Tag: supreme court

Despite healthy Q4 result, HDFC Bank believes tough times have begun for FY22, BFSI News, ET BFSI

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Amid the second COVID-19 wave, India’s largest private sector lender HDFC Bank reported on Saturday, an 18.2% y-o-y rise in net profit to Rs 8,186.51 crore for the quarter ended March. The Bank had posted a net profit of Rs 6,927.69 crore in the year-ago period. The Bank’s Net Interest Income also witnessed a 12.6% y-o-y rise to Rs 17,120 crore in the quarter under review, as compared to Rs 15,204 crore in the year-ago period.

HDFC Bank on Saturday also said that it has set aside ₹500 crore as provisions to cover the Supreme Court-directed compound interest refund to all borrowers during the March-August period.

Srinivasan Vaidyanathan, CFO of the bank, said that while the Indian Banks’ Association (IBA) is still working out the methodology of computing the refund, It is estimated that the waiver bill would be in the range of ₹7,000-7,500 crore. To be sure, the government has borne the waiver cost of ₹6,500 crore for borrowers of up to ₹2 crore in certain sectors announced last October.

In a regulatory Filing the private lender further added that the impact of COVID-19, including changes in customer behaviour and pandemic fears, as well as restrictions on business and individual activities, has led to significant volatility in global and Indian financial markets and a significant decrease in local economic activities.

The slowdown during the year has led to a decrease in loan originations, the sale of third party products, the use of credit and debit cards by customers and the efficiency in collection efforts.

“The extent to which the COVID-19 pandemic, including the current “second wave” that has significantly increased the number of cases in India, will continue to impact the Bank’s results will depend on ongoing as well as future developments, which are highly uncertain, including, any new information concerning the severity of the COVID-19 pandemic and any action to contain its spread or mitigate its impact whether government-mandated or elected by us.” HDFC Bank said in a statement, addressing the recent surge in covid cases in the country.

Lockdowns not only disrupt loan growth but also impact loan repayment collections. Banks are expected to give the true picture of their asset quality in the March quarter after the Supreme Court refused to extend the standstill on reporting of bad loans till August 31.

Early signs of asset quality impact are already visible for HDFC Bank. For the March quarter though, the lender reported gross bad loan ratio of 1.32%, which captures the true picture of asset quality given that judicial standstill on bad loan recognition has been lifted. Investors will now keenly monitor any changes in the lender’s asset quality and its commentary in the wake of the second wave of Covid-19 infections.

Despite healthy Q4 result, HDFC Bank believes tough times have begun for FY22Another major aspect that investors will keenly watch is the impact of the Reserve Bank of India’s order on issuances of new credit cards on the lender’s credit card business. The Reserve Bank of India (RBI) had asked the lender to halt all new issuances of credit cards and digital services offerings till the time it sorts out its technological issues.



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RBI asks banks to refund interest on interest, but who will pick the tab?, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) has asked all lenders to compensate borrowers with interest on interest charged between March 1, 2020, and August 31, 2020.

This will apply to all borrowers irrespective of whether the moratorium had been fully or partially availed, or not availed.

An RBI notification said that all lending institutions must immediately put in place a board-approved policy to refund or adjust the ‘interest on interest’ charged to the borrowers during the moratorium period as per the Supreme Court judgement.

In order to ensure that the above judgement is implemented uniformly in letter and spirit by all lending institutions, methodology for calculation of the amount to be refunded or adjusted for different facilities shall be finalised by the Indian Banks Association (IBA) in consultation with other industry participants and bodies, which shall be adopted by all lending institutions.The Reserve Bank of India (RBI)

“Borrowers who availed working capital facilities during the moratorium, whether they availed moratorium or not, should also receive refunds or adjustment. Lenders must disclose the aggregate amount of interest-on-interest refunded or adjusted by them in their financial statements for FY21,” the notification said.Earlier, the Indian Banks Association (IBA) had asked banks to refund interest on interest to those who have been charged.

Asset classification

The central bank also clarified that asset classification of borrower accounts by all lending institutions following the judgment by the Supreme Court should continue to be governed by the extant instructions: For borrowers who did not avail the moratorium, banks must follow extant income recognition and asset classification norms, for accounts which availed moratorium, lenders must remove the period between 1st March to 31 August 2020 for asset classification and for the period commencing 1 September 2020, lenders must follow asset classification as per extant norms.

The SC order

Last month, the Supreme Court had barred banks from charging penal interest on any borrower during the loan moratorium period.

“There should be no interest on interest or penal interest on the instalments which were due during the loan moratorium period from 1st March to 31 August 2020 on any borrower, irrespective of the loan amount. If such interest has already been collected, it should either refunded to the borrower or adjusted towards the next instalments,” the order had said

The calculations

As per rating firm ICRA, compound interest for six months of moratorium across all lenders is estimated at Rs 13,500-14,000 crore.

With the SC order, borrowers excluded earlier may get additional relief of Rs 7,000-7,500 crore in the form of compound interest benefit.
Even before the SC order, the government had said that it would compensate lenders for refunding interest on interest on small loans below Rs 2 crore, which has already been done.

Who will pick the tab?

It is not clear who will bear the additional burden of refunding compound interest or penal interest to borrowers with loans above Rs 2 crore, though the banks have been asked to refund it.

The banks, accounting for 70 per cent of the loan market, have operating profits of over Rs 3 lakh crore.

So, Rs 7,000 crore on Rs 3 lakh crore will be like 2 per cent of their operating profits, according to the rating firm.

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Put in place policy to refund ‘interest on interest’ charged during moratorium, BFSI News, ET BFSI

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MUMBAI: The RBI on Wednesday asked banks and NBFCs to immediately put in place a board-approved policy to refund/adjust the ‘interest on interest’ charged to the borrowers during the six-month moratorium, in conformity with the Supreme Court judgement last month.

As part of the Covid-19 regulatory package, the RBI had allowed lending institutions to grant a moratorium on payment of instalments of term loans falling due between March 1 and May 31 of last year. The moratorium was extended by three months till August 31.

Referring to the judgement of Supreme Court dated March 23, 2021, the RBI in a circular on Wednesday said: “All lending institutions shall immediately put in place a Board-approved policy to refund/adjust the ‘interest on interest’ charged to the borrowers during the moratorium period, i.e. March 1, 2020 to August 31, 2020…”

The apex court had directed that no compound or penal interest will be charged for the six-month moratorium announced last year amid the Covid-19 pandemic and the amount already recovered is to be refunded or adjusted in the next instalment of the loan account.

The RBI further said in order to ensure that the judgement is implemented uniformly in letter and spirit, methodology for calculation of the amount to be refunded/adjusted for different facilities should be finalised by the Indian Banks Association (IBA) in consultation with other industry participants/bodies, which “shall be adopted by all lending institutions”.

The “reliefs shall be applicable to all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed” said the circular on ‘Asset Classification and Income Recognition following the expiry of Covid-19 regulatory package’.

The central bank also said lending institutions should disclose the aggregate amount to be refunded/ adjusted in respect of their borrowers based on the reliefs in their financial statements for the year ending March 31, 2021.



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Analysts expect high slippages in banks’ Q4 results after SC verdict

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Reported slippages would be elevated, KIE said, but banks were not expected to report a worrying ratio, given the improvement seen in economic recovery in recent quarters.

As banks report their first set of quarterly earnings after the Supreme Court vacated an interim stay on the recognition of fresh bad loans, slippages could be elevated in Q4FY21, analysts said. Lenders could also reverse some amount of interest income, which could get reflected in their net interest income (NII) numbers. Kotak Institutional Equities (KIE) expects NII growth to be 18% year on year (YoY) for banks. “On the net interest income line, we see a higher level of one-off income recognition (due to NPL recovery) and income de-recognition (slippages recognised in this quarter on a cumulative basis for lenders who have not done it previously),” the brokerage said, adding that treasury income would be lower, too.

Reported slippages would be elevated, KIE said, but banks were not expected to report a worrying ratio, given the improvement seen in economic recovery in recent quarters. “We expect overall NPL (non-performing loan) ratios to remain significantly lower than RBI projections, considering that we have seen significant recovery of bad loans from a few companies (steel and infrastructure),” KIE said. Reported write-offs could be high as well.

Loan losses in the banking sector, as measured by the gross non-performing asset (GNPA) ratio could nearly double to 13.5% by September in a baseline scenario, and to as high as 14.8% in a severe-stress scenario resulting from the pandemic, the RBI had said in its last financial stability report (FSR). Volatile trends could emerge on provisions as lenders are likely to dip into Covid provisions made earlier or make higher provisions this quarter as well.

Analysts at Motilal Oswal Financial Services said while overall trends in asset quality had fared better than expectations, the recent surge in Covid-19 cases and the fear of a lockdown in key districts necessitate being watchful on asset quality. “While many banks have already provided for this likely increase and carry additional provision buffers, which should limit the impact on profitability, we expect them to continue to strengthen their balance sheets and credit cost to remain elevated,” they said in a report.

While analysts have mixed views on the pace of loan growth, most of them expect it to be driven by retail credit. Corporate credit growth remains muted in a scenario of overall deleveraging and lower risk appetite on the part of lenders.

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Interest waiver: PSU banks may have to take Rs 2,000 crore-hit

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Public sector banks may have to bear a burden of Rs 1,800-2,000 crore arising due to a recent Supreme Court judgement on the waiver of compound interest on all loan accounts which opted for moratorium during March-August 2020, sources said.

The judgement covers loans above Rs 2 crore as loans below this got blanket interest on interest waiver in November last year. Compound interest support scheme for loan moratorium cost the government Rs 5,500 crore during 2020-21 and the scheme covered all borrowers including the prompt one who did not avail moratorium.

According to banking sources, initially 60 per cent of borrowers availed moratorium and gradually the percentage came down to 40 per cent and even less as collection improved with ease in lockdown. In case of corporate, this was as low as 25 per cent as far as public sector banks were concerned.

They further said, banks would provide compound interest waiver for the period a borrower had availed moratorium. For example, if a borrower availed moratorium of three months, the waiver would be for that period.

The Reserve Bank of India (RBI) on March 27 last year announced a loan moratorium on payment of instalments of term loans falling due between March 1 and May 31, 2020, due to the pandemic, later the same was extended to August 31.

The apex court order this time is only limited to those who availed moratorium so the liability of the public sector bank should be less than Rs 2,000 crore as per rough calculations, sources added.

Besides, they said, the order does not specify a timeframe for the settlement of compound interest unlike last time so banks can devise a mechanism of adjusting or settling it in staggered manner.

Meanwhile, Indian Banks’ Association (IBA) has written to the government to compensate lenders for interest on interest waiver.

The government would take a call depending on various considerations.

The Supreme Court last month directed that no compound or penal interest shall be charged from borrowers for the six-month loan moratorium period, which was announced last year amid the Covid-19 pandemic, and the amount already charged shall be refunded, credited or adjusted.

The apex court refused to interfere with the Centre and RBI’s decision to not extend the loan moratorium beyond August 31 last year, saying it is a policy decision.

Rejecting pleas for a complete waiver on interest the court opined that such a move would have consequences on the economy. The bench also said that interest waiver would affect depositors. Along with this, the court also rejected pleas for further relief in the matter.

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Bank NPAs may rise by Rs 2 lakh crore in March quarter, face Rs 30,000 cr provisioning, BFSI News, ET BFSI

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The Supreme Court‘s lifting of the stay on classifying overdue loans is not only set to add to a sizeable chunk to banks’ non-performing assets, but hit their balance-sheet substantially.

In absence of a standstill by the Supreme Court, the GNPAs for the banks would be higher by Rs 1.3 lakh crore (1.2%) and net NPAs would have been higher by Rs 1 lakh crore (1%), according to estimates by ICRA.

However, the Icra estimates exclude the stressed loans recommended by K V Kamath panel for restructuring. The Kamath panel has suggested certain norms for restructuring loans in 16 sectors most hit by the pandemic and banks are in the process of identifying such loans. While the restructuring of such loans has to be done June 2022, the RBI may ask banks to recognise these loans as NPAs in the March quarter itself, which may raise the bank NPAs to Rs 2 lakh crore.

Also, banks will need to provide about Rs 30,000 crore for the newly added soured loans as per the norms. They need to provide 15% in the first year and the rest over three years.

Interest booked

Banks follow the accrual method of accounting and in the absence of the NPA tag, they were booking interest on these loans, even though the money was not coming into their accounts. With these loans now classified as NPAs, banks have to reverse the interest they have booked, which may lead to Rs 10,000 crore hit for them.

Silver lining

However, most banks have made provisions on proforma NPAs, which they will be allowed to write back. This will not lead to any large impact on the balance-sheets of most lenders. Also, proforma NPAs are falling, while the provision coverage ratio has improved by an average of 300 basis points to over 70% for private banks and above 65% for public sector banks in the same period.

The proforma numbers

Following the Supreme Court (SC) stay order, banks have not tagged overdue loans as NPAs since August 2020. However, they have been listing such loans as portfolio-level proforma NPAs and making provisions for them.

Compound interest hit

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.

As per 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. If the government takes the burden of Rs 7,500 crore on compound interest relief for large borrowers above Rs 2 crore, banks will be relieved to that extent.



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Government not inclined to bear loan moratorium costs, BFSI News, ET BFSI

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The government is not inclined to bear the burden arising of the recent Supreme Court judgement on a blanket waiver of compound interest or interest on interest on all loan accounts which opted for moratorium during March-August 2020.

“They (banks) are well-poised to handle this and we don’t see any space for government relief,” said a senior government official.

The government has already compensated banks for the interest on interest they had lost on loans outstanding below Rs 2 crore. Analysts estimate the additional cost to reimburse banks for all loans at Rs 7,000-10,000 crore.

“There is no directive from the court ordering the government to bear this cost,” the government official said on the condition of anonymity.

Since there is no deadline to refund the compound interest they have charged, banks can stagger the payment depending on individual account period and other conditions. A final call would be taken shortly, he said.

In its ruling last week, the Supreme Court refused to extend the moratorium beyond August 31, 2020 but directed lenders to waive interest on interest for all borrowers.

According to ICRA estimates, the compounded interest for six months of moratorium across all lenders was around Rs 13,500-14,000 crore, and the relief already extended over loans up to Rs 2 crore had cost the exchequer about Rs 6,500 crore.

A Macquaire research report has put the additional amount at around Rs 10,000 crore.

On account of the stress due to the Covid-19 pandemic, the Reserve Bank of India had announced the loan moratorium scheme to grant temporary relief to borrowers for payment of instalments due between March and August 2020.

The apex court in its judgement observed that the government and the central bank would decide on economic policy based on expert opinion. It further said a waiver of complete interest was not possible as it would affect depositors. The court ruled out an extension of the period of loan moratorium and any specific sector-wise relief.

According to Crisil Ratings, standstill on recognition of non-performing assets (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,” it said in a note.



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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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Banks’ sigh relief as Supreme Court decides waiver of complete interest not possible, BFSI News, ET BFSI

Banking & Finance

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The Supreme Court of India in the extension of loan moratorium case has provided its verdict and the uncertainty over the actual stressed assets in the banking system will become more clear.

The Supreme Court noted that the scope of judicial review on economic policy decisions and policy decisions with affect on economy has to be considered. The apex court also noted that if only some sectors are not satisfied, court cannot intervene in such matters of policy.

Considering the reliefs independently the court decided that the complete interest is not possible as banks also have to pay interest to account holders and pensioners.

The court also noted that the it cannot be said the centre has not taken steps in the aftermath of Covid-19 pandemic and therefore petitioners will not be eligible for waiver of interest on interest, or demand extension of moratorium or sector specific reliefs.

On the waiver of interest on interest for loans upto Rs 2 crore, the apex court believes there’s no justification on the same.

The court also said that there shall be no interest on interest or compensation interest during the moratorium period irrespective of loan amount the same amount collected shall be refunded. If refund doesn’t seems possible the interest on interest collection can be adjusted in the next installment payable.

(The copy will be updated once the final judgement is out)



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How the proposed bad bank will impact IBC?, BFSI News, ET BFSI

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After experimenting with debt recovery tribunals, SARFAESI and IBC, the government is setting up a bad bank.

The Union Budget 2021-22 has proposed the setting up of an asset reconstruction company a bad bank and an asset management company, which will rival the current Insolvency and Bankruptcy Code mechanism for large corporate loans.

Experts say loans greater than Rs 500 crore that have not been declared fraudulent will be transferred to the bad bank, statement of several senior officials in the government as well as Indian Banks Association have indicated.

Currently, all insolvency resolution cases are dealt by the IBC, which has been under suspension till March 24, 2021.

It is highly likely that the underlying companies would not be subjected to IBC in the first instance, rather the AMC will try and either revive these companies or package the loans to an investor, they say.

This is despite ARC is the last resort for bankers as the recovery rate is very low. However, in the case of the IBC, the rate has also been dismal.

Also, creditors of several companies had signed the Inter Creditor Agreement (ICA), pre-suspension and some of these corporates will continue negotiation under the framework roping in distressed asset investors.

IBC performance

The total number of corporate insolvency resolution process (CIRP) cases admitted under IBC till the second quarter of 2021 stood at 4,008, of which 277 ended in resolution, or firms getting new promoters, and 1,025 in orders for liquidation.

The total claims were Rs 10.48 lakh crore (Rs 4.34 lakh crore Gross NPAs plus Rs 6.14 lakh crore Net NPAs) and the realisable” amount Rs 2.2 lakh crore. This amounted to the total haircut at Rs 8.3 lakh crore, or debt recovery working out to be 79%

This dismal debt recovery rate is far lower than the earlier debt resolution processes when the recovery was 25%. Also, most of the debt claims — Rs 6.8 lakh crore or 59% of the total ended in liquidation.

Challenges

Experts say IBC faces new challenges including two-year loan restructuring the RBI allowed in August 2020 due to pandemic disruptions, the Supreme Court‘s September 2020 interim order to banks not to classify loans as NPAs until further orders and dilution of the IBC itself.

After resigning as the RBI Governor in December 2018, Urjit Patel wrote in his book “Overdraft: Saving the Indian Saver” that the government had diluted the IBC and weakened the RBI’s regulatory powers to resolve stressed assets after it issued a “revised framework” on February 12, 2018, asking banks to start resolution process after a day’s default.

The bad bank

Nine banks and two non-bank lenders, including the State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda

(BoB), are coming together to jointly invest Rs 7,000 crore of initial capital in a proposed bad bank that aims to help extract funds stuck in bad loans. Two other state-run financiers of power projects will also own stock in the bad bank.

Canara Bank, Union Bank of India and Bank of India will join their larger state-run peers as investors in the bad bank. ICICI Bank, Axis Bank and Life Insurance Corp of India-owned IDBI Bank are also among the shareholders. State-owned Power Finance Corp and Rural Electrification Corp will also be equal shareholders in the new company.



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