SBI helps sick Ispat Industries with fresh money to prevent loan being classified as ‘bad’

Debashis Basu 02 December 2010

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.

Comments

User

V Jayaraman

2 decades ago

In the DNA newspaper dated Dec 3, 2010, Mr. Anil Sureka, Director (Fin) has gone on record to state that this is part of regular shutdown and that regular shutdown has been preponed for reasons best known to them. Further, he states that this shutdown timeline has increased as they found that the problem is technically complex. Mr. Anil Sureka is a smooth operator and he knows how to cover up these type of questions. The skill of recovering monies from these promoters is the biggest weakness the Indian Banks carry. As long as this continues, these types of promoters shall carry unlimited enjoyment. Adding to this, huge expensive gifts showered by them during festive occasions ensure that these Banks / FIs do not ask any monies. No wonder, before the company hits BIFR, institutions like IFCI, IDBI Bank and ICICI Bank have converted part of their loans into equity shares to make the company stay afloat. These Banks/FIs are hand in gloves in these type of operations.

Guest

2 decades ago

This practice of lending afresh to hide NPA reporting is not new. I have been working with a leading private sector bank and have found this to be happening time and again. Its time that auditors and RBI check accounts on a client basis and any fresh disbursement within a week of due repayment be scrutinised thoroughly

v subramanian

Replied to Guest comment 2 decades ago

Why do the statutory auditors, who are chartered accountants appointed by RBI to audit banks, not point out these irregularities? How are they being managed?

K Narayanan

Replied to v subramanian comment 2 decades ago

In the supply chain mgt of corruption,the auditors are a vital part.It is surprising that you have so much faith in CAs as auditors.

sanjay doshi

Replied to v subramanian comment 2 decades ago

remember something called Satyam !

R Balakrishnan

2 decades ago

Once upon a time. A co called its Board of Directors for a meeting at Mumbai. Business class, stay at Taj/Oberoi for self and family. Limo at disposal. Then a special visit by a chartered aircraft to Tirupathi and back.
At a time when rescheduled debts were overdue, institutional nominees enjoyed the divine opportunity!
This is a typical story for many many companies.

Sreedhar

2 decades ago

Shame on SBI to bail out ISPAT
Any ethics in SBI's Financing Industries?

V Jayaraman

2 decades ago

If you go thru the notices issued by the company to stock exchanges, one of the notices state that the company has issued equity shares at par to ICICI Bank, IDBI Bank and IFCI Limited by converting part of their loans. Despite this, RBI is not insisting to consider this account as 'sub-standard'. Such classification would affect many bank / FIs books. That's why the policy of 'you scratch my back, I scratch yours'. Largesse is given by premier banks like SBI to evergreen the loans. Well this is only called rephasement of loans (note there is no word called 'reschedulement' spelt out). With this, Bank / FIs can walk away as 'Standard' asset classification. This is aptly called 'baap ka paisa'. This is the same Mittals who had diverted project funding monies into Peddar Road land acquisition.