Supreme Court verdict scrapping coal blocks to weigh on lenders

By Devidutta Tripathy

MUMBAI (Reuters) - The Supreme Court verdict scrapping most coal extraction permits given to companies over two decades has raised concerns that loans to the holders of the permits could turn sour, piling pressure on lenders already battling a rise in bad loans.

The court said on Wednesday that companies will have until the end of March to return most of the so-called coal blocks allocated by the government since 1993, after ruling last month the selective allocation process was arbitrary and illegal.

While the impact of the ruling on lenders is yet to be known, shares in banks including market leader State Bank of India fell in Mumbai trading as investors saw the ruling as negative for the sector.

The crackdown on the coal blocks will put $10-$12 billion of loans at risk, Credit Suisse estimated last month. That would add to almost $100 billion of stressed loans, or about 10 percent of banking assets, in the Indian banking system.

"You can talk about the direction - it's negative," said Saday Sinha, a banking analyst with Kotak Securities. Sinha added it was difficult to quantify the impact at this stage as not all the loans to the companies will turn into bad loans.

State-run lender IDBI Bank Ltd , whose shares closed 5.5 percent lower after the court verdict, has close to 20 billion rupees ($328 million) loan exposure to companies affected by the court ruling, the bank's chairman M.S. Raghavan said.

"Not all will have problems ... We are assessing (the impact)," Raghavan said in a phone interview.

Companies that are set to lose coal blocks will likely have to bid in an auction to win them back. Losing the coal blocks could also mean higher and costlier imports of the raw material used by sectors including steel and power.

State Bank of India, which has previously played down the possible impact of scrapping coal blocks on its asset quality, said the court verdict would remove uncertainty.

"We now look forward for a quick plan of action for ensuring that coal supplies are not disrupted and thereafter a swift and transparent bidding process for reallocation," Chairwoman Arundhati Bhattacharya said in a statement.

Shares in State Bank of India dropped 2.7 percent and the banking sector index <.NSEBANK> closed 1 percent lower, while the main Mumbai market index <.NSEI> ended down 0.19 percent.

($1 = 60.9850 Indian rupees)

(Editing by Sumeet Chatterjee and Mark Potter)