MUMBAI: Banks are set to take a hit of hundreds of crores in the March quarter as the biggest loan restructuring of Essar Steel would be pushed to next fiscal year since none of the bankers want to risk the prospect of being questioned by investigative authorities few years down the line.
In January, bankers led by the State Bank of India informally agreed to recast the Rs 44,000 crore loans of Essar Steel that has been struggling to repay for over a year now. However, within days of this development, the Central Bureau of Investigation arrested five IDBI Bank officials, including former CMD Yogesh Agarwal, for lending to the now-defunct Kingfisher Airlines.
“We were hopeful of sealing the deal by March-end but with the arrest of IDBI officials, lenders have developed cold feet. Now banks will go ahead with debt recast of any company only if the package is endorsed by an external committee,” said two senior bank officials who did not want to be named.
The arrests of IDBI officials shocked the banking industry leading to paralysis in decision making.
“This is particularly so because Kingfisher is tagged as wilful defaulter for not repaying Rs 9,000 crore of loans and its promoter Vijay Mallya fled the country in March 2016. The bank suffered huge losses and the bankers are now behind bars,” pointed out a bank official.
Bankers have asked the Reserve Bank of India to enhance the scope of the overseeing committee to vet all types of debt recast. As of now, the overseeing committee (OC) comprises eminent experts who will independently review the processes involved in preparation of resolution plan of S4A or Scheme for Sustainable Structuring of Stressed Assets. Essar Steel’s debt recast is outside S4A and hence outside the purview of the overseeing committee.
A consortium of 17 lenders has already classified the Essar Steel loan as sub-standard in the quarter ending March 2016. Any delay in restructuring the loans now would mean that banks would have to set aside more money as provisions in the fourth quarter.
Banks have to set aside 15% in the first year as provisions for bad loans which would increase to 25% in the second year. Beginning March 2017 quarter, banks would have set aside 25% as provisions for Essar Steel.
“The proposed decision of the Banks to refer all restructuring to the overseeing committee (OC) for final approval is a policy initiative for all cases that are being taken up by the banks,” Essar CFO V Ashok said.
“Bankers are willing to take a hit of hundreds of crores but do not want to take decisions on big-ticket loan recasts with the fear of being questioned in future by investigative authorities,” said a senior bank official.
After two year of negotiations, bankers and Essar Steel finally arrived at a mutually acceptable debt recast package which includes promoters, the Ruias, losing control of the company. Close to 25% would be sold to Farallon Capital for Rs 1,800-2,000 crore and banks would convert Rs 2,200 crore debt into equity for a 30% stake.
On March 1, IDBI Bank is jittery about selling its non-core business it assessed to be worth Rs 6,000 crore, its CEO Kishor Kharat said. IDBI loaned Rs 900 crore to Kingfisher following approval from the board since it was rated below investment grade.