“There are three kinds of people; the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s,” said Earl Wilson, the American journalist.
The aphorism impeccably matches the wicked state of bad loans in the Indian banking system. The country’s bad loans have come within kissing distance of the 10 lakh crore mark!
The case of India’s bad loans is getting worse by the day. An analysis of 50 stressed assets (forming 40 percent of total stressed assets in the system), shows that metal, construction, and power sectors together constitute 70 percent of the loot. In fact, SEBI had mandated companies to disclose details of loans on which they missed payments, but rolled it back “until further notice!”
BIG BROTHER STEP INTO SLUDGE
Stepping into the muck, the RBI has recommended 12 accounts, which represent 25% of the bad loans, for “immediate” resolution. Five hundred others have been given six months’ time to restructure their debt.
Following is the bird’s eye view of the shenanigans of the “dirty dozen.”
1. Bhushan Steel
2.Bhushan Power and Steel
Ten years ago, Neeraj Singal, managing director, Steel, organized lavish birthday binge, visited upon by the who’s who of industry and Bollywood. But the music stopped when a lawyer for the State Bank alleged that the company was defaulting on loans. At present, the company’s total debts stand at Rs. 45,000 crore. Initially, cash flow wasn’t an issue, but once Chinese demand dwindled after the 2008 Olympics, the Bhushan borrowed from one bank to pay off another. By the way, when the company was sinking in March 2014, SBI and a consortium of lenders sanctioned new loans!
In 2017, SBI asked Deloitte to conduct a forensic audit. In court, the Bhushans said Deloitte found no signs of malfeasance. Meanwhile, the Serious Fraud Investigation Office (SFIO) started an investigation into the diversion of money. By the way, Bhushan Power and Steel, a sister company of Bhushan Steel, has a loan default of Rs.37,300 crore to a consortium led by Punjab National Bank (PNB).
Interestingly, Tata Steel is buying up Bhushan Steel setting in motion a wave that can see some traction for the much maligned banks.
3. Essar Steel
At his 19th floor office at Essar House in Mumbai’s Mahalaxmi, Group Director Prashant Ruia must be recalling a Shakespearean statement: “Neither a borrower nor a lender be; for loan oft loses both itself and friend.”
Essar Steel owes banks Rs.40,000 crore approximately to a 30-bank consortium led by the veritable State Bank. The Ruias invariably found themselves at the wrong end of an economic cycle. Its refinery, its steel expansion, its power project, all came at a time when those industries where heading south. Now the Ruias have started selling
their crown jewels, and Essar will be a smaller business house soon.
4.Lanco Infratech
In Lanco Infratech Limited’s Gurgaon office, there is a figurine of a tiger swathed in a bedroll either wounded or dead. That sums up the state of the company correctly. Lanco Infratech, once among the fastest growing companies in the world, has a loan default of Rs.44,000 crores. The IDBI Bank has decided to take them to insolvency courts. Lanco was hit by the slowdown in the power sector. Once those high revenues vaporized, banks, too, bunged advancing funds. That led to a liquidity crisis, which squeezed the company.
5.Alok Industries
Alok Industries, once a promising growth story, is now facing the gallows. The company has defaulted on its payment obligations. The National Company Law Tribunal (NCLT) has admitted insolvency proceedings against the textile company, which owes Rs 29,000 crore to a consortium of lenders. The company was among the largest fully integrated textile companies. The company’s performance has been hurt by low plant usage. Industry experts believe a liquidation is a serious option.
6. Amtek Auto
Amtek Auto, an integrated component manufacturer, has a loan default of Rs 14,000 crore. Its rating has been suspended by rating agency CARE. SBI has moved the NCLT for bankruptcy proceedings. The company drove a robust inorganic development strategy over the last few fiscal years and made 21 acquisitions between FY 2012 to 2015. As the business conditions are unlikely to turn soon, a change in fortunes is dubious.
7. Monnet Ispat and Energy Ltd
Steel producer Monnet Ispat and Energy has a loan default of Rs. 12,500 crore. NCLT has approved bankruptcy proceeding against the company.
Monnet Ispat was allotted coal blocks in 1996. Later, according to the Supreme Court’s decision, all coal mines were de-allocated, and companies not only starved for coal but also did not know what to do with the investments made. Due to this directive of the Apex court the company lost all the five coal mines, hitting the business significantly. Meanwhile, steel prices crashed making business more difficult. Small wonder, Monnet found it difficult to pay its debt.
8. Electro-steel Steels Ltd
A pioneer in DI Pipes, the company established as a part of backward integration strategy. Consortium leader SBI has initiated insolvency proceedings to recover Rs 10,300 crore.
The sorry story of Electro-steel reveals that operational efficiencies and management capabilities play an equally important role. The promoters forgot that investing at the top of a commodity cycle is dangerous. However, Vedanta Ltd has received the approval from the fair trade regulator Competition Commission of India (CCI). Vedanta would be acquiring a 90% stake in the company.
9. Era Infra Engineering Ltd
Era Infra Engineering, one of India’s infrastructure companies, has a loan default of Rs 10,000 crore. The NCLT has approved Union Bank’s insolvency resolution plea. The company duped every Indian bank. The modus operandi: borrow from financial institutions under its flagship company ERA Infra Engineering Ltd (EIEL), default the payments and launder the money.
10. ABG Shipyard Ltd
ABG Shipyard, an Ahmedabad-based shipbuilding company, has a loan default of Rs 7,000 crore. Shipyards besides steel suffered severely after a sharp drop in trade. The promoters are looking to sell a majority stake to investors across the world.
11. Jaypee Infratech Ltd
Jaypee Infratech is a subsidiary of conglomerate Jaypee Group founded by Jaiprakash Gaur. It has a loan default roughly Rs.9,600 crore. Around 32,000 homebuyers of as many as 27 Jaypee projects in Noida and Greater Noida who are left in the lurch after the National Company Law Tribunal (NCLT) admitted a plea of the IDBI Bank for initiating insolvency proceedings against the debt-ridden company.
12. Jyoti Structures Ltd
Jyoti Structures is a power transmission and distribution company. It is a defaulter to the tune of Rs.7,000 crore. Its lead lender SBI filed the petition for insolvency. Like ABG Shipyard, Jyoti Structures did not oppose the bankruptcy proceedings against it. Jyoti Structures is into engineering, procurement, and construction in the power sector. The company is in a cash crunch due to project delays. The company has delayed payments to statutory authorities. These factors have adversely affected the aspect of the going concern.
BAD LOANS TEACH GOOD LESSONS?
Are there any lessons for the bankers from the above stories? Plenty. Most importantly, nothing can substitute close monitoring of the businesses of a borrower. In each of the 12 cases, they did not do that. The modus operandi of many firms involved in defaults is to get a group company approach banks for another loan. This firm, in turn, lends the money to the defaulting firm, which is also eventually defaulted. The RBI and the government are usually in the dark about the real picture on bad loans.
And the Indian Pilferers League
(IPL) begins!!
