NBFCs may be hit most by compound interest waiver

Mumbai: The financial sector could lose anywhere between Rs 4,000 and Rs 8,000 crore if the Supreme Court disallows compound interest on loans under moratorium in the last six months, analysts estimate.

Within the financial sector, NBFCs and housing finance companies (HFCs), which are already reeling under a fall in loan demand and facing difficulties in paying off their liabilities, could be hit the most, followed by public sector banks, analysts said.

ICICI Securities estimates that waiving interest on interest during the moratorium could lead to a cumulative hit of between Rs 7,500 and Rs 8,000 crore for the financial industry.

The brokerage estimates that NBFCs and HFCs will be hit the hardest, possibly losing Rs 3,500 crore in earnings. Private sector banks together stand to lose Rs 1,830 crore. Public sector banks will lose Rs 1,580 crore, excluding the Rs 490 crore loss likely for the SBI.

“This would mean a drag of 7 basis points on return on assets and less than 4% of operating profit (FY20). It would drag operating profit between 2% and 5% for the industry,” ICICI Securities said.

In a report earlier this month before the latest SC hearing, US-based brokerage Jefferies had estimated an impact of between Rs 4,000 and Rs 5,000 crore, or below 5 basis points of total assets.

Jefferies estimated that out of the total Rs 102-lakh crore loans in the banking sector, about Rs 41 lakh crore could be under moratorium, the interest on which would amount to Rs 2 lakh crore at 10% per annum. Out of that, about Rs 4,000 crore could be the compounded interest that could be waived off.

“Financial impact may not be large, but collateral risks are bigger. We believe that the financial impact of waiving interest-on-interest isn’t material; it is the collateral risks with respect to borrower behaviour that we worry about more,” Jefferies said.

Siddharth Purohit, analyst with SMC Global, said the impact on NBFCs will be the most severe because they still have to service their bond and loan liabilities even as business has been hit due to the economic crash.

Thursday’s extension of the status quo on loans until September 28 has given rise to the possibility that the financial sector may have to give up on some of its interest dues.

Late on Thursday, the government announced constituting a three-member panel, headed by former bureaucrat Rajiv Mehrishi and also including former SBI MD B Sriram and former RBI monetary policy committee member Ravindra Dholakia. It has one week to assess whether interest can be charged on interest and whether credit rating agencies can downgrade a firm hit by the pandemic during the moratorium.