Here’s How Much Banks With Exposure To Essar Steel Can Hope To Recover

The financial creditors of Essar Steel, which will be acquired by ArcelorMittal SA, would receive over 90 percent of their claims following the Supreme Court’s verdict on the insolvency case of the bankrupt domestic steelmaker.

The distribution of claims in the Essar Steel insolvency matter, the apex court ruled, will take place according to the resolution plan by winning bidder ArcelorMittal, setting aside a previous decision by the National Company Law Appellate Tribunal, which sought proportionate distribution among different classes of creditors.

That means funds from ArcelorMittal will be distributed according to the Oct. 25, 2018, resolution plan approved by committee of creditors. Secured or financial creditors would receive nearly Rs 42,000 crore—92 percent of the claimed amount.

For banks, the verdict would come as a relief as they had made provisioning as high as 50-100 percent against their exposures to Essar Steel. The lenders, which faced problems such as persistent asset quality issues and low provisioning coverage ratio, may use the writeback to provide for other stressed assets or boost its provisioning coverage ratio.

Kajal Gandhi, banking analyst at ICICI Direct, agreed. “The judgment is positive for banks in this case as well as for future resolutions as it provides committee of creditors the powers,” she told BloombergQuint. “Banks like State Bank of India may benefit the most followed by other large PSU banks with exposure to Essar. It will help the banks make provisions for other stressed accounts and boost the capital levels.”

Banks may classify their exposure to Dewan Housing Finance Corporation Ltd. as a non-performing asset in the third quarter of the ongoing financial year, according to banking analysts. Banks with minimal asset quality issues or exposure to sub-investment grade loans may utilise the funds to boost lending growth or profits.

Siddharth Purohit, analyst at SMC Institutional Equities, said the judgment is positive for banks, not just in this case but for other cases under the Insolvency and Bankruptcy Code. “We can expect higher recoveries which will boost capital levels of banks. In Q3, we will see upgradation in NPAs and hence improvement in asset quality. Banks may also start to look at incremental lending.”

JPMorgan said in a note that the verdict is a “positive for the resolution process in India” and expects more to start happening based on this judgment in other non-performing assets as well. “We believe the event is a positive for SBI and ICICI Bank Ltd. specifically, given the large amount of provision writebacks likely for these two banks.”