Mumbai: Maharashtra’s attempt to save interest costs by refinancing some of its borrowings didn’t quite come off as the market responded tepidly to its buyback offer on Wednesday.
According to a Reserve Bank of India (RBI) statement, it accepted bids worth Rs1,082 crore, about 10% of the Rs11,290 crore state development loans (SDLs) that the state wanted to buy back.
The decision to buy back from the market using an auction mechanism is interesting since it is likely the first time that any state has attempted to do so, said bond traders.
Maharashtra had sold these bonds, maturing in 2023-24, at an interest rate of between 9.25% and 9.63%, about 2 percentage points higher than the yield at which SDLs are being currently issued. The last auctions for SDLs happened on Monday at yields of about 7.6% while the benchmark 10-year government of India trades at 6.75%.
“The government had taken a decision to refinance SDLs as they put a high debt burden on the state. The market rate of interest is not 9.5% today,” said Sudhir Mugantiwar, finance minister of Maharashtra.
Despite the poor response on Wednesday which Mugantiwar said he wasn’t aware of, the Maharashtra government has sent a proposal to the Union finance ministry to “shift SDLs worth Rs75,000 crore to lower interest rate loans,” the state finance minister said.
Maharashtra has a debt stock of Rs4.13 trillion or 16.3% of gross state domestic product (GSDP). While its fiscal deficit for 2017-18 has been pegged at Rs37,789 crore (or 1.53% of GSDP), it spends a good Rs34,127 crore on interest payments alone, explaining the hunt for lower rates.
With RBI signalling a change in its monetary policy stance, and the exclusion of most states from investing in the National Small Savings Fund likely to raise SDL yields, it makes sense to attempt the switch sooner rather than later.
Such nifty cash management might not be easy.“Only 10% of the notified amount has been bought back, presumably indicating unwillingness on the part of the government of Maharashtra to pay the high premium at which such securities would have been offered by market participants,” said Jayanta Roy, group head, corporate sector ratings at ICRA Ltd.
Secondly, Maharashtra was able to do this re-financing because it has a large surplus cash holding which was invested in treasury bills. However, the exact extent of this is not known.
It is precisely for this reason other states might not be able to use this strategy to reduce the interest cost on their existing debt.
“All states that borrowed from the market three years back would have borrowed at higher rates. But re-financing is not simple. If a state doesn’t have surplus cash or liquid investments, it will be difficult for it to do this kind of refinancing,” said Roy of ICRA. “The centre caps state borrowing to 3% of GSDP plus an additional amount for repayments during the year. But pre-payment of loans is not included in this.”
Another reason for the poor response could simply be because the entities who typically hold SDLs are insurance firms, public sector banks who hold it in their hold-to-maturity book and pension funds.
“They are generally not inclined to sell without a good reason. They don’t hold these for trading purposes and would not disrupt their portfolio for good reason,” said Ajay Magnulia, head of fixed income at Edelweiss Capital Ltd.