Debt management
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Transcript of Debt management
PRESENTED BY,Dipu Thomas Joy
INTRODUCTION
DEBT MANAGEMENT:
Process of involving a designated third party
assisting a debtor with repayment of his/her debt
2 types of third party companies:-
Fee charges
Free or low cost services
IMPORTANCE OF DEBT MANAGEMENT
Helps the borrowers to manage the huge debts
It helps in :
-debt negotiation
-debt consolidation
-debt elimination
Helps in enhancing personal financial stability
Helps the debtors to remove the pressure from creditors
DEBT MANAGEMENT PLAN
A Debt Management Plan (DMP) is a method used in
various countries for paying personal
unsecured debt
DMP deal with only unsecured debt
It is offered by debt management companies
It relieves stress of payment
It can manage finance by using effective tips
PROS AND CONS OF DMPPROS-
It stops creditors callsReduces interest rates and
monthly paymentsFlexibility
Solution to Bankruptcy
CONS-
Fees and charges
Not acceptable to creditors
DMP cannot write-off the debtsSecured loans cannot be paid
by using DMP
PUBLIC DEBTDebt incurred by government in mobilizing savings of
the people in the form of loans which are to be repaid
at a future dare with interest
It can be both internal as well as external
It is an important source of income for government
It is mainly incurred for building up economic
infrastructure, for the govt to lend capital fund to private
sector and for meeting temporary as well as long term
deficits
PUBLIC DEBT MANAGEMENT
It is concerned with forms of public debt in terms of
which new bonds are sold, maturing debts are
redeemed or refunded, proportion in which different
types of public debt should be issued , the pattern of
maturities of debts & its ownership
In India, public debt management is coordinated
through the RBI
IMPORTANCE OF PUBLIC DEBT MANAGEMENT
Public debt policy place an important in formation of economic
policy of country
Increase or decrease of public debt affect the working of any
economy
It gives the knowledge of actual amount of requirements for
the implementation of certain policies.
It helps to know conditions which are essential for
implementation of planning policies
The way of utilization of public debt affects the economic
development of a nation
OBJECTIVES OF PUBLIC DEBT MANAGEMENT
Ensure the financing needs of the government
Minimize borrowing costs
Keep risks at an acceptable level
Support the development of domestic markets
It must serve the economic policy of the govt
In time of emergences, it should provide sufficient
funds t meet the requirement of economy
PRINCIPLES OF PUBLIC DEBT MANAGEMENT
Minimum interest cost of servicing public debt
Satisfaction of the investors
Funding the short term debt into long term debt
It must be in coordination with fiscal & monetary
policies
Proper adjustment of maturity
ELEMENTS OF PUBLIC DEBT MANAGEMENT
Refunding
Conversion
Surplus budget
Sinking fund
Terminable annuities
Additional taxation
Capital levy
Surplus balance of payments
TYPES OF PUBLIC DEBTPRODUCTIVE DEBT & UNPRODUCTIVE
DEBT
VOLUNTARY DEBT &
COMPULSORY DEBT
INTERNAL DEBT & EXTERNAL
DEBTSHORT-TERM, MEDIUM-TERM & LONG-TERM DEBTS
REDEEMABLE &
IRREDEEMABLE DEBTS
FUNDED &
UNFUNDED DEBT
PRODUCTIVE DEBTPublic debt is said to be productive when it is raised for
productive purposes
It is used to add to the productive capacity of the economy.
Debts are incurred for construction of such capital assets
which yield revenue to the govt
There is a working rule is that debt should be repay within the
physical lifetime of corresponding asset
Income derived from the creation of such assets is used for
repay the debts
UNPRODUCTIVE DEBTIt is also called dead weight debt
Unproductive debts are those which do not add to the
productive capacity of the economy.
Debt is incurred to cover any budgetary deficits or for
such purposes that does not yield any income to the govt
The interest on this type of debt must be obtained from
other source of public income
VOLUNTARY DEBT These loans are provided by the members of the public on
voluntary basis
It may be obtained in the form of market loans, bonds, etc
People are free to subscribe govt securities whenever they are
floated
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.
COMPULSORY DEBT
Rare phenomenon in modern public finance
Raised in special situations like war or famine
Govt enforces borrowing through legal compulsion
It is also resorted at times to curb inflationary
tendencies in the economy
Govt of India introduced ‘COMPULSORY DEPOSIT
SCHEME’ in 1971
INTERNAL DEBTDebt subscribed by persons or institutions inside 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
Internal loan only involves transfer of wealth within the
borrowing community
EXTERNAL DEBTDebts raised from foreign countries or international
institutions
Debts repayable in foreign currencies
It involves transfer of resources from foreign
countries to the domestic country
Help to take up various developmental programs in
developing and underdeveloped countries
SHORT TERM DEBT
These are unfunded debts generally incurred for a
short period of time
It must be repaid within a year
Low rate of interest
It includes treasury bills which are issued for a
currency of 91 days
MEDIUM TERM DEBTMaturity 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
LONG TERM DEBTThese are funded debts generally incurred for a long
period of time
Maturity period of 10 years & above
High rate of interest
Raised for developmental programs and to meet
other long term needs of public authorities.
REDEEMABLE DEBTThe debt which the government promises to pay off
at some future date
Most of the debt is redeemable in nature
There is certain maturity period of the debt
The government has to make arrangement to repay
the principal & the interest on the due date.
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
FUNDED DEBTIt is repayable after a long period of time
Funded debt has an obligation to pay fixed sum of
interest subject to an option to the government to
repay the principal
Funded debt is undertaken for meeting more
permanent needs
Money is credited by the government into this fund
UNFUNDED DEBTThese are incurred to meet temporary needs of the
government
The rate of interest is very low
It has an obligation to pay at due date with interest.
METHODS OF FINANCING PUBLIC DEBT MANAGEMENT
PAY –AS- YOU USE FINANCE
PAY- AS- YOU GO FINANCE
ROLE OF RBI IN PUBLIC DEBT MANAGEMENT
RBI has an important role to play in public debt
management
It manages the public debt of the Central and the
State Governments
It is the largest single holder of govt securities
It is entrusted with the responsibility of imposing
credit control measures
CONCLUSION
Effective public debt management is the cornerstone
of financial stability and sustainable fiscal policy.
Countries therefore need capable debt management
offices to design medium term strategies which
appropriately balance cost and risk and execute
financing transactions effectively