While Foreign Portfolio Investors (FPIs) have bought record amounts of Indian bonds this year — close to $16 billion — they are studiously staying away from state government loans. FPIs have used up just over 5% of the quota in SDLs (state development loans) of close to $4.4 billion or Rs 28,500 crore.
“FPIs feel yields on SDLs are too fine for the credit risk on the states. Moreover, they tend to prefer the quasi-sovereign paper like that of NHAI which have yields almost in the same range,” Shashikant Rathi EVP and head, treasury, Axis Bank, points out.
Nevertheless, even states whose finances appear weak, post-farm loan waivers, are able to borrow at relatively low yields. At the July 11 auction, Punjab picked up money at 7.34%, only slightly higher than Tamil Nadu’s 7.27%. In fact, Uttar Pradesh mopped up money at just 7.29%, only slightly higher than Maharashtra’s 7.22%; the western state boasts a GFD/GSDP ratio of 1.6%.
The small difference in yields is because SDLs are believed to be risk-free. Rathi points out that even if there is a delay in the servicing of interest or in the repayment of principal, the RBI debits the funds from the state’s account with the central bank. “Therefore, investors consider the SDLs as risk-free,” Rathi said.
Ratings agency Icra pointed out recently that the Punjab government “lacks the fiscal space to accommodate the full funding of the loan waiver in FY18, with its fiscal deficit budgeted at a high 5% of GSDP, well above the anchor of 3% of GSDP.
In the case of Uttar Pradesh, which has provided for Rs 36,000 crore of loan waivers in its FY18 budget, economists point out that while the revenue receipts are budgeted to grow at 19% in 2017-18, (over FY17RE) the fact is these have grown at lower pace between 2012-13 and 2016-17. The state’s revenue surplus is estimated to contract by 50% to Rs 12,279 crore in 2017-18, compared with an increase of 71% in 2016-17.
Vijay Sharma, senior EVP, PNB Gilts, says while domestic investors buy SDLs, FPIs believe the yields on these do not actually reflect the fundamentals of the states’ finances.“For them, the SDLs are not as good a credit as sovereign gilts,” Sharma observes.