Banks may be compelled to write off loans availed by steel companies that are now debt-ridden and undergoing bankruptcy proceedings. This implies that banks may have to bear steep haircuts of around 56% due to the high debt that these companies are smothered in.
According to the Reserve Bank list, out of the 12 companies facing bankruptcy proceedings, 5 are part of the steel industry. Monnet Ispat, Electrosteel, Bhushan Steel, Essar Steel, and Bhushan Power & Steel together contribute to a debt of more than Rs.1 lakh crore.
A significant fact is that these companies contribute above 22 million tonnes of the steel to the Indian steel industry, making up 17% of the total capacity.
Research analysts at Credit Suisse stated that the steel sector contributes to 20%-30% of bank NPAs. The debt-ridden companies account for 50%-80% of the NPAs in the steel industry. A resolution of these companies can amount to a reduction in basis points by 100-200. Since current provisions are only close to 30%, banks may need Rs.35,000 crore of additional provisions as well.
The iron and steel industry makes up Rs.2.93 lakh crore, i.e., 12%, of the Rs.25.47 lakh crore industrial loans. Out of the 5 companies that are debt-ridden, Monnet Ispat has already approached the court for bankruptcy. Since the remaining 4 are also being taken to court, the steel production in the country could be heavily hit. Additionally, the situation could provide an opportunity for acquisition for companies that are faring well, such as the government-owned SAIL and Jindal Steel and Power. JSW and Tata Steel are currently operating at capacity utilisation of more than 90% as well.