The Gujarat High Court on Monday dismissed Essar Steel India’s appeal against a Reserve Bank of India (RBI) order that asked creditor banks to start insolvency proceedings against the steelmaker, lawyers on the case said.
The ruling is a boost to the government, which in May tweaked Indian banking laws to empower the RBI to tackle the country’s bad debt issue, allowing the RBI for the first time to direct lenders to force defaulters into insolvency courts.
The ruling paves the way for the start of bankruptcy proceedings against Essar Steel, although the company could appeal the ruling. The company did not respond.
Essar Steel had argued that it should have been given an opportunity to present its case before the Reserve Bank of India decided to include the company among 12 defaulters that would be referred to bankruptcy court.
Essar had also argued that proceedings could result in the company’s demise when it was “almost in the stage of revival” and working to resolve its debt problems, according to court documents.
The RBI had in June asked lenders to start insolvency proceedings against 12 companies, as part of new powers it gained this year to help the country cut down on the more than $150 billion in stressed assets in the banking system.
Essar Steel owes lenders around Rs450 billion ($6.99 billion), of which Rs316.7 billion had become non-performing as of March 31, 2016.
Cracking down on bad loans, the RBI last month identified 12 accounts for insolvency proceedings with each of them having over Rs50 billion of outstanding loans, accounting for 25 per cent of total non-performing assets (NPAs) of banks.
Indian banking system is saddled with sticky loans. Bad loans at state-run banks have increased by more than Rs1 trillion since April 2016 to Rs6 trillion as of December 31. This goes up to Rs10 trillion when those of private and other lenders are added on.
The stressed assets of Indian banks are likely to increase to 15 per cent of total loans by March 2018 amid rising requirements for regulatory capital until 2019, S&P Global ratings said in a report recently.
According to industry body Assocham study, the move has the potential to bring down the non-performing asset (NPA) levels and “significantly improve” the financial health of banks.
“Somewhat bitter medicine came in the form of the Ordinance promulgated by the President in May,” Assocham’s Secretary General DS Rawat said.