In a brazen attempt at preventing its loan from being classified as a non-performing asset, the State Bank of India has just sanctioned Rs130 crore to Ispat Industres, adjusting Rs30 crore against earlier dues!
Yesterday Moneylife wrote how an acute cash crunch has forced Ispat Industries to close nearly all its plants, including the 3.3 million steel unit at Dolvi, Maharashtra. However, banks and financial institutions flush with funds, have been eager to help the company generously, no matter that a whole steel boom has come and gone without the slightest change in the fortunes of the company, its shareholders and its bankers.
Shockingly, even as the mill has remained closed from 3rd November and the bourses have not been informed (read: http://www.moneylife.in/article/4/11805.html), Moneylife learns that Ispat has got a fresh loan of about Rs130 crore from State Bank of India (SBI). We gather that of this amount, Rs44 crore has been used to pay overdue electricity charges, Rs30 crore towards excise duty, Rs30 crore for customs duty and demurrage, while an arm of SBI has taken away a part of what the bank has given the company. It appears that SBI has adjusted Rs28 crore against its earlier dues.
So why would the bank sanction a fresh loan if it has to take back part of the money? Apparently, SBI was indulging in what is called evergreening. By getting back part of the money, SBI has avoided classifying the loan as 'bad' which would have forced a series of actions. But SBI's action is in violation of the spirit of the Reserve Bank of India (RBI) guidelines.
When contacted about this largesse, both SBI and Ispat Industries kept mum.
Ispat Industries has been continuously piling up losses for several years and has been generously helped to stay afloat by leading institutions like IDBI, ICICI, IFCI and SBI. Mysteriously, this has not affected the promoters, nor their control over the company, which makes a mockery of corporate governance and the tough law called 'Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests' (Sarfaesi) that was enacted in 2002 to strengthen the powers to banks in the recovery of dues.
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A CRISIL study on 5,000 small and medium enterprises (SMEs) reveals that SMEs can enhance profits by 15% if they receive payments on time from their large corporate customers.
CRISIL estimates that timely payments from large customers will help SMEs reduce interest costs, and improve profitability by around 15%, and have a positive impact on the long-term health and sustainability of India’s SME sector. SMEs with large corporate customers have receivables of 90 to 120 days of sales on their balance sheets, as against 45 days stipulated by the Micro, Small, and Medium Enterprises Development (MSMED) Act.
The CRISIL study reveals that high receivables are endemic across industry sectors and geographies in the SME space. The smaller the SME, the weaker its receivables position tends to be. Small enterprises constitute a sizeable portion of India’s SME space and are most susceptible to liquidity pressures; it is, therefore, critical that the small entities receive payments on a timely basis from customers.
Ramraj Pai, director, CRISIL Ratings, said “SMEs need to understand the costs and impact of delayed receivables, and factor this into the selling price. Further, industry associations and trading bodies need to increase awareness among SMEs about the provisions of, and the redressal mechanisms under, the MSMED Act. ”