Easing of financial liquidity and a 180-day relaxation on NPA classification might not suffice the industry's needs.
18 Apr 2020 | 15212 Views | By Mayank Dhingra
The Reserve Bank of India on April 17, announced a host of fiscal measures designed to rev up the economy as the entire country and all non-essential economic activities continue to reel under the impact of a nationwide lock-down, which has been further extended till May 3.
The central ...
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The Reserve Bank of India on April 17, announced a host of fiscal measures designed to rev up the economy as the entire country and all non-essential economic activities continue to reel under the impact of a nationwide lock-down, which has been further extended till May 3.
The central bank, which took key measures of pumping in Rs 50,000 crore for small industries, infrastructure and the agricultural sector as well as reduced reverse repo rates in order to improve liquidity in the financial system, has prompted banks and lending institutions to support the ailing businesses on the ground.
Another critical announcement came in the form of a 180-day relaxation towards the classification of an asset into an NPA (non-performing asset) by foregoing the 90-day period between March 1 and May 31 and only assessing a loan's repayment record from June.
While the measures are aimed at keeping the economy afloat in these unprecedented circumstances where medium and small enterprises (MSMEs), such as automotive component manufacturers and retail dealers, are struggling with a total collapse of incoming revenue, they might be insufficient to solve the sector's concerns.
According to Vinnie Mehta, director general, ACMA, "These relaxations including the reverse repo rate cut are steps in the right direction as they are aimed at enhancing liquidity. But, liquidity has already been there in the system earlier on as well. The moot point is that banks are not very forthcoming at this juncture and are being overly cautious at lending."
"The biggest challenge being faced by the Tier 2 and Tier 3 component suppliers is that of cash flows and working capital, and they have been hit really hard there. These people are clearly not in a position to pay salaries and solvency could be a big issue for the industry if the lock-down prolongs any further," added Mehta.
According to veteran automotive dealer, Nikunj Sanghi, "These measures will improve the liquidity of the NBFCs and because of the asset classification, it would improve their rating. However, unless there is a remission of interest on loan for this period, most of the relief will not go to the consumer. Unless that is addressed, the measures would not bring any fruit."
"Liquidity right now is not such a big crisis because there are not too many borrowers. The actual relief will only come in the package that the Finance Minister has to announce," added Sanghi.
Labour challenge looms large
While there is no clear visibility on the demand side, the rising concern that is looming large for most component manufacturers is that of labourers returning to work when the lock-down gets released.
"The components sector, especially the Tier 2suppliers, sees a ratio of 70 percent contractual labourers and most of them are migrants. On one end, from a humanitarian perspective, they might not want to come back and would want to be with their closest people at this hour of medical emergency, the other thing is that with the benefits in the MNREGA scheme getting further enhanced, one would assess whether it would really make sense to go to work. So, we do not know what happens to the labourers - whether they will come back to work on May 4 or not," said Mehta.
Q1 FY2021 a complete washout
While the Indian automotive industry has downed its shutters since March 25, with no production and corresponding demand, the situation is getting critical with every passing day. As per SIAM data, the industry, on an average, is losing an estimated sum of Rs 2,300 crore on a daily basis due to the shutdown enforced to prevent the spread of the Coronavirus. Do the math for the 40-day lockdown and the amount spirals to Rs 92,000 crore.
Going forward, unemployment might be the resultant of the economic fallout of the whole situation. However, according to Mehta, "What is a good sign at this moment is that nobody in the organised components sector is talking of layoffs. Yes, there could be salary cuts due to no demand and no production."
"While the first quarter (April-June) of FY2021 is going to be a complete washout, there are two schools of thoughts to recovery. Either the first revival would only be possible during the festive season and in that case literally, the industry would be put back by a decade, or because of social distancing, people will stay away from shared transportation and there could be an immediate rise in the sales of small cars and two-wheelers," he added.
"Recovery would also depend upon how quickly we could restart production and manage logistics, supply chain and import of BS VI parts from Europe. So, this would be a key challenge to resume operations," explained Mehta.
Fiscal aid needed urgently
Even in the case of lowered demand, some companies might utilise this time to build a pipeline of BS VI products and be prepared to serve customers once the market recovers from the initial shock of the pandemic. However, viability and sustaining operations is going to be a big challenge.
"We are expecting some relief in the fiscal package that comes directly from the finance ministry. Our demands are largely on the front of liquidity and deferrals of statutory payments and electricity payments. Most component companies have very high fixed costs and especially for companies which are into forging and casting, the fixed charge for electricity is very high," remarked Mehta.
According to Sanghi, "The month of April is going to be a big challenge with regards to salaries and one recommendation that has come up is that these salaries be remitted from the ESI. We don't have the cash and if we borrow cash and pay salaries, we are already under burden."
"At this moment, there is no income at dealerships and the vehicles are standing. Business will not return so quickly and it will take a long time for revenue to come in. Approximately 8-10 percent of the dealerships would wind up because there would not be any viability. A relief will only come in the form of a package that the finance minister announces," concluded Sanghi on a hopeful note.