The proposed sale of troubled Indian steelmaker Bhushan Steel Ltd. is credit positive for the country's banks as it will help improve their asset quality metrics, Moody's said.
Indian lenders took Bhushan Steel to the country's National Company Law Tribunal for a resolution under the Insolvency and Bankruptcy Code in 2017 after the company failed to service its debt. The steelmaker is one of the banking sector's 12 large nonperforming loans, accounting for about 40% of the total NPLs of the country's steel sector, according to Moody's.
The rating agency's statement came after Tata Steel Ltd. said March 7 that it emerged as the highest bidder to acquire a controlling stake in Bhushan Steel. While Tata Steel did not disclose financial terms of the deal, media reports said the purchase price could result in a haircut of around 25% for Bhushan Steel's lenders.
Moody's said the sale will help improve banks' asset quality metrics and set a precedent for the resolution of other bad debts held by banks, particularly in the steel sector.
The Reserve Bank of India asked banks to provide a minimum of 50% of their respective loans to Bhushan Steel by March 2018. The resolution of the account will help several Indian banks, including State Bank of India, Moody's said, adding that the effect on profitability and capital will depend on the haircuts that lenders take in the resolution process. A haircut of less than their provisioning cover likely will result in a write-back of provisions for the banks.
If other steel assets are resolved with similar haircuts, many banks should expect a positive effect on profitability and capital, Moody's added.
