SC Verdict on Compound Interest/Reimbursement of Penalties Will Not Impact Banks as Government Must Reimburse: Yes

Yes Securities, the brokerage and investment arm of Yes Bank, said on Wednesday that the Supreme Court’s directive on the pandemic loan moratorium had provided much-needed clarity and that there would be no financial impact on banks as the compound interest waiver has to be reimbursed by the government.

In its verdict on a series of pleas asking for the moratorium to be extended beyond August 31, 2020, the Supreme Court on Tuesday said it was a political decision, refusing to interfere with the Center’s decision and to RBI not to extend the loan moratorium beyond the limit.

However, he observed that the benefit of the moratorium should go to all borrowers regardless of the amount of the loan and asked to repay any amount collected as penalty interest and compound interest from March to August 2020.

The benefit of the moratorium was for a loan of up to Rs 2 crore by means of deferred payment over these six months. The Supreme Court said there was no reason to limit such relief to loans up to Rs 2 crore only.

Yes Securities said the SC’s verdict and clarity are positive for lenders.

“There is no financial impact for lenders as the compound interest waiver would be reimbursed by the government,” he said in a note.

The clarity regarding no waiver of base interest and no extension of the moratorium period is positive for banks and NBFCs, Yes Securities said.

This now allows them to officially mark 90+ dpd accounts (over 90 days past due) as NPL (as of September 1, 2020) and continue the resolution and recovery process, the brokerage firm said.

According to rating company ICRA, the overall impact of waiving compound interest is estimated at around Rs 13,500-14,000 crore, of which Rs 6,500 crore has already been accrued in March-August while the additional impact is Rs 7,000-7,500 crore.

Gross Non-Performing Loans (NPLs) of banks could increase by Rs 1.3 lakh crore by December 2020, according to ICRA.

In other words, the gross non-performing assets (GNPA) of banks could be around 8.7 trillion rupees or 8.3% of gross advances against the reported GNPA of 7.4 trillion rupees (7, 1% of advances) in December 2020.

Yes Securities said the Supreme Court’s decision will improve the efficiency of lenders’ collection, as the Supreme Court’s ruling on NPLs has impacted the repayment discipline of some borrowers.

Forward flows in lagging buckets could be stopped, limiting the future cost of credit, he added.

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