The Economic Times
English EditionEnglish Editionहिन्दी
| E-Paper
Search
+

    Extension of moratorium unlikely to hit bank profits immediately

    Synopsis

    A complete waiver of interest will hit banks' profits the hardest as they will not only have to reverse the interest due on these loans, which have been so far accounted for, but also provide for losses arising out of them.

    Shutterstock.com
    On Thursday, the Supreme Court temporarily extended the moratorium on loans until September 28.
    MUMBAI: A virtual extension of the interest payments standstill on loans is unlikely to immediately hit the profits at banks as the affected lenders might still continue to accrue some interest on these advances. But bankers want the apex court to take a considered final view that would address the concerns of depositors as well.

    "This petition is originally against charging interest on the interest on loans. The SC may well ask banks to charge a simple interest on these loans instead of compounded interest, which will limit banks' losses and protect the system from a massive loss," said the CEO of a public sector bank.

    A complete waiver of interest will hit banks' profits the hardest as they will not only have to reverse the interest due on these loans, which have been so far accounted for, but also provide for losses arising out of them.

    "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," said Lalitabh Srivastawa, analyst at Sharekhan, a BNP Paribas-owned brokerage.

    Bankers said waiving interest completely is not something that banks or the government can take at times of stress.

    "If bank profits are hit, then they will find it difficult to survive and will need to depend on capital from the government, something the state cannot afford now," said the public sector banker quoted above.

    On Thursday, the Supreme Court temporarily extended the moratorium on loans until September 28, its next date of hearing, and asked banks, the central bank and the government to come out with a plan to provide relief to borrowers facing difficulty to pay interest.

    Bankers are, however, hopeful that the RBI-mandated restructuring of loans will help restrain bad loans.

    Crisil said Thursday that nearly two-thirds of the companies rated by it would be eligible for one-time debt restructuring based on the parameters proposed by the K V Kamath Committee.

    Crisil studied its rated portfolio of more than 8,500 companies after sorting them by rating, sector and moratorium availed.

    "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,” Crisil said. “In the less-resilient sectors such as auto dealerships, gems and jewellery, hotels, restaurants and tourism, power generation, and real estate, opportunities for debt restructuring could be a little lower as they can take longer to recover to pre-pandemic business levels. Here, only one in three companies could be eligible for restructuring."

    Every second company in the Crisil rated portfolio opted for a moratorium and will qualify for restructuring.

    Three out of four investment-grade companies (rated BBB- or higher) and one out of two in the BB rating category qualify for restructuring of bank loans. However, in the B category, only one in three qualify because companies here tend to have relatively weak debt protection metrics, said Subodh Rai, senior director, Crisil Ratings.

    The Kamath committee has time until June 30 2021 to scrutinise loans of Rs 1500 crore and above for restructuring after suggestions from banks.
    (Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    4 Comments on this Story

    Venu P130 days ago
    what the borrowers in distress deserve is waiver of interest on interest during the moratorium period. Complete waiver of interest will result in severe erosion of bottomline of banks, which in turn, will adversely affect the very recovery of economy, which is already in doldrums.
    Hanuman Bhardwaj131 days ago
    which Bank in loss during last 6 months due to this situation. how many businesses closed due to this situation?
    Banks charging heavy interest and paying little to depositor if that again depends if your money not sucked like PMC kind of banks. what the govt or RBI done for PMC? big amount still with PMC
    Treasury KAIJSBL132 days ago
    If borrowers not pay interest how bad k can pay the interest to Depositer
    It's very difficult and it's impact on banks profitablity
    How bank can lend
    How can economy grow
    It's very difficult situations
    Rbi and Govt responsiblity to satisfy lenders Depositers and Bank
    The Economic Times