Essar Oil deal to pull StanChart out of loan mess

StanChart that had lent $2.5 billion dollar to the Essar group will see its stressed asset problem come down significantly

Standard Chartered Bank India, struggling with bad loans, is likely to be one of the biggest gainers from the Essar Oil-Rosneft deal. The lender that had given $2.5 billion to Essar Group will see its stressed asset problem come down significantly, agree analysts.

By reports, the bank had put $5 billion of loans on its watch list. “This means that it is possible that a large quantum, if not exactly half of its non-performing assets (NPAs), of problems may get resolved. The bank had undergone a restructuring exercise and this may come as a big help,” said an analyst with a foreign brokerage house.

Standard Chartered Bank declined to comment on the benefits from this deal. Rosneft and Netherlands-based Trafigura Group have acquired 98 per cent stake of India's second-largest oil refiner Essar Oil  in all cash-deal at an enterprise valuation of Rs 72,800 crore ($10.9 billion).

With rising NPAs, the bank’s balance sheet had suffered a setback. Standard Chartered Bank India reported a loss before tax of Rs 6,729 crore ($981 million) in 2015, against a profit of Rs 3,848 crore ($561 million) in 2014. This was mainly caused by a steep increase in impairment losses on loans and other credit risk provisions that jumped eight times to Rs 9,198 crore ($1,341 million) from Rs 1,173 crore ($171 million) a year ago.

In fact, not only  Standard Chartered but several other lenders also stand to gain from this deal. Some other banks that will see their bad-loan problems easing with this deal include State Bank of India, ICICI Bank, Punjab National Bank, and IDBI Bank.

Motilal Oswal pointed out, "The Essar deal could help to resolve 10 per cent of the system’s non-performing loans (NPL). The deal will lead to a gain of Rs 40,000-45,000 crore (pre-tax) for Essar Oil’s promoters."

Motilal Oswal added that Essar Group’s total debt to the system was Rs 1.1-1.3 lakh crore, of which Essar Oil (always a standard account) accounted for Rs 28,000 crore.

"Most banks have declared their exposure to Essar Steel as non-performing and if the promoters infuse capital, the banks would be willing to take some haircut under the S4A scheme,” Motilal Oswal said. “This would be the largest case of non-performing assets resolution for the system (about 10 per cent of system’s bad loans)," Motilal Oswal said.