The Reserve Bank of India (RBI) on Tuesday said it had identified 12 NPA accounts, which can be immediately taken up under the Insolvency and Bankruptcy Code (IBC).
These accounts contribute around 25 percent to India's gross NPAs, the RBI said.
The Internal Advisory Committee (IAC) recommended IBC reference for all accounts with fund and non-fund based outstanding amount greater than Rs 5000 crore, with 60 percent or more classified as non-performing by banks as of March 31, 2016, RBI said on its website late on Tuesday.
The central bank did not reveal the names of the 12 companies which it has shortlisted but experts believe that the focus will be mainly on companies belonging to the steel and power sector.
A risk profile of select industries as at end September 2016 showed that iron & steel and power industries had high leverage as well as interest burden, a report by CLSA said.
The steel sector contributes to over 30 percent of gross NPAs as companies like Essar Steel (Rs 44,000 crore), Bhushan Steel (Rs 35,000 crore), and Electrosteel Steels (Rs 10,000 crore) have large amount of stressed assets (see graph below).
Loans to the power sector contribute over 40 percent to the lenders watch-list.
"The total borrowings by companies in chemical, computer, food products, hotel, rubber and textiles industries decreased during the period from September 2015 to September 2016. On the other hand, cement, construction, electrical machinery, power, iron & steel, jewellery, mining, automobiles, papers, pharmaceuticals, real estate, telecommunications and transport industries contributed towards an increase in total borrowings," CLSA says.
Why are steel and power ailing?
The menace of bad loans has stayed hidden in plain sight, slowly bloating into a monster that has engulfed the entire economy.
As per the Reserve Bank of India, the gross NPAs of public sector banks (PSBs) are around Rs 7.65 lakh crore, which make up a bulk of the banking system's total NPAs.
Experts blame lax lending norms during the boom years of 2009-2012 as one of the key reasons for rising NPAs, coupled with high competition. Weak global steel prices, now at their lowest since 2003, have also been a factor.
That combined with high costs means Indian companies have struggled with to compete with cheap imports from China, Japan and South Korea.
Steel production in India averaged 3001.32 thousand tonnes from 1980 until 2017, reaching an all-time high of 9000 thousand tonnes in March 2017. Local demand, however, has not kept up.
As shown in the chart below, steel prices have been sliding gradually since the past decade and reached an all-time high of 1265 in June 2008 and a record low of 90 in March 2016.
source: tradingeconomics.com
Exports of iron & steel in India decreased to USD 833.59 million in 2016 from USD 3177.14 million in 2015. Exports of iron & steel in India averaged USD 4012.57 million from 1996 until 2016, reaching an all-time high of USD 9223.38 million in 2013 and a record low of USD 662.18 million in 1998.
The story with the power sector has been one of chronic problems. Large underutilised capacities, muted demand, bunched-up capacity addition, soft merchant power prices, continued investments in renewable capacities, and weak discoms are the main reasons why thermal power plants have struggled to hold their heads above water.
“With a sub-50 per cent plant load factor (PLF), they have a high probability of debt default. Under the current scenario, the survival of such players is not possible,” ratings firm India Ratings said.
The firm in its report said that there is a possibility of sector consolidation, which could be triggered by the new bankruptcy code.
“Ind-Ra expects the PLFs of coal-based power plants to decline further in FY18 and rise thereafter, though they would continue to remain sub-65 per cent until FY22,” it said.
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