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C. Shivkumar

The bulk of these off-budget borrowings have been made at very high interest rates since 1997 and almost all of them are locked in for long periods. The sources said that borrowing costs were as high as 17.5 per cent since the liquidity was tight then.

BANGALORE, July 24

STATE Governments' attempts to shed high-cost off-budget borrowings raised through bond issues have run into rough weather in view of their inability to meet early redemption payments.

Almost all the State Governments in the country have resorted to off-budget borrowings, through special purpose vehicles (SPV) and power utilities, ostensibly to meet capital expenditure. But banking sources said that some of these borrowings were made to meet only revenue expenditure.

The bulk of these off-budget borrowings have been made at very high interest rates since 1997 and almost all of them are locked in for long periods. The sources said that borrowing costs were as high as 17.5 per cent since the liquidity was tight then. Among the large off-budget borrowers, are States likeOrissa, Maharashtra, Gujarat and Karnataka.

But almost all other States have used this route to raise funds from the market. The bulk of these issues were made through the private placement route. The subscribers to these issues included provident funds, UTI, cooperative banks and public sector insurance companies. Current estimates of such off budget debt stock are as high as three per cent of the gross state domestic product (GSDP).

For some of the States though the figures could be higher the sources said. This was because few of the States have maintained record of potential contingent liabilities.

Besides the agencies or the SPVs, which have floated the bond issues, are not in a position to service even the interest payments, as their current revenue streams are insufficient.

Accordingly these bond issues have been supported by sub-sovereign guarantees to provide comfort to subscribers. These interest payments have to per force depend on budgetary transfers to meet the servicing.

The sources said that some of these borrowings have been offered with put options (which allows bond subscribers to offer for premature redemption) which are expected to begin falling due from the second quarter of this year onwards.

And the risk of these options being exercised was high, especially by the institutional subscribers in view of the deterioration in the credit rating of the states, which have guaranteed the bonds.

States, which have been downgraded recently by the agencies, include, Maharashtra and Orissa.

States likely to face downgrades include Karnataka and Andhra Pradesh, the sources said.

The sources said, if the put options are exercised, almost the entire burden of meeting the payments was likely to devolve on to the governments, since the bulk of them have been supported by sub-sovereign guarantees.

As a result the burden of meeting the payments would have to be met from the revenue receipts of the respective State Governments.

However, this year is beginning to be an extremely tight one for the States in view tax shortfalls.

The sources said, many of them would not be in a position to meet the burden of meeting the payments if the put options are exercised.

Consequently some of the States have been approaching the institutional subscribers to stall any exercise of the early exit options.

Instead some of the States have asked the bond subscribers to hold on to the securities till maturity.

This time has been sought in order to ensure that the States generate sufficient revenues or are in a position to refinance these maturing bond issues, the sources said.

The revenue generation that is now projected by most of the States for meeting these payment liabilities is through improving the tax administration and raising the tax to state domestic product ratio to above 15 per cent.

Currently these ratios are in the region of eight per cent. Other alternatives that are being worked out include accelerated disinvestments of State public sector undertaking and subsequently discharge the liabilities. Refinance is the last alternative.

But since the first two options are likely to meet only with limited success in the short term, refinancing the maturing debt is likely to be the most preferred option, the sources said.

This option though was likely to push the States into a deeper debt trap, they added.

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