THIRUVANANTHAPURAM: Extending the repayment period has become a key strategy for Kerala – especially in the case of its substantial market borrowings, which now account for more than half of the state’s total debt.
But the comfort may be temporary. “By pushing liabilities decades into the future, Kerala risks creating a debt overhang that could crowd out future spending, especially if interest rates rise or economic growth slows,” a credit expert told businessbenchmark.news.
The trend has continued during the current financial year too for Kerala, issuing too long bonds or state development loans (SDLs) to raise funds from the market. Kerala borrowed Rs2000 crore through the market borrowing route on May 27 by issuing 26-year SDLs.
This was followed by the issue of two SDLs of 12 years and 37 years for Rs1000 crore and Rs2000 crore respectively. The latest one was issued on June 24 with a tenure of 27 years to raise Rs2000 crore.
Kerala has borrowed on the longest timeline among Indian states, with the average tenure of its State Development Loans (SDLs) nearing 15 years – almost double the national average. But it’s not just the length of the loans that stands out; it’s the urgency behind them.
Kerala appears to be using the long end of the bond market to buy time amid mounting near-term repayment challenges.
Kerala’s total debt stood at Rs4.22 lakh crore as of January 31, 2025, according to data tabled in the Assembly. It jumped to Rs4.5 lakh crore by end-March following the additional borrowings during the fiscal. With another Rs45,000 crore sanctioned for FY2025–26 – and substantial off-budget liabilities – the state’s debt pile could near the Rs6-lakh-crore-mark by late 2026.
Too long tenures
Unlike some peers that use long-term SDLs as tools for asset-liability matching or capital project financing, Kerala is increasingly turning to these instruments as a fiscal survival strategy, according to public finance experts.
According to public borrowing records and market data, the state has been issuing SDLs with tenures as long as 30 to 40 years, pushing repayment obligations deep into the future. This allows the state to ease immediate pressure on its exchequer at a time when revenue constraints, high committed expenditures, and limited central support are straining its liquidity.
Data from the Reserve Bank of India (RBI) shows a clear national trend towards longer SDL maturities, with the average across all states rising from 6.7 years in 2019 to 8.5 years by March 2024.
But Kerala is a clear outlier. Its 15-year average tenure and repeated issuances of ultra-long bonds suggest that the primary goal is not simply cost efficiency or project-aligned financing, but rather an urgent need to defer repayments and reduce rollover risk in the near term.
The state’s fiscal context supports this reading. Kerala has long run a structural revenue deficit, with over 70 per cent of its revenue expenditure locked in salaries, pensions, interest payments and welfare subsidies.
Pandemic-era spending, a weak recovery in tourism, and reduced GST compensation flows have further constrained its revenue base. In this environment, refinancing short-term debt or rolling over maturing bonds every few years would stretch the budget to breaking point.
“By locking into longer-tenure SDLs, Kerala is creating a financial buffer – postponing repayment obligations for one or two decades,” a former Kerala Finance Department top official told businessbenchmark.news.
She said this frees up space to meet essential spending needs now and reduces the pressure to refinance large chunks of debt every few years.
Long-term bonds in demand
The strategy also aligns well with investor appetite. Long-term bonds are in high demand among insurance companies and pension funds, which need long-duration assets to match their liability profiles.
Sovereign-backed SDLs, with no default risk, are ideal for such buyers—particularly in a volatile interest rate environment.
With nearly Rs17 lakh crore of SDL redemptions expected across Indian states between 2026 and 2030, a second wave of repayment stress is likely to hit mid-decade – and Kerala will be a key part of that equation.
Still, in the present, the math is clear: longer-term SDLs offer Kerala a lifeline. They help the state manage today’s cash flow struggles by borrowing tomorrow’s fiscal space.
While this may be financially expedient, it is also a warning signal – an acknowledgment that Kerala’s near-term fiscal position may be far more fragile than headline debt numbers suggest.
