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 country’s import of crude oil. The loan sought is big — just $1 billion short of the proposed global investment body that the government has been mulling for some time.

The public sector OMCs 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 OMCs than bank lending rates and, if approved, would be the largest deployment of the country’s 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 subsidy.

Borrowings by the three companies have risen substantially from Rs 71,080 crore as on June 30 to Rs 92,200 crore by August 14, an increase of almost 30 per cent. The companies’ financial situation had improved in June when RBI rung in the facility of special market operations, under which oil bonds were made more attractive for banks to hold. But that facility was withdrawn on July 24.

A senior oil company official said 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 Distress

The loan request comes at a time when both credit rating agencies have downgraded the 3 OMCs, making debt costlier to raise. If the forex loan doesn’t materialise, it could disrupt the country’s crude import

The firms have been issued oil bonds worth Rs 24,408 cr to pay for under-recoveries. But these will be released in October borrowings have risen from Rs 71,080 cr as on June 30 to Rs 92,200 cr by August 14, an increase of almost 30%