time for
existing MSMEs to plan and restart production and scale up the sales to normal
levels. Even though a significant portion of the loans might be stressed now, the
3-month moratorium granted by RBI on existing loans, provide sufficient
opportunity for the banks to rehabilitate viable ones, extend fresh facilities,
in addition to collateral free loans, to the deserving ones and save their MSME
portfolio (loans upto Rs.25 cr.) from the threat of down grading and consequent
higher provisions. However, there is a word of caution. In their eagerness to
save accounts from NPAs, banks might finalise rehabilitation or grant new loans
in a hurry without proper appraisal. A situation like 2008, when medium and big
industries were restructured on a large scale and became NPAs subsequently
cannot be ruled out.
3. Special liquidity scheme for NBFCs/HFIs for Rs.30,000 cr. appears the
next safe investment for the banks, as the debt securities are to be investment
grade (BBB & above) and are 100% guaranteed by the government. While
the scheme will help NBFCs/HFIs to manage their liquidity better by fresh issue
of debt instruments, whether it will result in onward loan lending to micro,
small enterprises or others depends on the end use of funds. If it is used to
meet maturing liabilities, the positive impact on the economy due to this
measure will be negligible. Also the special scheme is bound to have its own
riders like the financial conditions of the issuer, its track record, assets
position/AUM, etc. before making available the 100% guarantee on the
investment grade instruments proposed. We need to wait for the fine print
4. Credit facility to street vendors (upto Rs.10,000 per beneficiary)
with a credit outlay of Rs.5000 cr., should be implemented through SFBs, MFIs
and RRBs instead of engaging the Commercial Banks to achieve the desired
results. Their staff and the BCs will be already trained in financing SHGs, micro
finance facilities etc. The scheme should include mobile laundries, small
salons, petty shops as well. To inculcate prompt repayment habits in the
street vendors from the beginning, once 50% loan is repaid, 50% subsidy on the
principal amount can be thought of.
5. The next big announcement is concessional financing Rs.2 lac cr. to
additional 2.5 cr farmers and the list includes animal husbandry farmers and
fishermen. (works out to Rs.80,000 per
farmer). It was always felt that the investment credit and asset creation in
agriculture sector takes the back seat due to availability of interest
subvention scheme and KCC facility to crop loans only. Bankers can play a lead
role in making the scheme a success and even existing crop loanees can avail
investment credit to promote animal husbandry, dairy, etc. to supplement their
income. Every sector is faced with distress today and crop loan farmers
are no exception. Like emergency credit line made available for MSMEs upto 20%
of their outstanding, a similar scheme should be extended to crop loan
beneficiaries to overcome the present difficult situation. The additional
finance can be used for renewal of existing crop loans as well as to meet the
consumption requirements of the crop loan beneficiaries.
6. Partial Guarantee Scheme for giving loans to NBFCs/HFIs. Unless
the quality of loan/investment is safe, enhanced guarantee by another 10% might
not be sufficient to lure the bankers into this scheme.
7. Interest subvention scheme for Shishu loan beneficiaries may never be
put into use, as the stressed assets in that portfolio, even prior to lockdown was
huge. Most of the loans were extended to service sector like traders, etc.
and the activity might have stopped long back in majority of the stressed loans.
7. Subordinated debt as the name suggests is a loan subordinated to
other debts. It will be unsecured as well and hence has to be priced
higher. Getting a high cost loan will not make the unit viable. If it has
to be priced at a concessional rate, it should be part of restructuring, which
might not ‘enthuse’ bankers, as the loan is only partially guaranteed.
8. Farm gate infra facility (Rs.1 lac cr), and development loans for
micro enterprises for promoting local agriculture produce are good measures but
the impact will be felt by the economy over a period of five years.
Major money releases through others/by government
itself:
Through Others:
a. Equity Infusion to MSMEs through MSME Fund of Funds
-
Rs.50,000 cr.
b. Liquidity Injection for DISCOMs
- Rs.90,000 cr.
Sub-total
- Rs.1,40,000 cr.
Comments: Of the two above, liquidity injection
for DISCOMs by REC/PFC is the best thing that could have happened to the power
sector. It should be implemented immediately. But the scheme should be
detailed out, as the money is extended by the said PSUs against receivables of
DISCOMs. Proper water fall mechanism, right to replace the doubtful assets in
the pool with new ones and ensuring at least 75% of the amount remitted to
Gencos (balance can be used for meeting salaries, bank interest etc.) shall
form part of the covenants.
MSME fund of funds is likely to take a longer time as it should have
adequate daughter of funds which invest in MSMEs. As on date, very few
funds are available.
By the Government itself:
a. Liquidity made available by reducing TDS/TCS by
25%
- Rs.50,000 cr.
(reduced receipts to be received only
later)
b. EPF support for business/workers
- Rs. 9250 cr.
c. food support to migrants
- Rs.3500 cr.
d. Funds for PM Matsya Sampada Yojana(20000 cr),
Animal
husbandry & infra
development(15000 cr) herbal cultivation
bee kepping, fruits/veg
preservations(total 5000 cr)
-
Rs.40,000 cr
e. Additional allocation for MGNREGA to take care
of migrant workers - Rs.40,000 cr
f. PM Garib Kalyan Yojana
- Rs.1.93 lac cr.
Sub-total
- Rs.332,750 cr
Comments:
Except (d) above, where funds are allocated for different purposes and will be
used over a period of time, all others will be felt during current year
itself.
Summary:
Measures to increase the liquidity and lending activities through RBI, Banks
and Others is sure to help in revival of the relevant sectors as well as
economy, if the implementation is monitored to ensure that the end use reflect
the objectives, for which they are intended.
Particularly,
(i) collateral free loans to MSMEs, (3 lac cr)
(ii) special liquidity facility for NBFCs with guarantee from the government on the investment securities, (30,000 cr.)
(iii) KCC concessional loan scheme for investment credit including fishermen and animal husbandry farmers, (2 lac cr.)
(iv) CLSS linked affordable housing scheme (70,000 cr) and
(v) financing DISCOMS against their receivables by REC/PFC (90,000 cr.)
aggregating Rs.6.90 lac cr., are the ones to be taken right earnest and implemented as early as possible.
(i) collateral free loans to MSMEs, (3 lac cr)
(ii) special liquidity facility for NBFCs with guarantee from the government on the investment securities, (30,000 cr.)
(iii) KCC concessional loan scheme for investment credit including fishermen and animal husbandry farmers, (2 lac cr.)
(iv) CLSS linked affordable housing scheme (70,000 cr) and
(v) financing DISCOMS against their receivables by REC/PFC (90,000 cr.)
aggregating Rs.6.90 lac cr., are the ones to be taken right earnest and implemented as early as possible.
******************
The measures seem structurally effective if effectively implemented as you have mentioned. The immediate issue of addressing rural labour which has increased with migration from cities is not addressed effectively. Though MNREGA related announcements have been made how will this be implemented and how will the beneficiaries be indentified is still not clear. This is a political hot potato which may lead to unrest.
ReplyDeleteThere is a catch 22 for the government, on the one had finance availability to needy sectors are announced, through grants and loans from banks who are reluctant to lend, on the other hand Govt itself is crowding out the lending space by extra borrowing this fiscal of Rs 4.2 lac crore which will breach the budgeted (non covid times) 3.5 % of GDP. Effectively Govt's borrowing projected now will be Rs 12 lac crore.
Bank's intention's are clear if we go by some media reports where the top banks are rushing to the NCD issue of a TOP corporate. Their loyalties are clear if this report is any indication to go by.