State Bank of India on Thursday said it will do “proper due diligence” before sanctioning the Rs 6200 crore loan to the Gautam Adani-owned company for its mine project in Queensland, Defending its $1 billion loan to Adani Mining.
SBI chairman Arundhati Bhattacharya clarified that the bank has presently only entered into a memorandum of understanding (MoU) with the group and that funds would only be released after conducting a series of checks on the project.
“It will go through proper due diligence both on the credit side as well as on the viability side. So, all of that will be done,” Bhattacharya said. “The board will take a call and then only the loan will be sanctioned.”
The SBI loan will finance Adani’s $7 billion coal mine, rail and port project in Queensland, Australia and if it succeeds, it will be Australia’s largest coal mining venture at a time the country is struggling to cope with the loss of over 4,000 jobs in the sector.
On concerns being raised by environmentalists over the port of the shipment, she said: “We also checked with Queensland’s government they have clearly said that there is no environmental issue…the threat to Great Barrier Reef is much more from the star fish attack.”
“It is not from the Abbot Point port and today Abbot point coal come at USD 42 fob (free on board) which is much below better than international prices ruling today and quality of coal is very good. It is non-polluting in nature,” she said.
When asked about the exposure of SBI if its board approves the loan, Bhattacharya said the net exposure would be to the tune of $200 million as there are some repayments also due from the company.
During Prime Minister Narendra Modi’s Australia visit, the Adani Group announced an MoU with the SBI for a $ 1-billion credit facility for its coal mine project in Queensland.
“The MOU with SBI is a significant milestone in the development of our Carmichael mine,” Adani Group chairman and founder, Gautam Adani, who is considered to be close to Prime Minster Narendra Modi, had said earlier this week.
SBI’s willingness to even consider the Rs 6200 crore is likely to help the Adani group lobby other financial institutions for loans. The Carmichael project is worth around Rs 47,000 crore. Moreover, the group, which is also facing protests from anti-coal campaigners, is counting on lining up funding from South Korea, having named POSCO Engineering & Construction Co Ltd as the preferred contractor to build its rail line.
Ironically, Adani’s apparent momentum on the Carmichael project is in stark contrast to GVK’s slow progress on another huge coal mine in the Galilee Basin, the Alpha project, which is co-owned by Australian billionaire Gina Rinehart.
Meanwhile, Congress communication in-charge Ajay Maken questioned the SBI’s decision to provide the loan when several international banks had ruled out funding the project and alleged that Prime Minister Narendra Modi appeared taking keen interest in “promoting” Adani and getting the loan worth Rs 6,200 crore sanctioned during the Australia visit in which the SBI chairman was also present.
Maken said that SBI should not have lent such a huge amount to the Adani Group, considering the Coal Minister had said recently that the Government would not allow the import of coal. The group already has a liability of more than Rs 60,000 crore, he pointed out.
“When five top foreign banks have already declined to fund Adani’s project, what was the need and the sense in giving such a huge loan to him from the hard-earned money deposited by the common people? Did the SBI do the due diligence? If it did so, why is it not declaring the MoU? On what conditions was it done? And what was the liability?” Maken asked.
The opposition party is planning to raise the issue in Parliament, which convenes on Monday for the winter session.
Even the Aam Aadmi Part ( AAP) has criticised SBI’s decision.
“The SBI has been pressurised to bail out the Adani group in a difficult venture, the returns of which are uncertain,” AAP said.
Financial Services Secretary Hasmukh Adhia stepped in to emphasise that the government does not “micro-manage” state-run banks and added that banks have been asked to lend “without fear or favour.”
Even Union Minister Ravi Shankar Prasad said the state-run bank takes its own commercial decisions and asserted the government had no role in it.
“Congress has accused SBI of giving loan to Adani group. Adani Group has a mine in Australia, they have signed an MoU (Memorandum of Understanding) only. Loan has not been given. After establishing financial and commercial viability the loan will be decided by the SBI,” the minister said, adding that ‘the government has nothing to do with it.”
As on September 30, 2014, the total debt of Adani Group stood at Rs 72,632.37 crore. Total operating profit of the group over the last four quarters was at Rs 8,999.92 crore. The interest on its debt was Rs 5,733.77 crore.
This means an interest coverage ratio of around 1.57. Interest coverage ratio is essentially the earnings before interest, taxes and exceptional items (or operating profit) of a company divided by its interest expense. It tells us whether the company is making enough money to pay the interest on its outstanding debt. The lower the interest coverage ratio the better the situation of the company. Also, the moment the interest coverage ratio starts hovering around 1.5, the ability of the company to keep paying interest on its debt becomes questionable.”
In essence, Adani Enterprises is in an over-leveraged situation and is getting to a situation where it will find it difficult to keep paying the interest on its debt.