The Centre has come up with a fresh financial package for Essar Steel, Jindal Vijayanagar Steel and Ispat Industries, and it likely to approve it soon.

The package includes waiver of penalty on loan defaults, conversion of a portion of the debt of banks and financial institutions into equity and a reduction in interest rates.

Finance Secretary S Narayan on Thursday held a meeting with the chiefs of ICICI Bank, IDBI, State Bank of India and IFCI to fine-tune the restructuring proposal.

The total exposure of the banks and FIs to the three companies is to the tune of Rs 20,000 crore (Rs 200 billion).

Talking to Business Standard, the chairman of a financial institution said, "It is better to take a hit now than to forgo the entire principal later."

The recast proposal was discussed by banks and financial institutions under the corporate debt-restructuring framework which gives them a three-month time frame to hammer out a solution.

According to finance ministry sources, steel and textiles are two manufacturing sectors which have been accorded top priority by Finance and Company Affairs Minister Jaswant Singh.

At a time when the sector is looking up, a helping hand would enable the steel companies to turn around faster.

Sources said ICICI Bank Chief Executive and Managing Director KV Kamath, IDBI Chairman PP Vora, IFCI Chairman VP Singh and SBI Chairman SK Purwar had a two-hour meeting with Narayan to finalise the package.

After the meeting, a financial institution head said an announcement would be made before the Budget.

The promoters of Essar, Jindal and Ispat would also be required to write off a part of their equity in their companies, institutional sources said.

They, however, did not disclose the total hit banks and FIs would take due to the various sops.

They said fresh loans to the three companies were also likely to be extended. "The quantum will, however, be small," said an FI head.

Sources maintained that the interest rate would be reduced from the present level of about 18 per cent to between 12 per cent and 14 per cent. Essar Steel has sought a retrospective reduction in the interest rate to 14 per cent, they said, besides asking for a waiver of penal interest.

Jindal Vijayanagar Steel has an equity base of Rs 1,200 crore (Rs 12 billion) and the company has urged the FIs for part conversion of its debt into equity.

FI sources said this would be subject to the company writing off a part of its equity.

The steel sector has made a sizeable contribution towards profits in FIs with their huge exposure to the sector. Of the total Rs 18,000 crore  (Rs 180 billion) non-performing assets of FIs, almost 10 per cent lies with the iron and steel sector.

Institutional estimates peg the total debt by banks and FIs to the steel sector at about Rs 45,000 crore (Rs 450 billion).

While IDBI had a total outstanding of Rs 7,955 crore (Rs 79.55 billion), ICICI Bank and IFCI's outstandings were of the order of Rs 8,934 crore  (Rs billion) and Rs 3,372  (Rs 89.34 33.72 billion) crore, respectively, as on March-end 2002.