The news of the announcement of a package from the Minister of Finance has raised many expectations regarding the threat of a very negative impact of the coronavirus on the economy. A quick indicator of the reaction is the stock market, where the S&P BSE Sensex fell by around 500 points at the time the announcements were made. This is not surprising, since the FM had clearly indicated in its prologue that the announcements to be made would relate more to the procedural and administrative fields, which aim to meet the needs of individuals and units in light of the closure. However, she assured that there would soon be a special economic recovery plan.
What is this package about? It focuses on eight areas – income tax, customs, goods and services tax (GST), corporate affairs (MCA), IBC, banking, fishing and trade. In short, there has been an extension of the deadlines for filing various declarations / legal compliance from March to June 2020. Given the current foreclosure, this will benefit everyone involved.
However, three things stand out. The first concerns the IBC, where the FM raised the default threshold from Rs 1 lakh to Rs 1 core, with the addition that if economic conditions remain bleak or worsen over the next month, there would be an extension six months where small and medium-sized enterprises (SMEs) will not be taken to the CIB. This is a great positive, as these units have already suffered the brunt of the shutdown, as was the case with demonetization and the GST. Since the closure will affect their revenues and therefore their debt service capacity, the current series of announcements would be a major relief for SMEs.
It is also a signal for the banks, which will have to assess their portfolio as well as the possible loss of income of these companies which will not be able to repay their debt. This can be a potential stress point for banks, as they would also simultaneously monitor home loans where default rates may tend to increase.
The second concerns banking services where the FM has announced certain fee exemptions on the use of debit cards in all automatic bank machines (ATMs) or the maintenance of a minimum balance for a period of three months. This will be useful for households where people have been confined to the home and would need to have access to money to make payments given the care taken in using cards given the human touch required on machines.
Third, from a compliance standpoint, announcing flexibility in holding Board meetings for an additional 60 days, as well as announcing flexibility for independent directors, will help companies avoid the sanctions that accompany these clauses. given that administrators are unable to travel and hold meetings has become impossible under the current closing conditions.
As a result, overall, the announcements extended all deadlines from the end of March or April to the end of June without completely changing the guidelines of any program. This is important because the government is not really backing down on an established rule giving more time to comply in the current circumstances.
In the future, markets will look for more substantial announcements in the next package that could further support an economy that is likely to be hit hard by the virus in terms of jobs, lost output, supply dislocations and ‘uncertainty.
Madan Sabnavis is Chief Economist at CARE Ratings. The views are personal.