Railways Headed For Debt Trap

Faced with the resistance from financial markets, the railways are beginning to rely on the Indian Railway Finance Corporation (IRFC) for meeting its extra-budgetary resources requirements.

IRFC this year is expected to raise about Rs 2665 crore from the financial markets, partly to offset the failure of the build-own-lease- transfer (BOLT) schemes of the railways for funding permanent ways and rolling stock. The revised budget indicates that numbers in the own-your-wagon (OYW) and BOLT schemes are barely half of what was budgeted. In the revised budget for 1997-98 BOLT schemes were expected to generate about Rs 463 crore, as against the estimated Rs 900 crore.

And this increasing reliance on the IRFC is slowly leading the railways into a debt trap. A status paper on the railways has already indicated that their lease rental payouts will shortly exceed borrowings.

Lease rental payouts to IRFC and the BOLT and OWY schemes is about 6 per cent of the total plan size of the railways.

In actual terms, this is likely to be around Rs 1,050 crore this year. Actual borrowings targeted by the railways through the IRFC is about Rs 2,665 crore, and another Rs 235 crore for meeting the rentals of the BOLT and OWY schemes. This implies that the railways' ability to refinance maturing debts is slowly eroding.

Besides, the IRFC has also raised another $70 million floating rate notes in 1996. At that time the rupee-dollar exchange rate was about 35.

Now, with the exchange rate dipping by about 19 per cent from that level, the debt-service obligation of IRFC has also mounted.

For IRFC, such increases will have to translate into higher lease rentals, or alternatives will have to be resorted to removing the excess depreciation on its balance sheet. IRFC is in a situation where the depreciation on its balance sheet is more than what it requires to hedge against tax payments. This, in turn, implies that on the incremental lease rentals, the actual earnings will be lower than the effective cost of funds.