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Loans to pharma companies turn bitter pill for banks

Loans of more than Rs 2,000 cr to Surya Pharma, Orchid Chem need restructuring

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to mid-sized pharmaceutical companies have turned bad for a slew of top public sector banks in the first quarter of this financial year. Some of the large lenders are set to restructure some of these, to avoid more slippage.

North India-based Surya Pharmaceutical Ltd, flagship company of the Rs 1,700-crore Surya Corp, defaulted to State Bank of India, Punjab National Bank, and in the quarter.

While SBI had an exposure of Rs 460 crore, the total in this account that has become a non-performing asset (NPA) is close to Rs 1,000 crore.

Surya Pharmaceutical
Failed to pay State Bank of India, Punjab National Bank, Bank of India and Oriental Bank of Commerce 
Orchid Pharmaceutical 
and Chemicals
- Failed to pay Union Bank of India and Andhra Bank
  • SBI saw fresh slippage of Rs 11,000 crore in quarter ended June
  • Accounts in power, road sector and pharmaceutical sectors responsible
  • Bank says environmental clearances could help power, road sector accounts 
  • But no such hope for the pharma company

In the quarter ended June, SBI saw fresh slippage to the tune of Rs 11,000 crore and closed the quarter with an NPA ratio of 4.99 per cent of gross advances.

It has pointed to three accounts, one each in the power, road sector and pharmaceutical sectors, as having contributed significantly to its deteriorating asset quality.

SBI says the power and road sector accounts have a chance of getting upgraded once environmental clearances are in place but they are not sure about the pharma company's turnaround.

Loans to another firm, Orchid Pharmaceutical and Chemicals, also become an NPA for Union Bank of India and Andhra Bank. These banks have an exposure of around Rs 500 crore in all.

While SBI loans to did not slip to the NPA category in the first quarter, sources indicate the lender might restructure these loans to avoid fresh slippage.

SBI’s total exposure to Orchid is Rs 750 crore, including a foreign currency loan.

A loan, if restructured while the asset is classified as standard, can remain in the latter category but the provisioning requirement rises from 0.4 per cent to two per cent. However, if an NPA is restructured, the asset needs to be further downgraded and provisioning requirements increase sharply.

Bankers say the management of Orchid has told them they’re planning to raise funds from private equity entities to repay part of its debt.

When asked about fund raising plans, Orchid’s chairman and managing director, K Raghavendra Rao, told Business Standard he didn’t want to comment on market speculation.

The sharp decline in the rupee in the past year has resulted in higher costs for Orchid while repaying their foreign currency convertible bonds.

Bankers say the company had raised short-term funds to repay its long-term debt.

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