'State govt market borrowings' issuance may rise upto Rs 5 lakh cr in FY18'

Icra estimates that around three-quarters of the total SDL redemption of over Rs 700 bn due in current fiscal

The total SDL (state development loans) borrowings in fiscal 2018 could be in the range of Rs 4.8-5 trillion, says a report of Icra.

The back-ended redemption and funding of crop loan waivers could boost borrowing to Rs 3-3.2 trillion in the second half of the current fiscal from Rs 2.5 trillion a year ago, it said.

Thus, the total SDL borrowings in fiscal 2018 could be in the range of Rs 4.8-5 trillion, higher than Icra's initial baseline estimate of Rs 4.5 trillion, it further said.

"In Icra's view, the sharp 42.7 per cent year-on-year growth in SDL issuance in September quarter could be attributed to a mismatch of revenue and expenditure of state governments emanating from transitional cash flow issues related to the migration to the goods and services tax (GST)," said Jayanta Roy, the group head-corporate sector rating at Icra.

Going forward, the compensation for loss of revenue related to the shift to the GST and the release of the share of the state governments in integrated GST (IGST) would start flowing from the central government to the state governments, which would ease their liquidity situation during the second half, he said.

Nevertheless, he said, given the back-ended redemption of SDLs and the possible funding of loan waiver by some states in the second half, Icra expects the gross market borrowings of the state governments to rise to Rs 3-3.2 trillion in the second half from Rs 2.5 trillion a year ago.

As a result, the total SDL borrowings in current fiscal could be in the range of Rs 4.8-5 trillion, higher than our initial baseline estimate of Rs 4.5 trillion, Roy said.

The pace of growth of SDL issuance ramped up sharply to 42.7 per cent in September quarter from 18.6 per cent in the preceding quarter.

Moreover, the spread between the 10-year SDLs raised in September quarter (weighted average) and the 10-year government security (G-sec) widened to around 76 bps in September quarter from 51 bps a year ago.

This is in line with Icra's expectation of a widening of the spread on the back of an anticipated increase in the state governments' borrowings in the current fiscal, led by factors such as pay revision, servicing of the debt related to the Ujwal Discom Assurance Yojana (UDAY) scheme, a spike in debt repayment from FY2018 onwards and potential funding of crop loan waivers.

Icra estimates that around three-quarters of the total SDL redemption of over Rs 700 billion, due in current fiscal, is to be redeemed in second half.

The trend of issuing SDL in a single benchmark tenor by a majority of the states since FY2007, as well as the sharp rise in market borrowings from FY2009 onwards, are likely to lead to a sustained rise in redemptions from next fiscal onwards.

Icra estimates the redemption of SDLs to rise steadily to Rs 2.9 trillion in FY2026, and surpass the Rs 2.8 trillion G-sec redemption in that year, as estimated a year ago.