Credit interest package:responsibility of the creditor
April 28, 2020

Credit interest package:responsibility of the creditor

Let the responsibility of the interest component of banking credit be the responsibility of the Creditor! Says AIAI 

If not interest let the capital outstanding be the responsibility of the Banks this will help squeeze some reserved capital in the system, stressed All India Association of Industries (AIAI). 

Economy has already lost foreign capital and wooing it back should be the strategy of India, Inc. At the same time engineering of credit products should be the new scale and scope! 

Ms. Sangeeta Jain, Senior Director, All India Association of Industries said that, The All India Association of Industries (AIAI) is a premier Chamber of Commerce representing trade, industry and employment since 1956. 

Further she added that, COVID19 season has experienced a total net outflow of Rs 10,347 crore as overseas investors lost confidence on global cues. Indian COVID19 season of April saw foreign portfolio investors (FPI) pulling out a net sum of Rs 6,822 crore from equities and Rs 3,525 crore from the debt segment. The record high of  Rs 1.1 lakh crore on net basis from Indian markets (both equity and debt) was in the month of March.

Although RBI has come out with relief policy to support MSME through NBFC, SIDBI, NABARD .But clarity issues have put implementation on back burner. 

However, as India marches out high against the battle of COVID19 with higher recovery rate and lower deaths as compared to the other countries. There is an overall positive environment about India’s future as far as economy and other social and health factors are concerned . 

India has infact displayed an example of positivity in negativity inspite of being labeled for its unclean surroundings . 

Thus there is an urgent need for the TEAM INDIA to work on the return of these investments , inspite of the LOCKDOWN in place and put some of its supply chains back on track operationally as well as financially . 

India’s neighbors have already opened their Lockdowns with Bangladesh being the one to open its key Apparel industry . And one should note that this industry has a forward linkage of this supply chain  in India too! 

Overseas investors can be wooed back as the COVID19 reporting see the silver lining in the dark economy. 

At the same time the banking system needs to put its head on shoulders rather than on its knees! 

The huge retail client base, especially the public sector relied on will be the one to create the new list of NPAs in addition to the older ones which were created by the big cats . As MSME and Midcaps  hold 40 million jobs who are the biggest consumers of retail finance. 

If the banking system does not correct their chords in time there will be no margin left for them to put their balance sheets in place . 

1. It is time for the Public sector banks to accept that their apprehension  about the MSMEs and midcaps as one of the  worst predicted probability of default scenario. 

2. It is time Public sector banks come out of their bureaucracy and reserved apprehensions and embrace a new culture beneficial to both the banking system and the MSME and Midcap companies whole heartedly. 

3. It is time for the public sector banking system to release the entire Rs. 6.92 lakh crore excess liquidity which the entire public sector banking system is presently  sitting on .Which is equal to more than 3.4% of India’s GDP. This liquidity should flow to the industry to kickstart economic activity post lockdown. 

The reserves which the RBI alone holds is around Rs10 lakh crore.

With a conservative estimate of   liquidity around Rs30 lakh crore both FPI and banking system taken together , the Indian businesses especially the MSME and the companies below Rs5000 Cr have to beg and borrow at high interest rates as high as 27% from NBFCs and NFCs losing a huge capital in between such transactions which could have funded growth . 

We have already brought to the notice of both the government and the RBI how the MSMEs and the companies below Rs5000 Cr networth are subjected to double woes of bureaucratic laws and offices and the non availability of cheap credit in the entire system .And are still making inroads to fuel survival. 

 A data source states that nearly 43% about 674 companies are highly stressed with low Cash Resilience and Profitability with large  companies faring better. 

COVID19 is a  challenge but not an impossible one for the business, if revenue in terms of GST for the government  and credit interest for the banks/NBFCs  is not the goal for these stakeholders in these present times of distress . 

Moreover, government policy and pronouncement should be clear so that it is spelt out clearly so that implementation is in letter and spirit rather than files travelling from one table to the other entangled in the rings of bureaucracy.
Relief in terms of wages for workers for the cash starved MSMEs and Midcaps is the talk of the day . Also release of low cost funds for operations is a demand. 

The funds can be release with new packaging policies with the interest component subsidized .And at the same time separated from the principle amount with the same being packaged . 

Till now NBFCs flourished their business on this principle however an Ease of Business Initiative can be put in place . The interest packages can be financially engineered into instruments which can be rated and sold to investors. 

These securitized packages need to be left with the discretion of the creditors to be outsourced from agencies managed by them whether it is through the FPI route etc. 

In this way what the banks will be responsible only for the outstanding capital and not the interest component. 

Credit flow at a cheaper rate around 5% interest is what matters , however liquidity conditions  in Indian markets seem to have not afforded such a venture . 

However there needs to be way out of this situation to allow flow of credit to the MSMEs and Midcaps below Rs5000 Cr at a cheaper rate. And this situation cannot be tackled at NCLT/IBC when a NPA arises, it needs to be sorted out between creditors and bankers with support from RBI . 

Every loan application can be considered as a unit committee to develop tailor made credit product suiting to the requirement of the MSME and the companies below Rs5000 Cr networth with full faith in the company by the banking system upon its repayment. 

Thus we hope our suggestions are considered favorably, added Ms. Jain.