MUMBAI: The Supreme Court of India On Tuesday said the relief on payment of interest on interest or compound interest during the Covid moratorium period allowed to borrowers with liability of up to Rs 2 crore should be extended to all borrowers.

Analysts believe the impact of the SC’s verdict on the entire banking system could be to the tune of Rs 7,500 crore.

The court ruled that interest on interest, or compound interest, is charged by banks from borrowers in the event of wilful or deliberate default, and since the government through its March 2020 order provided moratorium on payment of instalments on all loans, there is no justification in charging penal interest for the moratorium period.

Earlier, banks had refunded compound interest charged on non-payment of loan instalments during the moratorium period of around Rs 6,500 crore on loans up to Rs 2 crore following SC’s guidance in September, JM Financial noted in a note.

The additional impact of Rs 7,500 crore on waiver of interest on interest accounts would less than 0.1 per cent of overall system loans, JM Financial said.

Bank shares surged in Tuesday’s session, as investors were relieved that the court did not allow waiver of interest on loans, which was one of the major pleas made by the petitioners in the apex court. Nifty Bank closed the day 1.8 per cent higher.

Analysts said it remains to be seen if the cost of refunding compound interest on loans of over Rs 2 crore will be compensated by the government, as was the case earlier or will it be absorbed by the banks themselves.

With the SC not extending the relief on recognition of bad loans that was provided earlier, investors will now await March quarter earnings of banks to gauge real health of lenders’ balance sheets.

“I do not think there is going to be any major slippages as a result of this Supreme Court judgement. I am not expecting very elevated NPA levels in March quarter. I am going by the numbers declared in December and the current assessment of the situation,” former State Bank of India Chairman Rajnish Kumar told ETNow.

CARE Ratings in a report said gross bad loans of the banking sector declined to Rs 7.5 lakh crore in the December quarter from Rs 8 lakh crore in the September quarter. Analysts said the enhanced Covid-19 provisions made by the banks in the past few quarters during the relief on bad loans recognition will ensure that new provisions in March quarter are not elevated.

“We remain positive on large banks given improving return ratios, healthy capitalisation levels and opportunity for market share gains,” JM Financial said.

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