By Gyan Pathak
The world is undergoing an unprecedented corporate distress induced by outbreak by COVID-19. Economy of every country has suffered unparalleled setback, with great loss of job and the very means of survival. Governments world over are trying their best to set their economies back on growth track but it could be done only when they can devote resources to corporate relief, repair, and recovery. Developed countries have enough resources to do that, but the developing countries, such as India, will have very few resources and a commensurately large repair job on their hands because they have not been able to spend on relief.
The government of India should urgently do something in this direction, because easing the distress of the corporate sector will have positive impact not only in the form of their improved performance but also will help ailing subsidiaries, most of them are MSMEs, in their recoveries. It would speed up the economic wheel of the country helping the unemployed to get jobs. It may reduce the mass long-term unemployment scenario.
MSMEs are the most hit sector of the economy. Since the sector provides largest number of employment after agriculture, their distress has rendered millions of people jobless. It is in this context, the government needs to offer lending effective lending support by sharing the risks and finances with them. There are millions of such enterprises which are still viable, and have moderate indebtedness, but have little access to borrowing from a risk averse financial system in our country. Lenders may also be encouraged or enforced to share the loss induced by the pandemic, since it was not the fault of the enterprises. Sharing the risks by the government and the lenders would be more effective than only guarantying an individual loan. Borrower enterprises can also be given incentives to improve their creditworthiness.
For that India would need to expand spendable public resources, which can be done by negotiating lower sovereign payments to external creditors, including private ones. Sovereign borrowing capacity must also be expanded which can be done by committing to return to fiscal viability over the medium term, for instance via legalized debt reduction target.
In this connection, an ADBI working paper by Raghuram Rajan titled “Dealing with Corporate Distress, Repair, and Reallocation after the Pandemic” is also worth mentioning. It has additionally suggested that the countries suffering from resource crunch should sell state-owned assets, where feasible. The resources thus raised should partly be used in corporate repair.
Corporate and bank capital will be depleted as losses are realized. So limits on domestic investors, such as pension funds, investing in such capital should be relaxed within board prudential norms. Foreign investment in domestic risk capital should also be welcomed. If viable firms still need capital, especially in the crucial financial sector, government should provide it on fair terms. This is a high value use of funds, the paper opined.
It should be kept in mind that without rapid recovery of demand, repair would have little impact. Since the pandemic has disrupted the world trade, the fast recovery is not possible at the moment. Recovery will depend on external demand to a great extent, be it from exports, investment, or tourism. Uninterrupted trade and investment flow is needed to help build even the domestic demand. International debt relief and multilateral loans may be negotiated.
For large indebted firms, the government could support the debt restructuring with selective infusion of equity. Clever restructuring would give the government some upside stake in case the supported firm flourishes and some downside protection in case the firms fail. Corporate distress must not be allowed to fester. Restructuring of debts must be done as swiftly as possible, since unaddressed or excessively delayed distress can spread. There should be certain mechanism to ascertain the viability of the enterprises as quickly as possible. The viable ones should be given immediate support and the taxpayers money should not be squandered on the unviable units.
The issue of viability of the firms needs a fresh look, because many firms had to take loans during the lockdown when their revenues have greatly depressed. In post-pandemic scenario many of them may be perfectly viable and cannot be treated as in normal times when large amount of borrowing make them unviable. What such firms need is a more suitable capital structure. That typically means negotiating debt, rents, and other claims down, either in an out-of-court-restructuring, or after filing for bankruptcy. India would need to revisit its bankruptcy policies and laws to enable such firms to revive.
The country may have to face several problems in this regards. The SMEs or other bigger firms may be supported that have excessive debt because of the factors beyond their control rather than their mismanagement. However, pushing them into bankruptcy to restructure their debts may overwhelm the existing bankruptcy system of the country. Therefore, a new system is needed to deal with the situation, which can benefit the viable firms without overwhelming our bankruptcy system. It can be done out of court, and then the negotiated package would later brought into the prevalent system for obtaining legal status for it.
Government support needs to be better targeted toward the firms that offer a high public return on the limited resources available. We must keep in mind that the support given in the initial phases of the crisis were proved insufficient. Because of limited government fiscal resources, households and SMEs have to muddle through as best as they can even by borrowing and selling their assets. In our country, even many households had to mortgage their gold jewelry. Help is thus urgently required. (IPA Service)