The Hindu Business Line : RBI warns States over mounting defaults

The warning from the central bank comes after a battery of complaints by several public and private sector banks over the mounting overdues from the States and the inability to recover these amounts.

Bangalore , Jan 5

CONCERNED over mounting defaults in meeting guarantee obligations, the Reserve Bank of India (RBI) has begun tightening the screws on the State Governments.

Sources said that the RBI had conveyed that failure to honour the outstanding obligation was likely to trigger measures to recover the overdues. The overdues were expected to be recovered either through netting the amount from the State development loan. Further, as a punitive measure, overdrafts of defaulting States were also likely to be reduced, the sources said.

The warning from the central bank comes after a battery of complaints by several public sector and private sector banks over the mounting overdues from the State Government and the inability to recover these amounts.

The RBI's move also comes close on the heels of a series of measures to clamp down on the private placement bond markets.

In fact, bankers said that even their threats to invoke the guarantee had little impact on the State Governments.

In fact, most of the States had sought a refinancing package of their outstanding obligations on the basis of the present soft interest rate regime. But few banks were prepared to meet this refinancing package, especially in a situation, where the borrowings had gone to fund the revenue deficits instead of the capital expenditure programmes, which was the original purpose.

The sources said that some of the banks have also failed to classify these overdues as substandard/loss assets. This was despite the fact that the overdues were in excess of the 180-day limits prescribed by the RBI's prudential guidelines. Bankers said that so far that all the State Government-guaranteed securities continued to be treated as standard assets. This was in view of the fact that the borrowings were made by sub-sovereign entities. Besides, some of the bankers fear, that classifying even one State Government into the substandard would amount to treating "quasi sovereign borrowers as insolvent."

The outstanding guarantee obligations of all the States are estimated to be close to about Rs 2 lakh crore. This included bonds floated by State government public sector enterprises/special purpose vehicles.

Worse bankers fear that the provisioning requirements for such overdues could have big implications on their balance sheets. Even if the assets are to be treated as substandard assets, the provisioning requirement is estimated to be in the region of about Rs 50,000 crore, making a large dent on the profits of the banks.

However, it is not the public sector banks alone that are affected by the overdue payments. Some of the old private sector banks, financial institutions like the Life Insurance Corporation of India and the four general insurers have also been impacted by these large overdue payments from the States.

In fact, among the worst hit are the provident funds, which are allowed to park up to 25 per cent of their investible corpus in State Government-guaranteed securities.

The funds had invested in the State Government bonds in a bid to raise the weighted average yield on investments, since Government securities currently earned below the cost of liabilities.

All these institutions have repeatedly sought the central bank's intervention in reaching a settlement on the outstandings. Some of the banks have sought permission to invoke the provisions of the Securitisation and Asset Reconstruction Act on the errant States.

Some of the banks which had made provision on these overdues, without classifying them as NPA have pushed for completely turning over all the overdue bonds to the Asset Reconstruction Corporation to clean up their balance sheets.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
SC sees no hurdles to disinvestment in NFL, EIL

Bulging population may stunt India's growth — Even 8% growth till 2026 can't contain unemployment, says LSE study

TUFS made attractive with sops

Maintain sense of balance, Antony tells media

RBI warns States over mounting defaults

BSNL overstated profits, says CAG

Share buyback: SEBI for cut in offer period through tender process

ISPs feel the heat as Net users log off