Zoom puts banks in Rs2,650 cr hole6 min read . Updated: 05 Aug 2010, 08:22 PM IST
Zoom puts banks in Rs2,650 cr hole
Zoom puts banks in Rs2,650 cr hole
Mumbai: Mumbai-based and state-owned lender Central Bank of India had to set aside Rs100 crore as provision in its June quarter after its loan to Zoom Developers Pvt. Ltd, a Mumbai-based engineering procurement and construction firm with operations spread across the globe, turned bad. The company is registered at Indore, Madhya Pradesh.
Central Bank is one of the 26 banks hit hard by the company’s delinquency; they are collectively owed around Rs2,650 crore, which would make this the single largest exposure that has gone bad in recent times.
None of the banks has yet disclosed the name of the company that was unearthed by Mint’s reporting. A senior Zoom executive confirmed that the banks had classified the company’s debt as a non-performing asset (NPA).
Zoom undertakes contractual work for companies—technically known as aggregators— to relocate or scrap factories, and transfer technological processes from one vendor to the other.
Zoom’s operations—which range from industrial asset revival to re-engineering, dismantling, packing and shipment, erection of plants, and commissioning—are spread across Germany, France, Italy, the UK and Scotland, the US, Canada, and Alaska.
“It is a case of the economic slowdown in Europe that led to a cascading effect, impacting the Indian banking industry," said the chairman of a large public sector bank, which has already made provision for this loan. He asked not to be identified, citing client confidentiality.
Neither the banks nor SBI Caps, the investment banking arm of India’s largest lender, replied to emails sent by Mint.
State Bank of India and some of its subsidiaries have exposure to Zoom.
The other banks that have exposure to the company include Bank of Baroda, Union Bank of India, Canara Bank, Indian Bank, Oriental Bank of Commerce and Andhra Bank.
In an email response, Zoom’s company secretary S.K Kabra said the consortium of banks wants to recast the debt and their request for restructuring was admitted in the last week of February. “During this process, the guarantees issued to the clients in India and overseas were invoked. Zoom had over Rs850 crore cash deposit with the banks," he said.
Kabra also said the banks have classified the account as an NPA “as the outstanding due to invocation was more than 90 days".
Under the law, when a loan account is not serviced for a quarter or 90 days, it turns bad and banks need to provide for it.
One of the aggregators, London-based Llondenium Trading Ltd, met Indian banks in Mumbai on 10 May along with Zoom’s proprietor Vijay Choudhary. Mint has reviewed the minutes of this meeting.
At the meeting, Llondenium informed the lenders that although they had a “long-term and mutually rewarding relationship with Zoom", and they were still willing to work with Zoom once its problems were sorted out, the situation was “completely shocking" and that they were “unable to understand" why Zoom’s banks did not come to its rescue when it started defaulting on its overseas commitment.
Llondenium also alleged that the foreign branches of Indian banks “quoted exorbitant rates even to deal with Zoom’s Indian bank bonds".
“We fail to understand as to how top Indian banks, mostly government-owned, allowed the engaged international banks to walk out in the midst of the contractual situation. Even with countries like Ukraine or Nigeria, we have not heard of such a situation," Llondenium said to a core group of bankers formed to look into the situation.
Countering Llondenium’s allegation that the overseas branches of Indian banks did not honour guarantees made by its domestic offices, one senior Indian banker said it was because the foreign offices work independently from the local branches.
“They are like foreign banks themselves. Before they lend, they do their own assessment and have the authority to decline any loan as they deem fit," he said. “As per rules, the domestic offices are not supposed to intervene in the matters of overseas offices."
Mint did not reach out to Llondenium.
Zoom’s business model is complex. Aggregators such as Llondenium used to lease out work to Zoom to scrap a plant or relocate it.
While handing over the contract, the aggregators would take local bank guarantees from Zoom. The local banks, in turn, would take guarantees from Indian banks.
Typically, the aggregator was liable to pay to the company selling its plant. The bank guarantees would take care of this liability and Zoom used to get money from the buyer of the plant, in accordance with the progress in work. At regular intervals, the aggregators used to encash the bank guarantees to clear their obligation to the seller of the plants.
According to bankers, after the economic slowdown in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. in September 2008, the buyer of the plant or process directed Zoom to “go slow", but Zoom continued to pay workers, lease technology and service debt in accordance with contractual obligations till cash flow dried up.
The risk-averse foreign banks refused to extend guarantees to Zoom, leaving the company short of funds to pay aggregators and workers.
Stand-by letter of credit
Foreign banks as well as overseas branches of Indian banks insisted on stand-by letters of credit (SBLCs) from Indian banks in lieu of guarantees. An SBLC gets operationalized when the party concerned fails to pay. In this case, the aggregators started invoking guarantees given by Indian banks through SBLCs when the money flow dried up.
Indian banks honoured their guarantees and settled the dues with the foreign banks, but when they approached Zoom, the company defaulted. There was a chain of defaults with the first instance of a guarantee being revoked happening last year, a senior banker said.
“If the company does not get full support from its vendors, it is very difficult for it to turn around," he added, asking not to be identified.
While SBI Caps’ mandate is restructuring the firm, Mott MacDonald, a managing engineering and development consultancy firm, has been appointed to do a survey of the sites the company was working on and find a case for recovering dues. Lazard India Pvt. Ltd is working on a business plan for the company.
The banks have also recast Zoom’s board and put their own professional nominees on the board.
They are meeting this week to finalize the corporate debt restructuring (CDR) plan. Under such restructuring plans, a company is normally given more time to clear debt, interest rates are cut and cheaper foreign currency loans may also be given to replace rupee loans.
“The foreign bank limits on Indian banks, who had issued the overseas guarantees, were reduced during the global financial crisis, which led to invocation on technical grounds due to non-acceptance of extension from Indian banks," Kabra said in his email.
The restructuring plan involves the execution of “standstill agreements" with clients, he said. Banks won’t lose any money nor has any concession been suggested, he added.
“Zoom had over Rs850 crore deposit with the banks against our total limits of Rs2,400 crore as proposed by the restructuring package," he said. “The amount will get settled immediately on the signing of the standstill agreement."
The company is working with the CDR cell and the restructuring package is close to being finalized, Kabra said.
“Once the standstill agreement as per the package is accepted, the company can revive," he said. “It is imperative to note that the company’s manpower has been reduced considerably and salaries have not been paid for the last seven months."