After the Supreme Court ended the blanket ban on the classification of non-performing assets (NPAs) on Tuesday (March 23), brokerage firm PhillipCap said that as the government has borne the interest on interest for loans up to Rs 2 crore, it may “make good” the remaining balance too.

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The report also states that the amount of interest on interest is not large enough to have a meaningful bearing on the sector. “Recognition of NPA, which was suspended before, will only restore normalcy in banking activities in the market,” states the brokerage note.

PhillipCap believes that restoration of normalcy will help to improve business growth and expedite recovery in private banks due to the sustained momentum and normalisation of the credit costs. Within public banks space, PhillipCap is positive on the State Bank of India due to its stable asset quality and potential for margin expansion, and on Indian Bank due to the stable business model around retail, micro, small and medium enterprises, and agriculture.

In an order on March 23, the apex court had stated that the government cannot be directed to ask banks to waive off interest on loans provided during the lockdown. The order added that the moratorium on equated monthly installments for repaying those loans could not be extended beyond August 31, 2020.

The SC order stated: “There shall not be any charge of interest on interest/compound interest/penal interest for the period during the moratorium from any of the borrowers and whatever the amount is recovered by way of interest on interest/compound interest/penal interest for the period during the moratorium, the same shall be refunded and to be adjusted in the next installment of the loan account.”