Lenders prepare to hit Rs 7,000 crore in fourth quarter pending government clarification of who bears the cost of waiving “interest on interest”
Banks and non-bank lenders are bracing for at least Rs 7,000 crore across the industry in the quarter ending March 31 as they wait for the government to clarify who foots the bill for the waiver of the “Interest on interest,” said three senior executives of the bank CNBC-TV18.
“The banks had asked IBA (Indian Banks Association) to make representation to the government and seek clarification on the compound interest issue. IBA has contacted the government, but they have not yet responded,” said the head of a large public sector bank on condition of anonymity.
“We (the banks) have decided that we will fully insure the repayment amount in the March quarter, and see what the government’s position is on the matter. If they agree to cover the cost, we can rewrite these provisions, another senior banker said on condition of anonymity. The banker added that the decision was taken unanimously by lenders at a meeting held by IBA after the Supreme Court order was made public.
Bankers believe that even if the government agreed to shoulder the burden of this waiver, it was unlikely to compensate the bankers immediately. Therefore, the required provision should now be taken independently.
The Supreme Court had ruled that no compound or criminal interest would be charged to borrowers during the entire six-month loan moratorium period, which was announced last year amid the COVID-19 pandemic. The Supreme Court also ruled that the amount already invoiced should be refunded, credited or adjusted.
According to people in the know, the Indian Banks Association calculated that the cost of “interest on interest” for loans over Rs 2 crore during the six-month moratorium period between March 1, 2020 and August 31, 2020 2020 would amount to around Rs 7,000 crore across industry including banks, NBFCs and cooperative banks.
According to ICRA Limited, the compound interest for six month moratorium for all lenders is estimated at Rs 13,500-14,000 crore. Of this amount, the government had already announced relief for borrowers who borrowed up to Rs 2 crore, which was estimated at Rs 6,500 crore according to the ICRA. Therefore, the additional relief of Rs 7,000-7,500 crore will need to be given to borrowers with loans over Rs 2 crore, in accordance with the Supreme Court order of March 23.
When asked what would probably be the amount of the provision / reimbursement per bank, one of the executives quoted above said: “For the two or three biggest banks also, the total amount of loans over Rs 2 crore shall not exceed Rs. 300 crore each. “
Meanwhile, the Reserve Bank urged banks to “immediately put in place a board approved policy to repay / adjust the” interest on interest “charged to borrowers during the moratorium period, that is, i.e. from March 1, 2020 to August 31, 2020 in accordance with the above judgment (CS order of March 23). In order to ensure that the above judgment is implemented in a uniform manner in letter and spirit by all credit institutions, the methodology for calculating the amount to be reimbursed / adjusted for the various facilities will be finalized by the Association of Indian Banks (IBA) in consultation with other participants / industry bodies, to be adopted by all credit institutions. “
RBI further clarified: “The above relief will apply to all borrowers, including those who used working capital facilities during the period of the moratorium, whether or not the moratorium was fully or partially used. . “
The regulator also said that asset classification for borrowers who did not take advantage of the moratorium would continue in accordance with Income Recognition and Asset Classification (IRAC) standards, and for borrowers who took advantage of the moratorium, the asset classification would comply with IRAC standards with effect from September 1, 2020.
(Edited by : Jomy)
First publication: STI