Rating agency Crisil has estimated that guarantees aggregating Rs 44,000 crore could devolve on the state governments in the next five years.
The agency reasoned that the risk of guarantees being invoked has increased due to the worsening risk perception of the state-guaranteed bonds.
The rating agency has estimated that the state governments are likely to encounter an aggregate debt servicing obligation of over Rs 44,000 crore over the next five years with a sharp rise in devolvement from 2003-4 onwards, according to a Crisil study on mounting state government guarantees.
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The Crisil study reveals that irrigation and power projects account for a large proportion of the guarantees.
The study is based on the guarantees extended by the five large states - Gujarat, Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu which account for 50 per cent of the state level guarantees.
Currently, if a State Level Entity (SLE), whose securities or loans and advances are guaranteed by the state government, defaults, the lenders treat these investments as a standard asset unless the guarantee is invoked. The investments are treated as NPAs only if the payments are not received within two quarters of the guarantees being invoked.
Currently, lenders rarely invoke the guarantees and hence such defaults remain hidden. However, according to Crisil, stricter provisioning norms for sticky government bonds would be introduced in the near future, which would force the lenders to invoke guarantees for such debt or advances.
The state governments stressed financial conditions could lead to the delays in debt repayment, causing an increased likelihood of invocation of guarantees. Recent delays in debt servicing have further increased concerns and would lead to reduced appetite for state government debt issues. The refinancing of debt would consequently become increasingly difficult.
Invocation of guarantees would further strain the fiscal position of state governments and may eventuate in frequent delays or in extreme cases defaults in honouring debt-servicing obligations by some states.
While provident funds have been major investors in bonds, loans have been extended by Nabard, Hudco, LIC, NCDC, REC, public sector banks and RRBs.
According to Crisil most of the state level enterprises (SLEs) have a poor stand- alone credit quality due to low profitability and a weak asset base.
According to Crisil estimates the bulk of the debt would fall in the speculative category of BB+ and below.
Even as the aggregate state guarantees increased by Rs 72,180 crore between 1996 and 2000, Crisil estimates that guaranteed market borrowings by SLEs alone accounted for over Rs 30,000 crore.