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By VP Nandakumar
A couple of months ago, in the March issue, I had written about COVID-19, even as it was in the early stages, highlighting the need for a coordinated global response. That was when total worldwide cases stood below 100,000 whereas it stands at over 3.8 million now, after having caused over 265,000 deaths. The disease has moved from China to Iran, Italy, South Korea, Spain, France, US and so on, to almost every inhabited part of the world. The worldwide lockdowns necessitated by the need to contain its spread have brought trade and travel to a grinding halt.
The economic costs have been enormous and may well exceed the havoc wrought by the global financial crisis of 2008-09. One of the benchmarks for crude oil prices, West Texas Intermediate or WTI, slipped briefly into negative territory (implying that sellers would pay buyers!) something unimaginable in normal times. Gold prices are rising almost every day and look set to surpass the previous peak set in 2011. Unemployment and Job losses have spared no sector and geography and things have never looked gloomier than this.
But then, it is said that the night is darkest before the dawn and there is reason for hope as well. Hospitals in Wuhan are not reporting new cases anymore and the city reopened on 8 April after a 76-day lockdown. Children in Spain were recently allowed outside for the first time in six weeks. In India, which went into a nationwide lockdown on March 24, most parts are limping back to normal, even as the red zones stay largely closed.
At the time of announcing the lockdown, the Prime Minister had said, “jaan hai to jahan hai” (there is a world because there is life). By realising the gravity of the problem and taking harsh measures early on to contain the spread of the disease, India has successfully achieved its target of flattening the curve. Of course, it is too early to celebrate, but there is no denying that we are beginning to see the light at the end of the tunnel.
The next battle
The time has come for us to gird ourselves for the next battle which will be bigger and longer lasting than the disease itself. This has to do with combating the economic fallout of the lockdown which has seen millions of Indian families lose their livelihood and pushed to the edge. For them, it is not so much about “revival of the economy” as a question of survival.
Most Indian households earn their livelihood in the informal or unorganised segment. About 68 percent of the workers in non-agriculture and agriculture (except in growing crops) are engaged in the informal sector. Among regular wage/salaried employees in the non-agriculture sector, 71 per cent had no written job contract, 54 per cent were not eligible for paid leave, and 50 per cent were not eligible for any social security benefit. Majority of these workers do not have access to social security like provident fund, pension etc.
More than 70 per cent of the Indian population lives in rural areas, and 52 percent of rural households are self-employed, while 25 percent depend on casual labour and 12 percent get regular wages and salaries. Only 9 percent of rural households are engaged in occupations such as officers and managers, professionals and technicians.
Tough times for NBFCs
There’s no doubt that the economic fallout of the Corona pandemic represents a major challenge to NBFCs, who were already facing liquidity issues following the IL&FS default in late 2018. The imposition of the lockdown and the subsequent recommendation by RBI about extending a three-month moratorium to borrowers heightened concerns about prospects for the NBFC sector. However, by now, it is becoming clear that many borrowers have preferred to stick with their existing repayment schedule because they realise that the moratorium does not offer a waiver of interest or principal and would add to their interest outflow. Meanwhile, the operational disruption from the lockdown will be temporary but there can be serious long-term implications for asset quality as clients face job losses and declining incomes, impacting their capacity to service loans. A shakeout in the industry followed by consolidation looks imminent, and NBFCs who enjoy a strong capital buffer will be the survivors and beneficiaries. In the long run, a process of consolidation where weaker players are weeded out is beneficial for the industry.
Gold loans will perhaps be the only lending business to come out of all this unscathed. It will also be the first to rebound when the lockdown eases. During periods of economic stress, banks are generally known to become risk averse and cut down on lending. Further, in today’s scenario, many NBFCs are faced with severe liquidity constraints and therefore in no position to pick up the slack. That would leave gold loans as the fall-back option for borrowers denied access to their regular channels. Indeed, the World Gold Council expects gold to become a tool for the revival of many small and medium enterprise businesses and household fortunes.
In the microfinance segment, analysts expect much pain ahead for lenders as defaults are expected to surge. However, based on our past experience of dealing with episodes of stress in the segment, we are much more positive. Most microfinance borrowers are keen to maintain their account in good standing to avoid negative reporting to the credit bureaus and thus continue to be eligible for future loans. We saw this behaviour after the floods in Kerala and Chennai and the cyclone in Odisha. Recall also that the microfinance sector was laid low by Demonetisation but rebounded strongly thereafter. Further, within microfinance, companies with lower borrowing cost (who therefore charge lower rates of interest to their borrowers) are better placed as they would have attracted more credit-worthy customers by a process of natural selection.
Critical to the health of the larger NBFC sector is the question, how quickly will the economy rebound after the lockdown is over? The incentive for borrowers to adhere to credit discipline and maintain repayments on schedule is much stronger when there is an end in sight to their pain. From this perspective, it will be worthwhile for the government to pump prime the economy with a large stimulus which can be unwound as and when growth picks up. Otherwise, a mood of pessimism and despondency may take over which can become self-reinforcing, in other words, something of a vicious cycle.
Published in Unique Times Magazine, May 2020
(VP Nandakumar is MD & CEO of Manappuram Finance Ltd. Views are personal)