As reported in The Financial Express, the Punjab government on Thursday took the lead in the transition to a market system for state government borrowings by announcing plans to raise Rs 60 crore through a 10-year paper auction on January 13 in the wholesale debt market.

The move sets in place a system wherein the state government's credit-worthiness will be determined by the market, analysts said. This will be the first time a state government has borrowed at market-determined rates.

Applications for the bonds will be received at the Reserve Bank of India's (RBI) Chandigarh office.

"The auction is the first of its kind for the state governments as they have been raising their market borrowings through conventional flotations with pre-determined couponrates," an RBI statement said.

Punjab is likely to be the trend-setter as a few other states are set to follow suit in this fiscal itself. Official sources said next in line could be the Andhra Pradesh government with the southern state weighing options to complete its remaining borrowings for the year at market rates.

Historically, the state governments have borrowed at pre-determined rates set by the Reserve Bank of India. With Punjab setting the ball rolling, credit ratings of individual state governments will play a crucial role in determining the cost of borrowings. Relatively stronger states like Maharashtra, Gujarat and Andhra Pradesh will be able to mop up funds at cheaper rates while Bihar may end up coughing up a higher price.

Credit rating agency Crisil has earlier this week downgraded Maharashtra from AA- to A+. This puts Maharashtra on a par with Gujarat which also enjoys A+ rating. Three other states that are being rated by Crisil are Andhra Pradesh (A), Goa (A-) and Orissa (BBB).

OnDecember 28, 15 state governments raised Rs 1,612 crore through 10-year bonds at a coupon of 12.50 per cent. Punjab had opted out of the issue of fixed coupon state loans.

The central government's borrowing rate for 10-year bonds in the current fiscal was 12.25 per cent.

The movement towards an auction system was first mooted by the Reserve Bank of India (RBI) in November, 1997, when it asked states to access the market on their own strengths. "State govermnments were offered a facility to raise 5 to 35 per cent of their market borrowing allocation in a flexible manner as regards timing, maturity and rate of interest," the RBI release said.