Iron ore export ban dries up cash for minining companies.

BANGALORE: Cash is drying up for iron ore mining companies in Karnataka’s Bellary district after the state banned exports, forcing them to dip into bank deposits.

“The free cash flow generated through the sale of iron ore has completely evaporated over the last 45 days. We are seeing them now turn to banks as they liquidate their deposits to tide over the crisis,” said an official with a government-owned bank in Bellary.

Loan defaults could begin if the ban continues for some more months. “There is enormous pressure on operations as cash flows have disappeared. Loan defaults would gather steam by early December or late November if the ban continues,” said the head of finance at one of the large mining companies.

Bankers say deposits are down between 12% and 15% across the region, including Sandur and Hospet. The Bellary-Hospet region had a credit-deposit ratio of over 100% in March 2010, with deposits at Rs 6,100 crore and advances at Rs 7,000 crore. Although mining is largely a cash-based business, banks have been courting miners to expand deposits and loans.

“A mid-sized mining firm normally maintains around Rs 10 crore to Rs 15 crore in its current account. Mopping up more current accounts makes sense as this is zero-cost funding as banks do not pay an interest on such accounts. Once the customer transacts through the current account, it also opens up opportunity on the asset side, notably (export) bill discounting,” said an official at a large private bank.

However, not all banks have been able to attract additional business. “We have not been able to attract large business from the mining sector because we are not authorised to carry out forex-related transactions,” said an State Bank of Mysore official.

The bill-discounting market in the Hospet-Bellary region is pegged at about Rs 1,000 crore per annum. ICICI Bank, HDFC Bank and Axis Bank are collectively believed to have a 15-20% market share, according to local industry watchers. PSU bankers say bulk of bill-discounting is done by small miners and traders.

Despite the cash crunch, bankers said there was no worry yet about repayment of short-term loans and advances. “Mining companies are not engaged in manufacturing and hence their requirement of cash is limited. There are no issues in repayment till date,” said an official at State Bank of India. But these are early days still. Truck rental companies are among the worst hit and many could go under.

“Business has nose-dived forcing many small truck operators out of business. There were at least 20,000 trucks plying in the Hospet-Bellary region,” said broker Mr Naveen.

Source : economictimes.indiatimes.com