The Hindu Business Line : Backstop facilities sought for PSUs borrowing

Funding support
Guarantees are offered to weak PSUs to facilitate borrowings from lending institutions
Backstop facility is a liquidity support mechanism in the event of shortfalls for meeting debt service payments

Bangalore June 5 Banks and rating agencies have sought creation of backstop facilities for public sector undertakings (PSUs) borrowing as a line for comfort.

The move comes in the wake of the downgrade of telecom PSU ITI Ltd to default status by rating agency, Fitch Ratings (India) Private Ltd, a domestic subsidiary of the global agency.

The downgrade was despite a specific guarantee from the Ministry of Communications.

Currently, such guarantee support provided by parent departments is mostly unfunded in nature.

The guarantees are, however, provided only to financially weak PSUs as a credit enhancement mechanism, to facilitate borrowings from commercial lending institutions. The downgrade followed ITI falling overdue on debt service payments on its bond issue.

Trustees to the bonds were unwilling to invoke the guarantees leading to the downgrade.

A backstop facility is a liquidity support mechanism in the event of an unfavourable situation.

Such a mechanism is suggested to provide in the event of shortfalls for meeting debt service payments.

Liquidity support

The Fitch Ratings (India) Managing Director, Mr Amit Tandon, said, "if guarantees are to be made effective, there has to be liquidity support equivalent to about six months debt service payment."

Bankers, however, said that such support would obviate the need for them to make provisions in the event of defaults and act as comfort cushion.

This is also because loan provisions dent profits. With the ITI's bonds in default category, institutional subscribers to the issue would now have to make full provisions and treat the bonds as substandard assets.

Default history

Besides such downgrades would impair the borrowing capabilities of PSUs and lead to higher interest costs for future credits, they said. In fact, this has happened in the case of state government guarantees.

Bankers and financial institutions are avoiding state governments that have a default history. Some eastern States have also been risk weighted at 100 per cent, virtually on par with commercial risk loans.

Funded guarantees

As a result, lending institutions such as the Power Finance Corporation, Rural Electrification Corporation and Life Insurance Corporation have been insisting on funded guarantees.

Funded guarantees imply that the guarantor would provide the backstop facility to the borrowers.

States like Karnataka have provided escrow account facilities up to 1.25 times of the outstanding debt service, as a comfort to lenders. This is for guarantees provided to borrowings by the private sector mega power plant, Nagarjuna Power Corporation, that is setting up a 1,015-MW plant near Mangalore.

Besides bankers want plan transfers to PSUs to be treated as a guarantee fund, to support commercial borrowings by debtor entities. Banks have sought a charge on such fund and as a mechanism that could be utilised for meeting liquidity requirements.

Such mechanisms, the bankers said would be required, as some of the large banks were migrating to Basel-II standards, where risk weights could go up to 150 per cent for substandard assets.

More Stories on : Public Sector Banks | Credit Rating

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

Stories in this Section
South Malabar bank to adopt 8 villages

The yuan-dollar charade

Rupee ends flat

Insurance cos told to raise rural, urban poor coverage

SMS alert facility extended

IOB saw many a change under Narayanasami

Backstop facilities sought for PSUs borrowing

SBT hikes term deposit rates

Bonds shed 5 paise

Call rates end low at 0.3-0.5%

The deposit free lunch

SBI officers to strike on June 8