More than $1 billion debt owed to India by Sri Lanka will undergo restructuring as part of the International Monetary Fund-led debt restructuring programme for the crisis hit South Asian country, Indian media reported on Thursday.

The debt is part of the Line of Credit that the Government of India has extended to Sri Lanka over the years for undertaking various projects, primarily related to infrastructure building associated with roads, energy, water, housing projects, among others. India’ current exposure to Sri Lanka is about $3 billion.

“…IMF is trying to come up with a resolution plan, where there may be some kind of haircut for the (international) lenders. We are not sure what kind of it is there, but we believe it is going to be common across the board,” said N. Ramesh, Deputy Managing Director, EXIM Bank of India to ET Infra.

“It’s about more than a billion (dollars),” he said on the amount that Sri Lanka has utilized from the several Line of Credit extended by India and which will undergo some form of restructuring.

EXIM Bank’s Policy Business, done on behalf of Government of India, facilitates project exports and supports development priorities in over 60 countries through Line of Credit and constitutes 52% of its loan portfolio.

Ramesh outlined that the nature of the restructuring of debt owed to India by Sri Lanka is yet to be firmed up, outlining that much will depend on the final contours decided by the IMF.

“There are many types of restructuring possibilities out there. A particular lender may be interested in taking a haircut on principal. Let’s say he gets back immediately 60% of his principal amount, he is okay with that but he doesn’t want to reschedule his loan to a larger period. There can be another lender who instead of a 10-year loan, he is okay with a 15-year loan. So his repayment is stretched there,” said Ramesh.

“..haircuts can be of different nature. Some people may go in for retaining the principal amount and then go for different kinds of interest. But again, there will be one or two options given as a common modality to be adopted and all the lenders have to follow,” he added.

Haircut in the financial sector means the amount of cut that a lender takes after the loan to the borrower turns bad and the borrower is not in a position of repaying the entire amount or a percentage of it.

In March, the Executive Board of the International Monetary Fund approved a 48-month extended arrangement under the Extended Fund Facility with an amount of $3 billion to support Sri Lanka’s economic policies and reforms, which are needed to put the country into a recovery path.

According to reports, Sri Lanka’s current debt owed to foreign lenders including India currently stands at $41.5 billion. The island country defaulted on its international debt obligations in May 2022 after the country faced economic crisis on account of depleted foreign exchange reserves resulting in lack of essential commodities.

Ramesh outlined that the focus of India remains on developing transport networks, both in rail and road in the island nation and India remains steadfast in supporting Sri Lanka economically.

“It’s a neighbouring country, strategically important and you cannot be very resolute in your stand also. The Government of India has been very cooperative with respect to Sri Lanka. Even after the debt suspension, there was a $500 million (Line of Credit) given for petroleum products and another $50 million (Line of Credit) for fertilizers. We have been very patient with the money,” said Ramesh.

In July, the Sri Lankan parliament approved the country’s domestic debt restructuring plan, which will cover about $42 billion of debt and the step is expected to pave the way for the restructuring of debt owed to foreign creditors.

Sri Lanka is expected to complete its debt restructuring process by September.

Source – ET Infra

Sri Lanka, India