Understanding Top Market Borrower

Tamil Nadu has raised $30,500 crore in top market borrowings among states so far in fiscal 2020-21, leading all states in India. According to Reserve Bank of India data, Tamil Nadu accounted for 17% of all borrowings made through the issuance of bonds, also recognised as the state development loans (RBI). 

The financing pattern of state government’s fiscal deficits has changed significantly over the years, with a significant increase in the borrowing market.  States enter the market regularly, competing with the Indian government and among themselves. Market borrowings were used to finance a small portion of states’ gross fiscal deficits (GFDs) before 1990, but this significantly increased to 74.9 per cent in 2017-18.

Tamil Nadu’s borrowing

Earlier, On July 7, 2020, Tamil Nadu needed to borrow an additional 500 crore, rather than the 2,000 crores that had been planned. The state intended to raise 2,000 crores by issuing 1,000-rupee bonds with 35-year and 3-year maturities. Tamil Nadu had the option to raise an additional 250 crore in any of these securities, known as the ‘green shoe’ option. In the July 7 RBI auction, Tamil Nadu raised 1,250 crores at a rate of 6.63 per cent for 35-year bonds and 1,250 crores at 4.54 per cent for three-year bonds.

The state has borrowed more money because of the drop in interest rates. On June 23, 2020, the state raised Rs. 1,250 crore by issuing 30-year bonds with a coupon of 6.7 per cent.

Tamil Nadu has favoured market borrowing to meet the ever-increasing expenditure and dropping revenue situation caused by the COVID-19 pandemic. According to the Finance Secretary’s projections, Edappadi K. Palaniswami – the chief minister, recently stated that if enterprises remain closed, the state will suffer a revenue shortfall of about 12,000-13,000 crore per month. The state’s GST collection fell 15 per cent on average in June, compared to a 3% drop throughout national GST collections due to the intense shutdown announced in just a few districts.

Compared to the rest, the state has approved more long-term bonds as a top market borrower and has not used short-term funding avenues. According to a senior State government official, market borrowings through long-term bonds help spread out repayments, and the Life Insurance Corporation of India and other pension funds are interested in such bonds.

In the RBI auction, Tamil Nadu raised 1,250 crores at a low-interest rate of 6.63 per cent for 35-year bonds and 1,250 crores at a rate of 4.54 per cent for three-year bonds.

Tamil Nadu loaned an additional 500 crores instead of the 2,000 crores planned. The state intended to raise 2,000 crores by issuing 1,000-rupee bonds with 35-year and 3-year maturities.

Tamil Nadu had the option to raise an additional 250 crore in these securities, known as the ‘greenshoe’ option.

Tamil Nadu may obtain additional loans totalling Rs 7,054 crore, the most of any of the ten states, and the Tamil Nadu Generation and Distribution Corporation may be able to use the funds for power sector reform projects such as metering of all connections, including agricultural services.

Based on the suggestions of the 15th Finance Committee, the Centre decided to grant states an extra borrowing limit of up to 0.5% of their GSDP per year for a four period from 2021-22 to 2024-25, based on reforms implemented in the power sector.

Conclusion

If Tamil Nadu borrows the identified 8,800 crores throughout March, the actual issuance in the fourth quarter will be 22,200 crores. As a result, Tamil Nadu’s total SDL issuance in FY2022 is expected to be 74,200 crores, a 16 percent decrease from 87,900 crores throughout FY2021. Following Tamil Nadu, the top market borrower states are Maharashtra (64,750 crores), Karnataka (59,000 crores), Uttar Pradesh (57,500 crores), and West Bengal (57,000 crores). According to CareEdge, these five account for nearly 49 per cent of the total borrowed money of 6.19 lakh crore in FY22.