India Banks Warn of Potential ‘Severe Plunge’ in Recoveries After Ruling
The ruling has placed secured creditors like banks at par with unsecured ones such as vendors to the insolvent company.
(Bloomberg) -- A group of lenders led by State Bank of India has filed a case in the nation’s Supreme Court seeking to annul a ruling that gives almost equal rights over the country’s largest distressed steel mill’s obligations to lenders and its 1,936 vendors.
Earlier this month an Indian bankruptcy court, that allowed ArcelorMittal’s $6 billion purchase of Essar Steel India Ltd. said the money has to be shared proportionately among all creditors. The judgment will enable vendors such as Associated Road Carriers Ltd. to get 60% of its 11.2 million rupees ($163,000) of dues, while State Bank of India, which lent 132 billion rupees against collateral, will be entitled to get 60.7% of the loan.
The decision to place secured creditors like banks at par with unsecured ones such as vendors to the insolvent company, would lead to a “severe plunge” in the rate of recoveries and expose the banks to “grave financial distress,” the creditors said in court filings seen by Bloomberg.
Banks are joining foreign funds including SC Lowy in predicting risks from the Essar Steel India Ltd.’s sale to attempts for cleaning up one of the world’s worst pile of soured debt. Lenders claim that the tribunal’s ruling may lead to higher lending rates with increased risk of capital, resulting in further unavailability and inaccessibility of credit in the market.
To read about how Essar ruling will deter India from bad-loan cleanup
“This will result in serious damage to the Indian Economy as a whole and dilapidate the entire banking system,” lenders said in the petition. Further distress in banking may force the government to make contributions to maintain required capital adequacy, they said.
To be sure, banks are not opposed to the sale of Essar Steel to the company controlled by tycoon Lakshmi Mittal but are against redistribution of funds ordered by the tribunal and taking away of lenders’ powers in making a commercial decision about bids during the insolvency resolution process. A spokesman for SBI didn’t immediately respond to a phone call and email seeking comments.
The banks are seeking an immediate stay on the National Company Law Appellate Tribunal’s ruling. The Supreme Court has not yet allotted the case date of hearing.
--With assistance from Swansy Afonso.
To contact the reporter on this story: Upmanyu Trivedi in New Delhi at utrivedi2@bloomberg.net
To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Anto Antony, Arijit Ghosh
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