The Hindu Business Line : Rising interest rates may not hit debt-swap scheme

During 2004-05, States are scheduled to prepay around Rs 40,000 crore worth of past high-cost Central loans, over and above the Rs 59,977-crore loans that were swapped in the preceding two fiscals.

New Delhi , Aug. 13

THE Finance Ministry is of the opinion that the recent rise in cost of Governmental market borrowings, courtesy inflation, will not substantially impact the operations of the debt-swap scheme during the current fiscal.

The scheme allows State governments to prematurely retire loans from the Centre bearing coupons of 13 per cent and above, by swapping these with additional market borrowings and up to 30 of their net small savings collections mobilised at lower interest rates.

During 2004-05, States are scheduled to prepay around Rs 40,000 crore worth of past high-cost Central loans, over and above the Rs 59,977-crore loans that were swapped in the preceding two fiscals.

"States have already swapped about Rs 26,000 crore of loans so far this year. That leaves only the balance Rs 14,000 crore, which can easily be covered in the remaining months of the fiscal," a top Ministry official said.

During 2002-03, States prepaid Rs 13,766 crore of high-cost loans under the debt-swap scheme, of which Rs 10,000 crore was from market borrowings (allocated in addition to their normal quota) and the rest against their issue of special securities to the National Small Savings Fund (NSSF).

The market loans of 10-year maturity were raised at the rate of 6.75-6.95 per cent, while the 20-year special securities were issued at 10.50 per cent.

During 2003-04, another Rs 46,211 crore of 13 per cent plus Central loans were prematurely retired by the States, with Rs 26,623 crore being swapped against additional market borrowings and the remaining through small savings proceeds. The market loans were made at even lower rates of 5.90-6.35 per cent and maturities ranging from 10 years to14 years, while the special securities, too, were issued at a lower interest rate of 9.5 per cent.

In the current fiscal, States have so far floated two instalments of market loans under the debt-swap scheme.

In the first tranche, on May 26, they managed to raise Rs 8,000 crore at just 5.7 per cent for a 10-year loan.

The second tranche, on July 29, sought to mop up Rs 8,000 crore, but only Rs 6,288 crore was realised, even after the loan was at 6.35 per cent and for a lower tenor of nine years.

Besides the additional market borrowings, States have prepaid another Rs 12,000 crore of high-cost Central loans out of their small savings proceeds, taking the total sum swapped this year to around Rs 26,000 crore and cumulative figure since 2002-03 to roughly Rs 86,000 crore.

"Irrespective of interest rates going up further, we are confident that by the end of this fiscal, States would succeed in swapping their entire Rs 1,00,000-crore worth of Central loans taken in the past at 13 per cent plus. Once this is done, we can think of bringing down the prepayment bar even further to 12 per cent," the official said.

Assuming that Rs 55,000 crore gets swapped against market loans (average coupon of 6.3 per cent) and the remaining Rs 45,000 crore against small savings (9.5 per cent), the average annual savings in interest outgo for the States from the debt-swap scheme comes to roughly Rs 5,300 crore.

"This is the extra sum they can deploy for social sector and other developmental expenditures," the official added.

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