The Hindu Business Line : State Govts’ borrowings get more expensive

Bangalore, Aug. 21 State Governments’ market borrowings just got more expensive due to a decline in liquidity surplus. The last round of borrowings through state development loans (SDL) saw the average spreads over ten year sovereign papers rising to about 45 basis points. Sources said that the rise in spreads was largely on account of less preference for SDLs among banks.

Spreads for some States like Jammu and Kashmir were about 80 basis points, despite the sovereign guarantee cover. States such as Madhya Pradesh have raised funds at spreads within the average of 55 basis points or 8.45 per cent. Only in the case of some southern States, such asKerala and Tamil Nadu, the spreads over sovereigns were lower, at about 40 basis points. The lower spreads were largely on account of better credit rating of these States, unlike the northern peersthat have debt arrears.

Banks reluctant

Bankers said few of them were interested in having SDLs in their investment portfolios. This was largely in view of the long maturities of SDLs. Although SDLs by virtue of their sovereign guarantee status are zero risk-weighted, they were largely illiquid in the secondary markets, bankers said. Besides, the illiquidity was also due to the derisking bias of banks. Typically in a tight or anticipated tight liquidity situation, the preference tended to be more for short- dated papers, in particular Treasury Bills. With the derisking of investments, banks have contained the average maturity to about three years. The derisking was also resorted in view of the Basel II compliance, where depreciation charges would be high on long-dated papers, they added.

The only investors interested in SDL papers were life insurance companies, bankers said. Insurers preferred SDL to comply with the mandatory investment norms of the Insurance Regulatory and Development Authority (IRDA). Most life insurers, the largest investors in SDLs, have mean yield expectations in excess of 8.5 per cent. These expectations are likely to rise in the coming months, bankers said, to partly offset the fall in the equity markets.

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