Memories of Zoom Developers, Winsome Diamond and Sterling Biotech, where thousands of crores of rupees of loans have turned bad, are still fresh. The high profile non-performing asset (NPA) - Kingfisher Airlines - is also a pain bankers are living with.
So, when S K Jain, chairman and managing director of Syndicate Bank, was arrested for allegedly taking a bribe of Rs 50 lakh from Bhushan Steel with a promise to extend credit extensions (this was followed by the arrest of the steel-maker's Vice-Chairman and Managing Director Neeraj Singhal), bankers went on a war footing to ensure that the company is able to service the Rs 40,000-crore loan.
There is another reason for the concern: Bhushan is already the country's most indebted steel maker with debt to equity ratio of 3.5 at the end FY14. The ratio rises to nearly four if deferred tax liability and other liabilities are included.
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Thus it was not a surprise when State Bank of India (SBI), the leader of the lender's consortium that extended working capital loans, announced last week that it had started discussions with other consortium members to appoint an external agency to oversee day-to-day operations of the steel-maker. A meeting of member banks is scheduled next week to take a call. If banks agree, then Bhushan's board approval will be required to appoint the agency.
SBI officials mentioned the name of Alvarez & Marsal (A&M), a leading global professional services firm specialising in performance improvement, turnaround management and business advisory services, as an entity which undertakes such jobs.
"It is an excellent plant, the asset is of good quality and it is running properly and we don't want it to get into any kind of trouble for our exposure," Arundhati Bhattacharya, chairman, SBI, had said.
What also explains the promptness of the banks is the sheer size of the loans. The dues involved in NPA accounts such as Kingfisher or Winsome is just one-tenth the size of Bhushan Steel's. Most importantly, the account has not slipped into the NPA category, which also explains banks' eagerness not to allow it to slip.
Some of the public sector banks have seen asset quality improving in the last two quarters. SBI, for example, reported lower gross NPA figures in the last two quarters, which is now at Rs 60,434 crore, compared with Rs 67,799 crore in end-December. So, when some signs of improvement in asset quality was visible, banks do not want any fresh slippages.
Till now the account is standard, though bankers agree that the company has liquidity problems. However, they also add the company should not be seen in isolation and should be viewed as part of the general problem steel companies are facing.
In addition, the Bhushan account was never a non-performing one, nor was it restructured. "The company neither defaulted on commercial papers, unlike a lot of infrastructure companies a couple of years back when they were facing a cash flow problem," said a senior banker.
According to bankers, the account was classified as special mention account 2 (SMA 2), that is overdue for more than 60 days but less than 90 days, but was regularised. A joint lenders' forum was also formed to resolve the problem.
The main concern of bankers was, following the arrests, some lenders might curb flow of credit to the firm which would have adversely impacted the operations.
"About 60 per cent of the sanctioned amount is disbursed for working capital loan. At this point, if additional funds are not released, production and future cash flows would become an issue," said a senior banker explaining the rationale behind the proposal for an external agency to oversee day-to-day operations.
The move also comes following the Reserve Bank of India (RBI)'s recent norms which asked banks for early detection of stress and to take prompt corrective actions to avoid non-performing asset creation.
Bhushan Steel, which started operations in 1989 as a value-added steel manufacturer, with a unit at Sahibabad in Uttar Pradesh, commissioned two million tonnes (mt) of capacity by FY10. According to analyst reports, the company was expected to commission the third phase of expansion at its Odisha unit in FY14. This would have raised its steel-making capacity to 5.2 mt.
The company has denied CBI's allegations, saying the company did not need any favour from banks to run its operations.