ICICI seeks govt view on sovereign guarantee

The borrowings of the erstwhile Industrial Credit and Investment Corporation of India (ICICI) are still haunting ICICI Bank. After the government asked ICICI Bank to free it from the sovereign guarantee it had provided for ICICI's outstanding borrowings of nearly Rs 3,400 crore, the country's second-largest bank has now asked the government itself to suggest a way out.

Development finance institution ICICI was merged with ICICI Bank in 2002.

ICICI Bank, not keen on pre-paying the loans from the Asian Development Bank and the World Bank, has written to the government, seeking clarification as to what can replace a sovereign guarantee. The government wants ICICI Bank to either pre-pay the loans or arrange for equivalent alternative guarantees.

"There is nothing that is equivalent to a sovereign guarantee. These loans are fixed-maturity loans and hence, we don't want to comment if it can be repaid or pre-paid. Additionally, one has to take the lenders' consent and consider their viewpoint. A way out could be that you can change the security and give the multi-lateral lending agencies equivalent security. We will wait and watch,'' said a senior ICICI Bank executive.

Banking sources said it was generally difficult for institutions to pre-pay such loans as they were based on certain agreements. "Unless the bank decides to pay a premium (penalty), it's very difficult to pre-pay. In this case, replacing a guarantee is not possible unless another sovereign is willing to give a security or the bank decides to repay. Since the government wants to withdraw its guarantee, it's possible that the bank may be negotiating with the government for bearing the penalty amount,'' the sources said.

ICICI had raised funds from the World Bank and the ADB through loans and issue of bonds, both of which were guaranteed by the government. As on March 31, 2007, ICICI Bank had Rs 3,396.67 crore of such loans and bonds outstanding, which is 6.6 per cent of the bank's total borrowings, including subordinated debt, at the end of March 2007.

The government had written to the bank on May 31, suggesting that it wanted to withdraw its outstanding guarantees given to the borrowings of ICICI, which was not allowed to raise funds through public deposits as its primary source of funding.