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State Government Guarantees

Article 293 of the Constitution of India provides for the borrowings of the State and guarantees given on the security of the Consolidated Fund of the State. Gujarat State Guarantees Act, 1963 provides the frame work for fixing the limit of the executive power of the State regarding the giving of guarantees. The State Legislature decides such limits from time to time. At present (with effect from March 2001) the limit for of Guarantees is र 20,000 Crore. As against this limit, the outstanding Government Guarantees, as on March 31, 2013 stood at र 6388 Crore.

The Consolidated Circular No.: BHD-1088-5576-A dated December 31, 1988 states in detail the clauses relating to policy of sanctioning guarantees, procedure to be followed in considering the proposals of guarantees, channel of submission and decision taking levels, execution of guarantees agreements, guarantee fees, monitoring of guarantees etc. In order to monitor all issues relating to guarantees more effectively, the government has issued various instructions/guidelines from time to time.

The Technical Committee (constituted by RBI) on State Government Guarantees in its report has suggested that since 'Tripartite Agreements' and 'Letters of Comfort' are equally binding as actual guarantees, in case of default by the borrower, they ought to be considered as good as guarantees. The state government has taken into account all tripartite agreements entered into, and the letters of comfort in the guarantees reported and taken into account the same while prescribing the guarantee limit. In case where Government has given guarantees through an indirect route by way of a Tripartite Agreement, the Corporation on whose behalf the such agreements have been made, has to ensure that 45 days prior to due date, a certificate from the bank confirming availability of adequate funds for servicing of bonds is sent to Trustee of bondholders. In case the bank is not in a position to give the certificate, the state government is required to transfer funds to the designated account. The Committee has been of the view that such structured payments arrangements should be discouraged, as the financing decision is then not based on intrinsic viability of the project, but rather on the availability of such assured payment arrangements.

Though guarantees are not debts yet in the eventuality of default, they have the potential to drain resources from an apparently sound fiscal system. Thus, it becomes all the necessary to carry out regular assessment of the guarantees.

Ceiling on State Government Guarantees

The existing limits on guarantees at various points of time were as follows:

Sr. No. Year Guarantee Limit Rs. in Crore)
1 1980 2500
2 1985 3500
3 1989 4500
4 1991 6000
5 1994 8000
6 1998 11000
7 1999 14000
8 2000 16000
9 2001 20000*
* The limit is unchanged till date.