Fund set up to cover borrowing risks

THE STATE Government has set up a Guarantee Redemption Fund with initial corpus of Rs 3 crore to cover risks with guarantees against borrowings by various departments so that its credibility in the market improves.

india Updated: Feb 14, 2006 01:42 IST

THE STATE Government has set up a Guarantee Redemption Fund with initial corpus of Rs 3 crore to cover risks with guarantees against borrowings by various departments so that its credibility in the market improves.

The Finance Department has already issued orders in this regard. It has asked all the departments not to exceed the sanctioned limit.

The departments have been directed to pay one per cent fee on the amount of guarantee. Given the size of the liabilities and deteriorating fiscal situation, the Twelfth Finance Commission (TFC) has recently conveyed to the states that they would need to set up a separate fund to meet these maturing liabilities.

This fund would to be created by crediting a portion of the revenue receipts and earmarked exclusive for debt redemption. Over half a dozen states, including Madhya Pradesh, have set up the Guarantee Redemption Fund.

Financial experts in the State said these mounting liabilities of guarantees created an explosive situation given the poor fiscal health of the State.

The State Government has already put a cap on guarantee issued by it to various boards, corporations, cooperative institutions, municipal corporations and others.

The Finance Department has put a ceiling of Rs 10,700 crore, which means that amount of guarantee would not cross this limit. At present, the State Government has given guarantee on various loans to the tune of Rs 10,000 crore.

Many a time, the State Government faced awkward situation when banks and financial institutions charge the State Government with not honouring its guarantee and also hesitate in extending loan to various state-owned undertakings on the basis of State Government’s guarantee.

Defaults on State Government-guaranteed bonds have piled up due to the lack of proper risk evaluation system and rampant issuance of guarantees, said a senior bank officer. However, creation of Guarantee Redemption Fund would certainly improve things, he said.

The Government notification says, “The Guarantee Redemption Fund is to be utilised for meeting the payment obligations arising out of the guarantees issued by the State Government in respect of bonds issued and other borrowings by the State — undertakings or other cooperative bodies and invoked by the beneficiaries.”

The Fund would be kept in the Public Account outside the Consolidated Fund of the State and would be utilised only in the manner prescribed in this scheme, said a senior officer of the department.

Talking to HT, he said that the fund would be administered by Central Accounts Section of Reserve Bank of India in Nagpur subject to such directions and instructions that the State Government would issue from time to time. He said the accretions to the fund together with accrued interest would be invested in Central Government dated Securities, State Government securities and auctioned treasury bills.

“The balance in the funds would be increased with contributions made annually or at lesser intervals so as to reach the level deemed sufficient to meet the amount of anticipated guarantees devolving on the Government as a result of the likely invocation of outstanding guarantees.”

First Published: Feb 14, 2006 01:42 IST