Comfort letters worth over Rs 300 bn given by PSUs under a haze
ECONOMY & POLICY

Comfort letters worth over Rs 300 bn given by PSUs under a haze

The letters of comfort (LoC) of over Rs 300 billion issued by various government-owned enterprises to decrease their borrowing costs are shrouded in ambiguity.

An LoC is a document that provides some confidence that an obligation, such as interest servicing and loan repayment, will be met in the end. An LoC, however, is not a definite promise, unlike an irreversible guarantee.

Following two communiqués, the first from the Reserve Bank of India in April and the second from the Ministry of Finance in June, there is currently a lack of clarity on existing LoCs by public sector firms.

While authorising only state-controlled non-banking financial businesses backing infrastructure to issue LoCs for specific operations, a finance ministry regulation issued on June 10, 2022 said that "under no circumstances shall the liability under the LoC evolve on the government."

However, the central bank advice note to credit rating agencies stated that LoC (unlike guarantees) is simply a "diluted, non-prudent" support structure and, as such, cannot be used to prop up a loan's rating or lower the interest cost on a loan backed by an LoC.

According to the RBI, only LoCs which are as solid as a legally enforceable guarantee or where the structure - in the case of LoCs issued by PSUs - allows the liability to boil over to the sovereign in the event of default by the borrowing entity, are admissible support mechanisms for credit enhancement or rating improvement.

The letters of comfort (LoC) of over Rs 300 billion issued by various government-owned enterprises to decrease their borrowing costs are shrouded in ambiguity. An LoC is a document that provides some confidence that an obligation, such as interest servicing and loan repayment, will be met in the end. An LoC, however, is not a definite promise, unlike an irreversible guarantee. Following two communiqués, the first from the Reserve Bank of India in April and the second from the Ministry of Finance in June, there is currently a lack of clarity on existing LoCs by public sector firms. While authorising only state-controlled non-banking financial businesses backing infrastructure to issue LoCs for specific operations, a finance ministry regulation issued on June 10, 2022 said that under no circumstances shall the liability under the LoC evolve on the government. However, the central bank advice note to credit rating agencies stated that LoC (unlike guarantees) is simply a diluted, non-prudent support structure and, as such, cannot be used to prop up a loan's rating or lower the interest cost on a loan backed by an LoC. According to the RBI, only LoCs which are as solid as a legally enforceable guarantee or where the structure - in the case of LoCs issued by PSUs - allows the liability to boil over to the sovereign in the event of default by the borrowing entity, are admissible support mechanisms for credit enhancement or rating improvement.

Next Story
Resources

Ajmera Realty launches tree drive on Environment Day

Ajmera Realty & Infra India marked World Environment Day with a large-scale tree plantation initiative—Plant-with-Purpose—across its projects in Mumbai and Bangalore. The drive was inaugurated at Ajmera Manhattan and Ajmera Greenfinity in Wadala, with senior company officials and residents in attendance. The campaign encourages residents to embrace eco-conscious, self-reliant lifestyles by growing useful plants and trees within their communities. Horticulture expert Devendra Bhekar guided residents on creating and maintaining green spaces. Ajmera Realty planted over 500 trees..

Next Story
Resources

Twaron®-reinforced tyre powers Brunel’s solar race car

Teijin Aramid’s Twaron® with circular content will debut in Bridgestone’s race tyres for the 2025 Bridgestone World Solar Challenge, supporting the Brunel Solar Team’s Nuna 13 car. This marks the first use of the recycled-content aramid in a high-performance race tyre. The Twaron®-reinforced belts help enhance durability, reduce rolling resistance, and maintain lightweight strength—critical for the 3,000-km solar race across Australia. Bridgestone combines this with ENLITENTM tech and other recycled inputs to maximise environmental and performance outcomes. Teijin Aramid, a..

Next Story
Building Material

Kamdhenu Paints launches new wood coating range

Kamdhenu Paints has launched a comprehensive premium wood coating range designed for both interior and exterior applications. The collection includes high-performance solutions like Kamwood 2K PU for a rich matt or high-gloss finish, Kamwood 1K PU for clarity and stain protection, and the Kamwood Melamyne system for a smooth, durable finish. Also featured are Kamwood Wood Stains, which enhance wood grains with vibrant colour, and NC Sanding Sealer for high-build grain filling. The range is supported by Kamwood Thinners for ease of application and optimal finish. Saurabh Agarwal, MD, ..

Advertisement

Advertisement

Subscribe to Our Newsletter

Get daily newsletters around different themes from Construction world.

STAY CONNECTED

Advertisement

Advertisement

Advertisement

Advertisement

Talk to us?