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[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

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