Loan moratorium: SC ruling clears overhang for banks

Lenders can now initiate recovery proceedings since the SC has lifted the standstill on asset classification, which protected stressed accounts from slipping into NPAs.

Banking stocks rallied on Tuesday after the Supreme Court refused to extend the six-month loan moratorium and allowed banks to tag accounts that have not been paying EMIs since August-end as non-performing assets (NPAs).

The judgment clears a major overhang for the sector and that is fuelling the optimism, said experts.

The Nifty Bank index was up 1.73 per cent, and all its constituents were in the green, barring one.

The ruling provided relief for borrowers as well.

The SC said banks cannot charge interest on interest for the moratorium period and the amount so collected must be refunded in the borrower’s next instalment.

Earlier, the Centre had waived off interest on interest for loans up to Rs 2 crore.

According to ICRA estimates, the compound interest across all lenders is Rs 13,500-14,000 crore.

Excluding the relief for loans up to Rs 2 crore (estimated cost Rs 6,500 crore), an additional relief of Rs 7,000-7,500 crore will need to be provided to borrowers.

While this provides clarity on possible financial impact on lenders (should the government not foot the bill), banks and NBFCs now get more flexibility.

For one, lenders can now initiate recovery proceedings since the SC has lifted the standstill on asset classification, which protected stressed accounts from slipping into NPAs.

Besides, the ruling will lead to more transparency for investors.

It is estimated that banks’ gross NPAs will be higher by Rs 1.3 trillion, or 1.2 per cent of loans, and net NPAs would be higher by Rs 1 trillion, or 1 per cent, according to ICRA.

“Gross NPAs of banks are estimated to be 7 per cent as of December 31, 2020.

"These would have been 100 bps higher, at 8 per cent, in the absence of the NPA standstill,” said Krishnan Sitaraman, senior director, CRISIL Ratings.

Analysts said investors should now look at proforma NPAs as real NPAs.

Their net NPA estimates suggest roughly Rs 30,000 crore can be attributed to private banks and rest to public sector banks.

Experts were earlier worried that banks would have to make extra provisions after the SC lifts the freeze on NPAs.

But, industry experts said the difference between gross and net NPAs is almost Rs 30,000 crore, indicating banks have provided around Rs 30,000 crore for possible bad loans.

This takes care of the provisioning cost to some extent and the burden seems manageable, they said.

The RBI has already provided a relief by deferring the regulatory capital ratios to October 1, 2021.

So, banks have to recognise the stress and provide for it, which will deplete their capital to some extent.

The impact for NBFCs, though, is expected to be relatively lower.

“Companies that are following IndAS accounting, in any case, had to make provisions.

"NBFCs and housing finance companies were making provisions adequately.

"Therefore, there is no impact at all on them,” explained Keki Mistry, vice-chairman and CEO, HDFC.

As of December, of the Rs 8-trillion proforma gross NPAs in the banking system, public sector banks alone (8 PSBs) account for over Rs 6 trillion, whereas the remaining 14 private banks reported proforma gross NPAs at over Rs 2 trillion, said a CARE Ratings report.

Among all scheduled commercial banks, State Bank of India reported the highest proforma gross NPA at over Rs 16,000 crore, followed by Punjab National Bank, Union Bank of India, and Canara Bank.

Among private banks, YES Bank, ICICI Bank, Axis Bank, and HDFC Bank accounted for the highest proforma gross NPAs, the report said.

Analysts said, while the ruling on compound interest may dent banks’ earnings in the short term, the long-term growth outlook remains intact.

Deepak Jasani, head of retail research, HDFC Securities, said, “Against expectations, banks will now have to factor in the interest (re)payment to borrowers.

"The only thing that will now be tracked is the build-up in NPAs which, so far, had been postponed.”

“While banks have been reporting proforma NPAs, we need to see if the actual build-up is less or more than that.

"The clarity in this regard is expected only by Q1FY22,” he said.

On the upside, the uncertainty on interest payments, moratorium extension, and asset quality overhang has been put to rest.

“There is likely to be a short-term overhang on the banking space due to the ruling to waive off interest on interest.

"This compound interest was an extra source of income for banks, which will now be refunded over the next couple of quarters,” said Gaurang Shah, senior vice-president, Geojit Financial Services.

That said, there has been a significant recovery in their earnings which may cushion the overall impact.

“We suggest investors to hold the stocks as the overall outlook remains positive on the sector,” said Shah.