And in the process, banks will have to take steep haircuts of around 56% of the loans because of the unsustainably high debt of these companies, according to a Credit Suisse report.
There are five steel companies in the list of 12 identified by the Reserve Bank of India which faces bankruptcy proceedings under the new Insolvency & Bankruptcy Code (IBC). These five companies Monnet Ispat, Essar Steel, Bhushan Steel, Electrosteel and Bhushan Power & Steel together make up more than Rs 1 lakh crore of loans.
More significantly, these companies contribute 22 million tonnes or 17% of India’s total steel capacity.
“The steel sector accounts for 20% to 30% of bank NPAs and the “Referred 5“ contribute 50%80% of the steel sector NPAs. A resolution in these five can, therefore, result in a 100-200 basis point reduction in gross NPAs. However, with current provisions only around 30%, we estimate banks will need Rs 35,000 crore of additional provisions,“ Ashish Gupta and Ravi Shankar, research analysts at Credit Suisse, stated in a note.
One basis point is 0.01 percentage point.
The iron and steel sector makes up about 12% or Rs 2.93 lakh crore of the Rs 25.47 lakh crore industrial loans. Of the five companies, Monnet Ispat has already been taken to bankruptcy court. As the other four are also being dragged to court, it could hit steel production and boost prices in the short term. The distress in the five RBI-shortlisted companies could also provide an acquisition opportunity for the better placed ones, including government-owned SAIL and Jindal Steel and Power. Tata Steel and JSW are already operating at more than 90% capacity utilisation.