Interview | Srei Infrastructure's Hemant Kanoria says liquidity measures for NBFCs are yet to yield results

Q. With state-wise unlocking happening now, how fast do you see a pick-up in economic activities? Are there any signs of the beginning of revival?

Many states are actually re-introducing lockdowns to stem the spread of COVID-19. The lockdowns are happening on a need-based basis, which is good for the curtailment of the pandemic, but it is also causing abrupt locking and unlocking of economic activities. However, until the pandemic is controlled, we have to learn to live with this as part of our lives, at least for the next few months. Therefore, the pick-up in economic activities will be slow and continual. The revival will also happen once the stabilisation of the pandemic happens. The businesses and the economy, for the next few months, will have to build in adaptability and resilience so as to survive. Survival of businesses should be the paramount mantra and the government, both centre and states, should provide the necessary support to businesses so that they do not perish. I do not see any signs of revival until the pandemic is controlled.

Q. A lot of experts have said that while the Reserve Bank of India (RBI) has reduced the policy repo rate by 115 basis points since March, transmission still remains something that needs a wider discussion. Do you think easy and cheap credit availability on the ground still needs to be addressed?

At present, credit is only available for certain sections, the retail segment and top-rated corporates; most other businesses are facing an acute liquidity crunch. This is because banks have turned extremely cautious in offering loans to businesses. Unless this gets addressed immediately, there won't be any economic recovery. For instance, following the IL&FS episode, many NBFCs have been facing a liquidity crunch. The outbreak of COVID-19 has accentuated the problem further. NBFCs support micro, small and medium enterprises ("MSMEs") and because of the liquidity conundrum, several MSMEs may not survive the crisis.

Q. How has the liquidity window that the government announced as part of the Aatmanirbhar package for NBFCs worked?

The government and the RBI have been trying their best to pump in liquidity to the sector. However, the measures announced so far are yet to yield any result because banks are refusing to lend due to fear of future defaults. Banks are willing to lend only those NBFCs which are in the retail space and have high credit ratings. However, given the challenging operating environment, most NBFCs have seen a rating downgrade and do not have access to bank credit. While the measures announced may alleviate the liquidity problems to a certain extent over the medium to long term, we need steps that would reduce the stress in the short term as well. Otherwise, not many businesses will stay afloat.

Q. Finance Minister Nirmala Sitharaman has said the government is in talks with the RBI over a one-time restructuring of loans. What is your view on the proposal?

In my opinion, the RBI should consider allowing one-time restructuring of loans based on the cash flow. Furthermore, the loan accounts should be classified as "standard" so that no provisioning is needed for the same. This will help stem the tide of non-performing loans ("NPLs") and prevent businesses from tipping over into default. If the one-time restructuring of loans is not allowed to the banks, there will be a sharp increase in NPLs.

Q. ICRA in a report has said the moratorium plan is impacting cash flows of NBFCs, which in turn would lead to a doubling of their bad loans. How do you view the moratorium scheme?

The moratorium scheme has definitely had an impact on NBFCs. On one hand, NBFCs have been directed to offer moratorium to their clients while on the other hand some banks, SIDBI and NABARD have not extended similar benefits to them. NBFCs are not manufacturers of goods; they borrow money from banks and through other sources like NCDs and ECBs and lend to sectors like SME, MSME and others. As NBFCs were asked to offer moratorium to their borrowers it was only fair that they should have also been allowed a moratorium on their loans and interest payments. Otherwise, it creates a mismatch in their cash flows. The risk of NPLs remains high as few banks and financial institutions are yet to accept moratorium requests from NBFCs.

Q. Experts have said that while the Aatmanirbhar package does look into structural and supply-side reforms, it does very little to spur demand. What is your view of the package?

The Aatmanirbhar package has addressed the needs in the rural area to a large extent, which is indeed commendable. However, trade and industry are yet to see the benefits and their problems have not been alleviated in the present economic downturn. I think it is important that while the question of lives has been addressed, for livelihoods more needs to be done.

Q. The government's focus has been to spur economic activity by generating rural demand. Do you see it picking up and kick-starting the cycle of demand creation completely?

The focus of the government to spur economic activities in the rural sector is indeed laudable but sectors like manufacturing, services and infrastructure also need immediate attention as they are rapidly slipping into deep problems. Unless this is addressed, it will become a monumental task for the government to bring these sectors back to normalcy. Therefore, at this juncture it is important to resolve certain key issues like facilitating liquidity in businesses, addressing government disputes with alacrity and sorting out clearance hurdles. These will be important steps in bringing the economy back on track.