On Friday, the SC upheld the committee of creditors (CoC) decision to hand over control of 10 million tonne Essar Steel plant to a joint venture of European ArcelorMittal and Japanese Nippon Steel Corp.
The much-awaited order came 830 days after the company was referred to the bankruptcy courts, and will result in financial creditors including banks recovering 92% of their Rs 42,000 crore dues from the company.
Since many banks had made a 100% provision on this account, lenders’ profits are likely to be boosted from this recovery in the quarter-ended December. But new signs of stress from sectors such as telecom will keep bank profits under check, analysts said. “The Essar judgement is a big positive and will no doubt boost bank bottom lines but in the near to medium term provisions will remain elevated from ageing related provisions from old accounts in power, infrastructure and large corporate segment. There is also new stress emerging from sectors like telecom and there are companies like DHFL where resolution has been stalled and there are allegations of fraud which will need more provisions,” said Lalitabh Shrivastawa, VP, research, Sharekhan by BNP Paribas.
Vodafone Idea and Bharti Airtel, two of the top three telecom companies, reported record losses in the quarter ended September hurt by a brutal price war unleashed by Reliance Jio and due to provisions they had to make to pay dues to the government after the Supreme Court upheld the government contention to include revenue from the non-telecom business while calculating the total revenues for these companies. “This has now become a matter of survival for these companies. The government has to urgently step in and prevent them from going under because telecom as a business has social and infrastructural ramifications. For banks, this means a new headache in terms of provisions,” said a private sector bank executive.
Indeed, the RBI data show that banks have a Rs 1.15 lakh crore exposure to telecommunications as of September 2019, up 25% from Rs 91,946 crore a year ago. “These loans are currently being paid, but the question is given the situation of these companies how long can banks ignore this huge exposure. This is a serious issue and probably needs government intervention to solve it,” said Anusha Raheja, analyst at LKP Securities.
Besides the old accounts, there’s also stress in non-banking finance companies, some media groups and large groups such as Anil Ambani-controlled Reliance Group which may need more provisions.