All eyes on upcoming Kerala bond issue

State to issue Rs2500 cr SDLs on August 7

THIRUVANANTHAPURAM: Kerala Government will be raising Rs2500 crore on August 7, through the sale of 12-year state development loans (SDLs), the longest tenure yet for the current financial year, taking the aggregate amount for the year to Rs8000 crore.

The SDL sale this time gains significance as this is taking place immediately after another policy rate hike by the Reserve Bank of India (RBI) last week.

“It is to be seen how the pricing of SDLs is going to play out in the backdrop of rate hike as well as the longer tenure of the SDLs this time,” treasury head of a bank told

Moreover, RBI has already notified that the valuation of SDLs issued by each state government will soon be done in a manner, which would objectively reflect their fair value based on observed prices/yields.

And this is expected to have an impact on the investment portfolios of banks that will invariably have development bonds issued by states as they qualify for statutory liquidity ratio (SLR) prescribed by RBI.

The sale process of the SDLs, as always, will be through auction and conducted by Reserve Bank of India (RBI). “The cut-off yield determined at the auction will be the coupon rate (per cent) per annum on the stock sold at the auction.

The proceeds of the loan will be utilized for financing productive development programmes and projects to be implemented in the state,” the Finance Ministry website has said.

According to an official document, Rs5520 crore SDLs are maturing for Kerala Government during the current financial year itself, meaning that the state will be required to find sources to address this redemption.

Though the redemption for the next two years also will be along the same lines in terms of amounts, the financial year 2021-22 marks the start of a period of higher redemptions that peak in 2026-27 at Rs17,300 crore.

The immediate past sale of SDLs was in the last week of May, when Kerala raised Rs1000 crore through 10-year SDLs. The maximum tenure of SDLs so far during the current year was 10 years.

Kerala sits on 120 SDLs or bonds outstanding as of March end, 2018 for an aggregate value of Rs1,14,735 crore (Rs1.15 trillion) as per statistics released by Clearing Corporation of India Ltd (CCIL). The average coupon rate of the SDLs outstanding for Kerala is 8.27 per cent, which is relatively high compared with that of several other states.

While Kerala accounts for 4.78 per cent of the aggregate SDL outstanding by all states as of March end, 2018, the largest chunk of the development bonds outstanding is in the names of Maharashtra and Uttar Pradesh at 10.47 per cent and 10.29 per cent respectively.

Getting subscriptions to state development bonds (SDLs) is seldom viewed as a problem as investment in these bonds qualifies for SLR under Section 24 of the Banking Regulation Act (1949) as they carry zero risk as in the case of G-Securities issued by Government of India – means no capital charge for accumulating such assets.

Moreover, these bonds issued by states invariably carry a premium (on coupon) over that of G-Secs issued by Government of India and should theoretically trigger higher demand from banks while building up SLR basket.

According to the latest statistics, state development bonds (SDLs) and the dated securities issued by Central Government (G-Secs) account for 41.6 per cent of the combined market borrowings by the states and Central Governments in 2017-18 compared with 24.1 per cent in 2012-13.


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