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

Business Standard - - ECONOMY & PUBLIC AFFAIRS - SOMESH JHA & HAMSINI KARTHIK New Delhi/mum­bai, 18 Oc­to­ber (With in­puts from Ab­hi­jit Lele)

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

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