2 min read.Updated: 24 Sep 2020, 09:57 PM ISTAparna Iyer
SBI will charge retail customers additional interest if they opt for restructuring, while HDFC Bank isn’t going to restructure loans below the size of ₹25,000 and will charge a processing fee
Stung by a sour past on asset quality, India’s lenders are taking all kinds of precautions before they go easy on borrowers by restructuring loans.
State Bank of India (SBI), the country’s largest lender, will charge retail customers additional interest if they opt for restructuring. HDFC Bank isn’t going to restructure loans below the size of ₹25,000 and will charge a processing fee. What’s more is that when reporting to credit bureaus the bank will label all loans of a single borrower availing easier terms as restructured to even though the borrower may have asked for leeway on just one loan.
The aim is clear. Banks do not want borrowers to apply for restructuring unless they are in dire need of one.
When distressed customers avail of easier terms, they would need to adhere to a disciplined credit culture. The higher interest rate charged is also to offset the cost the bank incurs due to provisioning. The regulator has mandated banks to set aside 10% as provisioning for loans restructured.
Analysts have noted the measures to mitigate the impact on balance sheets. “For individual loans, immediate P&L impact for SBI will be limited to the provisioning (10% of restructured loans) towards restructured individual accounts," wrote those at Equirus Securities Pvt Ltd. That said, these higher interest rate and other charges strengthen the case of petitioners who are seeking waiver of interest. In June, a clutch of representatives of industries filed a petition in the Supreme Court seeking waiver on interest accumulated during the moratorium period.
The rationale behind the move is that such an interest will only add to the indebtedness of the borrower, thus defeating the purpose of providing relief. Higher interest rate and processing fee charges also diminish relief besides increasing the indebtedness of the distressed borrowers. To be sure, banks are justified to price in the credit deterioration irrespective of the cause of it.
But how much the moratorium ends up hurting banks hinges on the verdict of the Supreme Court on interest waiver. The next hearing is scheduled on 28 September. The court is in favour of giving this waiver, Justice Ashok Bhushan had said in the last hearing. Meanwhile, a government panel has submitted a report on the issue and has suggested that the government bear the cost of such an interest waiver.
If the verdict favours borrowers, the banks will have to forgo up to ₹2 trillion of interest income as per the Reserve Bank of India’s (RBI) estimate. Ergo, the sacrifice of interest could hurt. Investors are surely wary of this judiciary risk. The Nifty bank index has slipped 5.7% since the last case hearing even as the broader Nifty slipped by 2.7%.