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Tuesday, June 02, 2020

Finance Ministry begins annual exercise to review guarantees against loans, aims to ‘avoid default’

“The monitoring or review undertaken should examine whether the borrower is discharging repayment obligations or interest obligations as per terms of the loan agreement,” the Ministry said in an official communication to ministries on Tuesday.

By: ENS Economic Bureau | New Delhi | Published: May 13, 2020 6:00:00 am
Finance Ministry, loans agreement, bad loan, NPA, economy news, Indian express news The Ministry said that government guarantees are “contingent liabilities and need to be monitored properly to avoid event of default” by the borrowing entities. (Representational/Illustration: C R Sasikumar)

The Finance Ministry on Tuesday asked all government departments and ministries to review guarantees against various loans issued by them.

The Ministry said that government guarantees are “contingent liabilities and need to be monitored properly to avoid event of default” by the borrowing entities. “The monitoring or review undertaken should examine whether the borrower is discharging repayment obligations or interest obligations as per terms of the loan agreement,” the Ministry said in an official communication to ministries on Tuesday.

Financial advisers of respective ministries have been asked to submit annual review of government guarantees to the budget division in the Finance Ministry. For guarantees given against external loans, the Department of Economic Affairs will conduct a review. This is an annual exercise done by the Finance Ministry.

The review is also done to monitor the repaying capacity for loan and guarantee amount of the borrowers.

In terms of Article 292 of the Constitution, the central government gives guarantees for the repayment of borrowings, and the government can provide up to 0.5 per cent of GDP (Gross Domestic Product) for incremental guarantees in a particular financial year.

The stock of contingent liabilities in the form of guarantees given by the government has increased from Rs 1.07 lakh crore in 2004-05 to Rs 4.47 lakh crore at the end of 2018-19, as per latest available data from the Finance Ministry.

During the year 2018-19, the net accretion to guarantees was Rs 66,811 crore, amounting to 0.4 per cent of GDP, within the outer limit of 0.5 per cent.

The government typically provides guarantees against loans taken by government entities for executing projects that have social and economic benefits. This helps improve viability of the projects and lowers their cost of borrowing.

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