IDFC AMC

What is State Development Loans (SDL)?
 

  • To fund their fiscal deficits, States issue SDL.
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  • SDLs are debts issued by State Governments, where in the actual process of selling the security is coordinated by BI. Each State is allowed to issue securities up to a certain limit each year.
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  • The coupon rates are generally higher than Gsecs issued for the same maturity.
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  • Normally SDLs are issued for 10 year maturity.
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  • SDLs are normally sold through auction process, similar to Gsecs.
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  • SDLs qualify as approved SLR security and LAF-Repos.
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  • As per the Twelfth Finance commission, Centre’s contribution to aide States to finance their deficits has been discontinued leading to additional issuance of SDLs to finance the same.
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  • National Small Savings funds (NSSF) like postal deposits, savings certificates, social security schemes formed a major source for financing state deficits. However, NSS collections have declined and there has been out flows last year. Therefore NSS contribution towards State deficits has declined from 18% FY11 to 9% FY12.
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  • As an alternative to NSS, States have been issuing SDLs for financing its deficits.FY12 SDL contribution towards financing state deficits has increased from 51% FY11 to 72% in FY12.
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Who are the Participants?
 

  • As SDLs qualify as SLR status, participants are mainly banks.
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  • Other participants include insurance companies, provident and pension funds, mutual funds.
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Why they invest in SDL?
 

  • To meet their SLR requirement, banks invest in SDL.
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  • SDLs are seen as a buy and hold instrument rather than instruments to be traded and are quoted at a premium to Gsecs. Insurance companies, mutual funds, provident and pension funds invest for the higher yield SDLs provide over and above government bond yields.
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Statistics
 

  • State government finances are weakening along with central government finances. State governments have been running Gross Fiscal Deficits ranging from 2.9% of GDP (FY10) to 2.2% of GDP (FY12). Gross fiscal deficit for States FY12 is Rs 199720 cr.
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  • State Governments have borrowed a total of Rs 100323 cr till 20th November 2012 out of a total borrowing program of Rs 203600 cr.
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10 year Gsec & 10 year SDL yield trend

 

  • Highest spread between Gsec and SDL yield during current financial year was 77 bps in July while lowest has been 33bps in April.
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  • The low spread of 33 bps has been after the announcement of rate cut by RBI by 50 bps on 17 April 2012.
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  • The spread as per the last auction in November is 73bps.
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  • Average spread for the current fiscal (till November) is 65 bps.

 

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