Srei Group may leave a $4 billion hole in some of India’s biggest lenders

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Srei Group may leave a $4 billion hole in some of India’s biggest lenders
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  • Most Srei Group’s lenders have either already recognised it as a non-performing account, or are planning to do so over the next three months.
  • Some of the biggest lenders to the group that is known for funding infrastructure projects include UCO Bank, Canara Bank, Bank of India and Axis Bank, among other public sector and private banks.
  • Srei told Business Insider that the amount due to its lenders is ₹28,000 crore (about $4 billion).
Kolkata-based Srei Group that runs non-bank lender Srei Equipment Finance Ltd., among other entities, has run into more trouble as its lenders have either already classified or are planning to recognise its borrowings as non-performing.

Some of the biggest lenders to the group that is known for funding infrastructure projects include UCO Bank, Canara Bank, Bank of India and Axis Bank, among other banks, said two people aware of the development, who spoke to Business Insider requesting anonymity.

The persons cited above said that the group owes ₹30,000 crore, whereas the company, which disputed the figure, told Business Insider that the amount due to the lenders is ₹28,000 crore (about $4 billion).

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“The company’s total liabilities are around ₹18,000 crore of bank loans and another ₹10,000 crore of external commercial borrowings and bonds. However, realizable assets, including arbitration awards, are higher. Therefore, we believe we can pay all our creditors over a period of time if structured in line with cash flows,” said a company spokesperson in an email reply to Business Insider’s queries.

Loans given to Srei Group, according to the first of the two people cited above, who is a senior executive at one of the lenders to the group, have already been tagged as non-performing. The bank, he said, has been waiting for a go-ahead from the banking regulator on further action.

The restructuring option proposed by the Group, the executive said, would allow lenders to recover just 30% of their dues over a nine-year period, even if a moratorium was to be offered initially. As no sustainable recovery options emerged, he said, it felt prudent to recognise Srei’s loans as NPA.

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The second of the two people cited above, who is also an official at one of the banks that had lent to Srei, told Business Insider that it was in the process of recognising Srei’s loans as non-performing over the next three months, as no resolution plan has been agreed upon between Srei and its creditors.


Recovery efforts at Srei Group



In October 2019, Srei had transferred all the assets and liabilities of Srei Infrastructure Finance Ltd. to its wholly-owned subsidiary Srei Equipment Finance Ltd. via a slump exchange. The business transfer agreement, the company said, was executed after getting approvals from its shareholders, debenture trustees, few lenders, stock exchanges and an in-principle approval from some of the domestic lenders including lead banks.
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But the company's already stressed balance sheet suffered a major blow during the pandemic, further impairing its ability to repay dues.

"Owing to the Covid-19 pandemic, including the second wave followed by extended lockdown from time to time and the moratorium, collection from borrowers and the lessees were severely impacted. In addition, it adversely affected the company’s liquidity during the year resulting in a cash flow mismatch as NBFCs like Srei Equipment Finance Ltd. were not allowed any similar moratorium by banks and financial institutions," Srei said in its emailed response.


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Later, in Oct. 2020, Srei Equipment Finance approached the Kolkata bench of the National Company Law Tribunal for debt realignment and seeking creditor approval on its business transfer agreement. The restructuring options proposed by the group, however, did not get a go-ahead from all its creditors.

"To pay back its lenders in a structured and orderly manner, the company submitted a scheme in October 2020 for paying back principal and interest over time to banks and financial institutions. The company also offered the option of modifying the proposed repayment schedule to be suggested by the creditors," the company said in the emailed reply.

While a section of creditors agreed to the respective schemes that proposed payment over time, a few others, including banks, are yet to agree or offer Srei a modified repayment schedule on how they would like to be paid over time, it said.

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Even as Srei remains in discussion with its creditors, it said in July that the group had got term sheets from Singapore's Makara Capital Partners for an investment of ₹2,200 crore, and from US-based Arena Investors for investment of ₹2,000 crore. On Sep. 10, the group also sold one of its subsidiaries, Trinity Alternative Investment Managers Ltd. for ₹1.32 crore.

But talks of a potential investment or the debt restructuring options offered by Srei have failed to strike a chord with its creditors.

Lenders don’t want to give any leeway and so, the incoming bad bank may be an option

As of March this year, an escrow account with Srei’s lead banker UCO Bank had collected ₹1,568 crore, as per its latest annual report. The Trust and Retention Account (TRA) allows Srei’s lenders to control all its cash flows, including business and operational payments.
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“Nevertheless, banks are already controlling the company’s cash flows since November 2020, and substantial collections have happened. It has enabled the bankers to distribute the money among themselves. At present, a payment schedule from them is awaited in view of the modification to the scheme submitted to the Honorable Tribunal,” it said.


But debt resolution remains elusive as Srei continues to suffer a severe cash crunch.

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As of June 30, the group’s net worth had fully eroded and it was not able to comply with various regulatory ratios/limits, it said in a stock exchange filing on Aug. 14. “All this may have an impact on the Group's ability to continue its operations in normal course in future and to meet its financial commitments as and when due,” it said.

Besides, an inspection by the Reserve Bank of India on Srei Infrastructure Finance and Srei Equipment Finance in March last year showed loans being potentially extended to related companies. The group’s total exposure to such borrowers, it said, is ₹7,961 crores as on June 30, 2021.

Based on Srei’s current state of affairs, said Jignesh Shial, head of Banking, financial services and insurance sector at InCred Capital, it makes more sense for lenders to recognise it as NPA on their books, and then the RBI could take charge of its resolution. “It is possible that the lenders may want to sell down Srei's bad loans assets to the National Asset Reconstruction Company Ltd. at a later stage, but even that option is not immediately available,” he said.

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On Sep. 16, the central government cleared a proposal to provide ₹30,600 crore government guarantee for security receipts issued by the National Asset Reconstruction Company (NARCL), as part of resolution of bad loans.

NARCL, or the proposed bad bank, is an asset reconstruction company set up by Indian banks to help them consolidate and take over existing stressed assets for their subsequent resolution.

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