India's banking sector at a turning point, thanks to the SC: Morgan Stanley

SC ruling last week not only paved the way for ArcelorMittal's purchase of Essar Steel India Ltd., but also allowed banks to set the terms of the distribution of sale proceeds among creditors

India’s banking sector may witness a turnaround, after recent rule changes put banks in a better position to get their money back from insolvent companies, according to Ridham Desai, managing director at Morgan Stanley India Co.
 

A Supreme Court ruling last week not only paved the way for ArcelorMittal’s purchase of Essar Steel India Ltd., an Indian steel mill, but also allowed banks to set the terms of the distribution of sale proceeds among creditors. The move to empower banks “has settled several disputes” around India’s bankruptcy law introduced in 2016, Desai said at a conference in Singapore on Thursday.
 

“Last week’s judgment may well prove to be an inflection point for the sector,” Desai said, adding that banks previously were not well-placed to recover loans. “I would be fairly optimistic of the banking sector in India.”
 

Indian lenders, which are saddled with some of the world’s worst bad-loan ratios, are expected to get a boost from increased regulatory oversight of the shadow banking sector as well, he added. The government last week introduced rules to help creditors recover loans due from large shadow lenders.
 

Meanwhile, authorities have also stepped up surveillance of non-banking financial companies of late, seizing control of another institution, Dewan Housing Finance Corp., which has total debt of about $12.5 billion.
 

The Mumbai-based analyst is overweight financials by two percentage points versus the MSCI India Index, with a preference for seven financial firms including HDFC Bank Ltd. and ICICI Bank Ltd. The NSE Nifty Bank Index, a gauge of the most liquid and large-cap banking stocks in the country, has risen 15% this year and is near a record high.
 

Furthermore, the government’s planned capital injection into public sector banks, which account for 65% of the industry, is “the biggest cyclical fix” that will support the sector, according to Desai. In August, the Indian government announced a series of state-bank mergers and a capital injection of 552.5 billion rupees ($7.7 billion) -- its most sweeping bank overhaul in decades -- in a bid to revive the economy.
 

“You should see signs of a new credit cycle in the next 12 months,” Desai said.