Group No-9
Members
Scarlette Almeida (04)
Mihir Bhammar (05)
Sumitra Cardoz (09)
Anshul Chadha (10)
Sandip Saha(50)
Road Map
Purpose of SDL
Issuance & Characteristics
Risk related to SDL
Auction procedure
Difference of SDL & Govt Securities
Recent Trends
Case Study Maharastra SDL
Recommendation
Purpose ?
 Over the years, the gross fiscal deficit of state governments
has been on the rise.
 Nearly 60 per cent of the deficit is on account of revenue
deficits arising mainly due to expenditure over returns.
 State government Loan represent the market borrowings
used in financing this deficit.
Issuances of SDLs
 SDLs are issued by the Reserve Bank of India (RBI) on behalf of
State Governments to meet their funding requirements
 RBI coordinates the actual process of selling of these
securities through the auction process.
 Each state is allowed to issue securities up to a certain limit
each year which is determined by the planning commission in
consultation with the respective state governments.
 The auctions for State Government securities are held
electronically on Public Debt Office-cum-Negotiated Dealing
System (PDO-NDS) module.
 The Public Debt Act, 1944, provides the framework under
which government securities are issued and serviced.
Characteristics of SDLs
 State Development Loans are eligible securities for Liquidity
Adjustment Facility (LAF) – Schedule Commercial Banks (excluding
RRBs) and Primary Dealers
 The Securities may be held in any of the three forms viz:(a) Physical
scrip form, (b) Subsidiary General Ledger (SGL) Account and (c) in a
dematerialized account with depositories (NSDL/CDSL, NSCCL)
 The coupon rates on State Development Loans are fixed and
marginally higher than those of GOI-Secs issued at the same time.
 The tenor of state government securities is normally ten years.
 The states have the option to manage their own market borrowings
to the extent of 35 per cent of total market borrowings.
Risk Related to SDL
 Maturity Risk
 Redemption risk
– Straight default.
– Compulsory renewal
Auctions
Competitive bidding
Non- competitive bidding
Competitive bidding
 Mainly by banks, financial institutions,
primary dealers, mutual funds and insurance
companies.
 Minimum amount is Rs 10,000 and its
multiples thereafter.
 Normally bids are of above Rs 2 crore.
 Multiple bidding is also allowed.
Non-Competitive bidding
 Objective
– To encouraging wider participation and retail holding of
Government securities
 Eligibility
– Open to any person including firms, companies, corporate
bodies, institutions, provident funds, trusts, and any other
entity as may be prescribed by RBI
 Procedure
– Under the Scheme, up to 10 percent of the notified
amount of SDLs will be allotted to eligible individuals and
institutions subject to a maximum of one percent of the
notified amount for a single bid per stock
Difference between SDL & G-Secs
• Unlike GoI Securities (G-Secs), SDL issuances are not
structured and don’t have any auction calendar.
• A new security is issued almost every month, some times
even twice or thrice in a month and no re- issuance of the
same security
• A minimal or no secondary market activity in the previously
issued securities, only the recently issued securities are
traded the most
• SDLs are generally issued for a maximum tenor of 10-years
Recent trends
 All States barring West Bengal offered plain-vanilla SDLs.
 West Bengal has offered banks early exit options(put option) on State
Development Loans (SDL) to make the borrowings attractive.
 Though several States had also planned to make such early exit option into
their bonds to take advantage of low short-term rates, only few have
managed to do so.
 Mutual funds have shown a renewed interest in SDLs; the total mutual
fund investment in SDLs, as on May 31, 2009 was Rs. 9.33 bn.
Recent trends

A CRISIL study shows that the exposure to SDLs, as a percent of the assets
under management (AUM) of gilt funds was 7.54 per cent (Rs 4.15 bn), as
on May 31, 2009, up from 0.15 per cent as on December 31, 2008.

Considering only gilt funds with investments in SDLs, this accounts for a 35
per cent of the portfolios

At the State Development Loan (SDL) auctions, where 7 States raised Rs
5824 crore, the weighted average yield on the SDLs was 8.33 per cent.

States’ borrowing limits raised to 4 per cent of their GDP to allow them to
undertake high expenditure as part of the fiscal stimulus.

Only a handful of States have taken advantage of the enhanced limit.
Recent trends

Restraint on borrowing in expectation of higher Central allocations in the
form of grants.

States are reluctant for SDL as it escalates their revenue expenditure
through interest costs.

Besides banks that were the largest investors in SDLs in the past preferred
to stay invested in short-term securities.

Several banks are parking funds in Treasury Bills as short-term treasury
management.
14 Major State Development Loan(SDL) issuances (Rs crore)
Maharashtra State Development Loans

The rating agency said over the years, the state’s fiscal position has
deteriorated significantly From a primary revenue surplus of Rs
1,446 crore during 1996 to a deficit of Rs 2,579 crore during 2001.
with progressively diminishing primary revenue balance,

The government resorted to high cost borrowings to part-finance its
revenue deficits and its capital expenditure programmes.

Increased overall debt burden of the state-run corporations

Off budget borrowings by providing guarantees to various
corporations like: the irrigation corporation, cotton monopoly
scheme, electricity board etc. As several of these corporations are
commercially non-viable, a large proportion of their debt servicing
burden would fall on the state
Maharashtra State Development Loans

ICRA Ltd has downgraded the rating assigned to the borrowing of
Maharashtra from LAA (-) to LA (-)

Result of deteriorating fiscal performance of the state over the past
few years and some delays in meeting its guaranteed obligations.

Maharashtra, however, cleared the payments and compensated the
investors with overdue interest for the delay.

The state has also initiated steps to ensure that such procedural
delays in meeting debt obligations are prevented in future.

The state delayed its payment to corporations like
1.
2.
Maharashtra Krishna Valley Development Corporation and
Konkan Irrigation Development Corporation,
Consequence - entities delayed the interest payment to
bondholders.
Maharashtra State Development Loans

The ICRA downgrading, however, will impact the ratings assigned
to:
Various bond programmes of Maharashtra State Electricity Board,






Godavari Marathwada Irrigation Corporation,
Maharashtra Jeevan Pradhikaran,
Tapi Irrigation Development Corporation,
Vidarbha Irrigation Development Corporation,
Maharashtra Vikrikar Rokhe Pradhikaran, and
Maharashtra Film, Stage and Cultural Development Corporation.
The agency argued, “the ratings of these bonds are based on the
budgetary support provided by the state and since the bond issuers
are unlikely to generate adequate revenues for debt servicing, these
ratings are reflective of the credit quality of the state”.
Market Capitalization of WDM
Segment in 2009
Security Type
No. of
Mkt
Percentage
Securities
Capitalization
of Total
(Rs. Mn.)
Govt Securities
128
19793385.00
63.24
PSU Bonds
801
1559270.04
4.98
State Loans
1307
5097215.11
16.29
Treasury Bills
53
1343882.65
4.3
Local Bodies
20
26433.28
0.08
Fin Inst.
282
670839.97
2.14
Bank Bonds
508
1580471.59
5.05
1
3912.22
0.01
941
1222058.63
3.91
4041
31297468.49
100
Supranational Bonds
Corporate Bonds
Total
Recommendation





Greater Awareness to be created in the primary market
Mandatory Rating for SDLs
Broaden the Investor Base
Develop Strong Securities Market
Primary Dealers should give 2 way quotes on SDLs so as to increase
transparency
 Secondary Market Trading
 Tax benefit for small investors (Compared to NSC, PPF, etc.)
 Better exit options to increases liquidity- For the last three rounds of market
borrowings, West Bengal had offered put option (giving investors the right, not the
obligation, for premature redemption) on all their SDL issues.
References
http://wealth.moneycontrol.com
 http://www.sbidfhi.com
 www.thehindubusinessline.com
 www.ccilindia.com
 www.bseindia.com
 www.nseindia.com
 www.google.com
 www.rbi.org.in


www.crisil.com