How ICICI Bank burned an $850 million hole with wrong bet on Australian coal mine

The loan

The total amount lent by the banks in the consortium—including Bank of Baroda, Indian Overseas Bank and Exim Bank—works out to about $1.4 billion (around Rs 11,396 crore at current prices), according to people familiar with the developments. Among them, ICICI Bank has a relatively significant exposure to the failed mine.

According to Australian media reports, ICICI Bank’s loans to Lanco for the Griffin buyout stood at $1.1 billion (around Rs 8954 crore at current prices) at one point, after initially lending $750 million (around Rs 6,105 crore at current prices).

The bank’s exposure to Griffin at this point is about $850 million, a person in the know told Moneycontrol on condition of anonymity. This became a non-performing asset (NPA) in 2017 and was fully provided for during FY18, the person said.

“This is one of the loans that went wrong for the bank,” said the person quoted above. “It became an NPA in 2017-18 and ICICI Bank has fully provided for it. The entire exposure to Lanco is provided for.”

Emails sent to ICICI Bank, Bank of Baroda, Indian Overseas Bank, and Exim Bank requesting comments on the matter remained unanswered. A separate email sent to the Reserve Bank of India (RBI) asking whether the regulator has looked into the matter was unanswered.

Wrong bet

How did ICICI Bank and the other lenders get dragged into the deal?

To be sure, it wasn’t ICICI Bank alone that sought a slice of the pie of risky corporate loans in 2010. Most Indian banks were upbeat at that time on the global energy story and wanted a share of it. ICICI Bank was no exception.

Additionally for ICICI Bank, the Lanco loan was granted at about the time the bank took a Rs 3,250 crore disastrous bet on the Videocon Group back home, under its former chief Kochhar. This loan was allegedly part of a quid pro quo deal between the Kochhar family and Videocon’s Venugopal Dhoot, according to later probes.

ICICI Bank’s funding enabled Lanco to try its luck in the tricky Australian coal mine business. Using the loan money, Lanco acquired Griffin Coal in 2011 through its Australian subsidiary. According to Lanco’s website, Griffin was the largest individual supplier of thermal coal to Western Australia's industrial coal market with over 1.2 billion tonnes of coal resources.

The cookie crumbles

The bet went wrong in all possible ways—for the buyer and the financiers.

In the years that followed, production at Griffin was less than optimal and Lanco reeled under a huge debt burden back home that would ultimately push the group to bankruptcy.

Lanco’s woes doubled in August 2018, when the Indian bankruptcy court ordered the liquidation of Lanco Infratech, the group’s holding company.

Analysts said Lanco paid too high a price for Griffin, which produced poor quality coal unsuited for exports. This raised the question of the efficiency of ICICI Bank’s due diligence process when it ascertained the creditworthiness of the borrower.

To cut a long story short, it isn’t an exaggeration to say that the coal mine turned out to be a white elephant for Lanco and its lenders.

Lanco finally hit a wall in 2017, when lenders took over the shares pledged against the loan after the company defaulted on payments, effectively taking ownership of the failed mine.

The Press Trust of India reported a Lanco official as saying in December 2017 that Griffin coal was no longer a subsidiary of the group after the lenders took over the pledged shares.

However, for the lenders, the damage was already done. It had to tag the funding for Lanco’s misadventure as an NPA and provide for it. A loan becomes an NPA if there is no repayment of interest or principal for 90 days. Provisions refer to money set aside to cover potential losses.

Sitting duck

An important question at this stage is whether ICICI Bank and the other lenders own the failed mine now.

According to Australia’s ABC News, since Lanco went bankrupt, ownership of Griffin is effectively with the lenders.

The reports suggest that lenders are now pushing for higher coal prices that could cause a commensurate increase for consumers in Western Australia, which faced a growing energy crisis.

“Despite the bank’s continued silence on its plans for the operation, it is understood ICICI is pushing for big increases to the price Griffin receives for its coal,” the report said. Reportedly, the Australian authorities are in talks with the lenders on this issue.

However, the person quoted above denied the lender’s ownership of the mine.

“The bank doesn’t have the ownership. Bluewaters Power wants the bank to take the ownership,” the person said.

Moneycontrol couldn’t independently verify this claim.

Will the bank get any money back from Griffin?

There is only hope left at this point. The bank expects that the Australian government’s efforts to revive the failed Griffin coal mine will help to improve cashflows and enable some writeback of the provisions made.

“If any money comes back, the bank is happy,” the person said.

But, according to ABC News, the mining lease of Griffin will expire in July and the Australian authorities need to be convinced of the owner’s financial capability. That will be another challenge for the lenders.

A larger problem

The Lanco loan is only one of many huge corporate loan bets that have gone wrong with Indian banks since 2010. When such loans were not repaid, banks resorted to large-scale corporate write-offs as part of a massive book-cleaning exercise started in 2015 by former RBI governor Raghuram Rajan.

India’s scheduled commercial banks wrote off loans of over Rs 10 lakh crore ($121 billion) during the past five financial years, according to data submitted by the government in Parliament. A loan is written off when there is no scope of recovery and banks want to take the bad asset off their balance sheets.

But this exercise comes at a cost to the bank. The provisions made on such loans affect their profitability. That’s not good news for shareholders and investors.

Recovery from such loans is always insignificant. Public sector banks could recover only about Rs 1 lakh crore from the written-off loans over the past financial years.