Compound interest on large loans could cost the government up to Rs 7,500 crore.

Following the Supreme Court’s order directing it to make no distinction between small and large loans for compound interest reimbursement, the government will have to pay up to Rs7,500 crore more in compound interest for loans over Rs 2 crore.

According to analysts at rating agency Icra, the government has already spent Rs 6,500 crore on relief for borrowers with loans up to Rs 2 crore. According to Anil Gupta, vice president – financial sector ratings, Icra, the compounded interest for six months of moratorium across all lenders is projected to be Rs 13,500-14,000 crore.

It was unclear whether the government intended to carry out the order or seek judicial review. The Reserve Bank of India (RBI) declared a provision for loan moratorium for borrowers affected by the Covid-19 pandemic in mid-2020, and Tuesday’s order may mark the end of legal proceedings that started in mid-2020. The petitions argued that borrowers who take advantage of the moratorium should not be paid punitive interest instead of the normal interest rate set by the RBI.
The apex court also lifted the moratorium on the identification of new bad loans after August 31, 2020, suggesting that banks and non-bank lenders’ asset quality ratios will now deteriorate.

According to Icra’s estimates, banks’ gross non-performing assets (GNPAs) stood at Rs 8.7 lakh crore, or 8.3 percent of advances, as of December 31, 2020, compared to a record GNPA of Rs 7.4 lakh crore (7.1 percent). In addition, on a pro forma basis, the banking system’s net NPA was Rs 2.7 lakh crore, or 2.7 percent of advances, compared to Rs 1.7 lakh crore (1.7 percent) as of December 31, 2020.

“As a result, in the absence of the Hon’ble Supreme Court’s stay, the banks’ gross NPAs would have increased by Rs 1.3 lakh crore (1.2 percent) and their net NPAs would have increased by Rs 1 lakh crore (1.0 percent),” Gupta said.

However, there may be little reason for concern because most banks have been offering protection against unrecognised bad loans as well, according to Care. “The majority of banks have set aside extra provisioning for future NPAs, or else the provisions would have been lower than recorded in December 2020 (on a Q-o-Q basis, provisions increased from Rs 0.54 lakh crore in September 2020 to Rs 0.61 lakh crore in December 2020),” according to the department.

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