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Public Sector Enterprises in India UPSC NOTE

 Financial implications and risks associated with State governments providing guarantees for loans taken by Public Sector Enterprises

  • As a State grows, the need to fund infrastructure projects increases

  • The Public Sector Enterprises which are executing these projects need funds

  • While many of them get funds within the State budget, some of the projects require huge investments, for which PSEs turn to banks and financial institutions

  • The State government stands as guarantor for such loans, otherwise the banks may not be willing to extend loans to such entities.

  • Given the guarantee, the banks are happy to give loans, often without even doing due diligence about the commercial viability of such projects.

  • Because of the very low risk attached to such loans, they also most often do not monitor the projects they finance

  • As long as the PSEs are financially sound and servicing the debt, this is a win-win situation.

  • However, if the PSEs turn loss-making, and if the banks invoke the guarantees, it is the State government which will be in trouble

  • This was the concern that the RBI’s Working Group on State Government Guarantees had expressed in its report released last week.

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  • The outstanding State-wise guarantees issued as a share of each State’s Gross Domestic Products at the end of March in 2018, 2019, 2020, 2021 and 2022

  • For instance, for Andhra Pradesh, the outstanding guarantees as a share of its GDP grew from around 4% to over 10% in the said period. 

  • In fact, the guarantees are on an increasing trend in 11 other States — Bihar, Chhattisgarh, Haryana, Karnataka, Kerala, Meghalaya, Rajasthan, Sikkim, Tamil Nadu, Telangana and Uttar Pradesh.

  • In Sikkim and Telangana, along with Andhra Pradesh, the share of outstanding government guarantees as a share of their GDPs was above the 10% mark at the end of 2022. 

  • Whereas it was around 8-9% in the case of Meghalaya and Uttar Pradesh

  • The Working Group has asked governments to have a fixed ceiling on the guarantees issued and make it uniform across all States. 

  • The Group has also recommended the States assess risks attached to each guarantee and assign weights based on the sector and the borrower’s past record.

  • In Sikkim and Telangana, along with Andhra Pradesh, the share of outstanding government guarantees as a share of their GDPs was above the 10% mark at the end of 2022. 

  • Whereas it was around 8-9% in the case of Meghalaya and Uttar Pradesh

  • The Working Group has asked governments to have a fixed ceiling on the guarantees issued and make it uniform across all States. 

  • The Group has also recommended the States assess risks attached to each guarantee and assign weights based on the sector and the borrower’s past record.


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Public Sector Enterprises in India UPSC NOTE
Public Sector Enterprises in India UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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