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Farm loan waivers have no impact on states' borrowing cost: SBI research

It said markets do not differentiate between different financial conditions of the states

Press Trust of India  |  Mumbai 

agriculture, farmers

The states which recently announced are unlikely to see any impact on their market borrowings through state development loans (SDLs), says a report.

States borrow from the markets through state development loans (SDLs) to fund their fiscal deficit. Five states--Karnataka, Madhya Pradesh, Maharashtra, Punjab, and Uttar Pradesh--have announced farm waivers involving over Rs 1.2 trillion loans to tens of millions of farmers.

When these states will raise their market borrowings through SDLs, the yield will be higher comparing to those states which have not announced farm loan waivers, according to a weekend report by Research.

"Interestingly, our findings suggest that, has no impact on the yield of these states. In FY18 till November 14, data suggests that is borrowing at a low yield rate than the median range of 7.43 per cent," the report said.

It said markets do not differentiate between different financial conditions of the states, notwithstanding their very different financial conditions.

"All the states that are fiscally better managed may explore the feasibility of disseminating their best fiscal practices through various channels to attract lower yield," the report said.

State development loans are issued by RBI through an auction-based system since 2006-07. Though these bonds are backed by government guarantee the yields on varies from one states to another and largely remain above the government securities yield.

Such a yield differential could possibly be attributed to the fiscal marksmanship of individual states, the report said, adding state-wise data on borrowing indicate that the bigger states like Maharashtra, Tamil Nadu, UP, Gujarat, Bengal, Andhra and borrow more than 60 per cent of the market borrowings through

Northeastern states borrow the least because of more Central assistance. Karnataka, Bihar, Uttarakhand and Jharkhand are the states which have seen a rapid spurt in market borrowings over the years.

In FY12, total amount of borrowed from the market was Rs 1.6 trillion that jumped rapidly to Rs 3.6 trillion in FY17, clipping at 18.2 per cent per annum.

The weighted average yield of on yearly basis of all the states has come down from 9.17 per cent in FY14 to 7.60 per cent in November 2017.

States that frequently borrow from markets with higher ticket size are attracting better yield than those states which are not frequent in the market, it added.

First Published: Mon, November 27 2017. 17:28 IST