Replacing a 12-year-old policy, the Finance Ministry has come out with a new Government Guarantee Policy (GGP), which aims to include all the changes in General Financial Rules (GFR) and financial policies.

Such a policy is required as the volume of sovereign guarantees undertaken during a financial year is limited as per the Fiscal Responsibility and Budget Management Act, 2003. The Act stipulates that the Centre will not give guarantees aggregating to an amount exceeding 0.5 per cent of the GDP in any financial year.

Process flow

Ministries/departments shall submit initial proposal on the dedicated portal and then send a physical copy to the budget division, which will process it. Approval or otherwise will be conveyed to ministries/departments through a guarantee portal. Once approved, the ministry/department may enter into a guarantee agreement.

The ministry/department will pay an applicable guarantee fee on the day of signing the agreement and thereafter, on April 1 every year. They will update details such as loan drawn history, repayments, etc. in the portal regularly. They are also required to send a review report to the budget division.

Guarantee fee categorisation

Guarantee fee has been categorised into two based on risk rating. For category ‘A’, the fee will be 0.5-0.6 per cent depending upon tenor while for category ‘B’, it will be 0.7-0.9 per cent.

Government guarantee intends to improve viability of projects or activities undertaken by Central entities with significant social and economic benefits. It also enables Central PSUs to raise resources at lower interest charges or on more favorable terms. Its objective is to fulfil the requirement in cases where sovereign guarantee is a precondition for concessional loans from bilateral/multilateral agencies to Central PSUs.

Who gets guarantee?

There are mainly five categories for which government guarantee is given. First category talks about guarantees given to RBI, other banks and industrial and financial institutions for repayment of principal and payment of interest, cash credit facility, financing seasonal agricultural operations and/or providing working capital to companies, corporations, cooperative societies and banks. Second category prescribes guarantees given for repayment of share capital, payment of minimum annual dividend and repayment of bonds or loans, debentures issued or raised by the statutory corporations and Central PSUs.

Third category has guarantees given in pursuance of agreements entered into by the Government of India with international financial institutions, foreign lending agencies, foreign governments, contractors, suppliers, consultants etc., towards repayment of principal, interest and/or commitment charges on loans etc., and/or for payment against supplies of material and equipment. Fourth category is about counter guarantees to banks in consideration of the banks issuing letters of credit or authority to foreign suppliers for supplies made or services rendered. Fifth category is related with guarantees given to Railways for due and punctual payment of dues by Central government companies or corporation.

The policy says since guarantees result in increase in contingent liability, they should be examined in the same manner as a proposal for a loan, taking into account, the credit-worthiness of the borrower, the quantum of risks sought to be covered by a sovereign guarantee, the terms of the borrowing, justification and public purpose to be served, probability of invocation and possible costs of such liabilities, etc. “Government will be liable to pay in case the entity/organization defaults in respect of which guarantee is given,” it said.

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