Industrial Development Bank of India (IDBI) has decided against disbursing funds to Essar Steel Ltd (ESL) towards the repayment of its defaulted US$ 250 m Floating Rate Notes (FRN). ESL was to payback FRN holders funds by 31st January'2000.
IDBI, is India's largest development finance institution and has been traditionally concentrating on project finance. It reported a turnover of Rs 74.6 bn for the year ending March'99.
As ESL will now not be in a position to payback the funds on time they may have to face litigation or renegotiate with FRN holders to give them more time for making the payment. IDBI has taken a firm stand on this mainly because ESL has not shown any improvement in its financials while other steel companies are showing signs of a turnaround. Also IDBI is not convinced that ESL is serious about its restructuring plans as it has not fulfilled many pre-conditions related to this restructuring. Moreover the promoters of ESL have not been able to convince IDBI on their efforts to improve upon its performance.
As IDBI has a big exposure to the Essar Group it is concerned about the repayment capacity of ESL. IDBI is clearly looking at an improvement in ESL's financials before giving any further assistance. In FY99 IDBI's exposure to the Iron & Steel industry stood at 13.2% of total loans. IDBI's net NPAs stood at 12% as of March'99 and within these NPAs the iron and steel industry accounted for 12.1% of NPAs.
This stance by IDBI can be seen as a move towards better monitoring of its NPLs. NPLs of financial institutions has become an area of concern over the last few years as many companies have defaulted due to the unfavourable economic conditions. The steel industry has been going through a very difficult phase. Hence to rectify this, financial institutions and banks are moving towards reducing their NPLs and this bold stance by IDBI will be viewed favourably by the market and investors. IDBI had in the past received much flak for bailing out companies which showed little respect for financial prudence and shareholder value.
As competition in the financial sector has picked up if IDBI sticks to its traditional ways of lending it will be left behind by other financial institutions.
As the market is still concerned about IDBI's NPA's it is rated as a "SELL" by many analysts.
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