Rule 258 of The General Financial Rules 2017 Defaults in Payment

Rule 258 of The General Financial Rules 2017 Defaults in Payment

Original Rule Text

Rule 258 (1) Defaults in Payment. The loan sanctions in favour of State or Union Territory Governments and the loan sanctions or undertakings or agreements in case of wholly Government owned companies or Public Sector Undertakings shall invariably include provision for the levy of penal interest on overdue installments of interest or principal and interest. The loan sanctions and agreements in all other cases shall invariably stipulate a higher rate of interest and provide for lower rate of interest in the case of punctual payments. The penal or the higher rate of interest, as the case may be, shall not, except under special orders of Government, be less than two and half per cent per annum above the normal rate of interest prescribed by Government from time to time for the loans advanced.Rule 258 (2) Any default in the payment of interest upon a loan or in the repayment of principal, shall be promptly reported by the Accounts Officer, to the authority which sanctioned the loan. The responsibility of the Accounts Officer, under this rule refers only to the loans, the detailed accounts for which are kept by him.Rule 258 (3) Procedure to be followed in case of defaults in repayment of interest free loans or loans sanctioned at concessional rates of interest:(i) In the case of grant of interest free loans e.g., loans to technical educational institutions for construction of hostels, prompt repayment shall be made a condition for the grant of interest free loans. The sanction letter in such cases shall provide that in the event of any default in repayment, interest at rates prescribed by Government from time to time will be chargeable on the loans.(ii) In the case of loans sanctioned at concessional rates of interest the difference between the normal rate and concessional rate), shall be made conditional upon prompt repayments of principal and payment of interest thereon by the entity concerned.(iii) In the cases where in addition to interest free loans, subsidy is also provided to meet running expenses the sanction letter shall provide that in the event of any default in repayment, then the defaulted dues would be recovered out of the subsidy payable.Rule 258 (4) On receipt of a report of default referred to in sub-rule (2) above, the authority concerned shall immediately take steps to get the default remedied and also consider enforcement of penal or higher rate of interest on the overdue amounts. Where the sanctioning authority is satisfied, having regard to the circumstances of the case, that penal or higher interest need not be recovered, the borrower shall ordinarily be asked to pay interest, at the normal rate prescribed in the loan sanction, on the overdue amount (of principal and/or interest) from the due date of payment up to the date of settlement of the default. The recovery of additional interest shall not be waived except in special circumstances or where the period of defaults is very short, e.g., a few days.

Visual Summary

Penal Interest

Mandatory for overdue loan installments.

Report Defaults

Accounts Officer reports payment defaults promptly.

Loan Conditions

Interest-free/concessional loans have specific repayment terms.

Executive Summary

Rule 258 of The General Financial Rules, 2017, outlines the procedures for handling defaults in loan payments by various government entities and other borrowers. It mandates the inclusion of penal interest provisions in loan sanctions for overdue installments. The rule also details the reporting mechanism for defaults by Accounts Officers and specifies conditions for interest-free or concessional loans, including the charging of interest upon default and recovery of dues from subsidies. It emphasizes prompt action by sanctioning authorities to remedy defaults and enforce penal interest, with provisions for waiver only in exceptional circumstances.

In-Depth Analysis of the Rule

Introduction: Rule 258 is a critical component of financial discipline within the government framework, ensuring accountability and timely recovery of public funds advanced as loans. It establishes clear guidelines for managing defaults, thereby safeguarding government finances.

  • Sub-rule (1) – Penal Interest on Defaults: This sub-rule mandates that all loan sanctions to State/Union Territory Governments, wholly Government-owned companies, and Public Sector Undertakings must include a provision for penal interest on overdue principal and interest installments. For other borrowers, a higher rate of interest for defaults and a lower rate for punctual payments must be stipulated. This penal/higher rate must be at least 2.5% per annum above the normal rate, unless otherwise specified by special government orders.
  • Sub-rule (2) – Reporting Defaults: It is the responsibility of the Accounts Officer to promptly report any default in principal or interest payments to the authority that sanctioned the loan. This responsibility is limited to loans for which the Accounts Officer maintains detailed accounts.
  • Sub-rule (3) – Defaults in Interest-Free or Concessional Loans: This section addresses specific conditions for loans with special terms:
    • Interest-Free Loans: Prompt repayment is a mandatory condition. Default in repayment will lead to interest being charged at government-prescribed rates.
    • Concessional Loans: The concessional rate is conditional upon prompt repayment of principal and interest.
    • Loans with Subsidy: If a subsidy is also provided for running expenses, defaulted dues can be recovered from the payable subsidy.
  • Sub-rule (4) – Action on Default Report: Upon receiving a default report, the sanctioning authority must immediately take steps to remedy the default and consider enforcing penal or higher interest rates. Waiver of additional interest is only permissible in special circumstances or for very short default periods, otherwise, normal interest is charged on the overdue amount until settlement.

Practical Example: Imagine a Public Sector Undertaking (PSU) receives a loan from the Central Government. The loan agreement, as per Rule 258(1), includes a clause stating that if any installment of principal or interest is overdue, a penal interest of 3% above the normal rate will be applied. If the PSU defaults on a payment, the Accounts Officer, responsible for that loan’s detailed accounts, immediately reports this to the administrative Ministry that sanctioned the loan (Rule 258(2)). The Ministry then contacts the PSU, demanding the overdue amount plus the penal interest. If the PSU had received a concessional loan, the concession might be revoked, and the normal interest rate applied due to the default (Rule 258(3)(ii)).

Related Provisions

Understanding Rule 258 is enhanced by examining other related provisions within the General Financial Rules, 2017:

Learning Aids

Mnemonics
  • D-P-A-C: Defaults trigger Penalties, Accounts Officer Communicates.
  • Defaults Promptly Attract Consequences: A reminder that any default in loan repayment under Rule 258 leads to immediate action and potential penalties.
Process Flowchart
Loan Payment DueBorrower DefaultsAccounts Officer ReportsSpecial LoanTerms?YesApply Specific ConditionsNoEnforce Penal InterestWaive PenalInterest?YesWaive (Exceptional Cases)NoMaintain Penal InterestDefault Remedied

Multiple Choice Questions

1. According to Rule 258 (1) of The General Financial Rules, 2017, what must loan sanctions for State/Union Territory Governments invariably include regarding overdue installments?

  • A) A provision for a grace period before interest accrues.
  • B) A provision for the levy of penal interest.
  • C) A clause for automatic loan restructuring.
  • D) An option for converting overdue amounts to equity.
Show Answer

Correct Answer: B) A provision for the levy of penal interest.

2. As per Rule 258 (2) of The General Financial Rules, 2017, who is responsible for promptly reporting defaults in loan payments to the sanctioning authority?

  • A) The borrower entity itself.
  • B) The Ministry of Finance.
  • C) The Accounts Officer.
  • D) The Comptroller and Auditor General.
Show Answer

Correct Answer: C) The Accounts Officer.

3. Under Rule 258 (3)(i) of The General Financial Rules, 2017, what is a key condition for the grant of interest-free loans?

  • A) The borrower must provide additional collateral.
  • B) Prompt repayment must be a condition.
  • C) The loan must be used for social welfare projects only.
  • D) The loan amount cannot exceed a specified limit.
Show Answer

Correct Answer: B) Prompt repayment must be a condition.

4. According to Rule 258 (1) of The General Financial Rules, 2017, the penal or higher rate of interest on overdue payments shall not be less than what percentage above the normal rate?

  • A) One percent per annum.
  • B) Two percent per annum.
  • C) Two and a half percent per annum.
  • D) Three percent per annum.
Show Answer

Correct Answer: C) Two and a half percent per annum.

5. Under Rule 258 (4) of The General Financial Rules, 2017, when can the recovery of additional interest on overdue amounts be waived?

  • A) If the borrower requests a waiver.
  • B) Only in special circumstances or for very short default periods.
  • C) If the loan amount is below a certain threshold.
  • D) After a mutual agreement with the Accounts Officer.
Show Answer

Correct Answer: B) Only in special circumstances or for very short default periods.

Frequently Asked Questions

What is the primary purpose of Rule 258 of The General Financial Rules, 2017?

Rule 258 primarily establishes the framework for managing defaults in loan payments by government entities and other borrowers, ensuring financial discipline and recovery of public funds.

Who is mandated to report loan defaults under Rule 258 (2) of The General Financial Rules, 2017?

The Accounts Officer responsible for maintaining the detailed accounts of the loans is mandated to promptly report any default in the payment of interest or principal to the sanctioning authority.

Can penal interest be waived for overdue loan amounts as per Rule 258 (4) of The General Financial Rules, 2017?

The recovery of additional (penal or higher) interest can only be waived in special circumstances or where the period of default is very short, such as a few days. Otherwise, normal interest is charged on the overdue amount until settlement.

Key Takeaways

  • Loan sanctions must include provisions for penal interest on overdue installments, typically at least 2.5% above the normal rate.
  • Accounts Officers are responsible for promptly reporting any defaults in principal or interest payments to the sanctioning authority.
  • Interest-free or concessional loans become subject to prescribed interest rates or normal rates upon default, with potential recovery from subsidies.
  • Sanctioning authorities must take immediate action to remedy defaults and enforce penal interest, with waivers only in exceptional, short-term situations.

Conclusion

Rule 258 of The General Financial Rules, 2017, is fundamental to maintaining fiscal discipline and ensuring the responsible management of public funds. By clearly defining the consequences of payment defaults and establishing a robust reporting and enforcement mechanism, it reinforces accountability among borrowers and safeguards the financial health of the government. Adherence to these provisions is crucial for the integrity and efficiency of government lending operations.

Related posts:

  1. Rule 250 of The General Financial Rules 2017 General Conditions for Loans
  2. Rule 257 of The General Financial Rules 2017 Installments of Loans
  3. Rule 256 of The General Financial Rules 2017 Utilization Certificate Reports Statements
  4. Rule 251 of The General Financial Rules 2017 Interest on Loans