Coronavirus economic impact: Banks offer fresh lines of credit to SME firms amid lockdown
Parul March 26, 2020
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As per reports, despite the State Bank of India, Bank of India, and Bank of Baroda announcing fresh credit lines for troubled companies, they are expecting a series of defaults by small and medium companies as the financial year draws to an end. In fact, the Union Bank and Indian Bank also announced similar measures to increase working capital limits.
Due to the economic impact of coronavirus, banks are also asking the Reserve Bank of India (RBI) to delay non-performing asset (NPA) classification by three months (from the end of 90 days of non-servicing of loan).
If a loan is not serviced for 90 days, it becomes a bad debt for the bank and provision is made. To ease pressure due to the coronavirus lockdown, corporates had asked banks and the government for a six-month liquidity line, so that they can pay off their suppliers and employees.
The rating agencies across the world are particularly in a fix. With the financial year ending on March 31, small- and mid-sized companies are likely to default, while rating agencies will have to mark them in the ‘default’ grade.
The rating agencies are guided by the principle of ‘one day, one rupee’, which says even if the default is for a day, or for a rupee, the issue has to be flagged as ‘default’. Once the default happens, the ‘default’ rating cannot be withdrawn for at least six months.
As per reports, there has been no communication on this issue from the RBI or the capital markets regulator Securities Exchange Board of India, the rating agency executive said.
With deadline looming and faced with redemption pressure, some corporates are withdrawing their liquid funds parked with mutual funds (MF). On the other hand, some sources claim that debt MF schemes saw about Rs 1 trillion of investments pulled out at the end of last week.