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Loan waivers have no impact on the cost of borrowing for states

Loan waivers do not impact the borrowing cost of states. Usually the rate at which the state government borrows is lower than the central government rates.

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Loan waivers do not impact the borrowing cost of states. Usually the rate at which the state government borrows is lower than the central government rates.

“Interestingly, the data also indicate that farm loan waiver has no impact on the yield of these States, as should have been the case.

In FY’18 till October, Maharashtra, Uttar Pradesh is borrowing at a low yield rate than the median range of 7.37% of all the States,” according a study undertaken by SBI ecowrap said in its report. 

 States borrow from market through State Development Loans (SDLs) to fund their fiscal deficit. Though, these bonds are backed by Government guarantee but the yields on SDLs varies from States to States and largely remain above the G-secs yield (average yield differential of around 56 bps during Apr’11 – Nov’17). This difference in yield across States attract a lot of debate among researchers and policy makers on factors which are responsible in determining it. Yields are indirectly proportional to the earnings. Higher the yields lower the earnings. 

 Recently five States Maharashtra, Punjab, Uttar Pradesh and Karnataka have waived farm loan. As it is quite expected that, when these States will raise their market borrowing through SDLs, the yield will higher comparing to States who has not announced farm loan. Interestingly, our finding suggest that, farm loan waiver has no impact on the yield of these States. IN FY’18 till 14th November, the data suggest that Maharashtra, who have recently waived farm loan is borrowing at a low yield rate than the median range of 7.43%. 

The state wise data on SDLs borrowing indicate that, the bigger States like Maharashtra, Tamil Nadu, Uttar Pradesh, Gujarat, West Bengal, Andhra Pradesh and Karnataka borrow more than 60% of the market borrowings through SDLs. North Eastern States borrow the least, perhaps because of more central assistance. Karnataka, Bihar,Uttarakhand and Jharkhand are the States whose market borrowing has increased rapidly over the years. 

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