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State guarantees not final word: RBI

Our Bureau

The RBI advice assumes significance especially in light of the controversy surrounding the Enron-promoted power project, which has both State and Central Government guarantees.

MUMBAI, Feb. 21

TIME was when the State was considered the final word in guarantees. The RBI however on Thursday issued a circular on infrastructure funding to chiefs of all banks and financial institutions (FIs) stating that Government guarantees do not necessarily mean that the credit is good.

It has advised banks and FIs to spare no efforts in appraisal while financing infrastructure projects undertaken by Government-owned entities. It has also asked the financiers to keep a watch on the end use of advances. Banks and FIs should "ensure that loans and investments are not used for financing the budget of the State Governments."

For infrastructure financing by way of term loans or investments in bonds issued by Government-owned entities, banks and FIs "must undertake due diligence on the viability and bankability of such projects to ensure efficient utilisation of resources and creditworthiness of the projects financed,'' the circular said.

The RBI advice assumes significance especially in light of the controversy surrounding the Enron-promoted power project, which has both State and Central Government guarantees. The company has accused both the Governments of dishonouring the guarantees.

Besides, the finances of several State Governments are in disarray with some of them such as Kerala walking the edge of bankruptcy. There have also been instances where State Governments raised money through special purpose vehicles set up for infrastructure projects, but channelled the resources to meet other expenses. "State Government guarantees may not be taken as a substitute for satisfactory credit appraisal and such appraisal requirements should not be diluted on the basis of any reported arrangement with the RBI or any bank for regular standing instructions/periodic payment instructions for servicing the loans and bonds,'' the circular read.

With respect to projects undertaken by public sector units, term loans may be sanctioned only for public sector undertakings registered under the Companies Act or a corporation established under the relevant statute.

Further, the term loans should not be in lieu of or to substitute budgetary resources envisaged for the project. The term loans could supplement the budgetary resources if such supplementing was contemplated in the Companies Act set up for financing infrastructure projects. It should be ensured, by banks and financial institutions, that these loan investments are not used for financing the budget of State Governments.

Whether such financing is done by way of extending loans or investing in bonds, the lenders should undertake due diligence on the viability and bankability of such projects to ensure that revenue stream from the project is sufficient to take care of the debt servicing obligations and that the repayment is not out of budgetary resources.

Lenders should also, while financing special purpose vehicles, ensure that the funding proposals are for specific monitorable projects other than those being implemented by State Governments in view of the fact that their borrowings for budgetary purposes are met by banks and financial institutions by contributions to their approved market borrowing programmes.

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