State govts may fix 'guarantees' at 5% of revenue, says RBI group

State Governments may consider fixing a ceiling for incremental guarantees issued during a year at five per cent of Revenue Receipts or 0.5 per cent of Gross State Domestic Product, whichever is less. States could consider charging a minimum guarantee fee for guarantees, according to the Reserve Bank of India’s working group.

A decision to form a working group on State Government Guarantees was taken at the Conference of State Finance Secretaries held on July 7, 2022, factoring in the risks such guarantees posed to their fiscal health and the banking system. The RBI today issued a statement highlighting the group's recommendations, which are expected to facilitate better fiscal management by the State Governments.

The RBI working group also recommended that besides charging a guarantee fee, states may levy an additional risk premium based on the risk category and the tenor of the underlying loan.

The word ‘Guarantee’ should include all instruments, which create an obligation, contingent or otherwise, on the part of the State Government. The purpose for which Government guarantees are issued should be clearly defined, the RBI group advised.

There was also concern associated with the increasing bank finance to state-owned entities backed by Government guarantees. This was especially so where the bank finance appeared to substitute budgetary resources of the State Governments, the group said.

State Governments may publish and disclose data relating to guarantees, as per the Indian Government Accounting Standard (IGAS).

The Working Group was composed of members drawn from the Ministry of Finance, Government of India; Comptroller and Auditor General of India; and some State Governments. The terms of reference of the Working Group included the task of prescribing a uniform guarantee ceiling for the States; a uniform reporting framework for the guarantees given by the State Governments. The group was also tasked to assess the adequacy of states’ contribution to the Guarantee Redemption Fund.