Banks relieved as government notifies reimbursement of compound interest

MUMBAI: Banks are relieved at the government notification waiving off only compounded interest as it will restrict their losses without burdening the fisc much. On Tuesday, the Reserve Bank of India (RBI) issued a notification directing banks to follow the government order reimbursing small borrowers with loans up Rs 2 crore that have paid compounded interest on their loans between March 1 and August 31.

Bankers said the government’s clarity and its notification committing to bear the difference between the rates have lifted a major over hang over banks.

“This issue has now been taken care off. The fact that the government has given a timeline for crediting the losses to banks is very positive because at one time we were not sure of what the court would say and whether we will have to bear the burden,” said a bank CEO.

Banks have to credit customer accounts by November 5 and raise a request for reimbursement from the government through the State Bank of India which the government has appointed as the nodal bank. Banks will have to seek reimbursement from the government through the State Bank of India, the nodal bank appointed by the government for this purpose. Banks will be credited the difference by December 15.

Analysts said the government order and the subsequent RBI notification clears a big overhang on banks.

“Banks will not have to take any additional burden due to that interest rate computation as there is a clarity,” said Karthik Srinivasan, senior vice president, financial sector ratings, ICRA Ratings. Banks and NBFCs can now move towards handling the uncertainty around NPAs due to the Covid 19 pandemic.

“Already some banks and NBFCs in their results commentary have indicated that they have proactively provided for the interest on interest, which would result in a writeback once government reimburses. The only unkown now is the impact on asset quality and NPAs, which presently is unclear due to the court’s stay on NPA recognition,” said Lalitabh Srivastawa, analyst at Sharekhan a part of the BNP Paribas Group.

In a report on Monday rating agencg Crisil said the government’s decision to bear the cost of waiver on small-borrower loans will eased pressure on lenders – already facing profitability pressure and asset-quality challenges because of the Covid-19 pandemic.

The rating agency estimates that the payment of the difference by banks and NBFCs for the moratorium period between March 1, 2020, and August 31, 2020 would cost the government Rs 7,500 crore.

The benefit will be extended to borrowers with outstanding loans, marked as standard as on February 29, this year. The size should be of less than Rs 2 crore under select categories irrespective of whether the moratorium was availed of or not.

Such loans account for more than 40% of systemic credit and 75% of borrowers. The cost to exchequer would have halved if waiver was allowed only where moratorium was availed of, Crisil said.

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