India's banking stocks are on fire after top court allows them to call out bad loans

India's banking stocks are on fire after top court allows them to call out bad loans
Shares of public sector banks rally after the Supreme Court's judgement on loan moratorium caseBCCL/BI India
  • Indian banks are rallying on the stock market after the Supreme Court’s judgement on the loan moratorium case on March 23.
  • The verdict now removes the stay that was in place keeping banks from declaring accounts as bad loans or non-performing assets.
  • Public sector banks saw their shares gain by as much as 10% in a bull run led by Indian Overseas Bank (IOB), Bank of Maharashtra and Bank of India (BOI).
Indian banks are rallying on the stock market after the Supreme Court’s judgement on the loan moratorium case today. The verdict finally ends the long pause that the apex court had put in place keeping Indian banks from declaring accounts are non-performing assets (NPAs) or bad loans.

The top court also said that the complete interest waiver is not possible while refusing to extend the moratorium beyond the designated six months. According to rating agency ICRA, this would have cost the government ₹7,000 crore to ₹7,500 crore.

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However, banks are still required to excuse any interest on interest — or compound interest — that these loans may have accrued during the six-month moratorium period from March till the end of August 2020.
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Public sector banks, in particular, are rallying in reaction to the news led by Indian Overseas Bank (IOB), Bank of Maharashtra and Bank of India (BOI). This is likely because these banks had the most at stake.

Public sector bankPercentage change in share price
Indian Overseas Bank10%
Bank of Maharashtra9.97%
Bank of India9.94%
Central Bank4.72%
Union Bank3.77%
Indian Bank3.67%
Bank of Baroda2.97%
Canara Bank2.63%
Punjab National Bank2.11%
State Bank of India1.36%
Source: Nifty PSU Bank

According to a report by CARE ratings, the gross NPA ratio of public sector banks stood at 9.01% in December 2020 compared to 3.49% with private banks.
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Analysts, and the RBI, have been fearful that the COVID-19 pandemic will set off a fresh cycle of bad loans in India. The apex bank’s most recent financial stability report shows that the GNPA ratio of public sector banks could hit 17.6% under the worst-case scenario by September 2021. IEven i the baseline scenario the ratio can rise to13.5% by September 2021 which is almost double of the ratio of 7% as of December.

Nonetheless, the banks have been preparing themselves. They have been storing up provisions in order to address the sudden inflow of bad loans that is likely to occur now. Cumulative provisions made by these banks for the yearm, which includes for NPAs among others, was around ₹ 1.78 lakh crore over the past three quarters.

Having the ability to declare accounts as NPA will also allow investors and stakeholders to have a clearer view of the banks’ balance sheets.
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