A string of pointers, including large capacities lying idle as global/domestic demand conditions have weakened, raise concerns regarding bank loans extended to the steel sector, a top Reserve Bank of India official said.

To draw a comparison between the Indian scene today and the events in South-East Asian economies in 1997-98 (though the degree of severity differs widely), RBI Deputy Governor SS Mundra took the example of the steel sector.

“Bank loans to the steel sector in India have witnessed a 21 per cent compounded annual growth rate over the past five years and broadly range between 4 to 9 per cent of individual bank’s loan book.”

Huge exposure

Banks’ total exposure to the steel sector stands at ₹3-lakh crore while net sales of the companies within the sector also stands at around ₹3-lakh crore with an EBIDTA (earnings before interest, depreciation, taxes and amortisation) of ₹37,000 crore, said Mundra at the ICAI International Conference at Indore.

Pointing out that the level of stressed assets in the sector exceeds 27 per cent, the Deputy Governor said 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,” the Deputy Governor said, and added that excessive leverage by the borrowing corporates is not limited to the steel sector alone. The Global Financial Stability Report, released by IMF recently, has noted that 36.9 per cent of India’s total debt is at risk, which is among the highest in the emerging economies, while India’s banks have only 7.9 per cent loss-absorbing buffer, which is among the lowest, Mundra explained.

Highlighting how problems unfold in a crisis, Mundra observed that the problem often begins with banks taking excessive exposure (concentration) to a particular sector or sectors, and corporates increasing their leverage manifold and investing in creating excess capacities.

Unravelling of the risks could perhaps still be managed if banks’ capital positions were strong, but if that is not the case, risk manifests itself in all its dimensions. Leveraged positions created out of borrowed money from abroad for funding growth in domestic markets add another twist to the tale.

“Once the home currency depreciates, debt servicing becomes a challenge for corporates holding large un-hedged positions. If there are large-scale borrowings by various corporates, this debt crisis could easily degenerate into a full-blown currency crisis,” explained Mundra.

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