BFSI - Supreme Court's interest waiver case - progressing favourably - ICICI Securities

The developments in the Supreme Court's (SC) 'interest on interest waiver' case are leaning favourably towards financiers. Firstly, the scope of discussion in the SC on Oct 14 was restricted merely to the implementation of suggested relief (as per earlier affidavit) to small borrowers (up to Rs20mn) through fiscal support. Sounds positive for the sector as there were no discussions on expanding the scope of relief (a huge overhang) to other categories or to interest waiver. Also, with government bearing the burden, there will be no liability as such for financiers. Small borrowers - MSME and retail loans up to Rs20mn - constitute >40% of the bank credit and relief on compounding of interest (at ~10% yield for 6 months) would translate to Rs110bn cost to exchequer for bank credit. Adding the exposure of non-banking lenders would increase the quantum by further 50%. Product segments with higher rates (MFIs, credit cards, 2-wheelers etc) or higher interest component in EMI (home loans) will benefit the most.

- Case further adjourned to November 2 - Bench seemed more apprehensive about the implementation of relief stated in earlier affidavit to small borrowers and stated government/RBI has laid out a roadmap in affidavit but has not issued any orders/circulars to banks to implement it. Nonetheless, it adjourned the case to November 2 expecting the implementation by then and will be reviewing the same in next hearing.

- No discussion on expanding the scope of relief - Unlike last hearing, where the bench along with the implementation through guidelines/notifications/circulars, had also highlighted government/RBI to respond to concerns raised by CREDAI, power producers and asked to give necessary details regarding questions asked in previous hearings, there were no discussions on those concerns. Sounds positive for the sector as there were no discussions on expanding the scope of relief (a huge overhang) - to other categories or to interest waiver. Also, with government bearing the burden, there will be no liability as such for financiers.

- Impact analysis - Relief on compounding of interest to small borrowers - MSME and retail loans (education, housing, consumer durable, credit card, auto loans, personal loans to professionals, consumption loans) of up to Rs20mn - would be available to all borrowers whether they have availed the moratorium or not. How is it effected for regularly servicing customers in terms of interest reversal needs to be evaluated - we will await regulatory circulars/orders for the same.

This category of eligible small borrowers constitutes ~40% of the bank credit and relief on compounding of interest (at ~10% yield for 6 months) would translate to Rs110bn cost to exchequer for bank credit. Extending it to the exposure of non-banking lenders would increase the quantum by further 50% (Rs50-60bn). Eventually, this will lead to similar extent of improved cash flows in the hands of small borrowers. With regards to product segments, one with higher lending rates (MFIs, credit cards, 2-wheelers etc) or higher interest component in EMI (home loans) will benefit the most. We believe retail/MSME financiers with skew towards these segments (HFCs, MFIs, credit card players etc) will see maximum benefit.

- Tagging of NPLs and its recognition till November 2 - Supreme Court observed till the government implements this relief, borrowers interest will be protected through its interim order of restraining any standard account as of August 31st being allowed to be tagged as NPL. As most quarterly earnings will be announced before November 2, slippages will be technically non-existential besides from SMA-1/2 pool as of March 1st. Banks that were looking to prudently recognise the stress upfront will now be restrained to do so - so no clear visibility is expected on stress recognition. However, financiers will continue to conservatively provide based on their assessment of stress and credit cost can still be elevated.

Source : Equity Bulls

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