The Maharashtra government is seriously looking at its outstanding liabilities arising out of guarantees being invoked by financial institutions, especially in respect of cooperative sugar factories and textile mills.
It paid Rs 25 crore (Rs 250 million) to ICICI on December 31, 2002 as full and final settlement of guarantee obligations.
Similarly, another Rs 10 crore (Rs 100 million) was recently paid to other financial institutions. The state is set to clear a further Rs 85 crore (Rs 850 million) by the end of this fiscal.
The state government is negotiating with IFCI, Industrial Development Bank of India and Industrial Investment Bank of India to arrive at an out-of-court settlement on the principal and interest amounts owed to them by defaulting sugar factories and textile mills.
IFCI, IDBI and IIBI have dragged the state to the Debt Recovery Tribunal with regard to over 50 units that defaulted on interest and principal payments. The state government had backed all these loans with an irrevocable guarantee.
An institutional source said that: "At the Reserve Bank of India conference of state finance secretaries, the apex bank made it clear that defaults on sovereign guarantees would not be permitted.
"It also held out the threat of auto-debiting the consolidated fund of defaulting state governments to ensure that the invoked guarantees are honoured."
According to the source, a veiled warning was also issued by the RBI to repeat offenders that their market borrowings programme may be undermined as the RBI could ask financial institutions not to subscribe to the bond issues of such defaulting states.
Uttar Pradesh, Bihar and some north-eastern states were identified as the repeat offenders who have failed to clear interest and principal payments on consecutive instalments.
Maharashtra's total exposure in terms of principal and interest dues owed by textile mills and sugar factories in the co-operatives sector is in the range of Rs 5,000 to Rs 6,000 crore (Rs 50-60 billion), informed sources said.
Guarantees to the tune of Rs 160 crore (Rs 1.6 boillion) have been invoked by financial institutions.
When contacted, a government official said: "It is a misnomer that we are utilising the budgetary allocations to clear the invoked guarantees.
The guarantee redemption fund of Maharashtra has Rs 600 crore (Rs 6 billion) in reserve. This amount was collected at the rate of two per cent as guarantee fees from the financial institutions that sought state backing for loans disbursed to sugar and textile units.
As against this, only Rs 340 crore (Rs 3.4 billion) is required to settle the invoked guarantees."
The government official added that it was only in the co-operatives sector that guarantees were invoked by financial institutions.
"In these cases we only pay the amount after allowing for the legal process for challenging the invocation. This is because these FIs are taking the easy way out (by invoking the government guarantee) instead of first recovering at least some portion of the outstanding amounts from the loanee (defaulting textile or sugar units)."
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