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More The Lockdown Extends, Higher Is The Credit Risk
Exactly a year back,in April 2019,everyone was talkingabout the general elections. Incumbent Prime Minister
Narendra Modi was expected to win a second consecutiveterm and, with the win, take the economy on an
upswing. But the credit environment didn’t look conduciveto supporta higher growth in the economy. Cracks had
already surfaced in India’screditenvironment. The great defaulters were pulled out and this clean-up act led to a
liquidity crunch.A liquidity crunch is never a good omen for the economy. In this casetoo, the liquidity crunch
created a drop in demand and slowed down the economy.
That was 2019.Realisingtheslowdown, the government took a series of measures. The RBI also announced
consecutiverepo rate cuts. The economy, as a combined resultof these measures, started showingsigns of revival.
But these early signs havenow been hit by a flu of gigantic proportions.Aflu that is creatingas much economic
damage as the human toll that it has been takingworldwide.
By March 2020, the dangers that the Covid-19 pandemic posed to the countries around the world was realised.By
the third week of March, the virus had already overpowered many of the advanced economies. These countries
were reeling under a very heavy death toll and India was clear ithad learntfrom the mistakes of others. The Janta
curfew on 22nd March was the curtain raiser and itwas followed by a 21 day lockdown that was set to end on 14th
April.Sincethe number of coronaviruscaseshadn’tflattened, the Central Government took the decision to extend
the lockdown by another 19 days.On 3rd May, when lockdown 2.0 is officially over India would complete 40 days
under lockdown.

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In the firstphaseitself,now popularly known as Lockdown 1.0, there were many economic casualties .BarringIT
and IT enabled services,all other industries such as engineering,cement manufacturing,auto ancillaries,cars &
two wheelers and metals had announced temporary shutdowns. Plagued by challenges of labour safety, many
FMCG companies followed suit.
The lockdown 2.0 is very evident to hitthe bottom lines of many companies.The most impacted due to this is the
MSME sector. These companies havebeen strugglingwith creditavailability and now with the cash flowbeing hit,
they will need borrowing to restart operations and to sustain it.Borrowingis good when the consumption is going
north. But the consumption demand is expected to be slowand this is certainly goingto slowdown the economic
growth further.
The loss of jobs and loss of incomes is another blow to the credit environment. A loss of the steady stream of
income will immediately resultin defaults.The RBI has provided a 3 month moratorium, but this will notbe
enough and one can definitely expect the defaults to increase.Even the most optimistic personalitieswill agree
that survival isthetop priority in a cash-strapped environment. There would be many people who would not mind
skippinga few EMIs to preserve some cash.Remember that the stock market has tumbled and many people woul d
be averseto sellingtheir mutual fund holdings or equities atthis subdued price.All this means that the risk of
NPAs going higher is a stark reality.The increasein NPA will happen even though the RBI has provided an asset
classification standstill for accounts thathave availed moratorium.This means that the time period for classifyinga
loan as an NPA has increased from90 days to 180 days.
But with the lockdown expected to be opened in phases,there will bemany hurdles on supply chain,labour
availability and creditavailability.This means that the economy might take 6 months to come back to a normal
level. The growth projections by the IMF, for Indian economy, stand at 1.9% - which indicates a very nominal
increasein demand. All in all,we would say that it’s a tough phase for the economy and one needs to be very wise
whileinvestingin mutual funds or equities consideringthe above possibilities in mind.