RBI panel proposes framework for state guarantees

• A Reserve Bank working group has proposed that state governments in India to charge a minimum fee for guarantees extended by them on loans.

Working Group Background

• The 32nd Conference of the State Finance Secretaries in July 2022 led to the establishment of a Working Group to address risks associated with state government guarantees.
• The group aimed to assess the fiscal risks of guarantees extended by state governments on their fiscal health and the banking system.

Key Recommendations

• Recommends the state governments to charge a minimum guarantee fee for guarantees extended.
• Suggests an additional risk premium based on the risk category and tenor of the underlying loan.
• Proposes fixing a ceiling for incremental guarantees issued during a year at 5% of Revenue Receipts or 0.5% of Gross State Domestic Product, whichever is less.

Comprehensive Assessment and Risk Classification

• Recommends the state governments to classify projects/activities as high risk, medium risk, and low risk and assign appropriate risk weights before extending guarantees.
• The purpose for which government guarantees are issued should be clearly defined.
• There should not be any distinction made between Conditional/Unconditional, Financial/Performance guarantees concerning fiscal risk assessment.
• States should consider the risk of guarantees being invoked and undertake a comprehensive assessment of loan proposals without solely relying on state guarantees.

Prelims Takeaway

• State Guarantees
• Reserve Bank of India