08 Nov 2017 12:43 IST

Post re-cap, banks may take sharp haircuts to end steel sector exposure

This may see PSBs taking haircuts of more than 60%

The ₹2.11-trillion ($32 billion) recapitalisation support to be provided by the government to State-run banks may prompt them to take bigger haircuts on their exposure to the steel sector, which, in turn, will lead to a rise in instances of liquidation.

According to Atanu Mukherjee, President, MN Dastur & Co, on getting recapitalisation support, banks may prefer to go in for haircuts as steep as over 60 per cent in a bid to exit from such exposures.

“When you recapitalise banks, there will be a tendency by any bank to say: ‘Now that I have got this recapitalisation, I want to get this monkey off my back, even if I have to take a 60 per cent haircut’,” Mukherjee told BusinessLine.

The capital-intensive steel industry has been one of the major contributors to the non-performing assets (NPAs) of banks, which stood at close to ₹8 lakh crore as on March 31.

Excess capacity

The creation of excess capacity without a “solid underlying model” has been cited as one of the major reasons of stress in the sector.

Nearly 90 per cent of the investments have been debt-financed, exposing them to very high levels of risk to any amount of volatility in the market, he said.

Bankruptcy code

The Indian bankruptcy code is still at a “nascent stage”, he said. With the lack of required ecosystem and expertise (to deal with stressed assets of such magnitude), there is a likelihood that a majority of these assets may not fetch the kind of value they should, and may end up in liquidation.

According to Mukherjee, the current system which expects business to be reorganised or restructured in a time span of 180 days or 270 days, may prompt companies to go under liquidation due to lack of expertise of insolvency resolution professionals (IRP) in restructuring such large assets.

“If liquidation happens in large assets such as that of Bhushan Steel, the concomitant effect would be significant in terms of recoveries to banks, destruction of capital, people, employment and communities at large,” he pointed out.

‘Set up an AMC’

The country should, therefore, consider setting up an asset management company (AMC), which will take market risk in turning around stressed assets, he pointed out.

“You need a mechanism where you give them more time so that the restructuring plan is more realistic and it doesn’t go out in a situation where these assets are auctioned and everybody tries to bid pennies to the dollar,” he suggested.