Stung by the crisis arising out of the Syndicate Bank bribery case, lenders have gone into a fire-fighting mode to avoid fresh bad loans from their exposure to Bhushan Steel, one of the most indebted steel companies in the country.
State Bank of India (SBI) has proposed an external management agency be appointed to oversee the company's day-to-day operations. The proposal needs approval of the Bhushan Steel board.
"The suggestion I have made to other banks is we will bring in a management agency that will oversee the day-to-day running of the unit," Arundhati Bhattacharya, chairman of SBI, leader of the consortium of banks that provided working capital loans to the steel maker, told the media on Friday.
Bhushan Steel, whose vice-chairman and managing director, Neeraj Singhal, was arrested on Thursday by the Central Bureau of Investigation (CBI) on alleged graft charges, has a debt-equity ratio of 3.5.
Lenders to the company have an exposure of Rs 40,000 crore, almost the entire loan portfolio of several mid-sized lenders such as Federal Bank or IndusInd Bank.
The consortium of lenders involves 35 banks, including SBI, ICICI Bank and Punjab National Bank (PNB). SBI's exposure is Rs 6,000 crore, including external commercial borrowings. PNB, another large state-run lender, is the leader of the consortium that has extended term loans.
Bhattacharya said SBI had spoken to other lenders on the issue and the consortium would hold a meeting on this soon. She added the company's plant was a good-quality asset and its loans were standard, indicating the steel company didn't default on payments so far. There was no move to change the management of the company, she said, adding the proposal was only aimed at safeguarding the interests of lenders. "We do not want the company to get into any kind of trouble."
What is worrying bankers is though the company has been profitable, its debt-servicing capacity is falling every quarter, owing to a tough operating environment and rising interest burden.
Though its net sales have risen 50 per cent in the past three years, its interest burden has more than tripled during this period. At this pace, the company may run out of cash to service debt by the end of FY15.
Banks hope Bhushan Steel, now put under rating watch by CARE, will agree to the proposal to appoint a management agency. Bhattacharya cited the case of the borrower agreeing to lenders' demand of having a safety advisor on its board, following an accident in the plant a few years ago.
In private, however, bankers said it would be an uphill task to convince the board, primarily because the company had serviced its loans so far and the asset was standard on banks' books. "Typically, there is a clause in the loan agreement that if the account becomes a non-performing asset, banks can take several steps, including management control. However, it not the case with Bhushan," said a senior banker.
For FY14, Bhushan Steel's net sales declined 10 per cent, while operating profit and net profit fell 18.3 and 93.2 per cent, respectively, compared to the year-ago period. Interest cost rose 29.2 per cent to Rs 1,663 crore, reducing the company's operating profit 60 per cent.
Bhushan Steel's financial parameters such as debt-equity ratio rises to about four if deferred tax liability and other liabilities are included. At the end of March this year, the company reported borrowings of Rs 31,839 crore, up 18 per cent compared to a year earlier. Besides, the company had other liabilities worth Rs 3,541 crore; it owned funds (net worth) of Rs 9,161 crore.
Following the CBI filing a bribery case, the Bhushan Steel stock has fallen 44 per cent to Rs 219.35 on BSE. Since last week, the company has lost market capitalisation of about Rs 4,000 crore.
The company has denied the CBI's allegations, saying it didn't need any favour from banks to run its operations.
Bhushan Steel started operations in 1989 as a value-added steel manufacturer, with a unit in Sahibabad, Uttar Pradesh. By FY10, it had commissioned two million tonnes (mt) of capacity.
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 steelmaking capacity to 5.2 mt.