`6,000 cr bank loans to Sterling group firms may turn bad

Mumbai: Indian banks are running the risk of close to ₹ 6,000 crore in loans advanced to several companies of Mumbai-based Sandesara Group turning bad, said bankers familiar with the situation. Gelatin maker Sterling Biotech Ltd is the flagship of the group, which has interests in pharmaceuticals, healthcare, oil and gas, engineering, and infrastructure.

add_main_imageA sizeable chunk of bank loans to Sandesara Group has already turned bad. The group is facing a lawsuit in London for failing to meet a 16 May deadline for payment to institutional investors that had bought five-year foreign currency convertible bonds (FCCBs) sold by Sterling Biotech in 2007.

State-run banks, including the country’s largest lender State Bank of India (SBI), Punjab National Bank, Bank of Baroda, Union Bank of India, Andhra Bank and UCO Bank, among others, have lent to Sandesara Group companies.NextMAds

These loans have either already turned bad or are at the risk of imminent default, according to two senior bank officials who did not want to be named.

Sterling Biotech apart, other Sandesara companies include PMT Machines Ltd, Sterling SEZ and Infrastructure Ltd, Sterling Port Ltd and Sterling Global Oil Resources Ltd.

Last week, a group of investors who had subscribed to Sterling Biotech FCCBs filed a suit against the firm in a British court after the company defaulted on $184 million ( ₹ 980 crore today) worth of bonds. Bank of New York Mellon Corp., the trustee of bondholders, filed the case seeking the recovery of the money.

International hedge fund QVT Financial LP, which in 2010 had taken Wockhardt Ltd to court after the Mumbai-based drug maker failed to redeem $110 million of FCCBs, is one of the investors.

One bondholder, who spoke on condition of anonymity, alleged that Sterling Biotech plunged into a financial crisis after diversifying from its core business—making gelatin—into unrelated verticals such as oil and gas, and infrastructure development.

Some transactions of the Nigerian oil arm of the group, including the sale of close to a 20% stake for about $20 million, is questionable, the bondholders said.sixthMAds

“The amount at which they sold the stake was too low, while the company’s valuation is around $10 billion. Investors were not informed about this,” the bondholder alleged.

Nitin Sandesara, managing director of Sterling Biotech, described the financial stress of the company as “temporary”.

“We are working on various options to repay the loans. We are engaged in negotiations with banks and investors. The current issue is just a temporary liquidity mismatch,” Sandesara added.

The bondholder cited above said he was not aware about any such negotiations, but the banks said the discussion has been on.

Banks have lent about ₹ 3,750 crore to Sterling Biotech and ₹ 992 crore to Sterling SEZ, according to bankers involved in the negotiations. About 1,500 crore has been advanced to Sterling Oil for its operations in Nigeria, they said.

These numbers could not be independently verified.

A sizeable chunk of this exposure has already been classified as non-performing assets (NPAs) as on 30 June, bankers said. Once an asset turns bad, banks need to set aside money to cover such loans, hurting their profitability.

According to a senior executive of Union Bank, the lenders met recently to take stock of the situation. They have given the group time until 30 September to repay the loans. 

Sterling Biotech shares have lost at least 97% from their peak of ₹ 262.45 in July 2008. Since then, BSE’s bellwether equity index, the Sensex, has risen 30.63%. On Monday, shares of Sterling Biotech rose 4.89% to close at ₹ 6.65; the benchmark Sensex fell 0.42% to end at 18,673.34 points.

Gross NPAs in the Indian banking system rose to ₹ 1.5 trillion in the quarter ended 30 June, up 51.6% from the year-ago period.

Among state-run banks, SBI has the highest level, with gross NPAs making up 5% of its loan book, followed by Central Bank of India (4.87%) and UCO Bank (3.88%) as of 30 June.

“We have an exposure to the company which is already an NPA. However, these loans were given with adequate security. We are in consultation with the company to safeguard our interest,” a senior SBI official said.

A UCO Bank official, too, said his bank is in discussions with the company to find a way out. Both officials declined to be named.

For the quarter ended June, Sterling Biotech reported a net loss of ₹ 89.9 crore against a net profit of ₹ 31.34 crore in the corresponding quarter last year.

Slowing economic growth and high interest rates have crimped the ability of Indian companies to repay debt. An estimated $2.97 billion worth of FCCBs sold by 33 Indian companies are due for redemption in July-December, according to data from KNG Securities Llp.

Analysts said bad loans given to corporations continue to remain a major source of stress for the banking sector, especially for public sector lenders. They do not expect the situation to improve in the near future.

“It is a clear fact that most of the public sector banks are struggling with NPAs as loans given to large corporations are turning bad. We do not see any respite from this in the near term,” said Saikiran Pulavarthi, an analyst at Mumbai-based Espirito Santo Securities India Pvt. Ltd.

Maulik Pathak in Ahmedabad contributed to this story.