Coronavirus: Banks offer fresh lines of credit to SME firms amid lockdown

Although the State Bank of India, Bank of India and Bank of Baroda are announcing new lines of credit for struggling businesses, they expect a series of defaults by small and medium-sized businesses as the exercise ends. Union Bank and Indian Bank have also announced similar measures to increase working capital limits.

The banks are also asking the Reserve Bank of India (RBI) to delay the classification of non-performing assets (NPA) by three months (from the end of the 90 days of non-servicing of the loan). If a loan is not repaid for 90 days, it becomes a bad debt for the bank and a provision is made. To alleviate the pressure from the coronavirus shutdown, companies had asked banks and the government for a six-month line of liquidity so they could reimburse their suppliers and employees.

According to Prabal Banerjee, chief financial officer of the Bajaj group led by Shishir Bajaj, default on bonds and loans will increase exponentially if the RBI does not allow a two-year moratorium on the payment of principal and a six-month moratorium one year on interest payments. “The downturn will have huge ramifications for banking NPAs,” said Banerjee.

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Bankers see this as a necessary step, even if it can raise concerns about moral hazard.

The rating agencies are particularly in difficulty. As the fiscal year ends March 31, small and medium-sized businesses may default en masse, while rating agencies will have to mark them in the “default” rating. Rating agencies are guided by the “one day, one rupee” principle, which says that even if the default is for a day or for a rupee, the problem should be reported as “default.” Once the default occurs, the “default” rating cannot be removed for at least six months.

“The problem now is that the cash flows must be protected, and the banks must make loans to businesses to keep their cash flows intact, so that they can continue to pay wages. If people don’t get paid, it would be a double blow to the economy, “said a chief executive of a rating agency.

There has been no communication on this matter from the RBI or the capital markets regulator Securities Exchange Board of India, said the director of the rating agency.

With the impending maturity and faced with redemption pressure, some companies are withdrawing their cash held in mutual funds (MF). According to industry sources, MF debt schemes saw around 1 trillion rupees of investment withdrawn at the end of last week.

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“With daily operations disrupted, businesses find it difficult to access financing from banks and, as a result, draw on liquid investments to honor working capital and debts,” said a fund manager.

Fear of running over industry assets prompted MFs to write to the RBI to increase the line of credit to Rs.1 trillion via a repo window for corporate bonds and commercial paper.

At the end of February, the average assets of investors managed in liquid funds – which are widely used by businesses and institutional investors for short-term liquidity needs – amounted to 4,900 billion rupees.

On a systemic level, liquidity has started to dry up, reflected by rising yields on the domestic bond markets. Yields on the shorter-term debt markets increased by 100 to 150 basis points in the current month.

The tightening was tightened by massive sales from foreign investors, with more than Rs 54,000 crore in debt securities sold in March.

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