Stressed steel sector to spur bank NPAs in FY16

Exposure to over-leveraged segment accounts for four-nine per cent of loan books

The asset recovery cycle of banks is expected to be delayed, thanks to their exposure to the stressed metals sector and weak commodity prices. Even if the economy recovers, the risk from over-leveraged companies will continue to be a real challenge, believe analysts. A new risk is emerging after the sharp fall in commodity prices globally and depressed demand in India.

Credit Suisse has done an extensive analysis of the steel sector and the potential asset risk to the banking sector. In an April 21 note, it says loans to the sector have grown at a 21 per cent compound annual rate over five years and now account for four to nine per cent of the loan books of banks. What makes things more worrisome is that 54 per cent of these companies had debt/Ebitda in excess of six times as of FY14.

So far, analysts claim, banks continue to lend to these companies and restructured or converted off-balance sheet exposures to prevent these accounts from turning into non-performing assets. Many investors seem to be assuming that the risk to the banking sector will reduce once growth revives but the going might not be that easy.

"Large corporate risks remain in a recovering economy. Over-leveraged corporates can experience credit stress," explains Anish Tawakley of Barclays, even as growth revives.

The exposure of banks to the metals sector will delay the asset recovery cycle, as steel prices have collapsed globally and China's surplus capacity will keep prices capped. China currently has a capacity of 1.16 billion tonnes and to offset the slowdown at home, Chinese mills have been flooding world markets with products at low prices. Given the shortage of iron ore in India, raw material prices have remained high in India and, consequently, Indian steel prices are higher than global prices.

Imports rose to 10 million tonnes in 2014. The disparities are expected to get sorted over a period of time. Highly leveraged companies have invested heavily in capacities over recent years, assuming steel prices of the past.

Analysts claimed that banks are looking at additional lending and recast of some of the steel accounts under the 25-year refinance scheme. Therein lies the risk, as banks will bet on recovery in these assets going by assumptions in steel prices and recovery in demand.