State Government's leverage levels decline: ICRA

Indian states net borrowings through State Development Loans (SDL) rose 22% in April-December 2012 yoy terms

Investment Information and Credit Rating Agency (Icra) of India Limited in its report on the performance of Indian States said, "Leverage levels of State Governments have declined. It further elaborated that improved monitoring of guarantees will be required to avoid any liquidity mismatch in future. The report was based on 12 states including Kerala, Gujarat, Punjab, Rajasthan and West Bengal (WB).

The ICRA report further says that, while there have been a few instances of invocation of guarantees in recent years, concerns prevail regarding the impact of devolvement of such commitments on the health of State Governments in the future. Reason: There are inadequate buffers created through guarantee redemption funds.
 
The performance of Indian States on indicators of debt servicing such as debt as a proportion of revenue receipts and gross state domestic product (GSDP) has improved between 2009-10 and 2011-12 revised estimates (RE).

States like Kerala, Gujarat, Punjab, Rajasthan and West Bengal (WB) remain relatively more indebted. On the other hand, Karnataka, Odisha and Chhattisgarh displayed a better performance in 2011-12 in terms of debt relative to revenue receipts, whereas Chhattisgarh, Haryana and Maharashtra were the least indebted states in relation to the size of the GSDP.
 
Under the terms of the scheme for financial restructuring of state distribution companies mooted by the Government of India, the entire magnitude of liabilities restructured would initially be guaranteed by the respective state governments. This would worsen the leverage levels of those states whose Discoms participate in this Scheme, the report said. ICRA however believes that a portion of the liabilities to be restructured under this scheme may already have been guaranteed by some States.
 
State Governments therefore need to improve guarantee monitoring systems to anticipate funding requirements for honouring guarantees and accordingly plan the space available for capital expenditure. In the event that there is no headroom available within the annual borrowing ceiling, state governments may have to delay payments or defer capital expenditure or take other measures including sale of land, for honouring their guarantee commitments.
 
The ICRA report says, the Indian states net borrowings through State Development Loans (SDL) rose by a steep 53% in 2011-12 and a further 22% in April-December 2012 in year-on-year (y-o-y) terms.