SC's compound interest waiver may have impact of Rs 7,000 crore: Analysts

The Supreme Court on Tuesday told lenders that they cannot charge interest on interest on the loan amount for all borrowers that was granted moratorium between March and August 2020 and said lenders have to refund the amount or the amount should be adjusted with the borrowers. The refund or the adjusted amount is likely to be in the range of Rs 7000 crore to Rs 8000 crore, rating agencies and analysts said.

Earlier, following a Supreme Court order, the government has already refunded the interest on interest to all borrowers of loans below Rs 2 crore.

The overall hit to the financial sector for the waiver was estimated at around Rs 14,500 crore of which relief Rs 6,500 crore was already paid by the government for loans less than Rs 2 crore.

“As per our estimates, the compounded interest for six month of moratorium across all lenders is estimated at Rs 13,500-14,000 crore,” rating agency ICRA said.

“The GoI had already announced relief for borrowers having borrowings upto Rs 2 crore which was estimated to cost around Rs 6500 crore to exchequer. With announcement of waiver for all borrowers, the additional relief of around 7000-7500 will need to be provided to borrowers,” ICRA added.

Kajal Gandhi, vice president at ICICI Direct, said the fresh impact on banks will be around Rs 7,500 crore to Rs 8,000 crore.

“The judgement removes possible uncertainties over the possible extension. Our estimate suggests an additional burden of Rs 7,500 crore to Rs 8,500 crore on the banks,” Gandhi said.

“Overall it is a positive for banks as complete interest waiver is ruled out,” said Siddharth Purohit, analyst with SMC Global.

State Bank of India, the country’s largest bank, had said applications for loan recast were received for Rs 18,125 crore which was 10% of the outstanding amount.

The Supreme Court said the interest cannot be waived off completely and also decided against the extension of moratorium beyond six months. It said no direction could be issued to the government or the RBI to announce any particular financial package or relief, and held that it could not issue directions to provide relief to particular sectors over and above others.

A Bench comprising Justices D Y Chandrachud, M R Shah and Sanjiv Khanna pronounced the judgment on the loan moratorium and waiver of interest.

After the nationwide lockdown was announced in March last year, the Reserve Bank of India announced a loan repayment moratorium for three months, which was later extended by another three months till August. RBI also imposed a standstill clause on the loans under moratorium as banks were not allowed to change the asset classification of that loan during the moratorium period.

In September, the Supreme Court had asked lenders not to classify loans which were standard as on August 31 not to declare as non-performing assets, till further order.

With this order there is now clarity for lenders on the asset classification issue as the apex court ruled out any further moratorium.

Even if there was a stay on asset classification, banks have identified loans that would have slipped to non-performing if not for the SC September order. Such slippages which are known as proforma slippages were identified after the banking regulator asked the banks informally for such an exercise, bankers said.

As per ICRA's estimates, on a proforma basis, the GNPA of the banks stood at Rs. 8.7 trillion or 8.3% of advances as against the reported GNPA of Rs. 7.4 trillion (7.1%) as on December 31, 2020.

The Net NPA ratio for the banks, on a proforma basis, stood at Rs. 2.7 trillion or 2.7% of advances as against the reported NNPA for all banks of Rs. 1.7 trillion (1.7%) as on December 31, 2020.

“In absence of standstill by Hon'ble supreme court, the Gross NPAs for the banks would have been higher by Rs 1.3 lakh crore (1.2%) and Net NPAs would have been higher by Rs 1.0 trillion (1.0%),” ICRA said.

SBI’s gross NPA ratio which was 4.77% as on December 2020 would have been 5.44% if there was no stay on asset classification.  

“The Supreme Court judgement is welcome. The court has limited their scope to judicial review and not opined on the merits of policy,” said Mahesh Misra, CEO, India Mortgage Guarantee Corporation.  

“Any other outcome would have created a potential moral hazard and also penalised conscientious borrowers. This creates the right precedent as well,” Misra said. 

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