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SC refrains from interfering in economic Policy decisions

The Supreme Court’s (SC) judgement in ‘interest on interest’ waiver case is encouraging, especially in spirit as it limits scope for judicial review of economic policy decisions. Given that no rationale was submitted for restricting the relief of ‘interest on interest’ waiver to loans up to Rs20mn, the SC has ruled that it should be extended to all loans. Our reading suggests the verdict is applicable only to loans under moratorium as it states that any amount “already recovered” shall be refunded to the “concerned borrowers”, or be credited/adjusted in the next instalment. However, we await clarity on whether the cost will be borne solely by financiers, or shared by the government. Waiving ‘interest on interest’ on loans >Rs20mn under moratorium will lead to a fresh burden of <4 bps for the industry.

Our view

* The SC verdict settles the uncertainty long lingering on the plea to waive the interest. Though delayed, the judgement is welcome in spirit as it limits scope for judicial review of economic Policy decisions, and probably sets a reference for such cases in the future.

* The words “amount already recovered” and refund to the “concerned borrowers” suggest that the relief will not be applicable to all loan accounts. Earlier the waiver was applicable to all loan accounts (whether under moratorium or not) up to Rs20mn. Rather, it seems applicable only to the portions of moratorium portfolio where ‘interest on interest’ has been charged.

* The interim relief of not declaring the accounts as NPAs, now stands vacated. In Q4FY21 banks would be disclosing actual NPAs and not proforma. Also, post tagging as NPA, banks can continue with recovery proceedings that were hitherto hampered due to non-tagging.

Impact: Incremental burden of <4bps of advances for the industry

* We have tried to quantify the impact of waiver of ‘interest on interest’ at an industry level using a few key publicly disclosed variables, viz. moratorium proportion, lending yield and proportion of >Rs2mn loans– for the purpose of our analysis.

* In our opinion, waiving ‘interest on interest’ on loans above Rs20mn under moratorium will lead to a fresh burden of Rs50bn for the industry; this would include ~Rs12bn for private banks/SFBs, ~Rs28bn for PSU banks, and Rs9bn for NBFCs/HFCs. The above means a drag of less than 4bps on RoAs. With respect to the lender-groups, this translates to RoAs (advances) of 3/4/5/4 bps for private banks, SFBs, PSUs and NBFCs/HFCs respectively. (refer table 1)

* For our assessment, we have used moratorium quantum based on RBI’s Financial Stability Report that is much on the higher side compared to reported numbers for many of the leading private banks. Had we applied the same based on reported moratorium numbers for private banks, the burden would be significantly lower at less than Rs20bn (less than 2bps of advances).

* Also, it is difficult to gauge bank-specific impact as granular details on moratorium between across credit segments and ticket-size for individual player is not available in public domain.

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