The Supreme Court (SC) has delivered its final verdict in the interest waiver case. In its verdict on Tuesday, the apex court said that a total waiver of interest is not possible. It also stated that no direction can be given to the government and Reserve Bank of India (RBI) to announce additional reliefs.

Brokerages believe that this verdict will be positive for Indian banks. The Supreme Court has declined the plea for complete interest waiver noting that this will have an adverse impact on banks’ balance sheet and indirectly on banks’ depositors.

"The positive for banks is that the SC has dismissed all demands of full interest waiver, an extension of the moratorium and further sectoral reliefs and also vacated the stay on NPA classification(all on expected lines)," global brokerage house CLSA said in a report.

Phillip Capital is also of the view that the recognition of NPA, which was suspended, will restore normalcy in banking activity which will help improve business growth and expedite recovery.

It continues to like private sector banks due to sustained momentum, normalisation of credit costs including ICICI Bank; Axis Bank & HDFC Bank.

Within the public bank space, it prefers SBI and Indian Bank. It is positive on SBI due to stable asset quality and potential for margin expansion. Also, it likes Indian Bank due to its stable business model around retail, MSME and Agri.

Meanwhile, Emkay believes that the actual recognition of NPAs would lead to margin compression in Q4 for banks due to the reversal of interest on NPAs and the simultaneous release of provisions made specifically for such interest on pro forma NPAs.

It added that actual recognition of NPAs and better clarity about the underlying asset quality could also prompt banks with relative excess provisions (such as Axis, ICICI) to write-back some provisions, while banks with inadequate provisions will have to make additional provisions in Q4.

On an overall basis, Emkay is also positive on banks due to improving macro-economic recovery feeding into better credit growth and limited asset quality disruption. Its preferred picks are ICICI Bank, HDFC Bank and SBI among large-caps; Federal Bank and City Union Bank among mid-caps; and Equitas Small Finance Bank among small-caps.

However, the SC has extended the interest on interest waiver to all borrowers with dues less than 2 crore given/funded by the government. CLSA estimates that the interest on interest relief on all loans below Rs 2 crore would cost around Rs 15,000 crore.

It added that since the government-funded all interest on interest waiver of below Rs 2 crore loans and should fund the relief for over Rs 2 crore loans as well. If funded by banks, it will be 30-35 bps of non-individual loans and around 15 bps of total loans for the banking system, noted CLSA.

However, Phillip Capital feels that this amount for interest on interest is not large enough to have a meaningful bearing on the sector.

(Edited by : Abhishek Jha)

First Published:Mar 24, 2021 3:10 PM IST