Small savings investment hits a new high to fund power projects

The National Small Savings Fund (NSSF) is investing Rs 1.2 trillion this financial year in government agencies that fund rural electrification and power, railway and highway projects among others. This would be the highest ever investment by the NSSF into public sector undertakings (PSUs), according to official government data.

NSSF is an aggregation of funds flowing from popular saving schemes such as post office savings deposits and public provident funds. It generally uses these funds to lend to the central government, so that it can pay back with interest to small savers. After the obligations on most state governments to borrow from the fund were removed in 2015-16, the NSSF started investing in public agencies/companies like Food Corporation of India. 

The government expects a record collection in the NSSF in 2018-19, growing 40 per cent year on year. According to officials in the finance ministry, the entire available funds would be deployed to pay guaranteed returns to small savers. 

Officials pointed out that the NSSF for the first time is lending to Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) - the two leading power sector financiers. The other major borrowers are Indian Railway Finance Corporation (IRFC) and National Highway Authority of India (NHAI).

NSSF offers high-volume long-term debt funding, an area where the bond market falls short. Also, while NSSF loans are costlier than market borrowings for the government, the fund charges a lower interest rate to most public agencies than the rate they pay on market bonds. Government agencies are making the most of this opportunity. 

In the current financial year, while the Centre is borrowing Rs 1.25 trillion from the fund, state governments are effectively redeeming Rs 30,000 crore. Along with public agencies, the total net loan disbursal from the NSSF has touched Rs 2.2 trillion this year. 

IRFC got its latest tranche of loan from the NSSF at an interest rate of 8.11 per cent, spread about 30 bps over the 10-year G-Sec yield. It got this for a period of ten years with half-yearly interest payment option. Contrary to this, AAA-rated bonds from the market are costlier for IRFC, charging the railway financier 8.55 per cent, nearly 100 bps over the G-Sec, a senior IRFC official said. 

"We need to diversify our funding avenues. Excess dependence on non-convertible debentures market is also not good. NSSF helped us with that," he said.

PFC executives said NSSF lending was a primary loan at a slightly higher interest rate than that on borrowings through the financial market or banks. PFC is in the process of acquiring government's stake in REC.  

An REC official said the NSSF loan had provided them with a liquid fund in the time of need. "The process was started by REC in order to maintain a liquid fund available even after an acquisition happens. NSSF has been diversifying lately and we took advantage of that," he said.

NHAI has borrowed Rs 40,000 crore from the NSSF in the last two years, Budget documents show. It paid an interest at the rate of 25-50 bps above the 10-yr G-Sec yield, which is a competitive rate, analysts said. Most importantly, NHAI is able to get long-term finance with bigger volumes which are difficult to draw from the corporate bond market, a company executive pointed out.

"Currently, the financial markets in India do not have that appetite to lend at an encouraging rate in some sectors, especially infrastructure. Meeting financial needs from bond market is not simple, and the NSSF has helped us quite considerably in this situation," said a senior NHAI executive. It's a win-win situation where the government and the NHAI both benefit, he added.