Tata Steel's purchase of bankrupt Bhushan a milestone for India

The deal is a victory for the first company to successfully emerge from India's strict new insolvency and bankruptcy regime

A steel blast furnace. Tata Steel has bought out Bhushan Steel. Friedemann Vogel/EPA

Tata's acquisition of a bankrupt steel company on Friday is seen as a major victory in the Indian authorities' war against the problem of bad loans, which are weighing on the country's banks.

Tata Steel, part of the sprawling Tata conglomerate, announced its buyout of amajority stake for 364 billion rupees (Dh19.65bn) in Bhushan Steel, which is the first company to successfully emerge from India’s strict new insolvency and bankruptcy regime, aimed at tackling the problem of bad debt.

India’s banks are struggling under bad loans which amount to about $150bn, according to data from the Reserve Bank of India, with state-owned lenders being the worst hit.

Bhushan Steel, India’s largest manufacturer of auto-grade steel, based in New Delhi, is one of the first major defaulters to be targeted under India’s new insolvency and bankruptcy code. It is among a dozen defaulters that have been referred by the central bank for swift resolution under the bankruptcy law.

Piyush Goyal, the interim finance minister in India, described Tata’s buyout of the company as “a historic breakthrough in resolving legacy issues of banks”.

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“Lenders recovered almost the entire principal loan of Bhushan Steel through [a] transparent bid by Tata Steel and also got a12 per cent stake in the company,” he said.

“This is a record step towards resolving the legacy of unprecedented amount of bad bank loans inherited by this government,” Mr Goyal added.

State Bank of India and Punjab National Bank, India’s two biggest state-owned lenders, had the highest exposure to the debt-ridden steelmaker.

If banks can continue to recover non-performing assets in this way, it is seen as a major step towards boosting lending to companies and helping to spur economic growth in the country.

The steel and infrastructure sectors have played significant roles in adding to the mounting bad debt in India.

The government towards the end of last year was forced to announce as $32bn recapitalisation plan for the banking sector because of its bad debt burden.