Moneycontrol
Last Updated : Jun 25, 2020 04:38 PM IST | Source: Moneycontrol.com

Canara Robeco MF debt head Avnish Jain says funding crunch in mid, small-cap companies may lead to defaults

"We are likely to see more bankruptcies as medium and small businesses are severely hit. Banks and finance companies are likely to rise sharply, post the moratorium period provided by the RBI to retail borrowers," said Avnish Jain.

Representative image
Representative image

The economy is likely to be severely affected by the COVID-19 pandemic as well as from the ensuing lockdown, and there is a likelihood of defaults in the Micro, Small and Medium Enterprises (MSME) space.

Business revenues have been hit, Avnish Jain, fixed-income head, Canara Robeco Mutual Fund, told Moneycontrol.

There could be ‘continued funding squeeze’ on mid- and small- size companies, which could lead to defaults, he says. Jain is concerned that in the manufacturing space, there could be more stress and higher defaults.

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“We are likely to see more bankruptcies as medium and small businesses are severely hit. Banks and finance companies are likely to rise sharply, post the moratorium period provided by the RBI to retail borrowers,” Jain said.

Finance companies are likely to see continued increase in NPAs as well as funding constraints. The muted credit growth of 6.2 percent (as of June 5, 2020) points to the banking sector’s risk aversion and reluctance to increase lending in a meaningful way.

Investors have become risk-averse in debt funds, spooked by falling credit quality of debt papers. This risk aversion may create a lesser market for debt papers of MSMEs and financial companies and companies with better credit quality record would be gain from RBI’s liquidity-boosting measures.

Also Read: MSME woes | Large corporates with strong liquidity hold up nearly Rs 3.3 lakh crore in payments: Report

Defaults in the past have led investors to look for quality debt papers, and this has led to better funding for well established companies in the financial space, Jain said.

Greed vs fear

Investors should always be aware of behavioural patterns related to “greed and fear,” he said.

When things are euphoric, investors tend to allocate more capital to riskier and riskier assets in anticipation of quick returns. This is greed. “In a scenario like the current one, when there is widespread panic, debt investors rush for safer options like fixed deposits, without taking cognisance of better assets. This is fear, Jain said.

Also Read | Companies in India face further rating downside, in case of prolonged downturn: S&P Global

According to Jain, debt investments should be spread over different kinds of assets, so that there is safety as well as liquidity.

“Liquidity is required for exigencies and should be in assets which could be liquidated without much impact cost,” Jain said. On whether it is wise to invest in traditional fixed income options such as fixed deposits instead of MF debt schemes for safety and liquidity, Jain said FDs can provide a predetermined rate of return for a defined period, but they have cost of liquidity (i.e. premature closure, penalty etc.) and no upside in a favourable markets.

On the other hand, mutual funds provide liquidity and market-related returns and there are a variety of choices catering to the differing risk profiles of an investor.

For investors who have felt some pain in credit funds, Jain recommends high quality funds like corporate bond funds.

Market Outlook 

The government has already announced borrowings to the tune of Rs 4.2 lakh crore, over and above the Rs 7.8 lakh crore announced in the Budget of FY2021, he said.

“We believe the government is unlikely to increase borrowings beyond these levels as the fiscal deficit is already expected to go above 6 percent of GDP with the new borrowing plan. There could be marginal increase, depending on the requirements, but we do not see any major deviation from the already announced borrowing plan,” he said.

Jain expects the new 10-year government bond paper to trade in a band of 5.60-5.90 percent as the government borrowing plan is high and is likely to reduce only in the second half of FY21.

On the other hand, short-term money market instruments such as commercial papers and certificates of deposit are already trading close to the repo rate (4 percent) and may move down only with further easing, either in the repo or reverse repo rate, he said.

“With ample liquidity and the possibility of further easing measures by the RBI, we do not anticipate rates moving higher,” he said.

Speaking about the geo-political risks, Jain said it will continue to impact India -- either on the external sector or on foreign currency flows. The India-China border tension could hit India’s economy if it escalates beyond a level.

“This may further hurt sentiments leading to pressure on the rupee and could potentially lead to foreign outflows, impacting both the debt and equity markets,” Jain said.

Rupee, Crude oil

Jain pointed out that lockdown has dented local demand and there is a sharp downtrend in imports. Oil prices have also fallen sharply. These factors have worked towards keeping the current account deficit low, leading to a stable rupee.

Also Read | Market-cap-to-GDP ratio lowest in 10 years: time to buy or turn cautious?

With India’s FX reserves topping $500 billion, there is an additional comfort on the rupee front, Jain said.

“We expect the dollar-rupee to trade in a range of 75-77 (to a dollar). Oil prices are suffering from global destruction of demand. Sharp production by OPEC+ in April has brought the prices back to above $ 40/bbl. However, as prices recover, some of the production cuts are likely to be reversed leading to downward pressure on prices,” Jain said.

He expects oil prices to remain below $30-50/bbl in the near term.

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First Published on Jun 25, 2020 04:19 pm
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