Description
The PPT explainig on Securities issued by the State Governments , but managed and serviced by the Reserve Bank of India
State Development Loans
State Development Loans
• Securities issued by the State Governments , but managed
and serviced by the Reserve Bank of India (the central bank coordinates the actual process of selling these securities)
• Issued only for developmental activities • Direct obligation on the respective states like G-Secs are on
the central govt
• Each state is allowed to issue securities up to a certain limit
each year
Primary Market Lenders
? Banks
? Mutual Funds ? Primary Dealers
– alone ? Banks identified by RBI
? Stand
? Pension Funds
Evolution of SDL
? Central govt’s large deficit limited its ability to
support the States
? State governments not allowed to borrow
externally
? RBI is responsible to maintain records of State
finances, key policy issues regarding their debt management
Evolution cont…
? Prior to 1990s: SDL and G-Sec market
characterized by
?Low liquidity
?Limited players
?Lack of transparency
?High transaction costs
?Controls on pricing
Evolution cont…
? Early 1990s: ? Combined borrowing at common coupon for all states ? Coupon at par with central government securities ? Banks required to invest in these issues based on deposits, similar to SLR ? Difficulty in raising loans through this route due to
? Sophistication of debt markets ? Mark-to-market requirements ? Risk-weighted capital of banks ? Deteriorating State finances ? Market perception of status of State Governments
Evolution cont…
? 1997: SDL offered at higher rate than Central govt
securities
SDL coupon = CG yield + mark-up (25-50 bps) ?State governments allowed to enter market on their own for 5%-35% of gross borrowings ?RBI to decide volume and timing of issue
? Until 1998-99: Tap issues ? 1998-99: Introduction of auction system
Evolution cont…
? 2005-06: ? 12th Finance Commission report (TFC) ? Moderation in fiscal imbalances of states ? Improved market perception of states ? 24 States went through auction route vis-à-vis 3 in previous year ? 48.5% of total borrowings raised at cut-off yields lower than 50bps ? Beyond 2006: ? Borrowings entirely through auction route
Issuance of SDLs : Competitive Bidding
? Auctions are multiple price yield based auctions
? Yield based auction
The bidder submits bids in terms of the yield per annum
? Multiple Price Based:
Bids are accepted at different yields quoted in the individual bid
? Notified amount:
The amount of security to be issued ‘notified’ prior to the auction date
? Bids:
Bids are to be submitted in terms of yields to maturity
? Cut off yield:
Highest yield at which bids are accepted.
Non-Competitive Bidding
? Non-Competitive Bidding introduced from August 25,
2009
? Advantages of the non-competitive bidding facility
? Encourage wider participation and retail holding of government
securities ? Enable individuals, firms and other mid segment investors who do not have the expertise to participate in the auctions ? A fair chance of assured allotments at the rate which emerges in the auction
? Eligible Investors :
? Small investors lacking market expertise ? Those who do not have current account or Subsidiary General
Ledger account with the Reserve Bank of India
Non Competitive bidding cont…
? Each bank or PD submit s a single bid for the
aggregate amount of non-competitive bids
? An investor can submit a single bid only , not
exceeding 1 % of the notified amount
? Allotment to the non-competitive segment is at the
weighted average rate of all allotments to competitive bidders
? In case the aggregate amount bid is
? More than reserved amount, allotment on pro rata basis
? less than the reserved amount, shortfall amount made
available for competitive auction
? Allotment of securities
Characteristics of SDL
? Issuances are not structured and don’t have any
auction calendar
? Issuances requires prior approval by the Central
Government
? Face Value: Rs. 100/? Accrued Interest is always calculated on a
30/360-day count
? Maturity: Generally issued for a maximum tenor of
10-years
? Interest payment frequency : Half yearly
Characteristics cont…
? Liquidity: Much less liquid than G-Secs
? Identified as an eligible investment by banks for the
purpose of SLR and LAF
? Can be issued in dematerialized form, physical form
and are transferable
? No stamp duty is payable on transfer ? May have eligible put /stock options embedded in
them
? Buy –backs allowed
Benefits of investing in SDL
? Safety and lower volatility
? Lower Margins ? Convenience ? Tax Benefits
Risks associated with SDL
? Redemption risk
? No Straight default – State govt can honor its
obligation by borrowing from the market
? Compulsory renewal – might force the investors to
renew the security that might affect their YTM
Recent Developments
? RBI included individual investors and institutions
in the auction process for up to 10 percent of the notified amount in August, 2009
? Sharp escalation in State Governments borrowing
costs despite the liquidity overhang in the financial markets
? Increased frequency of market entry by state
governments due to liquidity demand
? Market aversion to long dated securities ? Switch Operations
Recent Developments cont…
? A snapshot..
Recent Developments Cont…
Secondary Market – CCIL SDL Index
PRIt = PRIt-1 x WAPt/WAP t-1
References
? CCIL
? RBI website (www.rbi.org.in)
? Fixed Income Money Market & Derivatives
Association of India (ww.fimmda.org) ? 12th Finance Commission report ? Business line ? Primary Dealer websites – SBI
Thank you….
doc_620152838.ppt
The PPT explainig on Securities issued by the State Governments , but managed and serviced by the Reserve Bank of India
State Development Loans
State Development Loans
• Securities issued by the State Governments , but managed
and serviced by the Reserve Bank of India (the central bank coordinates the actual process of selling these securities)
• Issued only for developmental activities • Direct obligation on the respective states like G-Secs are on
the central govt
• Each state is allowed to issue securities up to a certain limit
each year
Primary Market Lenders
? Banks
? Mutual Funds ? Primary Dealers
– alone ? Banks identified by RBI
? Stand
? Pension Funds
Evolution of SDL
? Central govt’s large deficit limited its ability to
support the States
? State governments not allowed to borrow
externally
? RBI is responsible to maintain records of State
finances, key policy issues regarding their debt management
Evolution cont…
? Prior to 1990s: SDL and G-Sec market
characterized by
?Low liquidity
?Limited players
?Lack of transparency
?High transaction costs
?Controls on pricing
Evolution cont…
? Early 1990s: ? Combined borrowing at common coupon for all states ? Coupon at par with central government securities ? Banks required to invest in these issues based on deposits, similar to SLR ? Difficulty in raising loans through this route due to
? Sophistication of debt markets ? Mark-to-market requirements ? Risk-weighted capital of banks ? Deteriorating State finances ? Market perception of status of State Governments
Evolution cont…
? 1997: SDL offered at higher rate than Central govt
securities
SDL coupon = CG yield + mark-up (25-50 bps) ?State governments allowed to enter market on their own for 5%-35% of gross borrowings ?RBI to decide volume and timing of issue
? Until 1998-99: Tap issues ? 1998-99: Introduction of auction system
Evolution cont…
? 2005-06: ? 12th Finance Commission report (TFC) ? Moderation in fiscal imbalances of states ? Improved market perception of states ? 24 States went through auction route vis-à-vis 3 in previous year ? 48.5% of total borrowings raised at cut-off yields lower than 50bps ? Beyond 2006: ? Borrowings entirely through auction route
Issuance of SDLs : Competitive Bidding
? Auctions are multiple price yield based auctions
? Yield based auction
The bidder submits bids in terms of the yield per annum
? Multiple Price Based:
Bids are accepted at different yields quoted in the individual bid
? Notified amount:
The amount of security to be issued ‘notified’ prior to the auction date
? Bids:
Bids are to be submitted in terms of yields to maturity
? Cut off yield:
Highest yield at which bids are accepted.
Non-Competitive Bidding
? Non-Competitive Bidding introduced from August 25,
2009
? Advantages of the non-competitive bidding facility
? Encourage wider participation and retail holding of government
securities ? Enable individuals, firms and other mid segment investors who do not have the expertise to participate in the auctions ? A fair chance of assured allotments at the rate which emerges in the auction
? Eligible Investors :
? Small investors lacking market expertise ? Those who do not have current account or Subsidiary General
Ledger account with the Reserve Bank of India
Non Competitive bidding cont…
? Each bank or PD submit s a single bid for the
aggregate amount of non-competitive bids
? An investor can submit a single bid only , not
exceeding 1 % of the notified amount
? Allotment to the non-competitive segment is at the
weighted average rate of all allotments to competitive bidders
? In case the aggregate amount bid is
? More than reserved amount, allotment on pro rata basis
? less than the reserved amount, shortfall amount made
available for competitive auction
? Allotment of securities
Characteristics of SDL
? Issuances are not structured and don’t have any
auction calendar
? Issuances requires prior approval by the Central
Government
? Face Value: Rs. 100/? Accrued Interest is always calculated on a
30/360-day count
? Maturity: Generally issued for a maximum tenor of
10-years
? Interest payment frequency : Half yearly
Characteristics cont…
? Liquidity: Much less liquid than G-Secs
? Identified as an eligible investment by banks for the
purpose of SLR and LAF
? Can be issued in dematerialized form, physical form
and are transferable
? No stamp duty is payable on transfer ? May have eligible put /stock options embedded in
them
? Buy –backs allowed
Benefits of investing in SDL
? Safety and lower volatility
? Lower Margins ? Convenience ? Tax Benefits
Risks associated with SDL
? Redemption risk
? No Straight default – State govt can honor its
obligation by borrowing from the market
? Compulsory renewal – might force the investors to
renew the security that might affect their YTM
Recent Developments
? RBI included individual investors and institutions
in the auction process for up to 10 percent of the notified amount in August, 2009
? Sharp escalation in State Governments borrowing
costs despite the liquidity overhang in the financial markets
? Increased frequency of market entry by state
governments due to liquidity demand
? Market aversion to long dated securities ? Switch Operations
Recent Developments cont…
? A snapshot..
Recent Developments Cont…
Secondary Market – CCIL SDL Index
PRIt = PRIt-1 x WAPt/WAP t-1
References
? CCIL
? RBI website (www.rbi.org.in)
? Fixed Income Money Market & Derivatives
Association of India (ww.fimmda.org) ? 12th Finance Commission report ? Business line ? Primary Dealer websites – SBI
Thank you….
doc_620152838.ppt