Defaults on state government-guaranteed bonds are piling up alarmingly, and commercial banks are going all-out to see that no stone is left unturned in bringing the issue to the fore. Banking industry estimates show that such defaults have crossed the Rs 2,500-crore mark as on September 2002 from around Rs 1,800 crore as on end-March 2002 as per data provided by 27 state-owned banks and compiled by the Indian Banks’ Association (IBA). Matters have come to such a pass that state-run banks, which have a major exposure to state-guaranteed bonds, have approached both the IBA and the Fixed Income Money Markets and Derivatives Association of India (FIMMDA) to take up the issue with the regulators. Bankers have also urged the RBI to look into the matter. While bankers said that “the central bank has assured us that it would look into the matter”, they did not appear to be convinced on the same. However, the RBI has recently decided to form a committee to work out an arrangement to restructure outstanding loans to special purpose vehicles (SPVs). There are a quite a few cases of non-payment of both principal and interest amounts, bankers said. A high number of defaults is taking place, particularly in the power and transportation sectors. Among the state-guaranteed entities, the Madhya Pradesh State Electricity Board (MPSEB) tops the default list with other major defaulters being the the electricity boards of Assam, Meghalaya, Bihar and UP, the Orissa State Finance Corporation and the Bihar State Transport Corporation. Banks granted advances to these SPVs which turned non-performing due to non-servicing of interest. Banks also have investment exposures to privately-placed bonds floated by such SPVs. Experts opine that the actual default amount could be more than the projected one as banks rarely invoke guarantees in such cases and treat these as standard assets. By doing so, they avoid making provisions. “Invoking guarantees also lead to unnecessary complications and litigations, which everyone wants to avoid,” explained a banker. Meanwhile, the IBA’s managing committee is already in the process of compiling the current extent of defaults, while FIMMDA will consider the issue at its next board meeting scheduled for Tuesday. IBA sources confirmed that it has been deliberating over the issue for quite some time now. “We would like take up the issue with the respective state governments and persuade them to bring in better fiscal disciplines,” a source close to the development said. Bankers said though some entities were now showing interest in servicing the coupon portion, principal amounts were still pending. “We have been writing to them, but at times, we are not getting a response from them,” a banker pointed out. According to data as on end-March 2002, defaults amounted to Rs 755 crore as per banks’ advances to SPVs. In case of banks’ investment into state-guaranteed bonds, defaults amounted to Rs 1,024 crore (Rs 413 crore as principal and Rs 611 crore in interest payments).
