The Hindu Business Line : Banks for enhancing exposure limits to PSU oil companies

With the exhausted limits, oil companies are resorting to selling their oil bond holdings in the financial markets for raising funds for meeting their imports.

C. Shivkumar

Bangalore, May 6 A clutch of banks have approached the Reserve Bank of India (RBI) for enhancing exposure limits to public sector oil refining companies.

Top banking officials said that the banks have already hit the exposure ceiling (of 20 per cent of their net worth) to PSU oil companies.

Enhancement of the ceiling, the officials said, could be done only after a special approval from the RBI.

Under the current RBI guidelines, exposure is limited to 20 per cent to oil refining companies, since they are categorised as infrastructure companies. For non-infrastructure entities, the limit is 15 per cent.

The exposure ceiling is fixed as a percentage of the banks’ capital, both tier I and tier II. The sources said that the ceiling was reached, after oil prices hit a record $120 a barrel. This meant that the domestic import prices are close to about $113 a barrel. Since the import prices are not treated as fully passed on to product prices, oil companies were resorting to drawing down their credit lines.

The bankers said, with the exhausted limits, oil companies resorted to selling their oil bond holdings in the financial markets for raising the funds for meeting their imports.

Oil companies’ requirement is estimated to be at least $250 million per day for meeting the import payments of about 2.2 million barrels a day. Last week, the Indian Oil Corporation sold about Rs 2,300 crore of oil bonds at a steep discount, that translated into an yield to maturity of 9.22 per cent.

More oil bond sales are expected by two other companies — Hindustan Petroleum Corporation Ltd and the Bharat Petroleum Corporation Ltd — as the banks have reached the exposure limits to these entities as well.

HPCL has already entered the market for sale of the 7 per cent 2012, 7.47 per cent 2012, 7.61 per cent 2015 and the 8.13 per cent 2021 bonds to raise a total of about Rs 700 crore. The funds raised would be for meeting the import payment obligations.

Widening of spreads

The sell-off of oil bonds has resulted in widening of spreads between oil bonds and sovereign borrowings. The spread is currently close to about 100 basis points. For instance, the yield on the 4-year oil bond 7.47 per cent 2012 per cent security was as high as 8.81 per cent.

The yield on the 7.40 per cent 2012 sovereign security was about 7.65 per cent.

This was despite the fact that oil bonds were also sovereign guaranteed.

Oil bonds though are not eligible for Statutory Liquidity Ratio (SLR) status, resulting in the differential yields. Oil companies have been demanding SLR status on the bonds for some time, in order to reduce the costs of raising funds.

The Union Finance Ministry, though, has not conceded to this demand. SLR status for the bonds would align the spreads to the sovereign bonds, bankers said.

This would accordingly bring down the fund-raising costs for the oil companies with a concomitant impact on the refining margins.

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