Rs 5,400cr guarantees to devolve on state govts

Guarantees of state governments shot up by 210 per cent since 1992 as power and irrigation corporations of several states went on a fund mobilising-spree. Guarantees by states touched Rs 124,800 crore from Rs 40,200 in 1992. The RBI has already warned the states about the rising guarantees and asked the governments to bring down this to manageable levels.

“The state governments have extended such guarantees to weak entities with relatively poor credit profiles. These include a large fraction of entities whose stand-alone capacity to service debt is virtually non-existent,” Crisil said. A large number of the state corporations, primarily SPVs, have limited revenue-generating potential. Most of these SPVs have been floated to undertake large irrigation projects, aimed at reducing the dependence on rainfall and thereby providing a boost to the state’s agricultural sector. Some state governments have even diverted funds from these corporations to other areas.

Since the user charges levied are only notional, the expected revenue generation from such SPVs would be negligible. Therefore, any debt raised by such SPVs would inevitably require explicit guarantees. In fact, almost all the SPVs are currently provided full budgetary support by the state governments. Consequently, these guarantees would fully devolve on the state governments and hence, can be considered equivalent to debt.

The risk of the guarantees being invoked has increased due to the worsening risk perception of the state-guaranteed bonds. Currently, even if an entity, whose securities or loans and advances are guaranteed by the state government, is in default, the lenders treat these investments as a standard asset unless the guarantee is invoked. Further, the state governments’ stressed financial conditions could lead to delays in debt repayments by them, causing an increased likelihood of invocation of guarantees.

Five large states — Gujarat, Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu — together account for almost 50 per cent of the aggregate state-level guarantees.