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STATE DEVELOPMENT LOANS

What are State Development Loans?

State Development Loans (SDLs) are debt instruments issued by states for meeting their market borrowings requirements/budgetary needs of state governments.

Features of State Development Loans

More attractive than FD and bring in an element of safety.

BondsIndia Tip: Always study the financial health of a state before investing in SDL.

SDL securities are entitled securities for SLR and LAF of the RBI

The SDL securities issued by states are credible collateral which fulfills the SLR requirements of the banks and serve as collateral for getting liquidity under the RBI’s LAF comprising the repo.

SDL as a market-based borrowing structure for states

One notable feature of SDL is that it is a market-linked instrument for states to utilise funds from the open market. The higher the state’s fiscal strength, the interest rate(yield) will be lower it has to pay for the SDL borrowings.

RBI promotes the issue of State Development Loans securities in the market. SDL securities are preferred superior to loans utilized or bonds issued by state government entities. The RBI has the contributor to the issue of SDLs, has the authority of making repayments to SDls out of the central government disbursement to states.

SDL as a market-based borrowing structure for states

One notable feature of SDL is that it is a market-linked instrument for states to utilise funds from the open market. The higher the state’s fiscal strength, the interest rate(yield) will be lower it has to pay for the SDL borrowings.

RBI promotes the issue of State Development Loans securities in the market. SDL securities are preferred superior to loans utilized or bonds issued by state government entities. The RBI has the contributor to the issue of SDLs, has the authority of making repayments to SDls out of the central government disbursement to states.

SDLs Issue and marketability

SDLs securities are basically auctioned by the RBI via the e-Kuber portal which is entirely a dedicated online auction system for government securities and other instruments. SDL auctions are kept on hold by RBI once in a fortnight.

There is no credit risk on SDLs in this respect, they are identical to central government securities. This means that under the CRAR prudential rules, the SDL’s risk weight is zero and banks are not required to employ capital for investing in SDLs. Such specification and the higher yield(interest) of SDLs have promoted banks for investing in them in recent years and states are however be able to fulfill their borrowing obligations.

SDLs trading mechanism

The trading of SDLs is done through electronic mode on the RBI managed NDS-OM(Negotiated Dealing System-Order Matching) and is tradeable in the voice market (NDS).

SDLs interest rate or yield

The interest rate or yield of SDL securities is ascertained through auction. Still, the interest rate will be comparatively on a higher side than that of the Central government securities(G-secs) of similar tenure.

Who buys SDLs?

SDLs are considered basically by mutual funds, commercial banks, insurance companies that wants to avail of the slighter higher side of the SDL’s interest rate (as opposed to the central government securities). In 2015, Government permitted Foreign Portfolio Investors (FPIs) for buying SDLs of up to 2% of outstanding SDLs in the market.

Top Issuers
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Government of Uttar Pradesh

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Government of Punjab

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Government of Maharashtra

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Government of West Bengal

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Government of Kerala

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Government of Sikkim

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Government of Gujarat

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Government of Rajasthan

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Government of Tamil Nadu

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