Date:02/05/2006 URL: http://www.thehindubusinessline.com/2006/05/02/stories/2006050202840600.htm

Back RBI cool to SFCs' plea for stressed assets fund

C. Shivkumar

States reluctant to bring in equity funds

One of the major reasons for the State Governments' reluctance to bring in funds was the tight resource situation. States have cut back on capital expenditure during the last few years to reduce fiscal deficits.

Bangalore , May 1

Attempts by State Finance Corporations to create stabilisation funds for taking over non-performing assets (NPA) have come a cropper with promoter States reluctant to bring in equity funds.

SFCs currently have an NPA ratio of at least 50 per cent of their gross outstanding advances. Sources said that almost all the SFCs had approached the Reserve Bank of India for creation of a Stressed Asset Stabilisation Fund (SASF).

In fact, when the amendment to the SFC Act was made in 2001, the authorised capital was raised to Rs 1,000 crore for allowing the States to bring in capital and help the institutions turn around. Accordingly, the sources said, RBI had suggested that the respective States bring in their equity for taking out the assets.

The State Governments are 70 per cent stakeholders in SFCs with the remaining being shared by the public sector banks and the Small Industries Development Bank of India.

The creation of the stabilisation fund would therefore entail that the State Governments bringing in equity or other instruments for taking out the assets. The proposal involved the creation of a single fund or separate funds for each of the SFCs.

The mechanism would be identical to the one adopted by IDBI. In IDBI's SASF, a trust fund, the Centre had issued non-interest bonds worth Rs 9,000 crore. The redemption of the bonds were linked to the NPA recoveries by the SASF.

The proposal was made since the high NPA ratios had resulted in all the SFC having a negative capital-to-risk weighted asset ratio, due to large provisioning requirements. The proposal was taken up through the Council for State Industrial Development and Investment Corporations (COSIDIC). But COSIDIC's Secretary-General, Mr K.K. Mudgil, said, "We made the proposal sometime back. So far there is no progress."

The sources said that this was because few State Governments have taken the initiative forward. This was despite the deteriorating financials of the SFCs. The sources said that one of the major reasons for the State Governments' reluctance to bring in equity funds for the SFCs was the tight resource situation. States have cut back on capital expenditure during the last few years to reduce fiscal deficits. Besides there was also little certainty that these additional resources pumped in would result in raising non-tax revenues.

However, there were little alternatives to additional resource raising mechanism either for creating SASF or for provisioning the NPAs, the sources said. Additional resources would also be required for them to conform to the capital to risk weighted asset ratio prescribed by the RBI and for complying with statutory reserve norms, especially SFCs in Karnataka are aspiring to become universal banks.