Benchmark Issuance Strategy (BIS) and State Development Loans: RBI’s New Borrowing Reform

What are State Development Loans?

• State Development Loans are dated securities (bonds) issued by State Governments through auctions conducted by the Reserve Bank of India on behalf of the states.

Key Features

• Issuer: State Development Loans are issued by individual State Governments, not by the Union Government, to meet their borrowing requirements.
  • For Example: The Government of Maharashtra or Tamil Nadu raises funds through SDL auctions conducted by the Reserve Bank of India.
• Purpose: SDLs are primarily used to finance developmental expenditure and bridge fiscal deficits of states.
  • States borrow through SDLs to fund infrastructure projects like rural roads under PMGSY, irrigation projects in Telangana, or health sector expansion such as new medical colleges.
• Tenure: SDLs are medium- to long-term debt instruments, typically ranging from 5 to 30 years, enabling states to plan long-term investments.
  • A state may issue a 10-year SDL to finance a highway project, aligning repayment with future revenue generation.
• Interest Rate: The interest rate on SDLs is market-determined through auctions and is generally higher than Central Government securities (G-Secs) due to relatively higher risk perception.
• Repayment Responsibility: The concerned State Government is solely responsible for repayment of principal and interest, which is serviced through its own revenues. There is no explicit sovereign guarantee from the Centre.
  • States like Punjab or Rajasthan repay SDL obligations through tax revenues (GST share, excise, etc.) and non-tax revenues.