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FIs, banks tighten lending to States

C. Shivkumar

Utilising such loans for revenue expenditure was consequently leading to an escalation in the debt burden of the States, without any concomitant increase in revenue receipts.

BANGALORE, Nov. 24

FINANCIAL institutions (FI) and banks have tightened lending to the States through the negotiated loans route in a bid to restrict the build-up in outstandings.

Institutions like LIC, GIC, and the HUDCO normally extend the loans to the State Governments through bilateral negotiations. Such loans are raised by the States for the ostensible reason of funding urban housing and social sector development both in the urban and rural areas.

Barring agencies like the HUDCO, for most of the loans there is no other covenant other than guarantees. HUDCO, however, has consistently insisted on physical asset covers for lending to the States. Such loans are normally meant to be utilised for meeting capital expenditure and for the infrastructure sector.

But States have been resorting to this route of borrowings to meet their shortfalls in revenues and capital receipts to sustain Plan expenditure. However, some of these loans were also being utilised for meeting revenue expenditure, sources said here.

Utilising such loans for revenue expenditure was consequently leading to an escalation in the debt burden of the States, without any concomitant increase in revenue receipts. Besides, such loans were also leading an escalation in the interest burden of the States.

This was because such loans were negotiated at rates which were considerably higher than the loans apportioned to them through the RBI and very close to the FI's minimum lending rates. Currently such loans carry an interest rate of around 9 per cent.

As a result of such borrowings, the outstanding liabilities of States to FIs and banks have been mounting in recent years.

These liabilities are about one third of the gross internal debt of the States. Currently, outstanding to FIs and banks stand in the region of about Rs 50,000 crore. Since the beginning of this decade alone such borrowings have shown an increase of 40 per cent per year.

These borrowings, however, exclude resources raised through guaranteed bonds through various State Government utilities.

The sources said that the Centre had already advised the States that such borrowings could not be sustained for meeting revenue shortfalls, in view of the potential increase in interest costs. "Such high interest costs cannot be sustained if they are used only for revenue expenditure," the sources said. The only alternative is for the States to cut back on such borrowings.

But the States had so far been reluctant to cut back on such sources of borrowings, the sources said.

The Centre's advice comes even as some of the FIs and banks have begun complaining of delays and defaults in meeting the interest and principal servicing by some of the States, leading to severe asset-liability mismatches for the lenders.

Besides, the Centre has also conveyed that in the event of defaults on such loans without sovereign guarantees, the risks would have to be entirely borne by the respective States.

The Reserve Bank and the Ministry of Finance have so far not accepted the demands of FIs/banks for a charge on Central transfers by the lenders. Instead, the Centre has now advised the FIs and banks to slow down such lendings to States and advised that such loans should be extended, only after their own due diligence is conducted and purely on the bankability of the projects.

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