The Reserve Bank of India (RBI) has proposed to put state government securities for sale on-tap, as against the usual auction route, for raising Rs 7,000 crore towards the debt swap programme. The first tranche of sale for the current year will be held on June 12.
The state government papers are likely to be of ten-year maturity and will carry a fixed coupon in the range of 40-50 basis points over central government securities of similar maturity.
By raising money, the states plan to retire their high-cost debt and substitute these with market loans raised at lower interest rates. The exercise is aimed at reducing interest cost on public debt held by the states.
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After the first tranche of sale, more money will be raised by the states from the market depending on the overall liquidity position. The money will be raised as part of the additional market borrowing programme.
According to this, the states have to pre-pay high cost debt of almost Rs 100,000 crore over a period of three years, for which they will have to part with 20 per cent of their small savings in the first year followed by 30 per cent of savings in 2003-04 and 40 per cent in 2004-05.
The Centre, on its part, will allow the states to raise proportional additional market borrowing in the next two years.
Out of the total debt of Rs 2,44,000 crore owed by the states to the Centre, a little over Rs 1,00,000 crore bears a coupon in excess of 13 per cent per annum, far in excess of the current market rates. The interest burden is a major item of expenditure for the states leaving little money for development purposes.
As a result of this swap, the states will save at least Rs 81,000 crore in interest and deferred loan repayments over the residual maturity period of the loans.
It was earlier mentioned that the pre-payment is on account of the country