States may tap markets

Due to the high cost of loans taken from small savings funds with the Centre.

The Centre may consider allowing states to borrow from the market subject to their overall debt limit, rather than tapping their small savings accruals.

A number of states have raised the issue of the high cost of loans taken from small savings funds with the Centre. Some have even refused these loans citing high cost and have sought the Centre's permission to go in for market borrowings.

"It is not entirely clear if a state has the option not to borrow. If they refuse to borrow from the National Small Savings Fund (NSSF), some action will have to be taken," Planning Commission Deputy Chairman Montek Singh Ahluwalia told Business Standard.

The finance ministry may also take the line that states have to borrow as loans what they raise by way of small savings.

"If the borrowings from the National Small Savings Fund are less than the accruals this year, the finance ministry and the Planning Commission will have to see how to equilibriate the system. The fixed interest rate with a cost plus mark-up is something we need to look at," Ahluwalia said.

The NSSF funds constitute a continuing problem for states' finances. At present, the finance ministry expects that NSSF funds will be borrowed by states where they are raised.

The cost of these funds is high because of the administered rates offered to savers and the high cost of collection of these funds (post offices charge the central government for collecting).

"We recognise the problem, because if the market rate at which banks will be willing to lend to state governments is much lower than 9.5 per cent, the NSSF is not a very attractive source of funds. The market rates are around 7.5 per cent now," he said.

A number of states, including Karnataka, Delhi and Gujarat, have been refusing loans from small savings funds, which include time and recurring deposits in post offices and post office savings accounts, Public Provident Fund, National Savings Certificate (VIII issue) and Kisan Vikas Patras.

States have made a case for reducing the rate at which these loans are offered to them to the same rate at which the Centre raises them.

"If states do not take the funds, and the NSSF has to lend to the Centre at around 6 per cent, the gap of 2.5 per cent will remain and a loss will build up in the NSSF, which will have to be borne by the central government," he added.