Para 3.13.6 — MSO

3.13.6 The important points to be looked into in the course of audit of borrowings have been discussed below:

(i) Audit has the responsibility to ensure that the borrowings of a Government are so regulated as not to exceed the limits, if any, fixed by the Legislature from time to time and that the conditions laid down by or under an Act of Parliament are duly observed in respect of a loan granted by the Government of India to a State or guaranteed by it.

(ii) In the case of loans raised by State Governments, Audit should monitor the compliance, by the State Governments, with the conditions imposed by the Government of India while giving consent to their raising the loans or guaranteeing their repayment, or while granting a loan to them.

(iii) Audit should ensure that the proceeds from borrowings have been properly brought to account and have been expended only on the objects for which the loans were raised or to which borrowed moneys may properly be applied in accordance with the sound principles of public finance.

(iv) Audit should also examine whether adequate arrangements have been made for amortisation of the debt and bring to the notice of the Government instances in which this requirement has been ignored or the arrangements made appear prima facie to be inadequate. The following general principles will govern the examination of amortisation arrangements:

(a) Amortisation arrangements in respect of loans availed of for unproductive purposes may be related to some extent to their maturity period and also to the likelihood of an increase in unproductive debt.

(b) It would, however, be more prudent to relate the arrangements to the objective of the borrowing rather than to the actual currency of the loan. The period should be comparatively short in cases where

(i) the loan is intended for an unproductive purpose, expenditure on which should more appropriately be met from revenues;

(ii) the life of the assets created by utilising the loan is comparatively short; or

(iii) the extent of borrowings for such unproductive purposes is likely to increase rapidly.

(c) Where a material asset is created, the amortisation period should never exceed its life.

(d) Arrangements for amortisation of loans for productive purposes must depend on the peculiar circumstances of each case. Normally, the rate of amortisation should be related to the life of the revenue-producing asset for the creation of which the debt was incurred.

(e) Where the net earning power of an asset substantially exceeds the interest on the debt, it may not be necessary to insist upon amortisation. Where depreciation or renewal reserves are constituted for the replacement of assets created from loan funds, amortisation is often omitted altogether or its rate scaled down. However, even in both these types of cases, it is a sound and prudent financial policy to make amortisation arrangements.

(f) In the case of borrowings to finance loans to cultivators and others, the actual recoveries of principal may be sufficient for debt repayment if used for that purpose, provided all losses are written off to revenue.

(v) The responsibility for the audit of transactions connected with the Debt Redemption Scheme of the Union Government or of any such scheme adopted by State Governments devolves on the Indian Audit and Accounts Department. It should be verified that the conditions governing these schemes are scrupulously observed. It should be seen, in particular, that the annual debits against revenue under the schemes are calculated strictly in accordance with the approved programmes, that the appropriations for reduction or avoidance of debt are applied to the objects for which the money has been set aside, and that the liquidation of debt proceeds at the rate and on the lines prescribed.