SC’s compound interest waiver could impact Rs 7,000 crore: analysts

The Supreme Court on Tuesday told lenders they cannot charge interest on the loan amount for all borrowers granted a moratorium between March and August 2020 and said lenders must repay the amount or the amount should be adjusted with the borrowers. The repayment or adjusted amount will likely be between Rs 7,000 and 8,000 crore, rating agencies and analysts said.

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

The overall blow to the financial sector for the waiver has been estimated at around Rs 14,500 crore of which relief of Rs 6,500 crore has already been paid by the government for loans below Rs 2 crore.

“According to our estimates, the compound interest for six months of moratorium for all lenders is estimated at Rs 13,500-14,000 crore,” said rating agency ICRA.

“The Indian government had already announced relief for borrowers with borrowings of up to Rs 2 crore, which was estimated to be around Rs 6,500 crore for the Treasury. With the announcement of the waiver for all borrowers, the additional relief of approximately 7,000 to 7,500 will have to be granted to borrowers,” ICRA added.

Kajal Gandhi, Vice Chairman of ICICI Direct, said the new impact on banks would be around Rs 7,500 crore to Rs 8,000 crore.

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

“Overall, this is a positive for banks, as a full waiver of interest is ruled out,” said Siddharth Purohit, analyst at SMC Global.

The State Bank of India, the country’s largest bank, had said loan overhaul applications had been received for Rs 18,125 crore, or 10% of the outstanding amount.

The Supreme Court said interest could not be waived entirely and also ruled not to extend the moratorium beyond six months. He said no instructions could be given to the government or the RBI to announce any particular financial package or relief, and felt he could not issue instructions to provide relief to particular sectors in addition others.

A bench consisting of Judges DY Chandrachud, MR Shah and Sanjiv Khanna delivered 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 three-month loan repayment moratorium which was later extended for another three months until August. RBI also imposed a standstill clause on loans under moratorium, as banks were not allowed to change the asset classification of this loan during the moratorium period.

In September, the Supreme Court had asked lenders not to classify loans that it was normal for August 31 not to report as non-performing assets, until further notice.

With this order, lenders now have more clarity on the issue of asset classification, as the Supreme Court ruled out any further moratoriums.

Even if there had been a reprieve from asset classification, banks identified loans that would have gone non-performing had it not been for the September SC order. Such slippages, known as proforma slippages, were identified after the banking regulator informally asked banks for such an exercise, bankers said.

According to ICRA estimates, on a proforma basis, the banks’ GNPA amounted to Rs. 8.7 trillion or 8.3% of the advances compared to the reported GNPA of Rs. %) as of December 31, 2020.

The net NPA ratio for banks, on a pro forma basis, stood at Rs. 2.7 trillion or 2.7% of advances against the reported NPA for all banks of Rs. 1.7 trillion (1, 7%) as of December 31, 2020.

“In the absence of a standstill by the Honorable Supreme Court, gross NPAs for 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%),” the ICRA said. .

SBI’s gross NPA ratio which was 4.77% in December 2020 would have been 5.44% had there not been a suspension of asset classification.

“The Supreme Court judgment is welcome. The court limited its scope to judicial review and did not issue an opinion on the merits of the policy,” said Mahesh Misra, CEO of India Mortgage Guarantee Corporation.

“Any other result would have created potential moral hazard and also penalized conscientious borrowers. It also sets the right precedent,” Misra said.

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