XI. Public Dept Management (Part 2 of 2) - ربی - Reserve Bank of India
XI. Public Dept Management (Part 2 of 2)
Ways and Means Advances
11.24 The Reserve Bank provides WMA to States with a view to help them tide over temporary mismatches in cash flow. The WMA limits are fixed by the Reserve Bank from time to time. Drawing from the recommendations of the Ramachandran Committee (2002) and consultations with the State Governments, the Reserve Bank revised the Scheme of Ways and Means Advances for the States, effective March 3, 2003 to give them the benefit of higher limits in the last month of the fiscal year. The revised normal WMA limits have been computed by taking into account the average of revenue receipts for the three fiscal years 1999-2000, 2000-01 and 2001-02 and then applying a multiplication factor of 3.19 for the non-special category States and 3.84 for the special category States. The total normal WMA limits effective from March 3, 2003 at Rs.7,170 crore was 18.8 per cent higher than the earlier limit of Rs.6,035 crore (Table 11.11).
(Rupees crore) |
||||||
|
||||||
State |
WMA Limits 1996 |
WMA Limits 1999 |
WMA Limits 2001 |
WMA Limits 2002 |
WMA Limits 2003 |
|
(effective from |
(effective from |
(effective from |
(effective from |
(effective from |
||
August 1, 1996) |
March 1, 1999)$ |
February 1, 2001) |
April 1, 2002) |
March 3, 2003)* |
||
|
||||||
1 |
2 |
3 |
4 |
5 |
6 |
|
|
||||||
Non-Special Category States |
||||||
1. |
Andhra Pradesh |
168 |
288 |
463 |
520 |
620 |
2. |
Bihar |
118 |
195 |
220 |
245 |
305 |
3. |
Chhattisgarh |
82 |
91 |
100 |
130 |
|
4. |
Goa |
17 |
24 |
25 |
50 |
50 |
5. |
Gujarat |
118 |
243 |
393 |
445 |
485 |
6. |
Jharkhand |
51 |
57 |
75 |
105 |
|
7. |
Haryana |
50 |
99 |
167 |
180 |
205 |
8. |
Karnataka |
134 |
228 |
331 |
375 |
460 |
9. |
Kerala |
101 |
144 |
215 |
225 |
270 |
10. |
Madhya Pradesh |
134 |
221 |
244 |
275 |
345 |
11. |
Maharashtra |
252 |
483 |
685 |
760 |
905 |
12. |
Orissa |
101 |
141 |
159 |
185 |
215 |
13. |
Punjab |
101 |
141 |
200 |
235 |
240 |
14. |
Rajasthan |
101 |
202 |
288 |
310 |
365 |
15. |
Tamil Nadu |
185 |
281 |
402 |
415 |
570 |
16. |
Uttar Pradesh |
286 |
531 |
559 |
630 |
755 |
17. |
West Bengal |
168 |
235 |
295 |
360 |
420 |
Sub Total |
2,033 |
3,589 |
4,794 |
5,385 |
6,445 |
|
Special Category States |
||||||
1. |
Arunachal Pradesh |
17 |
28 |
35 |
50 |
50 |
2. |
Assam |
67 |
114 |
161 |
180 |
210 |
3. |
Himachal Pradesh |
34 |
59 |
92 |
115 |
135 |
4. |
Manipur |
17 |
25 |
38 |
50 |
50 |
5. |
Meghalaya |
17 |
25 |
30 |
50 |
50 |
6. |
Mizoram |
17 |
25 |
28 |
50 |
50 |
7. |
Nagaland |
17 |
26 |
40 |
50 |
55 |
8. |
Tripura |
17 |
31 |
46 |
55 |
60 |
9. |
Uttaranchal |
19 |
19 |
50 |
65 |
|
Sub Total |
202 |
352 |
489 |
650 |
725 |
|
Total |
2,234 |
3,941 |
5,283 |
6,035 |
7,170 |
|
|
||||||
$ Report of the Informal Advisory Committee on WMA to State Governments (Chairman: Shri B.P.R. Vithal, November 1998). |
11.25 The special WMA continues to be linked to the investments made by State Governments in Government of India securities. A lower and uniform margin of 5 per cent (compared with the 10 to 15 per cent margin earlier) would be applied on the market value of the securities for determining the operating limit of special WMA. The States would have to avail of special WMA limits first at a rate of one per cent below the Bank Rate before seeking accommodation under the normal WMA limits. The number of days that a State can be in overdraft (OD) has been extended to 14 consecutive working days from the earlier 12 consecutive working days. The OD regulation for State Governments has been made more stringent. With effect from April 1, 2003, the State Governments cannot remain in OD for more than 36 working days in a quarter (Table 11.12).
11.26 The outstanding WMA and OD of the State Governments was lower by 52.9 per cent in 2002-03 as compared with the previous year. For a majority of the States, the utilisation of WMA and OD came down significantly in 2002-03, indicating improved management of cash flows (Table 11.13).
11.27 The weekly average utilisation of WMA and OD during 2003-04 (up to July 2003) was lower, mainly due to higher small savings collections and larger market borrowing (Table 11.14). Stricter OD regime with higher rate of interest has presumably reduced States’ resort to OD. There has, however, been a sharp increase in States’ resort to special WMA as States are allowed to avail of special WMA before seeking accomodation under the normal WMA.
Market Borrowings of State Governments
11.28 States resorted to large volumes of market borrowings in 2002-03. States raised Rs.30,853 crore (Rs.27,880 crore through tap issuances and Rs.2,973 crore through auctions), an increase of 65 per cent over Rs.18,707 crore (Rs.15,942 crore through tap issuances and Rs.2,765 crore through auctions) during 2001-02 (Table 11.15). The interest rates on tap issues ranged between 6.60-7.80 per cent with a spread fixed in the range between 38-52 basis points over the corresponding secondary market yield of Government of India dated securities (Table 11.16). The cut-off yields on auctions ranged between 6.67-8.00 per cent with a spread ranging between 20-76 basis points over the corresponding secondary market yield of Government of India dated securities. Of the States that used the auction method, some were able to mobilise loans at competitive rates (Punjab and Andhra Pradesh) while others had to pay higher rates (Kerala and Jammu and Kashmir) (Table 11.17).
11.29 The provisional net allocation for the State Governments under their market borrowing programme during 2003-04 is kept at Rs. 24,000 crore including additional allocation of Rs. 4,000 crore. Taking into account the repayment of Rs. 4,145 crore, the gross (provisional) allocation amounts to Rs. 28,145 crore. During the current year so far (up to August 11, 2003), an aggregate amount of Rs. 22,896 crore has been raised by the State Governments under the market borrowing programme.
11.30 The weighted average yield recorded a decline of 1.71 percentage points in 2002-03 (Table 11.18). The State wise maturity profile of outstanding State Governments’ market loans suggests that almost 75 per cent of the loans are in the maturity bucket of 5-10 years (Table 11.19).
11.31 The distribution of annual repayment of the State Governments’ market loans is even but weighted at the longer end (Table 11.20).
11.32 As in the case of the Centre, the profile of the outstanding stock of the State Governments in terms of interest rate ranges indicates that over two-third of loans are contracted at interest rates of 10 per cent and more (Table 11.21).
Debt Restructuring
11.33 The Union Budget for 2003-04 has envisaged measures for debt restructuring as a part of fiscal consolidation. They encompass pre-payment of external debt, buy-back of loans by the Government from the banks on voluntary basis and restructuring of State Governments' debt to the Centre through a debt swap scheme.
11.34 Pre-payment of 'high-cost' currency pool loans from the World Bank and the loans from the Asian Development Bank and switching of this amount with domestic loans would reduce the cost to the Central Government. Accordingly, the Central Government prepaid foreign currency loans to these institutions amounting to US $ 3.0 billion. The possibility of further repayments of external debt is being explored.
Name of the State |
Tap Issue |
||||||||
April |
August |
December |
February |
February |
March |
||||
23-26, 2002 |
19, 2002 |
23, 2002 |
4, 2003 |
25-26, 2003 |
12-17, 2003 |
||||
7.80% |
7.80% |
6.80% |
6.60% |
6.95% |
6.75% |
||||
|
|||||||||
1 |
2 |
3 |
4 |
5 |
6 |
7 |
|||
|
|||||||||
1. |
Andhra Pradesh |
387 |
443 |
0 |
809 |
876 |
342 |
||
2. |
Arunachal Pradesh |
8 |
5 |
3 |
14 |
4 |
|||
3. |
Assam |
89 |
177 |
119 |
303 |
223 |
|||
4. |
Bihar |
184 |
327 |
227 |
299 |
298 |
|||
5. |
Chhattisgarh |
56 |
155 |
0 |
137 |
115 |
|||
6. |
Goa |
34 |
27 |
48 |
34 |
11 |
|||
7. |
Gujarat |
344 |
240 |
361 |
694 |
453 |
|||
8. |
Haryana |
130 |
78 |
169 |
289 |
90 |
|||
9. |
Himachal Pradesh |
104 |
150 |
100 |
100 |
175 |
69 |
||
10. |
Jammu and Kashmir |
61 |
46 |
30 |
212 |
90 |
87 |
||
11. |
Jharkhand |
88 |
97 |
65 |
129 |
76 |
|||
12. |
Karnataka |
150 |
300 |
352 |
457 |
151 |
|||
13. |
Kerala |
0 |
251 |
197 |
258 |
86 |
|||
14. |
Madhya Pradesh |
109 |
370 |
0 |
281 |
130 |
|||
15. |
Maharashtra |
328 |
237 |
0 |
0 |
0 |
|||
16. |
Manipur |
10 |
28 |
21 |
14 |
5 |
|||
17. |
Meghalaya |
21 |
29 |
20 |
13 |
4 |
|||
18. |
Mizoram |
10 |
14 |
81 |
10 |
3 |
|||
19. |
Nagaland |
36 |
53 |
74 |
7 |
7 |
|||
20. |
Orissa |
154 |
280 |
187 |
353 |
334 |
|||
21. |
Punjab |
212 |
127 |
0 |
451 |
266 |
|||
22. |
Rajasthan |
249 |
426 |
284 |
713 |
712 |
|||
23. |
Sikkim |
0 |
6 |
4 |
10 |
0 |
|||
24. |
Tamil Nadu |
309 |
406 |
146 |
729 |
460 |
|||
25. |
Tripura |
25 |
35 |
24 |
20 |
17 |
|||
26. |
Uttar Pradesh |
433 |
814 |
542 |
849 |
599 |
|||
27. |
Uttaranchal |
57 |
23 |
286 |
292 |
292 |
|||
28. |
West Bengal |
384 |
229 |
0 |
902 |
838 |
|||
Total |
3,974 |
5,374 |
3,341 |
1,121 |
8,398 |
5,671 |
|||
|
(Amount in Rupees crore; cut-off yield in per cent) |
||||
|
||||
Name of State |
2002-03 |
|||
Date of Auction |
Amount |
Cut-off |
||
|
||||
1 |
2 |
3 |
4 |
|
|
||||
1. |
Andhra Pradesh |
27.06.02 |
250 |
7.90 |
10.12.02 |
295 |
6.67 |
||
2. |
Gujarat |
27.06.02 |
245 |
7.83 |
30.10.02 |
200 |
7.33 |
||
3. |
Jammu and Kashmir |
27.06.02 |
70 |
8.00 |
4. |
Karnataka |
27.06.02 |
200 |
7.90 |
5. |
Kerala |
11.04.02 |
225 |
8.00* |
6. |
Madhya Pradesh |
18.11.02 |
247 |
6.94 |
7. |
Maharashtra |
27.06.02 |
279 |
7.83 |
8. |
Punjab |
18.11.02 |
85 |
6.80 |
9. |
Tamil Nadu |
30.10.02 |
275 |
7.30 |
10. |
West Bengal |
30.10.02 |
153 |
7.35 |
Total |
2,973 |
|||
|
||||
* Reissue |
11.35 The buy-back of high coupon loans by the Central Government from banks and debt-swap by the State Governments are the two schemes aimed at restructuring the domestic debt. The scheme of debt buyback, as announced in the Union Budget for 2003-04, was implemented on July 19, 2003. Government of India bought back 19 high cost, illiquid securities worth Rs. 14,434 crore (face value), by paying a premium of Rs. 3,472 crore. In lieu of these securities, four liquid securities were issued. The buy-back was conducted through a novel auction process whereby participants were able to revise their offers in a live interactive mode. The buy-back was conducted on a voluntary basis and banks were allowed additional income-tax deduction to the extent such business income was used for provisioning of their NPAs.
11.36 Under the debt-swap scheme mutually agreed to between the Central and the State Governments, all State loans from the Centre bearing coupons in excess of 13 per cent would be swapped with market borrowings and small savings proceeds at prevailing interest rates over a period of three years ending in 2004-05. As a consequence, States are expected to save at least Rs.81,000 crore in interest and deferred loan repayments over the residual maturity period of the loans. In 2002-03, 25 State Governments (excluding Maharashtra, Sikkim and West Bengal) were permited to prepay high cost debt from the Centre, partly out of small savings collections and partly through fresh market borrowings of Rs.10,000 crore conducted in two tranches in February and March 2003. The scheme has been continued in 2003-04. During the current year so far (up to August 12, 2003), the State Governments raised Rs. 15,000 crore from the market for this purpose. Another tranche of debt swap for Rs. 8,000 crore has been announced.
11.37 The major risk associated with the management of public debt is the size of the debt itself and the pressure on account of its servicing. The high debt accumulation since the mid-1990s has created a heavy debt servicing burden. Various policy measures evolved over the years which, inter alia, included market related primary issuance of government securities, introduction of varied instruments and alignment of the maturity period of new issues of debt while keeping in view redemption pattern of existing debt stock. The objective of the recent initiatives in debt restructuring is to resolve the problem of the debt overhang and strengthen fiscal consolidation (Box XI.2).
Debt Restructuring Fiscal adjustments through debt restructuring aim at mitigating the burden associated with unsustainable debt-GDP ratios and rising debt servicing. It involves a combination of debt conversion and debt reduction strategies by employing instruments like debt-swap, debt buyback, rescheduling, debt relief and concessional refinancing. The theoretical rationale for explicit debt reduction is based on the premise that if the debt exceeds the country's repayment ability in the future, expected debt service is likely to be an increasing function of the country's output level. When the country is unable to service its debt in full, the incentive to invest in the debtor country declines. This effect is known as debt overhang. Economic performance is affected by the debt overhang through crowding out, lack of access to international financial markets, and the effects of the debt on the general level of uncertainty in the economy. The debt overhang thus acts like an implicit marginal tax on investment. The principal benefit of reduction in debt overhang is the improvement in investment incentives for private investors and liquidity relief, in addition to capital gains to creditors. The success of debt restructuring process depends on whether the country is on the right or wrong side of the "debt laffer curve". If the country is on the wrong side of the debt laffer curve, debt restructuring (via buyback) may prove counterproductive and may not decrease the debt service payments. The three basic approaches of debt restructuring are market buy-backs, debt swaps and debt reduction agreements. The attractiveness of debt buybacks depends on whether they pay larger expected rates of return than other assets, and how the returns are distributed. Debt buy-backs yield an expected return equal to the risk-free interest rate, if distortions in sovereign lending are removed. Debt swaps are financial contracts that obligate one party to exchange a set of payments it owns for another set of payments owned by another party. They enable the country to bring forward in time the discounted benefits of a future debt write down. The kind of domestic liability that the government employs to finance the swap matters considerably. As long as the budget is continuously balanced, debt for bond swaps have no impact beyond that of a private sector debt repurchase. Money financed swaps, on the other hand, can lead to a situation of excess liquidity which can have other macroeconomic consequences. If debt swaps lead to an accumulation of domestic debt which is monetised subsequently, there would be a threat to domestic inflation. Since the late 1980s, many highly indebted countries have devoted considerable resources to repurchasing some of their outstanding debt at a discount on the secondary market. Countries like the Philippines, Mexico, Venezuela and Brazil had negotiated many market-driven deals for restructuring of debt which involved reduction in banks' claims at a price broadly in line with that prevailing in the secondary market. Subsequently, the holders of the debt being restructured have experienced an appreciation in the value of restructured claims. This appreciation also helped in improving the preception of country risk. Cross-country experiences in debt restructuring suggest that debt restructuring leads to lower debt servicing obligations and reduction in the debt overhang. References 1. Claessens S., E. Detragiache, P. Wickham and R. Kanbur (1996), "Analytical Aspects of the debt Problems of Heavily Indebted Poor Countries", World Bank Policy Research Working Paper No. 1618. 2. Detragiache, E (1991), "Sensible Debt Buybacks for Highly Indebted Poor Countries", World Bank Policy, Research and External Affairs Working Paper No. WPS 621. |
Scheme for Settlement of State Electricity Boards (SEB) dues
11.38 Based on the recommendation of Ahluwalia Committee (2001), a scheme for one-time settlement of outstanding dues of the State Electricity Boards (SEBs) to Central Power Sector Undertakings (CPSUs) was finalised. Under the scheme, the State Governments will issue 15-year bonds worth about Rs.30,000 crore to the CPSUs for the outstanding dues at a nominal tax-free interest rate of 8.5 per cent per annum repayable over 10 years after a moratorium period of five years. Subject to the approval of the Reserve Bank, 10 per cent of the bonds can be off-loaded in the market each year for trading. The Tripartite Agreements (TPA) in this regard have been signed among the Government of India, the Reserve Bank and 25 State Governments (Box XI.3).
Power Bonds: One Time Settlement of Dues of State Electricity Boards The State Electricity Boards (SEBs) have reached the verge of financial collapse owing to mismanagement, high transmission and distribution losses, irrational tariffs, degraded plant and machinery, and bloated workforce, reflected in the rising overdues of Central Public Sector Undertakings (CPSUs). The Expert Committee on the one-time settlement of State Electricity Board Dues (Chairman: Shri. M.S. Ahluwalia, 2001) suggested that a one-time settlement of outstanding dues should be attempted by shifting the burden of clearing these dues to State Governments while providing a package of relief and also a set of penalties and incentives favouring discipline and future reforms. The Committee recommended signing of Tripartite Agreements (TPA) among the Ministry of Finance, the Reserve Bank and the respective State Governments in this regard. The Scheme of One Time Settlement of SEB dues by way of securitisation to the CPSUs, as recommended by the Ahluwalia Committee, is being implemented. Current Dues If payments for the current dues of CPSUs are not received from the SEBs by the due date (within 90 days from date of billing), the amounts will be paid by the Government of India (GoI) to the CPSUs. The GoI in turn will get the amounts from the State Government through issue of payment instruction to the Reserve Bank to transfer funds from the respective State's account to GoI account. The Reserve Bank will act as per the specific instructions to be given by the GoI regarding amounts to be deducted under the TPA on each occasion. The payments of the current dues will be made subject to availability of funds in the account of the State Government. Securitisation of past dues - Issue of Power Bonds The Committee recommended that the overdues of the SEBs (till a cut-off date) should be securitised and power bonds should be issued by the State Governments to the CPSUs. The Reserve Bank as debt manager to the States should manage the issue of the bonds. The bonds would be issued with retrospective effect from October 1, 2001 at a nominal tax-free interest rate of 8.5 per cent per annum to the respective CPSU in 20 equal parts to facilitate trading and redemption of the bonds and each part will carry a fixed tenor with bullet redemption, the last being on April 1, 2016. The bonds should be issued in demat form to the original investors and interest will be paid half-yearly on April 1 and October 1 of each year. Furthermore, the bonds can be sold in the market only with specific prior approval of the Reserve Bank on each occasion and will enjoy SLR status when acquired by banks/institutions in the secondary market. The servicing of the bonds will not be done during the period of stoppage of payments on behalf of the State Government concerned. To facilitate early redemption of the bonds by the States, the bonds would have a call option usable at any point of time on or after five years of issue of the Power Bonds for part or full redemption with notice period of two months. TPAs have been signed with 24 States on March 20, 2003. |
Conference of State Finance Secretaries
11.39 The Reserve Bank has been organising the Conference of State Finance Secretaries since November 7, 1997. These conferences are held biannually to discuss the issues and problems related to cash and debt management of the State Governments. The Conference has emerged as an important single point forum for interaction among State Governments, Government of India, Planning Commission, Comptroller and Auditor General, Controller General of Accounts and the Reserve Bank. In the 10th Conference held on June 7, 2002, important issues like difficulties in the market borrowings of the State Governments, overdraft regulation scheme for States and finances of local bodies were deliberated upon. The Reserve Bank's customer service to Central and State Governments and the accounting and reconciliation procedure of the State Government transactions were also discussed. The major issues and recommendations in regard to the Draft Report of the Group on Interest Burden of States and Draft Report of the Group to Assess the Fiscal Risk of State Government Guarantees were also discussed. In the 11th Conference held on January 9, 2003, recommendations of the Advisory Committee on WMA of State Governments (Ramachandran Committee) were discussed and accepted with some modifications. A Group of Finance Secretaries was constituted to study the pension liabilities of the State Governments. Discussions on the Report of the Group to assess the Fiscal Risk of State Government Guarantees (2002) addressed the need to assign fiscal risk to different guarantees and their implications for State finances. The 12th Conference of State Finance Secretaries was held on August 1, 2003. The major issues deliberated upon in the Conference were defaults in the servicing of guaranteed bonds, market borrowings of State Governments, infrastructure financing, restructuring of State level PSUs, One-time Settlement of SEB dues and other administrative and technological issues relating to Government transactions. A one day interactive workshop on cash management was also organised by the Reserve Bank on August 2, 2003 for the benefit of the State Government officials.
Technical Advisory Committee
11.40 During 2002-03, two meetings of the Technical Advisory Committee (TAC) were held in July 2002 and June 2003. Apart from the general market developments, some specific issues discussed during the 15th meeting of the Committee related to : extension of facility to gilt account holders, screen based trading in Government securities through exchanges, review of the Liquidity Adjustment Facility (LAF) and re-examination of the scheme of non-competitive bidding facility. In the 16th meeting of this Committee held on June 10, 2003, the issues pertaining to introduction of 'when issued market', interest rate derivatives, report of the Interdepartmental Group on Forward Sale of Securities acquired under OMO, capital indexed bonds, introduction of 28-day Treasury Bills and retailing of government securities were discussed.
Outlook
11.41 The conduct of debt management continues to be driven by the objectives of reducing costs and elongating maturities while ensuring the smooth completion of the Centre's and States' borrowing programmes. The process of debt consolidation and efforts at enhancing the benchmarking of securities would be persevered with. Undue elongation of the maturity profile could increase interest rate risks. Accordingly, the issue of capital indexed and more floating rate bonds are under active consideration. It is expected that stripping of government securities will be operationalised after the Government Securities Act is passed in the Parliament. In the case of Treasury Bills, as in the past, the amounts offered in the auctions would be modulated keeping in view the liquidity conditions. In the secondary market, measures like rollover of repo and operationalisation of DVP III settlement system, measures to further develop the retail market for government securities using the PD network and banks would be accelerated. The Reserve Bank would develop the debt markets further through over the counter (OTC) as well as exchange traded interest rate derivatives (interest rate futures trading has commenced since June 24, 2003). Efforts are underway to introduce interest rate options on exchanges, broaden the eligible underlying to other items in the balance sheet for hedging through derivatives and permit market making to those banks that have the required risk management capabilities. Initiatives are being taken to harmonise regulations in respect of OTC derivatives with exchange traded interest rate derivatives.