Rajnish Kumar said any loss to GDP will get distributed to Centre, cos and thus impact banks.
Our scenario analysis depends on how quickly the lockdown is lifted and what is the pace of recovery thereafter. If there is a GDP loss it will get distributed among the government, corporates and individuals. Corporate profits are down. Ultimately this gets reflected in the balance sheet of banks. How much loans go bad depend on the pace of recovery.
What is the state of the economy? Is it worse than the worst-case scenario in the financial stability report?
The financial stability report has a base case, medium severity and high severity scenario. I think we are between the base case and medium severity scenario. The position will be clearer once we exit the lockdown. One thing that is becoming clear from the pronouncement of WHO and other agencies is that the World will have to learn to live with Covid-19 and economic activity cannot be kept under lockdown for a long period. We have to find ways to ensure that the virus does not spread and the economic activity resumes. While a lot of activity is happening in rural areas it is the unfortunately cities that contribute the most to GDP that are badly impacted. Ultimately for economic activity to come back, it is important for consumption points to become operational.
Will the Rs 20 lakh crore package help?
Thursday’s announcement was around MSME, NBFC and the power sector. Liquidity has already been provided by RBI and the government has provided risk capital by providing guarantees to NBFCs and MSMEs and state governments will probably be guaranteeing obligations of the power distribution companies. The liquidity support coupled with the guarantee will help businesses and control non-performing loans in this sector. The money will be used by MSMEs for working capital including the purchase of raw material. Everything will depend on how quickly we come out of the lockdown.
What other measures do you think are required?
I am very confident that the next set of announcements will be on increasing investment. I think they will be around easing the laws around production, setting up manufacturing facilities, availability of land and labour laws are major issues. So, the reforms around factors of production and factor productivity, the next set of reforms should be around that. This is also a dilemma for the government whether to put more money in productive sectors like infrastructure or put more into the hands of people.
What is needed to protect the financial system?
Banks and intermediaries have to be proactive in managing asset quality particularly in the corporate book. There is some help from the regulator and the government. The 90-day moratorium and government support to NBFC, MSME and power sector will improve the cash flows and reduce delinquencies. In the power sector bank exposure so far as it is to state and centre it is safe. As far as independent producers are concerned the guarantee will help.
The three-month moratorium to borrowers will end in two weeks, should it be extended?
It is difficult to say. This is a call that RBI has to take. It would all depend on how the lockdown exit strategy works and how quickly the system comes back to normal. A restructuring may not be required immediately. It will be sector specific and case to case. A picture will emerge in the second quarter.
Would a `bad bank’ help lenders to deal with NPAs after the lockdown?
Banks books have been cleaned up as most of the loans have been fully provided for. There are certain advantages outlined in the concept paper prepared at IBA. It is all about resolution. There are a lot of cases going in NCLT. Decision making will be centralised and maybe become faster and more professional. I think more discussion is required at RBI and government level.
Banks have been parking nearly Rs 8 lakh crore with RBI. When will lending start?
There is excess liquidity in the system. In April 2020 we got Rs 1.25 lakh crore as deposits as against Rs 14,000 crore in April 2019. A lot of money has come from central and state governments and our increase in market share shows that there has been a flight to safety. There is usually a negative growth in credit in April every year and as we are in surplus there is no choice but to park with RBI. Demand can come only when economic activity picks up.
What can be done to spur demand?
Ultimately it is investment that leads to jobs and when there are jobs demand will come. Other than that putting money in the hands of consumers also leads to demand. The Rs 40,000 crore transferred to JDY account in that sense is consumption money. But at the same time unemployment has gone up which will suppress demand. The cycle of investment and consumption needs to be revived and the government has to do a balancing act between spending on consumption and spending on infrastructure.
Do you continue to fund NBFCs? Have you extended a moratorium to them?
We are helping NBFCS in every manner. We disbursed funds in March. The government guarantee will ensure credit flow to NBFCs, especially those who do not command a high rating. We have been providing moratorium on a case to case basis.
Bank staff has been under strain working during the lockdown. Unlike other businesses work from home option is not available to many..
Strategies are being worked out on what type of work can be done (remotely) after taking into consideration system securities. We are trying to ensure that a certain percentage of workforce will have the flexibility to work from anywhere. The work is going on and we will have a blueprint in a month or so.