|
[Contn.]
The
NPA Cancer
The Next Step For FIs
|
The
Anatomy Of An Npa |
THE
RUN-UP TO THE HEIST
1. Promoters put
together a project report, ideally around a business-area listed by
a government-department as 'sunrise' and approach FIs either
directly, or through consultants who claim 'they can get things
done'.
THE GULLING OF
THE WILLING
2. The FIs
appraise the project, something analysts say they do not have the
competency to do, ask the promoters whether they can bring in 11 per
cent of the equity, and give it the go-ahead.
THE FIRST
PAYBACK
3. The
FIs release the money.
The promoters have to bring in their bit now and if they are smart
can source part of it from equipment vendors as 'commission' for
buying from them.
THE BEGINNING
OF THE ROT
4. The project
suffers cost, or time overruns, mostly both, and the promoters
approach FIs for further assistance. The FIs throw good money after
bad, after placing asking for an equity-conversion option.
TO BE OR NOT
TO BE AN NPA
5. The FIs now own
substantial equity in the project, and are also owed substantial
debt. Since legal redress could take time, they continue to pump
money into the project hoping against hope that it can be revived.
Finally, reluctantly, they term it an NPA. |
The dumbest way to deal with the NPA crisis-a
crisis, it definitely is-would be to dismiss bad debts as being endemic to
an economy in transition. The smartest way would be to change Indian laws
to reduce the natural advantage they bestow on borrowers. ''What is
required is a framework that provides for speedy legal redress,'' says
Vimal Bhandari, Executive Director, IL&Fs. That means a FI or a bank
will not need to hesitate to take the legal route to recovering money that
is owed it-a hesitation that comes naturally now given the slow pace at
which the legal system works, and the political clout of some businessmen.
There is, of course, recapitalisation, a
concept experts bring out of the deep freeze every time there is talk of
NPAs. Shorn of jargon, this is essentially a process of shoring up the
capital of banks and FIs, so as to enable them to simply write off NPAs.
But the government may not have enough funds at its disposal to fund the
recapitalisation of the FIs and banks.
Applications from four banks, Indian Bank,
United Commercial Bank, Dena Bank, and the United Bank of India for
recapitalisation aid are already pending with the GoI. But at least as far
as banks are concerned, recapitalisation may not be the solution. ''The
answer does not lie in recapitalisation, but in consolidation because of
the financial fragility of the banks,'' says Ashvin Parekh, Partner,
Arthur Andersen. ''After all, it is not easy to close them, which would be
the best option.'' The solution could lie in allowing the merger of weak
banks with the stronger ones.
IFCI-in its case, a standard recommendation
is its merger with IDBI-is counting on the GoI and its other promoters
(like the State Bank of India, the IDBI, and the Unit Trust of India)
infusing a fresh capital of Rs 1,000 crore. ''Once this is done, we will
diversify our portfolio and reduce the share of project finance from the
existing 94 per cent to 50 per cent,'' says Narasimham.
That isn't the only blue-sky planning
Narasimham has done. He also proposes to create a dedicated debt recovery
unit, and limit the FI's exposure to individual borrowers to Rs 100 crore
as against the present self-imposed limit of Rs 400 crore to Rs 500 crore
(self-imposed because Narasimham maintains, the RBI has mandated no limit
on exposure). Still, even that self-imposed limit can't explain how Essar
Oil owes IFCI Rs 723.30 crore, thereby breaching the norm for a single
borrower limit.
In the long-term, IFCI indicates it isn't
averse to a strategic partnership with another institution in what
Narasimham terms, ''a similar business, but with demonstrated skill in
corporate and project finance, investment banking, and the advisory
business''.
IDBI's Vora declines to get into specifics,
but hints that things will improve in the next six to eight quarters.
However, some analysts suggest that IDBI could ask the GoI for permission
to write off its NPAs, against its generous reserves which stood at Rs
8,473.8 crore in 2000-01. Whichever alternative the GoI chooses to
take-for despite its laissez faire approach when it comes to the troubles
of entities it owns and controls, it is the government that should resolve
this crisis-it'd better do it fast.
While at that, the government should revisit
issues related to the relevance of these FIs. Once, symbols of the State's
commitment to development and industrialisation, they are now teetering on
the brink of death.
|
Of
Unpaid Dues And Lost Assets |
The
Usha Group. Total amount owed to FIs: Rs 2,400 crore
 |
| VINAY RAI, CEO, ITIL |
CBI investigation or not, the
rais and the FIs have had a strange relationship. there's Malvika
Steel alone that owes IFCI, Rs 1,040 crore. Strangely, while the
RBI report on IDBI classifies the amount owed by Malvika Steel as
an NPA, its report on IFCI hasn't done so. Malvika started out in
1993, as a Rs 1,364 crore integrated steel plant, went in for an
expansion even before it was commissioned, which it eventually was
in 1996, and was shut down in 1998, courtesy a depressed global
pig iron market. By the time it was revived in 1999, the project
cost had zoomed to Rs 2,785 crore, but the FIs-Kulwant Rai, the
patriarch of the family was the government nominee on IDBI's board
between November 16, 1994 and November 15, 2000-had no issues
about doling out more funds. On June 29, 2001, the FIs again
cleared loans of Rs 173 crore to the company claiming that they
had forced the Rais out of the management, and that they (the FIs)
were increasing their holding to 51 per cent. While the Rais
refused to comment, industry sources say they could still be
counting on the project being profitable.
THE OTHER
DEFAULTERS
Like Usha and Modern mentioned
here, there are 782 others whose names appear under the NPA column
of IDBI and IFCI. Like Continental Float Glass which owes IFCI Rs
239.42 crore-the company has downed its shutters and the
realisable value of the land it has mortgaged to IFCI is a mere Rs
8.9 crore. Or Prakash Industries, which owes IFCI Rs 234.55 crore,
but has got itself declared a sick company (once a company has
moved the BIFR, no FI or bank can attach any of its assets). Now,
company sources say it has worked out a rehab package with BIFR
and that its debts of Rs 160 crore will be paid over 10 to 12
years. If there is one message that comes across clearly from
these tales of cost and time overruns and debt-rescheduling, it is
that entrepreneurs can embark on ambitious projects using money
raised from FIs-always hoping to negotiate a better deal with the
lenders in case things go wrong.
Essar Oil. Total
amount owed to FIs & other institutions:
Rs 6,194 crore
 |
| SHASHI RUIA, Chairman
(R) and RAVI Ruia, Vice Chairman, ESSAR OIL |
In february 1995, Essar oil's
prospectus mentioned that its 9 MMTPA (million metric tonnes per
annum) refinery project would be completed in the first quarter of
1998, and would cost Rs 5,350 crore. In February 1997, the company
revised the capacity to 10.5 MMTPA and the total project cost to
Rs 7,243 crore. Several subsequent revisions later (the last one
was in April, 2000) the total project cost now stands at Rs 10,430
crore (project cost of Rs 8,000 crore plus power plant and
terminal cost of Rs 2,430 crore). Though the project is yet to be
completed, the company's annual reports show that the funding from
FIs has increased from Rs 1,055.49 crore in 1998, to Rs 2,518
crore in 2001. The 2000-01 annual report of the company says that
the project is 63 per cent complete, and that the refinery would
be commissioned ''within a period of 18 to 24 months''. According
to a company spokesperson, the escalation in project cost is due
to increase in capacities, the devaluation of the rupee, and
interest costs during construction. It is also a fact that Essar
has not been able to get all of the funds it needs to complete the
project. If one were to include the contributions of UTI, LIC, and
GIC to the project, then the amount owed by Essar Oil stands at a
whopping Rs 6,194 crore. Caveat: this amount isn't even an NPA
yet; a project can be classified one only after it is
commissioned; which is why the total amount owed by any company to
an FI and the amount declared an NPA are different.
The Modern Group
Total amount owed to FIs: Rs 977 crore
 |
| H.S. RANKA, CMD,
Modern Threads |
H.S. Ranka's modern group
seems to have been born under a lucky star. Although it defaulted
on its interest payments-one company, Modern Threads alone
defaulted on interest payments to the tune of Rs 40 crore-in 1997,
the FIs, led by IFCI to which the group owes Rs 120.65 crore,
chose to give Ranka a long rope. Although the FIs decided that the
promoters would need to bring in Rs 100 crore (half by end 1998,
and the rest by March, 1999), they strangely gave Ranka more time
to meet these commitments. Only in August 1999, did the FIs decide
to appoint a consultant who would carry out a techno-economic
feasibility of the group. In April 2001, Modern Denim was declared
a sick company by the Board of Industrial and Financial
Reconstruction (this effectively means the FIs can say goodbye to
their money). And although the FIs and banks were quick to oppose
Modern Syntex's moves to get itself declared a sick company too, a
third group company, Modern Threads has now approached the BIFR.
When contacted, R.R. Maheshwari, who serves as the executive
director on the board of Modern Threads says the company (and the
group) have been hit hard by surplus capacity in the sector, and
depressed global markets. |
|
IFCI
SNAPSHOT |
|
|
|
P.V.
Narasimham |
RBI'S
CRITICISM: There
is erosion of Rs 676.20 crore in the Assessed Net Worth (ANW)
IFCI'S REPLY: This is on
account of using general reserve for provisioning/writing off bad
and doubtful loans
RBI'S
CRITICISM: IFCI's ratio of
net NPAs to net advances at 32.36 per cent is very high
IFCI'S REPLY: The percentage
is 20.68 per cent. The FI is yet to provide for companies which
have gone into production but are still to make profits
RBI'S CRITICISM: Over 70 per
cent of funds mobilised by the FI were being used for repayment
IFCI'S REPLY: It would take
three to four years for achieving a reasonable balance
RBI'S CRITICISM: IFCI's
capital adequacy ratio of 8.8 per cent would turn negative with
due provisioning
IFCI'S REPLY: This follows
from shortfall in provisioning requirement as assessed by the RBI
inspection team
RBI'S CRITICISM: The
supervision of the loan portfolio is lax
IFCI'S REPLY: The system and
procedures for effective monitoring of the loan portfolio are
being strengthened continuously |
|
IDBI
SNAPSHOT |
|
|
|
P.P.
Vohra |
RBI'S
CRITICISM: The addition to NPAs
identified by RBI inspectors stood at Rs 1,857.6 crore
IDBI'S REPLY: There could be a
honest difference of opinion in looking at a project or a proposal
RBI'S
CRITICISM: The assessed Capital Adequacy Ratios (CAR)
of the bank by inspectors was 13.24 per cent, due to estimation of
additional provision of Rs 4,84.71 crore
IDBI'S REPLY: This follows
view on underprovisioning
RBI'S
CRITICISM: Certain deficiencies were seen in
credit-appraisal
IDBI'S REPLY: The report is as
on March 2000. There has been a sea change since
RBI'S
CRITICISM: IDBI has not developed a system of rating of
customers for pricing of loans
IDBI'S REPLY: This is again an
issue of difference of opinion
RBI'S CRITICISM: Though IDBI
has a system of performance evaluation of institutions availing
refinance, this has not been carried out in time, or effectively
IDBI'S REPLY: Subsequently,
this role of refinancing for institutions has been passed on to
SIDBI |
1
|
2
|
