Crisis liquidity bridge from banks to support companies: Report

As businesses go through a tough phase with fall in revenues and liquidity crunch, a joint report by FICCI and Deloitte suggests that the banking sector can come up with a 'crisis liquidity bridge' for companies through working capital term loan (WCTL) and funded interest term loan (FITL) among other facilities to tide over the coroanavirus crisis.

As per the report, the proposed solution avoids a direct budgetary support by the government to businesses and the potential waste of additional liquidity due to a lack of rigour in determining rightful recipients.

Sangita Reddy, President, FICCI said: "The only way to ensure sustainability of businesses post lockdown and safeguard the economy is by neutralising the COVID impact and supporting businesses that have the potential to bounce back. Ensuring continuity of large businesses is important to put the economy back on track, also since 50 per cent of MSMEs are dependent on such businesses."

She further explained this can be done with concerted response from the Government, the RBI and banks with minimal expense to the exchequer.

Sumit Khanna, Partner, Deloitte India, said, "We suggest a deferment of Covid related losses by businesses and estimate a Crisis Liquidity Bridge support for the industry of Rs 3-4 lakh crore to fill the gap created, through the banking system."

It said that it would be a two-step approach whereby the excess of cost, including non-cash and finance costs over revenue during the COVID impact period may be quantified on a quarterly basis, and capitalised as a 'COVID Crisis Investment' in the balance sheet. It may be then amortised over a period of around five years, and treated as special deferred expenditure as part of long-term sources until fully amortised.

The amortised amount would continue to be treated as tax deductible expenses so that the tax shield, on loss incurred due to COVID, continues to be available with businesses for utilisation over a period.

Businesses that project forward as sustainable, after adjustment on account of moving impact of COVID Crisis Investment to the balance sheet and assumed disbursal of additional liquidity up to similar amount 'Crisis Liquidity Bridge', with or without some restructuring of their existing liabilities, would qualify as sustainable or potentially sustainable businesses.

The banks may continue to classify accounts per prevailing guidelines, and follow RBI's policies for Income Recognition and Asset Classification.

"In the second step, additional liquidity support (Crisis Liquidity Bridge) of up to the amount of the COVID Crisis Investment is to be provided by banks to businesses meeting the aforementioned sustainability test. Banks may consider corrective actions for businesses that do not qualify as sustainable post COVID," it said.

The report further notes that the the proposed solution requires limited support, primarily from the RBI and the government.

An amendment will have to be done by the Ministry of Corporate Affairs (MCA) or the Institute of Chartered Accountants of India (ICAI) to the accounting standards or release of a new accounting treatment by, in connection with the existing accounting standards and suitable clarification to provisions of the Companies Act, 2013 to allow capitalisation of the COVID Crisis Investment and its subsequent amortisation over a period of five years.

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The government should provide guarantee to lending banks for the Crisis Liquidity Bridge provided by them to each qualifying organisation for the bank's benefit against any loss or default.

Further the RBI should amend the Prudential Framework for the Resolution of Stressed Assets dated June 7, 2019.