State Development loans

Everybody knows GOI raises debt but ever wondered how states raise it?

State Development Loans (SDLs) - debt issued by State Govts to fund their deficits. RBI coordinates in selling securities.

SDLs qualify as SLR security (Statutory Liquity Ratio), and LAF - Repos (Liquidity adjustment facility) meaning banks, PD (Primary dealers) can raise short-term money from RBI under Repo facility. And they are approved investment for provident, pension funds etc.

SDL's are traded electronically on NDS-OM (Negotiated Dealing System - Order matching) and in the voice market (NDS). Participants include Banks, insurance cos, provident & pension funds, MFs.

Each state has limits to issue security each year. SDLs carry higher coupon rates than GOI-Sec, though trading is very low.

All states, good or bad financially managed both, are able to raise capital without much difference in coupon rates, which is an anomaly of course. RBI is stressing the need for fair pricing and valuation of SDLs. Its a matter of debate whether to equate pricing of SDL as corporate bonds.

Read this article for more.

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