Karnataka Offers Fig Leaf To Stave Off Rbi Freeze

Unable to bear the ignominy of having its treasury frozen by the RBI for not repaying a bank guarantee loan of Rs 20 crore, pledged by it on behalf of an ailing UB group firm Mangalore Chemical Fertilisers (MCF), the Karnataka government has decided to enter into a 'compromise' formula with the lending consortium of three banks.

Last month, the state government sought to make peace with the lenders by agreeing to sign an MoU with them. The move was prompted by the fact that the Corporation Bank dragged the state government to the Debts Recovery Tribunal (DRT). The Syndicate Bank followed suit and initiated legal action. The State Bank of Mysore (SBM) is yet to file a suit.

 

The DRT in turn directed the RBI to freeze state treasury funds amounting to Rs 8.22 crore which was to be repaid to the Corporation Bank.

Wanting to recover their dues the banks have welcomed the compromise formula.

The MoU will shortly be signed between the state government, MCF and the consortium comprising Corporation Bank, Syndicate Bank and the SBM. In the MoU, the state government acknowledges its liability to the banks for the counter guarantees issued.

The government guarantee for an amount of Rs 20 crore was in fact entered into with the banks way back in 1988.

It was done to facilitate the consortium to issue guarantees in favour of a group of leasing companies assuring them monthly lease rental payments from their client MCF. Unfortunately, in the latter half of 1990, MCF began to default on its payments and the banks had to fork out the money.

In the MoU, the three banks agreed not to press the DRT for recovery of their dues until the BIFR rehabilitation package for MCF was sanctioned. If MCF was sold, the company would ensure that the liabilities due to the banks were included in the rehabilitation package.

The new owner of the company would have to provide for a suitable term loan for the foreclosure of the banks liabilities.

The banks have also added another clause to cover the eventuality of BIFR not being able to find buyers or revive the company taken over by the UB group in 1988.

In such a scenario, the banks would allow the DRT to resume proceedings against the state government. The state commerce and industries department has also promised to actively take part in the MCF rehabilitation package.