BackSBI consortium to lend `35,000 cr to Tata Steel
Tata Steel’s Rs35,000 cr loan and Rs9,896 cr for Hindalco signal a boost for investments by Indian firms
Premium(A file photo of Tata Steel’s Jamshedpur factory. A person familiar with Tata Steel’s fund-raising plans said the company will use the money for its 6 mtpa steel plant in Kalinganagar in Orissa that’s under construction. )
Mumbai: The Indian banking industry signed off on two big-ticket loans for large conglomerates last week, close on the heels of the United Progressive Alliance (UPA) embarking on a raft of policy changes aimed at lifting the sagging economy.
Bankers say that companies are willing to put capital expenditure plans back on track and lenders are eager to back them.
A consortium of banks led by State Bank of India (SBI), the country’s largest lender, and HDFC Bank Ltd, the second most valuable Indian bank, agreed to lend ₹ 35,000 crore to Tata Steel Ltd, India’s largest steelmaker, and ₹ 9,896 crore to the world’s largest aluminium rolling company, Hindalco Industries Ltd, a part of the Aditya Birla Group.
Banks closing two such signature loan transactions in a span of days will boost investor confidence in Asia’s third-largest economy, where equity markets are on a roll following the government’s aggressive initiatives on policy despite stiff political opposition.
In the recent past, the government has eased foreign direct investment (FDI) rules in key sectors such as aviation and retail, besides unveiling debt-restructuring packages for the beleaguered state-run power distribution companies. It has also raised the price of diesel and curtailed the supply of subsidized cooking gas to help contain the fiscal deficit.
The loans may be harbingers of change, said SBI chairman Pratip Chaudhuri.
“It may take a while to change the sentiment," he said. “Nothing can be done overnight but we are on the right path." Both the loans have been closed, he said.
SBI has committed to give ₹ 7,000 crore to Tata Steel and its associate banks will give another ₹ 2,000 crore.
The two loans are the biggest made by the country’s banking sector in the past one year, said a top executive at HDFC Bank who was part of the negotiations.
“It shows that there is a revival in sentiment. People (companies) are coming and looking out (for loans)," the executive said, requesting anonymity because he is not allowed to speak to the media.
“This could be termed as a sign of confidence returning to Indian corporations, which have been suffering from uncertainties in government norms, investigations and lack of investment," a senior executive with one of the leading state-run banks said. He requested anonymity. “I do not remember any large transaction happening in the last one year."
Besides SBI and HDFC Bank, Standard Chartered Bank Plc, Citibank NA and a few others are also part of the consortium, the executive said. Mint wasn’t able to reach out to the other lenders involved.
A person familiar with Tata Steel’s fund-raising plans said the company will use the money for its 6-million tonne per annum (mtpa) steel plant in Kalinganagar in Orissa that’s under construction. He declined to be identified as he’s not authorized to speak to the media.
The first phase of 3 mtpa is expected to commence by 2014, according to the firm’s latest annual report.
“The company is in the process of tying up this loan. It is entirely meant for Tata Steel’s greenfield expansion in Orissa. It isn’t certain as to how much of this loan it will eventually draw, but it will be a significant amount," this person said. “Availability of loans depends on the project viability and the company secured the debt facility due to the worthiness of the Orissa project."
According to a 27 August PTI report, the total investment envisaged for Tata Steel’s Orissa steel plant is around ₹ 34,500 crore. Out of this, the company has spent ₹ 3,700 crore upto March 2012.
Hindalco was advised by SBI and its investment banking arm SBI Capital Markets Ltd in the ₹ 9,896 crore loan deal in which 28 banks participated.
SBI lent ₹ 3,000 crore and IDBI Bank Ltd lent ₹ 2,000 crore, contributing the major chunk of this funding.
The loan is being processed and the company will draw the major chunk by end of this month, said Alphonso Richard Das, president (finance), at Hindalco.
The money will be used for its ₹ 13,195 crore greenfield Aditya Aluminium smelter project at Lapanga in Orissa, with a proposed annual aluminium production capacity of 359,000 tonnes and backed by captive power plant of 900 MW.
The project has been funded in a debt-equity ratio of 75:25 with a debt component of ₹ 9,896 crore, Das said. “The debt carries a tenure of 12.5 years and is priced at the SBI base rate plus 125 basis points (bps), which works out to 11.25 %," Das said. One basis point is one-hundredth of a percentage point.
“We had recently tapped both the domestic bond market as well as the loan market to meet our financing needs. We are going ahead with our capital expenditure plan despite a slowing economy," Das added.
Mirroring the slowing economy, growth in demand for loans has dropped to 16% so far this fiscal, down from 21% in 2011-12, as companies delayed investment plans.
The Reserve Bank of India (RBI) has projected a loan growth of 17% in the current fiscal, but some banks have already cut their targets to 15-16% due to poor demand from borrowers.
“There are various reasons why this happened and the intermingling of reasons has created a self-sustaining inertia," analysts Nilanjan Karfa and Jitendra Nikam said in a Brics Securities Ltd note on 17 September.
Bankers said a few large loan transactions could help improve corporate sentiment and prop up loan demand even from smaller companies.
Demand for loans usually picks up in the second half of the fiscal year, which starts in October with the harvest season. Manufacturing also gets a boost from the consumption push expected during the upcoming festive season.
What will help banks meet the loan demand of companies is the improved liquidity in the system. Banks’ daily borrowings from RBI dropped to an average of ₹ 46,173 crore in September from ₹ 75,364 crore between April and August.
RBI’s move to slash the cash reserve ratio (CRR), or the portion of money that banks need to keep with the central bank, by 25 bps to 4.50% earlier this month, infused ₹ 17,000 crore in the banking system, easing liquidity further.
“With CRR coming down, there is an infusion of liquidity in the system," said the person familiar with Tata Steel’s transaction. “Also, there is a certain lightness in the economy now."
However, weak industrial production and a below-normal monsoon have led to a downward revision in India’s growth rate projection by Standard and Poor’s (S&P). The rating agency forecast Monday that India’s gross domestic product would grow at 5.5% this fiscal year compared with its more optimistic projection of 6.5% earlier. This is one percentage point lower than RBI’s projection of India’s economic growth in 2013.
In July, the International Monetary Fund lowered India’s growth forecast by 70 bps to 6.1% for calendar 2012—the steepest cut for any nation—in view of the deteriorating global economic situation. It also reduced the 2013 calendar year growth estimate by 70 bps to 6.5%.
Some analysts say the mood has changed for the better. “Liquidity is returning to the economy, following the reforms announced by the government," said Saurabh Mukherjea, head of equities at financial services firm Ambit Capital Pvt. Ltd. Mukherjea did not comment on the specific loan deals by Hindalco and Tata Steel. “Business confidence is increasing as money is coming into the market. The economy is likely to do better in the second half of this financial year."
Naresh Takkar, managing director at rating agency Icra Ltd, said it was too premature to say whether this marked a sustainable phase of investments.
“There has been a revival in sentiment due to recent government announcements on reforms but we have to wait and watch the execution of these reforms. It is too early to form an opinion that investments are returning to the economy as structural bottlenecks such as rules pertaining to land acquisition stay," Takkar said.
Dinesh Unnikrishnan contributed to this story.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
