A working group constituted by the Reserve Bank of India (RBI) made certain recommendations to address issues relating to guarantees extended by State governments.
What is a State Government Guarantee?
- A ‘guarantee’ is a legal obligation for a State to make payments and protect an investor/lender from the risk of default by a borrower. Guarantees are usually sought when the investors/ lenders are unwilling to bear the risk of default.
- As Per the Indian Contracts Act (1872), it is a contract to “perform the promise, or discharge the liability, of a third person in case of his default.”
- Article 292 of the Constitution of India extends the executive power of the Union to the giving of guarantees on the security of the Consolidated Fund of India, within such limits, if any, as may be fixed by Parliament. Similar powers are given to States under Article 293.
- State Governments often issue guarantees on behalf of various PSEs/ Cooperative Institutions/Urban Local Bodies, etc. to various banks/financial institutions for financing developmental schemes/projects.
Current Status of State Government Guarantees
- Extent: State-wise guarantee data for the period 2018-21 suggests that outstanding guarantees constituted less than 10 % of their GSDP for the majority of the states. It has, however, been rising over the years for most of the states.
- The guarantee given by 27 states was 4% of their aggregate GSDP at the end of 2021-22.
- For several states, the power sector accounted for the largest share of guarantees.
- States with a relatively higher outstanding guarantee levels include Sikkim (12.0%), Telangana (12.0%), Andhra Pradesh (10.4%), and Uttar Pradesh (8.8%).
- Andhra Pradesh has provided significant guarantees to sectors of agriculture and water supply, sanitation, housing and urban development.
Guidelines for Guarantee Policy of Government of India (2022)
- Guarantees may be given only for principal amount and normal interest component of the underlying loan.
- The Fiscal Responsibility and Budget Management Act, 2003 prescribe a limit of 0.5% of GDP for guarantees to be given in any financial year (since FY 2004-05).
- If this limit is exceeded owing to unforeseen circumstances, the Finance Minister is required to make a statement in both Houses of Parliament explaining the deviation.
- The Fiscal Responsibility and Budget Management Act, 2003 prescribe a limit of 0.5% of GDP for guarantees to be given in any financial year (since FY 2004-05).
- Guarantees may not be extended for external commercial borrowings;
- State Government may not extend guarantee for more than 80 % of the project loan, depending on the conditions imposed by the lender;
- Guarantees once approved, shall not be transferred to any other agency without the prior approval of the Finance Department;
- Government guarantees shall not be provided to private sector companies/ institutions;
- Appropriate pre-conditions may be specified by the Government while giving the guarantees, e.g., period of guarantee.