“Little known facts about the financial impact of Covid-19 and why they matter to India!”
Introduction
Outbreak of Covid-19 is unprecedented shock to the not onlythe Indian but also global economy. It has impact on health and economic crises. In this lock down, people can shop for essentials only in stipulated hours and in the vicinity of their house. Country wide lockdown resulted in disruption in demand, supply, and the economy will face recessionary period. Demand and supply restriction, fragment global and domestic supply chain, reduced domestic demand are ways for transmission of the impact. It will affect formal and informal sectors of the economy. In current scenario we have seen its impact largely on financial markets and on different type of industry sectors. Daily wage earners are going to impact a lot since they have limited savings and investments to bank on.
According to Economic Times, global economy could shrink by almost 1% in 2020 due to Covid-19 pandemic. Many people losing their jobs which in turn affect the revenue of business.Lockdown is alsoaffecting service sector, particularly the industries involved in hospitality, transportation and retail trade.
According to the “The Hindu”, world economy bound to suffer severe recession. The global economy was already slow before Covid-19 outbreak and now there is possibility to suffer from severe recession in 2020. The Indian economy is already having lower foreign direct investment, capital outflows, tighter financing conditions and price pressures from imports. This all is leading to recessionary trends.
According to Economic Times, China’s central bank recently bought 1.01% stake in HDFC. According to the shareholding disclosures, Bank of China held 1.75 crore shares of India’s biggest housing mortgage lender. If an investors stake crosses 1% then the companies need to disclose shareholding changes at the end of every quarter. This year HDFC shares fell nearly 40%. China-backed funds are seeking to buy Indian financial assets after the pandemic outbreak caused a major slump in the valuation of local companies.
According to Economic Times, the country’s second largest Information Technology (IT) service industry player Infosys suspended promotions and salary hikes due to ongoing covid-19 pandemic.Impact caused by Covid-19 has led to a significant displacement in the operating model while severely testing business continuity plans of companies. Also, the company is unable to provide revenue outlook for FY21 due to business uncertainty amid the outbreak.
COVID 19 impact on Finance
The coronavirus outbreak is first and foremost a human tragedy, affecting entire world. Amid uncertainty as to when the situation will normalize, there will be a sharp downturn in various indicators of the manufacturing and services sectors from March 2020 onward.This primarily includes the discretionary activities like travel, tourism and hospitality; labor intensive sectors like construction, transport and manufacturing of non-essential items; exports; and supporting sectors like electricity, etc.
According to the situation, in the current scenario, extended demand disruptions are likely to lead to elongated payment cycles.Since an entity’s liquidity position is of paramount importance to support its credit profile, several entities would endeavor to conserve cash, either by invoking force majeure clauses to revoke payments; or by deferring payments to the extent possible.
Consequently, many entities will face working capital blockage as their receivables get stretched and inventory doesn’t run-down simultaneously. The entities with weak liquidity buffers are likely to report significant weakening of their credit profile over the next couple of quarters.
Indian economy
It is seen that Gross Domestic Product(GDP) growth slowed to 4.7% in 2019 and scenario of industries in different sectors at the end of 2019 fail by 5.2% which is very worst condition. Private sector investment and the consumption expenditure is also declining. The consumption of rural and urban areas showing the contracting situation.
Impact on Banking and corporate sector
During the crisis, it is important that the banks must play crucial role in order to reduce the pressure on financial sector. Particularly when the stock market is down most of the firm looking for banks for their needs. But the banks and debt market also facing the problems which affect credit growth. The private corporate sector also facing the problem because of reduction in jobs. The financial performance of was also poor in 2019. Private sector investment has been declining. The corporate sector facing the challenge of managing human and business. Due to Covid-19 companies facing the problem of operating in new system.
Financial institutions
As the ramification of the health shocks and the repercussions of the country wide lockdown become clear with each passing day, the risk aversion of the banking system will get significantly aggravated. Many firms are struggling and they are unable to repay their dues amidst the massive demand and supply disruptions corporate delinquencies will go up and the level of Non- Performing Assets (NPAs) is increasing. Due to disrupting jobs and income sources many of the people may find it difficult to pay their existing loans. Defaults will not arise only in banking system but also in non-banking financial institutions because they are lending money to micro and small business because their earnings will fall sharply.
Financial Markets
Due to this pandemic there has been turbulence in the debt market. Debt mutual funds, even those that invest at a short end of maturity have taken serious hits to their net asset values. The equity market has been hitting new lows every day.Indian stock market has lost 26 per cent in dollar terms between February 1 and April 9, compared with a fall of 20 per cent and 14 per cent in the European and US markets.
Three channels of the global economy will be disrupted which are demand, supply and finance. On the demand side, a combination of reduced income and fear of contagion will result in lower private spending. On the supply side, due to sudden halt in manufacturing activities may affect global value chains. Due to the increased risk aversion and liquidity issues, the financial markets will weigh heavily on the global economy.
Impact on working capital
Important components of working capital are assigned to managing inventories, accounts receivables and payables and cash. Due to outbreak of Covid-19 many businesses are facing challenges of cash and working capital management. Suppliers are unable to provide raw material to manufacturers because of that there is delay in manufacturing process which affect the Work in Progress(WIP) balances. Low demand from consumers leading to excess stock of inventories will be difficult to clear. Many businesses are trying to approach their suppliers, customers and financers for arranging their short-term working capital requirements. In order to face the challenges, businesses are required to make short term and sustainable working capital improvements.
Issues related to leverage financing
Covid-19 has affected all the markets including leverage financing. In case of liquidity requirements and borrowing conditions, borrowers are being restless because of the effect of pandemic as the downturn in revenues, reduced demand and supply chain disruption. Some borrowers are dependent on steady cash flow to fund operations are facing immediate liquidity problems. Even as the government announces the new steps for supporting financial market, like buy back of government bonds, lenders facing challenges regarding sources of short-term funding.
Impact on Loan Amortization
Thelockdown will have impact on fresh loan and new disbursement of loan by non-banking financial institutions. The scope of impact will depend on asset class, income source of the customer, level of field work in operations and proportion of cash collections.The segments involved in microfinance will affect the most because they are unable to visit to households for repayment collection and the borrowers have weak credit profiles. Also, their way of income generation is disrupted due to lockdown. Vehicle finance will also affect because the reduced traffic will lead to lower down the earnings of fleet operators.
Manufacturing sector anticipates severe workforce crunch
Manufacturing in the country won’t take off as soon as lockdown restrictions are lifted due to an acute shortage of workers who have returned to their home states. The automobile, textile and engineering industries, among others, depend primarily on outstation employees for working their plants. This will majorly impact the industry.
Impact on IT sector
The IT industry is one of the important sectors in our country’s economic growth. Due to uncertain economic conditions the customers are expecting to cut down on their IT budgets and slow down new initiatives.
Work from anywhere but with assured security
During the recent corona crises people are ready to Work From Home (WFH) to fight against pandemic. The companies will need more security to prevent data breach and cyber security threats. This will in turn increase the cost which may become difficult to manage for companies.
Increasedinvestments on collaboration tools
As the companies are working through virtual system so they have to invest in advance collaboration tools for smooth functioning of the work. There is no doubt that this will help for growth but it will increase the costs.
New projects on cloud and digitization
People going towards cloud and digitization which will reduce human touch points. This will help to enhance the knowledge and create business opportunities.
More investments on automation
Looking at current situation, customers investing more into automation which reduce the dependency on manual intervention
Push for increased onshore and local presence
To reduce the hurdles in future, customers may insist on increasing the local onsite presence. For that companies need to invest in new local geography delivery canters, which in turn creates the burden on margins but companies may have to adopt new business strategies.
Consolidation of vendors and potential for new partnerships
Due to corona crisis,there is difficulty in keeping business continuity for the small vendorstherefore customers going for consolidation. So, the IT companies may take the benefit of this situation and maximize the business by opening new partnerships with local firms.
It is not only enough to identify the specific financial challenges but also important to device solution for the situation.
We would like to hear if you are facing some specific economic challenges and creative solutions which you may be applying.
Authored by: Dr. Sachin Bhide, Founder & Strategy Designer and Manali Bedekar, Research Assistant at Eha Management Consultancy