The insolvency proceedings against Lanco Infratech, represents a pervasive malaise. It shows how nexuses between Bank/FIs and overleveraged company are at the heart of the NPA problem. Lenders who act in concert themselves conceal vital information while approving loans; audit regulations are routinely given a go-by, enabling the errant companies to guzzle more debt from the unsuspecting lenders.
The insolvency application against Lanco Infratech was moved by IDBI Bank under the Insolvency and Bankruptcy Code and was admitted by the Hyderabad bench of the National Company Law Tribunal (NCLT).
Lanco Infratech owes banks Rs 43,502 cr. Lanco has consolidated debt of Rs 55,000 cr and Rs 11,000 cr is under insolvency proceedings.
According to the NCLT order, the total debt sanctioned by IDBI Bank to Lanco Infratech is about Rs 1,234 cr, in addition to another Rs 170 cr through a separate loan.
How are such huge debt profiles created? The CAG audit report of July 10, 2017 is instructive. This report examines four loans of Lanco for its power projects – three loans by Rural Electrification Corporation (REC) totaling Rs 3,294 cr and one by Power Finance Corporation (PFC) of Rs 1,875 cr.
REC and PFC appear compromised in the CAG report. Internal guidelines have clear entity appraisal guidelines and this involves past records. This is necessary for project approval and loan sanction and but this was simply not considered. Similarly, what is the capability of the promoters to contribute towards equity in the projects that are proposed, is a moot point. The CAG has noted that PFC while sanctioning loans (Lanco Amarkantak Power Ltd) did not consider equity requirements and commitments. Financial stress is a logical corollary when such practices are rampant. The promoter could infuse equity of Rs 3,816 cr only, out of the envisaged Rs 7,772 cr.
In the case of REC loans, the equity requirement of the project (Lanco Vidharbha Thermal Power Ltd) was Rs 1,387 crore but the available investible funds with the promoter was only Rs 684 cr, while the outstanding debts were to the tune of Rs 5,247 cr. An ambitious faith was placed on future business assumptions, on the profit potential of SPVs, many of which had not even commenced! And there are numerous other red flags relating to project viability, contractors being awarded to ‘related parties’, loan disbursement rules and interest manipulations. This is the nub of the NPA problem.
