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C. Shivkumar

Bangalore , Sept. 5

PUBLIC sector banks have sought assignment of Central transfer of Plan resources to States as a pre-condition for extending debt support to utilities and other state-owned public sector enterprises.

This move comes close on the heels of a series of defaults of debt service payments by State Government-owned utilities and public sector enterprises. All these loans extended were guaranteed by the respective State Governments. However, few banks have been able to invoke the guarantees for the payment defaults. Among those affected by the defaults are public sector banks, insurance companies, financial institutions and provident funds.

Sources said so far the banks have staved of declaring some of the loans as sub-standard assets partly in view of the current guidelines. These guidelines do not permit banks to make provisions on defaults in fulfilling guarantee obligations. However, most of the banks have stopped booking income on such assets though they have stopped short declaring of such loans as non-performing assets and full provisions for such defaults. The overdues to the banks, financial institution, insurance companies and provident funds from all the State Governments are estimated to be in excess of Rs 50,000 crore.

Besides, the Reserve Bank has also so far not agreed to intervene on behalf of the banks to recover the dues. Only some agencies such as Housing and Urban Development Corporation (Hudco) and Rural Electrification Corporation of India (REC) have managed to recover their dues through legal intervention.

But sources said that pre-emption of the Central transfers to the States was not possible by the central Bank in view of Article 266 of the Constitution. This particular article stipulates that all Central transfers to the States would have to be credited to the Consolidated Fund of the respective States. Accordingly, any pre-emption would be possible only with the concurrence of the States, the sources added.

Therefore, almost all the lending institutions have now decided that future lending to the State Governments would be done only on the basis if assignment of Central transfers were in favour of the lending agencies. High level PSU bank officials said, "We need a security mechanism as and when we start risk weighting sub sovereign loans."

The assignment would be more in the nature of providing a default charge on Plan transfers to the States. This charge is to be activated by lenders in the event of a default in debt service payments or trustees in the case of bondholders. So far, the sources said, only about three States have agreed to these terms, majority of them have not agreed to making any charge on the Central transfers fearing that this would further worsen their revenue deficits.

Consequently, the sources said that as an interim measure, some of the banks have tightened up on lending to the States only for specific projects. In such loans, the banks have stipulated debt service coverage ratios of 2:1. This tightening has already been put into effect by the public sector Indian Overseas Bank, bankers said. Other bankers are also expected to follow suit.

This tightening implied that the gross revenues of the States, after netting for repayments of loans would have to be double the debt service payments. This ratio, which measures the debt carrying capacity of the borrowers, is far tighter than the terms of the development financial institutions, where the prescribed ratio is 1.5: was to one and where backed up by guarantees, even 1.25 was acceptable to them.

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