The Reserve Bank of India‘s 5/25 plan allows banks to extend loan repayment periods up to 25 years, with an option of refinancing the loan every five years.
India’s most indebted steel company Tata Steel Ltd., according to a Business Standard news report, also announced plans to sell its long products division in Europe, but it had not been able to close that deal because international steel prices had weakened, reducing the unit’s valuation. The company had initiated talks with lenders to reduce its interest cost by 0.9 percentage points on a $1.5 billion loan taken out last year. Tata Steel signed $1.5 billion term loan as part of a $3.1 billion refinancing plan last year.
In its financial stability report last week, the RBI warned that steel companies would not be able to service their debt as the infrastructure sector in India struggled with stalled/delayed projects.
Another report by Credit Suisse had estimated the total debt of stressed steel companies in India was about $31 billion, which was 75% of the banking system’s gross non-performing assets.
Many bankers and analysts have also pointed out that some steelmakers which had set up plants between 2008 and 2010, when land acquisition and material costs were high, had even bigger problems at hand.
At today’s price levels of $360 per ton of steel, most of their revenue was going to the servicing of their debt. Not many expected a spectacular rise in steel prices in the coming months. That coupled with the Greece and the looming Chinese stock market crisis meant that Indian steel companies were left with very few options. They had to either sell off some of their assets or infuse more cash, which means more borrowing.
Steel and banking experts are of the view that if this situation is allowed to continue, India’s banking sector may end up with a crisis of its own. As such, borrowing could turn into bad debt. To avoid that, they suggested that the government, banking and steel sector leaders sit together and hammer out a solution to give both sectors a fresh start. The RBI’s 5/25 scheme was essentially just an offering of liquid cash to keep steelmakers afloat, It’s not a permanent solution.
The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.