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C. Shivkumar

Bangalore, Aug. 31

Karnataka’s outstanding liabilities to the financial institutions have jumped to 21 per cent of the gross state domestic product this year.

Borrowings from financial institutions are mostly from Life Insurance Corporation (LIC), General Insurance Corporation (GIC) and the National Bank for Agriculture and Rural Development (NABARD). Outstanding debt to the FIs this year was estimated at Rs 22,613.52 crore by the State Government.

Borrowing from FIs has increased by 220 per cent over the last five years. During the same period the increase in the public debt has actually dropped to 21 per cent of the GSDP from 22 per cent. This was largely on account of a reduction in funds raised directly from the markets. Five years ago, market borrowings by Karnataka were about 7.5 per cent of the GSDP. This year market borrowings are expected to be a little over just 5 per cent. In fact, the State Government has hardly raised any open market borrowings this financial year. State government officials had indicated that this year, the revenue receipts growth were higher than estimated. Consequently, States such as Karnataka were sitting on cash surpluses of about Rs 1,500 crore.

Borrowing from FIs were for meeting capital expenditure programmes that are project specific. The containment of market borrowings was also particularly to ensure curtail usage of borrowings for funding revenue expenditure, the officials said.

But the officials said, the major factor that was driving the State Governments such as Karnataka away from open market loans were the rising spreads over sovereign borrowings. Currently, the spread between sovereign and state government loans of identical maturities was close to about 50 basis points. In fact, a large portion of borrowing of the State Governments market borrowings were through small savings, that are currently available at rates of 8.5 per cent. States that were attempting to impose fiscal discipline through containing revenue expenditure were paring interest expenditure.

But institutional funds, especially from agencies such as LIC and GIC were far more expensive than market borrowings. This was particularly because of intense competition for institutional funds. Alternative investment opportunities for LIC and GIC include central public sector entities that were offering rates as high as 10 per cent. Consequently, the officials said state governments were also being forced to offer similar rates to these institutions for raising funds.

Only funds from Nabard under the Rural Infrastructure Development Fund come at rates of 6.5 per cent per annum. But other schemes for assisting cooperative institutions were as high as 9.5 per cent.

In fact, Nabard’s lending itself was likely to escalate from current levels. This was because Nabard was currently raising funds directly from the financial markets to support itself lending to the States.

More Stories on : Financial Institutions | Economy | Karnataka

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