The government today tightened the norms for providing sovereign guarantees for funding of projects and asked financially-strong public sector enterprises (PSEs) to raise money from the market directly without state support.
The Government Guarantee Policy issued by the Finance Ministry said that the blue chip PSEs with high credit profile should be raising money from the market without any state guarantee.
The government had outstanding guarantees, which are provided to improve viability of social projects and help PSEs raise funds at low interest rates, of Rs 1.13 lakh crore as on March 2009. These guarantees can be invoked in case of default.
"Guarantees may not ... Be proposed (by concerned administrative ministry) in respect of PSEs whose strong financial credentials and high credit rating would indicate inherent ability to directly raise the required resources without the support of the government," the Policy said.
It further said that concerned administrative ministries should thoroughly scrutinise the loan proposal before sending the proposal to the Finance Ministry for seeking government guarantee.
"...There should be a thorough scrutiny of the loan proposal by both the lending and borrowing agencies. Existence of a government guarantee should not become a substitute for financial prudence," the policy said.
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In order to check fiscal profligacy, the FRBM Act had suggested that the sovereign guarantee of the central government should not exceed 0.5 per cent of the GDP in any financial year.
The revised norms further stipulate that sovereign guarantee would be provided to only 70 to 90 per cent of the project cost and credit worthiness of the entity to be covered. The remaining 30 to 10 per cent of the cost would be guaranteed by borrowing institutions in the project.
In case of default the borrowing would have to pay its share of guarantee first and then approach the government.
The new provisions, the guidelines said, "would incentivise other stake holders to make proper analysis of the project, credit worthiness of borrowers, and build in strategies for risk management".
To safeguard its interest the government has also decided to monitor proper use of guaranteed funds, it said, adding "this has to be done to eliminate any perverse incentive for willful default".