Banks see no sense in sovereign guarantees for PSUs

Public sector banks are increasingly finding it difficult to make recoveries on loans extended to public sector undertakings (PSUs), thereby making sovereign guarantee redundant. They can still invoke the government guarantee but cannot recover the money as they are not allowed to take legal recourse against a PSU.

This is putting pressure on the balance sheet of public sector banks, as unlike in the past, they now need to classify their sticky exposures to PSUs as non-performing assets (NPAs) and provide for them.

Recently, the State Bank of India wanted to move against Indian Drugs and Pharmaceuticals Ltd (IDPL) to recover money but it was stopped from doing so by the inter-ministerial committee. Ditto about Indian Overseas Bank, which wanted to recover money from a sick textile firm in the public sector.

"The inter-departmental committee will never give the go-ahead for legal action. This means we will never be able to recover money," said a senior public sector banker.

IDPL has been incurring losses since its inception in 1961, except for a five-year period (1974-79), and its total liabilities are estimated to be over Rs 2,800 crore. The only way to recover money is to attach their property. However, a clearance from the inter-ministerial committee is required as this is a case of one government arm dragging another one to a court.

The inter-ministerial committee on disputes consists of a secretary from the banking division, secretary of the concerned ministry and cabinet secretary as the observer.

Provident funds (PFs) too are facing such dilemma as they also invest in public sector undertakings solely on the basis of state and central government guarantees. Unless the trust invokes the guarantee, PF investors have little recourse to ensure return on their funds.

Trustees tend to take time to invoke the guarantee and even then various ministries come into the picture and instead of making good the guarantee, ask the defaulting company to work around the issue.

For example, the Karnataka government failed to make good the "unconditional and irrevocable guarantee" issued in the case of Mysore Sugar Co. The state firm failed to meet interest payments to debenture holders of its Rs 15-crore non convertible debenture (NCD) issue due in March 2005. Trustees could not invoke the guarantee as the company has been referred to the BIFR (Board for Industrial & Financial Reconstruction).

Many state government corporations have defaulted on interest payments. This despite state government guarantees backing their instruments. These include the Madhya Pradesh Electrical Board, theMaharashtra Jeevan Pradhikaran and the Maharashtra Krishna Valley Dam Corporation.

However, in some cases the central government guarantees have been invoked and PF investors have been paid interest. HMT and Instrumentation Ltd, under the ministry of heavy industries, had failed to pay interest till Standard & Poor's highlighted the issue which led to payments being made.