What are State Development Loans (SDLs) Bonds?

State Governments in India unlike individual citizens have their own budget. At times, the budget goes higher than the available revenue resulting in fiscal deficit. State Governments in such situation issue State Development Loans (SDLs) to fulfil their need for additional funds.

Each state is allowed to borrow money from investors but to a certain limit only. Thus, State Development Loans (SDLs) are debt instruments issued by states for meeting their market borrowings requirements/budgetary needs of state governments. It is also known as State Development Bonds.

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More About State Development Loans (SDLs)

BondsIndia Tip: “Always study the financial health of a state before investing in State Development bonds in the country.”

Why not learn what is state development loans in details? It might help expand your knowledge and make you familiar about the key terms used in the Indian financial market.

  • 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.

Features of State Development Loans

  • State Development Loans bonds are more attractive than FD and bring in an element of safety.
  • SDL securities are entitled securities for SLR and LAF of the RBI - The SDL securities issued by states are credible collateral which fulfills the he Statutory liquidity ratio (SLR) requirements of the banks and serve as collateral for getting liquidity under the RBI’s liquidity adjustment facility (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.

Why invest in State Development Loans securities?

State Development Loans securities serve as a good source of fixed income for many investors. The interest in State Development Loans securities is paid bi-annually to the State Development Loans securities holders in India.

The investment in State Development Loans securities is relatively safe and known to provide good returns.


Advantages of State Development Loans securities


Advantages of State Development Loans securities

Fixed Income Source

State Development Loans securities pay half-yearly interest to investors. Thus, the investment made in State Development Loans securities act as a fixed source of income for an investor.

Lesser Risks

State Development Loans securities in comparison to AAA Corporate bonds, have lesser risks. It also comes with the sovereign guarantee. The monitoring by the RBI and its power of repayment to SDL securities holder out of the central government fund allocation to states adds to its security.

Yield on SDLs

State Development Loans (SDLs) are known to provide an option for safe investment yielding higher interest. The percentage of yield sometime tend to decrease subject to certain conditions.

Who should invest in State Development Loans (SDLs)?

SDLs are considered basically by mutual funds, pension funds, provident 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).

Also, individual investors now can invest in State Development Loans (SDLs) securities. In 2015, Government permitted Foreign Portfolio Investors (FPIs) for buying SDLs of up to 2% of outstanding SDLs in the market.

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Frequently Asked Questions

State Development Loans (SDLs) securities have lesser risk. It provides you interest biannually and return of principal on maturity. Also, it has the sovereign guarantee feature.

SDLs bonds are considered a safe instrument for investment. It comes with a sovereign guarantee.

The decision of investing in SDL securities lies with you. Experts consider it a good option for investors in need for a fixed and additional source of income.

The amount of investment in SDL securities depends on your risk taking capacity and financial goals.

Before investing in a particular state issued State Development Loans (SDLs) securities it is better to check the financial condition of the state.

State Development Loans (SDLs) are issued by states to manage their need for revenue to fund their fiscal deficit.

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