Guidelines on State Guarantees on Borrowings
February 12 , 2024
- A working group constituted by the RBI has made certain recommendations to address issues relating to guarantees extended by the state governments.
- It prescribed a uniform reporting framework for the guarantees extended (by State governments) and a uniform guarantee ceiling.
- As per RBI, the implementation is “expected to facilitate better fiscal management by State governments.”
- 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.
- 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.”
- Primarily, guarantees are resorted to in three scenarios at the State level:
- First, where a sovereign guarantee is a precondition for concessional loans from bilateral or multilateral agencies (to public sector enterprises);
- Second, to improve viability of projects or activities with the potential to provide significant social and economic benefits; and
- Lastly, to enable public sector enterprises to raise resources at lower interest charges or on more favourable terms.