FIs lose Rs 38 cr in Modern group

Now the group has proposed to pay interest along with the repayment of foreign currency loans due to the institutions from October 1998. The rupee loan payable to foreign financial institutions from October 1998 has also been rescheduled. A statement issued by Modern group claims that it would be able to generate cash profits as appraised by the financial institutions and it should be possible for the group to service its debts.

In the case of Modern group, the total institutional dues from five group companies is a whopping Rs 888 crore out of which Rs 715 crore is already overdue. "In a year scared by a general economic slowdown, the deepest wounds were visible in certain segments of industry. The textile industry particularly, reeled under the onslaught of a number of recessionary factors. All textile corporates were hit by waves of low demand, high interest rates, non-availability of credit and depressed capital markets," says the Modern statement.

Moderngroup’s problem was also precipitated by the CRB scam following which all the fixed deposit holders started queuing up for withdrawals even with manufacturing companies. After paying Rs 30 crore, the group could not repay the entire FD holders also. It was another faulty decision to finance long-term industrial projects with short term fixed deposits causing asset liability mismatch. The institutions have also been finding it difficult recover dues from groups like Parasrampurias — which have legally challenged them — and others like Orkay and the Modis.

The changed global scenario for petrochemicals and the recent revaluations by South East Asian countries have forced the Modern group to review its PTA project. Once the petrochemical market picks up the group would review its strategy for PTA. FIs have agreed to restructure its business by hiving off part of its interest in one or two units of the group to raise Rs 50 crore to overcome the liquidity crunch. The institutions have also agreed that thegroup will raise Rs 50 crore by March 1999 and repay the dues and give the promoters shares as pledge with them. The shares are already trading at very low prices and the future value of these shares will depend on the company’s performance.

If the company’s performance is not improving FIs are set to lose not only the huge amounts loaned to these groups, but even have to pay for the guarantees and other backup support given to them in the form of contingency liabilities. The total contingency liabilities of FIs are running into several thousand crores and one crisis here or there as happened during the Iraqi or South East Asian crisis can cause unprecedented crisis for these institutional guarantors.

Public sector banks and FIs have been indulging such type of waivers and concessions to promoters with dubious track record and the net result is that these institutions turn into red carrying huge amount of NPAs. The accumulated NPA of Indian banks and FIs as per the RBI statistics has gone upto Rs 42,000crore as on March 31, 1997 but several bad loans have been shown as standard assets using such types of accounting methods. In fact, FIs have not taken legal measures to recover dues from a large number of companies and the institutional nominee directors in these companies normally remain passive supporters of the promoters interest.

FIs will start facing problems only when such big accounts given from the money raised through public bond issues become NPAs. The financial mismanagement on the part of FIs has been increasing due to the undue freedom given to the institutional managers in sanctioning mega loans without any checks and balance. FIs can take a maximum exposure of 25 per cent of its total networth to individual corporate groups and if a few of such accounts go bad as happened in the S-E Asian countries, the strength of institutions will also be affected. Last year alone these institutions have written off a few hundred crores of NPAs.