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Assuring funds for performers

Shaji Vikraman

A RECENT letter from the country's central bank and the Government's debt manager -- the RBI -- to the Finance Ministry on the market borrowings of some State Governments appears to be acting as a wake-up call for the Government to thin k in terms of a policy to discourage the laggards and to enable the performers to borrow at fine rates.

Not that there is no such policy in place. The RBI has encouraged the States to borrow directly from the market for their fund requirements, ranging between 5 and 35 per cent of their gross borrowings aside of the pre-announced auctions. The States have the leeway to decide on the method, timing and maturities of these borrowings.

The idea was that the performers among States, whose fiscal management is fairly sound, would thus be able to benefit through lower yields compared to the laggards. While this has been borne out by the borrowing programmes of States such as Punjab, Andhr a Pradesh, Tamil Nadu and Karnataka, the dilemma centres around naturally on the laggards and some of the special-category States.

For, while Karnataka may manage to raise money from the market at marginally above 11 per cent for its 10-year stock, a Tripura or a Bihar may not fit the bill for investors who are turning out to be increasingly choosy. For good reasons. Several States have blithely stopped paying even the interest component on borrowings, forcing the earlier captive investor crowd of banks to offer resistance.

The problem has been compounded for them thanks to the RBI's diktat that investments in the State Government-guaranteed securities outside the market borrowing programme would attract a risk weight of 20 per cent. In case of default in payment of interes t or principal of such bonds, banks will now have to assign a 100 per cent risk weight for investments in such securities.

Moral suasion practised in the good old days as well as curt phone calls to the bosses of various banks by the RBI no longer works. For the Finance Ministry and the RBI, the worry stems from any initiative taken which might spark off protests from the St ates citing discrimination.

For officials -- the challenge lies in working out a fair equitable arrangement without compromising on the broader goal of improving fiscal management practices among States and providing incentives to the performers amongst them.

Market borrowings is only one part of the story. The time-bomb which is ticking is contingent liabilities. At the end of December 2000, the outstanding guarantees of 17 State Governments were of the order of Rs.99,306 crore. If the countless number of le tters of comfort issued in the past are also taken into account, the figure will balloon.

The Finance Ministry's response has been to quietly provide a guarantee redemption fund with a relatively small corpus of less than Rs 500 crore. This has never been publicised with officials in the Ministry, going around with a prayer on their lips, hop ing that this would escape the attention of the creditors.

Top officials of banks have a different story to tell. Getting the Central Government or the State Governments to honour guarantees issued by them is almost like asking for the moon.

Officials at the North Block are now holding out the promise of flagging off some work on the contingent liabilities to obtain a true picture of the liabilities and also towards a better incentive system in raising money from the market at better rates f or those States which are well managed.

Expect, yet another committee soon.