MUMBAI, MAR 10: The technical committee on state government guarantees has called for a legislated ceiling on ballooning state government guarantees. This is being practiced in some states like Gujarat where an overall ceiling on guarantee is legislated and such ceilings are changed by legislative amendments.The committee has also suggested the setting up of a contingency fund for guarantees. "The charging of guarantee fee should be rationalised and each state should set up a contingency fund or make some provision for discharging the devolvement under guarantees. The fees collected should be credited to the fund set up for the purpose," an RBI release on the technical committee's report said on Wednesday.The panel, constituted by the central bank in 1997, comprises finance secretaries of seven states and officials from the ministry of finance. The committee was set up against the backdrop of rising state government guarantees. In absolute terms, the outstanding guarantees of the states have increasedat an annual compounded growth of 12 per cent from Rs 40,318 crore in March 1992 to Rs 79,625 crore in September 1998.States were extending guarantees without looking at their capacity for repayments in case of defaults. The committee has recommended the following four parameters for fixing up the ceiling on guarantees: It can be linked to a dynamic variable like net state domestic product (NSDP) or revenue receipts; Alternately, as the NSDP is not a parameter that is within the ambit of the budgetary management of the state governments, this could be linked to the revenue receipts; The third approach is to link guarantees and debt to the consolidated fund where guarantees and debts together should not exceed twice the receipts in the consolidated fund; The forth approach is to ensure that ratio of incremental guarantees to incremental net market borrowing is either kept constant or brought down.According to the report, "there should be sufficient flexibilityto each state government to choose the most appropriate parameter while ensuring transparency". The state governments' handling of defaults in honouring will hold the key to the success of their market borrowing programmes, the panel felt. It has suggested that the state governments should authorise the RBI to earmark a portion of the new loans towards the arrears in payment of interest and principal on loans and bonds in case of defaults.As an alternative to this, the committee has suggested floatation of special bonds by banks and financial institutions in lieu of the accumulated arrears of payment due from state governments in case guarantees are invoked. "Each bond issue could be limited to specific amount of guarantees invoked by bank or institution based on market-related interest rates so that such bonds could be traded in the secondary market," the report said.In a bid to contain the contingent liability arising out of a letter of comfort provided by state government, the committee has suggestedthat states may eschew the practice of providing letter of comfort. "Where letter of comfort from state government is required, credit enhancement could be provided through explicit guarantees within the overall limit fixed for the purpose," an RBI release said.Dwelling on the escrow mechanism of independent power projects (IPPs), the committee has said that state governments should encourage state electricity boards (SEBs) to build up risk fund to handle the contingent liability on account of exchange risk under escrow account arrangements provided to IPPs. "Along with disclosure of guarantees, the states should disclose the revalued liabilities of the state electricity boards under IPPs," the release said.
