Good margins make
financing to the shipbreaking industry a lucrative option for banks
Shipbreaking finance is a lucrative business for
banks. It gives them good margins over their base rates of nearly four to five
per cent as the loans are availed by small, unlisted players who are generally
micro, medium and small entrepreneurs.
Bulk of the financing is non-fund based whereby the
bank provides the guarantees to the firms to buy the ship. The size of the
shipbreaking bank finance in India is about Rs 10,000 crore, according to the
banks’ estimate and about half of this financing is undertaken by State Bank of
India (SBI).
Among the banks, the big financiers of shipbreaking
are SBI, Bank of Baroda, Dena Bank, Indian Overseas Bank and HDFC Bank.
A senior SBI official said, “Operating revenues of
ship breaking are showing a healthy growth but the operating margins are
growing at modest levels but have come under pressure due to fragmentation,
competition and interest costs. The credit profiles of the shipbreaking finance
companies will remain under pressure as demand for scrap steel is down and the
exchange rate is volatile.”
According to a report by rating agency Icra, the
shipbreaking financing business typically starts with the shipbreaker paying
the earnest money of about 10 per cent of the ship’s value in order to bring
the ship to the national anchorage point/high seas.
But the volatility in the exchange rate and the
falling cost of scrap steel are deteriorating the financial position of
shipbreakers as the scrap steel is the main component in a ship.
Senior official from Bank of Baroda said,
“Shipbreakers have a letter of credit (LC) with a credit cycle of 180 days to
270 days from the banks to procure the ship and the LC is later converted into
a fund-based facility. But mostly, all of this is short-term financing. The
fund-based component is mostly for paying the customs and excise duties. The
loan is generally of Rs 30 to Rs 50 crore, where the ship is hypothecated to
the bank along with some personal properties of the borrower. The ship breaker
has to make an upfront fees of 10 to 25 per cent of the cost of the ship.”
Icra says in its report, “In most cases the fund
based limits, which are mainly used to cater to the daily requirements like
administration expenses, labour charges and fuel expenses, are significantly
lower than the non-fund based limits. Hence, any delays in the approvals for
beaching as well as delay in the shipbreaking activity after beaching can
result in substantial funding mismatches with respect to the obligations
related to the non-fund based limits and can have an adverse impact on the
liquidity profile of the concerned shipbreaker.”
A senior official from Indian Overseas Bank said, “It
is a lucrative financing option for banks as it is non-fund based exposure and
the revenue stream is guaranteed as the ships are purchased with clear
assessment of the worth. But of late, as the demand for steel is going down
many shipbreakers are loosing the market to sell off the scrap steel.”
Bankers are, however, worried about the exchange rate
volatility, unless the customers take forward covers it gets very risky.
In Icra’s view, any further depreciation in rupee,
decline in steel prices or increase in interest costs would be few of the key
downside sensitivities affecting the business and financial risk profile of the
Indian shipbreakers. Icra also notes that Indian shipbreakers have a high
reliance on non-fund based facilities like import letter of credit (LC), which
are used for funding the purchase of ships. In comparison, their fund based facilities
are rather limited which exposes them to a risk of liquidity crisis in case of
significant delays in the shipbreaking process which may take place at the
approval level, before beaching or during demolition.”
In 2011-12, India reclaimed its lost position as the
world’s largest shipbreaking nation with its yards in Alang demolishing 415
ships. According to bankers, “over 150 ships are waiting for their turn at the
dismantling units.”
Source: By Manju AB. 21 December 2012
http://www.mydigitalfc.com/news/banks-rs-10000-cr-business-opportunity-456
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