Financial Daily from THE HINDU group of publications
Thursday, Mar 16, 2006
Money & Banking - Govt Bonds
Industry & Economy - Economy
Hardening rates to raise interest costs of States
Bangalore , March 15
Hardening interest rates are likely to raise the revenue expenditure of States' borrowing from the markets.
At the beginning of the fiscal, States had estimated their interest expenditure on borrowings at Rs 99,079 crore. However, as they present the Budget for this year, they are likely to face large slippages in their expenditure, driven entirely by increased borrowings and on account of higher borrowings costs, sources said.
Estimates are that interest costs are likely to be in excess of Rs 1 lakh crore this year.
The rise in borrowing costs was evident from the hardening yields of State Development Loans (SDL).
Last April, States were able to raise funds at less than 7 per cent for 10-year borrowings. These rates were at least 30-50 basis points higher than the prevailing 10-year yields of Central government securities. In the auctions, the average was 7.7 per cent.
Moreover, the sources said that some of the States, that had undertaken power sector reforms, had absorbed the dues of their respective electricity boards into their own balance sheets. This was because lenders had declined requests for changes in their covenants, despite agreeing for refinancing some of the old high-cost debts.
As a result, States are beginning to review the auction-based method of raising funds from the markets. Instead, they want to return to fixed-coupon borrowings, sources said.
Kerala and Uttar Pradesh had to raise funds at rates ranging from 7.75 per cent and 7.85 per cent for the 10-year borrowings at the last SDL.
However, Tamil Nadu and Andhra Pradesh were able to raise funds at rates that were at least 20 basis points lower.
The sources said that some States had questioned the differentials in the rates. This was especially in view of the fact that all the loans floated were sovereign guaranteed.
The sources asked, "Where is the question of differential rates?" Besides, the loan covenants were identical for all the States, allowing the Reserve Bank of India to net central transfers in the event of a build up in overdues.
Fixed coupon rates
Accordingly, the sources said that returning to fixed coupon rates would allow all the States to raise the funds at identical rates.
The increase in yields implied that the most of the States would be faced with an escalation in their revenue expenditure for the current year. In fact, the escalation has partly offset the gains they had made through debt swaps with the Centre during the last three years.
These swaps allowed them to shrink their debts with the Centre and replacing them with low-cost market borrowings and small savings.
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