“Steel promoters must bring in more capital,” says Arundhati Bhattacharya
State Bank of India (SBI) chairman asked promoters of steel companies to bring in more capital on the table as investment to ensure better profile and reduce stress.
“Steel firms are working on very thin margins, leaving them with little room to face adverse events. They must have a robust business models with sufficient margins to provide cushion to absorb shocks as well as resources for research and development,” Bhattacharya said, addressing Centrum Broking’s steel industry conference on Wednesday.
Bhattacharya said many steel units were fraught with project delays and cost overruns. At the start of the project, promoters bring in initial capital but in later phases, they express inability to bring in additional money as their contribution. “This is the start for delays and escalation of financial burden as interest on loans continues to accumulate,” she said.
Pointing to trust deficit between lenders and management or promoters of companies, the SBI chief said banks have stopped trusting data provided by steel companies and that there was a need for better transparency and corporate governance. The problem in the banking industry is that if a bank were to give more money to non-performing assets (NPA), bankers would be open to questions. “If the unit turns around, there will be no one to pat your back but if it goes bad, you will face questions on why you threw good money after bad and what was the consideration you received?” she said.
“With that kind of environment, if you believe that banks can go ahead and support NPAs, that belief is wrong,” Bhattacharya added.
Bhattacharya had conveyed this issue to the Reserve Bank of India (RBI) and the previous governor Raghuram Rajan. “The earlier governor came from a background (the US) where NPAs are considered as a matter of course and are hand-held to turn them around,” she said.
Rajan used to tell Bhattacharya that he would allow banks to give fresh money to NPA accounts, and RBI would allow banks to classify it as a standard asset. However, under Indian banking regulations, such accounts would still be treated as NPAs. “Therefore, we would be exposed to the same questions.”
The steel industry was hit by a slump in demand and dumping of products from China which put Indian players at a major disadvantage. This pushed many large and medium-sized steel companies in the red and become NPA in books of banks.
“Banks will not be in a position to provide cheap credit to the industry when they are saddled with a pile of bad loans on exposures to sectors like steel,” Bhattacharya said.
Bhattacharya said that banks would be in a better position to provide loans to the steel industry if the industry were to get priority or infrastructure status. Under these dispensations, banks would be able to lend money for a longer tenure.