Reserve Bank of India Gives Steelmakers a Debt Lifeline with 5/25 Plan

Contrary to the belief that Indian steelmakers are well off as compared to those in other economies, it’s just not the case.

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For the last three years, Indian steel companies, including market leaders such as Tata Steel Ltd., have been hammered from all sides. Low consumption, dropping prices, a weak economy and cheap imports have all combined to push many of them into debt. The plunge continues, and some financial analysts have now forecast that even an expected rate of economic growth in India of 7-8% may not be enough to bring the spiral to a halt.

According to one report, the total borrowings by “stressed” steel companies was estimated to be $31 billion. Now the fear is that many of them will be unable to ever repay their loans, leaving banks that lend to steel companies exposed and facing financial ruin.

India’s central bank, the Reserve Bank of India (RBI) has said five of India’s top 10 private steel companies were under huge financial stress. Most are now taking steps to reduce their debt and a few have shown an an inclination to sell more assets in 2015-16.

To help out domestic steelmakers, the RBI recently announced a “5/25 scheme,” which, at heart, is essentially a debt restructuring option. It extends the tenure of loans to 25 years with an option to refinance in five years. At least two steelmakers, Bhushan Steel Ltd. and Essar Steel India Ltd., have opted for it. Companies have an option to refinance the loan every five years.

At this midpoint of the year, Essar Steel, backed by the billionaire Ruia brothers, is reported to be seeking to restructure part of its about $6 billion in debt.

Earlier this week, New Delhi-based Bhushan Steel finally received approval from its bankers to refinance its approximate $55 million debt under the RBI’s 5/25 scheme.

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