The Hindu Business Line : Debt swaps may be restricted to loans against small savings

Negotiated loans raised by States from financial institutions and banks are proposed to be kept out of the purview of the formal debt-swap mechanism. The proposal to allow States to swap small savings loans bearing high coupon rates will ease the burden of future interest payment obligations and eventually help in fiscal consolidation.

While States stand to gain, the Centre may have to take a hit as it will have to forego future interest receipts for the residual maturity on the old stock of loans. One way of compensating the Centre could be to charge a small pre-payment premium, said official sources.

With the Government on-lending 100 percent of the net small savings collections to States from the current fiscal, the latter have been asked to consider using 30 per cent of the proceeds for retiring high cost debt. The stock of outstanding small savings carrying an interest rate of 13 per cent is estimated at around Rs 80,000 crore.

If the Centre's suggestion is accepted, States would be able to retire their high cost debt in about four years time. The Centre has also proposed excluding negotiated loans raised by States from the mechanism of formal debt swaps, saying that swaps should be limited to loans from the Government of India. The onus of pre-paying negotiated loans would therefore rest wholly on States.

It is also understood to have made it clear that swaps on existing stocks of SLR borrowings would be tough as banks would be hesitant to consider prepayment of high interest bearing SLR bonds through fresh placement of low coupon bonds.

While a final view is yet to be taken on the issue of debt swap, States have also been asked to consider restricting dearness allowances and bonus and substituting loans and advances extended to employees with loans from other lending agencies.

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Debt swaps may be restricted to loans against small savings