In a move that will reduce the interest burden of states, the government is planning to pass loans extended by multilateral agencies like World Bank and ADB directly on to states as against the present practice of providing it in the form of grants and loans at a higher interest rate.
However, states would have to bear the risks arising out of fluctuations in foreign exchange rates during the tenor of the loans.
The finance ministry is working out the modalities following a green signal from the Planning Commission, official sources said on Friday.
Considering the growing debt burden of states, the plan panel has given in principle approval to the 'back-to-back' transfer of funds from external agencies to states, which would bring down the interest outgo of states to 5-7 per cent as against the 9 per cent interest on Central loans to states.
The move would also ensure the Centre passing on the external loans to states without any loss on account of exchange rate risks or gain in interest rate differential.
Under the proposal, all external grants and loans received by the Centre on behalf of the states would pass on to the states as 100 per cent grant or loan as against the current practise of 70 per cent loan and 30 per cent grant.
States would get the same maturity, moratorium and amortisation schedule that the Centre gets from external lender.
Once the proposal is implemented, the states would gain substantially from lower interest payments as current IDA loans carry only 0.75 per cent service charge and no interest, while IBRD and ADB loans carry interest of Libor plus 0.3-0.6 per cent.
Regarding the foreign n exchange risk that the states would face in case of back-to-back transfer of external funds, the proposal has outlined two options.
The first is creating a special reserve by transferring full or part of the interest rate savings to this special reserve.
The second option is providing a foreign exchange depreciation cover to the states by charging an agreed percentage of principal over the entire loan period to create a foreign exchange fluctuation fund to pay for the difference.
The Centre would continue to avail itself of all forms of external assistance and all projects would be routed through Department of Economic Affairs.
In case of special category states, funds would continue to be transferred as 10 per cent loan and 90 per cent grant and the externally aided projects of states would get delinked from the scheme of the Central Assistance to states Plan.
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