Tag: icra

Compound interest relief may cost banks 2% of their operational profits, BFSI News, ET BFSI

Banking & Finance

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The Supreme Court has allowed compound interest relief for borrowers with loans over Rs 2 crore. While the government has picked the tab for such payment for small borrowers, banks may have to pony for relief to larger ones.

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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SC Verdict: Additional relief of about ₹7,000 crore to borrowers may have to be given

Banking & Finance

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The Centre may have to allocate an additional ₹7,000 crore as relief to borrowers following the Supreme Court verdict on loan moratorium on Tuesday, according to analysts.

“As per our estimates, the compounded interest for six month of moratorium across all lenders is estimated at ₹13,500 to ₹14,000 crore,” said Anil Gupta, Vice President – Financial Sector Ratings, ICRA.

Pointing out that the Centre has already announced relief for borrowers having borrowings up to ₹2 crore, which was estimated to cost about ₹6,500 crore to the Exchequer, Gupta said, “With announcement of waiver for all borrowers, the additional relief of about ₹7,000 crore to ₹7,500 will need to be provided to borrowers.”

Mahesh Misra, CEO, IMGC welcomed the Supreme Court judgement and said, “The court has limited its scope to judicial review and not opined on the merits of the policy. Any other outcome would have created a potential moral hazard and also penalized conscientious borrowers. This creates the right precedent as well.”

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ICRA upgrades long-term debt rating of Muthoot Finance to AA+

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ICRA has upgraded its ratings on the long-term debt facilities of Muthoot Finance Limited to ‘[ICRA] AA+(Stable)’ from ‘[ICRA]AA(Stable)’.

The rating upgrade signifies reaching the highest standing in the category and this rating is just one level below ‘AAA’ rating, which is the highest rating for long term debt instruments. The rating denotes ‘high safety’ regarding timely servicing of financial obligations, and such instruments carry very low credit risk.

This rating upgrade will enable the company to raise more long term debt funds and attract a wider set of investors. This upgrade can further attract retail investors’ investments in the public issue of NCDs in which the company has a track record of 24 issuances raising ₹17,392 crore cumulatively. Moreover, the company will be able to raise funds at much more competitive rates.

George Alexander Muthoot, Managing Director, said “With this rating upgrade from ICRA, Muthoot Finance Ltd has crossed a major milestone of AA+ credit rating from two rating agencies, earlier being from CRISIL. It is a recognition of its market leadership position in the gold loan industry as well as its robust financial standing. We wish to highlight that the achievement of this rating level for Muthoot Finance Ltd is on a standalone basis without any parental support factored in this rating. We continue steadfast in the mission of making Indians Atmanirbhar and supporting the financial needs of every individual as well as MSMEs.”

ICRA, in its rating rationale, has stated that “The rating upgrade factors in the sustained healthy financial performance of Muthoot Finance Limited along with the scale-up in the overall portfolio which was largely led by the gold loans business. MFL’s gold loan book has more than doubled over the last five years to ₹49,622 crore as of December 2020 and accounted for about 90 per cent of its overall consolidated portfolio. The credit costs in the gold loan business have been under control, which uplifts the consolidated earnings performance. ICRA expects the consolidated earnings performance to remain healthy as gold loans would account for about 85-90 per cent of the overall lending portfolio. MFL’s capitalisation profile characterised by a consolidated managed gearing of about 3.5 times as of December 2020 is also expected to remain comfortable over the medium-term supported by its expected healthy accruals.”

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G-Sec yields may soften temporarily if last two weekly auctions are cancelled: ICRA

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Government Security (G-Sec) yields could soften temporarily as the Government of India’s (GoI) fiscal deficit may undershoot FY2021 Revised Estimate (RE) by ₹50,000 crore to ₹90,000 crore, possibly resulting in cancellation of the final two G-Sec auctions, according to credit rating agency ICRA.

ICRA observed that the yield for the 5.85 G-Sec 2030 has risen by more than 35 basis points (bps) since its introduction, to 6.23 per cent intra-day as on March 5, 2021, with an uptick in the recent weeks.

This increase in yields is mainly due to higher-than-expected fiscal deficit and borrowings of GoI for FY2021 and FY2022, a rise in US Treasury yields and hardening crude oil prices.

 

“In our assessment, there could be a modest upside to the GoI’s tax revenues, whereas its non-interest non-subsidy revenue expenditure may trail the Revised Estimate (RE) for FY2021. Therefore, the GoI’s fiscal deficit in FY2021 may end up undershooting the RE of ₹18.5 lakh crore by ₹50,000 crore to ₹90,000 crore,” said ICRA in a study.

Accordingly, the agency projected the fiscal deficit in FY2021 at ₹17.6-18.0 lakh crore or 9-9.2 per cent of GDP (as per ICRA’s nominal GDP forecasts), lower than the 9.5 per cent of GDP included in FY2021 RE.

“Based on this, we assess a lower borrowing requirement of the GoI in the remainder of this fiscal year. However, given the substantial devolvement in Friday’s auction, it remains unclear whether the GoI will choose to cancel the last two weekly auctions of Government of India security (G-sec) with a planned amount of ₹49,000 crore, instead of carrying forward larger cash balances,” ICRA’s economists Aditi Nayar, Yash Panjrath, Aarzoo Pahwa and Tiasha Chakraborty said.

If the final two G-Sec auctions for March 2021 are cancelled, ICRA expects the yield for the benchmark 5.85 GS 2030 may temporarily soften from the current levels (6.2324 per cent) to 6.10-6.15 per cent in the remainder of this month.

Subsequently, the bond yields would take cue from the domestic inflation trajectory, upcoming borrowing calendar of the GoI for H1 (first half) FY2022 and the State governments for Q1 (April-June) FY2022, magnitude of Open Market Operations (OMOs), as well as global factors such as movement in US treasury yields, crude oil prices, and overall risk sentiment.

Yields may remain elevated

Based on the available trends, the agency expects the headline CPI inflation to average around 6.1 per cent in FY2021, before easing to 4.5 per cent in FY2022, while remaining above the mid-point of the Monetary Policy Committee’s (MPC’s) current target range of 2 per cent to 6 per cent. ICRA anticipates that the MPC will leave the repo rate unchanged in 2021.

Given the large supply of dated G-sec and state development loans (SDL) that is expected in FY2022 (aggregate net supply projected at ₹16.0-16.5 lakh crore), yields may remain elevated in the absence of sizeable and frequent market operations.

In ICRA’s view, the benchmark yield may rise during Q1 FY2022, to as much as 6.35 per cent by the end of the quarter.

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ICRA: Negative rating actions in Mar-Dec ’20 exceeded historical 5-year average

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Rating agency ICRA on Wednesday said negative rating actions undertaken by it in the March to December 2020 period exceeded the historical five-year average.

About 13 per cent of the portfolio experienced a rating downgrade compared to the previous five-year average of 9 per cent, it said. Further, as many as 15 sectors, including aviation, hospitality, residential real estate, retail, and commercial vehicles, have a negative outlook in the near to medium term.

“The credit quality of India Inc has experienced rapid changes since the onset of the Covid-19 pandemic and the imposition of the nationwide lockdown in March 2020. Business health has been bruised in general and some entities in select sectors have been badly hurt, even though the effects have not been apocalyptic, and the worst-case scenarios have not played out,” ICRA said in a statement.

Also read: PSBs may require up to ₹43,000 cr in FY22: ICRA

According to K Ravichandran, Deputy Chief Rating Officer, ICRA, another 9 per cent of the rated entities witnessed a change in outlook — from Stable to Negative or from Positive to Stable.

“Without the various fiscal and monetary interventions which provided a liquidity relief to the borrowers, the negative rating actions could have been higher,” he said, adding that textiles, real estate and construction were the top three sectors in terms of the count of downgrades.

Besides, aviation and hospitality sectors too witnessed a number of negative rating actions.

In terms of upgrades, only 3 per cent of the rated entities were upgraded in the past 10-month period, compared to the previous five-year average of 9 per cent.

The outlook on sectors including ferrous and non-ferrous metals and textiles has been revised from Negative to Stable following the uptrend in prices and expectations of healthy revenue and profit over the medium term, it said, adding that the outlook on cement, passenger vehicles and auto ancillaries has been revised from Negative to Stable.

“ICRA expects the credit quality pressures to remain elevated in general over the near to medium term; however, the intensity is likely to remain quite varied across sectors,” said Ravichandran.

Also read: ICRA Ratings expects pressure on logistics sector in near term

The instances of defaults have been much lower in the past 10 months due to the benefit of the loan moratorium, the agency said, adding that there were only 30 defaults across the rating spectrum compared with 81 in the corresponding previous period.

It also noted that compared to its earlier expectations of about 6-8 per cent of the borrowers at the system-level to get their loans restructured, only a handful of entities in ICRA’s portfolio had applied for loan restructuring.

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NBFC AUM growth would revive in FY22 to about 7-9%: Icra

Banking & Finance

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Smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers.

Growth in non-banking financial companies’ (NBFC) assets under management (AUM) is likely to recover to about 7-9% in FY22 from a flattish performance in FY21, rating agency Icra said on Wednesday. In order to achieve this rate of growth, they will have to raise Rs 1.9-2.2 lakh crore, in addition to refinancing existing lines. The rating agency carried out a survey across non-banks, involving about 60 entities, together accounting for over 50% of the sectoral AUM and about 23 investors. The survey revealed that more housing finance companies (HFCs) expect growth of over 10% as compared to NBFCs. Also, smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers. However, investors have a relatively muted growth outlook.

A M Karthik, vice president and sector head – financial sector ratings, Icra, said that growth in FY22 is likely to be driven by the improvement in demand from all the key target segments. Some of the key segments which would bolster growth include gold loans, home loans, personal credit, rural finance and microfinance. Growth in the vehicle finance and business loans segments, which are closely linked to economic activity, are expected to take longer to register a reasonable revival.

Non-bank exposures to commercial real estate and other large corporate or wholesale exposures are expected to register a decline even in FY22 after the decline of about 15% in FY20 and a 10% expected contraction in FY21. “As per the survey, majority (~70%) of issuers and investors do not expect co-lending to account for less than 10% of non-bank AUM over the next two-three years. Access to adequate funding, therefore, would remain critical for the sector to register a sustained improvement in growth,” Karthik said.

Growth would be contingent upon the access to adequate funding lines. Incremental bank loans to non-banks, considering their high sectoral exposure to the NBFC segment, remains to be seen and would, in turn, depend on overall bank credit growth. Mutual funds registered some improvement in their exposures to non-banks over the recent past, but their sustainability will be critical. An expected improvement in securitisation volumes in FY22 after the sharp contraction in FY21 and access to funding from other sources, including retail or overseas lenders or investors, would be key for sustainable growth.

Icra expects the slippages from the restructured book (estimated at 4-6% of AUM) to keep NBFC non-performing assets (NPAs) at elevated levels even in FY22 after an increase of up to 200 basis points (bps) in FY21. This is after considering that entities, especially those having retail exposures, would prefer to write off sticky overdues, in view of the provision build-up, adequate earning performance and their comfortable capital structures. Collection efficiency, notwithstanding the improvement since April 2020, remains about 5-15% lower than pre-Covid levels, thereby exerting pressure on their current asset quality.

“While part of the stress could get restructured, slippages would increase in H2FY21. As per the survey, ~90% of the investors expect the NPAs to increase by about 100-200 bps by March 2021 vis-a-vis 40% of the issuers. Further, another 40% of the issuers expect the NPAs to remain stable vis-a-vis March 2020 levels,” Icra said.

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