Supreme Court hears interest waiver case today; banks largely safe as court rules out complete waiver

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June 17, 2020 10:11 AM

A Supreme Court bench will today, once again, gather to hear the case relating to interest waiver during the moratorium period.

The court left it open to employers to negotiate the payment of full wages for 54 days - from March 25 to May 17 - during which the notification was in place.Banks stood to lose as much as 111% of their operating profits for the fiscal year if interest waiver would have been granted

A Supreme Court bench will today, once again, gather to hear the case relating to interest waiver during the moratorium period. Although the apex court in its previous hearing ruled out a complete interest waiver on term loans during the moratorium period, the bench seeks to know whether interest will be charged on accrued interest during the said period. Analysts say this comes as huge relief for the banking sector that could have faced significant operating losses if the interest waiver was granted on term-loans during the moratorium period. According to a report, banks stood to lose as much as 111% of their operating profits for the fiscal year if interest waiver would have been granted.

“Our analysis shows that the interest forgone on the accrued interest in the moratorium book for a period of six months could impact FY21 operating profits in the range of 0.5-2.6%,” said brokerage firm Motilal Oswal in a research note post the Supreme Court hearing last friday. This is significantly less than what the banks stood to lose in case of a complete interest waiver. Interest waiver on accrued interest is likely to impact the profit before tax of lenders somewhere in the range of 0.7%-9%. RBI had estimated a loss of almost Rs 2 lakh crore if the Supreme Court had allowed interest waiver in the moratorium period, this would translate to nearly 15% of the banks’ net worth in financial year 2019. 

Currently the moratorium book of the banking system stands at 39% of the overall loan book. This, according to Motilal Oswal translates to Rs 38.9 lakh crore. The report pegs the waiver of Interest on accrued interest for 6 months, based on present value at Rs 0.10 lakh crore which is just 0.8% of the banking system’s net worth in financial year 2019. The Finance Ministry will today after having talks with the central bank, update the Supreme Court on whether it plans to charge interest on the accrued interest during the period. DCB Bank would have been the worst affected in case of a complete interest waiver, hitting 111% of its pre-provision operating profits. Other banks that might have taken a massive hit included Bandhan Bank and Federal Bank with 68% to 56% of operating profits being affected. 

Bank stocks opened in the red on Wednesday morning. Nifty Bank, Nifty PSU Bank, and Nifty Private Bank index were all down over 1%. Bandhan Bank and SBI were some of the worst affected, while Axis Bank, IndusInd Bank beat the bears and marched upwards. Sensex was down 200 points on opening and Nifty 50 was still below the 9,900 mark.

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