On May 12, 2020, the Ministry of Finance announced that the government departments and ministries will review guarantees issued against loans issued by various government entities.
The exercise is done to make sure that the borrower is discharging the repayment obligations and interest obligations according to the loan agreement. The financial advisories of the ministries have been asked to submit a review of government guarantees to the budget wing operating under Ministry of Finance.
This is an annual exercise that is done by the Finance Ministry.
The review exercise is done to monitor the capacity of guarantee amount of the borrowers. Article 292 of the constitution guarantees repayment of borrowings. According to the article, the government shall provide up to 0.5% of GDP for incremental guarantees in a financial year.
The guarantees given by the Government of India has increased from Rs 1.07 lakh crores in 2004-05 to Rs 4.47 lakh crores in 2018-19. The guarantees are provided by the government entities to improve viability of the projects and also help lower the cost of the borrowing.
The Guarantee policy of the Government launched in 2010 streamlines and has improved the approval of guarantees
Objectives of the Guarantee
According to the policy, the main objectives of government guarantees are as follows
- To improve viability of projects
- To encourage public sector to increase resources at lower interests
- To fulfill the requirements of concessional loans
Other Legal Provisions
- The Indian Contract Act, 1872 provides provisions to the contracts of guarantee. Source: The GKToday