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States Urged To Factor High Risk Guarantees In Budget

Our Banking Bureau  |  BUSINESS STANDARD 

The Reserve Bank of India-constituted group of state finance secretaries, which looked into the fiscal risk of state government guarantees, has recommended that the states should treat separately those guarantees which are in the nature of direct liabilities and the risk of which is assessed at 100 per cent as equal to debt. The repayment provision for such guarantees should be made in the budget itself, the group said.

For other types of guarantees, the group is in favour of classifying the projects for which the debt is being raise as high risk, medium risk, low risk and very low risk and assigning appropriate risk weights.

The outstanding guarantees of the state governments have risen from Rs 40,317 crore at end-March 1992 to Rs 1,69,562 crore as at end-March 2001.

To assess the risk, the states can make use of credit rating for bonds, the group said. The Centre has already made it mandatory that all bonds issued with government guarantee in future will have to be compulsorily credit rated.

The state governments, according to the group, can assess the risk sans guarantee using the assistance of rating agencies. The rating, sans guarantee, could then be used for the purpose of classifying the guarantees into various risk catogeries. Such exercise may be undertaken for both bonds and loans. The devolvement probability could be 5 per cent for very low risk, 25 per cent for low risk, 50 per cent for medium risk and 75 per cent for high risk.

The group suggested that the devolvement probability should be applied to the underlying liabilities which were guaranteed to estimate the devolvement obligation. At the next stage, it should be added to debt service obligation to arrive at the annual fiscal burden of debt and guarantees for the state governments.

The group, consisting of finance secretaries from Andhra Pradesh, Bihar, Gujarat, Kerala, Maharashtra, Meghalaya and Uttar Pradesh, was set up in 2001 to examine the fiscal risk of guarantees extended by the state governments. The draft report was discussed with the state finance secretaries in June 2002. The group submitted the final report in July 2002 to the RBI which was discussed with the State Finance Secretaries on January 9 this year.

The group has recommended a modification in the 11th Finance Commission

First Published: Sat, March 15 2003. 00:00 IST