Only two weeks ago, a story went viral in the global press showing how in rural India, people had taken to trees for self-isolation because they didn’t have space at home and wanted to keep their families and neighbours safe. This story was a testament to India’s innovative spirit, the hope there can be for recovery and the idea that we will somehow hack it.
We will figure out some “jugaad’ (or workaround) to make it through the covid crisis. Three weeks into the lockdown, however, there is clear evidence of the devastating impact the pandemic has already had on daily wage earners, the country’s un-skilled and semi-skilled work force, and small businesses that represent roughly 95% of the total industrial units in the country, employing about 40% of India’s workforce, delivering approximately 45% of the total Indian manufacturing output, and 40% of its total exports, all of which have essentially come to a standstill.
While we may be able to find a jugaad to survive, we will need far more long term and sustainable solutions if we are going to make a positive impact on the lives of Indians and keep India growing. The most important intervention needed is to prop up the MSME segment. India could embrace a micro-level approach rather than a macro-level one, and introduce specific interventions for sectors that are critical to the economy.
The US has introduced a huge remediation and stimulus package, but it has applied it agnostically by sector/location. This could mean that critical sectors, vulnerable populations and geographies will be disproportionately disadvantaged as the virus continues to wreak havoc. Japan, on the other hand, introduced tax and cash compensation and loan guarantee schemes to prop up its services and manufacturing sectors, which are its largest contributors to gross domestic product (GDP), and which through their small enterprises generate new jobs.
The Indian Government could launch a “StartBackUp India" programme and offer well targeted tax sops, cash compensation schemes and loan guarantee schemes to prop up MSMEs in both the services and manufacturing sectors. These sectors need adequate capital injected quickly into MSMEs, while of course striking a balance so as not to create too large a fiscal deficit.
StartBackUp India could include:
One, financing to help these critical sectors get back up and running;
Two, low interest rate loans for 12 months post lock-down;
Three, export finance guarantees for manufacturing and services companies;
And four, interest rate caps for MSME working capital loans post lock-down, together with quotas on the percentage volume of capital that must be disbursed to MSMEs in the two sectors.
The challenges that lenders are facing today to service this critical segment of the economy also need to be addressed. Banks are inundated with new loan requests. But they are hampered from deploying capital quickly because of several factors. Pre-covid KYC norms often require in-person interaction. Lenders are overwhelmed by requests for assistance from their existing client base without the manpower to deal with the increased workflow. They are also wary of extending loans since overall risk has increased while capital reserve requirements remain in-place from earlier.
At the same time, borrowers under lockdown need working capital quickly more than ever to be able to tide over this period. They have to pay salaries and rent. Borrowers that provide critical services to the economy need both working and expansion capital quickly in order to keep pace with heightened demand. However, they are not able to interact with their lenders to complete the formalities.
We need solutions for both parties urgently. Specific interventions could include:
One, the relaxation of regulatory requirements for lenders to let banks recognize as capital more of their regulatory loss allowance reserves, so that they can lend more. This could go with regulatory forbearance that allows for the restructuring of agreement terms in these critical sectors. We also need relaxation of know-your-customer norms for lending, so that KYC formalities can be completed digitally/by phone or video.
Two, the facilitation of digitization initiatives for the MSME credit market, including the appointment of accredited digital intermediaries to work with lenders on all aspects of credit underwriting—this would catalyse the digitization of MSME lending across the entire workflow, and speed up the delivery of credit.
Three, guarantees and subsidies to incentivise lenders to provide: a) Short term working capital facilities for hospitality, tourism, manufacturing and the broader services sector (offered for 6 months with no principle repayment); b) Interest free period on new loans issued to MSMEs; c) Emergency Loans to cover salaries of employees; d) Deferred payment of principle on secured MSME loans.
All that should go with salary support to MSMEs by way of direct transfers to employee accounts, like the job retention scheme in the UK, and even closer home, in Bangladesh.
Without such interventions, lenders will struggle to not only deploy much needed capital, since the pre-crisis credit regulations are not designed for this situation, but also to do so in a timely manner.
The consequences will be dire if not enough is done, as a number of sectors will simply collapse under strain if it takes 4-6 weeks to secure weeks to secure a loan, as it does under normal circumstances.
No Western government has yet introduced financial remediation or stimulus packages designed for women. Yet, women, prior to this crisis, were already in a disadvantaged position in terms of exposure to domestic abuse and sexual harassment, and earning 33% less pay on a global average for the same work as men, and that too, with much lower access to affordable capital from formal financial institutions. India could be even more progressive and introduce specific lending and remediation measures for women.
These could include:
One, a government salary redressal fund for women workers in the textile sector who have been furloughed;
Two, a special innovation fund for women entrepreneurs;
Three, a relaxation of collateral requirements for women borrowers in the MSME sector and reduced interest rates with government backed guarantees;
And four, financial education programmes for women entrepreneurs.
All this could go into a StartBackUp India programme for the economy to overcome covid-19.
Aditya Ghosh is an investor and advisory board member of CreditEnable, and Nadia Sood is founder and CEO of the company.
Views expressed are personal.