SC decision on loan moratorium will decide lenders fate

It’s a busy schedule for India’s Supreme Court this week and crucial for all parties, the petitioners, defendants, lawyers, Industry experts, etc.
After hearing telecom companies plea over Average Gross Revenue (AGR) two-days ago, the apex court will today again hear a petition seeking a waiver of interest during the period of moratorium on loan repayments.
This could turn into a move that may prove disastrous for the banking institutions of the country already dealing with the threat of a spike in non-performing assets at the end of the moratorium period.
An unfavourable outcome could result in lenders losing as much as 111% of their operating profits for the next fiscal year.

The moratorium period, which was earlier in March proposed by the Reserve Bank of India to be for a period of three months on term loans, was last month extended for another three months by the central bank.
RBI has estimated a loss of almost Rs 2 lakh crore if the apex court allows interest waiver in the moratorium period, this would translate to nearly 15% of the banks’ net worth in financial year 2019.
Though, the probability of an adverse ruling is minuscule, the judgment against banks could affect financial stability and trigger capital calls across banks.

The banks might not just lose a significant part of their income, an interest waiver would also put them in a tight spot to pay interest to depositors.
An interest waiver on the moratorium book would see DCB Bank fare the worst, hitting 111% of its pre-provision operating profits. Bandhan Bank and Federal Bank would be among the other two worst-hit private lenders with operating profits taking a hit of 68% and 56%, respectively. If the Supreme Court asks the banks to provide an interest waiver on the total loan book, all but three private sector banks would witness the operating loss. ICICI Bank, Bandhan Bank, and HDFC Bank are the only lenders that might see some profits in that scenario.

Large banks are relatively better placed, but looking at smaller banks the exposure to the moratorium is quite high. For Equitas Small Finance Bank and Ujjivan Small Finance Bank, the moratorium book stands at 93% and 90%, while for Bandhan Bank it is at 71% of the total loan portfolio.
Earlier this month RBI in an affidavit said a forced interest waiver will make a huge dent in the stability of the financial institutions.

The RBI further highlighted the intention to offer moratorium during the lockdown period was to ease the cash burden on borrowers and give them some time to normalize their cash flows/businesses.
The Supreme Court did argue that granting moratorium without an interest waiver could be detrimental for many borrowers at the current juncture, and the economic aspect should not be higher than the health of the people. The central bank along with the Finance Ministry was then asked to file a joint reply. The case might be seen as a Black Swan event if a decision does not come in favour of the banking industry.

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