Which will bleed Kerala more: LDF's 'masala bonds' or UDF's Kochi Metro borrowing

Thiruvananthapuram: The 'masala bonds' floated by the last LDF government in the London Stock Exchange to mobilise Rs 2150 crore was criticised by the Opposition for what was termed its exorbitant interest rate (9.723 per cent) and was made fun of for what was seen as a Communist government's capitalist fantasy.

As an alternative, the Opposition had held up the debt model adopted by Kochi Metro Rail Corporation (KMRL) during the previous UDF regime as less stressful on the state's finances. It had low interest rate (below 2 per cent), was insulated from exchange rate vagaries and had a grace period of five years.

However, finance minister K N Balagopal begs to differ.

The loan secured by the Centre for KMRL from the French company Agence Francaise De Development (AFD) might seem attractive but, in effect, would drain more from Kerala than the 'masala bonds'.

Balagopal made a comparison of both the models in the Assembly on October 6. The Centre entered into an agreement agreement with AFD on February 7, 2014, for an assistance of Rs 1327.11 crore (180 million euro). The entire amount was transferred to KMRL in several tranches between 2014 and 2017.

The repayment period is from 2014 to 2039. Since there is a grace period of five years, the repayment began only from September 2019. On the other hand, inviting severe opposition censure,  'masala bonds' offered Kerala no grace period.

On the other hand, Balagopal said that the AFD loan did not enjoy one of the major advantages of 'masala bonds': immunity from exchange rate fluctuations. 

"Since the AFD loan was secured through the centre, it is true the KMRL need not worry about foreign exchange variations," Balagopal said. The KMRL only has to pay the Centre as per the existing interest. The Centre in turn would pass on the money to the AFD. "Truth is, a clause in the agreement says that any liability on account of exchange rate variations would have to be paid by the Kerala government, " the minister said.

For the moment, the centre will pay the extra amount but the burgeoning burden will be passed on to Kerala later.

The Centre, which repays to the AFD, will recognise the foreign exchange rate variations only after repayment and not during the tenure of the loan. Meaning, it will record the additional amount it has to pay on account of the periodical fall in the value of the rupee vis a vis the Euro and the sum thus accumulated would be asked from Kerala in 2039, the last year of repayment.

According to the minister, in the last 15 years the rupee has fallen by 59 per cent against the euro; an average fall of 3 per cent a year. "If the trend continues, the repayment will balloon by 54 per cent, meaning Kerala will have to pay Rs 2000 crore just to make  up for the fall in rupee value, " he said.

So the minister said Kerala would eventually have to pay Rs 3327.11 crore for a Rs 1327.11 crore loan taken at a seemingly nominal interest rate of 1.55 per cent. But for the Rs 2150 crore 'masala bonds', Kerala has to pay back a far lesser amount: Rs 3195.22 crore; Rs 2150 crore as principal amount and Rs 1045.22 crore as interest.

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