Private placement: RBI plan gets FinMin backing

The RBI had also asked Centre to advise states to moderate the issuance of state development loans during remaining part of this fiscal in view of the high yields, a senior finance ministry official said. The finance ministry has conveyed to RBI that it is looking carefully into the issuance of non-SLR securities by states, especially those with high cash balance, the official said, adding that the ministry has conveyed to RBI that permission to issue non-SLR securities by states with huge cash balances will be restricted. The UDAY bonds would compete with other high-quality papers of the Central and state governments to attract the investors.

The yields of state government bonds have risen in view of the sharp rise in state borrowings. State governments’ borrowing in FY16 is estimated to be around Rs 3 lakh crore as against Rs 2.4 lakh crore a year ago.

There have been concerns regarding excessive supply of state government securities in the bond markets as the UDAY scheme comes into effect. On February 26, a RBI spokesperson had said that UDAY bonds will be issued as non-SLR state development bonds and will be issued via private placements, adding that RBI was considering classification of these bonds in the held-to-maturity category. The finance ministry, however, is yet to take a final decision regarding held-to-maturity status of UDAY bonds, the official said.

Under the UDAY scheme, which was launched last month, the government had asked states to voluntarily take over 50 per cent of the loans of state electricity boards by March 31, and 75 per cent by the end of FY17. These taken-over loans will not be counted for the states’ Fiscal Responsibility and Budget Management for the current fiscal and the next. The states, in turn, will have the facility of a concessional interest rate of about 9 per cent for servicing the loans, as against rates of over 13 per cent that is charged at present on SEBs’ outstanding debt. The states will issue bonds at 0.5 per cent above the G-sec coupon rate, to finance the restructuring. From 2017-18, the SEBS’ losses will have to be taken over by the states without any relief on the FRBM front.