Debt management agency could run into roadblocks

The possibility of the Public Debt Management Agency (PDMA) managing their debt is unlikely to go down well with States ruled by political parties opposed to the ruling dispensation at the Centre.

Reason: the proposed Agency will be under the general supervision of the Central Government. Currently, the Reserve Bank of India manages the debt of both the Centre and the States. Stakeholders generally perceive it as a neutral institution.

“Once the Public Debt Management Agency (PDMA) comes into being, the States, where political parties opposed to the Central Government are in power, may be wary of the Agency’s neutrality as it will be viewed as an extended arm of the Centre,” said the treasury head of a State-owned bank.

The NDA government, which has been talking about co-operative federalism, may have a lot of convincing to do to get States’ buy-in on the PMDA.

The proposal to set up PMDA was mentioned in the Finance Bill for 2015-16. The objective of the PDMA is to minimise the cost of raising and servicing public debt over the long-term within an acceptable level of risk at all times.

While the chapter relating to PDMA in the Finance Bill is not explicit on State Government debt, there are indications that its ambit will cover State debt also. For example, the Bill states that the agency can establish its offices or branches at any other place in or outside India.

Treasury market experts deduce that there is no need for it to establish offices at any other place in India if the PDMA was to restrict its jurisdiction to purchase, re-issue and trade in Government securities, manage the contingent liabilities of the Centre, and undertake cash management for the Central Government.

Once the management of the central government debt goes out of its hand, it is unlikely that RBI will want to manage the State debt, said another banker.

Difficulties that banks may face due to the longer settlement cycle for securities traded on stock exchanges could be the other sticking point.

The move to issue all Government Securities in dematerialised form, according to the Finance Bill, will imply that all transactions, including repo and reverse repo and auction of G-Secs, in these securities will move to a stock exchange platform, where transactions are settled on “T+2” basis.

A T+2 settlement cycle means that exchange of monies and securities between the buyers and sellers respectively takes place on the second business day after the trade day. Treasury market experts point out a T+2 settlement cycle is too long a period in the money markets where liquidity and interest rates change dynamically.

In repo transaction, a bank borrows funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price, which includes interest for the funds borrowed.

Reverse repo transaction involves lending funds against purchase of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price, which includes interest for the funds lent.

In the current system, commercial banks, scheduled urban co-operative banks, Primary Dealers, insurance companies and provident funds maintain both funds account (current account) and securities accounts (Securities General Ledger account) with RBI. This facilitates seamless trading, clearing and settlement.

The jury is still out whether the PDMA will replicate the current seamless transactions in repo/ reverse repo to lend comfort to banks about liquidity.