The request for the loan comes at a time when both global and domestic credit rating agencies have downgraded the three firms, making debt costlier for them to raise. The companies have informed the oil ministry that if the foreign exchange loan does not materialise, it could disrupt the countrys import of crude oil. The loan sought is bigjust $1 billion short of the proposed global investment body that the government has been mulling for some time.
The public sector oil marketing companies have been issued oil bonds for the first quarter worth Rs 24,408 crore ($6.1 billion) to pay for their under-recoveries. But these will be released only in October after parliamentary vote. The foreign exchange loan will prove far less costly for the oil marketing companies than bank lending rates and, if approved, would be the largest deployment of the countrys reserves so far.
The finance ministry and the government would have to decide if the loan could be considered an investment to improve the oil companies finances or would be tantamount to current expenditure. The companies are suffering the impact of massive rises in crude oil prices in the international market that they cannot pass on to consumers through retail prices. They also have the additional burden of selling LPG and kerosene at a massive subsidy.
Borrowings by the three oil companies have risen substantially from Rs 71,080 crore as on June 30, 2008 to Rs 92,200 crore by August 14, 2008, an increase of almost 30%. The companies financial situation had improved in June when RBI rung in the facility of special market operations, under which the oil bonds were made more attractive for banks to hold. But that facility was withdrawn on July 24, 2008.
A senior oil company official told FE that borrowings by the three firms are expected to increase by Rs 10,000 crore a month. Even if the facility of SMOs is revived, their borrowings will cumulatively rise to a massive Rs 1,03,200 crore by October, Rs 97,000 crore by November (falling due to the SMOs) and Rs 1,06,000 crore in December 2008. In order to reduce such borrowings, the oil companies have asked the government to issue oil bonds on a monthly basis after the release of bonds in October.
The oil companies have already told the petroleum ministry that if the oil bonds are not issued on time, payment of advance income tax would have to be made only on the basis of their cash profit (in other words, excluding oil bonds). Moreover, the three firms have also decided to defer payments to be made to ONGC, OIL, GAIL and MRPL for crude and product purchases. Furthermore, they have asked the government to defer excise duty payments without any interest or penalty.