The Hindu Business Line : State loans now become repoable

In a bid to provide greater liquidity to banks, the Reserve Bank of India has included state development loans (SDLs) within the liquidity adjustment facility auctions.

This essentially implies that SDLs would become eligible securities for repurchase operations by the RBI. Bankers said making the securities repoable would also improve their liquidity. The outstanding SDLs are estimated to be over Rs 1 lakh crore.

The greater liquidity is also expected to improve the pricing of SDLs.

Currently despite the sovereign guarantee support on SDLs, almost all the securities have a higher yield than comparable Government securities ranging from 40 to 80 basis points, depending on the issuers.

The higher yield is largely on account of the illiquidity premium attached to SDLs. Bankers said this illiquidity premium would vanish with SDLs becoming repoable.

Moreover, they said this would also allow the life insurance companies to switch some of their holdings with the banks. Life insurers traditionally prefer securities with a residual maturity of above 10 years. Banks prefer short tenors.

Iliquidity is one of the major factors that have prevented banks from picking up SDLs from the insurance companies.

Borrowing calendar

The RBI has also suggested to the state governments to announce a borrowing calendar. Currently only the Centre announces such a calendar. This is part of its move to progressively shift the states to the auction-based route for market borrowings allowing for greater transparency and price discovery.

Credit policy

Besides, the RBI's lean season credit policy has also taken steps to improve the depth of the debt markets. This includes involving more players in the market. The policy has permitted large pension/provident funds like the Seamens'/ Coal Miners' funds to access the NDS-OM (Negotiated Dealing System). Besides, the central bank has also permitted mutual funds to participate in the NDS-OM. Both these categories of institutional participants have been allowed to open temporary SGL Subsidiary General Ledger accounts.

Moreover, the credit policy has also permitted the primary dealers to diversify their activities. The guidelines for such diversification are expected to be announced shortly.