Banks will need to refund Rs 4,500 cr compound interest to borrowers

Banks will need to refund estimated Rs 4,500 crore to borrowers for compound interest charged on loans greater than Rs 2 crore. This follows Reserve Bank of India’s directive to banks to refund compound interest levied during six-months moratorium, according to Kotak Institutional Equities.

Banking regulator gave advise to banks to implement Supreme Court order on giving the compound interest relief to loans above Rs 2 crore and lifting of standstill on classifying account as non-performing loan.

The estimated impact is assessed for 4QFY21E earnings with a broad-brush assumption of corporate and SME loans as the qualifying amount (above Rs 2 crore) and interest rate of 10 per cent on these loans. For the banks under coverage, this suggests an impact of Rs 45 billion, about 11 per cent of estimated earning for Q4FY21. Banks with higher share of corporate/SME portfolio will face greater impact, the broking house said.

Kotak, in research note, said the impact would differ across banks based on the loan composition. But initial estimates suggest the impact would be about 10 basis points (bps) on Net Interest Margins. Public banks would have a higher impact as compared to private banks.

The lenders have to refund/adjust the ‘interest on interest’ charged to borrowers during the six-month moratorium, irrespective of whether moratorium was utilized (fully or partly) or not. The methodology for calculation of the amount to be finalised by the Indian Banks Association (IBA) in consultation with the industry. Lenders have to disclose the aggregate amount to be refunded/adjusted in their financial statements for FY2021.

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd