STATE
GUARANTEES - ECONOMY
News:
Working Group suggests
tighter norms for States while giving guarantees
What's
in the news?
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The RBI Working Group has recommended that
the government guarantees should be
subject to a reasonable cap on issuance of guarantees.
Key
takeaways:
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Government guarantees should not be
allowed for creating direct liability / de facto liability on the State.
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States have been cautioned against using
guarantees to obtain finance through State Owned Entities.
RBI
Working Group:
The Working Group on
‘State Government Guarantees,’ consists of members from the
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Ministry of Finance, Government of India
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Comptroller and Auditor General of India
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Some State Governments.
Key
takeaways from the Working Group:
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The group emphasized that guarantee is a
potential future liability that is contingent on the occurrence of an
unforeseen future event.
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States should continue with their
contributions towards building up the Guarantee
Redemption Fund to a desirable level of 5 percent of their total
outstanding guarantees over a period of five years from the date of
constitution of the fund.
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As of March, end 2021, outstanding
guarantees issued by the States stood at ₹7.40lakh crore, or 3.7 per cent of
their combined SGDP.
Recommendations
of the Working Group:
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The state governments should consider
fixing a ceiling for the incremental guarantees they issue during a year at 5 percent of the revenue receipts or 0.5
per cent of Gross State Domestic Product, whichever is less.
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It suggested that the state government
assess, monitor and be prudent while issuing guarantees.
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State governments may consider charging a minimum guarantee fee for
guarantees extended and additional risk premium may be charged based on the
risk category and the tenor of the underlying loan.
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It also suggested that state governments
may publish data relating to guarantees, as per the Indian Government Accounting Standard (IGAS).
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A minimum of 0.25 percent per annum may be
considered as the base or minimum
guarantee fee.
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An additional
risk premium which is based on risk assessment by the State government, may
be charged to each risk category of issuances.
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The group said State governments need to classify the projects/ activities as high
risk, medium risk and low risk and assign appropriate risk weights before
extending guarantee for them, said the group.
○
Such risk categorisation should also take
into consideration the past record of
defaults.
Go
back to basics:
Government
Guarantees:
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The Union
Government and the State Governments give Guarantees for repayment of
borrowings within such limits, if any, as may be fixed upon the security of the Consolidated Fund of India or of the State,
as the case may be, in terms of Articles
292 and 293 of the Constitution.
Guarantees
given by Union government:
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Guarantees are also given by the Union
Government for payment of interest on
borrowings, repayment of share capital and payment of minimum annual dividend,
payment against agreements for supplies of materials and equipment on credit
basis on behalf of the State Governments, Union territories, local bodies,
railways, government companies or corporations, joint stock companies,
financial institutions, port trusts, electricity boards and co-operative
institutions.
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Guarantees are also given by the Union
Government to the Reserve Bank of India,
other banks and financial institutions for repayment of principal and
payment of interest, cash credit facility, financing seasonal agricultural
operations and for providing working capital in respect of companies,
corporations, co-operative societies and co-operative banks.
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The guarantees are also given in pursuance of agreements entered into by
the Union Government with International Financial Institutions, foreign lending
agencies, foreign governments, contractors and consultants towards repayment of
principal, payment of interest and payment of commitment charges on loans.
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It also gives performance guarantees for fulfilment of contracts or projects awarded
to Indian companies in foreign countries as well as foreign companies in
foreign countries besides counter-guarantees to banks in consideration of the
banks having issued letters of credit to foreign suppliers for supplies or
services rendered by them on credit basis in favour of companies or
corporations.
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The guarantees are also given by the Union Government to railways and
electricity boards for due and punctual payment of dues and freight charges
by the companies and corporations.
Does
Guarantee given only by Union government?
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Guarantees are also given by the State
Governments and Union Territory Governments (with legislature).
Guarantee
Redemption Fund (GRF):
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The objective of the GRF is to provide a cushion for servicing contingent
liabilities arising from the invocation of guarantees issued by the State
governments, in respect of bonds and other borrowings by State Level
undertakings or other bodies.
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Though the participation from the states
in GRF is voluntary, around 19
States have already established GRF.
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The GRF corpus is managed by the RBI.