Indian Railway Codes and Manuals-General Financial Rules-2017-Chapter- 11 (XI) GFR-2017.

 

Chapter – 11

GOVERNMENT GUARANTEES

Rule 275 (1)

Power to Give and Limits on Government Guarantees. The power of the Union Government to give guarantees emanates from and is subject to such limits as may be fixed in terms of Article 292 of the Constitution of India, the Fiscal Responsibility and Budget Management Act and Rules framed there under as amended from time to time.

Rule 275 (2)

In terms of the Fiscal Responsibility and Budget Management Act and Rules framed thereunder, the Central Government shall not give guarantees aggregating the amount prescribed therein.

Rule 275 (3)

Powers to grant Government of India Guarantee, including those on external borrowings, vests with the Budget Division, Department of Economic Affairs (DEA).

Rule 276

O b j e c t i v e s o f G o v e r n m e n t Guarantees: The sovereign guarantee is normally extended for the purpose of achieving the following objectives: (i) To improve viability of projects or activities undertaken by central entities with significant social and economic benefits; (ii) To enable central public sector companies to raise resources at lower interest charges or on more favourable terms; (iii) To fulfil the requirement in cases where sovereign guarantee is a precondition for concessional loans from bilateral/ multilateral agencies t o c e n t r a l p u b l i c s e c t o r companies/agencies.

Rule 277

Guidelines for grant of Government of India Guarantee: The following guidelines should be followed by the Ministries or Departments of the Government of India for recommending guarantee or counter guarantee.— (i) A proposal for guarantee by Government must be justified in public interest such as in the case of borrowings by central public sector institutions for approved development purposes or borrowings by central public sector undertakings from Banks for working capital and other purposes. (ii) The Administrative Ministry/ Department or the credit Divisions of Department of Economic Affairs shall examine the proposal in consultation with the Financial Adviser in the same manner as a proposal for loan. While examining the proposal the following considerations shall be kept in view :- (a) Public interest which the guarantee is expected to serve. (b) Credit worthiness of the borrower to ensure that no undue risk is involved. (c) Terms of the borrowing shall take into account the yields as applicable on Government paper of similar maturity. (d) The conditions prescribed in the guarantee order/agreement in order to ensure continued credit worthiness of the borrower. (iii) Risk associated with assumption of a new contingent liability/guarantee proposal, including the probability of future payouts should be thoroughly assessed by the concerned Administrative Ministry/Department or Credit Divisions of Department of Economic Affairs recommending the proposal. Such assessment should ideally be entrusted to an independent unit and should be undertaken even when it has already been decided by a higher authority to provide guarantees. The assessment should reveal an accurate picture of the financial condition of the entity to be guaranteed; risks associated with implementation of the project/ scheme, etc. This information would be useful to estimate the funds needed to meet associated contingent liabilities if the need should arise, in current or future budgets. (iv) After examination in the concerned Ministry or Department or Credit Division of DEA, all proposals for extending guarantees shall be referred to Budget Division, DEA for approval. No guarantees shall be given without the approval of Budget Division, DEA (v) With a view to enable the Ministry of Finance to examine cases of Government of India guarantees and extension thereto, all Ministries or Departments should furnish to that Ministry, data of certain operational parameters of the Public Sector Undertaking or Entity, as given in GFR 26. In case the accounts of the Central Public Sector Undertaking or Entity have been audited by the Comptroller & Auditor General of India, the effect of the comments of the Comptroller & Auditor General of India on the Central Public Sector Undertaking’s profitability should be brought out. Further, where BIFR targets have been assigned or Cabinet directions issued to the Company, the actuals vis-à-vis targets for the preceding three years should be indicated. The data should be furnished in the Form GFR 26 along with the proposal for guarantee. (vi) Guarantees shall normally be restricted to the repayment of principal and normal interest component of the loan. Other risks shall not form part of the guarantee. (vii) Government guarantees will be extended to only central public sector companies/ agencies. (viii)Government guarantees shall not be provided to the private sector. (ix) Government guarantees should normally not be extended for external commercial borrowings. (x) Government guarantees may be given on all soft loan components of the bilateral/multilateral aid. However, guarantee shall not be normally given for the commercial loan components of such aid. (xi) Government of India guarantee will not be given in cases of grants. However, if the donor insists on ensuring performance, the same may be listed as a negotiating condition for getting the grant. (xii) Appropriate conditions, may be made by Government while giving the guarantee e.g. period of guarantee, levy of fee to cover risk, representation for Government on the Board of Management, Mortgage or lien on the assets, submission to Government of periodical reports and accounts, right to get the accounts audited on behalf of Government etc. Even if fee, representation and mortgage are not considered necessary, the right to verify the continued credit–worthiness of the borrower should be ensured. (xiii)Guarantees may not be proposed for pursuing low priority objectives or programmes. Proposal for grant of guarantee as an off-budget support s h o u l d a l s o b e e x a m i n e d comprehensively by the proposing Ministry/Department against other alternative forms of support which may be more appropriate and costeffective. For example, in the case of provision of credit guarantees to enterprises that continually incur losses as a result of government's pricing policy, budgetary subsidies or direct government loans may be a more effective and less costly option. (xiv) Guarantees may not be proposed in respect of Central Public Sector Enterprises whose strong financial credentials and high credit rating would indicate inherent ability to directly raise the required resources without the support of government guarantee.

Rule 278

Borrowings from multilateral agencies by Central Public Sector Undertakings. (i) All borrowings from the multilateral agencies by Central Public Sector Undertakings would be direct (without Government of India’s intermediation) on the terms as agreed mutually between the borrower and the lender and approved by the Government of India. However, where such terms involve guarantee of Government of India, prior approval of the Budget Division of the Ministry of Finance may be obtained. (ii) The borrowing should relate to the Projects approved by the prescribed competent authority of the Central Government. (iii) Wherever guarantee is to be given by Government of India, the borrower shall enter into an agreement with the Government of India for the payment of guarantee fee on the principal amount of the loan drawn and loan outstanding from time to time. (iv) The Government of India Guarantee would only cover the principal amount and the normal interest. All other risks including the exchange rate risk would be shared between the borrower and lender as per terms and conditions prescribed in the loan agreement.

Rule 279 (1)

Levy of Guarantee Fees. The rates of fee on guarantees would be as notified by the Budget Division, Department of Economic Affairs, Ministry of Finance from time to time. The rates of guarantee fee are given in Appendix - 12. Ministries or Departments shall levy the prescribed fee in respect of all cases. The fees are also to be levied in respect of non-fund based borrowings or credits (viz. letters of credit, Bank guarantees etc.). In case of any doubt with regard to the categorisation of any particular undertaking or organization or the nature of borrowing for the purpose of levy of fee, the matter may be referred to the Budget Division for clarification. The Ministries or Departments should also take adequate steps to ensure prompt recovery of the prescribed fees.

Rule 279 (2)

The guarantee fee should be levied before the guarantee is given and thereafter on first April every year. The rate of guarantee fee is to be applied on the amount outstanding at the beginning of the guarantee year.

Rule 279 (3)

Where the guarantee fee is not paid on the due date, fee should be charged at double the normal rates for the period of default.

Rule 279 (4)

The Government may guarantee no more than 80% of the project loan, depending on the conditions imposed by the lender. This would incentivize the lenders to make proper analysis of the project, credit worthiness of the borrower(s), and build strategies for risk management. In such cases, bankers/ lenders may be asked to share the risk by bearing a minimum of 20% of the net loss associated with any default. The arrangement would ensure that the lenders undertake a more rigorous assessment of the risk exposure. Provided further that in certain exceptional circumstances, the Government of India may guarantee 100% of the financing where the organisation concerned is discharging some function on behalf of the Government of India.

Rule 280

Execution of Government Guarantees. (i) Once the guarantee is approved by Ministry of Finance, the guarantees will be executed and monitored by the Administrative Ministries concerned, who are also required to report the status in this regard on an annual basis till they are invoked or are obliterated. The following guidelines need to be kept in view while issuing guaranteesa) The obligations of the borrower to service the loan and the guarantee, and the monitoring of the utilization of the guaranteed loans, and adherence to the terms and conditions of the guarantee by the Borrower shall be ensured by the Administrative Ministry/ Department through a back-toback agreement with the borrower which may be drawn up and implemented to the satisfaction of the Administrative Ministry concerned. For this purpose, necessary records to monitor the guarantee, including servicing of guarantee fee shall be maintained by the Line M i n i s t r i e s / D e p a r t m e n t s concerned. b) Administrative Ministry should ensure that there are no inconsistencies between the guarantee approval given by the Ministry of Finance and the guarantee agreement signed by it with the borrower. The obligations enforced by the Government as guarantor would be duly factored in. c) Deviations/modifications/ amendments on the main conditions of the guarantee, particularly with reference to the rate of interest on the loan to be guaranteed and obligations of the Government to be covered, should not be referred in a routine manner to Budget Division for clarification/ change. The A d m i n i s t r a t i v e M i n i s t r y concerned shall make out a separate case, fully justifying the need for considering any p r o p o s e d m o d i f i c a t i o n s / amendments, after thorough scrutiny of the request of the borrower for the same, before placing these proposals before the Budget Division for a final decision. d) In respect of bilateral and multilateral credit, Standard format of Guarantee of the lending institutions may be examined with a view that the same are not in contradiction with the conditions of sovereign guarantee prescribed in this chapter, before signing by the A d m i n i s t r a t i v e M i n i s t r y / Department. The guarantee agreement may also not omit any conditions as brought out in this Chapter. New conditions or covenants, and differences, if any, shall be referred to Budget Division of the Department of Economic Affairs (DEA) for concurrence. e) Guarantee proposals approved by the Budget Division shall have to be executed in the same financial year. If the guarantee/ loan agreement is not signed in the same financial year as that of the approval of the guarantee proposal, the guarantee proposal shall have to be submitted again. f) The guarantee shall hold only for the specific purpose agreed to by the Budget Division. g) Guarantee given by Government of India shall be nontransferrable and would cease to exist in case the ownership of the entity is transferred from Government of India, unless the Guarantee is re-confirmed by the Budget Division. (ii) The Financial Advisers in Ministry/ Department will perform the responsibility of maintenance of records and reporting including for the Finance Accounts and the IGAS, through the office of Controller/Chief Controller of Accounts.

Rule 281 (1)

Review of Guarantees. All Ministries or Departments shall ensure that all guarantees are reviewed every year. The monitoring or review undertaken should examine whether the borrower is discharging repayment obligations or interest obligations as per terms of the loan agreement, whether the repaying capacity for the loan and guarantee amount is imposed in any manner, and whether all covenants and conditions are being religiously followed. The Financial Advisers of the Ministries or Departments should undertake these reviews. A copy of the review report including on timely and correct payment of guarantee fees, shall be forwarded by the Finance Advisor to the Budget Division by 30th April every year for the previous financial year.

Rule 281 (2)

The Financial Adviser of the Ministries or Departments would be responsible for ensuring that the annual reviews are carried out by the Ministries or Departments concerned. They shall also ensure that a register of guarantees in Form GFR 25 is maintained :- (i) to keep a record of guarantees; (ii) to retain information required from time to time in respect of guarantees; (iii) to keep record of the annual reviews to see that these are carried out regularly; (iv) to keep record of levy and recovery of guarantee fee; (v) to send data as contained in Form GFR 25, duly updated every year to the Budget Division in the Ministry of Finance, Department of Economic Affairs by tenth of April.

Rule 281 (3)

In respect of guarantees issued by the Ministry of Finance for external loans, the respective credit divisions of Department of Economic Affairs shall conduct an annual review in consultation with the Financial Adviser (DEA). For this purpose the Financial Adviser (DEA) shall ensure the maintenance of the required registers, as well as ensure that the annual reviews are carried out by the concerned credit divisions, and report forwarded to the Budget Division inForm GFR 25. In cases, where the guarantees on external loans are issued by the concerned administrative Ministry, that Ministry would be responsible for conducting the review.

Rule 281 (4)

Classification of guarantees. For the purpose of record keeping, guarantees shall be classified asunder:- (i) guarantees given to the RBI, other banks and industrial and financial institutions for repayment of principal and payment of interest, cash credit facility, financing seasonal agricultural operations and/or providing working capital to companies, corporations, cooperative societies and banks; (ii) guarantees given for repayment of share capital, payment of minimum annual dividend and repayment of bonds or loans, debentures issued or raised by the statutory corporations a n d c e n t r a l p u b l i c s e c t o r undertakings; (iii) guarantees given in pursuance of agreements entered into by the G o v e r n m e n t o f I n d i a w i t h international financial institutions, foreign lending agencies, foreign governments, contractors, suppliers, consultants etc., towards repayment of principal, interest and/ or commitment charges on loans etc., and /or for payment against supplies of material and equipment; (iv) counter guarantees to banks in consideration of the banks having issued letters of credit or authority to foreign suppliers for supplies made or services rendered. (v) guarantees given to Railways for due and punctual payment of dues by Central Government companies or corporation; (vi) Others guarantees not covered under above five classes.

Rule 282

Accounting for Guarantees. In order to ensure greater transparency in its fiscal operations in the public interest, Rule 6 of the FRBM Rules, 2004 requires government to publish a disclosure statement on guarantees given by government, at the time of presenting the annual financial statement and demands for grants. This statement covers, inter alia, details regarding the class and number of guarantees, amounts guaranteed, outstanding, invocations, guarantee fee payable and other material details. (i) The statement is to be compiled by the A d m i n i s t r a t i v e M i n i s t r i e s / Departments and submitted to Controller General of Accounts, for onward submission to Budget Division. Based upon the inputs, a statement of Guarantees given by the Central Government is depicted as an annexure in the Receipt Budget. (ii) While furnishing the Statement of guarantees to the Ministry of Finance, the Administrative Ministries or Departments should ensure and certify that the amounts shown tally with the total figures in the statement to be included in the Detailed Demands for grants. (iii) While furnishing the summary statements, the Ministries or Departments should also certify that the information tallies with the material furnished to the Controller General of Accounts for the purpose of inclusion in the Finance Accounts of the relevant year and is compliant with Indian Government Accounting Standard- 1 (IGAS-1) relating to Government Guarantees.

Rule 283 (1)

Invocation of Guarantee. A Guarantee Redemption Fund (GRF) has been established in the Public Account of India for redemption of guarantees given to CPSEs, Financial Institutions, etc., by the Central Government whenever such guarantees are invoked. The funding to the Guarantee Redemption Fund is to be done through budgetary appropriations, as considered appropriate, under the head 'Transfer to Guarantee Redemption Fund' through the Demands for Grants of the Department of Economic Affairs.

Rule 283 (2)

The Administrative Ministries/ Departments should inform any case of impending/likely invocation, well in advance, to the Budget Division, along with the proposed corrective measures.

Rule 283 (3)

In the event of invocation of a guarantee, the obligation may be discharged by sanctioning loan to the borrowing entity equal to the amount of guarantee outstanding with the approval of Budget Division, Ministry of Finance. However, any payment on this account will finally be charged to the Guarantee Redemption Fund maintained in the Public Accounts.

Multiple choice questions:

1.What is the source of the Union Government's power to give guarantees?

• a) Article 293 of the Constitution of India
• b) Article 292 of the Constitution of India
• c) Article 265 of the Constitution of India
• d) Article 112 of the Constitution of India
  Answer: b) Article 292 of the Constitution of India

2.Which act and rules govern the limits on the Union Government's power to give guarantees?

• a) Financial Responsibility Act
• b) Budget Responsibility Act
• c) Fiscal Responsibility and Budget Management Act
• d) Monetary Policy and Management Act
  Answer: c) Fiscal Responsibility and Budget Management Act

3.Which division has the power to grant Government of India guarantees, including those on external borrowings?

• a) Budget Division, Department of Economic Affairs
• b) Finance Commission
• c) Reserve Bank of India
• d) Planning Commission
  Answer: a) Budget Division, Department of Economic Affairs

4.For what purpose is the sovereign guarantee normally extended?

• a) To reduce government expenditure
• b) To improve the viability of projects with significant social and economic benefits
• c) To increase taxes
• d) To promote private sector businesses
  Answer: b) To improve the viability of projects with significant social and economic benefits

5.Government guarantees are typically not extended to which of the following?

• a) Central public sector companies
• b) External commercial borrowings
• c) Bilateral/multilateral aid soft loan components
• d) Grants
  Answer: b) External commercial borrowings

6.Which of the following is a condition that may be imposed when the Government of India gives a guarantee?

• a) Representation for Government on the Board of Management
• b) Levy of a fee to cover risk
• c) Mortgage or lien on the assets
• d) All of the above
  Answer: d) All of the above

7.What should be assessed thoroughly before proposing a new contingent liability/guarantee?

• a) Public opinion
• b) Risks associated with the proposal, including future payouts
• c) Political implications
• d) Foreign exchange rates
  Answer: b) Risks associated with the proposal, including future payouts

8.What percentage of a project loan may the Government of India guarantee under certain conditions?

• a) 50%
• b) 60%
• c) 80%
• d) 100%
  Answer: c) 80%

9.In what scenario may the Government of India guarantee 100% of the financing?

• a) When the organization is a private company
• b) When the organization is discharging a function on behalf of the Government of India
• c) When the loan amount is small
• d) When the lender requests it
  Answer: b) When the organization is discharging a function on behalf of the Government of India

10.What is the consequence if the guarantee fee is not paid on the due date?

• a) The fee will be waived
• b) The fee will be reduced
• c) The fee will be charged at double the normal rates
• d) No consequences will be imposed
  Answer: c) The fee will be charged at double the normal rates

11.What must be obtained from the Budget Division before giving a guarantee for external borrowings?

• a) Prior approval
• b) A loan agreement
• c) A risk assessment report
• d) A performance bond
  Answer: a) Prior approval

12.Which fee is levied before a guarantee is given and on the first of April every year?

• a) Administrative fee
• b) Service fee
• c) Guarantee fee
• d) Processing fee
  Answer: c) Guarantee fee

13.Government guarantees are normally restricted to covering which of the following?

• a) Principal and normal interest component of the loan
• b) Exchange rate risk
• c) All risks associated with the project
• d) Additional charges and penalties
  Answer: a) Principal and normal interest component of the loan

14.What is required when extending a Government of India guarantee for borrowings from multilateral agencies?

• a) Approval from the Reserve Bank of India
• b) Approval from the Supreme Court
• c) Agreement with the Government of India to pay a guarantee fee
• d) Approval from the local government
  Answer: c) Agreement with the Government of India to pay a guarantee fee

15.Which of the following is NOT a guideline for recommending a Government of India guarantee?

• a) The proposal must be justified in public interest
• b) The guarantee can be proposed for any private sector company
• c) The creditworthiness of the borrower should be ensured
• d) The risks associated with the guarantee should be assessed
  Answer: b) The guarantee can be proposed for any private sector company

16. What is required for the execution of government guarantees once approved by the Ministry of Finance?
a) The guarantees will be executed and monitored by the Budget Division.
b) The guarantees will be executed and monitored by the Administrative Ministries concerned.
c) The guarantees will be executed by the Comptroller and Auditor General of India.
d) The guarantees will be executed by the Prime Minister's Office.
Answer: b) The guarantees will be executed and monitored by the Administrative Ministries concerned.

17. What must Administrative Ministries ensure when issuing a guarantee?
a) The guarantee agreement aligns with the approval given by the Ministry of Finance.
b) The guarantee is signed by the Prime Minister.
c) The guarantee includes provisions for repayment of external loans.
d) The guarantee includes a minimum interest rate of 10%.
Answer: a) The guarantee agreement aligns with the approval given by the Ministry of Finance.

18. When must a guarantee proposal be submitted again if not executed?
a) Within the same financial year.
b) At the end of the fiscal quarter.
c) In the following financial year.
d) After six months.
Answer: c) In the following financial year.

19. What should be done if there are proposed modifications to the main conditions of the guarantee?
a) Automatically implement the modifications.
b) Refer the modifications to the Budget Division for clarification/change.
c) Reject the modifications.
d) Seek approval from the Prime Minister.
Answer: b) Refer the modifications to the Budget Division for clarification/change.

20. What must the Financial Advisers in Ministries/Departments ensure regarding government guarantees?
a) Regular maintenance of records and reporting on guarantees.
b) Payment of guarantees by the borrower.
c) Submission of guarantees to the Supreme Court.
d) Elimination of guarantees by the end of the financial year.
Answer: a) Regular maintenance of records and reporting on guarantees.

21. Who is responsible for conducting an annual review of guarantees issued by the Ministry of Finance for external loans?
a) Administrative Ministries.
b) Credit divisions of the Department of Economic Affairs.
c) Prime Minister’s Office.
d) Central Bureau of Investigation.
Answer: b) Credit divisions of the Department of Economic Affairs.

22. What should be included in the annual review of guarantees?
a) Audit of all financial statements of the borrower.
b) Examination of whether the borrower is discharging repayment obligations.
c) Renegotiation of the guarantee terms.
d) Legal action against the borrower.
Answer: b) Examination of whether the borrower is discharging repayment obligations.

23. How should guarantees be classified for record-keeping purposes?
a) Based on the geographical location of the borrower.
b) Based on the financial health of the borrower.
c) Based on the type of institution receiving the guarantee.
d) Based on the lender’s nationality.
Answer: c) Based on the type of institution receiving the guarantee.

24. What is required under Rule 282 for the transparency of fiscal operations?
a) Publishing a disclosure statement on guarantees given by the government.
b) Providing a list of guarantees to international organizations.
c) Making the guarantee records publicly accessible.
d) Sending the guarantee records to the Prime Minister.
Answer: a) Publishing a disclosure statement on guarantees given by the government.

25. What fund has been established for the redemption of guarantees given to CPSEs and other financial institutions?
a) Central Contingency Fund.
b) Fiscal Reserve Fund.
c) Guarantee Redemption Fund.
d) National Emergency Fund.
Answer: c) Guarantee Redemption Fund.

26. What should Administrative Ministries/Departments do if they anticipate an invocation of a guarantee?
a) Inform the Comptroller and Auditor General of India.
b) Notify the Supreme Court.
c) Inform the Budget Division well in advance.
d) Automatically terminate the guarantee.
Answer: c) Inform the Budget Division well in advance.

27. Upon invocation of a guarantee, how may the obligation be discharged?
a) By sanctioning a grant equal to the guarantee amount.
b) By sanctioning a loan equal to the amount of guarantee outstanding.
c) By waiving off the entire guarantee amount.
d) By selling the borrower’s assets.
Answer: b) By sanctioning a loan equal to the amount of guarantee outstanding.

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