The quiet death of the SBI-Adani loan agreement

There is nothing official about it, but the so-called memorandum of understanding that the nation’s largest lender State Bank of India (SBI) had signed with Gujarat’s Adani Group in November 2014 to build a $7.8 billion coal mine in Australia has died a natural death. Neither the lender nor the borrower is keen to follow up the agreement that raked up a huge controversy after it was announced in Brisbane where Adani Group boss Gautam Adani was accompanying a business delegation for the Group of 20 summit, attended by India’s Prime Minister Narendra Modi.

Opposition parties dubbed this as an instance of the crony capitalism that has been plaguing India’s Rs.90 trillion banking industry. Many suspected that the decision was influenced by Modi, who till May 2014 was Gujarat’s chief minister.

At that time, SBI maintained that it was merely an agreement and it would disburse the loan only after it is satisfied with the company meeting all terms and conditions and the project is found commercially viable. No SBI official is willing to talk on this, and rightly so, as bankers are not expected to talk about individual borrowers. I understand that the bank had asked for several pieces of information but did not receive them. As a result, the proposal has been shelved and SBI will not disburse money even though officially the agreement has not been not scrapped. Adani officials would not comment officially, but off the record they insist that the project is financially viable and has got the approval of the government. The company is in talks with a few Australian, South Korean and Chinese banks to raise the funds.

A 13 March Reuters report, citing unidentified people, had said that SBI was preparing to turn down the loan request intended for a coal project in Australia. A few days later, Adani Enterprises Ltd, in a stock exchange filing, said it was in discussions with a number of financial institutions in India and abroad to raise money and that any denial of a particular loan was unlikely to affect its business. “Given our various capex (capital expenditure) plans, we continue to work with various financial institutions for raising financial resources,” the company said.

Incidentally, this is not SBI’s first exposure to the Adani Group. It has Rs.15,402 crore funded and Rs.4,327 crore non-funded exposure to the group, the highest among all Indian banks, and more than one-fifth of the entire banking industry’s exposure to the group. The bank’s biggest exposure is to the power business of the group, followed by the port and other trading activities. Barring Adani Global Pte Ltd in Singapore, which is unrated, all group firms to which SBI has given money enjoy investment-grade rating and none of them has defaulted on repayments.

SBI had given loans to the infrastructure group during the Congress-led United Progressive Alliance rule, too. It gave $800 million, for seven years, in 2011 to partially fund the purchase of a 50 million tonnes per annum (mtpa) coal terminal at Abbot Point, Queensland, Australia. The company plans to expand the capacity to 120 mtpa in two phases.

In 2010, the Adani Group acquired the rights to develop the Carmichael coal mine in Galilee Basin, Queensland, with an estimated reserve of 7.8 billion tonnes. Later, the estimate for coal reserves was raised to 11 billion tonnes. The Queensland authorities have given in-principle approvals even as a court hears an objection against the lease, raised by an environmental group.

Environmentalists in Australia have been up in arms against the Carmichael project because of the potential danger the mine can cause to the Great Barrier Reef.

The Queensland authorities have also approved a railway line between the Carmichael coal mine and the Abbot Point coal terminal, covering 382km. The local government has pledged to put in $455 million to pick up a 45% equity in the rail project run by North Galilee Basin Railway Pte Ltd.

The overall cost of the coal mine project is pegged at $7.8 billion, being funded in the proportion of $5.46 billion debt and $2.34 billion equity. SBI has signed the agreement to chip in the equity on behalf of two promoters that own 90% of it. Reserve Bank of India norms allow local banks to fund equity of Indian firms when they buy assets abroad. By planning to finance equity, SBI had planned to take exposure to two Adani firms, which are into trading, and not the Australian mining outfit. As collateral, the group was willing to pledge shares of Adani Enterprises and another company with SBI. But all these are history now.

Political influence on loan decisions taken by India’s state-owned banks, in which the government holds a majority stake, may not be common, but are not entirely unheard of. There have been instances in the past, but the Modi-led government is keen to break away from this tradition. After an offsite in Pune with public sector bankers in January, the finance ministry in an office note assured all bank chiefs that the government would not intervene with their work. The note encouraged them to take all commercial decisions in the best interest of the organization without fear or favour. “All decisions should be taken based on facts of the case and objectivity. No such decision should be taken out of any other extraneous considerations such as the influence or the position that the borrower is holding,” it said.

Many feel that the SBI-Adani episode is a public relations disaster for the bank. The lesson from this is obvious: A bank should never make public a loan agreement—however small or big it may be—in the presence of a politician, even if the person happens to be India’s Prime Minister. There is a risk of such publicity backfiring because the industry-politics nexus is difficult to break despite the government’s assurance that it would not interfere.