Richa Mishra
Sarbajeet K. Sen

New Delhi, April 3

THE process of drawing up a formal mechanism for disintermediation by the Centre in providing loan assistance to States is being kicked off next week. The Reserve Bank of India and the Ministry of Finance have called a meeting with all States to assess their preparedness to directly access the market to raise an estimated aggregate borrowing of about Rs 29,003 crore during the current fiscal.

The meeting, which has been scheduled for April 8, is a follow-up of the 12th Finance Commission's (TFC) recommendation that the Centre should step aside to allow States, barring the `weak' ones, to access the market to raise debt.

"We would try to make a preliminary assessment of the readiness of the States and to discuss the schedule for the programmes to access the market," a senior Finance Ministry official said.

The meeting is to be Chaired by the Governor, Reserve Bank of India, Dr Y.V. Reddy, and other top officials of the Centre and the State Governments.

Officials said that the States would not be compelled to access the market. "Those States that seek the Centre's help would have to bear the extra cost of intermediation," officials said.

The TFC had pointed out that the system of egging the State Governments to access the market would clearly help in differentiating the fiscally prudent States from those that are imprudent.

"While fiscally prudent States manage to borrow at rates lower than those offered by the federal government, the fiscally imprudent States would find their access to the loan curtailed," the Commission had said.

Currently, the Centre is making plan loans available to the States at 9 per cent. Officials feel that there could be a lowering of interest rates by as much as 200-300 basis points if the States borrow the same amount from the market.

In fact, the TFC feels that there is no valid argument for seeking Centre's intermediation in a low-interest rate regime. "While there might have been some justification for the Centre to Act as a banker to States when market rates of interest were high and in the process of on-lending to States by way of concessional interest this is no longer valid in a low interest rate regime," the Commission had pointed out.

(This article was published in the Business Line print edition dated April 4, 2005)
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