The government on Tuesday told the Supreme Court that the moratorium on repayment of loans allowed during the coronavirus crisis can be extended by two years. This came a day after the government's deadline for temporary relief on loan repayments ended. The Reserve Bank of India had allowed banks and other financial institutions to offer a six-month moratorium to all existing individual and corporate term loan borrowers until August 31.
Solicitor General Tushar Mehta, representing the government, told the Supreme Court that discussions were on with the central bank and the bankers' association to arrive at a solution on the issue of waiving interest on loan dues during the moratorium period. "There are more issues involved, GDP is down 23 percent and the economy is stressed," said the government lawyer.
A Supreme Court bench will today, once again, gather to hear the case relating to interest waiver during the moratorium period. Although the apex court in its previous hearing ruled out a complete interest waiver on term loans during the moratorium period, the bench seeks to know whether interest will be charged on accrued interest during the said period. Analysts say this comes as a huge relief for the banking sector that could have faced significant operating losses if the interest waiver was granted on term-loans during the moratorium period. According to a report, banks stood to lose as much as 111% of their operating profits for the fiscal year if interest waiver would have been granted.
“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%,” said brokerage firm Motilal Oswal in a research note post the Supreme Court hearing last Friday. This is significantly less than what the banks stood to lose in case of a complete interest waiver. Interest waiver on accrued interest is likely to impact the profit before tax of lenders somewhere in the range of 0.7%-9%. RBI had estimated a loss of almost Rs 2 lakh crore if the Supreme Court had allowed interest waiver in the moratorium period, this would translate to nearly 15% of the banks’ net worth in the financial year 2019.
Thus it is better to play safe and avoid the banking sector for today as any decision not in favour of banks can topple the Bank Nifty. If you are trading bank nifty today then caution is the only word due to enhanced volatility.
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