- RBI’s working group made recommendations to resolve issues related to guarantees extended by State governments.
- A working group was constituted by the Reserve Bank of India in July 2022 to make recommendations on issues related to guarantees extended by State governments.
- The Working Group recommended a uniform reporting framework for the guarantees given by State governments and a uniform guarantee ceiling. It also recommended to expand the definition of ‘guarantee.’
- A ‘guarantee’ is a legal obligation for a State to make payments and protect an investor/lender from the risk of default by a borrower.
- The entity to whom the guarantee is given is the ‘creditor’, the defaulting entity on whose behalf the guarantee is given is called the ‘principal debtor’ and the entity giving the guarantee (State governments in this context) is called the ‘surety’.
At the State level, guarantees are given in three scenarios, which are as follows:
- Where a sovereign guarantee is a precondition for concessional loans from bilateral or multilateral agencies.
- To improve the viability of projects or activities with the potential to provide significant social and economic benefits.
- To enable public sector enterprises to raise resources at lower interest charges or on more favourable terms.