SC Ruling On Moratorium To Help Banking Stocks

The Supreme Court’s (SC) decision on loan moratorium and interest waiver pronounced on Wednesday helped the banking sector stocks to outperform the benchmark indices on Thursday. The Nifty and the Sensex suffered yet another setback in the wake of heavy selling on the expiry day of the March series derivatives contract. 

Both the headline indices once again lost in excess of 1.5 per cent, while taking a cue from the Wednesday SC verdict, Bank Nifty and BSE Bankex, after remaining highly volatile through-out the day, closed with a loss, lesser than the main gauges. 

SC lifted the ban on Non-Performing Loan (NPL) classification imposed by the centre but directed compound interest waiver for all borrowers in its ruling on a plea by various bodies pleading to extend the loan moratorium and waive the interest during the moratorium period between March-August 2020.

The SC ruled that there should be no charging of compound interest, interest on interest or penal interest on the instalments due during the moratorium period (March 1 to August 31) on any borrower, irrespective of the loan amount. If such interest has already been collected, it should be either refunded to the borrower or adjusted towards the next instalments.

The court effectively set aside the direction of the central government and RBI to restrict waiver of compound interest to certain categories of borrowers (retail and MSME) and for loans less than Rs 2 crore. 

Explaining the impact of the SC ruling on the banking sector, YES Securities in a note said, the verdict and clarity given by SC are positive for lenders. There is no financial impact for lenders as the compound interest waiver would be reimbursed by the government. The clarity about no waiver of the base interest and no extension of the moratorium period is positive for Banks & NBFCs, as this now allows them to officially tag delinquencies in accounts in excess of 90 days as NPLs (from 1st Sept 2020) and pursue the resolution and recovery process.

As a result, the collection efficiency can show further improvement as the Supreme Court NPL stand-still had impacted the repayment discipline of some borrowers. Forward flows in overdue buckets could get arrested, restraining future credit cost, the YES Securities said. 

As a result, even after the market remained volatile on Thursday when both the banking sectors index of BSE and NSE moved in excess of 1,100 points (3.5 per cent) intra-day, closed with a loss of 0.8 per cent. Private sector lender Federal Bank and ICICI Bank were top gainers among the pack while state-run lenders SBI and Punjab National Bank (PNB) saw huge trading volumes of 5.47 crore shares and 19.07 crore shares respectively.

SC, however, rejected pleas like total waiver of interest during the moratorium period, to extend the period of moratorium, to extend the period for invocation of resolution mechanism and further reliefs over and above the packages already offered by the centre and the RBI.

As per ICRA’s estimates, the cost of compounded interest waiver pertaining to all moratorium cases across all lenders is Rs13,500-14,000 crore. Of this, the already announced relief for borrowers having loans up to Rs 2 crore had cost the exchequer Rs 6,500 crore.

YES Securities recommended its clients to buy shares of HDFC Bank, ICICI Bank, Can-Fin Homes, Equitas Small Finance Bank and Shriram Transport from the sector following the SC ruling.  

Emkay Global Financial Services in a note said, “We believe that vacating the stay on NPA recognition is positive for retail/SME heavy banks as it will open up the legal recourse and improve collection efficiency in the late overdue buckets, more so with the renewed risk of the second Covid-19 wave”. 

However, the SC directive to provide an interest-on-interest waiver for loans above Rs 2 crore could increase the financial burden on the govt., which is already running into a fiscal deficit. 

Emkay Global said, “We remain positive on banks due to improving macro-economic recovery feeding into better credit growth and limited asset quality disruption. Our preferred picks are ICICI Bank, HDFC Bank and SBI among large-caps; Federal Bank and City Union Bank among mid-caps; and Equitas among small-caps.”