States seek to pay off costly loans from FIs

Plan panel in favour of debt swap scheme for high-cost credit

Backed by the Planning Commission, several states, including West Bengal, Andhra Pradesh and Maharashtra, have approached the finance ministry for restructuring high-cost loans borrowed from financial institutions like the Life Insurance Corporation (LIC) and Housing and Urban Development Corporation Ltd (HUDCO).

"States want freedom to prepay high-interest loans to financial institutions. After the debt swap, these loans constitute a significant portion of states' outstanding expensive loans," said Abhijit Sen, member, Planning Commission.

The Twelfth Finance Commission has suggested reducing interest rates on outstanding central loans to 7.5 per cent. States want similar relief on other high-cost loans like negotiated ones and those from the National Small Savings fund. The Planning Commission has assured them support.

Most states have taken loans from LIC, General Insurance Corporation, HUDCO and banks at interest rates of 14-18 per cent for key development areas like water supply, sanitation and low cost housing.

Given that the current market interest rates are around 7 per cent, states want to pay back these loans and borrow from the market.

States want some kind of a debt swap scheme, like what was introduced for central loans, to be extended to these loans, too.

"Financial institutions, however, have either been refusing to take prepayments, or demanding a pre-payment surcharge imposed on states, which want to pay back before the term of the loan," Sen said.

In Budget 2004-05, Finance Minister P Chidambaram had proposed that the debt swap scheme would be extended by allowing states to raise fresh loans and repay their old high-cost loans taken from Nabard (National Bank for Agriculture and Rural Development) and some other agencies.

However, states have not been provided with any relief on that front to date.

Credit to states

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What states want?
Prepaying high-cost loans like negotiated ones (borrowed from FIs like LIC and HUDCO), and those from the National Small Savings fund

Plan panel's stand
Supports states' demands. Debt swap scheme for costly loans on the lines of the one for retiring central loans

FIs feel
They have either been refusing to take prepayments or demanding a pre-payment surcharge on states, which want to pay back before the term of the loan