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SC extends waiver of interest on interest for all borrowers; NPA classification standstill stands withdrawn

Rules out complete interest waiver and further extension of the moratorium period

* Putting an end to a series of uncertainties, the SC has extended the waiver of interest on interest to all borrowers while ruling out: i) a complete interest waiver, ii) extension of the moratorium period, and iii) extension of restructuring period – thus removing a key overhang from Banks. The stay on NPA recognition now stands withdrawn, which will allow lenders to recognize actual NPAs and actively pursue recovery efforts.

* Media reports suggest that the waiver would cost INR135-140b, of which INR65b has already been provided. The additional impact is likely to be INR75-80b across all lenders. Our scenario analysis suggests an impact of INR68-106b for Banks and INR30- 45b for NBFCs, thus the total impact is likely to be INR98-152b.

* While the earlier impact of INR65b was borne by the government, we await further clarification on who would bear this additional impact. In the unlikely event of Banks being made to absorb this additional burden, the impact on profitability is likely to be in low single-digits, which appears manageable.

SC extends interest on interest waiver for all loans, rules out complete waiver

* To provide relief to all borrowers, the SC has asked lenders not to charge any interest on the interest portion of the loan amount for all borrowers. The earlier scheme, as approved by the government, was only applicable for Retail and MSME loans having sanction limits and outstanding amount not exceeding INR20m as on 29th Feb’20. The SC has now extended this benefit to all borrowers.

* It has instructed lenders to refund the amount of such a waiver by adjusting the same against subsequent installments.

* The apex court ruled out a complete interest waiver, citing limited scope of judicial review and refrained from commenting on policy decisions, which removes a long-drawn overhang from Banks.

SC dismisses extension of the moratorium period; stay on NPA recognition stands withdrawn

* The SC has ruled out the possibility of further extension of: a) the moratorium period, and b) the time period for restructuring. Its stay order on asset classification now stands withdrawn. This clarifies the air on asset classification, and lenders, who so far have been reporting pro forma asset quality, would now be able to recognize NPA and show their exact position.

Media reports peg additional impact at INR80b, our scenario analysis suggests a total impact of INR98-152b

* Some media reports estimate the interest waiver benefit at INR135-140b, of which INR65b has already been provided. This waiver is likely to have an additional impact of INR75-80b across all lenders.

* We have analyzed the amount of interest waiver under different interest rate scenarios (8-10%). For NBFC loans, we have considered the interest rate in the 9-11% range. Our scenario analysis suggests an impact of INR68-106b for Banks and INR30b-45b for NBFCs, thus the total impact is likely to be INR98-152b.

MOFSL

view The judgment has put an end to the interest waiver issue and thus removed an important overhang on lenders ever since the plea was filed in Mar’20. Withdrawal of the stay on NPA recognition will allow lenders to recognize actual NPAs and actively pursue recovery efforts. We await further clarification on who would bear this additional burden. In the unlikely event of Banks being made to absorb this additional burden, the impact on profitability is likely to be in low single-digits, which appears manageable. Media reports suggest that the waiver would cost INR135-140b, of which INR65b has already been provided. The additional impact is likely to be INR75-80b across all lenders. Our scenario analysis suggests an impact of INR68b-106b for Banks and INR30b-45b for NBFCs, thus the total impact is likely to be INR98b-152b. We maintain our preference for ICICIBC, HDFCB, and SBIN.

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