Market loan maturity schedule set to deepen states' debt woes

Some of the debt-ridden states, particularly West Bengal, are likely to face increasing redemption pressures, beginning 2017-18 when repayment schedule of their market loans start kicking in.

The increased loan burden could be a big challenge for West Bengal which has improved its financial situation over the last five years. Data from the Reserve Bank of India shows, market loan repayment burden for West Bengal would be Rs 11,610 crore in 2017-18, against about Rs 3,200 crore in 2016-17, a more than three-fold rise. In fact, on an average, the share of market loans or state development loans for West Bengal in its total debt burden has been close to Rs 3,000 crore every year. Also, West Bengal's market loan repayment obligation would be the highest among all states in 2017-18.

Some of the other states which might see an increased loan burden include Maharashtra, Tamil Nadu and Uttar Pradesh.

In the recent report on the study of state finances for 2015-16, the Reserve Bank of India has said: "At the end of March 2015, around 68.5% of state development loans (SDLs) were in the maturity bucket of five years and above. The increase in market borrowings of state governments since 2008-09 entails large repayment obligations from 2017-18 onwards."

For Maharashtra, Tamil Nadu and Uttar Pradesh, the market loan repayment burden would increase in 2018-19 as they have started heavy market borrowing in 2008-09. Thus, according to the RBI data, in 2018-19, the highest market loan repayment obligation will be of Uttar Pradesh at around Rs 12,690 crore, against Rs 4,420 crore in 2017-18. West Bengal's market loan repayment obligation would be the second highest at Rs 12,400 crore in 2018-19, against Rs 11,610 crore in 2017-18. The third highest obligation would be that of Maharashtra at about Rs 17,760 crore in 2018-19, against Rs 8,520 crore in 2017-18.

Starting 2007, states have been borrowing heavily through market loans. The borrowings were mostly through state development loans, which were of ten-year maturity, and mostly subscribed by public sector banks and other government undertakings.

"Due to the financial crisis in 2007-08, states started relying on market borrowing, which led to a spike in state development loans," said Anuja Shah, economist, Care Ratings.

Also, the government has been increasingly encouraging states to opt for market loans, beginning 2007.

"There has been a gradual change in the mix of borrowings of the states beginning 2007, as both the central government and the RBI have been encouraging states to go for market borrowings. The idea was to encourage market-linked borrowing rate, as states with weaker profiles would have to pay higher borrowing cost, while those with strong profiles had to pay less. Unfortunately, spreads between borrowing costs of different states at the same auction tend to be narrowly clustered, with market forces not differentiating much between credit profile of various states," said Jayanta Roy, senior vice-president, ICRA.

It may be recalled, in 2003, the central government had announced a debt-swap scheme, which allowed state governments to replace high cost borrowing with lost cost ones from small savings pool and market borrowing.

"It is entirely up to the central government, if it allows the states to prepay or roll-over the loans," said a senior government official. Observers feel the Mamata-Modi bonhomie could play a crucial role here.

A case in point is Haldia Petrochemicals for which the Centre exempted a tax demand in excess of Rs 2,000 crore, which paved the way for share transfer between TCG's Purnendu Chatterjee and the government.

The total loan market obligation of all the states would more than double at Rs 70,200 crore in 2017-18, against Rs 31,800 crore in 2016-17. The loan burden would further increase to nearly Rs 1,19,900 crore in 2018-19.

The problem of debt repayment, in case the Centre doesn't extend help, would be more accentuated in case of West Bengal than other states, due to its limited revenue mobilisation, said a former official in the West Bengal finance department. On account of several tax reforms resulting in higher tax compliance, West Bengal's revenue deficit as a percentage of GSDP fell from 2.76% in 2011-12 to 1.03% in 2015-16. However, the state's own tax as a percentage of GSDP has remained almost the same over the years. In 2011-12, the ratio of state's own tax as a percentage of GSDP was 4.72%, which stood at 4.57% in 2015-16.

In 2016-17, outstanding debt of West Bengal is projected to touch nearly Rs 3.34 lakh crore, with its total loan repayment bill (principal and interest) expected to be Rs 36,869 crore.