State Development Loans (SDLs)

State Development Loans (SDLs)

State Governments also raise loans from the market. SDLs are dated securities issued through an auction similar to the auctions conducted for dated securities issued by the Central Government (see question 3 below). Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Like dated securities issued by the Central Government, SDLs issued by the State Governments qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF).

Why should one invest in Government securities?

Holding of cash in excess of the day-to-day needs of a bank does not give any return to it. Investment in gold has attendant problems in regard to appraising its purity, valuation, safe custody, etc. Investing in Government securities has the following advantages:

  • Besides providing a return in the form of coupons (interest), Government securities offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.

  • They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping.

  • Government securities are available in a wide range of maturities from 91 days to as long as 30 years to suit the duration of a bank's liabilities.

  • Government securities can be sold easily in the secondary market to meet cash requirements.

  • Government securities can also be used as collateral to borrow funds in the repo market.

  • The settlement system for trading in Government securities, which is based on Delivery versus Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.

  • Government security prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.

  • Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to hold Government securities as indicated below:

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