KOCHI: As the Kerala Government embarks on a massive fundraising exercise through various instruments such as Pravasi Chitty and masala bonds, in addition to the proposed loan of USD 500 million each (total Rs 7,300 crore) from the World Bank and Asian Development Bank, the declining value of the rupee and the state’s precarious financial position may make the ambitious plans a Herculean task.
Given the rate at which Indian rupee is depreciating -- an average of 12 per cent per year -- the repayment amount for the loans from the multilateral loans at the time of maturity may also balloon into unmanageable proportions, reckon experts.
Though the fundraising via the Pravasi Chitties may lure some non-resident Keralites (NRKs), who look at short-term gains, it is still not clear the amount of ‘free float’ that will be generated through the scheme for the state.
The government can consider itself lucky if it succeeds in garnering at least half of the Rs 12,000 crore it has targeted to raise when it announced the scheme during the state budget in March 2017.
“Chit fund scheme, by its very nature, will give only a small free float to its organisers. I still don’t know how the government is hoping to collect such a huge amount through the scheme,” wonders V K Vijayakumar, investment strategist at Geojit Financial Services.
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A senior officer at Kerala State Financial Enterprises (KSFE), which is managing the Pravasi Chitty, expresses confidence about raising the big amount through the scheme.
“Within the first two weeks of the launch of the scheme, we have been able to collect over Rs 2 crore. Over 40 chitties were closed after we started online registration on October 25,” he informs. Francis Mathew, a former senior Financial Controls Specialist with ADB, explains most of the NRKs are ordinary people and not savvy investors, and hence they would look at short-term gains through the Pravasi Chitty and would not look at aspects such as currency depreciation over a period of time.
This may not be the case with investors of masala bonds, through which Kerala plans to mobilise `2,650 crore in the first tranche. Given the fact that masala bonds are directly pegged to the Indian rupee, overseas investors -- mostly financial institutions -- take the currency risk or the exchange rate risk.
“These investors are savvy and hence they will take a decision to invest in the bonds only after taking into consideration the forex fluctuations, global interest rate scenario etc,” reckons Mathew.
Vijayakumar says Kerala’s finances are weak with its borrowing limit touching the ceiling of 3 per cent of its GDP.
According to a calculation by Mathew, the rupee depreciated 335 per cent, from 17 per dollar in January 1990 to 74 in October this year, averaging 12 per cent/year. This will be taken into consideration by financial institutions while subscribing to Kerala Infrastructure Investment Fund Board’s (KIIFB) masala bonds.
This will also be a huge factor when the time comes to repay the World Bank and ADB loan.
“Though assuming an average 8 per cent annual depreciation, the financing cost of loan taken in the dollar at 2 per cent interest will have effective financing cost of 10 per cent, which is higher than the rupee-denominated bond rate of 8 per cent,” Mathew points out.