Fear in these uncertain time and expectations from RBI

1. Uncertainty and fear go together. What is certain now, progressively, is that the World is getting into a recession.  What is also certain, is that this uncertainty will continue till a vaccine is available.  While 170 Pharma companies/labs are actively pursuing this, almost in a race with each other, there is a great expectation that the World shall see the first vaccine, hopefully, by Fall of this year, which means that any normalcy can be expected only by the end of this calendar year.  This could, perhaps, be extended by 3 to 6 months, if the virus mutates rapidly and delays the introduction of the vaccine altogether.  In light thereof, why can’t we plan up to December and announce measures, fiscal, regulatory or administrative, imparting some level of certainty for stakeholders across the economy. 

Measures announced by RBI today fall short of expectations.  RBI is accepting the possibility of a negative GDP growth for this financial year and also a subdued revival in the first half of next year too.  While they have corrected the anomaly of expecting all borrowers to repay the interest after the end of the moratorium period, and have extended the moratorium by another three months to August (why not till the end of quarter till September?); a FITL to be repaid over the next 7 months seems rather unreasonable especially when neither the Government nor the RBI are themselves quite sure of how the economy would pan out this fiscal.  Similar arguments have been advanced by some bankers in defence of the RBI for their not announcing any forbearance on restructuring of accounts.  According to them, it would be impossible for any borrower to project for any defined period and for any banker to restructure the accounts.  Perhaps, they forget, that often global best practices in banking do not accept pie in the sky projections for providing bank finance; rather its based on past actuals, and restricted to a multiple of the actual EBITDA to prevent overleveraging.  As such, in these days of uncertainty, we could have very well imparted some semblance of certainty by converting the instalments and interest for the 9 months of this financial year to a FITL and WCTL, to be repaid over 3 years rather than the short period permitted presently.  How much wrong would the banks have done in the process vis the cost to the economy?  While banks have been extending new funding to borrowers, these are often adjusted against the installments falling due in the moratorium period so that the percentage of borrowers who have sought moratorium remains low. It’s time we got real and tried to impart some certainty and reduce the fear which would speeden the return to normalcy.

2. Liquidity, labour, and logistics  in India have been compounded by lockdown and led to demand compression and supply side disruptions.  Labour is scared and may not return in a hurry.  Liquidity, though abundantly available in the system, is not flowing down, understandably so, given the risk aversion across the system (why blame the bankers alone?); and logistics, in any case, we never had one we could rely on, but in the absence of the required labour, trucks, drivers, etc, this too is severely fractured.  While the bankers may be loath to increase their exposure, they can not be faulted for maintaining their exposures at the same levels and maybe in the interest of the economy, pass on the benefit of the successive repo rate cuts to their borrowers too.  If these were done across all value chains, the return to normalcy would, perhaps, be faster.  The least we can give to our economy to heal itself is time and this would, in fact, reduce the overall cost, mostly and eventually to the banking system by way of delinquencies and defaults and consequent NPAs.

3. It’s time that RBI reconsidered it’s June 7th circular and provided for restructuring without any further loss of time especially as the number of borrowers who would need and require this dispensation would be extremely large, and given the constraints in the banking system well nigh impossible to complete the process without adversely affecting both the banks and the borrowers. In the worst case, post 9 months based on actual costs, some realignments/fine tuning may be necessitated, but in the interregnum, a large part of India would have some hope for survival during the crisis, and revival post the crisis.

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