Financials under pressure ahead of SC verdict on interest waiver plea

A paper released by RBI has warned that the NBFC system may see deterioration in credit quality
Shares of financial services companies were under pressure on Friday with most of the related indices slipping over 3 per cent on the National Stock Exchange (NSE) ahead of the Supreme Court hearing on interest waiver case.

At 09:23 am, Nifty Bank, Nifty Private Bank, Nifty PSU Bank, and Nifty Financial Services were down in the range of 3 per cent to 4 per cent, as compared to 2.3 per cent decline in the benchmark Nifty 50 index.

Among individual stocks, IndusInd Bank, RBL Bank, Federal Bank, Bandhan Bank, IDFC First Bank, Indiabulls Housing Finance, Edelweiss Financial Services, Mahindra & Mahindra Financial Services, Cholamandalam Investment and Finance Company, Jammu & Kashmir Bank, Indian Overseas Bank, Uco Bank and Union Bank of India were down more than 4 per cent on the NSE.

Today's scheduled Supreme Court hearing on interest loan waiver case, sought by home buyers, on the loans under moratorium is more crucial for non-banking financial companies (NBFCs), who also have granted moratoriums to their borrowers until August.  Moreover, a paper released by the Reserve Bank of India (RBI) has warned that despite interventions by the central bank and the government, the NBFC system may see deterioration in credit quality on account of Covid-19 related disruptions.

“The RBI has argued the interest waiver for six months on moratorium loans would be significant at around Rs 2 trillion (15 per cent of the banks’ FY19 networth). While we believe the probability of an adverse ruling is minuscule, the judgment against banks could affect financial stability and trigger capital calls across banks,” Motilal Oswal Securities said in a report.

The brokerage firm analysis shows the interest forgone on the moratorium book for a period of six months could impact FY21 operating profits in the range of 24–111 per cent, while the interest foregone on the complete book could result in operating loss across most banks.

“While we believe the probability of an unfavorable ruling is minuscule, this nevertheless remains an important event to watch for. Adverse judgment could affect the financial stability of the Banking sector and trigger capital calls across several banks. This may also dent depositors’ trust in the banking system as several banks with a high proportion of moratorium loans may find themselves unable to honor their obligations to depositors,” the brokerage firm said.

Any judgment on interest waiver also needs to consider whether the waiver should be made available only to customers who sought moratorium or even others who, despite facing hardships/lockdown, continued paying their monthly dues. Also, as a fair proportion of lending happens outside banks, from NBFCs and other lenders, the judgment would have implications for these entities as well. Loan waivers in the past have impacted credit behavior, and thus this event becomes even more important from a credit behavior perspective within both moratorium and regular-paying loans, it said.

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