Borrowings from the National Small Savings Fund (NSSF), which appeared prohibitive for the Orissa government due to its high cost few months back, may soon turn out to be an attractive source of borrowing in the backdrop of the current financial meltdown.
The interest rate on the market borrowing, an alternative source of borrowing for the state government, is nearing 9 percent, which is closer to 9.5 percent interest charged on NSSF loans.
In this backdrop, the state government may be forced to reverse its policy of seeking lesser amount from the NSSF, feel the experts.
Previously, during the low interest rate regime, the state government preferred to raise loans from the market as the interest rate on such borrowing was cheaper. It also used the money to pre-pay a portion of high cost loans availed from NSSF at 9.5 percent interest. Since the market loans were cheaper compared to loans availed from NSSF, Orissa was drawing less loan from this fund compared to its entitlement. The share of the state in this fund was 80 percent, down from 100 percent earlier, but the state’s off take of loan from this source was even less.
The situation, however, is likely to reverse soon with the possibility of the state government demanding 100 percent of its loan share from NSSF. “In view of the perceived liquidity crunch and the assured nature of the loans from the NSSF, this appears to be one of the attractive sources of borrowings”, a senior official of the state finance department said. The Orissa government pre-paid small savings loan of Rs 137.05 crore carrying an interest rate of 13 percent in 2004-05. There was no swapping next fiscal even as the government intended to retire high cost NSSF loan of Rs 600 crore utilizing a part of the World Bank sponsored second tranche of the Orissa Socio Economic Development Programme loan in 2005-06.
While there was no pre-payment of NSSF loans during 2006-07, the state government pre-paid Rs 200 crore NSSF loan in 2007-08 carrying 10.5 percent interest.
Though the government plans to pre-pay Rs 200 crore NSSF loan during the current fiscal, given the surge in expenditure on some popular schemes and the projected burden on the state finances due to the implementation of sixth pay recommendations, it may be a tough task, sources added.
