The Hindu Business Line : States unlikely to swap Plan loans for market borrowings

The reason for this, bankers say, is the hardening interest rate environment, which is making it difficult for States to complete even their existing budgeted borrowing programme.

Currently, the Centre provides Plan assistance to States, with 70 per cent being in the form of loans and the remaining as grants. In the case of special category States, 90 per cent of Plan assistance goes as grants. During 2004-05, the total Central assistance to State Plans and Central & Centrally-sponsored Plan schemes is budgeted at Rs 66,161.59 crore, which includes Rs 27,250.34 crore as loans and Rs 38,911.25 crore of grants.

What the Finance Ministry has proposed — based on the recommendations of the 12th Finance Commission — to do from the coming fiscal is to stop extending any further Central assistance in the form of loans and provide only grant support. States would be given an option to bridge the gap instead, by make additional borrowings directly from the market.

On paper, this makes financial sense for both parties. If States were to raise the budgeted Plan loan amount of Rs 27,250.34 crore for 2004-05 from the market, it would bring down the Centre's capital expenditure by a corresponding sum, translating into a lower fiscal deficit.

The gains for the States, in turn, arise from the perception that market loans work out cheaper than borrowings from the Centre. The Centre currently lends to States at 9 per cent, whereas the weighted average yield of market loans contracted by States amounted to only 6.13 per cent in 2003-04. The cost of borrowings have declined significantly in recent years, from 14 per cent in 1995-96 to 10.99 per cent in 2000-01, 9.20 per cent in 2001-02 and 7.49 per cent in 2002-03.

Bankers, however, point out that the situation has changed considerably since the start of the current fiscal. On April 21, 2004, States managed to raise a 10-year loan of Rs 7,500 crore at just 5.6 per cent, as against the target amount of Rs 6,500 crore.

But in the latest tap sale auction of January 11, the States had to offer 7.02 per cent for a same tenor loan and yet could mobilise only Rs 3,148 crore of the targeted sum of Rs 6,000 crore. During the current fiscal, States have been able to so far raise only Rs 35,636.90 crore out of their budgeted borrowings of Rs 42,071 crore. And during the course of the year, the average cost has gone up by 150-200 basis points.

While a 7.3-7.4 per cent interest on market loans is still below the 9 per cent rate on Central loans, the fact is that the latter is available for a 20-year period, with a five-year repayment moratorium to boot. Market loans, by contrast, are typically contracted for 10 years.

"Only select creditworthy States are likely to come forward and accept the Finance Ministry's proposal. The others would prefer to route their borrowings through the Centre," the bankers added.

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