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Sunday, Jan 20, 2002

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FIs: Hoist by their own petard

Reshma Krishnan

WITH realisations falling across the board and no hope of a dramatic increase in consumption in the short-term, the solution to the steel industry's problems lies in the hands of the financial institutions. As there appears hardly any consensus among the players to cut back production to trigger a price rise, the FIs are also in a quandary. To some extent, the vacillating attitude of the FIs is partly responsible for the state they find themselves in. In the guise of "last-mile" financing of some steel projects, which had come out with primary offers in 1994 and 1995, the FIs, in 1997-1998, resorted to a roll-over of debt. In some cases, they even contemplated offering guarantees for external commercial borrowings to steel players raise cheap debt to substitute high-cost debt.

Following the failure of these attempts to help steel players tide over the financial crisis, the FIs have been active in inducting experienced steel professionals on the boards of ailing companies such as Malvika Steel or Bellary Steel and Alloys. But these were half-hearted measures and did not yield the desired results. In the final assessment, the failure of the FIs to bite the bullet in terms of closing down unviable capacities, resorting to a bold change in management in some cases, or putting up some units for sale is adding to their woes.

Dr S. K. Gupta, Vice-Chairman, Jindal Vijayanagar Steel, highlighting the key issues affecting the steel industry, in a paper, says that at least a third of accrued interest does not have matching assets due to a delay in the completion of project. He added that even if Indian companies were competitive on the basis of variable cost, low productivity in finance would eat into profits.

The cumulative investments of all financial institutions in the iron and steel sector as of March 2000 is approximately Rs 35,000 crore. Of this, over Rs 20,000 crore was invested in 1995-2000. As of March 31, 2001, IDBI's exposure to steel was Rs 7,468.5 crore and ICICI's was Rs 9,322 crore as of September 30, 2001. The problem is that there is too much at stake and no FI wants to be saddled with such huge NPAs. If companies were subject purely to market forces, then the consequences would be dire for many of the FIs.

It is in this backdrop that corporate debt restructuring packages are being planned for some existing steel companies. One of the restructuring packages currently under consideration is for Jindal Vijayanagar Steel. According to Mr J. K. Tandon, CEO and Joint Managing Director, Jindal Vijayanagar Steel, the restructuring package will allow the company reduce its interest burden and improve working capital requirements. This package is at an advanced stage of evaluation by the FIs, and has yet to be approved. Till then, any comments on the efficacy of the package would be premature.

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