What are State Development Loans (SDLs)?

State Development Loans (SDLs) are dated securities issued by states for meeting their market borrowings requirements. In effect, the SDL are similar to the dated securities issued by the central government. Purpose of issuing State Development Loans is to meet the budgetary needs of state governments. Each state can borrow upto a set limit through State Development Loans.

SDL securities are eligible securities for SLR and LAF of the RBI

The SDL securities issued by states are credible collateral for meeting the SLR requirements of banks as well as a collateral for availing liquidity under the RBI’s LAF including the repo.

SDL as a market based borrowing arrangement for states

One remarkable feature of SDL is that it is a market oriented instrument for states to mobilise funds from the open market. Higher the fiscal strength of a state, lower will be the interest rate (yield) it has to pay for the SDL borrowings.

RBI facilitates the issue of State Development Loans securities in the market. SDL securities are considered as superior to loans mobilized or bonds issued by state government entities. The RBI as the facilitator to the issue of SDLs, has the power to make repayments to SDLs out of the central government allocation to states.

Issue and marketability of SDLs

SDLs are basically securities and they are auctioned by the RBI through the Negotiated Dealing System (NDS) which is dedicated electronic trading system for government securities and other instruments. RBI holds SDL auctions once a fortnight.

The SDLs doesn’t have any credit risk and in this respect, they are similar to central government securities. This means that under the CRAR prudential norm, the risk weight of SDL is zero and banks need not keep any capital for investing in SDLs. Such a treatment and the higher yield (interest rate) of SDLs have encouraged banks to invest in them in recent years and states are hence able to meet their borrowing requirements.

Trading of SDLs

SDL's are traded electronically on the RBI managed NDS-OM (Negotiated Dealing System-Order Matching) and traded in the voice market (NDS).

Interest rate or yield on SDLs

The rate of interest or yield of SDL securities are determined through auction. Still the interest rate will be slightly higher than that of Central Government securities (G-secs) of matching tenure.

Who buys SDLs?

The investors in SDL are basically commercial banks, mutual funds, insurance companies who are attracted by the slightly higher interest rate of SDL (compared to central government securities). In 2015, Government allowed Foreign Portfolio Investors (FPIs) to buy SDLs up to 2% of outstanding SDLs in the market.