Government Backed COVID-19 Crisis Liquidity Bridge From Banks: FICCI-Deloitte Report

New Delhi, May 12: Almost 50 days of lockdown and a near-complete halt in operations has pushed many businesses into a precarious position. Going forward, critical cash position could result in a breach of lending covenants, the possibility of ratings downgrade and accelerated redemptions in some cases, compelling companies to incur an increased cost of capital, apprehended a report jointly done by industry chamber FICCI and Deloitte.

Amidst mounting apprehensions that the collapse of businesses en masse can precipitate a systemic lockdown/failure of the banking system, the joint report suggested a two-step approach. 

The first is to isolate the impact of COVID-19 on businesses and move the losses from profit and loss to the balance sheet. The second step requires the banking sector to step in and provide focussed relief in the form of Crisis Liquidity Bridge through additional Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), and other relevant facilities that businesses may require to overcome the COVID-19 impact.

“The only way to ensure the sustainability of businesses post -lockdown and safeguard the economy is by neutralising the COVID-19 impact and supporting businesses that have the potential to bounce back. Ensuring business continuity of large businesses is important to put the economy back on track, also since 50 per cent of MSMEs are dependent on such businesses,” said Sangita Reddy, President, FICCI.

She further explained this can be done with a concerted response from the government, Reserve Bank of India (RBI), and banks with minimal expense to the exchequer.

“Even sustainable businesses are starved for liquidity. We suggest a deferment of COVID-19 related losses by businesses and estimate a Crisis Liquidity Bridge support for the industry of Rs 3– 4 lakh crores to fill the gap created, through the banking system. Given a sharp fall in revenues breach of lending covenants and possible defaults threaten the banks which gain by keeping resultant NPAs in check. The government guarantees this credit and the RBI, and the banks work together to ensure that sustainable businesses and their value chain are preserved,” said Sumit Khanna, Partner, Deloitte India.

The report highlighted that the redeeming feature of the proposal is that the government does not undertake any fund outflow upfront. The government is only required to provide a guarantee on bank loans based on an assessment by lending banks, guided by parameters set by RBI. 

It added that while there may be defaults despite continuous and rigorous monitoring, they are expected to be contained within 10 per cent, necessitating support of Rs 30,000 - 40,000 crore to banks over a period of five years by the government.