Banks plan to ask the government to foot the bill for the next round of compound interest waivers, estimated at ₹7,500 crore, following Tuesday’s Supreme Court ruling on the moratorium on loan repayments.
Paying out of pocket could hurt bank profitability, said a person familiar with the development.
“It is impossible for banks to bear the burden resulting from waiving compound interest without passing the financial impact on to depositors or negatively affecting their net worth,” the government informed last October.
The Supreme Court said on Tuesday that the benefit of a compound interest waiver, or interest on interest, should be available to all borrowers, regardless of their outstanding loan amount.
In October, the government announced that loans to individuals and small businesses of up to ₹2 crore will benefit from the compound interest exemption. This waiver concerns interest payments during the moratorium period from March to August 2020.
The Reserve Bank of India (RBI) had authorized deferral of repayments to help borrowers in the wake of the coronavirus outbreak that has left millions jobless and facing loss of income.
“Although we will be asking the government to pay for this round as well, I don’t think the bill will be too high. The lenders will discuss this with the Association of Indian Banks (IBA) at the next management committee meeting soon enough, “said the person mentioned above.
There is still a lot of uncertainty about the second cycle of compound interest waiver. Some expect the government to pay for it, while others are unsure.
The first cycle of exemption from the payment of compound interest, the cost of which is estimated ₹6,500 crore was announced in October 2020.
Analysts are also skeptical, given that the government has specifically agreed to allow small businesses and retail borrowers to benefit from the exemption.
“In such a situation, there will be a direct impact on the profitability of the lender because the same thing would not have been considered. Banks can ask for government support to manage the impact, ”said Dnyanesh Pandit, managing director (financial services) of consulting firm Protiviti India.
Non-bank financial corporations have not yet received their share of the first round of exemption reimbursements. SBI was appointed the nodal agency for the collection and settlement of dues for all lenders after submitting claims by December 15th.
“We lodged our complaints through the SBI, which was the nodal agency, and all complaints are the responsibility of the government. We haven’t heard from anyone reimbursed yet. They deal. It’s going to take some time, ”said Raman Agarwal, co-chair of the NBFC Finance Industry Development Council (FIDC).
Never miss a story! Stay connected and informed with Mint. Download our app now !!