special purpose vehicle ( spv ) providing an autonomous source of finance for the governments. it mobilises small savings through post offices and banks and lends against special non - tradable securities issued by the states and the centre as per the proportion fixed by the latter. the loans have a maturity of 25 years with an initial moratorium of five years in the repayment of principal. one - twentieth of the amount is repaid every year beginning from the sixth year. the special securities currently carry a rate of interest of 9. 5 %, as fixed by the centre, resulting in a spread of around 1. 5 % for the centre. while repayments to the nssf are generally made out of fresh accretion, net outflows since 2007 - 08 have exposed the nssf to alm mismatches. open market borrowings the market - borrowing programme of the state governments ( as also borrowings by way of negotiated loans and central loans ) is finalised by the government of india and the planning commission, keeping in view the provisions of article 293 ( 3 ) of the constitution of india. once the government of india indicates, generally at the beginning of the fiscal, the size of state - wise net allocation of market borrowings to the reserve bank, the bank decides on the timing and volume of issues, taking into account the market and liquidity conditions and the cash needs of the states. debt management in 1990s in terms of the reserve bank of india act, 1934, the bank acts as the fiscal agent and the debt manager to the state governments by way of mutual agreement. accordingly, the rbi is the banker to 26 states while it is the debt manager to all the 28 states. during the 1990s, the reserve bank used to complete the combined borrowing programme of all the states generally in two or more tranches through issue of bonds with a pre - determined coupon and pre - notified amounts for each state ( traditional tranche method ). high statutory pre - emption in the form of statutory liquidity ratio ( slr ) and the small size of state government borrowings ensured the success of these primary issues. in 1997, state governments were given the option to enter the market individually to raise resources using the tap method or the auction method. in 1999, states began to adopt the auction method and some states were able to mobilise loans at competitive rates, whereas other states had to pay higher rates. the spreads in tap tranches were subsequently raised to around 50

##sitized the states about the fiscal risk associated with such guarantees, need for transparency with regard to the guarantee policies and the magnitude of guarantees. the reserve bank provided the forum in the form of state finance secretaries conference where the issues related to guarantees were discussed. further, the reserve bank provided the technical expertise and provided the secretariat to the various groups on state guarantees. pursuant to the recommendations of a technical committee, several states have since fixed a ceiling on guarantees to be issued by them. further, a group of state finance secretaries on the fiscal risk on state government guarantees ( 2002 ) underlined the importance of according appropriate risk weights in respect of devolvement of guarantees and suggested estimation of risk weighted guarantees so as to make adequate budgetary provisions for honouring these guarantees once they devolve on the states. since 2003, the reserve bank has been also organising workshops on the evaluation of fiscal risks of guarantees for the benefit of state government officials. the report of the fiscal responsibility legislation at the state level ( 2005 ) recommended fixing a limit on annual incremental risk - weighted guarantees in relation to their gsdp / total revenue receipts. many states have incorporated this recommendation in their frl although this was not mandated by the twfc for receiving debt relief. consequent to the improvement of the fiscal position of states, the record of honouring of guarantees by the state governments has significantly improved. guarantee redemption fund the reserve bank, in its capacity as a regulator of banks and financial institutions, issued a circular in 2003 to the effect that they should exercise due diligence and proper appraisal to ensure project viability, irrespective of the provision of state government guarantees. the reserve bank also circulated a draft scheme on guarantee redemption fund ( grf ) amongst the state governments for voluntary adoption. as on march 31, 2009 the aggregate investments of the nine state governments that have set up the grf amounted to rs. 30. 4 billion. vii. debt management in an era of fiscal consolidation with the implementation of the twfc ’ s recommendations, the year 2005 - 06 marked a watershed in the evolution of state finances and debt management. during 2005 - 06, 48. 5 per cent of the market borrowings were raised through the auction route as compared with 2. 3 per cent in 2004 - 05. the moderation in fiscal imbalances and enactment of fiscal responsibility legislation facilitated the smooth transition to the conduct of entire open market borrowings by the auction route since 2006 -