The NPAs (Non-Performing Assets) are one of the most formidable problems of Indian Banking sector. The higher the NPA, lesser is the confidence of investors, depositors, and lenders. It also results in poor recycling of funds, which in turn have a damaging effect on the deployment of credit. The non-recovery of loans effects not only the further availability of credit but also financial soundness of the banks.
The NPAs in Indian steel sector
The capital-intensive steel industry is considered as the largest contributor to Indian banking system’s overall NPAs. Last year, in June, RBI’s internal advisory committee (IAC) identified 12 accounts, each having more than INR 5,000 crore of outstanding loans and accounting for 25% of total NPAs of banks.
Following the RBI’s advisory, banks referred Bhushan Steel Ltd., Bhushan Power & Steel Ltd., Essar Steel Ltd., Jaypee Infratech Ltd., Lanco Infratech Ltd., Monnet Ispat & Energy Ltd., Jyoti Structures Ltd., Electrosteel Steels Ltd., Amtek Auto Ltd., Era Infra Engineering Ltd., Alok Industries Ltd. and ABG Shipyard Ltd. to NCLT. These accounts together have total outstanding loan of INR 1.75 lakh crore.
Steel sector’s five major companies Essar Steel, Monnet Ispat, Bhushan Steel, Electrosteel and JSPL have maximum NPA problems with an aggregate debt of INR 1,48,289 crores as on 31 Mar’16.
The key reasons that led to the stress in steel sector are ambitious overseas acquisitions, capacity expansions, and subsequent fall in exports due to protection measures initiated by various countries primarily resulting in the capacity overhang. Thus in an effort to address the problem of steel industry’s NPAs, the ministries of finance, steel, and PMO came together and are expected to clear the major roadblock for banks to lend to the sector.
The pros of NPA recovery for the banking sector
The situation of NPAs in steel sector started improving this year when biggies like JSW Steel, Vedanta, and Tata Steel started acquisition of these debt-ridden companies.
While the Kolkata bench of the National Company Law Tribunal (NCLT) has already approved Vedanta’s resolution plan for acquisition of Electrosteel Steels last month, the NCLT has asked the lenders of BPSL (Bhushan Power & Steel) to consider the bid submitted by the U.K.-based Liberty House for the debt-ridden company. In addition to this the Tata Group has acquired controlling stake of 72.65% in the debt-ridden Bhushan Steel Ltd. for about INR 36,000 crore last week.
With this Tata Steel’s buyout of Bhushan Steel which was the second largest account in RBI’s list of companies for resolution under IBC (Insolvency and Bankruptcy Code), the finance ministry expects banks to write back more than one lakh crores after the resolution of all 12 NPA cases referred to insolvency proceedings by the RBI in its first list.
As and when NPAs get ticked off from the banks’ balance sheets, the profitability of banks improves, their lending power and interest income surges, weighted average risk gets reduced, liquidity position improves, creditability of banks increases and country’s economic growth gets promoted.
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