Sale of debt-laden Bhushan Steel, one of the largest non-performing assets (NPAs) with the country's banks, is positive. It will help improve banks’ asset quality metrics and set a precedent for resolution of other NPAs in steel, Moody's Investors Service said.
On Wednesday, Tata Steel announced it had emerged as the highest bidder to acquire a controlling stake in the Neeraj Singhal-promoted company. It did not disclose the purchase price or other terms and conditions. Media reports, however, dropped clear hints that the purchase price could result in a haircut (write-off) of around 25 per cent for the lenders to Odisha-based Bhushan Steel, Moody's reported. The Reserve Bank of India has asked banks to provide a minimum of 50 per cent of their respective loan amounts by March 2018 for all the cases referred to the National Company Law Tribunal for insolvency resolution. A haircut of less than this cover will result in a writeback for the banks and improve their profitability, observed Moody's.
“In addition, depending on exposure of individual banks to the account, we expect banks’ proforma on non-performing loan ratios, as of December 2017, to improve by 50-80 basis points, as the exposure will be converted into a standard asset,” Moody's stated.
“We expect most rated Indian banks to have some exposure to Bhushan Steel and the resolution will particularly benefit State Bank of India, the lender to the consortium of lenders to Bhushan Steel,” said Moody's report.
About 40 per cent of Indian banks’ NPAs are undergoing resolution under NCLT starting July 2017. The steel sector has the largest share, about 35 per cent of these NPAs. Within the steel sector’s non-performing loans, Bhushan Steel is the largest account, about 40 per cent share.
Meaningful resolutions of NPAs would significantly improve banks’ asset quality metrics. The effect on profitability and capital will depend on haircuts that lenders take in the resolution process, said Moody's.
In this context, the Bhushan Steel transaction is a milestone. It is the first and largest of the first list of 12 NPAs under the NCLT resolution process.
Bhushan Steel has annual operational capacity of 5.6 million tonnes in Odisha and is a high-margin business, catering to the domestic and global automobile market.
The company had debt of Rs 481 billion as of March 31, 2017. Apart from Tata Steel, Bhushan Steel had received resolution plans from its employees and the Sajjan Jindal-led JSW Steel.