Finance Ministry begins annual exercise to review loan guarantees, aims to “avoid default”

The finance ministry on Tuesday asked all government departments and ministries to review guarantees against various loans they have issued.

The ministry said government guarantees are “contingent liabilities and must be properly monitored to avoid defaults” by borrowing entities. “The follow-up or review undertaken should examine whether the borrower is meeting its repayment or interest obligations in accordance with the terms of the loan agreement,” the ministry said in an official communication to ministries on Tuesday.

Financial advisers from the respective ministries were invited to submit an annual review of public guarantees to the budget division of the Ministry of Finance. For guarantees given on external loans, the Department of Economic Affairs will conduct a review. This is an annual exercise carried out by the Ministry of Finance.

The examination is also carried out to monitor the repayment capacity of the loan and the collateral amount of the borrowers.

Under Article 292 of the Constitution, the central government gives guarantees for the repayment of loans, and the government can provide up to 0.5 percent of GDP (gross domestic product) for additional guarantees during the course of ‘a particular financial year.

The stock of contingent liabilities in the form of guarantees given by the government increased from Rs 1.07 lakh crore in 2004-05 to Rs 4.47 lakh crore at the end of 2018-19, according to the latest data available from the Ministry of Finance.

In 2018-19, the net increase in guarantees was Rs 66,811 crore, or 0.4% of GDP, within the outer limit of 0.5%.

The government generally provides guarantees against loans taken out by government entities for the execution of projects with social and economic benefits. This improves the viability of projects and reduces their cost of borrowing.

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