Softening of interest rates have prompted states to borrow funds from markets for swapping high-cost debts owed to the Union government. According to a Reserve Bank of India (RBI) report, the interest rates on borrowing by states ranged from 6.40 per cent to 5.85 per cent. These loans were used to pre-pay loans with coupon rate of 13 per cent.
As per the debt pre-payment arrangement, 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.
In 2002-03, as many as 25 states, excluding Maharashtra, West Bengal and Sikkim, prepaid high-cost debt 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.
Declining interest rate has been having a positive impact on debt profile of states since 2001-02. As a result of rising debt level, the interest burden of states increased from 13 per cent of revenue receipts in 1990-91 to more than 24 per cent in 2001-02. The burden, according to RBI, will come down as a result of softening of interest rate and debt-swap scheme.
The interest rate on market borrowings of state governments ranged between 8.0 per cent and 6.7 per cent in 2002-03 as compared with a range of 10.5 per cent and 7.8 per cent in 2001-02.
For the current year, the borrowing rates ranged from 6.40 per cent to 5.85 per cent and weighted average interest rate will come down further.