RBI relief package to help sustain businesses during coronavirus: Bankers

Will the Reserve Bank of India's (RBI's) relief package for the financial sector lead to an uptick in credit growth?

“Abhi zinda rehna sabse important hai (The most important thing right now is survival),” Union Bank of India's Managing Director and Chief Executive Officer Rajkiran Rai G said.

Rai is confident that there will continue to be demand for credit from the industry, though it may not be for productive investment. “The companies are tight on cash and have halted production because of the lockdown. They will depend on borrowings to meet their expenses, such as paying wages to workers. However, it will be more for the survival of the business than for a productive investment,” he added.

The Union Bank CEO said that the RBI’s package would help in sustaining business at a time when a 21-day nationwide lockdown to stop the spread of the COVID-19 virus has led to closure of most factory units and services.

The RBI has also allowed banks to reassess the working capital cycle for firms so that they may not be classified as non-performing assets to tide over this lockdown period.

Indian Banks’ Association's Chief Executive Officer Sunil Mehta felt that though the credit offtake will be slow because of the impact of the coronavirus, there will be enough credit demand from the industry for multiple reasons. “The working capital cycle will be extended. Banks can reassess the working capital and it won’t be considered as restructuring or a downgrade. This will increase the demand for funds and there will be surplus liquidity for banks to support growth. Cost of funding will definitely go down,” Mehta said.

Some bankers said that the RBI’s intervention will solve supply-side problems. “However, demand will be dependent on market conditions which will have to fundamentally correct itself. For now, the RBI has provided enough incentive for demand to pick up, including banks' direct line of assistance to companies through lenders buying corporate bonds,” Syndicate Bank MD and CEO Mrutyunjay Mahapatra said.

In a press conference on Friday, State Bank of India Chairman Rajnish Kumar said that the working capital demand is expected to go up. “There is cash-flow disruption in the aftermath of the lockdown and businesses will depend on banks to finance operations. In the coming days, there will be a spur in investment action,” Kumar opined.

 

However, banks will also face some issues related to cash flow because of a moratorium announced by the RBI on repayment of all term loans and credit card dues for the next three months.

“There will be some cash flow issues. Syndicate Bank gets Rs 20,000 crore in the form of bank loan interest and installments every year, so cash flow worth Rs 5,000 crore might be affected. However, there will be enough liquidity to fund it as RBI has brought in other relief measures,” Mahapatra said.

In the meantime, the Department of Financial Services (DFS) said the RBI's measures will help bank liquidity and also help  borrowers manage cash flows. In a tweet, the department said the government and regulators are committed to ensure stability and growth of the economy.