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C. Shivkumar

Bangalore , Sept. 30

CREDIT Rating Information Services Ltd (Crisil) has tightened its methods of assessing the credit-worthiness of State Government-guaranteed papers and has begun insisting that the guarantors fund the liabilities.

Speaking to Business Line, Crisil's Executive Director and Chief Rating Officer, Ms Roopa Kudva, said, "Henceforth we will insist on budgetary provisions for such guarantees if they are to be recognised for the rating."

These provisions would have to be made for both principal and interest payments. Crisil has taken this measure in a bid to ensure that the ratings it gives out on debt papers reflect the actual situation of the borrowers/issuers.

Crisil's step follows the string of defaults that have been recurring in the private placements markets, especially of State Government-guaranteed securities, where the guarantor States have failed to meet their obligations. The failure to meet the obligation have landed a series of subscribers to these papers in a deep liquidity crisis and undermined the investor confidence in these papers.

Among the worst hit by these defaults are provident funds. Several PFs both in the exempted and non-exempted categories have parked funds in such papers and have landed into liquidity problems as a result of the defaults in debt servicing by the issuers.

Ms Kudva also said that Crisil was keeping a close watch on the States in view of the alarming fiscal situation. Crisil, she said, estimates that despite the debt swaps carried out by the Centre to help reduce the interest burden on the revenue expenditure of State budgets, guarantee devolvement was likely to the extent of about Rs 44,000 crore over the next five years. In arriving at the this figure she said, Crisil had also taken factored in unrated papers issued by the State Governments to various categories of subscribers on the strength.

However, she admitted that not all categories of State guarantees have been taken into account. These were especially in certain categories of letters of comfort issued by the State Governments to subscribers, which were in the nature of guarantees.

"Unless the letter of comfort is in the nature of guarantees," she said, "these cannot be construed as guarantees." There were also other categories of letter of comfort issued by the States, which fell outside the legal interpretation of guarantees. These obligations were still in the process of being quantified, which include guarantees on the power purchase agreements of independent power producers and letters of comfort, which fell outside the "legal interpretation of guarantees."

But failures to meet guarantee obligations have already pushed many States in to the Speculative grade category, especially, Maharashtra and Gujarat. Only States like Karnataka and Andhra Pradesh continue to be in Investment grade of ratings.

Crisil's move comes after concerns expressed by several bankers and the Centre over the defaults by the State entities. In fact about a year ago, the Ministry of Finance and the Reserve Bank of India had advised the State Governments to set up a sinking fund to meet such maturing liabilities. However, so far few States have set up such funds.

Even where States have complied with the advice, the funds fell way below the prescribed limit.

As a result bankers, who have invested in State Government bonds and advanced funds to State utilities on the strength of State Government guarantees have already sought assignment of central transfers to meet their dues.

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