States' loan guarantee more than triples since FY17 to Rs 9.4 lakh cr in FY23
States often sanction and issue on behalf of their various enterprises, cooperative institutions, and urban local bodies guarantees in favour of their lenders which are generally banks or other financial institutions.
The total loan guarantees extended by the 17 major states to their entities have more than tripled to Rs 9.4 lakh crore as of FY23 from Rs 3 lakh crore in FY17.
This is equivalent to the entire increase in such guarantees of these states during FY2017-22, Icra Ratings chief economist Aditi Nayar said in the report.
In fact, such guarantees have been steadily increasing over the years, from Rs 3 lakh crore in FY17 to Rs 7.7 lakh crore in FY21 and to Rs 9 lakh crore in FY22.
The states excluded from the report are the Northeastern states and other hilly states along with Goa.
The RBI guidelines include tighter rules for ascertaining guarantee ceiling by a state than is being currently implemented by most states as well as assigning risk weights to guarantees, in addition to enhanced monitoring.
The guidelines also state that guarantees should not be extended for external commercial borrowings, the amount guaranteed should be limited to 80 per cent of the loan, etc.
Moreover, the guarantees should not be used for obtaining finance through state-owned entities, which substitutes budgetary resources of the states.
According to Nayar, this is in line with the change in guidelines on off-budget debt issued by the Centre in FY23 and she feels that together, these two will nudge states to become more selective while extending guarantees to their entities.
Additionally, the working group has also urged the lenders to assess a loan proposal from state-owned entities without taking comfort of a guarantee,
