Removal of bad debt ‘hangover’ to lend clarity to banks’ earnings, growth

The country’s biggest banks face reduced uncertainty on their profit outlook after a top court’s decision forced lenders to resume classifying and disclosing bad debt.

The Supreme Court ruled that banks won’t be able to charge borrowers for additional interest on loans incurred during a six-month repayment holiday last year. That may cost lenders an extra $1 billion, according to Anil Gupta, vice-president of financial sector ratings at ICRA Ltd, an arm of Moody’s Investors Service Ltd.

It remains unclear who ultimately will foot the bill and whether the government will step in and provide more help to banks. The total amount for the waiver of accumulated interest is estimated at $2 billion of which Prime Minister Narendra Modi’s administration has already promised to bear about $900 million for loans up to Rs 2 crore.

The top five lenders State Bank of India, HDFC Bank, Bank of Baroda, ICICI Bank, Punjab National Bank who hold about half of the $1.8 trillion financial sector’s loans will have to refund $500 million, while the rest will mainly be spread among more than 50 local banks and shadow lenders. Still, this is a small amount compared with their combined annual operating profit of more than $28 billion, according to ICRA’s Gupta.

“The hangover of all the uncertainties related to bad loan classification, loan holiday is now over, which will give investors clarity on banks’ earnings and growth,”said Siddharth Purohit, an analyst at SMC Global Securities Ltd.

The Bankex ended 1.5 per cent higher Tuesday, outperforming the broader Sensex.

Regulators had allowed a six-month relaxation on classifying bad loans that was due to expire in August before the court extended it. The Reserve Bank of India expects that roughly 13 per cent of outstanding loans at local lenders could turn sour by September, which would be the highest level since 1999.

We “need clarity on who might foot the bill,” Prakhar Sharma, an analyst for Jefferies Inc. in Mumbai, wrote in a report.

The ruling also comes about a week before companies can resume filing for bankruptcy, a process that has been frozen over the past year as part of pandemic-relief measures to prevent soured credit causing more pain for an economy already saddled with stressed assets.

The waiver on accumulated interest will not have a “material impact” on lenders’ earnings and will not overshadow the clarity from being able to clearly mark their loans as bad, SMC’s Purohit said.

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