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Guarantee Redemption Fund

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“Guarantees” are contingent liabilities that may have to be invoked if an event covered by the guarantee occurs. Since guarantees result in increase in contingent liability, they should be examined with as much due diligence as a proposal for a loan, taking into account, the credit-worthiness of the borrower, the amount and risks sought to be covered by a sovereign guarantee, the terms of the borrowing, the justification and public purpose to be served, probabilities that various commitments will become due and possible costs of such liabilities, etc.

Article 292 of the Constitution of India extends the executive power of the Union to the giving of guarantees on the security of the Consolidated Fund of India, within such limits as may be fixed by Parliament. Article 293 provides that the legislature of a State can fix limits on borrowing by a State as well as limits on guarantees to be given by it. Articles 292 and 293 refer, respectively, to borrowings by the Government of India and borrowings by the States. In article 292, a limit on the borrowing as well as on guarantees to be given by the Union government can be fixed by Parliament by law. Similarly article 293 provides that the legislature of a State can fix limits on borrowing by a State as well as limits on guarantees to be given by it. Article 299 of the Constitution provides that all contracts made in the exercise of the executive power of the Union shall be made expressly indicating that the contract has been made on behalf of the President.

The Ninth Finance Commission observed that in order that the capital stock of the country might be maintained intact, there should be adequate provision for depreciation and loan should be repaid out of the amortization/sinking fund. The Tenth Finance Commission recommended the establishment of sinking funds for overall fiscal discipline. Eleventh Finance Commission also emphasized the need for setting up of Sinking Fund in each State for the amortization of debt.

A Guarantee Redemption Fund (GRF) has been established in the Public Account of India from 1999-2000 for redemption of guarantees given to CPSEs, FIs, etc. by the Union Government whenever such guarantees are invoked. The fund is fed through budgetary appropriations with an annual provision in the Budget Estimates (BE),under the head 'Transfer to Guarantee Redemption Fund' (Grant No. 32 of Department of Economic Affairs).

On the recommendations of Twelfth Finance Commission that all States should set up sinking funds / guaranteed redemption fund for amortization of all loan including loans from banks, liabilities on account of NSSF, etc through earmarked guarantee fees, fifteen States have set up Guarantee Redemption Fund and twenty States Consolidated Sinking Fund. This fund is maintained outside the consolidated fund of the States in the public account and is not to be used for any other purpose, except for redemption of loans. This ensures good fiscal governance.

Reports of the Finance Commissions




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