Covid 19- Banks need to be more flexible to support the businesses
Evolving scenario due to Covid-19 endemic is creating a huge liquidity crunch for many businesses especially MSMEs. Banks should support by extending loan with very flexible terms.
Post lockdown announced by the Hon’ble Prime Minister, the economy suddenly came to grinding halt. There are hue and cry in the business community for a rescue package to help them to overcome the challenge they face in managing the cash flow. In response, RBI Governor on March 27, 2020, announced to extend the moratorium on loans.
Alongside few Banks have announced schemes to support the business to tide over the acute cash crunch.
Against this backdrop, we reviewed the CoVid-19 loan of few banks on how they support the struggling businesses.
COVID-19- is an uncertainty based risk:
The present global crisis triggered by the Coronavirus outbreak is one of its kind never seen since the organized lending (under the regulatory oversight of central banks) is started in the global economy. The pandemic is not a routine risk confronting the businesses. No positive probability can be assigned to estimate the likelihood of recurrence. It is an uncertain risk and can be classified as an act of god. In other words, it can be described as a force majeure event.
Since it is a special event and an extraordinary situation is developed and still evolving. Its longevity, spread and impact are still unclear. The world economy is entering into uncharted water and does not have the capability to estimate the impact.
Hence the situation demands special attention to those who need help to stabilise the economy by supporting the economic enterprises to prevent their collapse and or value destruction due to their inability to adjust to the new challenge. It is more pertinent to the MSME segment who are shouldering the social burden of engaging unorganized & semi-skilled labours and largely financially weak to navigate the challenge from Covid 19.
Banks have an important role to bail out the business in the scenario
The circumstances we are discussing is extraordinary and the global community never experienced this in the past. It needs special attention. The consequences on the business as well as finance providers are needed to be handled with the utmost sensitivity to the people who are affected.
RBI and Banks are responding well. Many banks have shown an inclination to assist the businesses in many ways. We have been seeing the press publications of special loan products launched by the banks in India to help businesses to tide over the cash crunch. Their enthusiasm is amazing.
I had a chance to review the special COVID 19 loan products launched by three banks recently. Though the narrative signifies the commitment and concern for the businesses affected, the finer reading of the products is highly disappointing.
Out of three banks, two are major nationally important banks and. The glaring aspect is- products seeks to limit the eligibility to those customers whose account/s is graded SMA0 only. (SMA0 grade indicates the account which is a standard asset in the books of the bank and not having any adverse features in the operation. Other two categories are SMA1 and SMA2. These two categories are also standard assets but suffer from some deficiency in meeting their commitment on a timely basis).
There are two important points which negate the relevance of the Covid-19 loan products of these banks:
a) Narrow scope: Limiting the eligibility to SMA0 means exclusion of a very large section of the borrowers to get accommodation, especially MSMEs. They lack the financial flexibility to remain SMA0. It is quite likely that banks mightn’t have made an assessment of what proportion of their customers will be eligible. As a result, this product is just a narrative than a source of comfort in the trying circumstances for many.
b) The product does not recognize the evolving scenario: In the global crisis like the one we are witnessing, the risk across the asset class converge as we had seen in the Global Financial Crisis in 2008. In other words, the riskiness of SMA0 and SMA2 will be the same in this scenario. The distance between these two asset classes is not significant enough to predict the better default probability. Because they are going to confront the challenge in almost equal level. If the business scenario deteriorates and the default chances will be almost the same.
In the nutshell, the products of two banks have narrow relevance and have ignored an important aspect- how default probability will behave in the face of evolving uncertain scenario. Unless it is made more inclusive and having flexible terms, there are high chances that many of the standard loan accounts may not be able to navigate the challenges, especially in MSME space.
Businesses are confronting a very unique challenge and scenario is going affect them in almost equal measure for a large section of the business community. Banks need to structure the Covid-19 loan products to make it relevant to bail themselves out.