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RBI’s announcement has been very timely and there are few positive things in terms of interest rate cuts, repo cut and cut in the reverse repo rate. But the moratorium that they have announced, there is a bit of clarification required.
One is that they allowed a moratorium on loans from 1 March but the objective of the policy and RBI’s intervention is that you want to alleviate the pain caused by disruption due to lockdown. But if you really look at it, the loan which is, say, 60 days past due (DPD) delinquent on 1 March will under the new regulation become NPA. It would not have become NPA otherwise because most of the collections happened in the month of March. So RBI needs to provide one clarification on that.
Secondly, RBI has said that three months interest period has to be accumulated together but if you look at the reality of business loans, all typical businesses proposing make a Rs 2 lakh contribution per month. Now a Rs 2 lakh contribution to your fixed cost, which is rent, salaries, will take away something like Rs 2.5 lakh; so Rs 50,000 is what any typical businessmen or a small businessman is left with. If business is disrupted for three to four months, then you have an overhead of Rs 4-5 lakh, which will take at least a year to cover; if at all your business resumes to normalcy. Therefore, the 100 million small businesses which are there would not be in a position to pay the accumulated interest after three weeks. So that also has to be looked at.
Even during the 2008 crisis, which was much lesser in terms of impact, there also the restructuring was one year or two years or much longer period. So RBI will have to consider that. Otherwise what will happen on 30th will be a bigger pain for most of the NBFCs and banks. The impact of this is unprecedented for mankind, forget about India or us. So we really need to understand how businesses slowdown, how their contributions and profits evolve and the RBI and government have to work together to make sure that they help them in terms of the financials because of the impact of three months as their costs are fixed.
Also, they help them in terms of tax cuts and revival in demand to make sure that we come out of this unscathed not only physically in terms of health but also economically in terms of jobs and incomes and the quality of assets with the banks and NBFCs.
Specifically at IIFL, could you tell us what you expect in terms of activity at the SME and MSE level? Moratorium has come but that is more like a band-aid approach. In three months, some of these borrowers may not be healthy enough; so what happens after three months?
This is a much larger problem. It is not only a problem of banks and institutions. In India, 85% of the workforce is in the informal sector. This means they do not have the provident fund and they are either mom and pop shops or employed by people. This entire sector, government has to look at it from a larger public welfare point of view. It is not only a question of their defaults. But if this entire sector will be under stress, something will have to be done. Otherwise we will have a much bigger crisis at hand. So I am sure this government is looking at it.
As far as we are concerned, our SME business is just about 15% of our total book. A lot of collections could have happened in the month of March, which obviously could not happen. But we are trying to seek clarification from RBI whether the moratorium is only for 1 March onwards. What happens to loans which are say 60 days overdue on 1 March as that collection also could not happen in the month of March. The objective of the policy is to provide you 90 days before you consider it as a bad quality asset because most of the loans cannot be collected on due date. Most of the loans are like that. Sometimes even the government does not pay on the due date. If this is the way the COVID-19 package of RBI is interpreted then it will become hard not only for us but also for all other NBFCs and banks.
Also what has happened is that most of the physical interactions are not happening; so it is very difficult for your associations to take up the matter. But people are taking it up through media channels like yours or by writing directly. So for us, our entire businesses are shut. But we have come out with this COVID-19 emergency personal loan package which is all our existing customers can borrow based on their eligibility. We are just trying to help them overcome this problem because of lockdown as many people might need some money as their salaries might not come. People like you and me do not worry because our salaries get credited at the end of the month but 85% of workforce in this country has to worry and that is where all of us have to think very seriously about it.
What is the market pricing reflecting, have we seen the worst of it all? We do not know how long the lockdown is going to be and if the infected cases are going to finally plateau out the numbers. Is there a chance for the market to retest the previous lows or for that matter fall further?
There is a chance that markets fall but the greater chance would be that the market would recover because like in Mumbai or Maharashtra where the number of cases are largest, today is the tenth day of lockdown; so in case this problem were to surface, it would have surfaced by now. Although many of the international media will say that India does not have an adequate number of testing kits and therefore the number of cases may be a lot more than what is being reported. But I do not agree with that because if that was true then we would have heard stories about hospitals getting overwhelmed. Or there being enough patients but no doctors to cater to them. But none of these things are happening.
So the fact of the matter is that India has come out of it mostly. I would not say come out of it because we are in the tenth day of lockdown in Mumbai, which has been the most connected with the outside world and therefore the most impacted also. Kerala also has infected a lot. But the number of cases are a thousand; they are unlikely to go to 100,000 like the US. So India has a much better chance to recover; it may take one month, two months, three months but the world will come out of it.
Now after the world comes out of it, India relatively would be far better placed as a destination for investment because there is still a global investment in the emerging markets or outside the US that has to find some destination. So India will be much better placed. Two, India’s macro can recover because oil prices will be low, commodities prices will remain low and India is a net importer of commodities as well as oil.
Therefore, the government and the RBI should not miss this opportunity and make sure that domestic businesses are catered to; somebody has to really go deeper and understand the extent of the problem and find a solution which really works. But I have a feeling that the previous lows will probably be tested. It cannot be ruled out because if there is a trigger event, then that can have an impact but it is not very likely. There is a 30-40% chance that after 10April when people say that lockdown is going to get lifted on 14 April, you can see a very strong recovery.
But are you finding genuine value on the screen right now? Are prices reflecting that? We have seen a serious correction across the board; even the bluechip names have succumbed to selling pressure and trading 50% off their previous highs. Where is it that you find value right now?
There is value across the board but investors will look at sectors where there is relative safety. There are very strong rallies in financials; so strong banks and insurance companies will definitely survive and will grow post crisis. And in fact, RBI governor made a very positive statement. He has assured that for all the private banks, deposit holders are safe. So those words are very important for the market and investors to take note of. So one can look at private sector banks, well-established companies in financial sectors, insurance companies, pharma companies and select IT companies.
If there is recovery with a huge investment and public infrastructure, then will see some of the cyclicals like infrastructure companies and cement companies revive. All of them today offer very attractive value. Only thing is, people are waiting to see what kind of stimulus package the government comes up with for businesses. They have done something which is Garib Kalyan which is for the bottom of the pyramid; urgency was required, which is good.
RBI has done some quick steps for liquidity, which is very positive and will help the economy very well because the CRR cut itself gives Rs 1,37,000 crore of liquidity, along with that the interest rate cut and the difference between the reverse repo and repo has increased, which will basically make sure that the banks are compelled to lend. All these are big positives. So if you ask me, I will bet my money on the recovery of Indian stock market and maybe in next three months, our market can do much better than the global market.
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