Ruia-controlled Essar Steel, which has debt of around Rs 23,000 crore on its books, is 30 days behind in its interest payment schedule due to a "liquidity stress" within the company, bankers familiar with the development told moneycontrol.com.
Saikat Das & Santosh Nair
Ruia-controlled Essar Steel, which has debt of around Rs 23,000 crore on its books, is 30 days behind in its interest payment schedule due to a "liquidity stress" within the company, bankers familiar with the development told moneycontrol.com. In banking parlance when a borrower stops paying interest on loans for 30 days, it is perceived to be under stress and bankers review the situation. The standard industry practice is that when the delay in payment exceeds 40 days, bankers and the borrowers start negotiations on whether the matter has to be referred to the Corporate Debt Restructuring (CDR) cell.
Of the 18-20 lenders which have loaned money to the privately-held Essar Steel, a leading state-owned bank is said to have the highest exposure of close to Rs 9000 crore.
"We are in talks with the management to sort of the issue. There are some liquidity issues hurting its business, but the situation is still not beyond redemption yet," said a senior banker at a PSU bank, adding that if the delay persisted, debt restructuring would have be considered.
A loan account can be referred to the CDR cell when at least 75% of the banks (by value) and 60% of lenders (by number) agree to resolve the case under CDR mechanism. Under the terms of CDR, either the interest rate is reduced or the tenure extended, so that the loan does not become a non-performing asset for the bank. Under Reserve Bank of India rules, a loan account becomes a non-performing asset after 90 days of continuous non-payments.
In response to moneycontrol.com's queries, Essar Steel said they had more than enough assets to back the loans, and expected cash flows from their newly set-up plants to pick up soon.
"We have invested around Rs 37,000-38,000 crore to create our current asset base, which includes facilities in Hazira, Odisha, and Visakhapatnam," said Amit Agarwal, CFO, Essar Steel.
"The replacement value of this asset base would be in excess of Rs 65-70,000 crore. Considering the debt level, we have a comfortable asset cover," said Amit Agarwal, CFO, Essar Steel.
And he says, the company has not violated any interest payment norm.
"Payments and such things (interest & principal) are based on certain norms. And we are always meeting all those norms. All are in line with banking industry norms," he said.
Will Essar Steel's loan be referred to the Corporate Debt Restructuring cell? The company denies things will come to that, and is in talks with the banks to resolve the issue.
"The company has a liquidity stress impacting their interest payments, but it could also be a short term issue," said a senior banker.
"The question is cash flow generation. Asset base can generate cash flow when it is sold at present value. In the current economic scenario, who will buy them at double the price?," the banker said.
Industry people say the liquidity problem could be due to group level problems.
Group company Essar Oil has been asked by the Supreme Court to pay back Rs 6300 crore to the Gujarat government as it was not eligible for the sale tax incentives it had claimed.
Also, the global steel industry is going through a rough patch because of worldwide economic slowdown. Locally, the problems have been caused by raw material shortages, particularly coal.
Last week, rating agency Standard & Poor's downgraded its rating on ArcelorMittal to below junk grade, citing the weak steel environment as one of the key factors.
If Essar Steel is unable to resolve does knock the door of CDR cell due to drying up cash flows, it could well be a major shock for the banking industry after Air India (at around Rs 22,000 cr) and Kingfisher airlines (nearly Rs 7,000 cr).
Rating agency Crisil sees bad loans in the banking industry to rise to Rs.2 lakh crore or 3.2% of the total loans by March, 2013. So far this financial year till July, around Rs 26,000 crore of loans have been referred to the CDR.
Rating agency Care had assigned Essar Steel a rating of A-1 in January, 2012 for their secured and unsecured loans. It is currently in the process of reviewing the rating. The rank A-1 signifies a little above 'moderate' (BBB) but below 'adequate' (A) by standard. AAA is the 'best' while 'AA' is good
Clarification: The earlier copy said that if the delay in interest payment exceeds 40 days, the loan is referred to the CDR cell. We wish to clarify that the loan does not automatically get referred to CDR after 40 days delay, but lenders usually commence negotiations to recover their dues, and if the borrower is unable to assure the banks of timely payments, the matter is referred to CDR.