The government today approved Rs 45,000 crore loan to FCI out of National Small Savings Fund, while exempting most of the states and UTs from mandatory investment norms with regard to funds collected under the NSSF scheme.
The Cabinet decision to exempt states barring four, Arunachal Pradesh, Delhi, Kerala and Madhya Pradesh, from NSSF investments from April 1, 2016 will help them raise cheaper funds from the market and reduce interest outgo.
The Cabinet meeting headed by Prime Minister Narendra Modi also approved providing one-time loan of Rs 45,000 crore from NSSF to FCI to meet its food subsidy requirements.
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Servicing of interest and principal of debt is extended to FCI through the budget line of Department of Food and Public Distribution.
"The repayment obligation of the FCI in respect of NSSF Loans would be treated as the first charge on the food subsidy released to the FCI. In addition, FCI shall reduce the amount of its current Cash Credit Limit with the banking consortium to the extent of the NSSF loan amount," an official statement said.
A legally binding agreement will be signed between FCI, the Department of Food and Public Distribution and the Ministry of Finance on behalf of NSSF on the modalities for repayment of interest rate and principal and the restructuring of FCI debt will be made possible within 2-5 years.
According to the Cabinet decision, Arunachal Pradesh will be given loans to the tune of 100 per cent of NSSF collections within its territory, whereas Delhi, Kerala and Madhya Pradesh shall be provided 50 per cent of collections.
NSSF in the future shall, with the approval of Finance Minister, invest on items the expenditure of which is ultimately borne by Government of India and the repayment of principal and interest thereto would be borne from the Union budget, it said.
Once states are excluded from NSSF investments, the investible funds of NSSF with Government of India will increase.
The increased availability of the NSSF loan may reduce the GOI's market borrowings. The States will however, see an increase in market borrowings.
"Any increase in yields due to an increased demand for loanable funds in the market from Centre and States combined would be marginal. The reduction of FCI's borrowing cost equivalent to the extent of the interest differential will be reflected in the Gol's savings on the Food Subsidy Bill," he said.
Implementing the decision to exclude states from NSSF investments and extending the loan will entail no additional cost, it said, adding that instead a reduction in the food subsidy bill of the GOI is anticipated.
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While Arunachal Pradesh, Delhi, Kerala and Madhya Pradesh will continue availing of NSSF loans, 26 other States and Puducherry which are eligible to borrow from the market have preferred to stop taking loans from the NSSF.
The Fourteenth Finance Commission (FFC) recommended that state governments be excluded from the investment operations of the NSSF.
The NSSF loans come at an extra cost to the state governments as the market rates are considerably lower.
The Union Cabinet in its meeting held on February 22, 2015, accepted that this recommendation will be examined in due course in consultation with various stake holders.
Barring Arunachal Pradesh, Delhi, Kerala and Madhya Pradesh, the other state governments/UTs expressed a desire to be excluded from NSSF investments.
The loan contracted by states till March 31, 2016 from the National Small Savings Fund will stand completely repaid by the Financial Year 2038-39.
The fund extended to FCI will reduce its interest cost. FCI presently takes working capital loans through Cash Credit Limit (CCL) at an interest rate of 10.01 per cent and Short Term Loan (STL) at a weighted average interest rate of 9.40 per cent, whereas the NSSF currently charges 8.8 per cent interest on its loans.
This savings on interest rate outgo will reduce the food subsidy burden of the Government of India.
