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C. Shivkumar

BANGALORE, Sept. 18

THE Reserve Bank of India has proposed clubbing of borrowing by the State Government special purpose vehicles (SPV) along with State development loans in a bid to restrict unbridled accumulation of debt.

Sources said that the RBI has suggested that wherever SPV debt servicing was supported by the budgetary provisions, the loans be included as part of the respective State Government's overall borrowing quotas. Such a move, banking sources said, would impose limits on the quantum resources that could be raised through borrowings. Further, this clubbing would in turn reduce the borrowing quotas available for State Governments through sovereign guaranteed State development loans. This proposal, the sources said, has been made to the Centre and was likely to be put into effect soon.

Currently, almost all the State Governments were breaching the borrowing quota limits by resorting to raising resources through State utilities and SPV. The impact of this level of borrowings was an inflation of the revenue expenditure of the State Governments on account of debt service payments. This in turn leads to an escalation of the revenue deficits of the State Governments.

A few State Governments introduced legislative caps on the insistence of the RBI. However, almost all of them have exempted SPVs from the ceiling. This exemption was done on the grounds that the debt service of SPVs were budget funded. The budget funding however has not affected the borrowing quota limits so far.

The RBI's new proposal was triggered by the mounting debt service burden liabilities of the States and the delayed/defaults in servicing State development loans. Debt service payments currently account for as much as 30 per cent of the revenue expenditure of the State Governments. But if loans sourced through SPVs and State utilities are also included, the revenue deficits escalate to as high as 40 per cent of the revenue expenditure. Borrowings by the State utilities are made, through issuance of guarantees as well as letters of comforts, both of which result in rising contingent liabilities for the States.

The sources said that such borrowings have been necessitated by revenue shortfalls at the State level. Besides most State Governments have remained wary of widening the revenue base either through hikes in user charges of some of the State utilities or through expanding the tax base. Instead, most of them have taken the softer option of raising funds through borrowings.

The RBI's move also stems from the potential impact defaults by the State Governments on the banking sector.

The sources said that since the papers floated by the SPVs were supported by the State Governments, the public sector banks were reluctant to classify defaults as sub-standard/non-performing assets. What has also alarmed the central bank is that most of the borrowing entities were raising resources at higher rates particularly for refinancing maturing loans/bonds.

This continuous resorting to financing has pushed up refinancing costs substantially. The costs are currently at least 600 basis points (6 per cent ) above sovereign yields compared to about 250 basis points (2.5 per cent ) a year ago. Such high spreads are identical to rates offered on securities falling under the speculative/default categories. As the spreads increase, the risks of an NPA build up also escalates, the sources said.

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