The Telegraph
Since 1st March, 1999
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RBI leash on state loans

Calcutta, Sept. 30: The Reserve Bank of India (RBI) has suggested that development loans raised by states should be combined with money borrowed by special purpose vehicles (SPV) to keep their runaway debt in leash.

SPV debt that is serviced from budgetary provisions should be included in a state’s overall borrowing quota. If implemented, it will limit the quantum resources that could be raised through borrowings. It would also squeeze the development loan quota to the extent of the money raised indirectly. “The proposal has been sent to the finance ministry and was likely to be put into effect soon,” RBI sources said.

Most state governments borrow more than they are allowed to under limits set by the central bank, getting around the ceiling by raising resources through utilities and special purpose vehicles. Debt repayments on this account push up revenue expenditure.

Utilities and agencies are often used as SPVs to raise funds. For example, when ways-and-means advances from the RBI could not slake Bengal’s thirst for cash a few years back, it raised money through West Bengal Infrastructure Development Corporation. However, options like these widen revenue deficits of state governments.

A few states introduced legislative caps on loans at the insistence of the RBI. However, most have exempted SPVs from those ceilings on the ground that debt raised by these agencies is serviced from the budget.

The RBI has come up with the new proposal due to concerns over mounting repayment obligations of states and delays/defaults in servicing development loans.

Debt servicing accounts for 30 per cent of revenue expenditure of state governments. But if loans taken through SPVs and state utilities are taken into account, the figure will go up to 40 per cent, RBI officials said.

Utilities borrow by issuing guarantees and letters of comforts, both of which increase contingent liabilities of states.

Sources say such loans have been taken to cope with revenue shortfalls of states that have fought shy of boosting income by raising user charges of products and services provided by their agencies, or bringing more people and items in the tax base.

Instead, the tendency over the past few years has been to raise larger amounts through loans. Banking sources said RBI’s suggestion could also have been floated to avert the possibility of state defaults on banks.

Since debt instruments issued by SPVs are supported by states, sources said public sector banks are reluctant to classify defaults on this account as sub-standard assets. “What has also alarmed RBI is that most entities are raising resources at higher rates, particularly for refinancing manufacturing loans/bonds.” This has pushed up substantially the refinancing cost, which is at least 600 basis points above the sovereign yield against 250 basis points a year ago.

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