Indian economy and the financial sector is suffering from the impact of the deadly coronavirus pandemic as there is a nationwide lockdown in place to contain its spread. In the financial markets, investors seem to have lost all their confidence and started pulling out their money. While the stock markets crashed across the world, central banks made off-cycle rate cuts. There was a dire need to inject liquidity to keep the economy moving. The lack of liquidity could curtail consumer mobility and lead to a deferral of spending. The credit market could have been the worst affected by the pandemic-driven disruption.
Indian NBFCs were facing a stringent liquidity squeeze post-IL&FS crisis. Further, shrinkage in bank deposit funding can constrict the liquidity available for lending to the shadow banking sector. The pandemic has made it further difficult for the non-banking industry to meet its asset quality requirements. In a quest to deter the economic gloom, the Indian Government has also been prompt enough to lay out a road map towards building a self-reliant India.
Debriefing India’s Corona Relief Package
The Government has recognized five key pillars identified as Economy, Infrastructure, System, Vibrant Demography, and Demand. To stir economic activity throughout the nation and lead the country towards self-reliance, a specialised commercial package of INR 20 Lakh Crores was announced recently. The package is equivalent to 10% of Indian’s GDP.
In the first part of the economic relief package announced on May 13, 2020, the Finance Minister of India focused on Micro, Small and Medium Enterprises, NBFCs, Housing Finance Companies and MFIs, and other key sectors.
In the article ahead, we discuss some of the economic relief and credit support measures announced for our financial sector.
1. Relief for MSMEs
The Government took the initiative to amend the definition of MSMEs to escalate their scope of benefit. Initially, the MSMEs were businesses with an investment limit of INR 25 lakhs. This limit was revised upwards to INR 1 crore for all micro manufacturing enterprises. Quite similarly, the investment limit for small and medium manufacturing enterprises has been changed to INR 10 cr and INR 50 cr, as opposed to earlier investment limits of INR 5 crores and INR 10 crores, respectively. The Government has also prescribed additional criteria, which is based on turnover figures, i.e. INR 5 crore, which is for the micro-level enterprises, INR 50 crore, small-level enterprises, and INR 200 crore medium level enterprises.
When it comes to credit requirements to ease the financial difficulty and restart operations, MSMEs can now make automatic loans worth INR 3 lakh, from financial institutions like banks and NBFCs, without any collaterals. The amount of these loans can range up to 20% of all outstanding credits on February 29, 2020, for a four-year tenure. The Central Government also announced that it would provide a 100% credit guarantee to banks and NBFCs on the principal and interest amounts. MSMEs, which are Non-Performing Assets or are stressed, enjoy relief in the form of INR 20,000 crore subordinated debt. Another INR 4,000 crore is promised to Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE), which also serves as a partial guarantee to banks who will then give benefit to stressed MSMEs.
A Fund of Funds with the treasury of INR 10,000 crores is also proposed to help MSMEs through equity funding provision. All their receivables from government and central public sector enterprises are to be released within 45 days precisely to aid MSMEs facing liquidity problems. The Government has proposed the help of Fintechs to enhance transaction-based lending data generated by the e-marketplace.
2. Relief for NBFC, MFI, and HFC
The proposal also includes the launch of a unique INR 30,000 crore liquidity scheme. Under this scheme, the investment is to be made in both primary and secondary market transactions in investment-grade debt paper of NBFCs/MFIs/HFCs. This provides liquidity support for NBFCs/MFIs/HFCs and mutual funds, but it also creates confidence in the market. There are also plans to infuse INR 45,000 crore liquidity through a partial credit guarantee scheme, which would cover borrowings such as primary issuance of Bonds/CPs.
3. Liquidity Support for Business and Workers
To increase the in-hand salary to employees and to give relief to their respective employers, the Government has thoughtfully decreased the rate of payment of statutory provident funds from 12% to 10% for the next three months i.e., June, July & August 2020. Even the validity of the Pradhan Mantri Garib Kalyan Package was extended for June, July, and August 2020.
4. Liquidity Injection for DISCOMs
Government agencies like Power Finance Corporation and Rural Electrification Corporation will work to infuse liquidity in the Power Distribution Companies to the limit of INR 90,000 crores in two equal installments. This amount will be used by the companies to pay their dues to transmission and power generation companies. Moreover, Central Public Sector generation companies will give rebates to electric power generation companies on the condition that the refund is passed on to the final consumers as a relief towards their fixed charges.
The massive economic relief package is intended to flush MSMEs and industry with liquidity to kick start dormant operations. In the absence of any immediate relief for migrant workers, the consequential sufferers of the lockdown, this relief package will impose various indirect benefits for them. While there is an atmosphere of overall disappointment in the industry relating to inadequate provision of any assistance in the payment of wages to employees, it remains a significant concern for commercial establishments.
Given the massive liquidity crunch, funding of existing and new fintech can experience a receding trend as investors may shy away from investing fresh capital given the market conditions amidst corona scare. Fintechs need to focus more on sustainable business models and not rely on investors’ money only.