Public sector banks were the key gainers on Friday after the Supreme Court of India said the resolution of Essar Steel would proceed as per the October 2018 plan, clearing the way for ArcelorMittal to acquire the bankrupt company. The Nifty PSU Bank itself gained nearly a percent on top of 3.3 percent gains. The banking shares continued its rally on Monday.
RBI had directed banks to refer 12 systemically large non-performing assets (NPAs) to the National Company Law Tribunal (NCLT) and Essar Steel was one of them having Rs 49,500 crore exposure to financial creditors and Rs 19,700 crore to operational creditors.
The court?s landmark judgment sets forth two important precedents which are significant positives for future IBC-led resolutions;
- Financial creditors are to be given precedence over the operational creditors (ex-workmen and employees)
- NCLT cannot dictate distribution of recovery proceeds, which are determined by the
Committee of Creditors.
Now, after the court judgment, recovery for banks in the case will be closer to 90 percent against 60 percent earlier. The judgment established Committee of Creditors’ (CoC) primacy in allocating future proceeds from settlements. SBI could have a recovery of around Rs 12,000 crore as suggested by COC. Healthy recoveries were also expected for Bank of Baroda, Canara Bank and PNB. It expects banks to have a high provision cover (in some cases 100 percent) on this exposure, given Essar has been an NPA for the sector since March 2016 ? hence, most of the loan recovery should flow through the P&L as provision writebacks / recoveries from written-off accounts.
We remain positive on SBI and ICICI Bank, which would be biggest beneficiaries in resolution of IBC (insolvency and bankruptcy code) cases, including Essar Steel.