Vaishali Gupta

MBA2019-167
Section -Y

Case Study ABC Steel Co.

1. The causes of the crisis in ABC steel were:

Debt repayments did not matter as much for ABC Steel because its operations generated cash
well in excess of what it had to pay by way of interest and loan repayments. For instance, between
financial years 2006 and 2010, while debt repayments ranged between 55 crore and ₹316
crore a year.
Cash from operations (profit after tax plus non-cash expenses) was much higher, at around
400 crore each year. These were the years when ABC Steel clocked net profit growth at a compound
annual growth rate of 53 per cent.
The company’s problems began in 2010-11 when its debt repayment obligation more than trebled to
1,118 crore. This was probably because a part of the loans taken for capacity expansion,
including for phases I and II of the Odisha plant, became due. ABC Steel’s operating cash flows of
994 crore, fell short of its debt-repayment obligations.
The situation worsened in 2013-14, with more loans becoming due. The company repaid 3,384 crore in
2013-14, double what it had the year before. Debt repayments apart, ABC Steel’s rising interest burden,
too, had become a nagging problem, shooting up eight-fold in four years to 1,663 crore in 2013-14. The
company’s profit shrank 93 per cent to 59 crore during the same period. A fall in global steel prices from
their 2008 highs amid a glut did not help. ABC Steel was consequently reduced to a position where its
profit (before interest and tax payments) was just about enough to meet its finance cost. Together, these
factors played into the company’s desperation to prevent its loans from being converted into non-
performing assets.

2. The lessons learned from the case are:

a. ABC Steel is part of the “NPA crisis”, shorthand for Rs 8-lakh crore worth of loan defaults or Non-
Performing Assets, that have choked India’s banking system and pushed lending, the lifeblood of
the economy, to its lowest point in 20 years. Company promoters blame these defaults on a global
recession, poor regulation and sheer bad luck.

b. The dramatic rise and fall of ABC Steel reveal the NPA crisis is equally about public sector banks
backing risky bets of promoters accustomed to growing their businesses on borrowed money. And when
these businesses floundered, banks threw good money after bad, often through third-party transactions.
c. Despite many challenges, your company’s bankers have demonstrated continued
confidence on the company,” the annual report stated, noting that banks had extended almost Rs18,000
crore in fresh loans and working capital.
d. India’s banks have portrayed themselves as hapless victims of canny promoters. Yet, banks played
along through a systemic failure of project monitoring, and inadequate due-diligence.HT sent SBI, ABC
 Steel’s lead banker with a total exposure of over Rs. 10,000 crore, a detailed email - through their
media agency to understand why banks continued to give fresh loans to the company when it had
trouble paying back old debts.
e. Recovery in NPA crisis via IBC as it RBI and government’s important tool currently was not a robust
system for the collection of debt from the companies. Even the Economic Survey 2018 said the new
Insolvency andBankruptcy code (IBC) was helping improve the health of banking sector despite the
fact that the banks', especially public sector banks (PSBs), asset quality remained stressed in the
current financial year.

3. An evergreen loan is a loan that does not require the repayment of principal during the life of the loan, or
during a specified period of time. In an evergreen loan, the borrower is required to make only interest
payments during the life of the loan. Evergreen loans are usually in the form of a line of credit that is
continuously paid down, leaving the borrower with available funds for credit purchases. Evergreen loans may
also be known as “standing” or “revolving” loans.
Evergreen loans provide borrowers with monetary flexibility but require the ability to regularly make
minimum monthly payments.
● An evergreen loan is a type of interest-only loan in which principal payment is deferred.
● Typically, the repayment of principal is only expected at the end of the loan term, although interest
rates may be higher or contain penalties for delayed payment.
● They are called evergreen since interest can be paid but the repayment of principal can, in effect, be
delayed indefinitely such that it works like revolving credit.

4. Yes, the banks as lending institutions were equally responsible for the mess in ABC Steels But the dramatic
rise and fall of ABC Steel reveals the NPA crisis is equally about public sector banks backing risky bets of
promoters accustomed to growing their businesses on borrowed money. And when these businesses
floundered, banks threw good money after bad, often through third-party transactions. In the on-going court
case of ABC Steel and Syndicate Bank, the Central Bureau of Investigation alleges in a First Information
Report,a bank official purportedly demanded bribes to ignore defaults.

India’s banks have portrayed themselves as hapless victims of canny promoters. Yet, banks played along
through a systemic failure of project monitoring, and inadequate due-diligence.HT sent SBI, ABC Steel’s
lead banker with a total exposure of over Rs. 10,000 crore, a detailed email - through their media agency -
to understand why banks continued to give fresh loans to the company when it had trouble paying back
old debts.
Banks in spite of tough times kept lending to the company. Despite these challenges, your company’s bankers
have continued demonstrated confidence in the company,” the annual report stated, noting that banks had
extended almost Rs18,000 crore in fresh loans and working capital. “Many loans were secured against the
company’s stock.”according to the financier, noting that the Mehras owned 70% of the stock. This allowed
lenders to pretend that their loans were sufficiently collateralised. Then on August 1 2014, the Centre Bureau
of Investigation, acting on a tip-off from a bank insider, said ABC Steel allegedly defaulted on an Rs.100 crore
loan repayment to Syndicate Bank and allegedly bribed the bank chairman, S.K. Jain for a credit extension.
“Fresh creditwas extended to M/s BSL by Syndicate Bank and as a token, an illegal gratification of Rs 10 lakhs
was paid to Shri Sudhir Kumar Jain,” as mentioned by the CBI’s FIR.

5. The following steps can be taken by the banks :

a. Impact on credit score– Whenever any person defaults on the payment of Equated Monthly Installments
(EMIs), it decreases their credit score, which has a negative impact on their borrowing capacity in future.
b. Penalties– In case of late payments which are a part of default in payment, the lender can impose a penalty
amount on the defaulting party.
c. Legal Recourse - Sec 138- The lender will always have legal recourse available under the ambit of law.
Payment defaults by bouncing of payment instrument may lead to filing of case under Sec 138 of IPC.
d. Seizure of collateral or property – SARFAESI – In case of secured loans, after the borrower is given sufficient
notice and time period to repay the loan amount, the lender opts for the option to seize the collateral under
the SARFAESI Act. Such repossessed properties are then auctioned in order to recover dues.
e. Deploy MCLR strictly.