Almost 50 days of lockdown and a near-complete halt in operations have severely hit India Inc. Businesses across industry sectors are likely to go through an extended, though finite, a period of reduced revenues and continuing fixed costs.

While some businesses may seem resilient, and some may even do better, most businesses are likely to suffer large costs/losses. These are essentially 'COVID Crisis Investments' being made by businesses along with the government in the fight against the pandemic. FICCI and Deloitte have sent a report to the government offering solutions to the logjam situation that is impending business continuity.

The report suggests a two-step approach. The first is to isolate the impact of COVID on businesses and moving the losses from P&L to the balance sheet. The second step requires the banking sector to step in and provide focussed relief in the form of Crisis Liquidity Bridge through additional Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL) and other relevant facilities that businesses may require to overcome the COVID impact.

“Even sustainable businesses are starved for liquidity. 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. Given a sharp fall in revenues, breach of lending covenants and possible defaults threaten the banks which gain by keeping resultant NPAs in check. The Government guarantees this credit and the Reserve bank of India (RBI), and the banks work together to ensure that sustainable businesses and their value chain is preserved," said Sumit Khanna, Partner, Deloitte India.

As per the proposal, the government does not need to undertake any fund outflow upfront. The government is only required to provide a guarantee on bank loans based on an assessment by lending banks, guided by parameters set by RBI. While there may be defaults despite continuous and rigorous monitoring, they are expected to be contained within 10 percent, necessitating support of Rs 30,000 - 40,000 crore to banks over a period of 5 years by the Government.

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

FICCI & Deloitte believe it may help by:

- Speedy recovery of economy and preservation of employment

- Faster growth of GST and Income Tax collections for government: Assuming monthly GST collections have declined by 50 percent to Rs 50,000 crore p.m. post COVID, and with proposed liquidity support through banks, the GST collections revive at an accelerated rate, the government would be able to collect more during the 5 year period.

- Assuming a 1 percent spread over banks’ borrowing and other costs, banks’ annual earnings will improve by Rs 3,000-4,000 crore and provide cushion to absorb potential default by businesses.

The report emphasizes that the benefits far outweigh the estimated limited exposure. The proposal also mitigates significant potential exposure of banks towards NPA of over Rs 3 lakh crore (at 10 percent default on bank credit to industry), and subsequent government support towards capitalization of banks to address their capital erosion on account of loss of interest and additional provisioning. This can be mitigated by providing relatively low fiscal support of Rs 30,000 - 40,000 crore to banks over a period of 5 years. The consequences of not undertaking any resuscitation measure to support businesses would be much higher.