Banks will have to repay the compound interest of Rs 4,500 cr to borrowers

Banks will be required to reimburse borrowers around Rs 4,500 crore for compound interest charged on loans over Rs 2 crore. This follows the Reserve Bank of India’s directive to banks to repay compound interest received during the moratorium. six months, according to Kotak Institutional Equities.

Banking regulator advised banks to implement Supreme Court order granting compound interest relief on loans over Rs 2 crore and lifting the standstill on classification of the account as a loan unproductive.

The estimated impact is assessed for the profits of 4QFY21E with a general assumption of business and SME loans as the eligible amount (above Rs 2 crore) and an interest rate of 10 percent on these loans. For covered banks, this suggests an impact of Rs 45 billion, or about 11% of estimated profits for T4FY21. Banks with a higher share of the business / SME portfolio will face a greater impact, the brokerage said.

Kotak, in a research note, said the impact would differ from bank to bank depending on the mix of loans.

But early estimates suggest the impact would be around 10 basis points (bps) on net interest margins. Public banks would have a greater impact than private banks.

Lenders must repay / adjust “interest on interest” charged to borrowers during the six month moratorium, whether or not the moratorium has been used (fully or partially). The methodology for calculating the amount is to be finalized by the Indian Banks Association (IBA) in consultation with industry. Lenders must disclose the total amount to be repaid / adjusted in their financial statements for fiscal year 2021.

Disclosure: Kotak Family Controlled Entities Have Significant Stake in Business Standard Pvt Ltd

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