The State Bank of India has announced decision to extend the largest ever bank loan sanctioned by an Indian bank to an Indian firm for a foreign business project. The bank will lend $1 billion to Adani Mining, the Australian subsidiary of Adani Enterprises. The loan is for the company to operate the Carmichael mine in Queensland, Australia. The mine has huge untapped coal reserves. The company aims to build the project by end of 2017.The bank loan is highly questionable on several counts.
First, the Adani Company is a huge debtor. Its total debt amounted to Rs 72,632.37 crore. In a matter of six months the debt increased by Rs 7653.33 crore. How could the bank extend a huge loan to a company which continues to increase its debt?
Secondly, does the company have the ability to service its huge debt? On the basis of how the company performed in servicing its debt during the recent period financial analysts after studying figures consider the company’s ability to service its debt most unlikely.
Thirdly, while it is true that taking fresh debt can generate higher earnings to reverse an adverse situation the worst happens if the company continues to lose. On current reckoning Adani Enterprises is definitely headed in the wrong direction. The coal industry is globally in crisis. Big global coal companies like BHP Billiton and Glencore have canceled their operations in Queensland because of the declining global market. One third of Australian coal output is making losses. Global coal prices have continued to decline during the last three years. This happened because coal supply remained unchanged while demand continued to reduce. And with current environmental concerns about pollution this is expected to accentuate. According to Goldman Sachs coal imports will continue to decline while coal supply remains the same.
The Australian miners are well protected. Australian miners are protected by long term “take or pay” contracts which require companies to pay $20 per tonne of transport costs whether or not they ship coal. Australian miners therefore will continue to supply coal.
In the light of all these facts how could India’s biggest state owned bank extend the biggest loan ever to an Indian company for an apparently losing foreign project? It is doing this in reckless violation of all banking norms. What could be the reason for this totally unprofessional approach? The obvious reason is the close relationship Mr. Gautam Adani, chairman of Adani Enterprises, has with Prime Minister Mr. Narendra Modi. Can crony capitalism be more brazen?
The Modi government should watch out. There is a thin line dividing crony capitalism from corruption. If it appears that the line has been crossed any time in the future the Adani Bank Loan Scam could snowball like the Bofors case.