Mumbai: A Reserve Bank working group has suggested that state governments should levy minimum charge For the guarantee given by them Loan Taken by their enterprises, local bodies and co-operative institutions.
Keeping in view the inherent risks associated with their financial health of State Governments and the guarantees given by them on the banking system, it was decided to set up a Working Group, RBI, during the 32nd Conference of State Finance Secretaries held in July 2022. said in a statement on Tuesday.
Reserve Bank has released ‘Working Group Report’ State government guarantee‘ on its website.
State governments are often required to give and issue guarantees on behalf of various state enterprises, co-operative institutions, urban local bodies and other state-owned entities in favor of their creditors, who are generally commercial banks or other financial institutions. Are.
There is a specific limit of 0.5 per cent of GDP in a financial year for additional guarantees to be issued by the Central Government as prescribed under the FRBM Act.
Guarantee is a type of contingent liability that protects the investor/lender against the risk of default by the borrower. Guarantees are usually sought when investors/lenders are not willing to take the risk of default.
“State governments may consider charging a minimum guarantee fee for the guarantee extended and additional risk premium may be charged depending on the risk category and tenure of the underlying loan,” the group’s key recommendation said.
The panel also suggested that state governments may consider capping the incremental guarantee to be issued during a year at 5 per cent of revenue receipts or 0.5 per cent of gross state domestic product, whichever is lower. .
The Group also suggested that the term ‘guarantee’ should include all instruments which create an obligation, contingent or otherwise, on the part of the State Government.
Furthermore, the purpose for which a government guarantee is issued should be clearly defined.
“As far as assessment of fiscal risk is concerned, no distinction should be made between conditional/unconditional, financial/performance guarantees as all these are in the nature of contingent liabilities which may materialize at a future date,” Another opinion is the suggestion given by the panel.
It further suggested that State Governments should classify projects/activities as high risk, medium risk and low risk and assign appropriate risk weights before giving guarantees for them.
The RBI has, in the past, flagged the issue of bank finance to government-owned entities, often in violation of prudential guidelines.
“Since most of these loans are backed by explicit guarantees given by the respective state governments, it may be necessary for states to consider the risk of invoking the guarantees,” the report said.
The lending bank/NBFC should also undertake a comprehensive appraisal of the loan proposal without taking relief from the guarantee given by the State.
The working group included representatives from the Union Finance Ministry; The Comptroller and Auditor General of India (CAG), Andhra Pradesh, Haryana, Karnataka, Odisha and the Union Territory of Jammu and Kashmir were formed.
Keeping in view the inherent risks associated with their financial health of State Governments and the guarantees given by them on the banking system, it was decided to set up a Working Group, RBI, during the 32nd Conference of State Finance Secretaries held in July 2022. said in a statement on Tuesday.
Reserve Bank has released ‘Working Group Report’ State government guarantee‘ on its website.
State governments are often required to give and issue guarantees on behalf of various state enterprises, co-operative institutions, urban local bodies and other state-owned entities in favor of their creditors, who are generally commercial banks or other financial institutions. Are.
There is a specific limit of 0.5 per cent of GDP in a financial year for additional guarantees to be issued by the Central Government as prescribed under the FRBM Act.
Guarantee is a type of contingent liability that protects the investor/lender against the risk of default by the borrower. Guarantees are usually sought when investors/lenders are not willing to take the risk of default.
“State governments may consider charging a minimum guarantee fee for the guarantee extended and additional risk premium may be charged depending on the risk category and tenure of the underlying loan,” the group’s key recommendation said.
The panel also suggested that state governments may consider capping the incremental guarantee to be issued during a year at 5 per cent of revenue receipts or 0.5 per cent of gross state domestic product, whichever is lower. .
The Group also suggested that the term ‘guarantee’ should include all instruments which create an obligation, contingent or otherwise, on the part of the State Government.
Furthermore, the purpose for which a government guarantee is issued should be clearly defined.
“As far as assessment of fiscal risk is concerned, no distinction should be made between conditional/unconditional, financial/performance guarantees as all these are in the nature of contingent liabilities which may materialize at a future date,” Another opinion is the suggestion given by the panel.
It further suggested that State Governments should classify projects/activities as high risk, medium risk and low risk and assign appropriate risk weights before giving guarantees for them.
The RBI has, in the past, flagged the issue of bank finance to government-owned entities, often in violation of prudential guidelines.
“Since most of these loans are backed by explicit guarantees given by the respective state governments, it may be necessary for states to consider the risk of invoking the guarantees,” the report said.
The lending bank/NBFC should also undertake a comprehensive appraisal of the loan proposal without taking relief from the guarantee given by the State.
The working group included representatives from the Union Finance Ministry; The Comptroller and Auditor General of India (CAG), Andhra Pradesh, Haryana, Karnataka, Odisha and the Union Territory of Jammu and Kashmir were formed.