The Supreme Court granted relief to the borrowers by extending the loan moratorium period virtually till September 28, and through its interim order, instructed the banks to not declare any instalment as a non-performing asset (NPA) due to non-payment of the instalments. Under the moratorium scheme, borrowers were permitted to defer loan payments for a period of six months. The apex court bench led-by Justice Bhushan in its interim order declared last week said, “Accounts not declared NPA as on August 31 shall not be declared NPA till further orders”.
|| Rhythima Agrawal
A bench of Justices consisting of Ashok Bhushan, R Subhash Reddy and M R Shah adjourned the matter for further hearing on September 28. They suggested the government and the RBI consider all issues. The bench clarified that it was giving one last opportunity; after that, the matter would not be adjourned.
However, an extension of the moratorium will not hit the profit of banks immediately because the banks probably would accrue interest on the delayed payments by the borrowers. In case, the Supreme Court rules in favour of the petitioners demanding an interest waiver, the banks will charge simple interest instead of compound interest. “The Supreme Court may ask banks to charge simple interest on these loans instead of compounded interest, which will limit banks’ losses and protect the system from a massive loss”, said a CEO of a public sector bank.
A complete waiver of interest will hit the profits of the bank for three reasons. Firstly, banks will have to reverse the interest due on the loans. Secondly, the banks will have to provide for the losses incurred due to complete waiver of interest and thirdly, the banks liquidity would be squeezed in case of deferred instalments during the moratorium period. An analyst at the brokerage firm has an opinion. Lalitabh Srivastava, an analyst at Sharekhan, said, “There are no calculations yet as to how much the banking system would lose if interest is waived totally, but it is fair to assume that it will go into thousands of crores. Besides the direct impact on bank profits, it will also hit the credit culture in the long run”.
What do the experts have to say?
Crisil, a credit rating Company said that approximately two-thirds of the companies rated by it are eligible for restructuring as per norms recommended by KV Kamath expert committee. “Three out of four rated ones in the resilient sectors such as construction, chemicals, pharmaceuticals, iron and steel manufacturing, corporate retail, and consumer durables/FMCG will qualify for restructuring’, said Crisil.
What lies ahead?
The extended moratorium period may result in increased NPA accounts for banks; the bank’s liquidity to extend loans further would be squeezed in case of deferment of installments during the moratorium period. As per the Supreme Courts’ guidelines to charge simple interest only will affect the bottom-line of banks Profit and Loss. Since the GDP is dipping, those who have lost their jobs will find it difficult to pay extended months of the installment due to rescheduling of the moratorium period interest. It will complicate the situation for banks by affecting NPA accounts of banks in the long run.