GOVERNMENT OF ANDHRA PRADESH

ABSTRACT

Guarantees – Guarantees issued by State Government – Certain guidelines prescribed - Orders- Issued.

FINANCE (DMC) DEPARTMENT

G.O.Ms.No. 446 Dated: 29^th September 2003

Read the following:-

1. G.O.Ms. No. 17, Finance and Planning (W&M) Department dated 22^nd January, 1981
2. G.O.Ms. No. 246, Finance and Planning (Finance Wing – W&M-I) Department dated 2^nd November, 1995.
3. G.O.Ms. No. 6, Finance (BG:II) Department dated 3^rd January, 2002.
4. G.O.Ms. No. 445, Finance (DMC) Department, dated 29^th September 2003.

O R D E R:

1. In reference 1 cited, Government has issued orders stipulating guidelines for issuing State Government guarantee (hereafter referred as “guarantee”).

2. In May 2001, the Reserve Bank of India constituted a Committee of State Finance Secretaries to examine the fiscal risk of guarantee(s). The RBI Committee submitted its report in July 2002, which recommended on various aspects of the guarantee(s). Accordingly, the Government has issued orders laying down the policy guidelines on guarantee(s) in the reference 4 above cited.

3. In the light of the above, the following guidelines are laid down to be followed by the Heads of Departments and the Departments of Secretariat in regard to guarantee(s). The guidelines have been classified as Pre-Sanction (pg 1-6), Guarantee Deed (pg 6) and Post-Sanction (pg 6-7) Guidelines.

4. PRE-SANCTION GUIDELINES

A. Guidelines issued by the Reserve Bank of India

1. All proposals for extending guarantee shall be referred to the Reserve Bank of India for clearance unless:

a. the rate of interest and other conditions relating to debentures or deposits as the case may be have already been approved by the Reserve Bank of India, and

b. the guarantee is proposed to be furnished in respect of loans and advances obtained by a borrowing entity from a Commercial or Co-operative Bank.

B. Guidelines prescribed by the State Government

1. The guarantee shall cover only the principal portion of the loan and not the interest thereon. Under exceptional circumstances, in case interest is also to be guaranteed, the reason for the same shall be detailed by the borrowing entity, which shall be examined by the Government and decided suitably.

2. The borrowing entity shall set apart from its profits an adequate Debt Redemption Reserve that shall be invested in Government Securities and shall not be utilized for any purpose without the permission of the Government.

3. The State Government may not guarantee the entire borrowing program of the borrowing entity. The extent of guarantee would vary from case to case basis so that the risks are not borne by the State Government alone and would be shared between the State Government and the Lender.

C. Guidelines for borrowings from Financial Institutions owned by the Central Government

1. Guarantee shall not be issued in case of borrowings from the Central financial institutions (especially those owned by Central Government[1]). It may not be appropriate for the Central Government owned institutions to obtain guarantee(s) from State level institutions.

2. The lending institution shall assess projects solely on the basis of viability and shall not rely on the guarantee(s). Where guarantee is taken as credit enhancement, it shall be reflected in reduction in the lending rate.

D. Additional Guidelines prescribed by the State Government based on the type of institution

1. Guidelines for Statutory Corporations wholly owned by Government

In case of Public Borrowings i.e. market loans or loans from Financial Institutions guarantee(s) shall be given in accordance with the Reserve Bank of India’s instructions.

2. Guidelines for Government Corporations, Government Companies, Co-operative Bodies, etc.

a. Loans for developmental purposes[2]

i) No guarantee shall be insisted upon, in cases where the lending institutions are satisfied about the management, the economic viability of the proposal, financial position and capacity for cash generation. The guarantee which the financing institutions demand shall not be more exacting than the guarantees which they demand from private companies / parties.

ii) In cases where guarantee is sought for, the following shall be the responsibility of the Administrative Departments of the Secretariat:

a. Undertake a detailed financial appraisal as to the viability and bankability of the proposed investment. It would also include analyzing the overall financial performance of the borrowing entity and in particular on the basis of its audited accounts and position of tax arrears.

b. Examine the parity between owned funds and capital investment, the overall debt-equity ratio and the net-worth of the Company. If necessary, stringent forms of financial discipline, like restrictions on distribution of dividends, further expansion on aggregate borrowings, creation of further charge on assets and stipulation of maintenance of minimum net working capital, etc. may be imposed.

c. In case of Co-operatives, obtain a report from the Registrar regarding the borrowing capacity of the Society, its audit classification and whether it has complied with the audit points raised.

d. Undertake the managerial appraisal to see if the existing management is capable of executing the expansion project successfully.

e. Consult the Government with respect to appointment of a Chief Executive; the selection shall be done carefully to provide efficient and effective management.

f. Insist on a second mortgage[3] of the assets in favour of the Government as a pre-requisite for the guarantee and ensure that adequate security and margin is available.

b. Loans for Working Capital purposes[4]

i) The Government shall not give guarantee in regard to cash-credit accommodation for working capital purposes. It shall be for the borrowing entity to enter into bilateral relationship with the lending institution for cash-credit accommodation by hypothecating its trading or manufacturing stocks with due margin demanded by the lending institution.

ii) Guarantee in respect of cash-credit accommodation shall arise only for margin money loans or before the commencement of production when hypothecation of stock for cash-credit accommodation may be difficult. Once production commences the guarantee shall be withdrawn.

iii) Trading concerns may prefer relying on cash-credit accommodation even for their working capital requirements. In such cases, the outstanding dues would be covered by hypothecated stock and thus, guarantee shall not be necessary. In case a lending institution demands for guarantee notwithstanding suitable stock coverage, it shall suitably justify its demand.

iv) If in exceptional cases, guarantee for a working capital loan or cash-credit accommodation becomes inevitable even after production commences, then

a. the guarantee shall be given only after careful examination of the credit worthiness of the borrowing entity subject to an agreement between the lending institution and the Government by which the lending institution shall agree to obtain direct security from the borrowing entity in the form of hypothecation of stock.

b. the lending institution shall take all precautions to watch that all sale proceeds of the hypothecated stock are credited to the loan account as first charge.

c. there shall also be an agreement between the Government and the borrowing entity that the latter shall give the required security to the lending institution by hypothecating its stock and all sale proceeds of the hypothecated stock shall be credited to the loan account as first charge.

d. the borrowing entity shall agree not to resort to credit sales during the period of the guarantee except when credit sales are secured by Bank Guarantees.

3. Guidelines on Guarantee Commission

a. The Departments of Secretariat and Heads of Departments shall adopt the following principles and rate of guarantee commission:

i) No security deposit need be paid by the borrowing entity on whose behalf Government guarantee is given,

ii) The guarantee commission shall be charged at ½% per annum or 2% consolidated for the entire guarantee period.

iii) The guarantee commission collected shall be credited to ‘0070. Other Administrative Services – 60. Other Services – MH.800. Other Receipts – SH.08. Commission for guarantee given by Government.’

4. Guidelines on Fiscal Risk Evaluation

a. The Departments of Secretariat and Heads of Departments shall evaluate the fiscal risk of the guarantee based on the following factors:

i) The guarantee shall be classified as direct liability, high risk, medium risk, low risk and very low risk, and the following weights shall be assigned depending on the type of risk:

a. Direct Liability – 100%

b. High Risk – 75%

c. Medium Risk – 50%

d. Low Risk – 25%

e. Very Low Risk – 5%

ii) The weights shall be applied to the underlying liability that is to be guaranteed to estimate the guarantee devolvement obligation, which shall then be added to debt service obligation to arrive at the annual fiscal burden of debt and guarantee(s).

iii) The following factors shall be considered for fiscal risk evaluation:

a. Debt servicing through own sources or Government Support – It shall be examined whether the borrowing entity would be able to service the debt through its own sources of income or some government support would be required.

b. Repayment Schedule – The repayment schedule of the borrowings of the borrowing entity shall also be examined.

c. Financial performance of the entity – The financial performance of the borrowing entity shall be analysed in terms of its profitability, operational strength, financial ratios such as debt-service coverage ratio, turnover ratios, liquidity ratios, etc. so as to take a view on the ability of the entity to service the debt.

d. Primary Security – It shall be examined whether any fixed assets or stock of the borrowing entity would be hypothecated or pledged or a charge would be created against the fixed or movable assets of the borrowing entity that would be offered as primary security to the lending institution.

e. Valuation of assets – The realizable value of the asset of the borrowing entity shall be considered while calculating the guarantee devolvement obligation of the Government. A Valuation Report mentioning the book value, actual value and realizable value of the assets of the entity shall be submitted along with the guarantee proposal.

f. Statutory Liabilities prior to Government Guaranteed Debt – The statutory liabilities to be settled prior to the Government Guaranteed Debt by the borrowing entity shall be considered for calculating the guarantee devolvement obligation of the Government.

iv) Based on the aforesaid fiscal risk evaluation the Departments of Secretariat and Heads of Departments shall submit the details of the borrowing entity in the format enclosed as Annexure I. The Departments of Secretariat and Heads of Departments shall give a detailed explanation on the fiscal risk evaluation of the proposal.

5. The Finance Department shall consider the proposal for approval for issuing the guarantee only after the above guidelines have been complied with by the Administrative Departments.

6. Before giving the approval for a guarantee the Finance Department shall also check whether the total amount of the outstanding guarantee(s), including the guarantee amount for which approval has been sought, is within the overall ceiling (currently 9% of the Gross State Domestic Product) imposed on guarantee(s) by the Government.

5. GUIDELINES FOR GUARANTEE DEED

A. Suitable clauses with respect to the following points shall be incorporated in the Guarantee Deed:

1. It shall be the primary responsibility of the lending institution to check whether the investments are in conformity with the project report. It shall not permit any deviation without the prior approval of the Government; otherwise, the Government shall be absolved of their responsibilities under the Guarantee Deed.

2. The lending institution shall undertake continuous monitoring of expenditure, proper managerial control and periodic evaluation of the progress.

3. Large-scale escalations and costs revision shall be brought to the notice of the Government and Government’s concurrence shall be obtained for revision of project cost.

4. The lending institution shall fully satisfy itself that the projects financed have income generating capacity sufficient to service the loans.

5. The lending institution shall report to the Government any event that might adversely affect the financial health of the guaranteed entity.

6. Guarantee shall be subject to timely availability of credit.

7. Guarantee shall not be taken as a substitute for satisfactory credit appraisal.

B. Failure to adhere to the obligations imposed on the lending institutions shall entail cessation of Government’s obligations under Guarantee Deed.

6. POST-SANCTION GUIDELINES

A. Guidelines on performance monitoring of guaranteed entity

1. The following measures shall be undertaken by the Administrative Departments to monitor the proper utilization of credit, and prompt repayment of loans:

a. The investments by the guaranteed entity shall be made according to the approved project report and on schedule.

b. Suitable administrative machinery and sound reporting mechanism shall be established, to ensure that:

i) the terms of the loan and of the guarantee are being fulfilled,

ii) the affairs of borrowing institutions continue to be satisfactory,

iii) provision is being made towards Debt Redemption Reserve and other Reserves,

iv) prescribed guarantee fee commission is being recovered promptly,

v) the accounts of the guaranteed entity are being audited regularly.

c. A separate file shall be maintained containing all the Inspection Reports and Audit Reports for each guaranteed entity.

d. A separate Register shall be maintained showing details of guarantee(s) given.

e. Specific responsibility shall be assigned to designated officers to monitor the latest position of the guaranteed entities regarding payments of amounts guaranteed, etc. and shall immediately bring to notice any default that arises or is likely to arise.

B. Guidelines on monitoring, disclosure and assessment of fiscal risk of outstanding guarantee(s)

1. The following measures shall be undertaken by the Departments of Secretariat and Heads of Departments with respect to the outstanding guarantee(s):

a. The Departments of Secretariat and Heads of Departments shall evaluate the fiscal risk of the outstanding guarantee(s) given by the State Government based on the Guidelines for Fiscal Risk Evaluation mentioned above.

b. The Departments of Secretariat and Heads of Departments shall submit on quarterly basis entity-wise position of the outstanding loans guaranteed by the Government and the likely future devolvement of the Government as at the end of the quarter in the format enclosed as Annexure II.

2. The following measures shall be undertaken by the Finance Department with respect to the outstanding guarantee(s):

a. The Tracking Unit would maintain a database of all the guarantee(s) issued and monitor the guarantee(s) issued with a view to control the underlying risk.

b. The data on guarantee(s) would be published in the State Budget in the format shown in Annexure III.

c. The information on default, invocation and payment performance would be disclosed in the State Budget, in addition to the annual sanctions of guarantee(s) and outstanding amount.

d. The information on outstanding guarantee position and the likely future devolvement as at the end of every quarter would be consolidated based on the statements submitted by the Departments of Secretariat as shown in Annexure II.

e. Techniques need to be developed to discipline the State Level Undertakings whose borrowings are guaranteed as well as set up an arrangement whereby they make provisions to meet possible shortfalls in project earnings.

f. Guarantee Redemption Fund:

i) 1% of the guarantee(s) outstanding against guaranteed entities whose liability is not taken over directly or indirectly by Government as on 31^st December of every year would be contributed to the fund account.

ii) In addition to income accrued to the Fund, the accretions by way of Guarantee Commission realized during the preceding year from the institutions, etc., to whom guarantee has been issued, would also be transferred to the fund account, during the succeeding year.

7. The Managing Director, APTS is requested to place these orders on the Andhra Pradesh Government website “www.ap.gov.in”.

(BY ORDER AND IN THE NAME OF THE GOVERNOR OF ANDHRA PRADESH)

V.S. SAMPATH

PRINCIPAL SECRETARY TO GOVERNMENT

To

All Departments of Secretariat

All Heads of Departments

All Section Officers in Fin. & Plg. (Fin.Wing) Department

Copy to Account-General I, Andhra Pradesh, Hyderabad.

Copy to Account-General II, Andhra Pradesh, Hyderabad.

Copy to the Director of Treasuries and Accounts, Andhra Pradesh, Hyderabad.

Copy to Pay and Accounts Officer, Hyderabad.

Copy to SF/SC.

ANNEXURE I

FISCAL RISK EVALUATION OF THE PROPOSAL FOR GOVERNMENT GUARANTEE

Name of the Borrowing Entity for whom guarantee is required
Name of the Lending Institution to whom guarantee is to be given
Purpose for which loan is proposed
Amount of Loan (Rs.)
Rate of Interest (% p.a.)
Amount for which guarantee is required (Rs.)
Guarantee Period (years)
Fiscal Risk involved in the Guarantee
Direct Liability	High Risk	Medium Risk	Low Risk		Very Low Risk
Primary Security (if any)
Value of the Assets as per the Valuation Report (Rs.)
Statutory Liabilities to be settled prior to Government Guaranteed Debt (Rs.)
Debt Servicing through own sources or Government Support
Amount of Outstanding Debt as on date (Rs.)
Principal		Overdue Interest		Total
Amount of Outstanding State Government Guaranteed Debt as on date (Rs.)
Principal		Overdue Interest		Total
Comments:

NOTE:

1. Attach the repayment schedule of the proposed loan.

2. Attach the detailed explanation on the fiscal risk evaluation of the proposal including the analysis of the financial performance of the borrowing entity.

ANNEXURE II

(To be submitted on quarterly basis by the Departments of Secretariat to the Finance Department)

NAME OF THE DEPARTMENT:

A) OUTSTANDING LOANS GUARANTEED BY THE STATE GOVERNMENT AS ON _______ __

Name of the Corporation / Institution	Loans outstanding as on _______________ for which Govt. Guarantee has been given			Year in which Govt. Guarantee was given	Fiscal Risk[5]	Scheduled Payments (Rs.)
	Principal (Rs.)	Overdue interest (Rs.)	Total			Year 1	Year 2	Year 3	Year 4	Year 5
TOTAL

NOTE:

1. In case the schedule of payment is beyond Year 5, kindly insert the additional year(s) in the above table.

B) FUTURE DEVOLVEMENT POSITION AS ON _______ __

Fiscal Risk	Scheduled Payments					Discounted Present Value of the Schedule Payments (@ 10% p.a.)
	Year 1	Year 2	Year 3	Year 4	Year 5
Direct Liabilities (100%)
High Risk (75%)
Medium Risk (50%)
Low Risk (25%)
Very Low Risk (5%)
TOTAL

ANNEXURE III

GUARANTEES ISSUED BY THE STATE GOVERNMENT AS ON MARCH 31, 200-

Sr. No.	Name of the Sector	Name of the public or other body to whom guarantee has been given	Authority for giving guarantee and date of sanction	Nature and extent of guarantee		Maximum amount guaranteed		Guaranteed debt outstanding as on March 31, 200-		Whether any securities are pledged to Government as a set-off against the guarantee	Guarantee fee charged	Guarantees invoked		Remarks (Date of maturity of loans)
				Bonds	Loans	Bonds	Loans	Bonds	Loans			Discharged	Not Discharged
1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
1	Power
2	Co-operative Sector
3	Irrigation
4	Roads and Transport
5	SFCs
6	Urban Development and Housing
7	Other Infrastructure
8	Others

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[1] Financials Institutions such as National Bank for Agriculture and Rural Development (NABARD), National Co-operative Development Corporation (NCDC), Life Insurance Corporation (LIC), National Housing Bank (NHB), Housing and Urban Development Corporation (HUDCO), are owned by the Central Government.

[2] Guarantee given to financing institutions like Industrial Development Bank of India, Industrial Finance Corporation of India, Life Insurance Corporation of India, etc. and to Commercial Banks for medium-term loans

[3] The first mortgage of the assets of the borrowing entity might have been executed in favour of the lending institution.

[4] Guarantee given to financing institutions and Commercial Banks for loans advanced to Public Sector Institutions, Co-operative Bodies and Government Companies.

[5] Fiscal Risk of the guarantee shall be classified into Direct Liability, High Risk, Medium Risk, Low Risk or Very Low Risk.