Mounting Npas In Steel Worry Fis

The continuing rise in non-performing assets in the steel industry is expected to substantially weaken banks and financial institutions.

The gravity of the situation can be seen from the fact that many leading steel producers have been downgraded by credit rating agencies in the current financial year. This is expected to increase the stickiness in the asset books of financial intermediaries and there appears no scope for a turnaround in the industry. The most worrying aspect is the large sums of funds lent to greenfield steel project, which once classified as NPA will not only hit income but will require huge provisioning.

Says an industry analyst, " if it comes to the crunch and these loans have to be written off, there is not much the FIs will recover as it is nearly impossible to sell of these huge assets with the slow down in global trade." Provisioning for such a hit will eat into the networth of financial intermediaries. Last year itself the NPAs in the steel sector amounted to 14.5 per cent of IDBI's total sticky assets while it was 5.5 per cent in the case of ICICI . The last two years, 1996-97 and 1997-98 saw an economic slowdown and government expenditure too reduced substantially. This has hit the players in the steel industry.

Since financial institutions do not reveal the specific companies that are sticky in their books, it is possible to infer the problem only by looking at the downgrades by the rating agencies of major companies. That apart it must be remembered that a few greenfield projects has been rescheduled and hence will not reflect as NPAs. According to a study by Crisil Research and Information Services, "Asia as a whole is likely to remain a net importer of steel though imports as a per cent of total demand is expected to decline. International prices in the short to medium term will continue to remain soft due to higher available in the region."

To add to the recession, companies like Sail and Tisco are placed in a situation where modernisation of their existing plant is a must to meet global competition This has added to their cost of production and high debt. The downgrade of leading steel producers like Tisco will lead to the entire steel sector being downgraded, Crisil officials say. But there is some hope. Analyst said, "if the infrastructure projects go on line, there will be demand for long steel products, while if the demand for white goods and automobiles pick up, it will lead to increase in demand for flat steel." "This depression in the steel segment is a passing phase but for the strong companies who have modernised or are on their way towards modernisation," said an analyst.