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DEBT MANAGEMENT Kiran Babu Sinto K A Syam Prasad Vishnu Menon Sreelatha S Nair SOP 18 SOP 18, MBA 11-13 B

Debt Management

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Page 1: Debt Management

SOP 18, MBA 11-13 B

DEBT MANAGEMENT

Kiran Babu Sinto K A Syam Prasad Vishnu Menon Sreelatha S

Nair

SOP 18

Page 2: Debt Management

SOP GROUP : 18MBA 11- 13 BATCH : B

DC SCHOOL OF MANAGEMENT & TECHNOLOGY (DCSMAT)

VAGAMON, IDUKKI, KERALA

Page 3: Debt Management

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

Page 4: Debt Management

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

Page 5: Debt Management

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

Page 6: Debt Management

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

Page 7: Debt Management

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.

Page 8: Debt Management

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.

Page 9: Debt Management

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

Page 10: Debt Management

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

Page 11: Debt Management

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

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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

Page 13: Debt Management

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.

Page 14: Debt Management

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.

Page 15: Debt Management

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

Page 16: Debt Management

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.

Page 17: Debt Management

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

Page 18: Debt Management

SOP 18, MBA 11-13 B

Page 19: Debt Management

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

Page 20: Debt Management

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

Page 21: Debt Management

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.

Page 22: Debt Management

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

Page 23: Debt Management

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

Page 24: Debt Management

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.

Page 25: Debt Management

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

Page 26: Debt Management

SOP 18, MBA 11-13 B

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SOP 18, MBA 11-13 B

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SOP 18, MBA 11-13 B

Page 29: Debt Management

SOP 18, MBA 11-13 B

COCNCEPTS OF FINANCING DEBT MANAGEMENT

TWO CONCEPTS: PAY AS YOU USE FINANCE PAY AS YOU GO FINANCE

Page 30: Debt Management

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

Page 31: Debt Management

SOP 18, MBA 11-13 B

BUDGET STATEMENT CURRENT BUDGET AND CAPITAL

BUDGET ACCOUNTS

CURRENT BUDGET – TAX FINANCED

CAPITAL BUDGET – LOAN FINANCED

Page 32: Debt Management

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

Page 33: Debt Management

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

Page 34: Debt Management

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

Page 35: Debt 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.

Page 36: Debt Management

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

Page 37: Debt Management

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

Page 38: Debt Management

SOP 18, MBA 11-13 B

LIQUIDITY MINIMUM INTEREST COST PRINCIPLE –

Not adequate GOVERNMENT CONTROL OVER MONEY

SUPPLY DEBT MONETISATION Lengthening the debt

Page 39: Debt Management

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

Page 40: Debt Management

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

Page 41: Debt Management

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’

Page 42: Debt Management

SOP 18, MBA 11-13 B

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SOP 18, MBA 11-13 B

ANY Questions???