China devaluing the Yuan to its lowest in nearly two decades has become the most talked issue for now. The back-to-back devaluations by the Bank of China have meant the Yuan has lost nearly 3.5% in the past two days. This strategic move from China came even as its stock market has been tumbling and the nation observed a collapse in exports that led to a slowing economy. The motive for China here is to recoup the competitiveness amongst its manufacturers. This may restore prosperity back in China, or so Chinese authorities hope. However, the domino effect of these moves is being felt back home in India too. Including Indian Banks and the domestic iron and steel sector.
A weaker Chinese currency is likely to mean reduced competitiveness of goods manufactured in the rest of the world. Added to that could be the dumping of commodities from Chinese markets. This could be a threat to domestic players overseas too.
Thus the cheaper Chinese production led by the devaluation of currency will affect the export as well as domestic markets in India. As per an article in Economic times, Indian iron and steel sector companies will bear most of the burnt with these cheaper exports from China. Not just that, Indian Banks financing these companies may be in a soup to. Getting a sense of the same, the RBI has warned that the debt-laden iron and steel industry may be the next Achilles heels for the Indian Banking Industry. Out of the total industry's share of bank advances, which stands at 41%, steel industry's alone is at 4.61%. Further, as reported by RBI, steel sector contributes to more than a tenth of the total restructured loans.
Just recently, a report by Credit Suisse highlighted the steel sector to be a key source of stress for banks in FY16 as well as FY17. As on date, banks' total exposure to the steel sector stands at a whopping Rs 3,000 bn. That of SBI alone stands at little over Rs 757 bn as on June 2015.
Among others, one lesson that banks must surely draw out of this experience is not to expose themselves excessively to one particular sector. The domestic metal sector too may find itself struggling over the next few years. Hopes can be revived only when the unutilized capacities are absorbed, earnings go far above the debt servicing levels and when the overall demand in the economy picks up.