ECONOMIC UPDATE

EXTENSION OF MORATORIUM – RAY OF HOPE

The government may consider extending the loan moratorium period from end to August to November 2020 as bankers are fearing that there would be a major rise in NPA if no immediate action is taken. 

Good monsoon so far:-  The monsoon has already been set pan India and there has average rainfall has been more than 11 % pan India. Going ahead if the monsoon remains good then the agriculture sector will see bumper production and there has been estimates that 25 % more production of rice may take place. The farmers will have good income and the rural demand may pick up strongly in the coming months.

Demand pick up during festive seasons:- There has been some green shoots in the economy as the coming seasons have many festivals and so there would be some push in demand and consumption in various sectors.  Sectors like auto, consumer durables, restaurants may see up tick in the demand.

GST for April to June:-  The April to June 2020 saw the gross GST collections of Rs. 1.85 lakh crore which was quite impressive given the fact that the entire economy was in a downturn due to the national level of lockdown.  

Auto sales for June:-  The auto industry had some signs of respite as the June unlock saw tractor sales at 90 % of the pre COVID level,  4 wheeler car sales at 60% of pre-COVID-19 levels and 2 wheeler sales at 80% of the pre-COVID-19 levels.  The unlock 2.o which has started from July will see a further easing of restrictions and more businesses getting to normalcy levels. 

 

Already stressed NPA levels:-  The banking sector already has total NPA of Rs. 8.5 lakh crore and banks balance sheets are already under stress as provisioning has eaten away their profits.  If the current moratorium period is not extended then there could be a rise in NPA levels as small businesses are not in a position to repay the amount of loan already taken by them. As per estimates, there is around Rs. 40 lakh crore of loans under moratorium and even if 35 % gets NPA the total amount of NPA could be around Rs. 10 lakh crore which would shake the entire banking sector.

SME may benefit a lot:-  The extension of the moratorium period will benefit the Small and Medium Enterprise segment the most as they are already facing a liquidity crunch, low business volume and other credit crunches. There are 6.54 crore SME in India and the current announcement of Rs. 3 lakh crore loans without collateral will benefit only 45 lakh SME who qualify for that kind of facility.

Rise in NPA could trigger fall in stock markets:-  Rise in the NPA levels would act as signs of weakening financial system of India which may trigger FII to sell the stocks in the stock market. This could trigger fall in the stock markets as FII may resort to high level of selling.

Risk of lower credit rating:- The International credit rating agencies may also lower our credit rating due to weakness in the financial system where banks are the key players. The rise in the NPA would mean that International agencies like FITCH, Moody, and Standard and Poor may downgrade our economy.

Suggestion:-  The moratorium period should be extended till November 2020 since Govt has already extended all the schemes related to the poor till November. The filing of income tax, GST, and other statutory filings have also been extended.