Financing business revival without pain

If the sector-cum-size bins, and ratios are accepted, the decision to disburse loans to business entities that seek loan is automatic, thus eliminating the risks in credit decision-making
Covid-19 requires exceptional, yet responsible and affordable policy response, to financially help Indian businesses to support their revival. We set out here the design of an impactful, fiscally responsible programme that removes the bottlenecks of risks in credit decision making.

The proposed programme design (i) eliminates active credit decision making with the use of GST return filings for beneficiary classification, identification, loan amount quantification, and loan recovery; (ii) leverages the Reserve Bank of India's (RBI’s) balance sheet for liquidity support without parking credit risk of loans on RBI’s balance sheet; and (iii) uses the State Bank of India’s (SBI’s) institutional capabilities to administer the programme.

The programme envisages the establishment of the “Bharat Aapatkal Vyawassay Utkarsh Nigam” (BAVUN) as a body corporate through an Act/ Ordinance to establish and operate a “Co­vid Financial Emergency Fund”, notified by the government of India (GoI). BAVUN would be wholly owned by the GoI.

The target size of this fund is Rs 1.5 trillion. This would be approximately 0.75 per cent of India’s GDP (FY20E); and about 37 per cent of the incremental non-food credit of scheduled commercial banks to industry, trade and services (excluding non-banking financial companies) in FY19.

This fund would be financed by zero coupon bonds issued by BAVUN (BAVUN ZCB), fully guaranteed by the GoI for repayment of principal. The RBI would be the sole investor in BAVUN ZCBs. Being a GoI guaranteed security, RBI’s investment in BAVUN ZCB would not deplete its economic capital. This would enable establishing a fund of Rs 1.5 trillion without explicit additional GoI borrowing, without monetisation of the fiscal deficit (though FRBM Act/Rules may need to exclude this GoI guarantee from the limit of 0.5 per cent of GDP); and without impacting RBI’s asset quality or economic capital.

Programme lending framework

To qualify for the programme loan, the business entity: (i) must have a GST registration; (ii) must have filed its GSTR returns for FY2018-19 and (iii) its aggregate turnover for FY 2018-19 (including turnover of zero rated supplies, and nil rated exempt supplies) across all GST registrations linked to the same Income Tax PAN number, must not exceed Rs 5 billion. Further, before applying online for the programme loan, the potential beneficiary entity must have filed its GST returns for at least nine months during FY 2019-20, and the aggregate turnover therein should be at least 50 per cent of the aggregate turnover of the business for the corresponding period in FY2018-19. Businesses engaged in agricultural activities and financial services are excluded from the programme.


The universe of all eligible businesses is divided into 12 bins based on sector and size. There are three sectors — manufacturing, non-financial services and, real-estate and construction; and four size groups. These bins determine the quantum of the programme loan (ex­pressed as a ratio of FY19 sales) made available to an individual business and the loan terms as set out in the table (The lending module). The interest rate is linked to the yield on 10-year G-Secs. These bins and the characteristics of loan quantum and terms are created using CMIE’s Prowess database. Financial statements of a sample of 12,430 enterprises were used to create these, and the lo­an/sales ratio itself is derived as the me­dian net working capital requirements of enterprises in the particular bin. It is assumed that the distribution of these by size and other financial characteristics reflects the population of all enterprises covered under the GST.

Very large businesses or those whose sales is in the top quartile of the distribution of sales by size are excluded from the programme.

If the sector-cum-size bins, and ratios are accepted, the decision to disburse loans to business entities that seek loan is automatic, thus eliminating the risks in credit decision-making.

These would be unsecured loans without any prefixed repayment term. Interest would be charged on the outstanding balance (including accrued, unpaid interest) at rates given in the table.

There would be a moratorium of six months from disbursal. Post moratorium, the outstanding loan and accrued interest thereon would be recoverable solely through the following statutory adjustment enabled through legislative changes (referred earlier) to the CGST Act and IGST Act:

(i) By applying [X] per cent hair cut on input tax credit of CGST and half of IGST in the monthly/quarterly GST returns filed by the beneficiary, which hair cut shall be applied towards programme loan servicing; and

(ii) By applying [Y] per cent step up on gross GGST and IGST liability in GST returns filed by the beneficiary monthly/quarterly, as “additional” GST obligation.

Where both [X] and [Y] will vary between [3] per cent to [5] per cent depending on which of the 12 bins (refer table) the beneficiary’s business falls into.

The programme (from application, processing, documentation, disbursal, interest computation, to recovery of dues) would be run on a digital platform to be administered by SBI.

BAVUN will have a life of 15 years, after which it will stand wound up without liquidation. All net outstanding liabilities of BAVUN at winding up will devolve on the GoI. The outstanding balances in the programme loan accounts which remain unrecovered on expiry of the 15 year life of BAVUN will stand waived.

This is the tail risk of the GoI. But it is minimised by the automatic and regular adjustment of the input tax credit by the loan servicing amount. In fact, the GoI only carries the risk of the revival of business. If buisnesses do revive, it carries no risk and no fiscal cost. Further, since credit decision making is entirely rule-based and process driven, no one carries the risk of decision making. While RBI finances the programme, its economic capital is not compromised at all. Everyone in the programme has a stake in the revival of business. This is therefore a win-win proposal.

Chitale is managing partner, M. P. Chitale & Co; Vyas is MD & CEO, CMIE

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