Call on LIC to infuse liquidity into NBFCs
Noting the painful impact of coronavirus on global economies, the ASSOCHAM has sought a blanket year-long moratorium by Indian banks on debt repayment both for corporates and individuals.
It has also called for urgent infusion of liquidity by the Life Insurance Corporation of India into the NBFCs in a quasi-equity format.
“It is difficult to prepare for a ‘Back Swan’ event like the outbreak of the COVID-19 pandemic. India, like most other countries, has been deeply affected,” said ASSOCHAM President Dr Niranjan Hiranandani on 21 Mar 2020.
“Unfortunately for India, this has come at a time when the country’s credit environment was already fragile and the economy was slowing down,” the ASSOCHAM said in a communication to the Finance Minister, Nirmala Sitharaman, enumerating a slew of measures to ensure that the economic growth bounces back fast when normalcy returns.
The difficult economic situation can be turned around with early financial measures, the ASSOCHAM said, emphasizing that India should be the first major economy to spring back and take advantage of the global paradigm, post Coronavirus crisis.
The ASSOCHAM suggestions include large scale liquidity infusion into NBFCs through different channels. While 7-year term loans, up to three times their net worth be extended from the banks, the LIC can chip in with quasi-equity 10-year redeemable or convertible preference shares equivalent to their net worth, in the systemic important Non-Banking Finance Companies (NBFCs).
Medium to long-term financing is key to stability of the crucial NBFCs which are one of the main sources of funding for the MSMEs, hit hardest by the Coronavirus crisis.
The LIC investment into the NBFCs too would bear dividends for the state-owned insurance giant once fortunes turn for the overall economic cycle Dr Hiranandani commented on the chamber’s suggestion.
He said huge bail-out packages have already been announced in several major economies like UK, while the US is working on the packages which may exceed even a trillion dollar.
The chamber note to the Covid-19 Economic Response Task Force stated that for all present corporate loans which are impaired, government and regulator should relax norms and allow a two-year window for the borrower and the lender to re-work the terms of loan based on the cash flow of the account.
During that period, the loan account should be classified as ‘standard’ so that no provisioning is needed for the same.
It called for including within the scheme assets originated up to 30 September 2020 instead of the present deadline of 31 March 2019 and increase in the individual asset size cap to Rs.50 crore from the existing Rs.5 crore cap, keeping in mind that NBFCs lend to big ticket infrastructure equipment.
Under the present circumstances, law should be amended to allow NBFCs to avail 100% GST credit, instead of present 50%.
Calling for a thorough review of the NPA guidelines and provisioning forms for the banks, it said classifying an asset as NPA on the basis of number of days of dues unpaid is not quite in line with the global best practices.
In most developed nation jurisdictions, the number of days of ‘past due’ is not the only determining factor.
In European Union, a borrower’s ‘ability to pay’ is given very high weightage.
In United States, the value of collateral is also taken into consideration.
In addition, the ‘past due’ number of days criterion is essentially used for loans of small-ticket size, whereas for large-ticket loans, several qualitative and quantitative factors are also taken into consideration.
In India, the provisioning norms also lock up huge funds thereby reducing available funds for fresh lending.
The ASSOCHAM also suggested relaxation in Section 29A of Insolvency & Bankruptcy Code (IBC) which should be made applicable only in cases where perpetration of fraud by promoters has been established through a forensic audit.
“Otherwise, in cases where the promoters have been victims of circumstances or factors beyond their control, they should be allowed to bid for their companies during the resolution process. That would ensure better realization of value thereby improving the recovery by lenders,” said ASSOCHAM. fiinews.com
