Coalgate: Rs 3 lakh cr loans at risk. Banks biggest victims of UPA scam

The Supreme Court’s verdict on Monday that deems coal block allocations made between 1993 and 2009 illegal might be a big blot in the otherwise impeccable resume of Manmohan Singh, but the biggest victims to the whole turn of events are banks, whose money appears to be at big risk.

The SC verdict doesn’t quash the coal block allocations, but when the final verdict of the apex bank will be out on the matter, two possible scenarios can emerge:

One, the Court can go for the cancellation of the licences of those firms, where the production is not commenced yet. Second, in other cases, penal actions can be imposed-possibly in the form hefty penalty.

More from Corporate

Maha: Court orders Rs 30L compensation for parents after youth dies in road accident Ashleigh Barty comes from set down to beat Coco Gauff in Australian Open lead-up

Either way, banks would suffer since the cash flows of the borrower firms will get severely impacted due to cost over-runs and resultant delay in the repayments to banks. The actual impact on banks/companies can be ascertained only after the final verdict is out on the matter.

Till June, Indian banks have lent Rs 2.6 lakh crore to iron and steel companies and Rs 5 lakh crore loans to power companies. Not all of these loans will be at risk.

For instance, of the Rs5 lakh crore given to power sector, a chunk of the money is given to electricity distribution units, which don’t have direct impact from the SC order. But a back-of-the-envelope calculation shows that exposure to power, steel producer firms could be between Rs 2.5 lakh crore to Rs3.5 lakh crore.

Yet another big worry for the bankers will be the existing pile of restructured loans from iron, steel and power sectors, which too face stress due to the order.

Even now, iron & steel and power segments are the biggest contributors to the restructured loan pile under the so-called corporate debt restructuring (CDR) mechanism, constituting about Rs80,000 crore or 24 percent of the total CDR loans. Under CDR, banks offer relaxed loan repayment terms to stressed companies.

Possible cancellation of allotted coal blocks and resultant stress on the sector would be a double whammy since that will adversely impact the chances of recovery of these loans. If these firms fail, banks will have to either write off or classify them as non-performing assets (NPA).

Bad loans impact the profitability of a bank since it requires the entity to set aside additional money to cover such loans. Provisions for bad loans can range from 20 percent to 100percent, depending upon how bad the asset it. Overall, bank loans that will take direct hit from SC action on coal could be about Rs 3 lakh croreon a conservative estimate.

To quote a banker, who is involved in the lending process to steel, power companies, “it can’t be positive anyway”. About 200 coal blocks were awarded between 1993-2009 to steel, cement and power companies for their own consumption. Only very few of them have begun production in these plants.

If at all the Court decides to cancel the coal blocks and seek re-allocation, it would mean considerable delays, which would mean possible slippages. Banks will, in that case, will be forced to invoke the underlying assets of the companies, whichever way chances of impending stress are almost sure.

This isn’t the first time SC whip on alleged wrongdoings of the UPA government raising concerns among the banks. In early 2012, banks faced similar plight when SC quashed 122 2G spectrum licences granted UPA-government on the ground that they were issued a “totally arbitrary and unconstitutional” manner. But, banks’ exposure to 2G loans was much less, about Rs 10,000 crore.

What is important to note here is that in both cases, banks have lent to companies relying on the process followed the government in allocating the resources. But in both cases, the alleged irregularities on the part of the government and the subsequent intervention of the apex court have put their money at risk.

Even though banks are technically safe since all the money they lent to steel are against some underlying assets, recovery will not be an easy task and time consuming as chances are high that these firms will move to court seeking legal relief.

Clarity on the extent of damage on banks will emerge only after the final take of the apex court on the matter. The concern among bankers for repeatedly being victims of the wrongdoings of politicians are logical since banks are already sitting on a huge pile of sticky assets, about Rs2.5 lakh crore as at end June.

This, coupled with about Rs 5 to Rs 6 trillion of restructured loans, makes the total size of stressed assets in India’s banking system about 13 percent of the total credit given by banks so far.

Not a good sign for an aspiring economy.