State Government Introduced UDAY Bonds Worth Rs. 1565 Crore But With Little Crunch In Interest Rates

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On Wednesday morning, Piyush Goyal (power minister) made an important announcement about UDAY bonds from Rajasthan government. These bonds are at the rate of 8.39% which is slightly on lower bars than 8.55%. On coming March 8th, bonds worth Rs. 1000 crore are to be auctioned to raise the fund. These bonds are under Ujwal Discom Assurance Yojna  scheme to revamp the losses incurred in discom (power distribution companies). Resultantly, a lower amount of interest will be paid than the usual state government interest on bonds.

Under this scheme, states will take cover of 75%  of the distributor’s debts. With five years of suspension period for the repayment, it will include only the amount of interest pays in fiscal deficit of states. According to the figures of September 2015, a sum of Rs. 4.3 trillion was outstanding in the accounts of discoms.

One of the bankers mentioned, “Discom bond issuance will now begin and UP, Haryana and Bihar are already in talks with banks”.

On Tuesday, Rajasthan government mentioned of issuing bonds worth of Rs. 28,500 crore in exchange of three power discoms in UDAY schemes.

On February 27th, RBI made clear indication that it would try to allow UDAY bonds under HTM. One of the banker mentioned that, “This is a big flaw in these bonds which the RBI needs to check”. Apart from this, banks will need to take hit of almost 3-4% because the bonds own very low yielding value.

Banks are quite hopeful regarding the buyers of the UDAY bonds. One of the banker said, “These bonds offer a good yield and are state-backed. Long-term investors like insurance companies will be very much interested”.

Nilesh Shah (MD of Kotak Mahindra Asset Management Co.) mentioned that, “These are not SLR bonds. There is already an excess SLR in the system. To that extent, yes these will impact the demand from banks. But these bonds also offer less yield than SDLs and g-secs. So who will buy these bonds? By keeping the yield of UDAY bonds below SDL, the government has ensured that these don’t affect the demand for government bonds and SDLs. This is a non-starter in terms of trading and banks would end up putting these bonds in HTM”.

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