Is The Indian Debt Market Dented With Credit, Interest, Liquidity Risk, And A Looming Default Risk?

The Indian government is trying to counter the coronavirus outbreak and the resulting slowdown, by announcing certain measures and policy changes, so as to bring the growth back on track, while the inflation remains within the targeted zone of 2% to 6%. Retail inflation for India stood at 5.8% during March 2020 with a 0.8% drop from 6.6% during February 2020. The Wholesale Price Index (WPI) for India stands at 122.2 for the month of February 2020 according to the RBI bulletin June 2020 after a rise of 2.26% YoY from 119.5 during February 2019.

The following key measures have been announced by the government:

• India’s Monetary Policy Committee (MPC) has observed two emergency rate cuts to infuse liquidity. Currently, the repo rate stands at an all-time low of 4%. And, to discourage lenders from parking cash with the central bank, the RBI slashed its reverse repo rate by 115 basis points to 3.35%, during May 2020.
• There is no need for banks to set aside cash reserves for loans that are provided to small businesses or for credit so as to help the customers purchase a car or house between 31 January 2020 and 31 July 2020. CRR and LCR were reduced to 3% and 80%, respectively.
• A repo operation announced in April 2020, with the condition that out of the total funds availed by the banks, 50% should be passed on to small and mid-sized NBFCs. But this operation received a passive response as the banks stayed away due to the perception of high risk.
• RBI even conducted open market operations for purchase of bonds worth INR 10,000 crore, INR 30,000 crore and INR 15,000 crore on 20th, 24th, and 26th March, respectively.
• On 30 March 2020, RBI hiked the limit for foreign portfolio investors’ (FPI) investment in corporate bonds to 15% of outstanding stock for FY2020-21. During FY2019-20, the limit for FPI in Central Government securities (G-secs), State Development Loans (SDLs), and corporate bonds stood at 6%, 2%, and 9% of outstanding stocks of securities, respectively.
• An economic package of INR 20 lakh crore was announced in May 2020 by the Finance Minister, Nirmala Sitharaman, in a set of five tranches. Under the package, a total of INR 5.94 lakh crores of relief was provided with a major focus on micro, small and medium enterprises sector (MSMEs). The government has proposed collateral-free and fully guaranteed loans which would have a moratorium period of twelve months, capped interest rate, and no guarantee fee.
• All MSMEs which have an outstanding credit of INR 25 crore and a turnover of INR 100 crore would be eligible to borrow up to 20% of their outstanding debt as on 29 February 2020. Such loans would have a tenure of four years and can be availed until 31 October 2020. A budget of INR 3 lakh crores has been allocated for this scheme.
• During a press conference dated 22 May 2020, the previously announced debt moratorium period on loan EMI installments by RBI for a period of three months ending 31 May 2020 has been extended for an additional period of three months, ending 31 August 2020. RBI also further clarified that there would be no alterations in terms and conditions of the loan agreement. The extension has been taken in view of the extension of the lockdown as well as perpetual disruptions arising due to Covid-19. Any default in loan repayment under normal circumstances would adversely affect the borrower’s credit history and risk classification of the loan. In the case of the moratorium though, the borrower’s credit score/ rating will not be impacted. The moratorium extension would lead the total liquidity cycle to extend because of delays in the collection and recovery procedure.