The Industrial and Development Bank of India (IDBI) had set a pre-condition for setting up trust and retention accounts for sanctioning fresh loans to steel companies, and commercial banks, which provide working-capital funds, have demanded that they have the first rights on the funds.

IDBI chairman and managing director GP Gupta told The Financial Express: "We are keen to work a way out, but the problem should not be viewed too seriously. We are speaking to the banks on how the receivables could be distributed among all the lenders in a more equitable manner and we expect that the issue will be resolved shortly."

Industrial Finance Corporation of India (IFCI) chief PV Narasimham said: "The institutions and banks are working on it. We hope to resolve the issue very soon."

The likeliest way out, it appears, issettling on a pari passu arrangement on the receivables. It is learnt that a possible solution that is being worked out on the insistence of IDBI is through distribution of the receivables in proportion with the size of the loans from the issuing lender.

If both banks and institutions agree on this, it will be a complete breakaway from tradition. Banks have always had the first right on current assets, while institutions have had the first right on the fixed assets of companies.

The IDBI board had recently approved fresh loans to six companies totalling Rs 1,080 crore. However, steel companies feel that the dispute between banks and institutions may delay disbursal of loans to the sector despite being sanctioned.

The companies that have been sanctioned loans include the ML Mittal flagship Ispat Industries, Ispat Metalliks, Essar Steel, Jindal Vijaynagar Steel, Usha Ispat and SJK Steel.

The steel industry has been grappling with huge cost overruns estimated at around Rs 10,000 crore. The institutions,in a bid to recover their already-disbursed loans, have been forced to consider and subsequently sanction further loans to enable the steel companies to complete their projects.

INSIGHT

From the FIs' point of view, the problem is that bank covenants require that all borrowers' sales realisations be routed through the bank account. Which means that the banker is always in a position to apply the moneys deposited into the borrower's account to set off his dues. Only if the account is regular will term loan dues to FIs be paid. Clearly, the FIs are unsure whether there will be any surplus left with the steel companies to pay their loan instalments, after paying the interest due to banks. Hence the talk of a sharing arrangement for sales proceeds.