Rule 277 of The General Financial Rules 2017 Government of India Guarantee Guidelines

Rule 277 of The General Financial Rules 2017 Government of India Guarantee Guidelines

Original Rule Text

Rule 277 Guidelines for grant of Government of India Guarantee: The following guidelines should be followed by the Ministries or Departments of the Government of India for recommending guarantee or counter guarantee: – (i) A proposal for guarantee by Government must be justified in public interest such as in the case of borrowings by central public sector institutions for approved development purposes or borrowings by central public sector undertakings from Banks for working capital and other purposes. (ii) The Administrative Ministry/ Department or the credit Divisions of Department of Economic Affairs shall examine the proposal in consultation with the Financial Adviser in the same manner as a proposal for loan. While examining the proposal the following considerations shall be kept in view: – (a) Public interest which the guarantee is expected to serve. (b) Credit worthiness of the borrower to ensure that no undue risk is involved. (c) Terms of the borrowing shall take into account the yields as applicable on Government paper of similar maturity. (d) The conditions prescribed in the guarantee order/agreement in order to ensure continued credit worthiness of the borrower. (iii) Risk associated with assumption of a new contingent liability/guarantee proposal, including the probability of future payouts should be thoroughly assessed by the concerned Administrative Ministry/Department or Credit Divisions of Department of Economic Affairs recommending the proposal. Such assessment should ideally be entrusted to an independent unit and should be undertaken even when it has already been decided by a higher authority to provide guarantees. The assessment should reveal an accurate picture of the financial condition of the entity to be guaranteed; risks associated with implementation of the project/ scheme, etc. This information would be useful to estimate the funds needed to meet associated contingent liabilities if the need should arise, in current or future budgets. (iv) After examination in the concerned Ministry or Department or Credit Division of DEA, all proposals for extending guarantees shall be referred to Budget Division, DEA for approval. No guarantees shall be given without the approval of Budget Division, DEA. (v) With a view to enable the Ministry of Finance to examine cases of Government of India guarantees and extension thereto, all Ministries or Departments should furnish to that Ministry, data of certain operational parameters of the Public Sector Undertaking or Entity, as given in GFR26. In case the accounts of the Central Public Sector Undertaking or Entity have been audited by the Comptroller & Auditor General of India, the effect of the comments of the Comptroller & Auditor General of India on the Central Public Sector Undertaking’s profitability should be brought out. Further, where BIFR targets have been assigned or Cabinet directions issued to the Company, the actuals vis-à-vis targets for the preceding three years should be indicated. The data should be furnished in the Form GFR 26 along with the proposal for guarantee. (vi) Guarantees shall normally be restricted to the repayment of principal and normal interest component of the loan. Other risks shall not form part of the guarantee. (vii) Government guarantees will be extended to only central public sector companies/ agencies. (viii) Government guarantees shall not be provided to the private sector. (ix) Government guarantees should normally not be extended for external commercial borrowings. (x) Government guarantees may be given on all soft loan components of the bilateral/ multilateral aid. However, guarantee shall not be normally given for the commercial loan components of such aid. (xi) Government of India guarantee will not be given in cases of grants. However, if the donor insists on ensuring performance, the same may be listed as a negotiating condition for getting the grant. (xii) Appropriate conditions, may be made by Government while giving the guarantee e.g. period of guarantee, levy of fee to cover risk, representation for Government on the Board of Management, Mortgage or lien on the assets, submission to Government of periodical reports and accounts, right to get the accounts audited on behalf of Government etc. Even if fee, representation and mortgage are not considered necessary, the right to verify the continued credit–worthiness of the borrower should be ensured. (xiii) Guarantees may not be proposed for pursuing low priority objectives or programmes. Proposal for grant of guarantee as an off-budget support should also be examined comprehensively by the proposing Ministry/Department against other alternative forms of support which may be more appropriate and cost- effective. For example, in the case of provision of credit guarantees to enterprises that continually incur losses as a result of government’s pricing policy, budgetary subsidies or direct government loans may be a more effective and less costly option. (xiv) Guarantees may not be proposed in respect of Central Public Sector Enterprises whose strong financial credentials and high credit rating would indicate inherent ability to directly raise the required resources without the support of government guarantee.

Visual Summary

Public Interest Justification

Guarantees must serve a clear public interest.

Thorough Risk Assessment

Evaluate creditworthiness and contingent liabilities.

Budget Division Approval

All proposals require explicit approval from Budget Division, DEA.

Executive Summary

Rule 277 of The General Financial Rules, 2017, lays down comprehensive guidelines for Ministries and Departments of the Government of India when recommending or extending government guarantees. The core principle is that such proposals must be justified in public interest, undergo rigorous examination by the Administrative Ministry/Department and Credit Divisions of DEA, and receive explicit approval from the Budget Division, DEA. The rule also specifies that guarantees are generally restricted to central public sector companies/agencies, cover only principal and normal interest, and are not typically extended to the private sector, external commercial borrowings, or grants. It mandates a thorough assessment of associated risks and creditworthiness, along with the furnishing of specific financial data (GFR 26) to the Ministry of Finance.

In-Depth Analysis of the Rule

Introduction: Rule 277 serves as a critical framework for managing the Government of India’s contingent liabilities arising from guarantees. It ensures fiscal prudence and strategic alignment when the government undertakes financial backing for various entities.

Breakdown of the Rule:

  • Public Interest Justification (i): Any proposal for a government guarantee must be clearly justified by public interest. This includes borrowings by central public sector institutions for approved development projects or working capital.
  • Examination by Administrative Ministry/DEA (ii): The Administrative Ministry/Department or the Credit Divisions of the Department of Economic Affairs (DEA) must examine the proposal. This examination involves assessing:
    • The public interest served by the guarantee.
    • The creditworthiness of the borrower to mitigate undue risk.
    • The terms of borrowing, considering yields on similar government papers.
    • The conditions in the guarantee order/agreement to ensure the borrower’s continued creditworthiness.
  • Thorough Risk Assessment (iii): A comprehensive assessment of the risks associated with a new contingent liability/guarantee, including potential future payouts, is mandatory. This assessment should ideally be conducted by an independent unit, even if a higher authority has already decided to provide the guarantee. It aims to provide an accurate financial picture of the guaranteed entity and estimate funds needed for contingent liabilities.
  • Budget Division Approval (iv): All proposals for extending guarantees, after examination by the concerned Ministry/Department or Credit Division of DEA, must be referred to and approved by the Budget Division, DEA. No guarantee can be issued without this approval.
  • Data Furnishing to Ministry of Finance (v): Ministries/Departments must provide the Ministry of Finance with operational parameter data of the Public Sector Undertaking (PSU) or entity, as per Form GFR 26. This includes details on profitability, audit comments from CAG (if applicable), and performance against BIFR targets or Cabinet directions for the preceding three years.
  • Scope of Guarantee (vi): Guarantees are typically limited to the repayment of principal and normal interest components of the loan. Other risks are generally excluded.
  • Eligibility (vii & viii): Government guarantees are exclusively extended to central public sector companies/agencies and are explicitly prohibited for the private sector.
  • Restrictions on Borrowings (ix & x): Guarantees should normally not be extended for external commercial borrowings. For bilateral/multilateral aid, guarantees may cover soft loan components but not typically commercial loan components.
  • No Guarantees for Grants (xi): Government of India guarantees are not provided for grants. If a donor requires performance assurance, it should be a negotiating condition for the grant.
  • Appropriate Conditions (xii): The government may impose various conditions, such as the period of guarantee, levy of a risk-covering fee, government representation on the Board, mortgage/lien on assets, and submission of periodical reports and audited accounts. The right to verify the borrower’s creditworthiness must be ensured.
  • Avoid Low Priority Objectives (xiii): Guarantees should not be proposed for low-priority objectives or programs. Off-budget support proposals should be compared with other cost-effective support forms like budgetary subsidies or direct loans.
  • Avoid Guarantees for Strong PSUs (xiv): Guarantees should not be proposed for Central Public Sector Enterprises that possess strong financial credentials and high credit ratings, indicating their inherent ability to raise resources independently.

Practical Example: A Central Public Sector Undertaking (CPSU) requires a significant loan for a new infrastructure project deemed vital for national development. The Administrative Ministry, in consultation with its Financial Adviser, prepares a proposal. They must demonstrate how the project serves public interest, assess the CPSU’s creditworthiness, and evaluate all associated financial risks. The proposal, including GFR 26 data, is then sent to the Budget Division, DEA, for final approval. The guarantee, if approved, would cover only the principal and normal interest of the loan, and specific conditions like a guarantee fee and government representation on the CPSU’s board would be stipulated.

Related Provisions

Understanding Rule 277 is enhanced by considering these related provisions:

Learning Aids

Mnemonics
  • J.A.A.E.R. for key guidelines on Government Guarantees:
    • Justify in Public Interest
    • Assess Creditworthiness & Risk
    • Approve via Budget Division
    • Ensure Conditions are Met
    • Restrict to Central PSUs
Process Flowchart
Guarantee ProposalJustify Public InterestAdmin Ministry ExaminesAssess CreditworthinessEvaluate RisksFurnish GFR 26 DataRefer to Budget DivisionBudget DivisionApproves?YesGuarantee GrantedNoProposal Rejected

Multiple Choice Questions

1. According to Rule 277 of The General Financial Rules, 2017, what is a primary justification for a Government of India guarantee proposal?

  • A) To increase the private sector’s profitability.
  • B) To provide off-budget support for low-priority programs.
  • C) To serve public interest, such as approved development purposes of central public sector institutions.
  • D) To cover all risks, including commercial loan components of aid.
Show Answer

Correct Answer: C) To serve public interest, such as approved development purposes of central public sector institutions.

2. Under Rule 277 of The General Financial Rules, 2017, which entity’s approval is mandatory for extending Government of India guarantees?

  • A) The Administrative Ministry/Department.
  • B) The Comptroller & Auditor General of India.
  • C) The Budget Division, Department of Economic Affairs (DEA).
  • D) The Reserve Bank of India.
Show Answer

Correct Answer: C) The Budget Division, Department of Economic Affairs (DEA).

3. Rule 277 of The General Financial Rules, 2017, states that Government of India guarantees will be extended to which type of entities?

  • A) Only private sector companies.
  • B) Both central public sector and private sector companies.
  • C) Only central public sector companies/agencies.
  • D) Foreign governments for commercial loans.
Show Answer

Correct Answer: C) Only central public sector companies/agencies.

4. What is the normal restriction on the scope of Government of India guarantees as per Rule 277 of The General Financial Rules, 2017?

  • A) They cover all risks, including exchange rate fluctuations.
  • B) They are restricted to repayment of principal and normal interest component of the loan.
  • C) They cover commercial loan components of bilateral/multilateral aid.
  • D) They are given in cases of grants if the donor insists.
Show Answer

Correct Answer: B) They are restricted to repayment of principal and normal interest component of the loan.

5. According to Rule 277 of The General Financial Rules, 2017, what data should Ministries/Departments furnish to the Ministry of Finance for guarantee examination?

  • A) Only the project’s technical specifications.
  • B) Data of certain operational parameters of the PSU or entity, as given in GFR 26.
  • C) A detailed list of all private sector partners involved.
  • D) The personal financial statements of the borrower’s management.
Show Answer

Correct Answer: B) Data of certain operational parameters of the PSU or entity, as given in GFR 26.

Frequently Asked Questions

Can private sector entities receive Government of India guarantees under Rule 277 of The General Financial Rules, 2017?

No, Rule 277(viii) explicitly states that Government guarantees shall not be provided to the private sector. They are restricted to central public sector companies/agencies.

What is the role of the Budget Division, DEA, in granting guarantees under Rule 277 of The General Financial Rules, 2017?

The Budget Division, Department of Economic Affairs (DEA), plays a crucial role. All proposals for extending guarantees must be referred to and approved by the Budget Division, DEA, after examination by the concerned Administrative Ministry/Department or Credit Division of DEA. No guarantee can be given without their approval.

What data must be furnished to the Ministry of Finance for guarantees under Rule 277 of The General Financial Rules, 2017?

Ministries or Departments must furnish data of certain operational parameters of the Public Sector Undertaking or Entity, as specified in Form GFR 26. This includes profitability, audit comments from CAG (if applicable), and actuals versus targets for the preceding three years where BIFR targets or Cabinet directions exist.

Key Takeaways

  • Government guarantees must always be justified in public interest and undergo thorough examination for creditworthiness and risk.
  • Approval from the Budget Division, Department of Economic Affairs (DEA), is a mandatory prerequisite for all guarantee proposals.
  • Guarantees are primarily for central public sector companies/agencies and are generally restricted to covering principal and normal interest, with specific exclusions for the private sector, external commercial borrowings, and grants.
  • Ministries must provide detailed financial and operational data (GFR 26) to the Ministry of Finance for comprehensive assessment.

Conclusion

Rule 277 of The General Financial Rules, 2017, establishes a robust framework for the prudent and strategic issuance of Government of India guarantees. By mandating public interest justification, rigorous financial assessment, and centralized approval, it aims to safeguard public funds, ensure fiscal discipline, and promote responsible financial management within central public sector entities. Adherence to these guidelines is crucial for maintaining the government’s financial health and ensuring that guarantees serve their intended developmental objectives without undue risk.

Related posts:

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  2. Rule 280 of The General Financial Rules 2017 Execution of Government Guarantees
  3. Rule 283 of The General Financial Rules 2017 Invocation of Guarantee
  4. Rule 275 of The General Financial Rules 2017 Government Guarantees