RBI report calls for caps on state government guarantees

MUMBAI: A report released by RBI on Tuesday has called for fresh caps on guarantees provided by state governments for project loans and disallowing guarantees for the private sector.

The report of a working group said that a reasonable ceiling on the issuance of guarantees by state governments is desirable. The group has recommended a ceiling for incremental guarantees issued during a year at 5% of the state’s revenue receipts or 0.5% of the state’s gross domestic product, whichever is less.

In the past, RBI has flagged the issue of bank finance to government-owned entities, often in violation of the prudential guidelines. RBI’s concern was also because states sought to substitute budgetary resources with bank finances.

Following the warnings by RBI, the issue of increasing bank finance to government-owned entities, in the 32nd Conference of the State Finance Secretaries (SFS) held on July 7, a working group comprising senior finance bureaucrats from states and the Centre and an RBI official was constituted.