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The Reserve Bank of India (RBI) on Tuesday recommended that state governments should consider fixing a ceiling for incremental guarantees that they issue during a year at 5 per cent of Revenue Receipts or 0.5 per cent of Gross State Domestic Product, whichever is less.

The RBI has also recommended that state governments may consider charging a minimum guarantee fee for guarantees extended and additional risk premium may be charged based on the risk category and the tenor of the underlying loan.

It said that besides, state governments may publish data relating to guarantees, as per the Indian Government Accounting Standard (IGAS).

The RBI recommendations also said that the word ‘Guarantee’ should include all instruments, which create an obligation, contingent or otherwise, on part of the state government and the purpose for which government guarantees are issued should be clearly defined.

The implementation of these recommendations made by the RBI’s Working Group is expected to facilitate better fiscal management by the state governments.

The RBI has placed the report of the Working Group on State Government Guarantees on its website.

During the 32nd Conference of the State Finance Secretaries held on July 07, 2022, it was decided to constitute a Working Group comprising members drawn from the Ministry of Finance, Government of India; Comptroller and Auditor General of India; and some State Governments.

The terms of reference of the Working Group included, inter alia, prescribing a uniform guarantee ceiling for the States; uniform reporting framework for the guarantees given by the State Governments; assessing the adequacy of states’ contribution to the Guarantee Redemption Fund, etc.