Banks relieved as government announces reimbursement of compound interest

MUMBAI: Banks are relieved public notification only to waive compound interest as it will limit their losses without burdening the fish much. On Tuesday, Indian Reserve Bank (RBI) issued a statement instructing banks to follow repayment from the public order small borrowers with loans up to Rs 2 crore who have paid compound interest on their loans between 1 March and 31 August.

Bankers said the government’s clarity and its announcement, which commits to bear the difference between the rates, has lifted a large over hang over banks.

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

Banks must credit customer accounts by November 5 and file a request for repayment from the government State Bank of India which the government has appointed to the nodal bank. Banks will have to seek government compensation through the State Bank of India, the nodal bank appointed by the government for this purpose. The banks are credited with the difference before 15 December.

Analysts said the government order and the subsequent RBI announcement clear a large overhang on banks.

“Banks will not have to take on additional burdens because of this interest rate calculation, as there is clarity,” said Karthik Srinivasan, senior vice president, ratings for the financial sector, ICRA Ratings. Banks and NBFCs can now move towards dealing with the uncertainty surrounding NPAs due to the Covid 19 pandemic.

“Already some banks and NBFCs in their performance comments have indicated that they have proactively provided interest on interest rates, which would result in reversal when the government repays. The only unknown now is the impact on asset quality and NPAs, as in the moment is unclear. due to the court’s stay on NPA recognition, ”said Lalitabh Srivastawa, an analyst at Sharekhan, part of BNP Paribas Group.

In a report on Monday, valuation agent Crisil estimated that the government’s decision to bear the cost of waiving small borrowers’ loans would ease pressure on lenders – who are already facing profitability pressures and asset quality challenges due to the Covid-19 pandemic.

The rating agency estimates that paying the difference between banks and NBFCs in the moratorium between March 1, 2020 and August 31, 2020 will cost the government $ 7,500.

The benefit is extended to borrowers with outstanding loans marked as standard on February 29 this year. The size must be less than Rs 2 crore under selected categories regardless of whether the moratorium was used or not.

Such loans account for more than 40% of systemic credit and 75% of borrowers. The cost of government bonds would be halved if only exceptions were allowed where moratorium was used, Crisil said.