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Tuesday, Mar 25, 2003

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Banks refuse refinance support to State PSUs

C. Shivkumar

Some State PSUs want to retire mostly high cost bonds and term loans. A few States proposed to buy back some of these high cost bonds/debts for refinancing the same with lower interest loans/bonds for extended tenures.


FINANCIAL Institutions (FIs) and banks have refused to provide any refinance support to State public sector enterprises for shedding some of the high cost bonds supported by State government guarantees.

Sources said here that several States had approached FIs for a complete restructuring of their respective public sector undertakings, power utilities and special purpose vehicles in a bid to capitalise on the current regime of soft interest rates. The kind of loans that these enterprises want to shed include mostly bonds and term loans which were taken at high interest rates of 14 per cent upwards. The restructuring proposed by some of the States include buying back some of these high cost bonds/debts and refinancing the same with lower interest loans/bonds for extended tenures. However, the sources said that the banks and some of the FIs were agreeable to premature redemptions. In fact some of the banks and the FIs want the premature redemption so that this would reduce the provisioning requirement on some of these assets.

"Extending fresh support for shedding these loans would amount to ever greening of the assets and we are not interested in pursuing it," the sources added. Ever greening implies extending fresh credit to shed some overdue payments.

The sources said that one of the major reasons for banks' reluctance to provide any refinancing for the debt shedding package of the State governments is due to the past history of most of the States if not all. Most of the States, they said had defaulted in both interest and pricing payments to the bondholders including the banks. Invoking the agreements with the trustees also has so far been of no avail. This was because most of trustees in the privately-placed bonds have simply refused to cooperate with the banks or the FIs for recovery purposes. Besides invocation of the guarantees/letters of comfort have so far not served any support.

The sources also added that this year almost all the banks have stopped booking income from some of these investments, supported by State Government guarantees as non-performing. But these assets have also not been provisioned, since they have not yet been declared as non-performing, they said. Among the institutions with large exposures to State Government guarantees include FIs such as LIC, GIC, Hudco, and almost all the public sector banks.

But banks' preference is for the premature redemption option to refinancing. This was in view of the fact, that transferring the assets to any of the asset reconstruction companies would mean incurring losses. This was because the assets would have sold at large discounts to face value. On the contrary, if the States were prepared to redeem it at par, lenders were prepared to consider it so long as it did not involve additional commitments.

However, some of the larger banks and specialised institutions were also prepared to consider fresh round of rescheduling of loan/bond redemptions and restructuring of interest payments.

But there are riders to this condition. FIs and banks have said that for this rescheduling none of them had prepared unfunded guarantees as in the past. In fact all of them have sought a funded guarantee mechanism, which allows access to central transfers and the States tax pool in the event of defaults in meeting repayment obligations.

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