Centre to ensure interest waiver benefits by Nov 2
Experts say provisioning requirements for banks may go up 20-50% in Q2 due to SC standstill order
The Union government is set to pass on the benefits of the compound interest waiver to small borrowers before November 2. Banks, on the other hand, have started making additional provisioning based on their own judgment of the loan books in balance sheet for the second quarter following the Supreme Court’s standstill order on classifying loans as nonperforming assets (NPA).
“We are putting all our efforts to ensure that we pass on compound interest waiver to borrowers before the SC deadline,” a top government official said, requesting anonymity.
Both state-owned and private lenders will be asked to refund the compound interest waiver sum to all borrowers, with loans up to ~2 crore, before November 2 and file a claim with the government subsequently. However, the government is likely to frame a scheme that will spell out the modalities to be followed by lenders. It will be applicable to all borrowers — irrespective of whether they availed moratorium or not but the calculation of computing waiver by banks may vary according to the type of loan.
It will tentatively cost around ~6,500 crore to the Central government. After getting the Cabinet’s nod, the government will seek authorisation from Parliament in the winter session for making appropriate grants towards waiver of compound interest, following which it may start transferring money to the banks based on their claims.
The Supreme Court, which is hearing a batch of petitions seeking waiver of inter
est on loans during the RBI’S six-month moratorium announced in March, had directed the government to tell the progress of compound interest loan waiver by November 2.
On September 3, the SC had asked banks not to classify loans that were standard or stressed till August 31 as NPAS till further order. Banks have started finalising their balance sheets for July-september period and have made additional provisioning towards possible NPA. They are being termed as either accelerated or Covid-related provisioning but experts felt that the second quarter results of banks may not reflect true picture of their asset quality or profitability.
Federal Bank said it had stressed assets at an all-time low owing to the SC’S standstill order. It reported slippage of only about ~3 crore, against ~184 crore in the previous quarter.
However, the actual slippage would have been ~237 crore in the quarter, according to the bank management’s estimates. “As a prudent measure”, the bank made additional provisions of ~402 crore as ‘standard assets provision.’
HDFC Bank made contingent provisions of around ~2,371 crore, against the required ~1,130 crore for NPAS “as a matter of prudence” towards accelerated provisions on accounts that could potentially get affected if the SC order were not in place and due to the potential impact of the pandemic. The bank reported gross NPA of 1.08 per cent of its loan book, against 1.37 per cent if there was no standstill order.
Chief executive officer of a mid-sized public sector bank said it was looking at the SMA-2 accounts to gauge the possible slippage of loans into NPA in a bid to make additional provisioning to the tune of 2025 per cent. “On an average, ~500-600 crore worth of loans become NPA for the bank. The bank will not be classifying such loans as NPAS but floating provisions to the tune of 20-25 per cent will be made,” the executive said, requesting anonymity.
Auditors said there was no need for banks to deviate from income recognition and asset classification norms in absence of any communication from the RBI and they felt that the provisioning cost may go up by 20-50 per cent in Q2. “When our operating metrics is gradually improving, additional provisioning is an avoidable burden in the current circumstances,” said chief executive of a private bank.
“Banks have started to make voluntary provisions based on the management estimates. It’s difficult to say whether it’s adequate or not as we do not know the basis of the calculation. We think the numbers may not reflect the true picture in terms of asset quality or profitability margins,” ICRA Vice-president (financial ratings) Anil Gupta said.
The RBI had submitted an affidavit in the apex court earlier this month asking it to lift the freeze on NPA declaration as the move will have “huge implications for the banking system, apart from undermining the regulatory mandate of the RBI.”
Banks will be asked to refund the compound interest waiver sum to all borrowers, with loans up to ~2 crore, before November 2 and file a claim with the government subsequently