The Hindu Business Line : Short-term loans: Oil cos can't count on OIDB

What they say
Finance Ministry is of the view that OIDB funds should be used for projects and building strategic reserves.
According to the Petroleum Ministry, both the oil companies and the Board stand to gain from the arrangement.
Oil companies will be able to borrow at a lower interest rate, while the Board can earn more interest than from banks.

New Delhi , May 16

Oil companies may have to look at other sources to borrow short-term working capital with the Finance Ministry not endorsing the Petroleum Ministry's proposal to permit these entities to tap Oil Industry Development Board (OIDB) for the purpose.

The Finance Ministry has, however, left it to the OIDB to take a final decision. The board of OIDB is expected to meet in June.

The Petroleum Ministry had approached the Finance Ministry to consider allowing oil companies to borrow capital from OIDB to improve their liquidity. Oil companies, which are suffering high levels of under-recoveries due to soaring international crude prices, have requested the Petroleum Ministry to allow them to borrow short-term working capital from the OIDB as their bank loans credit limits were being exhausted.

According to official sources, the Finance Ministry did not endorse the proposal as it felt that OIDB funds should be used for projects and building strategic reserves, and not to meet working capital requirements of oil companies.

Besides, the Finance Ministry felt that the oil companies were suffering financial strain due to very different reasons (surging international prices) and OIDB amount was too small to help them in any significant way, sources added.

According to estimates, under-recoveries being suffered by oil marketing companies namely Indian Oil Corporation, Hindustan Petroleum Corporation, Bharat Petroleum Corporation, and IBP, is almost doubling every year, which is also impacting their financial viability. Collectively, the projected under-recovery for 2006-07 is about Rs 73,512 crore.

The under-recovery on petrol and diesel is projected at Rs 46,330 crore in 2006-07 up from the estimated Rs 14,965 crore in 2005-06. The projected under-recovery on kerosene and cooking gas for 2006-07 is Rs 27,182 crore up from estimated Rs 24,630 crore for 2005-06.

Special circumstances

After consulting the OIDB board and also noting that the Oil Industry (Development) Act, 1974 did not restrict it from giving such loans, the Petroleum Ministry had approached the Finance Ministry to consider the proposal because of the special circumstances, sources said.

According to the proposal, this arrangement could be for a period of one year, after which it could be reviewed.

The argument put forth by the Petroleum Ministry was that this loan facility would enable the oil marketing companies to borrow at an interest rate lower than what the banks charge.

Besides, the OIDB could earn more interest than it receives from funds parked in banks. The OIDB extends loans to oil companies only to meet a part of their capital expenditure on specific projects.

About Rs 3,000 crore of OIDB's money is lying in banks. The Board gets interest of 7.31-8 per cent a year.