BORROWING

CONCEPT OF INTERNAL BORROWING

The debt taken from people and institutions of a country by floatation of public debt instruments is called internal or domestic debt. The internal debt is received in national currency. The internal debt can be both voluntary and involuntary. The internal debt is taken by the government with the central bank, commercial banks, financial institutions, individuals, and private and non-governmental organisations. The government raises internal debt from two sources:(a) Market Borrowing The market borrowing is the debt received by selling transferable government securities in the market. For example, the debt raised by floatation of treasury bills and government bonds are the forms of market borrowing. The short-term loans are raised through the treasury bills to finance current expenditure. On the other hand, the longterm loans are raised through development bonds to meet the development finance of longterm nature. (b) Non-market Borrowing When the government borrows by means of non-transferable instruments, it is called non-market borrowing. The non-market borrowing is available from following two sources: i. Public Sector The non-market source of borrowing is public sector itself. The government takes loan from financial public enterprises, insurance companies, postal saving bank, provident fund and central bank. ii. Private Sector The government raises loans from private enterprises. The private enterprises like commercial banks, finance companies, insurance companies, mutual fund, investment companies, and pension fund should keep certain percentage of their reserves in the form of government securities.

CONCEPT OF EXTERNAL BORROWING The debt taken with foreign government, individuals, institutions and international institutions is called foreign debt. The foreign debt is available in foreign currency. The foreign debt is voluntary. External debt should be defined as liabilities on which a contractual obligation to repay exist In case of external borrowing, the government usually borrows from n0n~market source like foreign government and multilateral agencies. It is because the foreign individuals and institutions are reluctant to buy government securities due to the non-development of the financial market in developing countries.

REFINANCING
Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political stability of a nation, currency stability, banking regulations, borrower's credit worthiness, and credit rating of a nation. In many industrialized nations, a common form of refinancing is for a place of primary residency mortgage Risks Most fixed-term loans have penalty clauses ("call provisions") that are triggered by an early repayment of the loan, in part or in full, as well as "closing" fees. There will also be transaction fees on the refinancing. These fees must be calculated before embarking on a loan refinancing, as they can wipe out any savings generated through refinancing. If the refinanced loan has lower monthly repayments or consolidates other debts for the same repayment, it will result in a larger total interest cost over the life of the loan, and will result in the borrower remaining in debt for many more years. Calculating the upfront, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.