Compound interest

NBFC: NBFCs could be the most affected by waiver of compound interest

Mumbai: The financial sector could lose between Rs 4,000 and 8,000 crore if the Supreme Court rejects compound interest on loans under moratorium in the past six months, analysts believe.

Within the financial sector, NBFCs and housing finance companies (HFCs), which are already suffering from declining demand for loans and struggling to repay debts, could be the hardest hit, followed by banks in the public sector, analysts said.

believes that waiving interest on interest during the moratorium could result in a cumulative impact of between Rs 7,500 and Rs 8,000 crore for the financial sector.



The brokerage firm estimates that NBFCs and HFCs will be the hardest hit, possibly losing Rs 3,500 crore. Private sector banks together stand to lose Rs 1,830 crore. Public sector banks will lose Rs 1,580 crore, excluding the probable loss of Rs 490 crore for the SBI.

“This would mean a decrease of 7 basis points in return on assets and less than 4% in operating income (FY20). This would result in an operating profit of between 2% and 5% for the industry, ”said ICICI Securities.

In a report released earlier this month before the last SC hearing, US brokerage firm Jefferies estimated an impact of between Rs 4,000 and Rs 5,000 crore, or less than 5 basis points of total assets. .

Jefferies estimated that of the total loans of Rs 102 lakh crore in the banking sector, around Rs 41 lakh crore could be subject to a moratorium, with interest amounting to Rs 2 lakh crore at 10% per annum. . Of this total, around 4,000 crore rupees could represent compound interest that could be canceled.

“The financial impact may not be large, but the collateral risks are greater. We believe that the financial impact of waiving interest on interest is not significant; it is the collateral risks associated with borrower behavior that we are most concerned about, ”said Jefferies.

Siddharth Purohit, analyst at SMC Global, said the impact on NBFCs will be most severe as they still have to honor their obligations and loans, even though business has been hit due to the economic crash.

Thursday’s extension of the status quo on loans until Sept. 28 raised the possibility that the financial sector might have to give up some of its interest.

On Thursday evening, the government announced the formation of a three-member group, led by former bureaucrat Rajiv Mehrishi and also including former SBI Managing Director B Sriram and former member of the RBI Monetary Policy Committee. Ravindra Dholakia. It has a week to assess whether interest can be charged on the interest and whether rating agencies can downgrade a company affected by the pandemic during the moratorium.


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