Fresh demand needed to enable steel sector pay off loans

By: | Updated: March 29, 2016 2:15 AM

The precarious scenario on the loan repayment ability of steel producers has prompted the government to introduce a series of supporting measures in favour of the industry, like customs duty enhancement and imposition of safeguard duty of 20% on HRC

Outstanding bank loans to the steel sector are currently making headlines. As a lender each bank has a standard policy framework under which loans to the corporate sector are granted and the debtor has to fulfill a few criteria in order to become eligible for the loan. The scanning of the environment facing the sector in the next few years is also an important yardstick for the banks to agree for extending the credit. The business scenario that is likely to emerge in the coming years for the sector that would determine the return of investment by consistent rise in market realisation remains the most critical factor to determine if the loans become non-performing or not at the time of repayment. In the pre-disbursement phase, the banks have every right to reject the proposal on grounds of non-enabling circumstances that would severely restrain the debtors to repay the loans as per schedules.

This implies that the inability to assess the business outlook appropriately by the lenders is one of the major factors responsible for this disastrous scenario. Although it may be said in favour of the financial institutions that mismatch between the projected business scenario and the actual hinges on a number of enablers presumed to have been activated by domestic policy prescriptions and external events, the lenders need to work out a sound contingency plan (other than for the wilful defaulters) in case things do not happen the way they have been predicted. The 5/25 credit restructuring policy is one such innovative scheme, but must be supplemented by others to prevent the alarming proportions of the NPAs. It is reported that around 10% of the total credit has become NPAs on account of the steel sector alone which owes more than R2 billion to the banks.

Compared to this, China is currently having around $1.5 trillion loans on behalf of steel industry. The government plan to shift the policy from heavy industry to light industry and service sector and the planned journey to promote consumption as against investment in the next decade along with special thrust to eliminate polluting industries would make the loan repayment process extremely difficult. However, the role of the Chinese government in coming to the rescue of the central bank and other commercial banks in defining the character of unpaid loans is much more pervasive and rigorous as compared to its Indian counterparts.

No doubt the above precarious scenario on the loan repayment ability of Indian steel producers has prompted the government to introduce a series of supporting measures in favour of the industry like customs duty enhancement, imposition of safeguard duty of 20% on HRC, introduction of MIP on 173 steel products and the issuance of mandatory quality certification of most steel categories, all these to restrict the steady flow of steel imports from China, Korea, Japan and CIS.

With fresh booking of steel imports virtually stopped except those under Advance Licences, indigenous price level — both for Long and Flat — has begun to rise from the lowest levels reached by January-end. As the producers are gradually raising the steel prices  and trying hard to achieve a reasonable Ebitda, the good news is that global prices also have commenced journey upwards. The Chinese export offer that was $260-$270/t fob is currently hovering around $360/t fob.

Similarly the global prices of scrap, semi- finished steel, rebars, plates, CRC, galvanised and coated steel, pipes have gone up in the recent period. It is noted that rebuilding of inventory for merchant use and for further processing taking advantage of cheap prices of steel are the two primary reasons leading to raising the global prices rather than a marked uptick of demand from the end-using sectors and therefore may not be sustainable.

Price rise in the domestic market must not be the only offshoot of the availability of the imported steel market (around 6-7 million tonne) to domestic producers and must be sustained by enhancing the fresh demand from the construction, urban and rural infrastructure, real estate, oil and gas, roads and rail network building and manufacturing sectors.

This would enable the industry to pay off loans to the banks and carry on the current brown field expansion plans and re-orient the green field plans for capacity augmentation. The sustainability of this process critically hangs on enhancing the public investment in infrastructure that would usher in private corporate investment also. The growth in per capita income in the country raises hope of more household demand for consumer goods sector.

The author is DG, Institute of Steel Growth and Development. Views are personal.

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