One of the major irritants in the growth journey of Indian steel industry seeking an augmentation of steel capacity to cater to the emerging demand from various end using sectors has been the poor record of repayment of loans taken from the banks and other financial institutions. Out of the total loans to the industry, the steel sector has a share of 10.24% (Rs 3.1 lakh crore). It is reported that the stressed assets of steel sector out of the gross NPAs comprise around 29.38% and stands at Rs 1.5 lakh crore. In China the financial liabilities of the banks and financial institutions to the steel sector consisting of SOEs and SMEs are also enormous. In fact many of the provincial governments in China have already converted a part of the loans into equity of the enterprises which are mostly SOEs.
The financial liabilities of SMEs are a major worry as a large number of them are served notices for violation of environment norms and therefore need to be closed their operations. Under the current subdued market conditions and the continuing economic restructuring that is taking place in China, the demand for conventional standard grades of steel is on the wane and the suppliers of these grades of steel from induction furnaces and other SMEs that are environment polluting would be facing a huge problem of survival.
After a series of financial restructuring schemes such as 5/25 schemes, strategic debt restructuring schemes, conversion of loans by the lender groups into equity, the issue of stressed assets and NPAs became the sole indicator of the banks’ ability to extend loans to steel sector in the country not only for capacity expansion but even for meeting the working capital requirements and participation costs in the bidding process of acquiring fresh mines of coking coal and iron ore.
Apart from forming an oversight committee on bad loans, RBI has now come out with a list of 12 major defaulters in steel, infrastructure, auto component sectors to take appropriate steps. Already the four major creditors in the steel sector, namely, two Bhusan groups, Electrosteels, Essar steel with a combined debts of Rs 1.29 lakh crore have been referred for insolvency proceedings under the Insolvency and Bankruptcy Code to National Committee for Law Tribunal by SBI, the lead lender for three cases and PNB for one (Bhusan Steel and Power).
As per the norm, if three-fourths of the lenders are convinced of a revival plan, the deadline of six months can be extended by another three months, else an automatic process of liquidation would commence. Indian steel industry had passed through an agonising period in FY15 and FY16 when the government lent a helping hand to the ailing industry suffering maximum losses including fall in profitability and drop in market share from cheap and dumped imports from China, Korea, Japan and Russia by imposing MIP, Safeguard and AD duties.
Fortunately, the global finished steel prices also improved on the back of a surge in coking coal and iron ore prices in the following years. The profitability indices improved for steel sector in FY17 and are continuing. It should provide some relief for the other beleaguered steel producers. Essar steel has ramped up its steel production from 3.8MT to 5.6MT in FY17, a 47% growth over last year against a capacity of 10MT. It has been able to create a niche market for special grade Plates in the defence sector and increasing supplies of high grade CR for the auto sector.
Its Pellet plant is enhancing the production and the supplies of natural gas to the plant are slowly getting restored. It had proposed fresh equity provision of around Rs 2,500 crore along with conversion of a part of bank loans to equity to reduce promoters’ stake. A lot depends on convincing the lenders of a sound and robust revival plan. Like in other countries, the latest development may rekindle the consolidation and merger process in Indian steel sector, including the infusion of foreign capital.
Earlier, we had witnessed the mega ticket investment plans of Arcelor Mittal and POSCO not materialised due to land acquisition and raw material sourcing issues. The market potential for Indian steel industry is indeed bright with gradual increase in global prices and therefore the loan restructuring process by the banks would unleash abundant opportunities for the investors, both in the country and abroad.