The Hindu Business Line : States seek interest waiver on bonds — Bankers in a fix over threat to default on payments

Banking sources said that some of the States have even threatened to default on payments, if the bankers refuse to oblige their demands. This demand has put bankers in an extremely difficult situation, especially since most of them are in the process of finalising the results for the current financial year.

The bankers said that the States have resorted to this step on the strength of the Centre's move to reschedule Plan and non-Plan loans that included write-off of outstanding interest. The bankers said barring a few, several of the state-owned borrowers had run up large debt servicing over ues. The sources said that most banks were left with few alternatives, since few had made provisions on State Government guaranteed bonds, on interest or principal overdues. The bulk of these loans had been extended to State Government-owned special purpose vehicles or State Government public sector undertakings, including State electricity boards on the strength of the guarantees by their sponsors. The bulk of the funds raised were used to fund either unviable projects or the revenue deficits of respective States.

Bankers said that States had begun using these methods to settle their outstanding debts since refinancing windows were no longer open. Besides, the Reserve Bank of India had already begun exerting pressure on the States to settle their overdues, after banks had sought intervention.

Above all, banks are expected to begin treating such loans as any other commercial lending, and accordingly apply prudential norms without relying on the guarantees. This would mean that wherever there were overdues in debt servicing in excess of 90 days, they would have to be classified as non-performing assets. Bankers said that this was likely to escalate their provisions on bad loans for the current year, with the shift over to the new provisioning norms.

Till last year, banks were required to make provisions on loans only in the event of guarantees being invoked. Consequently, few banks invoked the guarantees. But almost all of them had sought the Reserve Bank of India's interventions for recovering their dues from the States through pre-emption of Central transfers. The outstanding amount of the State government guaranteed securities are estimated to be over Rs 1.5 lakh crore. Among the institutions that had subscribed to these State government guaranteed bonds, included, provident funds, insurance companies, cooperative and regional rural banks. These banks would also be expected to comply with the new prudential norms prescribed by the RBI. Most of these bonds were floated during the late 90s and the early party of this decade and carried high coupon rates, of over 12 per cent.

Bankers said that as the alternative to making provisions, they would have to opt for the one-time settlement offered by these State Governments, allowing for recovery of only the principal. This was also likely to lead to losses. But the banks are unlikely to be hit as hard as insurers, the sources said. This was because large banks already had a sizeable cushion by way of floating provisions created out of past profits from treasury operations. the insurance companies, who hold these bonds as part of their mandated investments and provident funds, are likely to take a bigger beating.

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