Small businesses in India, already struggling amid the pandemic, now have to repay growing debt after a loan holiday ended last month.
The Reserve Bank of India granted borrowers a six-month freeze on their loan repayments, which ended on August 31, with about a third of India’s $ 1.8 trillion in outstanding loans being deferred under from the program. Businesses still trying to cope with a slump in demand now have to find a way to pay off their loans or face closure.
This is a dilemma that Regi Philip faces. He owns a travel agency in Mumbai, which has not been in business since April, when the country entered detention. He got a temporary reprieve from his bank, helping him save Rs 45 lakh per month in debt repayment. He is worried about how he will resume these payments, given that his travel business has yet to recover and he still has salaries and other overhead to pay.
“The Reserve Bank should ask the banks to extend the moratorium,” said Philip, managing director of Cosmos Agencies LLP. “Otherwise, I may have to resort to reducing capital expenditure and laying off staff. “
The central bank has given borrowers some relief by allowing banks to extend the moratorium and restructure loans, but the process is not automatic. Lenders can grant extensions of up to two years and have until the end of the year to choose which loans to recast and until June 2021 to do so.
Prime Minister Narendra Modi’s government has also set up an expert panel to assess the waiver of interest on loans frozen until August 31, which is as much as Rs 2 lakh crore.
But for many small businesses, which account for around 30% of India’s economy, the relief won’t be enough. According to the Confederation of Indian Traders, around 1.75 crore of stores, representing a quarter of small businesses, are on the verge of closing due to a lack of financial support from the government.
“The next level of stress for the economy is likely to emerge,” said Kunal Kundu, economist at Societe Generale GSC Pvt. in Bangalore. “Many of those organizations that have barely managed to stay afloat thanks to the proposed moratorium will inevitably go bankrupt, reducing employment levels and aggregate demand. “
The economy’s 23.9% contraction in the last quarter was the worst on record and the largest of any major economy that Bloomberg tracks. Consumption, which accounts for around 60% of gross domestic product, has been severely affected after millions of Indians lost their jobs during the lockdown. The recovery has been slow, and an increase in cases of the virus has led many economists to downgrade their growth forecasts.
Banks oppose extending the freeze on loan repayments because they see it as a strain on their finances and an opportunity for borrowers – who have the capacity to repay – to suspend their payments.
About 75% of companies that opted for the moratorium were below investment grade, according to an analysis of 2,300 companies by Crisil Ltd., the local unit of S&P Global Ratings. In industries such as gems and jewelry, hotels and car dealerships, one in five companies have requested the moratorium, he said.
“We are looking at a potential collapse scenario for our business if we do not get any reprieve from the government,” said Ashokan Puthenpurackal, managing director of Antech Offshore Engineering Pvt. in Bombay. “We are completely empty about the future for the simple reason that business has not yet grown.”
– With the help of Suvashree Ghosh and Anirban Nag.