The Hindu Business Line : Swap package for M.P. govt guaranteed loans

A CLUTCH of banks with the intervention of the Reserve Bank of India has worked out a settlement with Madhya Pradesh for rescheduling overdue state government guaranteed debts.

Banking sources said the settlement involved rolling over the entire Rs 500 crore of outstanding debts into a fresh round of borrowings.

The new bonds would have revised terms identical to the terms extended to Centrally-owned public sector undertakings such as Power Finance Corporation and National Thermal Power Corporation.

Accordingly, the mechanism involves assignment for central transfers to the banks through a default escrow account. In the event of defaults, banks had the option of drawing on the escrow account.

The state government guaranteed the Madhya Pradesh State Electricity Board's (MPSEB) borrowings through the bond markets. The outstanding liabilities were mainly to the MPSEB amounting Rs 500 crore. A large component of these borrowings were in the form of high coupon bonds, which the SEB had found difficult to service.

Moreover, Madhya Pradesh had delayed the repayments after bifurcation of the State and had indicated that the debt service obligations would have to be incurred by Chhattisgarh, which had inherited the bulk of the generation assets.

Faced with the overdue payments, banks and financial institutions had sought the intervention of the RBI for recovering their dues.

The new round of borrowings, bankers said, would be in the form a state development loan. Consequently, the rates would therefore be at the yields for state development loans. The last round of SDLs with a 10-year maturity profile was raised at 7.5 per cent.

The sources said all the banks and financial institutions, including insurance companies that have overdue debt service from Madhya Pradesh, have agreed to subscribe to these bonds. The proceeds of these bonds would in turn be utilised for discharging the SEB's guaranteed debts and clean up the balance sheet.

The sources said the state government has already agreed to make budgetary provisions for meeting debt-servicing obligations in the current year.

They said this kind of arrangement was finalised since it helped banks from making any large provisions for non-performing assets.

So far, a few state governments' bonds have been declared as substandard assets since this implied the lenders would have to make large provisions.

Loans technically become NPAs if the debt service payments were in excess of 90 days. However, several banks had not yet declared state government guaranteed bonds as NPAs, though payment dues were well in excess of the stipulated guidelines nor have they invoked any of the guarantees.

Bankers said the Madhya Pradesh arrangement would be model for settlement of more state government guaranteed debts.

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