Banks may not cut lending to steel sector despite export duty hike, say rating agencies

Indian banks are unlikely to cut back lending to steel companies despite the likely near-term pressure on their balance sheets due to the government’s recent export duty hike, according to rating agencies. Banks, however, said that they are examining the impact and are yet to form a view on the same.

The government, on May 21, increased the duty on exports of iron ore to 50 percent from 30 percent and imposed 45 percent duty on pellets. It also imposed a 15 percent export duty on hot-rolled and cold-rolled steel products from nil earlier.

The measures aim to shore up domestic availability of iron ore and in turn cool off rising price pressures in the economy. According to analysts, the move will disincentivise steel producers to export and would force players in the industry to review their capital expenditure plans.

“The balance sheet and credit profile of steel companies are far better now compared to seven-eight years back supported by considerable lowering of debt levels over time,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer at CRISIL Ratings.

“While the recently announced fiscal measures could impact the topline and EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin of steel companies in the near term, we do not think it will dissuade banks from lending to this sector given their stronger balance sheets,” Sitaraman added.

Steel companies are among the largest fund borrowers of banks. As per latest data from the Reserve Bank of India, banks’ total credit to the metal sector stands at Rs 2.9 lakh crore, of which iron and steel is at Rs 1.92 lakh crore.

Hence, any deterioration in steel companies’ financial health can raise risks of higher defaults and strain banks’ balance sheets. Banks are just about recovering from the COVID-19 crisis and the impeding lockdown that strained borrowers’ financial health.

Indian lenders have burnt their fingers in the past few years with heavy exposures to Bhushan Steel, Bhushan Power & Steel and Essar Steel that were under the bankruptcy process. The key factors that led to stress in the steel sector have largely been ambitious overseas acquisitions, and capacity expansions, among others. However, recoveries from these three accounts have been healthy due to the turning around of the commodity cycle, and since the plants continued to be operational due to the insolvency process.

“Over the last two years, iron and steel companies have benefited immensely from the surge in domestic prices and export. That has helped improve their balance sheets in a meaningful way,” said Soumyajit Niyogi, Director, Core Analytical Group, India Ratings & Research.

“Most of them have reduced leverage by paying (off) debt; this is reflected in recent rating upgrades of various entities. So, banks will be comfortable to lend.”

Niyogi was referring to Fitch Ratings upgrading JSW Steel to ‘BB’ from ‘BB-’ on May 13 due to expectations of a “significant” reduction in its leverage. Fitch had also upgraded Tata Steel to ‘BB+’, from ‘BB’ citing improvement in its financial profile for financial year 2022, driven by record EBITDA and significant debt repayment.

The infra push

Steel companies are dependent on the government’s policy measures and its push to revive infrastructure in the country. The government, in 2019, had announced the National Infrastructure Pipeline (NIP), which is a group of social and economic infrastructure projects slated to be established over a period of five years. Last year, the federal cabinet had also approved Rs 6,322-crore Production-Linked Incentive (PLI) scheme to boost the production of speciality steel in India.

Analysts said that the government’s infra push through the NIP and PLI schemes should help support credit growth in the sector, despite the recent export duty hikes. Banks, in turn, would want to play on the corporate credit growth cycle by lending to the steel sector, they added.

“Expectations of rate hikes by the RBI could also shift steel companies towards borrowing from banks rather than raising funds from the bond market where rate increases have been quicker,” said CRISIL’s Sitaraman.

“Hence, credit demand from banks should be reasonable given the expectation of more than 7 percent gross domestic product growth this fiscal,” Sitaraman added. “We do not see any material increase in non-performing assets on banks’ corporate loan books because of these measures.”

Banks undecided

Banks, however said, that it was too early to determine the impact of the export duty hikes and whether they would be averse to lending to the sector. At least three banks Moneycontrol spoke to said that the lenders are yet to take a call on the same.

“The measures have just been announced and it will take some time to play out. Right now, we have not taken any call. We will see the impact and assess it,” said a senior banker at a large state-run bank on condition of anonymity.

Bank of India’s Executive Director Swarup Dasgupta said that the bank will go on a “case-to-case basis,” when it comes to lending in the steel sector.

“Wherever promoters’ strengths are there and if all infrastructure is in place, we will take a call based on the project,” Dasgupta said.