The creditors, which include the country's biggest bank State Bank of India, will also appoint three directors to Bhushan Steel's board, Punjab National Bank, which leads a group of lenders, said in a statement.
The Central Bureau of Investigation (CBI), India's top crime fighting agency, this month detained Bhushan Steel's managing director over allegations of offering to bribe a senior executive at the Syndicate Bank Ltd in exchange for loans. Syndicate Bank Chairman Sudhir Kumar Jain has also been detained.
Family-run Bhushan Steel has denied any wrongdoing and said it has so far been able to service loans.
Lenders found Bhushan Steel's operations "satisfactory", according to the statement. However, as a "corrective action plan" the banks would appoint a top auditor to conduct a "forensic audit" of Bhushan, and another to monitor its cash flow on a daily basis.
The lenders will also appoint an engineering firm to monitor the operations of Bhushan and projects under expansion.
Nittin Johari, finance chief of Bhushan Steel, did not immediately respond to calls seeking comment.
While two years of less than 5 percent economic growth has led to a surge in bad loans, part of the bad debt has also been blamed on poor scrutiny. Bad loans in Indian banks have surged to 4 percent of the total as of March, from just above 2 percent as of March 2012, according to central bank data.
A central-bank appointed committee in May called corruption in state banks a major public policy concern. The committee has recommended the government cut its stake in these banks to below 50 percent.
Bhushan Steel shares fell 5 percent, their maximum daily limit, on Monday. Since the bribery allegations came to light in early August, the stock has lost more than 60 percent of its value, making it the worst-performing metals and mining stock globally, according to data compiled by Thomson Reuters.
The lenders also asked Bhushan to cut debt by bringing in equity and sell some non-core assets, although that would not be immediate. Bhushan's board last week approved selling shares to raise up to $1 billion but has not set a timeline.
Bhushan Steel last week posted a $23 million loss for the three months to June that was its third straight quarterly loss. Its net profit plunged to $10 million in the year to March 2014 from $171 million two years ago, while net debt jumped to $5.86 billion from $3.49 billion, according to a company presentation.
The company's net debt was nearly 13 times its operating profit for the year ended March, compared with nearly 7 times two years earlier. ($1 = 60.7650 Indian rupees)