The Hindu Business Line : States await nod for high-coupon bonds' buyback

Sources said that these measures were being worked as part of a fiscal restructuring at the State level. So far State governments have shed only their high-cost borrowings from the Centre through debt swaps. Through these debt swaps, the State governments this year have borrowed about Rs 11,000 crore under additional market borrowings. In addition, they have also raised funds through the small savings route to pre-pay some of their high-cost liabilities to the Centre.

This exercise is likely to be extended to the SDLs as well, where there were still a large component of high-coupon loans, estimated to be in the region of about Rs 24,000 crore. Inclusive of sovereign guaranteed borrowings (SLR bonds) by State Electricity Boards and other utilities, the outstanding amount of high-coupon securities is estimated to be in the region of about Rs 75,000 crore.

Since the entire borrowings by the State governments are done on a 10-year basis, almost all them have got locked into high interest rates for a long period. State government are locked into high interest loans till about 2012, at coupons ranging from 14 per cent to 11 per cent. The securities also include bonds floated by State electricity boards, local bodies and other agencies with sovereign guarantees.

Several State governments in the past had demanded that they be permitted to undertake debt buyback on the same terms as the Centre. However, the sources said the proposal was still in the incipient stages. The buyback terms are however unlikely to be on the same terms as the Centre had offered to the banking sector. The premium realised on the debt buyback was permitted to be used for writing off bad loans in the banking sector and accordingly profits realised from these operations were treated as tax exempt.

Sources said that all the States have been pushing for this debt-restructuring package to enhance their resource availability for capital and development expenditure. The States have pointed out that their ability for additional resource mobilisation has peaked. With almost 40 per cent of the revenue receipts being utilised for meeting debt servicing expenditure, there was little left for meeting development and welfare expenditure.

Besides, in a regime where interest rates were down to about 6 per cent, all the outstanding previous debts could also be completely refinanced at the current low rates. This would bring down the average cost of servicing borrowed funds to under 8 per cent, the sources said, as against the current level of about 11 per cent.

This reduction they said would bring down the revenue expenditure considerably and pave the way for fiscal correction in the long term.

More Stories on : Govt Bonds | States | Buyback

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page