Compound interest relief may cost banks 2% of their operational profits, BFSI News, ET BFSI
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Banks may have to take a hit of Rs 7,500 crore after the Supreme court extended the compound interest relief to loans above Rs 2 crore.
“All the borrowers irrespective of moratorium status and loan size will be eligible for compounded interest benefit for six-month moratorium period.
No compound or penal interest will be charged during the six-month loan moratorium period announced last year amid the COVID-19 pandemic and the amount already charged shall be refunded, credited or adjusted, SC said in its order.
The math
As per rating firm ICRA, compound interest for six months of moratorium across all lenders is estimated at Rs 13,500-14,000 crore.
The government had already announced relief for borrowers having loan up to Rs 2 crore which was estimated to cost about Rs 6,500 crore to the exchequer.
SC said compound interest should be charged on deliberate or wilful defaulters, in the nature of penal interest. The government’s March 27, 2020 notification had provided for deferment of installments due and payable during the moratorium period.
“Once the payment of installment is deferred…non-payment of installment during the moratorium period cannot be said to be willful and therefore there is no justification to charge interest on interest/compound interest/penal interest for the period during moratorium.
“Therefore, we are of the opinion that there shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium from any of the borrowers and whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded,” the apex court said.
It said there was no rationale to restrict such relief to loans up to Rs 2 crore only.
“As a result, borrowers excluded earlier may get additional relief of Rs 7,000-7,500 crore in the form of compound interest benefit,” Anil Gupta, Vice President – Financial Sector Ratings, ICRA Ltd said.
Who will pick the tab?
On who will bear the additional burden of refunding compound interest or penal interest already collected during the moratorium period, Gupta said it is premature to assume the hit will be on the government.
On whether the banks should pay from their pocket, he said, “We don’t know”, adding the amount is not very large.
To give a perspective, Gupta said the banks, accounting for 70 per cent of the loan market, have operating profits of over Rs 3 lakh crore.
“So, that way Rs 7,000 crore on Rs 3 lakh crore will be like 2 per cent of their operating profits,” he added.
Clarity to banks
Finance minister Nirmala Sitharaman said the judgement brings much-needed clarity to lenders on these issues, adding that it also clears the way for lenders to recognise non-performing assets, which they had not been able to do since the end of the moratorium period in August 2020. Reported gross non-performing assets of the banking system are estimated to be around 7% as of Dec 31. These would have been 100 basis points higher at 8%, if not for the apex court’s standstill order on recognition of such loans. “Standstill on recognition of NPAs had tied the hand of lenders and consequently impacted the credit discipline of borrowers. Withdrawal of the same will enable lenders to enforce various legal measures and support their recovery efforts,” Sitaraman said.
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