Loan moratorium case: SC verdict may hit banks in short-term, say analysts

Loan moratorium case: The Supreme Court said that the waiver of complete interest is not possible as it affects depositors

The Supreme Court (SC) pronouced verdict on loan moratorium case on Tuesday and declined to extend the six months loan moratorium, observing further that the waiver of complete interest is not possible. The apex court said that the waiver of complete interest is not possible as it affects depositors.

However, it said that any amount collected as compound interest shall be adjusted to the next installment payable instead of refunding it to the borrower irrespective of the loan amount.

Pronouncing its verdict on a batch of pleas by various trade associations, seeking an extension of loan moratorium and other reliefs in view of the Covid-19 pandemic, the Court partly allowed the petitions which had challenged the decision of the Centre and RBI to restrict waiver of interest on interest to certain categories of borrowers who had availed loans of less than Rs 2 crore.

The Centre had earlier submitted before the top court that if it were to consider waiving interest on all the loans and advances to all categories of borrowers for the six-month moratorium period announced by RBI, then the amount foregone would be more than Rs 6 trillion.

“If the banks were to bear this burden, then it would necessarily wipe out a substantial and a major part of their net worth, rendering most of the lenders unviable and raising a very serious question mark over their very survival,” it had said.

Against this backdrop, analysts read the verdict as a mixed bag for the sector. While they believe the Court’s ruling to refund/adjust the compound interest may dent the banks’ earnings in the short-term, the long-term growth outlook, they say, remains intact.

Here’s how they interpret the verdict:

Deepak Jasani, head of retail research, HDFC Securities

The Supreme Court’s ruling to adjust/refund the compound interest and waive it off completely, for all the borrowers, could dent the earnings of the banks. However, its extent is yet to be ascertained. Against expectations, the banks will now have to factor-in the interest (re)payment to borrowers. The only thing that will now be tracked is build up in the non-performing assets (NPAs) which, so far, had been postponed. While banks have been setting aside proforma NPAs, we need to see if the actual build up is less or more than that. The clarity on this regard is expected only by Q1FY22. On the upside, the uncertainty with regards to the interest payments, moratorium extension, and asset quality overhang has been put to rest.

Gaurang Shah, senior vice president, Geojit Financial Services

There is likely to be a short-term overhang on the banking space due to the SC’s ruling to waive-off interest on interest. This compound interest was an extra source of income for the banks, which will now be refunded/adjusted over the next couple of quarters. That said, there has been a significant recovery in the banks’ earnings which may cushion the overall impact. We suggest investor hold the stocks as the overall outlook remains positive on the sector.

Ajit Mishra, VP and senior technical analyst, Religare Broking

The market has negatively reacted to the SC’s verdict that the banks will have to adjust the interest on interest. This is due to the fact that banks will have to forego the extra income that they were generating. However, we believe the banks may have set aside provisions for this as well as the case had been pending in the Court for a long time. We might not see any major dent in the earnings going-forward but the exact extent is yet to be analysed.

Gaurav Garg, head of research, CapitalVia Global Research

The Supreme Court has provided a verdict in the loan moratorium case that no further extension can be provided beyond six months. Also, as announced earlier, any interest charged on interest will have to be reverted back by the banks. Overall, we see this as a positive development for banking stocks, which have been underperforming for the last few weeks. Investors should hold the stocks.

Kajal Gandhi, BFSI analyst, ICICI Direct
The uncertainty in the sector related to extension of the moratorium has now been put to rest with today's verdict which is a positive development. That said, banks will have to reverse the accrued interest payments on loans above Rs 2 crore in value which is partially negative. However, we don't expect the reversal to be substantial for the industry as a whole, and therefore remain constructive on the space. As regards the concerns over NPAs, we expect them to be well within the prescribed proforma limits. In this backdrop, investors should hold their investments in the sector.