Banks and financial institutions are planning to meet in Mumbai over the next fortnight to take stock of the situation. "We will not be influenced by any directive from any quarter. We have to assess the risk involved (in pumping in fresh funds) and take a commercial decision," said one senior banker.

When contacted, Industrial Development Bank of India chairman GP Gupta told The Financial Express: "It is left to individual institutions and banks to take a decision on whether fresh funds will be extended (to the company) or not... Nobody will waive the prudential norms (to accommodate fresh loans). We are yet to take a view on how much loan can be given." Inother words, none of the banks or institutions will relax the exposure norms to extend fresh loans to Essar Steel.

Going by RBI guidelines, a financial intermediary's exposure to any corporate entity cannot exceed 25 per cent of its net worth. In case of a group, it is 50 per cent of net worth. "However, this is the limit (of exposure). Internally, any bank or institution can decide to prune the limit (even further) within the overall cap," a senior banker said.

Gupta admitted that the steel industry was passing through a difficult phase and banks and institutions were concerned about it. "We discussed this at a recent meeting (January 4) but no commitment was given to the company. The question of relaxing prudential norms also does not arise," he said.

The IDBI chief also categorically said that his institution would not give any guarantee to help Essar Steel refinance its $250 million floating rate notes (FRN), due for redemption in July.Last week the government had announced a Rs 2,500 croreconditional bailout package for Essar Steel which envisages Rs 1,700 crore worth of fresh funds from financial institutions while the promoters are expected to contribute Rs 800 crore.

Banks and institutions are upset with the manner in which the "government" has injected itself into the whole exercise. Although IDBI's Gupta maintained that the meeting (held on January 4) was called to discuss the state of affairs in the steel industry, in private senior bankers alleged that in this rare instance government representatives seemed more keen to discuss the funding of a particular project.

The meeting--attended by IDBI's Gupta, ICICI chief KV Kamath, Industrial Finance Corporation chairman PV Narasimham, Unit Trust of India chief PS Subramanyam and State Bank of India managing director V Janakiraman--was convened by finance minister Yashwant Sinha's advisor Mohan Guruswamy.

No official from the banking division of the ministry or the RBI was present at the meeting. Even though a fortnight has passed sincethe meeting took place, none of the bankers who attended the meeting has received the minutes of the discussion.

According to sources, the chiefs of institutions and banks had the first round of discussions at the Delhi office of IDBI which was followed by another round at Guruswamy's office and finally a "very brief exchange of views" with finance minister Sinha.

"We should not be penalised for one corporate house's expansion plan(s). If the choice is between allowing one empire to sink and sinking the entire financial system, everybody should know what should be done," said another source, clearly suggesting that bankers are not amused by the intervention from Delhi.

INSIGHT
Capital spending or debt requirement?

FIs and banks, funding the flat steel producers, are in a quandary. Firstly, the demand supply position is quite adverse. Demand is slated to be only in the region of 11.8 to 12 million tonne while supply has gone up with new capacities of Tisco, Ispat, JVSL, etc. coming instream. The demand is not expected to change over the next couple of years and higher supply of around 15-16 million tonne would keep the prices under strain-irrespective of the floor price put by the government.

It is unclear whether Essar needs money to fund its blast furnace project or to redeem earlier loans or for just meeting working capital requirements. Given the present depressed prices, it may be essential for Essar to produce steel through BF-EAF (Blast Furnace combined with electric arc furnace route) and not by EAF alone. FIs would have to take a gamble on the future steel price and on that basis decide whether they would fund the blast furnace.