The modern world has not witnessed such a testing time that is being witnessed today due to the global coronavirus outbreak. There is no clarity on when economic activity would resume and when people would be able to get back to their jobs, nor is there any guarantee that they would even have their jobs, once things settle down.
Speaking to CNBC-TV18, former SEBI chairman UK Sinha's said that borrowers, especially non-banking financial companies (NBFCs) are facing a very difficult time and that "things are getting bad very fast".
Below is the unedited transcript of the interview.
Q: Can you assess the trouble in the financial sector?
A: So far as this crisis is concerned, government of India should be complimented that they reacted early, they took actions proactively and for a large democratic country, it was something unique. Many other countries have not been able to do it. But so far as the financial sector is concerned, the economy is concerned, I think we have to take similar measures, which are proactive and bold.
Now the point is that some people could argue that one has to do first root-cause analysis, one has to go into what are the cost benefit analysis and all that but as the Prime Minister (PM) has rightly said in many of his speeches that this is a war against coronavirus, we have to bring the same mentality and same approach in dealing with the financial sector issues.
Are there any early warning signals? Till March 31, mutual funds (MFs) were facing the redemption but by and large the non-banking financial companies (NBFCs) managed things and there was not much of a problem but last week – that is the week that has just gone by – we have enough evidence and enough warning signals that things are getting pretty bad and pretty fast.
Can you or anybody imagine that state development loans about Rs 37,500 crore, which were there last week, in many cases the states were not able to raise the money directly and they had to cancel their auction. In many cases they were able to do it but at a very high cost. The whole cost, the yield went up by 70-80 basis points (bps). Look at large public sector undertakings (PSUs) like NABARD or NHPs, they could not press the whole amount and whosoever money in IL&FS, in Dewan Housing and the latest was – these tier-I bonds in the Yes Bank situation, where 100 percent cut was finally done. Although I believe Reserve Bank of India (RBI) wanted to do something better but somehow it couldn’t happen and the matter is now in the court.
In that situation, what is happening today is that AAA rated corporates including AAA NBFCs, they are able to raise money at a higher cost but the problem is that those who are not AAA rated, they will not be able to raise money, MFs are not getting any fresh money, the foreign portfolio investors (FPIs) are largely negative and the banks and other institutions are not coming forward. The market view is that last week when these state development loans were there, LIC was perhaps was absent. So in that situation we need to take some action. The type of actions can be variety of things. It is not just one action. But we have to first realize and acknowledge that there is a problem.
The problem is that the NBFCs, especially those who are dealing with housing finance or even other NBFCs, they will not be able to raise money and they are finding that their borrowers are not repaying and the lenders from they have taken money, their obligations are coming. There are another set of problems for two specific sectors. One for example is the MSMEs. The market feedback is that some of those NBFCs who were lending to MSMEs have infact started sending notices to MSMEs for prepayment. Imagine, in such situation they are sending notices for prepayments. I don’t know how the MSMEs are going to honour that.
The second worry is with regards to microfinance institutions who were getting good amount of money from the NBFCS. This announcement by RBI about moratorium, that announcement perhaps maybe deliberately or don’t know how, in smaller towns, in regional places, that announcement is being implemented or being understood as if there is a waiver. So there is a waiver on the loans given to the MFI customers. That is very serious situation. If there is a feeling like an agricultural waiver, there will be a loan waiver for MFI customers for three months or whatever period then we have another set of very serious problems.
So if we acknowledge that there is a serious problem and if we acknowledge that we have to act fast like we acted in case of the lockdown very fast, similar action is required. If we don’t take similar action early, the situation is that we have to take early action. If we don’t take early action, there will be more pain in the system and the cost will go up.
Q: What are the actions? The one recommendation we got and we have been getting is look at the other central banks, they are also repoing money against AAA corporate bonds, the RBI has not yet done that but even assuming they do, that will only go to AAA corporate, isn’t it? How do you get it down the line to the NBFCs and the MSMEs that you just spoke about?
A: There are several weapons in the arsenal but we have to start with what you just said that repo against the AAA bonds because it will be difficult for us to argue that they should also do repo against the lower rated bonds but what happens if RBI starts doing that with AAA rated bonds and with the liquidity that has been pumped into the financial system or the banking system. They will be forced to look at other bonds, which are not AAA but bonds, which are lower than that. So there will be some – the crowding out will go down. Right now, the market situation is that large corporates and highly rated corporates are – I will not name them – coming in the market with huge money borrowing demands. They are trying to take that money out before the system gets locked down further.
So you start with that. The other one is that the – you can start giving some targeted government guaranteed bonds and let me remind you about what happened in case of old UTI and in the Specified Undertaking of Unit Trust of India (SUUTI) bonds were given, those bonds were issued by SUUTI but those were guaranteed by the government. It cannot be done across the board but let us identify certain sectors or certain situations and government should give a guaranteed bonds.
The third option is that we should start considering issuing some tax-free bonds and I am sure if those tax-free bonds are issued maybe by institutions like NHAI or NHP and I am sure – of course it will have to be tested – but my feeling at this stage is that it will cool down the yield drastically because people will even go to 200 bps less than what is being done.
These are difficult times so these difficult solutions will have to be thought through. My feeling is that
It is better that we do it early rather than wait for things to deteriorate and then take those actions because then the cost will be higher. Let me also caution here that when we take these measures there will be come mistakes and let us have a tolerance for genuine mistakes. If we are saying that this is war, this is a yudh then there will be some causalities, let us be prepared. So honest decisions have to be supported and we should communicate that very well.
Q: One more issue, we have being discussing this issue with experts and you have put a fund of ideas of trying to raise NHB bonds or NHAI or NABARD bonds which can be guaranteed and the money can be lend to specific sectors. There was a suggestion that we should redefine or reclassify NPAs only for a definite period or allow one-time restructuring. A lot of the hesitation to lend is coming because you expect that next quarter these people are going to announce 10 percent NPAs or whatever and therefore they will become unviable. Do you think that Brahmāstra is also called for - reclassify NPAs for a 6 months or allow restructuring for one year?
A: Let me give you a dimension to this suggestion that this is the time when very high degree of coordination between different regulatory agency and the government is necessary. For example the moratorium that has been issued by RBI there are still some technical and procedural issues which are yet to be sorted out, those should be sorted out. In September 2019 for example after the Essel Group crisis when all the lenders had agreed for interest being forgone or being allowed for a certain period of time, SEBI came out with a circular maybe very rightly so at that moment and in that situation and which was a very strict circular so there is a need to re-look at all this.
I would suggest that there are number of procedural issues, for example there is another issue with regards to certain accounting standards being kicked in to a circular by RBI on March 13th. It is high time we all sit together and look at whether these things have to be done now or can be deferred them by one year. Having said all that my feeling is that a variety of measures including restructuring should be possible. There is another word in the financial sector that is rescheduling which means that you don’t extend the total repayment period – if it was 8-10 years it remains so, but you reschedule it – one or two payments are not made all those things should be looked at.
So there are a variety of things for example NPA recognition and all. I know there are people who will strongly argue against this because they think that once it is done it perpetuates and there is industry pressure. I acknowledge that in this situation there will be pressure from various industry group, but the government and the regulators put together I hope will be smart enough to understand what is in larger national interest than what is a wish list from the half of an industry.
My suggestion and worry is more about MSMEs, I mean MSMEs you look at what situation they are facing and there is a suggestion or an assessment from All India Manufacturing Organisation that if the lockdown continues beyond 4 weeks then 25 percent of the MSMEs will close down and if it goes to as much as 8 weeks then 43 percent of the MSMEs will close down. I find that there is some sense in these projections because there are already reports from various sources that the stress which the MSME sector is facing, so we have to have a special regulatory as well financial package for them.
MFIs – those who are lending to MFIs and as I said there is a political belief at the ground level not at the higher level that this is something which amounts to a waiver so we have to handle those situations. So all these variety of measures should be taken together. My feeling is lot of coordination is required and there has to be some amount of tolerance for honest, good decisions taken in a war like situation like we have today.
Q: You have worn the mutual fund regulator hat for a longish bit and you have also headed one of the largest mutual funds and as joint secretary presided also over the UTI transition from a government owned entity to a private market entity, what is the immediate requirement for that sector – mutual funds because they have become a very prominent vehicle?
A: Mutual funds at his moment if they had lot of redemption pressure in the week ending March fortunately in the first week of March they didn’t have any pressure. Let us see how things go out in this week. However, the fact remains that they are not getting any fresh money and unless some of these measures that we have discussed just now about the large financials system, the larger corporate sector those measures are taken and there is a level of trust and confidence. Right now we are passing through a period of fear so far as the financial markets are concerned that fear has to be removed.
So, I won’t recommend anything in particular for the mutual fund sector today but let us look at it as and when things evolve. I will also like to add that the calamity is spreading all over the world in an exponential manner, so our response – the government and the regulators response cannot be linear which means that we have to take certain measure but be ready to review them, be ready to revise them as and when situation develops. I would say that let us wait for one or two more weeks, keep watching situation, but right now the problem is more acute in case of a NBFCs, in case of housing finance companies and for MFIs.