Sources in the Reserve Bank said that the loan is likely to carry a maturity of 10 years. However, this could not be confirmed till late evening.

Money market dealers said that Punjab did not raise money in the last round when 15 states entered with a 10-year state government loan maturing in 2008 offering a coupon of 12.50 per cent on December 28. The loans received an oversubscription worth Rs 1,204.95 crore for a notified amount of Rs 1,612.06 crore.

According to dealers, Punjab will be in a position to raise the money at 12.40-12.45 per cent for a 10-year paper. "There are a number of strong banks in the state like Punjab National Bank, State Bank of Patiala, Punjab & Sind Bank and private sector Bank ofPunjab. The issue will sail through," a dealer with a primary dealer firm said.

The Reserve Bank has been trying to get state governments to enter the debt market on their own for quite sometime. But the proposal hit a roadblock after the weaker states objected to it. "The states with weaker finances opposed the move as they would not be able to raise money at fine rates," a source in RBI said.

The proposal is set to see the light of the day after the central government decided to give the go-ahead to the RBI to allow Punjab to tap the debt market on its own.

The immediate provocation seems be worsening fiscal positions of the states taking the combined fiscal deficit of the centre and the states beyond 8 per cent of the GDP.

Analysts said that states like Punjab, Gujarat, Maharashtra and Andhra Predesh were in a position to raise funds on their own while Bihar, Uttar Pradesh, Orissa and Rajasthan need to be clubbed with the stronger states in order to garner money at fine rates.

According to moneymarket dealers, the Punjab-based provident funds as well as insurance firms and financial institutions may subscribe to the issue. The state had in the previous two rounds opted to borrow Rs 100 crore each and on both occasions the issues were oversubscribed. The exact amount of oversubscription was not available.

INSIGHT
Pleasant break from past fund-raising

The move by the Punjab government is a pleasant break from past fund raising, where state governments went in en masse, irrespective of the credit-worthiness of the individual states. Hence, the financially weaker states rode on the strength of the stronger states obfuscating interest rates and penalising the better-managed states. This is a very good development as the RBI, in keeping with its recent pro-active reformist role, has decided that this is a good way to enforce fiscal discipline among states.