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What are State Development Loans (SDLs)?

Governments raise / borrow funds by issuing government securities to finance a variety of projects and activities.

What is Government Security (G-Sec)?

Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. 

G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

What are the types of G-Secs?

Government securityTermIssued by
Treasury Bills (T-bills)Short-termCentral Government
Cash Management Bills (CMBs)Short-termCentral Government
Bonds or Dated G-SecsLong-termCentral Government
State Development Loans (SDLs)Long-termState Governments

What are State Development Loans (SDLs)?

State Governments also raise loans from the market which are called State Development Loans (SDLs).

What are the features of SDLs?

  • SDLs are dated (long-term) securities issued by State Government. 
  • Interest on SDLs is serviced at half-yearly intervals and the principal is repaid on the maturity date. 
  • SDLs qualify for Statutory Liquidity Ratio (SLR) purpose.
  • SDLs are eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from Reserve Bank of India (RBI) under the Liquidity Adjustment Facility (LAF) and special repo conducted under market repo by Clearing Corporation of India Limited (CCIL).

Auction and Settlement of SDLs

  • RBI, in consultation with State Governments announces, the indicative quantum of borrowing on a quarterly basis.
  • The auctions of SDLs are held every Tuesday. 
  • The minimum bid amount for SDLs is ₹10,000 and in multiples thereof.
  • Bids can be places by investors under both Competitive Bidding and Non- Competitive Bidding. 10% of the notified amount is reserved for retail investors under non-competitive bidding subject to a maximum limit of 1% of the notified amount for a single bid per stock.
  • Settlement for the SDLs auctioned is made on T+1 day i.e. on the working day following the trade day. On the settlement date, the fund accounts of the participants are debited by their respective consideration amounts and their securities accounts are credited with the amount of securities allotted to them. 

Valuation of SDLs

SDLs were previously valued by marking it up by a spread of 25 basis points on the Central G-Sec yield of the corresponding residual maturity. 

RBI decided that SDLs shall be valued in a manner which would objectively reflect their fair value based on observed prices / yields and Financial Benchmarks India Pvt. Ltd. (FBIL) shall make available prices for valuation of SDLs based on the above principles. 


References

Reserve Bank of India. (2020, April 01). 'Government Securities Market in India – A Primer'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=79


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