Sector Update | 14
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Supreme Court rules out complete interest waiver
Relief for banking system; Potential impact significantly reduced
The Honourable Supreme Court (SC) has ruled out the possibility of a complete interest
waiver during the moratorium period on 12th Jun’20. This is in line with
our earlier report,
which highlights miniscule probability of a complete interest waiver. Further, the SC has
added that the scope of hearing is limited to the interest waiver, which is levied on
accrued interest. The SC has also asked the Finance Ministry and the RBI to meet within
three days to decide on the matter and has deferred the hearing to 17th Jun’20.
This comes as a sign of relief to the banking system, which otherwise would have faced
significant operating losses coupled with triggered capital calls across banks. Our analysis
shows that the interest forgone on the accrued interest in the moratorium book for a
period of six months could impact FY21 operating profits in the range of 0.5-2.6% while
PBT could get impacted in the range of 0.7-9.0%.
Impact of Interest waiver on
accrued interest on coverage
Interest waiver on
accrued Interest for
% of PPoP % of PBT
SC rules out complete interest waiver; next hearing on 17
In the hearing on 12
Jun’20, the SC has ruled out the possibility of a complete
waiver of interest during the moratorium period. The SC has added that the scope of
hearing is limited to the waiver of interest, which is levied on the accrued interest.
The SC has asked the Finance Ministry and the RBI to hold a meeting within three
days to decide on the matter and has deferred the hearing to 17
government has further stated that it would hold a meeting of the stakeholders
(including the RBI, banks and the Finance Ministry) this weekend to arrive at a
response and would submit it to the SC by 17
Waiver of interest on accrued interest to impact PBT in the range of 0.7%-9.0%
We have now re-assessed the impact of this judgment on our coverage universe.
Our analysis shows that the NPV of the interest forgone on the accrued interest in
the moratorium book for a period of six months could impact FY21 operating profits
in the range of 0.5-2.6% and would have a slight bearing on margins. The
incremental interest that would be lost – if the interest on accrued interest is
waived off – forms 0.7-8.1% of FY21 provisions and constitutes 0.7-9.0% of a bank’s
Our analysis suggests an EMI increase of ~8%/17% for home/car loans and ~214%
for MFI loans; tenure could increase by 1-8 months
Further, we have analyzed the probable impact of the moratorium on borrowers
considering there would be some restructuring in the EMI/tenure of the loan. We
have taken a car loan, home loan and MFI loan as samples to assess the impact on
revised EMI/tenure (For
details refer page 4).
Home loans could see 7.6% increase in EMI; tenure could increase by 8
We have taken a sample home loan of INR5m with an interest rate of
8% and tenure of 15 years. Note that after availing the moratorium, for a
borrower who has already paid 60 installments, the EMI could increase by ~7.6%
with constant total tenure.
Research Analyst: Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
Investors are advised to refer through important disclosures made at the last page of the Research Report.
14 June 2020
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.