SC directs Center/RBI to review interest waiver matter
Next hearing scheduled for first week of Aug’20
* The Supreme Court (SC), in a hearing on 17th Jun’20, has maintained its stance that the Government should make the benefit of the moratorium available to all. The SC stated that it does not see any merit in charging interest on accrued interest for loans, which are under the moratorium.
* The banks’ association along with SBI have stated that this waiver could dent the credit culture and impact the financial health of banks, and thus, any decision to waive interest should be taken on a case-to-case basis. Thus, the SC has directed the Government/RBI to review the matter and has deferred the hearing to the first week of Aug’20.
* In our earlier report titled ‘Supreme Court rules out complete interest waiver’, according to our analysis, the interest forgone for the accrued interest on the moratorium book for a period of six months could impact FY21 operating profits in the range of 0.5-2.6% while PBT could get impacted in the range of 0.7-9.0%.
Government/RBI to review matter; Hearing scheduled for first week of Aug’20
* In a hearing on 17th Jun’20, the SC asked the government to intervene in the said matter citing that the matter cannot be left for the banks to decide on. The SC has added that benefit of the moratorium should be made available to people and that it does not see any merit in charging interest on accrued interest for loans that are under the moratorium.
* In its response, SBI stated that ~90% of borrowers have not even availed the moratorium and that the interest waiver cannot be given like a free gift as it could dent the credit culture and should be viewed on a case-to-case basis. To this, the SC replied by stating that customers have not availed the moratorium as they know that there is no benefit due to interest being charged.
* The banks’ association along with SBI argued that the situation is evolving and that the hearing should be deferred by thee months. Thus, the SC has directed the government/RBI to review the matter and deferred the hearing to the first week of Aug’20. It has further requested the Indian Bank Association (IBA) to see if new guidelines can be brought in force for the moratorium issue.
Waiver of interest on accrued interest to impact PBT in the range of 0.7-9.0%
In our earlier report, we have assessed the impact of this judgment on our coverage universe. Our analysis shows that the NPV of the interest forgone on the accrued interest on the moratorium book for a period of six months could impact FY21 operating profits in the range of 0.5-2.6%, and would slightly impact margins. The incremental interest that would be lost – if the interest on accrued interest is waived – forms 0.7-8.1% of FY21 provisions and could impact FY21 PBT in the range of 0.7-9.0%. Also, according to our analysis (our report), availing the six-month moratorium could result in an EMI increase of ~8%/17% for home/car loans and ~214% for MFI loans with the original loan tenure unchanged. However, the tenure of loan could increase by up to 8 months if a borrower chooses to keep the same EMI.
The SC has limited the scope of hearing to the waiver of interest, which is being levied on accrued interest. This has significantly reduced the potential impact on the banking system and brought a huge relief to banks, many of which would have seen capital calls getting triggered. Loan waivers in the past have impacted credit behavior, and thus, this event remains important from the credit behavior perspective within both moratorium and regular paying loans. This is especially true given that the hearing has been deferred to the first week of Aug’20 while the moratorium period terminates by end-Aug’20. According to our assessment, the impact of potential interest waiver on accrued interest will be quite manageable at 0.7-1.6% of PBT for large private banks and SBI. We continue to maintain our preference for ICICIBC, HDFCB and SBIN.
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