New Delhi, Feb. 25: Finance minister Jaswant Singh is considering a Planning Commission proposal to cut the rate of interest charged from state governments for loans given out of the central exchequer, from an abnormally high rate of 11.5 per cent to about 9-9.5 per cent.
“The move is for a rate cut with prospective effect and not retrospective effect,” said top finance ministry officials who admitted that this could induce a feel-good effect among states battling with huge, costly loan overhangs.
States have a combined loan overhang of nearly Rs 6,64,000 crore, of which some Rs 2,74,000 crore come from the central kitty. The rate cut is really designed to sweeten the way for a compromise on a debt swap scheme, which Bengal and Maharashtra have dubbed unfair.
The Centre wanted to launch a debt swap scheme to exchange high cost debts of states with low cost securities worth Rs 1,10,000 crore during the next four years.
Maharashtra and Bengal — the two states that account for around 40 per cent of total loans taken by states — have not agreed so far as they want the Centre to improve the terms of the debt swap arrangement in view of the magnitude of their debts.
The Centre agreed to swap debts worth Rs 25,000 crore — Rs 15,000 crore on account of small savings and the remaining due to market borrowings by states. Through this mechanism, the Centre intends to provide a relief of at least Rs 1,000 crore to states.
But the problem say state government officials is that the relief offered is “too little while the sacrifice which involved giving up rights to part of the small saving collection was too high.”
Bengal and Maharashtra will be big losers under this formula as they are accessing the small savings collection for loans at 9 per cent rate of interest which is far cheaper than central loans. “The two states could lose up to Rs 1,000 crore if they accepted the swap scheme,” officials explained.
The prospective rate cut on new loans is expected to sweeten the way for fresh negotiations which could see their states agreeing to a slightly modified debt swap package which could be “agreed upon as early as April this year.”
State loan auction
The RBI today received good response for the first tranche of the on-tap issue of state government loans worth Rs 7,325 crore and closed the tap for 26 states. The tap would be kept open for one more day in the case of Rajasthan, the RBI said in a release. The 10-year securities carry a coupon rate of 6.95 per cent.