Compound interest

Banks relieved as government notifies compound interest repayment

MUMBAI: The banks are relieved by the government notification that only waives compound interest, because this will limit their losses without burdening the tax authorities too much. On Tuesday, the Reserve Bank of India (RBI) issued a notice directing banks to follow the government’s order reimbursing small borrowers with loans of up to Rs 2 crore who paid compound interest on their loans between March 1 and August 31.

Bankers said the government’s clarity and its notification committing to bear the difference in rates raised a serious problem on the banks.

“This issue has now been settled. The fact that the government gave a timeline for crediting 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 bear the losses. burden, ”said a bank CEO.

Banks are required to credit accounts receivable by November 5 and submit a refund request to the government through the State Bank of India which the government has designated as the nodal bank. The banks will have to be reimbursed by the government through the State Bank of India, the nodal bank designated by the government for this purpose. Banks will be credited with the difference before December 15th.

Analysts said the government order and subsequent RBI notification wiped out a large surplus on banks.

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

“Some banks and NBFC have already indicated in their comments on the results that they proactively forecast the interest on the interest, which would lead to a recovery once the government repaid. due to the suspension of the recognition of the NPA by the court, ”said Lalitabh Srivastawa, analyst at Sharekhan, a subsidiary of the BNP Paribas group.

In a report released on Monday, the credit rating agency Crisil said the government’s decision to bear the cost of forgetting loans from small borrowers would ease the pressure on lenders – already facing profitability pressure and credit problems. quality of assets due to the Covid-19 pandemic.

The rating agency estimates that paying 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 on February 29 of this year. Size must be less than Rs 2 crore in some categories whether or not the moratorium has been used.

These loans represent more than 40% of systemic credit and 75% of borrowers. The cost for the chessboard would have been cut in half if the waiver was only allowed when a moratorium was invoked, Crisil said.

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