Bank loan to steel sector grew 21% over past 5 years

Reserve Bank of India Deputy Governor S S Mundra has stressed on the alarming rate at which bank lending to the steel sector has been growing.

He stated lending to the steel sector in India has been growing at a compounded annual growth rate of 21 per cent over the past five years and now broadly ranges between four and nine per cent of an individual bank’s loan book.

“Banks’ total exposure to the steel sector stands at Rs 3 lakh crore, while the net sales for the companies within the sector also stands at around Rs 3 lakh crore with an Ebitda (earnings before interest, taxes, depreciation, and amortisation) of Rs 37,000 crore. The level of stressed assets in the sector exceeds 27 per cent. Large capacities are lying idle as global/domestic demand conditions have weakened. Further, the capacity expansion has been done using excessive leverage. These pointers definitely raise concerns,” said Mundra at a conference.

According to RBI, as on date five out of the top 10 private steel producing companies are under severe stress on delayed implementation of projects due to many factors including land and environmental clearances.

The gross non-performing loans of Iron and Steel sector have grown from 4.8 per cent in March 2013 to 7.1 per cent in March 2015, according to finance ministry data.

Mundra also added that the stress in the banking system is not only limited to the steel sector but is spread across. Recently a Global Financial Stability Report released by IMF stated that 36.9 per cent of India's total debt is at risk, which is among the highest in the emerging economies. This is at a time while the banks only have 7.9 per cent loss absorbing buffer, which is among the lowest.

Asset quality concerns especially around the public sector banks continue to remain. As per the Financial Stability Report published by RBI the GNPA in the system has been increasing. As per the report, the GNPA in the system has increased from 3.4 per cent in March 2013 to 4.6 per cent in March 2015. Even the overall stressed advances have inched up to 11.1 per cent in March 2015 to 9.2 per cent in March 2013

Mundra laid out the steps included by the regulator to correct and check the growing bad loans in the system. For instance RBI has revoked forbearance on restructuring, enhanced fraud monitoring framework, asked banks to set up the Joint Lenders' Forum (JLF) etc.