Even a partial interest waiver during loan moratorium will put huge burden on banks: SMC Global Securities

Once valuation takes a further knock from here, even raising funds will be difficult, says Siddharth Purohit, analyst.

Prima facie, what is your own opinion on interest waiver?
If you hear the last words by the Supreme Court, that they had clearly tried to articulate that they are not talking about the complete waiver and even the Reserve Bank has clearly said that as a bank is a commercial entity. So the matter of discussion is the interest component and that will be heard today. So I think if that amount is also waived off, it will not materially impact the banking performance. But if the entire interest is waived off in the moratorium period, it will significantly impact the banking operation. But that has been clearly ruled out.

The Supreme Court has said that they want to bring a balancing act between business interest and the consumer interest. So the key to watch would be whether they allow interest to be charged on interest. The RBI was also saying that the total interest outgo that one could end up losing is roughly about Rs 2 lakh crore. So the interest on interest for two quarters on the entire Rs 2 lakh crore does not seem to be very big. So even if the Supreme Court gives a judgement, and it is just my assumption that interest should not be levied on the interest component, it will not really derail the financials of banks. So I am not really worried about that part.

But if there is a judgement that the interest component should be entirely waived off, it could be a big negative, which is very unlikely in my understanding. And like I said banks work on very thin margins of trade. So if the entire interest is waived off then it is structurally difficult or impossible to service the depositors. So even the Supreme Court will look from that point of view.

Let us look at the scenarios. Scenario number one is the Supreme Court says it is status quo; a moratorium has been granted by the Reserve Bank of India and the court says we will not like to intervene in what the interest loan waiver is. Scenario number two, a partial interest rate waiver kicks in. How do you see banks reacting in case today the court decides to give a partial loan waiver?
Even if a partial loan waiver is given for the entire moratorium period, it will be negative. I don’t think that banks should be burdened extra at this time when on one hand they are struggling for capital and additionally they are supposed to lend also. Yes, if interest on interest is waived off, that will not materially impact the financials. But even partial interest waiver and the moratorium period will impact the financials. That is what I believe and banks will react negatively. But as I said, even the Supreme Court understands that probably banks should be left to the commercial decision. So I am not expecting that to happen. But if at all it happens, probably it will be negative for banks.

Looking at the math here; Rs 2 lakh crore is 15% of the Indian banking sector’s net worth. Currently there are loans already worth about Rs 39 lakh crore, which is way higher and are already under the moratorium. So what could be a possible solution wherein one can protect the banking industry as well as be compassionate towards those who have to extend the moratorium and opt for it?
Right now most of the PSU banks and private banks are not in a position to raise substantial amounts. If you waive off all this big amount, it will eventually have an impact on your net worth and that will further impact the valuations for banks or ratings for the funds. So definitely, if you talk about the entire amount or even a part of that or half of that to be waived off, then definitely the valuations of banks will take a hit. So that is why I am not expecting any negative ruling against banks. We must understand that banks are right now very important pillars for supporting the economy.

You cannot expect the economy to really bounce back immediately. So somewhere down the line, banks will again have to be funded; the government will have to give funds to the PSU banks and the private banks will have to hit the market and raise money. So once valuation takes a further knock from here, even raising funds will be difficult. Right now the government and the central bank are equally concerned about the underlying asset quality and the fact that a moratorium has been given till 31 August is already a big relief for the industry.

Giving more relief is good from a consumer point of view but certainly it is not going to help the bankers in any way. Now certainly banks need to support the consumer because the cash flow of most of the corporates and retail has taken a hit but purely from a commercial point of view, any sort of interest waiver will have a very negative precedence and the credit quality and credit culture could change.

We have seen that in earlier cases whenever there has been a loan waiver in subsequent quarters, even in other sectors those who can afford to also pay end up defaulting. So we should not set a wrong benchmark for the industry. I cannot say what will happen at the Supreme Court hearing. I would expect that there is no negative verdict against the banks.