No more cheap loans to state companies

By : Manojit Saha
Last Updated: Tue, Jun 05, 2012 04:35 hrs
A man walks past a bank advertisement for four wheeler vehicle loans in Mumbai

The era of government-owned companies being offered the best interest rate by public sector banks (PSBs) despite being financially stressed may be coming to an end.

The Union finance ministry has asked the state-run lenders not to allow any concession on interest rates to government-owned entities with poor ratings. The ministry, say bankers, feels a government–owned entity does not necessarily ensure timely repayment.

"Many state-owned companies like the state electricity boards have a low rating, like B, and are being offered the base rate, which is 10.5 per cent for most banks now. Ideally, only AAA-rated firms should enjoy the base rate, as the lowest interest rates should only be offered to the best customers," said the chairman and managing director of a PSB who has received a communication from the ministry on the issue. "The finance ministry wants to ensure loan pricing is done after proper risk assessment."

The trigger for the move was the Air India fiasco, with the troubled government carrier failing to repay its debt. The original debt recast plan of AI would have resulted in huge losses to banks and was averted after the finance ministry intervened. A fresh package was prepared which saw substantial reduction in the haircut on banks as compared with the initial proposal. Bankers said the present health of state electricity boards have also prompted the government to issue the caution.

According to a study by CRISIL, about Rs 300,000 crore has been lent to state-owned utilities and a quarter of this has been restructured. A majority of the loan recast pertains to three states - Rajasthan, Uttar Pradesh and Haryana. The accumulated loss of state power utilities was Rs 200,000 crore as on March 31.

Banks have recently completed a debt recast of power companies in Rajasthan. The distribution companies will be given a two-year holiday on repaying the principal and three more years to pay the loans and the banks will increase their interest rates by 100 to 150 basis points. The latter increase will mean the net present value of the loan is maintained. The banks will, however, according to Reserve Bank of India guidelines, will have to make an additional standard asset provisioning of two per cent.

The agreement with Rajasthan's power utility firms also mandated that the borrower will continue to pay monthly interest instalments, while the state government will stand guarantee to the loan amount.

Also, the state governments is to make prompt payment for subsidy and pay for losses; the rates of power supply are to be periodically reviewed. Banks hope to replicate the Rajasthan model while restructuring loans for other state power utilities.

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