Directive Issued Under Government Guarantee Policy

The Indian Finance Ministry as the part of the Government Guarantee Policy issued a directive on 24 Sept 2010, in which to which the government proposed to curtail norms for providing sovereign guarantees for funding of projects and has asked blue chip state-run firms to raise money from the market directly without state support. The directive specified the number of norms for seeking such guarantees. The provisions mentioned in the directive is expected to incentivise other stake holders to make proper analysis of the project, credit worthiness of borrowers, and build in strategies for risk management. Guarantees have been provided to improve the viability of social projects as well as enable public sector firms to raise resources at lower interest rates. The guarantees would act as a precondition for concessional loans from multilateral to bilateral agencies. However, since the guarantees are contingent liabilities that can be invoked in case of a default, the finance Ministry expressed its desire to limit its expenditure in this regard. the Centre had outstanding guarantees, amounting to Rs 1.13 lakh crore up till March 2009. It was then that the FRBM Act suggested that sovereign guarantees by the Centre should not exceed 0.5 per cent of the GDP in any financial year, in order to counter fiscal profligacy. The directive also mentioned that Guarantees may not be proposed for public sector enterprises which can directly raise the required resources without the support of the government. The administrative ministries were directed to scrutinise the loan proposal before sending the proposal to the finance ministry for seeking government guarantee.