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C. Shivkumar

The devolvement is partly on account of the inability of the state-owned entities to service outstanding debts. The outstanding guarantees provided to state public sector corporations had increased to Rs 12,000 crore, sources said.

BANGALORE, Nov.14

IN a bid to contain mounting contingent liabilities, the Karnataka Government has begun withholding guarantees to State public sector undertakings.

Sources here said that the move was being taken in view of the large volumes of guarantees that have devolved on to the Government. The devolvement implied an escalation in the debt-servicing costs. The devolvement is partly on account of the inability of the State-owned entities to service outstanding debts. The outstanding guarantees provided to state public sector corporations had increased to Rs 12,000 crore, sources said. At the end of the last financial year, the outstanding guarantees were Rs 10,325 crore.

The sources said that most of the companies, including the special purpose vehicle — the Krishna Bhagya Jala Nigam Ltd — had so far not been able to generate cash flows to service their debts. KBJNL alone accounts for about 60 per cent of the off-budget borrowings. As a result, the entire debt is being serviced directly from the revenue receipts of the State Government. However, as far as the other SPSUs are concerned, they have not been able to generate sufficient revenues even to meet the debt- servicing costs. Consequently, the entire cost of servicing has been transferred to the Government as the guarantor. The sources said that as a result of this situation, the overall internal debt stock, inclusive of the guarantees of the State Government, was up substantially. This figure is close to about 19 per cent of the Gross State Domestic Product (GSDP).

Further, this figure of outstanding liabilities does not include a component of off-budget borrowings, which are raised on the strength of letters of comfort issued.

These are not accounted as part of the contingent liabilities. Nevertheless, bankers prefer treating this component also as part of the internal debt stock. Among the agencies which had raised borrowings through this method were State-owned utilities including the power transmission corporation and state-owned financial institutions, the sources said.

"With this kind of a heavy debt servicing burden, we are expecting slippages in our revenue deficit target," the sources said. The consolidated revenue deficit target for the year was 2.85 per cent of the GSDP. But this figure is already well over 3.5 per cent, assuming there is not likely to be any shortfalls in revenue receipts.

In reality however, the State is already faced with a serious shortfall in revenue receipts. Available figures suggest that during the first 8 months of the current fiscal year, the internal tax collection slippage was to the extent of at least Rs 2,000 crore.

This means that the State Government has so far been able to realise only about 45 per cent of the target during the peak tax payments season.

Consequently, the State Government has preferred to cut back build-up of liabilities and prevent any further slippage in revenue deficit targets, by containing revenue expenditure, particularly interest payments. As a result, the State Government has now begun scaling down its guarantees to PSUs.

In fact, some of the PSUs have been asked to either go to the financial markets without any guarantees or through securitisation methods.

Among such PSUs are the state industrial development corporation and other state-owned financial institutions.

But few of the institutions are in a position to raise funds without credit enhancement mechanisms, since they are already over-leveraged.

The alternative method involves mortgaging of cash flow streams.

This mechanism was, however, unlikely to be acceptable to lenders, since the cash flow quality of the state-owned lending institutions was below acceptable standards, the sources said.

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