State Bank of India (SBI) Explores Loan Sale in Hindusthan National Glass
Source and Citation: Article published by ET Bureau in Economic Times on January 19, 2024.
Analysis for a Layman
State Bank of India (SBI) is considering selling its Rs 1,272 crore loans to bankrupt glass bottle maker Hindusthan National Glass (HNG) to asset reconstruction companies (ARCs) amid prolonged insolvency proceedings. HNG has been undergoing insolvency proceedings since 2021, with delays attributed to legal disputes even after the resolution plan was approved in October 2022.
Impact on Retail Investors
For retail investors, the situation highlights the challenges in India’s insolvency processes, with delays causing value erosion for lenders and potential haircuts for loans sold to ARCs. Protracted legal disputes and delayed resolutions have become common, impacting the recovery outcomes for lenders. Retail shareholders are encouraged to advocate for reforms such as dedicated benches and stringent costs for frivolous litigations to uphold the sanctity and speed of insolvency processes.
Impact on Industries
In the BFSI sector, the sale of distressed loans to ARCs with potential haircuts inhibits optimal capital recycling, delaying the restart of productive credit cycles for growth sectors. Prolonged litigation and delays in resolving cases like HNG set discouraging precedents, affecting the competitiveness of industry sectors. Delays in resolving financial distress cases impact overall manufacturing sectors, leaving unviable firms in limbo and hampering industry competitiveness until final outcomes emerge.
Long Term Benefits & Negatives
Over the longer term, India must benchmark global best practices in legal processes related to insolvency and contracts enforcement to improve its ease of doing business rankings. Legislative reforms are required to restore the originally envisioned speed and certainty of insolvency processes. Severe costs for appeals without merits can deter holdouts, and success stories of expedited acquisitions, such as Tata Steel acquiring Bhushan Steel, should set examples to emulate. Otherwise, recurrent delays will foster value erosion and hinder the overall eco-system.
Short Term Benefits & Negatives
In the short term, SBI’s move indicates that regulators may not prevent lenders from offloading loan exposures to alternate capital providers like private equity funds or ARCs in case of indefinite resolution processes. While this presents a transient opportunity for alternate capital providers to enter at attractive valuations, it also deters serious bidders due to the fear of unending litigations. Delays in insolvency cases temporarily benefit distressed asset investors but erode Enterprise Value outcomes over the long run, impacting the overall eco-system.
Potential Gainers and Losers from SBI’s Hindusthan National Glass Loan Sale
Indian Companies Likely to Gain:
- Asset Reconstruction Companies (ARCs): Companies like Edelweiss ARC, JM ARC, and RECO ARC could be interested in purchasing Hindusthan National Glass loan from SBI, potentially leading to increased business and fee income. Positive market sentiment if successful in acquiring and resolving the bad debt.
- AGI Greenpac: While facing litigation delays, confirmation of SBI’s intent to sell the loan could potentially expedite approval of their resolution plan and acquisition of HNG, leading to positive market sentiment.
Indian Companies Potentially Impacted:
- State Bank of India (SBI): Selling the loan will result in immediate loss of interest income and write-down of a portion of the debt, potentially impacting profitability. However, it will free up capital and reduce non-performing assets, leading to neutral or slightly negative market sentiment depending on the final sale price.
- Other lenders to HNG: The sale of the loan by SBI might set a precedent, impacting their recovery expectations and potentially influencing their future lending decisions. Market sentiment could be neutral or slightly negative depending on individual exposure and resolution progress.
Global Companies Likely to Gain:
- Global debt restructuring or recovery firms: Companies with expertise in distressed asset management might see potential business opportunities in advising or partnering with ARCs on the HNG loan resolution. Potential for positive market sentiment if they contribute to a successful resolution.
Global Companies Potentially Less Impacted:
- International lenders to HNG: Global banks or financial institutions involved in the loan might already have factored in potential losses based on the bankruptcy proceedings. Overall market sentiment likely minimal impact.
Important Note:
This analysis is based on the provided information and current market conditions. It is not financial advice and investors should conduct their own due diligence before making any investment decisions.