Given the government’s refusal to reimburse Indian lenders for compound interest refunds, for loans exceeding 2 crores during last year’s moratorium, two people familiar with the matter estimated that it would cost them over 7,000 crores this quarter.
During the March 1-August 31 moratorium, the government has decided to make good compound interest refunds on loans up to 2 crores, and has already rewarded banks with $6,500 crore. It has made no commitments about the rest, leaving bankers to bear the brunt of the loss. One of the two people mentioned above, the head of a public sector bank, said, “The Indian Banks’ Association has taken up the matter with the government.”
“Banks don’t have an option but to reimburse borrowers. Each bank will face a loss of between 300 and 400 crore rupees. This (Supreme Court) order is therefore beyond our ability to appeal. The order as a whole is in good shape. This order will not be reopened”. On condition of anonymity, the banker said, “Maybe a one-time hit is okay.”
The Supreme Court ruled last month that borrowers cannot be paying compound interest for the duration of the loan moratorium, which is six months. The Reserve Bank of India (RBI) issued a directive on April 7 requiring all lenders to implement board-approved policies for compound interest refunding.
The central bank also stated that in their March quarter financial statements, all lenders must report the amount to be refunded. This relief would be available to all borrowers, regardless of whether the moratorium was used in full or in part, or whether the moratorium was not used at all.
Asset classification will continue to be based on Income Recognition and Asset Classification (IRAC), norms for borrowers who did not take advantage of the moratorium, and asset classification will be based on IRAC norms for borrowers who took advantage of the moratorium, with effect from September 1, 2020, according to the banking regulator.
Non-performing assets in banks are expected to grow to 9.6-9.7% by March 31, 2021, and 9.9-10.2 percent by March 31, 2022, according to rating agency ICRA, up from 8.6% on March 31, 2020. Despite the effect of Covid on borrowers’ debt servicing ability, new slippages or incremental bad loans were much lower in April-December than in 2019-20, at 1.8 lakh crore versus 3.6 lakh crore.
Relief steps such as the moratorium on loan repayment, asset classification halt, and liquidity provided to borrowers under the assured emergency credit line, according to the ICRA , were responsible for this. However, due to substantial provisions made on legacy bad loans, banks’ net NPAs are projected to be relatively lower. As a result of the decrease in net NPAs and strengthened capital position resulting from a fresh capital raise in FY21, as well as internal accruals buffered by a dramatic drop in bond yields, the banks’ solvency position has improved.
