Published on 19/11/2020 12:40:53 PM | Source: ICICI Securities Ltd

Banking Sector Update - Supreme Court`s `interest on interest` waiver case – drifting away from base case assumptions By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Banking Sector #Sector Report #ICICI Securities

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Supreme Court’s ‘interest on interest’ waiver case – drifting away from base case assumptions

Discussions, observations and interim order in the last two hearings on ‘interest on interest’ waiver case in Supreme Court (SC) are drifting away from our (and street’s) base case assumption of the least likelihood of waiver of ‘interest on interest’. Also, SC seems to be seeking more specific relief beyond a restructuring framework for a few sectors under litigation. However, further hearing is deferred to 28th September and till the time final judgement is delivered, uncertainty and overhang will continue.

Impact analysis – incremental burden of Rs75-80bn (7bps of loans; <4% of PPoP)

* We have, to the best of our assessment, tried to quantify the impact of waiver of ‘interest on interest’ at an industry as well as financier level working around with few key publicly disclosed variables – namely moratorium proportion, lending yields and product tenure.

* In our opinion, waiving interest on interest during moratorium period (if SC outcome is unfavorable) will barely lead to a cumulative burden of Rs75-80bn for the industry - including ~Rs20bn for private banks/SFBs, ~Rs20bn for PSU banks and Rs35bn for NBFCs/HFCs.

* This would mean a drag of meagre 7bps on RoAs and impact of less than 4% of operating profit (FY20).

* With respect to lender-group, this translates to RoAs (advances) of 5-8/30/3/8/35 bps for private banks, SFBs, PSUs, HFCs and NBFCs respectively and would drag operating profit by <2%/5%/3%/5% for private banks, regional banks, HFCs and NBFCs respectively.



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