Business Today
Loading...

Coronavirus: Now states can borrow up to Rs 19,335 crore at just 4.4%

According to the 14th Finance Commission, the fiscal deficit targets of the states will be anchored to an annual limit of 3 per cent of Gross State Domestic Product (GSDP)

twitter-logoDipak Mondal | Print Edition: May 3, 2020
Coronavirus: Now states can borrow up to Rs 19,335 crore at just 4.4%
Representative Image

With the Reserve Bank of India (RBI) raising the limits of the Ways and Means Advances (WMA) to states by 60 per cent, the states can borrow an additional Rs 19,335 crore at a much lower rate. At a time with severe fund shortage, this should come as a respite for the states as they get access to funds at a much lower rate of 4.4 per cent compared to State Development Loans (SDLs) with much higher yields.

The average yields on SDLs are around 8-9 per cent. Earlier this month, Kerala raised over Rs 6,000 crore through SDLs at 8.96 per cent even as repo rate has been reduced to 4.4 per cent. According to experts, despite RBI reducing the repo rate by 75 basis points, yields on government bonds have only inched up as the markets expect both state and the Centre governments to increase their market borrowings due to likely sharp fall in tax revenue owing to coronavirus outbreak.

However, a higher WMA limit may for the time being temper the yields on SDLs.

"The sizeable enhancement in the WMA limit for the state governments will ease the liquidity crunch that they are facing, following the reduction in their revenue receipts amid a higher spending requirement during the lockdown period," says Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA Limited.

He further says that the higher WMA limit is expected to temper the surge in SDL issuance by the states in the first half of 2020-21, and therefore contribute to some cooling of spreads compared to the alarmingly high levels seen over the last six weeks.

However, he still feels that the spreads of 10-year SDL relative to the same tenure of G-sec may remain higher than the 60-70 bps recorded during most of April-December 2019.

States have earlier raised concerns over such high yields on SDLs. Kerala Finance Minister had earlier said that with GDP in 2020-21 likely to contract, it will be unsustainable for states to pay 9 per cent interest on their borrowings.

However, for the states to avail the new WMA limit, the government will have to revise the 14th Finance Commission recommendations for additional borrowings by the states. The 15th Finance Commission has not given any recommendations in this regard.

According to the 14th Finance Commission, the fiscal deficit targets of the states will be anchored to an annual limit of 3 per cent of Gross State Domestic Product (GSDP). The states will be eligible for flexibility of 0.25 per cent over and above this for any given year for which the borrowing limits are to be fixed if their debt-GSDP ratio is less than or equal to 25 per cent in the preceding year.

States will be further eligible for an additional borrowing limit of 0.25 per cent of GSDP in a given year for which the borrowing limits are to be fixed if the interest payments are less than or equal to 10 per cent of the revenue receipts in the preceding year.

According to an SBI research report, based on 14th Finance Commission recommendations, only a handful of states such as Assam, Odisha (additional 0.5% of their GSDP), Goa, Gujarat, Jharkhand, Karnataka, Telengana, Uttar Pradesh and Uttarakhand (0.25% of their respective GSDP) can avail the higher WMA limit.

The ways and means advances are short-term loans given by the RBI to the Centre and the states to meet any revenue-expenditure mismatch. The loan has to be returned within 90 days. The rate of interest on WMA advances is the same as the repo rate. The higher WMA limit will be available until September 30, 2020.

Also Read: Infosys FY20 net profit climbs 8% to Rs 16,639 crore; revenue up 10%

Also Read: Vijay Mallya loses UK High Court appeal against extradition to India

Also Read: Coronavirus impact: Steel demand to drop first time in 16 years in 2020; 7.7% dip expected

Youtube
  • Print

  • COMMENT
BT-Story-Page-B.gif
A    A   A
close