Bank stocks' recovery in danger as SC to hear interest waiver issue tomorrow

Gajender Sharma, one of the petitioners, has sought a direction for waiver of interest on loan repayments during the moratorium.

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RBI's stand is clear that it does not want the banking sector to pile up NPAs. It was all evident when RBI Governor Shaktikanta Das recently asked banks to raise capital proactively.
NEW DELHI: The Supreme Court would on Wednesday hear the issue of interest being charged by lenders on deferred EMIs of term loans following the lifting of the moratorium.

Analysts tracking the banking sector said the recent recovery in these stocks was partly due to a reduction in loan books under Moratorium 2. Any verdict for waiver of interest or even interest on interest payments under loan moratorium would not be appreciated by Dalal Street, they said, warning investors that the recent gains in banking stocks could be in danger.

Gajender Sharma, one of the petitioners, has sought a direction for waiver of interest on loan repayments during the moratorium. Vishal Tiwari, the other petitioner, in his plea to SC has sought directions to extend the moratorium period to help borrowers defer their EMI dues on term loans. Moratorium 2 ended on August 31.


The Finance Ministry in an affidavit told the Supreme Court on Tuesday that a waiver of interest on interest during moratorium would go against the basic canons of finance. It said the RBI circular of August 6 permitted lenders to allow a moratorium of up to two years.

Umesh Mehta of Samco Securities said banking stocks at present are not factoring in any negative outcome in the pending cases regarding moratorium, as suggested by the 90 per cent F&O rollovers in derivative contracts of some of the private lenders.

"Already burdened with huge NPAs, if banks are made to bear the burden of interest on interest themselves, it would be a very negative development and could endanger the recent recovery in banking names," he said.
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RBI's stand is clear that it does not want the banking sector to pile up NPAs. It was all evident when RBI Governor Shaktikanta Das recently asked banks to raise capital proactively. Many banks such as ICICI Bank, Axis Bank and Kotak Mahindra Bank have of late announced QIPs, while lenders such as Bandhan and HDFC Bank, among others, have also raised capital through secondary market sale.

Mehta of Samco Securities said some Covid-hit pockets such as MSMEs could get moratorium relief from RBI, but a concession on interest payment could be a difficult .

The finance ministry said borrowers, who are fearful of being in default as on September 1 and becoming an NPA soon could continue to avail the moratorium as part of the resolution plan implemented in terms of the above circular.

"The after-effect of this moratorium and the impact that we are going to see on bank balance sheets is yet going to play out. The fact is that the economy is recovering at a far slower rate and there is no credit growth. Banks will see this intermittent nervousness. Whenever there is some sort of broader nervousness, they will be the favourite places where investors will look to sell out of," said Nitin Raheja, Co-Founder, AQF Advisors.
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Among the large banks, shares of Axis Bank have climbed 74 per cent from March 25 low point of Rs 285. HDFC Bank has recovered 50 per cent from its March 24 low of Rs 738.90. ICICI Bank is up 47 per cent from March 24 low of Rs 269. SBI has also gained 42 per cent from its March 22 low of Rs 149.55.

Mehta of Samco Securities said: "Bank stocks in the US are still down 50 per cent despite the recent recovery. Legendary investor Warren Buffett has been seen cutting down his stake in Wells Fargo. What it means is that banks stocks are not favourite anywhere. If any bad news comes on the regulatory side, it won't take long for domestic banking stocks to erode recent gains."
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The argument in favour of an interest waiver is that deferment of interest payments would not solve the problem of borrowers, as accumulated interest has piled up at the end of the moratorium period. The counter-argument says it is not possible for banks to pay interest to their depositors unless borrowers pay interest on their loans.

"There should only be a little upside in financials from here on till we have more clarity on the hit on bank balance sheets. We see momentum, but we have to see how long that can last. Financials still are the biggest link for the economy and the market overall," said Sandip Sabharwal, asksandipsabharwal.com.
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