Banks roll back advances to Indian Oil, HP and BP

The three nationalised oil marketing companies, Indian Oil, Bharat Petroleum, and Hindustan Petroleum, are finding their source of funds drying up as commercial banks roll back lending on account of the industry-wide liquidity crunch and the high debts accumulated by these companies due to forced subsidies on the sale of petroleum products.

As an oil-driven economy, India meets only 30 per cent of its demand internally, and has to import over 70 per cent of its petroleum requirements. Consequently, oil marketing companies need to fund their needs for US dollars to buy petroleum in the international market from both foreign and domestic banks. They also rely on the money market to exchange their rupees for dollars, at a rate of around $1 billion a week, given the current range of crude oil prices around $90 a barrel.

However, recently, on account of the liquidity crunch, sources in the oil industry say that commercial banks have stopped lending money to these oil marketing companies. This has restricted their operations to the money market, exchanging rupees for dollars in real time, given the availability of cash with the company. Foreign currency loans in terms of US dollars to the oil companies are reported to have dried up around a month ago.

Indian Oil Corporation (IOC), India's largest crude oil refiner and petroleum products marketer has borrowings of around Rs60,000 crore in its books of account, of which around a fifth of the debt is in US dollars. IOC spends around $3 billion each month to buy crude oil, and has been borrowing in the range of Rs6,000 crore to Rs 7,000 crore monthly since July 2008 to keep its operations going.

Similarly, borrowings of Bharat Petroleum (BPCL) are around Rs23,000 crore, again with a fifth of the debt being dollar-denominated. Altogether, IOC, Bharat Petroleum and Hindustan Petroleum have borrowed a cumulative amount in excess of Rs1,00,000 crore in the first half of the year.

The oil marketing companies are now facing an even more uphill task in their bid to secure adequate funding, with the credit crunch having pushed up call rates, or overnight borrowing rates, to around 16 per cent as of a week ago.

The companies need to borrow is even more pressing since the government, who issues oil bonds to offset the under recoveries from the sale of petroleum products at below market rates, is yet to issue them. Sources say that IOC, which is due to receive Rs34,000 crore in terms of oil bonds, has just about enough money to keep going till the end of the month. In the absence of these oil bonds, oil marketing companies are now having to borrow even more, and the interest payable on this additional borrowing could well prove to the last straw, if the government were to delay the issue of bonds.

Market sources say that the government is scheduled to issue oil bonds to the oil marketing companies when the Parliament meets on 17 October. Oil company sources say the government, which is also the owner of these oil companies, is well aware of the situation, and would take action before a crisis looms before the oil marketing trio.