High interest rates: Govt. to take up matter with Centre

By Roy Mathew

THIRUVANANTHAPURAM, AUG. 24. The State Government will take up with the Centre the question of high interest rates on the loan of more than 56,000 million yen from the Japan Bank for International Cooperation (JBIC) for the controversial Kerala Water Supply Project.

The agreement between the Government of India and the Japan Bank, signed in February 1997, specified an interest rate of 2.1 per cent when the London Interbank Offered Rate (LIBOR) for yen (one month) was around 0.5 per cent. This was thus 205 basis points above LIBOR. (LIBOR is the rate of interest at which banks borrow funds from other banks in the London interbank market).

Official sources said that the Government would write to the Centre inviting its attention to the interest being charged on the loan when the London Interbank Offered Rate had dropped further. (The one-month LIBOR rate for yen was 0.12 per cent and the six-month LIBOR rate 0.06 per cent on Thursday).

Banking sources said that the interest rate for the yen credit fixed at 205 basis points above LIBOR was very high for loans carrying sovereign guarantees from a country like India. Indian corporates in recent years had been able to secure dollar loans at less than 50 basis points above LIBOR. For India, loans in yen carried additional foreign exchange risk because rupee yen rates were linked to dollar yen rates. The Reserve Bank of India can keep a check on rupee-dollar exchange rates, but it has little control over dollar-yen rates.

Since March this year, the overnight call rates for yen had been effectively zero. In fact, interest rates in Japan has gone negative with banks charging customers to keep their money in the bank. The Japanese economy is facing problems and the banks had been blamed for it.

By availing of the loan at 2.1 per cent at this juncture, Kerala will be giving a helping hand to a foreign bank when the State itself is seeking a bail-out loan from the Asian Development Bank.

It is notable that the Union Finance Ministry took the initiative to sign an agreement for a long-term loan (30 years) with the Japan bank when the LIBOR for yen was falling. The one-month LIBOR for yen was ruling above two per cent in 1995 when the negotiations began. However, it had fallen to 0.5 per cent by the time the agreement was signed.

At the time of signing the agreement, there was some advantage for India because the domestic interest rates were high. When corporates take a foreign exchange loan, they calculate the effective interest by adding the cost for covering exchange risks. The one-month forward cover cost for yen based on current rates is 7.4 per cent. When one adds an interest rate of 2.1 per cent, it becomes 9.5 per cent. Now, domestic interest rates have fallen. If it avails of a loan in yen at this juncture, it is taking a high risk for a marginal gain.

According to official sources, the Union Ministry of Finance was pressing the State in recent months to avail of the loan for the Water Supply Project at the earliest. They wanted the Government to reverse the Cabinet decision to go for fresh global tenders for the consultancy contract. (The Cabinet reversed the decision last week). There is reason to suspect that some vested interests had a hand in this.

As the rate is much higher than LIBOR, the loan from Japan Bank is essentially a commercial loan. Hence, there was little justification for the country agreeing to various conditionalities and guidelines for selection of consultants and other matters. The Bank had been for the past three years pressing the State for inclusion of a Japanese consulting firm in the short list for selection of consultants disregarding the Government practices and procedure. The Antony government gave in to their demand last week and ignored the irregularities detected in the selection process. The only justification that was being offered by the Chief Minister, Mr. A.K. Antony, was that he wanted the drinking water project, which covers his home constituency besides four other regions, to go on stream at the earliest. However, the consultancy fees the Government was willing to pay for the Project (Rs. 125 crores) is more than sufficient to build a water supply project for Cherthala town and nearby areas.

With the yen appreciating against rupee, the actual amount of loan in rupees, which is stated to be Rs. 1,519.38 crores in official documents, including Cabinet notes in 1998, has now gone up to Rs. 2,219 crores.

There is little doubt that the Kerala Water Authority would be spending this amount, if not more. This means that the annual interest payable on the amount from the 10th year would be Rs. 300 crores. Besides, the principal would also have to be repaid. This means that the authority would have to get a revenue of more than Rs. 30 from each kilolitre of water produced. The operating and maintenance costs would have to be added to this. Currently, the average cost of water in the State is Rs. 8 per kilolitre. The per capita construction costs, which is around Rs. 2500 now, will jump to about Rs. 5,600.

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