State Bank of India, ICICI Bank, Canara Bank and Punjab National Bank stand to benefit most from the Supreme Court judgment in the Essar Steel insolvency case, with shares of most public sector banks rising as much as 3 per cent Monday, marking the second day of a surge in share prices since the Court order on Friday.
On the same day, the Central Government also paved the way for the resolution of financial service providers through the NCLT mechanism under the IBC, by providing for “a generic framework for insolvency and liquidation proceedings of systemically important FSPs other than banks”.
How much money will the banks recover?
Banks are expected to recover 90 per cent of their exposure to the Essar Steel account, with the State Bank of India recovering nearly Rs 12,000 crore out of its Rs 13,220 crore outstanding. This compares with only 60 per cent they would have recovered earlier as per the order of the National Company Law Appellate Tribunal . As many banks including SBI have made full provisions for their exposure, recovery of these bad loans would help them write back provisions and boost profits. Apart from SBI, Canara Bank and Punjab National Bank has large exposure of Rs 3798 crore and Rs 2936 crore, respectively to Essar Steel. Union Bank of India, Bank of India and Corporation Bank, which have exposure of Rs 2122 crore, Rs 1985 crore and 1566 crore, respectively, will also gain through recoveries. The impact on each bank’s profitability will depend upon how much provisioning have they done against their exposure.
What does it mean for the Insolvency and Bankruptcy Code?
The Supreme Court’s order is being seen as bringing the rigour and momentum back into the IBC as an effective tool to deal with stressed assets in the economy. These twin developments — the Court order and government move on financial service providers — bode well for the banks battling high NPAs. While banks will recover money resolution process in large accounts, likely stress from NBFC and telecom accounts will remain a drag.
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