Crisil 'Downgrades' Orissa Guarantees

With Orissa's contingent liabilities mounting to unsustainable levels, Crisil has "downgraded" financial guarantees given by the state.

The lower rating has been assigned for the borrowing programme of the Industrial Promotion and Investment Corporation of Orissa Limited (IPICOL), a 100 per cent state government-owned undertaking, for raising Rs 130 crore through a bond issue guaranteed by the state.

This is the first time that a state's guarantee has been "downgraded" and more states are likely to meet a similar fate as many of them have violated prudential norms for raising non-plan resources.

The downgrading has been attributed to IPICOL continuously resorting to state government support to meet its debt-service commitment on past bond issues. Debt service by other state-owned public sector undertakings have also devolved on the state government, putting pressure on its finances.

However, the effective rating is not on IPICOL but on the guarantee provided by the state against any default by IPICOL in debt-service payments. The downgrade, therefore, implies that the strength of the state has weakened on account of the mounting contingent liabilities.

The move comes within two years of the state initiating major reforms in the power sector that included trifurcating the Orissa State Electricity Board into the Orissa Hydel Power Corporation, Grid Corporation of Orissa and Orissa Power Generation Corporation.

The three corporations have made separate forays into the debt market, raising funds through state government guarantees, which technically amounts to raising non plan resources for the state.

The state's debt has mounted from Rs 870 crore in 1995 to Rs 1,122 crore, according to the revised estimates available for 1997.

However, this does not include debts incurred by PSU borrowing programmes and the devolvement of debt service on this account.

Orissa's debt as a percentage of the net state domestic product is estimated at 43 per cent. Banking sources, however, said if the devolvement is included, the ratios may be inflated by another 25 per cent.

Even before the downgrade, several banks had fixed limits for funding projects on the basis of state government guarantees.

Foreign banks, for instance, insist on counter-guarantees from the Centre for funding projects if the contingent liabilities of the state are in excess of 22 per cent of aggregate receipts. Indian banks, however, have more liberal limits. But even these have become extra cautious in picking up state-guaranteed papers when the state in question has contingent liabilities in excess of 60 per cent of aggregate receipts. In most cases, contingent liabilities exceed these limits.