Rule 279 of The General Financial Rules 2017 Levy of Guarantee Fees

Rule 279 of The General Financial Rules 2017 Levy of Guarantee Fees

Original Rule Text

Rule 279 (1) Levy of Guarantee Fees. The rates of fee on guarantees would be as notified by the Budget Division, Department of Economic Affairs, Ministry of Finance from time to time. The rates of guarantee fee are given in Appendix – 12. Ministries or Departments shall levy the prescribed fee in respect of all cases. The fees are also to be levied in respect of non-fund based borrowings or credits (viz. letters of credit, Bank guarantees etc.). In case of any doubt with regard to the categorisation of any particular undertaking or organization or the nature of borrowing for the purpose of levy of fee, the matter may be referred to the Budget Division for clarification. The Ministries or Departments should also take adequate steps to ensure prompt recovery of the prescribed fees.Rule 279 (2) The guarantee fee should be levied before the guarantee is given and thereafter on first April every year. The rate of guarantee fee is to be applied on the amount outstanding at the beginning of the guarantee year.Rule 279 (3) Where the guarantee fee is not paid on the due date, fee should be charged at double the normal rates for the period of default.Rule 279 (4) The Government may guarantee no more than 80% of the project loan, depending on the conditions imposed by the lender. This would incentivize the lenders to make proper analysis of the project, credit worthiness of the borrower(s), and build strategies for risk management. In such cases, bankers/ lenders may be asked to share the risk by bearing a minimum of 20% of the net loss associated with any default. The arrangement would ensure that the lenders undertake a more rigorous assessment of the risk exposure. Provided further that in certain exceptional circumstances, the Government of India may guarantee 100% of the financing where the organisation concerned is discharging some function on behalf of the Government of India.

Visual Summary

Guarantee Fees Levy

Mandatory levy on government guarantees, including non-fund based.

Payment Schedule

Levied before guarantee, then annually on April 1st on outstanding amount.

Default Penalties & Limits

Double rates for overdue fees; guarantees generally limited to 80% of loan.

Executive Summary

Rule 279 of The General Financial Rules, 2017, mandates the levy of guarantee fees by Ministries and Departments for government guarantees, including those for non-fund based borrowings. The fees are to be levied before the guarantee is issued and subsequently on April 1st each year, calculated on the outstanding amount. Failure to pay on time results in double the normal rates. The rule also stipulates that the government generally guarantees no more than 80% of a project loan, aiming to incentivize lenders to conduct thorough risk assessments. However, in exceptional circumstances, a 100% guarantee may be provided if the organization is performing a function on behalf of the Government of India.

In-Depth Analysis of the Rule

Rule 279 is a critical provision within the General Financial Rules, 2017, establishing the framework for managing financial risks associated with government guarantees. It ensures that the government is compensated for assuming contingent liabilities, promoting fiscal prudence and accountability across Ministries and Departments.

Breakdown of the Rule:
  • Rule 279 (1) Levy of Guarantee Fees: This sub-rule makes it mandatory for Ministries and Departments to levy fees on all government guarantees. This includes guarantees for non-fund based borrowings like letters of credit and bank guarantees. It also specifies that any doubts regarding categorization or borrowing nature for fee levy should be referred to the Budget Division for clarification, and Ministries must ensure prompt recovery of these fees.
  • Rule 279 (2) Annual Levy and Calculation: The guarantee fee must be levied initially before the guarantee is given. Subsequently, it is to be levied annually on the first of April, based on the amount outstanding at the beginning of the guarantee year. This ensures continuous compensation for the ongoing risk.
  • Rule 279 (3) Penalties for Default: To discourage late payments, this sub-rule stipulates that if the guarantee fee is not paid by the due date, double the normal rates will be charged for the period of default.
  • Rule 279 (4) Guarantee Limits and Risk Sharing: The government generally limits its guarantee to 80% of the project loan. This policy aims to incentivize lenders to conduct their own rigorous analysis of the project and the borrower’s creditworthiness, thereby sharing the risk. However, in exceptional circumstances, a 100% guarantee may be provided if the organization receiving the guarantee is performing a function directly on behalf of the Government of India.
Practical Example:

Consider a Public Sector Undertaking (PSU) seeking a loan of Rs. 100 crore for a new infrastructure project. The lender requires a government guarantee. As per Rule 279 (1), the administrative Ministry must levy a guarantee fee. This fee, determined by the Budget Division’s notified rates (Appendix 12), is paid by the PSU before the guarantee is issued. If the loan is for 10 years, the fee will be levied annually on April 1st for the outstanding loan amount. If the PSU defaults on a fee payment, Rule 279 (3) dictates that double the normal rate will be charged. Furthermore, under Rule 279 (4), the government would typically guarantee only up to Rs. 80 crore (80% of the loan), pushing the lender to assess and bear the risk for the remaining 20%. If, however, the PSU’s project is deemed critical and directly serving a core government function, a 100% guarantee might be approved under exceptional circumstances.

Related Provisions

Understanding Rule 279 is enhanced by reviewing related provisions that govern government guarantees and borrowings:

Learning Aids

Mnemonics:
  • F.E.E.D.L. – Fees (Levy), Every (April 1st), Excess (Double rates for default), Default (Penalties), Limits (80% guarantee).
Process Flowchart:
Start: Need forGovt. GuaranteeBudget DivisionNotifies Fee RatesMinistry/Dept Levies Fee(Before Guarantee)Fee Levied Annually(April 1st)Fee Paid on Due Date?YesContinueNoCharge Double RatesGovt. Guarantees up to 80%(or 100% in exceptions)End: GuaranteeIssued/Managed

Multiple Choice Questions (MCQs)

1. What is the primary purpose of levying guarantee fees under Rule 279 of the General Financial Rules, 2017?

  • A) To generate revenue for the government’s general budget.
  • B) To compensate the government for assuming contingent liabilities and promote fiscal prudence.
  • C) To discourage public sector undertakings from seeking loans.
  • D) To cover the administrative costs of processing guarantee applications.
Show Answer

Correct Answer: B) To compensate the government for assuming contingent liabilities and promote fiscal prudence.

2. According to Rule 279 (2) of the General Financial Rules, 2017, when is the guarantee fee applied after the initial levy?

  • A) Quarterly, on the outstanding amount.
  • B) Annually, on the first of April, on the outstanding amount.
  • C) Only when the loan repayment schedule changes.
  • D) At the end of the project’s completion.
Show Answer

Correct Answer: B) Annually, on the first of April, on the outstanding amount.

3. What is the penalty for not paying the guarantee fee on the due date, as per Rule 279 (3) of the General Financial Rules, 2017?

  • A) A flat penalty of Rs. 10,000.
  • B) The guarantee is immediately revoked.
  • C) Double the normal rates for the period of default.
  • D) The outstanding amount is added to the principal loan.
Show Answer

Correct Answer: C) Double the normal rates for the period of default.

4. What is the general maximum percentage of a project loan that the Government may guarantee under Rule 279 (4) of the General Financial Rules, 2017?

  • A) 100%
  • B) 50%
  • C) 80%
  • D) 75%
Show Answer

Correct Answer: C) 80%

5. Rule 279 (1) of the General Financial Rules, 2017 states that guarantee fees are levied on which types of borrowings?

  • A) Only fund-based borrowings.
  • B) Only non-fund based borrowings.
  • C) Both fund-based and non-fund based borrowings or credits.
  • D) Only borrowings from multilateral agencies.
Show Answer

Correct Answer: C) Both fund-based and non-fund based borrowings or credits.

Frequently Asked Questions

What is the purpose of guarantee fees under Rule 279 of the General Financial Rules, 2017?

The purpose is to compensate the government for the contingent liability it undertakes by providing a guarantee. It promotes fiscal discipline and ensures that the risk assumed by the government is appropriately priced.

How are guarantee fees calculated and when are they due as per Rule 279 of the General Financial Rules, 2017?

The fees are calculated based on rates notified by the Budget Division, Department of Economic Affairs. They are initially levied before the guarantee is given and then annually on April 1st, based on the outstanding amount of the guaranteed loan.

Are there any exceptions to the 80% guarantee limit mentioned in Rule 279 (4) of the General Financial Rules, 2017?

Yes, in certain exceptional circumstances, the Government of India may guarantee 100% of the financing. This typically applies when the organization concerned is discharging some critical function directly on behalf of the Government of India.

Key Takeaways

  • Rule 279 mandates the levy of guarantee fees for all government guarantees, including non-fund based credits.
  • Fees are initially levied before the guarantee and then annually on April 1st, based on the outstanding amount.
  • Default in fee payment incurs double the normal rates as a penalty.
  • Government guarantees are generally capped at 80% of the project loan to encourage lender risk assessment, with a 100% guarantee possible in exceptional, government-function-related cases.

Conclusion

Rule 279 of The General Financial Rules, 2017, is fundamental to the prudent management of government guarantees. By instituting a clear framework for levying fees, ensuring timely payments, penalizing defaults, and setting limits on guarantee coverage, it reinforces financial accountability and encourages a shared responsibility for risk assessment among all stakeholders. Adherence to this rule is crucial for maintaining fiscal health and transparency in government financial operations.

Related posts:

  1. Rule 277 of The General Financial Rules 2017 Government of India Guarantee Guidelines
  2. Rule 278 of The General Financial Rules 2017 Borrowings from Multilateral Agencies
  3. Rule 281 of The General Financial Rules 2017 Review of Guarantees
  4. Rule 283 of The General Financial Rules 2017 Invocation of Guarantee