New fund to address capital problems of stressed steel sector

The government is looking to create a separate fund under the NIIF, the country’s first sovereign wealth fund, to address the capital requirement of domestic steel companies.

The Rs 40,000-crore National Investment and Infrastructure Fund (NIIF) will operate as the mother fund, which will have several sectoral funds under it. However, the sizes of the funds are not known.

“The government is working to operationalise the NIIF…we are trying to see how we can structure something for the steel industry there, which will definitely go a long way in bringing down the capital costs,” steel secretary Aruna Sundararajan said.

High capital cost is one of the main reasons impacting the competitiveness of the domestic steel industry.

“The government is developing long-term funding for sectors, including steel, while the Reserve Bank of India (RBI) has brought the 5/25 format, where there is a recognition that you cannot expect industries like steel to repay their loans in short spans of five to seven years,” she said.

The 5/25 norms allow banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years.

The NIIF will invest in greenfield, brownfield and stalled projects, which are commercially viable. The government will invest Rs 20,000 crore in the NIIF and the remaining amount will come from private investors. The fund will also facilitate foreign investment in India, particularly in the infrastructure sector.

Finance minister Arun Jaitley announced setting up of the NIIF while presenting Budget 2016.

Gross non-performing assets (NPAs) — loans that do not yield returns — in the banking sector surged to over 6% of total advances as on March 31, 2016.

Steel is one of the most stressed sectors. Bankers recently met representatives of debt-laden companies, including Jindal Steel & Power Ltd, Bhushan Steel, Essar Steel, Visa Steel and Adhunik Metals, in Mumbai, to conduct a review of loan repayments and explore possible options of bringing in strategic investors.

According to a Financial Stability Report by the Reserve Bank of India (RBI), five out of the top 10 private steel companies are under severe stress.

Jaitley also said on Thursday that the steel industry accounts for the largest proportion of banks’ NPAs. “The biggest contributor in the NPAs is steel sector. Because if our companies will not be able to sell their steel, it is obvious that they will not be able to repay bank loan and the interest upon it.”

Steel, a key alloy used for making cars and consumer goods and in building houses, has seen a major drop in demand after China, the world’s largest consumer and producer of the material, hit a major slowdown.