The Supreme Court on Tuesday said that it will not interfere in the NPA classification but directed lenders to waiver interest on interest for all borrowers. Earlier the government had reimbursed interest on interest dues to those who had loans outstanding below Rs 2 crore.
“As per our estimates, the compounded interest for six months of moratorium across all lenders is estimated at Rs 13,500-14,000 crore. The GoI had already announced relief for borrowers having borrowings up to Rs 2 crore which was estimated to cost ~Rs 6500 crore to the exchequer,” said Anil Gupta vice president financial sector ratings ICRA.
“With the announcement of waiver for all borrowers, the additional relief of Rs 7000-7500 crore will need to be provided to borrowers,” he said. Since the government had provided compensation for the earlier compound interest waiver, the fresh round of waivers for larger borrowers is also expected to be funded by the government.
While the Supreme Court decision will result in NPAs ballooning in the fourth quarter, this will not come as a surprise to investors. Although banks have not been classifying defaults during the lockdown as NPA, RBI has asked lenders to indicate the defaults as proforma NPAs in their notes to accounts and all analysts have been adding this number to the gross NPA figures while drawing up their projections.
As per ICRA’s estimates, on a proforma basis, the gross NPAs of the banks stood at Rs. 8.7 lakh crore or 8.3% of advances as against the reported GNPA of Rs. 7.4 lakh crore (7.1%) as of December 31, 2020. Also, on a proforma basis, the Net NPA for the banks stood at Rs. 2.7 lakh crore or 2.7% of advances as against the reported NNPA for all banks of Rs. 1.7 lakh crore (1.7%) as of December 31, 2020.
“Hence, in absence of standstill by Hon’ble supreme court, the Gross NPAs for the banks would have been higher by Rs 1.3 lakh crore (1.2%) and Net NPAs would have been higher by Rs 1.0 trillion (1.0%),” said Gupta.
Banks are required to set aside roughly 15% of the loan value in the first quarter that a loan turns bad. The amount of provisioning will vary depending on the security and age of the loan. Most banks have made excess provisions in anticipation of the lifting of the stay by the Supreme Court.
“Banks have sufficient capital. We expect the government allocation of the balance 14500 for the current financial year (as capital to public sector banks) in the next few days,” said Gupta.