The Uttar Pradesh government has securitised overdue payments to the Housing and Urban Development Corporation (Hudco) through tax-free bonds. The deal is structured through a special purpose vehicle (SPV) floated for the purpose. This is the first time that a state government is using this method to settle overdue payments to financial institutions (FIs).
Banking sources expect the deal to set off similar deals between state governments and FIs. They said the overdue payments securitised were interest and principal flows from Ghaziabad Development Authority, Meerut Development Authority and Allahabad Development Authority. The amount involved is about Rs 77 crore.
The new method involves placement of 10.5 per cent tax-free bonds worth Rs 50 crore with Hudco, with Rs 27 crore being settled in cash. These bonds are backed by state government guarantees, with an escrow charge on a portion of the state revenues to meet the interest and repayment obligations during the five-year tenor of the bonds.
Hudco, sources said, had been forced to use this route to avoid classifying these loans as non-performing assets (NPA). Under the current prudential norms applicable to such institutions, if there are payment obligations for more than two quarters, they are to be treated as substandard assets and payments beyond this limit will have to be classified as doubtful assets. The settlement of dues through this method eliminates the possibility of treating these loans as NPAs. The company can also get tax exemption on its income from such bonds. Sources said this method of securitisation also gave the loans an element of liquidity since Hudco would be in a position to liquidate these assets in favour of other buyers after the yields on tax-free bonds fall.
Last year, the institution was forced to invoke state government guarantees on loans given to these authorities. Hudco is in a position to recover its dues through pre-emption of the state's share in central taxes. However, it has so far refrained from exercising this option and instead adopted the rollover and escrow route in order to secure repayments. Last year, central public sector undertakings like the National Thermal Power Corporation had chosen to pre-empt tax flows to the state to settle dues.
