Framework for State guarantees

State guarantees were the focus of the recently released Report of Working Group on State Government Guarantees by the Reserve Bank of India (RBI).

Key Highlights of the Report:

• The RBI decided to constitute a Working Group on State Government Guarantees during the 32nd Conference of the State Finance Secretaries held in 2022.
• Its members comprise representatives from the Ministry of Finance, Comptroller and Auditor General of India, and some State Governments.
• Terms of reference for the Woking group include:
  • To prescribe a uniform guarantee ceiling for the States
  • Uniform reporting framework for the guarantees given by the State Governments
  • To assess the adequacy of states’ contribution to the Guarantee Redemption Fund (GRF).
    • GRF is a fund established in the Public Account of India to redeem guarantees given to CPSEs and financial institutions.

Major recommendations of the Working Group:

• The word ‘Guarantee’ should include all instruments, which create an obligation, contingent or otherwise, on part of the State Government.
• The purpose for which Government guarantees are issued should be clearly defined.
• State Governments may consider fixing a ceiling for incremental guarantees issued during a year at 5% of Revenue Receipts or 0.5% of Gross State Domestic Product (GSDP).
• State Governments can charge a minimum guarantee fee for guarantees extended and additional risk premiums, based on the risk category and the tenor of underlying loan.
• State Governments may publish/ disclose data relating to guarantees, as per the Indian Government Accounting Standard (IGAS).
• IGAS are accounting standards for the cash system of accounting, formulated by the Government Accounting Standards Advisory Board (GASAB).
• The implementation of the recommendations is expected to facilitate better fiscal management by the State Governments.

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