NPAs IN SECTOR WILL DISAPPEAR: STEEL SECY

The government’s move to address the issue of non-performing assets (NPAs) in the banking system is likely to benefit the steel sector in a major way, with the ministry of steel expecting that the NPAs in the segment would “disappear” by the end of FY18. Banks are expected to offer a combination of features of various restructuring schemes to help companies move out of the distress they are in. Aruna Sharma, Union steel secretary, said once the “re-phasing process was complete, the NPAs itself will disappear” and “new lending” would start.

The government’s move to address the issue of non-performing assets (NPAs) in the banking system is likely to benefit the steel sector in a major way, with the ministry of steel expecting the NPAs of the segment would “disappear” by the end of 2017-18.

Banks are expected to offer a combination of features of various restructuring schemes to help companies move out of the distress.

Speaking to Business Standard, Aruna Sharma, Union steel secretary, said once the "re-phasing process was complete, the NPAs itself will disappear" and "new lending" would start.

According to a report of CARE Ratings, the gross bank credit to the iron and steel industry as of March 2017 stood at ~3.195 lakh crore, which has increased at a compound annual growth rate of about 6 per cent between FY15 and FY17.

Sharma said the steel sector’s bad loans comprised 28 per cent of the NPAs of the banks. About 36.94 per cent of the total loan outstanding as of March 2016 had turned into NPAs, according to the government data

“We would be the first in the queue to reap the benefits of the Ordinance,” Sharma said. The government last night notified an Ordinance to amend the Banking Regulation Act, giving more powers to the Reserve Bank of India to tackle bad loans and non-performing assets.

As a step to further cushion the stressed steel sector, the government has allowed loan restructuring by the aggrieved companies through a mix of instruments including S4A (scheme for sustainable structuring of stressed assets), statutory debt restructuring, and re-phasing under the 5/25 scheme.

Under S4A, large-ticket loans are restructured by separating a sustainable loan from an unsustainable loan. The lenders are required to make this classification. A sustainable level of debt is one which the banks think the stressed borrower can service with its current cash flows.

The 5/25 scheme allows banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years.

Each restructuring would be accompanied by a forensic audit so that there is no diversion of funds. Monitoring would be done by an oversight committee. "All this should help in easing stress in the sector and trigger expansion," the steel secretary said.

The steel industry in 2016-17 started recovering from the previous three years’ downturn. Sharma said during 2016-17 leading steel makers had shown a positive EBITDA (earnings before interest, taxation, depreciation, and amortisation). "This makes for a strong case to handhold them at this moment and use three RBI formulations to work out modalities so that the NPA recovers and the banks start getting their money," she said.

Based on these parameters, discussions were held with bankers as well as the industry. The companies have initiated loan restructuring and as a result of that banks have started getting their money back.

The central government’s interest in reviving the steel sector can be gauged from the fact that the Union Cabinet earlier this week cleared a National Steel Policy, aimed at boosting sales of debt-laden companies.

To meet the target set by the government, CARE Ratings sees an additional investment requirement of ~10 lakh crore for the industry to reach the capacity of 300 million tonnes by 2030. This implies annual credit of about ~77,000 crore between FY18 and FY30. The industry would have to rely on the banking system and the corporate bond market.

"However, as per RBI’s guidelines, the stressed advanced ratio was the highest for basic metals and their products at 42.9 per cent as of September 2016. Therefore, the banking system hasn’t been lending much to the industry which has to depend progressively on the bond market. For this the companies in the industry will need to have a strong credit standing," the CARE Ratings report said.

Besides the steel policy, the Cabinet cleared a policy to give preference for domestic steel in infrastructure projects. "The preferential policy will apply to projects where the funding is being done by the Union or the state government," she said. However, the preferential push might lead to increased cost, the Engineering Export Promotion Council (EEPC) of India said on Friday.

“With steel prices in India ruling 15-20 per cent higher than the global level, the preferential procurement of the basic raw material for the infrastructure and the government projects from domestic manufacturers would further push up the cost, making it extremely difficult for engineering exporters, particularly in the SME sector, to survive,” EEPC India Chairman T S Bhasin said in a statement.

Sharma said each of the stressed sectors would have a monitoring committee of bankers, which would get inputs from the administrative ministry on the trends in the sector.

India Ratings and Research said in its report that the volatility in input cost, mainly coking coal prices, was likely to keep the steel sector spreads (difference between price and raw material cost) under pressure in FY18.

The price of coking coal, a key raw material, started going up in April after softening from the elevated levels of November 2016.

India has become the thirdlargest steel producer globally, contributing about 2 per cent of the country’s GDP with production of 91.9 million tonnes and a capacity of 122 million tonnes in FY16. Production crossed the 100 million tonnes in FY17.

“THIS MAKES FOR A STRONG CASE TO HANDHOLD THEM AT THIS MOMENT AND USE THREE RBI FORMULATIONS TO WORK OUT MODALITIES SO THAT THE NPA RECOVERS AND THE BANKS START GETTING THEIR MONEY” ARUNA SHARMA, Union steel secretary