A working group has recommended a ceiling for incremental guarantees issued by state governments during a year at 5 per cent of revenue receipts or 0.5
per cent of the gross state domestic product, whichever is less.

The guarantee fee should reflect the riskiness of the borrower or projects. States should charge a minimum guarantee fee of 0.25 per cent apart from levying additional risk premiums based on their risk assessment.

The working group comprised members drawn from the finance ministry, Comptroller and Auditor General of India and a few state governments.

The panel recommended that there should not be any distinction between conditional and unconditional; financial and performance guarantees for arriving at the total amount of guarantees as all of these would be like contingent liability that might crystallise at a future date.

It added that ‘‘guarantee’’ should be used in a broader sense and may include all such instruments, by whatever name they are called if they create an obligation on the part of the issuer for making payment on behalf of the borrower at a future date.

The purpose for which government guarantees may be issued should be clearly defined to ensure the financial viability of projects or activities undertaken by government entities and to enable state public sector entities to raise resources at lower interest charges or on more favourable terms.

States should classify the projects or activities as high risk, medium risk and low risk and assign appropriate risk weights before they extend guarantees.

According to the committee such risk categorisation should also take into consideration record of defaults.

It recommended that the states should conservatively keep the lowest slab of risk weight at 100 per cent.

“A reasonable ceiling on issuance of guarantees may be desirable, as their invocation could lead to significant fiscal stress on the state governments,” it said.