With loans to Bhushan Steel at Rs 40,000 cr, SBI wants an outside agency to watch co

State bank of India (SBI) and other commercial banks have a combined exposure of Rs 40,000 crore to scam-ridden Bhushan Steel and are in talks to appoint a management agency to monitor the operations of the company, said Arundhati Bhattacharya, chairman of the country’s largest lender.

SBI alone has Rs 6,000 crore exposure to Bhushan Steel, whose top executive was arrested recently in connection a bribery case involving state-run Syndicate Bank.

However, Bhattacharya said the bank’s exposure to Bhushan Steel has not turned NPA yet.

“We are in discussions with other banks including Punjab National Bank(PNB), which is the consortium leader,” Bhattacharya said. “This (management) agency will monitor the company on a daily basis,” Bhatacharya said. There are 35-50 banks in the consortium, including PNB, ICICI Bank and IDBI Bank.

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Lenders to Bhushan Steel will meet next week to discuss the appointment of an external agency to monitor the company, a senior SBI official said. PNB is the lead banker for term loans to Bhushan, while SBI heads the consortium for working capital loans.

SK Jain, chairman of Syndicate Bank, was arrested by the Central Bureau of Investigation last week. The investigative agency has alleged that Jain took Rs 50 lakh bribe to extend credit facilities to private sector companies, Bhushan Steel and Prakash Industries, in violation of lending norms.

The CBI arrested Bhushan Steel vice chairman and managing director Neeraj Singal in connection with the case.

The CBI has extended the bribery probe to other banks too.Besides the investigating agencies, the Reserve Bank of India (RBI) too has initiated an inspection into the developments that led to the arrest of Syndicate Bank chairman, RBI governor Raghuram Rajan said early this week.

“An inspection is underway on Syndicate bank case,” Rajan said.

“The loan to Bhushan is not bad at this point,” said a senior SBI official. But, given that company is facing investigations and loans given by banks are being examined, banks are running the risk of losing money, analyst said.

“It is a high risk loan, which can turn very well turn bad,” said Vaibhav Agrawal, vice president, research, at Angel Broking Ltd. If indeed loans given to Bhushan steel loan turns bad, that can inflict significant damage on the books of several banks in the consortium in the approaching quarters.

India’s banking system is struggling under the pressure on bad and restructured assets. Total bad loans of India’s 40-listed banks, as at end June, stood at Rs 2.45 lakh crore, while total restructured loans under the so-called corporate debt restructuring mechanism alone stood at over Rs 2.5 lakh crore.

The actual number of restructured loans will be even higher because banks also do bilateral loan recasts.

A significant portion of stressed assets in the banking system has emerged from loans given to large companies to fund projects. Many of these projects got stalled due to lack of clearances and economic slowdown, thus impacting the cash flows of companies resulting in repayment delays to banks.

However, another bigger reason for bad loan accretion is the careless lending and interested-party lending by banks over many years, leading into huge additions of bad loans. Bad loans impact the profitability of banks and threaten their financial health because current norms stipulate banks to make provisions on such loans.

If a loan turns bad, banks need to provide between 20 percent to 100 percent of the loan value as provisions depending upon the category of the bad asset. If a new loan is recast, banks need to set aside 5 percent.