The Hindu Business Line : States to borrow Rs 5,000 cr to prepay Central loans

The States have so far raised a total of Rs 23,000 crore from the open market this fiscal as additional borrowings over and above their normal allocated quota.

New Delhi , Jan. 9

THE Finance Ministry has allowed State Governments to raise a fresh tranche of additional market borrowings worth Rs 5,000 crore to be used for prepaying their high-cost Central loans under the debt-swap scheme.

"The fourth and final tranche of additional market borrowings under the debt-swap scheme will be conducted during the current month. The States will mobilise Rs 5,000 crore for the proposed on-tap State Development Loan auction, the details of which will soon be announced by the RBI," a top North Block official said.

The States have so far raised a total of Rs 23,000 crore from the open market this fiscal as additional borrowings over and above their normal allocated quota. This included a 10-year loan at 6.35 per cent for Rs 7,000 crore on June 12, followed by a similar tenor security with lower 6.2 per cent coupon for Rs 8,000 crore on July 30 and a 12-year loan of 6.2 per cent interest for Rs 8,000 crore on August 25.

Of the aggregate Rs 23,000 crore mobilised this fiscal, State Government have used Rs 22,089 crore for retiring Central loans carrying interest in excess of 13 per cent per annum. During 2002-03 also, the States had accessed the market for additional borrowings of Rs 14,151 crore in two tranches, of which Rs 10,000 crore was deployed for the debt-swap scheme. This included Rs 8,398 crore raised at 6.95 per cent on February 25 and Rs 5,753 crore at 6.75 per cent on March 12. Both tranches involve on-tap auction of 10 year securities.

In all, States have so far prepaid over Rs 32,000 crore of high-cost Central loans by swapping these with market borrowings raised at increasingly lower coupons for corresponding maturities.

Besides this, they have also used a part of their net small savings proceeds for the same purpose. During 2002-03, Rs 3,765 crore of small savings collections were used to prepay high-interest Central debt, with about Rs 14,000 crore of net proceeds being similarly swapped so far this fiscal. The savings in interest outgo through this route, however, works out to be much less, given that the special securities issued to the National Small Savings Fund (NSSF) by the States bear a coupon of 9.5 per cent, compared with the sub-6.5 per cent market borrowings rate.

It is precisely for this reason that State Governments have preferred to avail of additional market borrowings rather than small savings window to retire high-interest Central loans under the debt-swap scheme.

But the Finance Ministry and the RBI have been reluctant in allowing enhanced market borrowings by the States, which, they believe, would lead to a tightening of liquidity.

The debt-swap scheme envisages retirement of roughly Rs 1,00,000 crore worth of high-cost loans (13 per cent plus) contracted in the past over a three year period ending 2004-05. As on date, around Rs 50,000 crore of debt has been swapped, of which Rs 32,000 crore has been through additional market borrowings and the rest through small savings proceeds.

"By the end of this fiscal, we expect another Rs 10,000-11,000 crore to be swapped, of which Rs 5,000 crore would be through the next tranche of fresh market and the remaining Rs 5,000-6,000 crore through small savings," the official added.