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SOP 18, MBA 11-13 B
DEBT MANAGEMENT
Kiran Babu Sinto K A Syam Prasad Vishnu Menon Sreelatha S
Nair
SOP 18
SOP GROUP : 18MBA 11- 13 BATCH : B
DC SCHOOL OF MANAGEMENT & TECHNOLOGY (DCSMAT)
VAGAMON, IDUKKI, KERALA
PUBLIC DEBT MANAGEMENT - DEFINITION “ Public debt management is concerned
with the decisions of forms of public debt, in terms of which new bonds are sold, maturing debts are redeemed or refunded, the proportion in which different forms of public debt should be issued, the pattern of maturities of debt and its ownership etc”
- Prof. Abbos
SOP 18, MBA 11-13 B
SOP 18, MBA 11-13 B
INTRODUCTION
Public Debt is the debt borrowed by government through various methods from the public
R.B.I. Formed Internal Debt Management Cell in October 01, 1992
Formation of debt policy that seeks to achieve certain objectives & the implementation of such a policy
Methods adopted by the government through the processing of FLOATING, REFUNDING & REPAYMENT of public debt
Management of public debt by Govt to avoid inflationary or deflationary effect on the economy
SOP 18, MBA 11-13 B
FUNCTIONS OF PUBLIC DEBT MANAGEMENT
Manages:- The form of issue of public securities The form of refund of public debt The proportion of different types of debt
to be issued The pattern & structure of interest rate
on securities Authoritative decision making in public
debt
SOP 18, MBA 11-13 B
RELEVANCE OF PUBLIC DEBT MANAGEMENT
Increase or decrease of public debt has effect on the working of any economy
Public debt influences the formation of the economic policy of the country
Utilization of public debt will foster or hamper the changes in economic development
Necessary to know the conditions which are essential for the implementation of planning policies
Gives knowledge about the actual amount required for a certain policy
SOP 18, MBA 11-13 B
OBJECTIVES OF PUBLIC DEBT MANAGEMENT
To maintain government’s economic policy:- Helps to raise the purchasing power and effective demand in depression period & vice-versa during inflation
Providing sufficient funds to economy during war period.
To strengthen the money market of the country
Beneficial for the activities of government
Should not have any adverse effect on the economic condition of the country.
SOP 18, MBA 11-13 B
PRINCIPLES OF PUBLIC DEBT MANAGEMENT
According to Philip E Taylor, three general principles of debt management can be identified as:
a. The policies pursued must be able to extract from the public without undue coercion.
b. The extraction of loanable funds from the market and its repayment when it is inconvenient to do so.
c. It should be so placed as to minimize the need to enter the market when it is inconvenient to do so.
SOP 18, MBA 11-13 B
PRINCIPLES OF DEBT MANAGEMENT
Minimum interest cost of servicing public debt.
Satisfaction of the investors. Funding the short term debt into long
term debt. Public debt must be in co-ordination
with fiscal and monetary policies. Proper adjustment of maturity
SOP 18, MBA 11-13 B
DEBT MANAGEMENT AND OPTIMAL MATURITY STRUCTURE Low interest obligation. Preference pattern of investors. Optimal maturity structure. Monetization of debt. Maintenance of interest rate Anti- cyclical use of debt
SOP 18, MBA 11-13 B
TYPES OF PUBLIC DEBT Productive debt & Unproductive debt Voluntary debt & Compulsory debt Internal debt & External debt Short term debt, Medium term debt &
Long term debt Redeemable debt & Irredeemable debt Funded debts and Unfunded debts
SOP 18, MBA 11-13 B
PRODUCTIVE DEBT Public debt when raised productive purposes
and used to add the productive capacity of the economy
Public debts which are fully covered by assets of equal or greater value.
Self liquidating in nature Provides a continuous flow of income to
Govt. The interest and principal amount is
generally paid out of income earned by the government from the production projects
E.g. Railway projects, Irrigation projects, Power generation Projects etc
SOP 18, MBA 11-13 B
UNPRODUCTIVE DEBT Public debt which do not add to the
productive capacity of the economy Public debt used for war, famine relief,
social services, etc. is considered as unproductive debt
Not necessarily self liquidating Burden to the government Repaid generally through additional
taxes.
SOP 18, MBA 11-13 B
VOLUNTARY DEBT Loans are provided by the members of
the public on voluntary basis Voluntary in nature Obtained in the form of market loans,
bonds, etc. The Government makes an
announcement in the media to obtain such loans
The rate of interest is normally higher than that of compulsory debt, in order to induce the people to provide loans to the government.
SOP 18, MBA 11-13 B
COMPULSORY DEBT Rare phenomenon in modern public
finance Raised in special situations like war or
crisis Public are compelled to give debt The rate of interest on such loans may
be low These loans are similar to tax, the only
difference is that loans are rapid but tax is not.
E.g. Compulsory deposit scheme In India
SOP 18, MBA 11-13 B
INTERNAL DEBT Funds borrowed by the government from
various sources within the country. Include individuals, banks, business firms, and
others. Instrument include market loans, bonds,
treasury bills, ways and means advances, etc. Repayable only in domestic currency It imply a redistribution of income and wealth
within the country & therefore it has no direct money burden.
The internal debt of the Central Government of India has increased from Rs.1.54 lakh crore in 1990-91 to Rs.13.4 lakh crore in 2005-06.
SOP 18, MBA 11-13 B
EXTERNAL DEBT Debts raised from foreign countries or
international institutions Debts repayable in foreign currencies Voluntary in nature It involves transfer of resources from
foreign countries to the domestic country Repayment of interest and principal
amount through transfer of resources takes place in the reverse direction.
Help to take up various developmental programmes in developing and underdeveloped countries
SOP 18, MBA 11-13 B
SOP 18, MBA 11-13 B
SHORT TERM DEBT Short term debt matures within a
duration of 3 to 9 months Low rate of interest E.g. Treasury bills with maturity period
of 91 days and 181 days
SOP 18, MBA 11-13 B
MEDIUM TERM DEBT Maturity period of above one year and
up to 5 years Borrow for medium term needs,
development & non development activities
E.g. Different types of market loans
SOP 18, MBA 11-13 B
LONG TERM DEBT Maturity period of 10 years and above High rate of interest Raised for developmental programmes
and to meet other long term needs of public authorities.
SOP 18, MBA 11-13 B
FUNDED DEBT Repayable only after a long period of time
of 30 years or more Funded debt has an obligation to pay
fixed sum of interest subject to an option to the government to repay the principal
The government may repay it even before the maturity if market conditions are favorable.
Undertaken for meeting more permanent needs, like building up economic & industrial infrastructure
Establishes a separate fund for repaying
SOP 18, MBA 11-13 B
UNFUNDED DEBT Debts which are incurred to meet
temporary needs of the government Maturity period less than one year Unfunded debt has an obligation to pay
at due date with interest. Generally low rate of interest
SOP 18, MBA 11-13 B
REDEEMABLE DEBT Government promises to pay off these
debt at some future date It can be redeemed and have a maturity
period The government has to make
arrangement to repay the principal & the interest on the due date.
SOP 18, MBA 11-13 B
IRREDEEMABLE DEBT Debts with no maturity period Govt. may pay interest regularly, but no
repayment date of the principle amount is fixed
It is also a perpetual debt Usually government does not resort to
such borrowings
SOP 18, MBA 11-13 B
SOP 18, MBA 11-13 B
SOP 18, MBA 11-13 B
SOP 18, MBA 11-13 B
COCNCEPTS OF FINANCING DEBT MANAGEMENT
TWO CONCEPTS: PAY AS YOU USE FINANCE PAY AS YOU GO FINANCE
SOP 18, MBA 11-13 B
PAY- AS -YOU USE FINANCE
• SATISFACTION OF SOCIAL WANTS AND FUTURE BENEFITS
• COST PAYMENTS ARE MADE OVER THE YEARS
• CAPITAL OUTLAYS FOR CONTINUOUS AND DISCONTINUOUS PROJECTS
• RELEASE OF RESOURCES MAY BE EITHER FROM PRESENT CONSUMPTION OR FROM CAPITAL FORMATION
• LOAN FINANCE
SOP 18, MBA 11-13 B
BUDGET STATEMENT CURRENT BUDGET AND CAPITAL
BUDGET ACCOUNTS
CURRENT BUDGET – TAX FINANCED
CAPITAL BUDGET – LOAN FINANCED
SOP 18, MBA 11-13 B
BUDGET FOR PAY AS YOU USE FINANCE
CURRENT BUDGET
CAPITAL BUDGET
RECEIPTS EXPENDITURES RECEIPTS EXPENDITURE
a) TAXES
b) OTHERS
a)Expenditure for current benefits
b)Interest amount
a)Sale of asset
b)Net borrowings
a)Expenditure for future benefits
b)Net increase in provision for future benefits
c)Other current expenditures
c)Net increase in provisions for future benefits
SOP 18, MBA 11-13 B
PAY- AS-YOU GO FINANCE CONTRIBUTORY AND QUID PRO
BASIS
PROHIBITS BORROWING
FOCUSSES ON LIMITING CURRENT EXPENDITURES TO CURRENT RECEIPTS
OBSERVED AS AN IDEAL FISCAL POLICY BY LOCAL GOVERNMENTS
SOP 18, MBA 11-13 B
DEBT MANAGEMENT AND MONETARY POLICY SECURING A SATISFACTION COORDINATION
BETWEEN TREASURY’S DEBT MANAGEMENT AND CENTRAL BANK’S MONETARY POLICY
THREE APPROACHES: *POSITIVE MANAGEMENT
*NEUTRAL MANAGEMENT*NEGATIVE MANAGEMENT
SOP 18, MBA 11-13 B
POSITIVE MANAGEMENT ACCORDING TO THIS CONCEPT:
DEBT MANAGEMENT POLICY CREATES STABILISING OR DESTABILISING EFFECT
PUTS RESTRAINT ON ADDITIONAL CREDITLONG TERM OBLIGATIONS ARE CHANGED
INTO SHORT TERM BILLSDURING BOOM PERIODS, INTEREST RATES
RISE AND GOVT. IS REQUIRED TO ENTER THE LONG TERM MARKET.
SOP 18, MBA 11-13 B
NEUTRAL MANAGEMENT
DOES’NT PROMOTE STABILISATION THROUGH DEBT MANAGEMENT
STABILISATION IS LEFT TO CENTRAL BANK AND DEBT MANAGEMENT BY TREASURY REMAINS NEUTRAL
DIFFICULT FOR THE GOVT. TO FOLLOW NEUTRALITY
DEBT TO BE MAINTAINED IN THE FORM THAT EXISTS CURRENTLY
SOP 18, MBA 11-13 B
NEGATIVE MANAGEMENT MINIMISING INTEREST COST ON
NATIONAL DEBT TAKES ADVANTAGE OF MARKET
CONDITIONS ENTERS LONG TERM MARKET DURING
THE TIME OF RECESSION UNDESIRABLE FROM ALL POINTS OF
VIEW
SOP 18, MBA 11-13 B
LIQUIDITY MINIMUM INTEREST COST PRINCIPLE –
Not adequate GOVERNMENT CONTROL OVER MONEY
SUPPLY DEBT MONETISATION Lengthening the debt
SOP 18, MBA 11-13 B
MANAGEMENT OF FOREIGN DEBT
Debt managers understand a clear understanding of macro-economic developments
Frames fiscal and monetary policy Imf- 1/5th of the developing countries
were explicitly managing their debt systematically
SOP 18, MBA 11-13 B
TWO IMPORTANT ISSUES RELATING TO MANAGEMENT OF FOREIGN DEBT
Extent of govt. regulation of foreign debt
Appropriate composition of debt
SOP 18, MBA 11-13 B
MANAGING THE LEVEL OF FOREIGN DEBT
In most countries, public sector itself is the largest borrower
Prices of goods produced by private companies may be destroyed by Govt. policies
‘Amount of public debt depends on the
growth rate of the economy and its export performance of the country’
SOP 18, MBA 11-13 B
SOP 18, MBA 11-13 B
ANY Questions???