Lenders to a clutch of stressed steel companies are looking to initiate the sustainable structuring of stressed assets (S4A) scheme for these firms, two senior bankers told FE. As a first step they have commissioned techno-economic viability (TEV) studies for Bhushan Steel, Visa Steel and Electrosteel; the results would reveal whether these manufacturers qualify for a recast of their loans.
Bhushan Steel’s gross debt amounts to Rs 39,078 crore while Visa Steel and Electrosteel owe banks Rs 3,094 crore and Rs 10,235 crore respectively. All the three exposures have been classified as non-performing assets (NPAs) by banks. Independent TEV studies have been initiated for a couple of other firms too though FE was not immediately able to ascertain the names of these companies.
An S4A plan requires the current cash flows of a company to be sufficient to service at least half the total borrowings. A senior public sector bank executive said a loan recast by way of an S4A might be possible since both demand and prices of steel have looked up in the past few months and the imposition of the minimum import price (MIP) has limited imports.
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Domestic steel production grew 4.6% in April and May this year, higher than the 1.1% reported in the same period of 2015. Following the recent price hikes, domestic HRC prices are now hovering around Rs 29,500-30,500/tonne, close to the MIP- based import parity (Rs 30,600/tonne). However, globally demand could weaken post Brexit, dampening prices, analysts believe.
Meanwhile, lenders have approached Reserve Bank of India (RBI) via Indian Banks’ Association (IBA) seeking changes to some provisions of the S4A scheme. Banks want some elbow room while deciding on the repayment schedule; they want to be allowed to stretch the tenure, if needed, to match future cash flows generated by the firm. Moreover, they have requested RBI for some flexibility to be able to lower loan rates if necessary, since interest rates have been trending down. Further, they would like to be able to reverse provisions made against an account if there is a change in management.
The S4A scheme has been viewed as an improvement over the Strategic Debt Restructuring (SDR) plan since it allows banks to retain the promoters whereas the SDR envisaged bringing in a new set of promoters. While banks have initiated an SDR for more than a dozen firms, they have been unable to rope in new promoters for even one company. Many of these exposures have been classified as NPAs.
The S4A is a more lenient scheme towards lenders because the sustainable debt needs to be not less than 50% of the total debt implying a haircut of 50% or less. The scheme, however, does not permit changes in either the moratorium or the payment terms for either the principal or the interest. Banks are permitted to covert the ‘unsustainable’ part of the debt into equity or redeemable cumulative optionally convertible preference shares (CRPS). To be eligible for the scheme, the projects should have commenced commercial operations and the total exposure (including accrued interest should be more than Rs 500 crore. Moreover, lenders need to have provided for at least 20% of the total loans.
While the sum of bad loans in the banking system stood at Rs 5.9 lakh crore at the end of March, 2016, the loans recast by the corporate debt restructuring (CDR) cell stood at Rs 4 lakh crore. Lenders are estimated to have restructured loans close to Rs one lakh crore via the SDR scheme. Meanwhile, in the Financial Stability Report , released last week, RBI has observed gross NPAs could touch 9.3% in FY17 in a severe stress scenario and 8.5% in the baseline scenario from 7.6% in March 2016.