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State Development Loans (SDLs) Explained
July 31, 2017
State Development Loans or SDLs are government securities that are issued by the states for meeting their budgetary requirements. SDLs are similar to the date securities that are issued by the central government, only they are issued by the states for their individual borrowing needs.
While the states can borrow any amount of money by the way of issuing SDLs, there is a set threshold for the same.
SDL Market
Trading of SDL is done exactly like how the government bond market works. They are traded in the voice market i.e. Negotiated Dealing System (NDS) and traded on NDS-OM (NDS-Order Matching).
The typical investors interested in SLDs are insurance companies, banks, mutual funds companies, provident and pension funds, etc.
SDLs qualify as approved investments for insurance companies, trusts, and pension funds. They also qualify as Statutory Liquidity Ratio (SLR) security and repo in Liquidity Adjustment Facility (LAF) RBI auction.
SDLs usually offer higher yields in comparison to the government bonds. However, they have a poor liquidity and are traded as much as 5% less than the government bond volumes.
Insurance companies and banks invest in SLDs primarily for holding and not for trading.
Key Points About SLDs:
- SLDs are similar to government securities in a way that they don’t have any credit risk. Their risk weight is zero and banks don’t need to keep any capital for investing in them.
- The interest rate of SDLs is decided at the time of auction. However, it’s always higher than that of the G-secs, even if slightly.
- Apart from domestic banks and insurance companies, etc. Foreign Portfolio Investors (FPIs) are also allowed to invest in SDLs as much as 2% of the SDLs available in the market.
