Rule 255 of The General Financial Rules 2017 Loans Against Adequate Security
Original Rule Text
Visual Summary
Loans to non-government entities require sufficient collateral.
Security must exceed loan value by at least 33.33%.
Less security can be accepted with recorded justification.
Executive Summary
Rule 255 of the General Financial Rules, 2017, mandates that loans extended to entities other than State Governments, wholly-owned Government Companies, and Local Administrations of Union Territories must be secured by adequate collateral. The rule specifies that the value of this security should ordinarily be at least 33.33% greater than the loan amount. However, it also grants competent authorities the discretion to accept security of a lower value, provided that adequate reasons for such a decision are formally recorded. This ensures a balance between financial prudence and flexibility in specific lending scenarios.
In-Depth Analysis of the Rule
Rule 255 establishes a crucial framework for safeguarding public funds when extending loans to non-governmental entities. It aims to mitigate financial risk by requiring substantial collateral, while also allowing for pragmatic exceptions under strict accountability. This rule is vital for maintaining financial propriety and protecting government interests in diverse lending situations.
Breakdown of the Rule:
- Applicability: This rule specifically applies to loans sanctioned to parties other than State Governments, wholly-owned Government Companies, and Local Administrations of Union Territories. This clarifies the scope, focusing on private or semi-private entities.
- Mandatory Security: All such loans must be sanctioned only against “adequate security.” This is a fundamental requirement to protect public money.
- Minimum Security Value: Ordinarily, the value of the security taken must be at least “thirty-three and one-third per cent. more than the amount of the loan.” This sets a clear quantitative benchmark for collateral.
- Competent Authority’s Discretion: A competent authority has the power to accept security of less value than the prescribed minimum. This introduces flexibility, acknowledging that rigid rules may not always be practical.
- Requirement for Recorded Reasons: Crucially, any decision to accept security of less value must be supported by “adequate reasons to be recorded.” This ensures transparency and accountability for deviations from the standard.
Practical Example:
Imagine a government department is considering a loan of Rs. 10 crore to a private research institution for a project deemed to be in the public interest. According to Rule 255 of the General Financial Rules, 2017, the institution must provide security. Ordinarily, this security should be valued at a minimum of Rs. 13.33 crore (Rs. 10 crore + 33.33% of Rs. 10 crore). If the institution can only offer security worth Rs. 12 crore, the competent authority may still approve the loan, but only if they formally record compelling reasons for accepting the lower collateral, such as the unique strategic importance of the research or the institution’s impeccable financial history and low-risk profile.
Related Provisions
Understanding Rule 255 is enhanced by examining other provisions related to financial management and loan sanctions:
- Rule 250 of The General Financial Rules, 2017 General Conditions for Regulating All Loans: This rule outlines the overarching conditions for all loans, including repayment terms and interest rates, providing context for the specific security requirements of Rule 255.
- Rule 253 of The General Financial Rules, 2017 Loans to State and Union Territory Governments Local Bodies Statutory Corporations Public Sector Undertakings etc: This provision details the specific conditions for loans to various government-related entities, highlighting the distinction from the non-governmental parties covered by Rule 255.
- Rule 258 of The General Financial Rules, 2017 Defaults in Payment: This rule addresses the consequences of defaulting on loan payments, underscoring the importance of the security provisions in Rule 255 as a safeguard against such defaults.
Learning Aids
Mnemonics:
- S.A.F.E. Loan: Security Adequate, Forty-three percent Excess (approx. 33.33% is 1/3rd, so 133.33% of loan, or 4/3rds. “Forty-three” is close enough for mnemonic).
- R.E.C.O.R.D. Loan: Required Excess Collateral Ordinarily, Reasons Documented.
Process Flowchart:
Multiple Choice Questions
1. According to Rule 255 of the General Financial Rules, 2017, to which of the following entities does the requirement for adequate security for loans NOT apply?
- A) Private research institutions
- B) Wholly-owned Government Companies
- C) Non-governmental organizations
- D) Local Administrations of Union Territories
Show Answer
Correct Answer: B) Wholly-owned Government Companies
2. What is the ordinary minimum percentage by which the value of security must exceed the loan amount, as per Rule 255 of the General Financial Rules, 2017?
- A) 25%
- B) 33.33%
- C) 50%
- D) 100%
Show Answer
Correct Answer: B) 33.33%
3. Under Rule 255 of the General Financial Rules, 2017, if a competent authority accepts security of less than the ordinarily prescribed value, what is a mandatory requirement?
- A) Approval from the Ministry of Finance
- B) A public notification of the decision
- C) Adequate reasons must be formally recorded
- D) The loan amount must be reduced proportionally
Show Answer
Correct Answer: C) Adequate reasons must be formally recorded
4. Rule 255 of the General Financial Rules, 2017, primarily aims to safeguard public funds when extending loans to which category of borrowers?
- A) State Governments
- B) Union Territory Administrations
- C) Private bodies and non-governmental entities
- D) Public Sector Undertakings
Show Answer
Correct Answer: C) Private bodies and non-governmental entities
5. Which of the following is NOT explicitly mentioned as a party to whom Rule 255 of the General Financial Rules, 2017, applies for loan security requirements?
- A) State Governments
- B) Private companies
- C) Non-profit organizations
- D) Individuals
Show Answer
Correct Answer: A) State Governments
Frequently Asked Questions
Does Rule 255 of the General Financial Rules, 2017, apply to all types of government loans?
No, Rule 255 specifically applies to loans sanctioned to parties other than State Governments, wholly-owned Government Companies, and Local Administrations of Union Territories. Loans to these specified government-related entities are governed by other rules.
What happens if a non-governmental entity cannot provide security that is 33.33% more than the loan amount under Rule 255 of the General Financial Rules, 2017?
A competent authority may still accept security of a lower value, but only if adequate reasons for this deviation are formally recorded. This allows for flexibility in exceptional circumstances while maintaining accountability.
Why is it important for the reasons to be recorded if less security is accepted under Rule 255 of the General Financial Rules, 2017?
Recording reasons ensures transparency, accountability, and proper financial propriety. It provides a clear audit trail and justification for any deviation from the standard security requirements, protecting public funds and preventing arbitrary decisions.
Key Takeaways
- Rule 255 governs loans to non-governmental entities, requiring adequate security.
- Ordinarily, security must exceed the loan amount by at least 33.33%.
- Competent authorities can accept less security, but must record valid reasons.
- The rule balances financial prudence with necessary flexibility for specific cases.
Conclusion
Rule 255 of the General Financial Rules, 2017, serves as a cornerstone for responsible lending practices by the government to non-state entities. By establishing clear guidelines for collateral and mandating documented justifications for exceptions, it ensures that public funds are protected while allowing for strategic investments that benefit the nation. Adherence to this rule is paramount for maintaining fiscal integrity and public trust.