Para 10.10 — When the Government guarantees loans taken by Publ

10.10 GUARANTEES GIVEN BY CENTRAL GOVERNMENT 10.10.1 Guarantees create contingent liabilities and it is necessary to account for the same. Government generally gives guarantee against the loans taken by Central Public Sector Undertakings. Article 292 of the Constitution of India extends the executive power of the Union Government to give guarantees on the security of the CFI, within such limits, as may be fixed by Parliament. Beginning with the financial year 2004-05, the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) and the Rules made there under prescribes a limit of 0.5% of GDP for guarantees to be given in any financial year. If this limit is exceeded owing to unforeseen circumstances, the Finance Minister is required to make a statement in both Houses of Parliament to explain the deviation. The statement should explain whether the deviation is substantial, if it relates to actual or any potential budgetary outcomes, and the remedial measures that the Government proposes to take in the matter.

10.10.2 Chapter 11 of General Financial Rules, 2017 prescribes the powers to give Government Guarantees and the limits thereon. Rule 276 of GFR, 2017 defines the objectives of Government Guarantees and purpose for extending the same. The sovereign guarantee is normally extended for 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 to central public sector companies/ agencies.

Rule 277 of GFR,2017 details the Guidelines for grant of Government of India Guarantee. This includes the necessary safeguards that the FA may keep in view while processing the application. It prescribes that after examination in the concerned Ministry or Department, all proposals for extending guarantees shall be referred to Ministry of Finance (Budget Division) for approval.

10.10.3 Government Guarantee Policy,2022 issued by Ministry of Finance vide OM. No. 12(13)- B(SD)/2020-Part dated 17th May, 2022, stipulates the procedure to be followed while extending guarantees and other salient features of guarantees given by Government of India. In order to

ensure greater transparency in fiscal operations, Rule 6 of the FRBM Rules, 2004 requires government to publish a disclosure statement on guarantees, at the time of presenting the annual financial statement and the 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. These statements are compiled by the Line Ministries/Departments and submitted to CGA Office, for onward submission to Ministry of Finance (Budget Division). Based upon the inputs, a statement of Guarantees given by the Central Government is presented as an annexure in the Receipt Budget.

10.10.4 As per GFR Rule 281 annual review of guarantees is to be ensured by all Ministries or Departments. The FAs of the Ministries or Departments should undertake these reviews. 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 periodical 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, Ministry of Finance, DEA by tenth of April. While furnishing the summary statements to Budget Division the Ministries or Departments should also certify that the information tallies with the material furnished to the CGA for the purpose of inclusion in the Finance Accounts (IGAS-1 Statement) of the relevant year.

10.10.5. Invocation of Guarantee: In the event of invocation of a guarantee, the obligation may be discharged with the approval of Budget Division, Ministry of Finance by sanctioning a loan equal to the amount of guarantee outstanding/invoked. However, any payment on this account will finally be charged to the Guarantee Redemption Fund maintained in the Public Account. (Rule 283(3),GFR,2017). The expenditure as well as the recoveries, if any, should be classified in the Government account under a distinct sub-head "Loans on invoking guarantees given by Government". This will be done under the relevant loan major head, exhibiting the name of the person/party against which loan is indicated at the detailed head level. If in due course, the whole or a part of the loan amount is finally held to be irrecoverable, the same should be adjusted in the manner indicated below:

 The amount of loan held to be irrecoverable shall be adjusted by debit to the Guarantee Redemption Fund, through the same accounting procedure as prescribed for accounting of expenditure financed from reserve Funds. This is as per para 3.4 of the General Directions in the List of Major and Minor Heads of Accounts.

10.10.6 Accounting for Guarantees: The Head of Accounting Organisation of Ministry/Department i.e. Pr.CCA/CCA/CA(i/c) as the case may be, shall be responsible to maintain guarantee register. To do this, they shall obtain necessary details from all Administrative Division of their Ministries/Departments dealing with sovereign guarantees on Government Account. The information relating to Statement Number – 4/ IGAS-1 of the Finance Accounts of the Union Government, for the guarantees outstanding at the end of a financial year shall be called by CGA from the Head of Accounting Organisation i.e. Pr.CCA/CCA/CA(i/c) as the case may be, of each Ministry/Department. The Pr.CCA/CCA/CA(i/c) shall be responsible to send the duly verified statement to the Finance Accounts Section of the office of CGA, latest by 31st May each year. Such returns sent by the Principal Accounts Office will also show the cases of guarantees if so, invoked during the year. Since the payments for invoked guarantees shall be treated as loans, the figures of paid amounts in the Statement should be based on the figures booked in the accounts.

10.10.7 Administrative Division of Ministries/Departments would be required to send the documents listed below to their Principal Accounts Offices on regular basis for reporting, monitoring and review of guarantees and maintenance of guarantee information in GFR 25 and IGAS-1. This will enable Principal Accounts Offices to furnish the requisite information to office of CGA for inclusion in Union Finance Accounts.

(i) Copy of the guarantee agreement containing terms and conditions for checking correctness of calculations of the guarantee fee. Schedule of guarantee fee receivable and received

(ii) Class, sector of guarantee

(iii) Details of loan indicating purpose and amount etc.

(iv) Repayment, schedule of loans

(v) Rate of Guarantee fee per annum

(vi) Copies of other related documents while updating GFR 25 (outstanding principal, interest etc. At the end of the period)

(vii) Inputs/information as per the format of IGAS:1 Guarantees given by the Central Government.

To ensure accuracy, the Principal Accounts Office should also confirm the figures to be included in the IGAS-1 with concerned Administrative Divisions, before forwarding to office of CGA.

(MoF, Budget Division OM No 12(10)-B(SD)/2023 dated 25.09.2023) 10.10.8 As a measure to enhance fiscal management and make adequate provision for guarantees related contingent liabilities/invoked guarantees, a 'Guarantee Redemption Fund' has been created. In order to meet the contingent liability arising out of guarantees invoked, an amount as decided each year is provided under the head 'Transfer to Guarantee Redemption Fund' below the Major Head '2075-Misc. General Services' in the Demand for Grant of DEA. The amount provided as transfer to ‘Guarantee Redemption Fund’ will be accounted for under a distinct sub-head 'Transfer to Guarantee Redemption Fund' below the Minor heads '797-Transfer to Redemption Fund/Deposit Account' under the Major head '2075-Misc. General Services'. Contra credit shall be afforded to the Major Head-8235- General and other Reserve Fund -117- Guarantee Redemption Fund. When guarantees are invoked, the expenditure incurred will be accounted for at Sub-Head level of the loan head, as "Loans on invoking guarantees given by the Government' with the name of the loanee indicated as the detailed head. Recovery from the Fund will also be accounted under the loan head as Deduct entry below minor head '902- Deductamount met from Guarantee Redemption Fund'.

What This Means

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Key Points

• 1Government guarantees create contingent liabilities that must be accounted for under FRBM Act limits (0.5% of GDP per year)
• 2GFR 2017 Chapter 11 prescribes powers, limits, and guidelines for government guarantees
• 3FAs must annually review guarantees and maintain a register in Form GFR 25
• 4Pr.CCA/CCA/CA must send verified guarantee statements for Finance Accounts by 31st May each year
• 5Invoked guarantees are discharged through loans charged to the Guarantee Redemption Fund

Practical Example

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Cross References

Frequently Asked Questions

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.