EXPLAINED: SC order in interest waiver case and its implications for banks

For NBFCs, the problem would be even bigger because they themselves could not avail of the moratorium on loan repayments during the six months between March – August 2020, but they were obliged to offer it to their borrowers.

Additionally, some sectors like power had sought for extension of moratorium and certain relief packages. The court turned down this request too, and said it was not for courts to decide on economic and financial matters, but for the government and Reserve Bank. The court made its stance clear, it will not interfere in policy making. Again a welcome relief.

Now to the second part of the order relating to compound interest, or as the more popular term used with the case goes- “interest on interest.” Here, the Supreme Court ruled that borrowers be compensated for the compound interest they’ve paid on their loans, without any terms and conditions.

As things stand, the government has already refunded the compound interest for the entire six month period to borrowers with loans of upto Rs 2 crores. The Court has now extended the relief to all borrowers, even those with loans of over Rs 2 crores.

The extension of relief ensures that borrowers who did not avail of the moratorium will not regret having been timely with their repayment.

Yet, this part of the ruling may set a bad precedent. Charging interest as penalty for delayed interest payments is routine banking practice. The value of interest paid by a borrower two or three years later than he was supposed will not have the same value. That value would have been eroded by rising inflation. This is why banks levy an interest on delayed interest payments.

Estimates suggest that an additional Rs 7,500 crores or so would have to be repaid to borrowers due to this order. Anil Gupta, Vice President – Financial sector Ratings, ICRA Limited said, “As per our estimates, the compounded interest for six month of moratorium across all lenders is estimated at Rs 13,500-14,000 crore. The GoI had already announced relief for borrowers having borrowings upto Rs 2 crore which was estimated to cost ~Rs 6500 crore to exchequer. With announcement of waiver for all borrowers, the additional relief of Rs 7000-7500 crore will need to be provided to borrowers.”

The expectation is that the government, which had borne the burden of the compound interest waiver initially, will also step in to foot the bill for this additional sum. The government, however, has not officially clarified this yet.

The third part of the order relates to the asset classification standstill. In October, while hearing this matter, the Supreme Court asked banks to not classify any accounts that were regular in payments as on August 31, 2020 into a non-performing category even if they delayed payments. The court asked banks to maintain a “standstill” on the classification of all such accounts. This resulted in banks showing artificially lower stress levels in the quarter gone by.

As part of its final order, the top court lifted this stay, saying, “Interim relief granted earlier not to declare the accounts of respective borrowers as NPA stands vacated.”

Therefore, stressed accounts that were artificially kept as standard will now have to be downgraded by banks in the March quarter. Banks reported total gross NPAs of Rs 7.4 lakh crores, but the actual gross NPA, or proforma NPA (without the SC standstill order) would have been Rs 8.7 lakh crores instead. Therefore, the difference of Rs 1.3 lakh crores is the additional amount that banks will have to declare as gross NPA in the quarter ending March 31. Similarly, banks are expected to declared another Rs 1 lakh crore as net NPA additionally in this quarter. This figure should hardly come as a surprise to investors as banks have been disclosing, if not reporting in their profit and loss statements, the additional unrecognised stress.

Referring to the SC order today, Krishnan Sitaraman, Senior Director, CRISIL Ratings said, “It also clears the way for lenders to recognize NPAs as per the delinquency record of borrowers, which they had not been able to since the end of the moratorium period in August 2020. Most lenders, however, had disclosed, proforma NPAs and also made provisions against the same which may limit the immediate impact on profitability.”

Not completely waiving off interest on loans under moratorium, not intervening in commercial-decision making of lenders- both brought relief to banks. The waiver of interest on interest, not so much.

The lifting of stay on NPA classification may cause banks some immediate pain as they declare higher bad loans, set aside more provisions. But this also brings about transparency, gives the real picture on stress levels, and in the process earns the investors’ trust. All in all, a bitter-sweet ending.