Context:
Recently, a working group constituted by the Reserve Bank of India (RBI) made certain recommendations to address issues relating to guarantees extended by State governments.
Guarantee:
- Contingent liability of a State, processed by an accessory contract, which protects the lender/investor from the risk of borrower defaulting. They are answerable for the debt, default or miscarriage of the latter.
- Not much harmful in good times but leads to significant fiscal risks and burden the State at other times resulting in unanticipated cash outflows and increased debt.
- State governments are often required to sanction, and issue guarantees, on behalf of State owned enterprises, cooperative institutions, urban local bodies and/or other State governed entities, to respective lenders.
- Resorted into 3 scenarios at the State level –
- A sovereign guarantee is a precondition for concessional loans from bilateral or multilateral agencies (to public sector enterprises)
- To improve viability of projects or activities with the potential to provide significant social and economic benefits
- To enable public sector enterprises to raise resources at lower interest charges or on more favourable terms.
Key Terms:
- Creditor – the entity to which/whom the guarantee is given.
- Principal debtor – the defaulting entity on whose behalf the guarantee is given.
- Surety – the person/entity giving the guarantee.
- Indemnity – contract that protects the lender from loss caused to them by the conduct of the promisor or the principal debtor.
Source: The Hindu
Previous Year Question
Which one of the following statements correctly describes the meaning of legal tender money?
[UPSC Civil Services Exam – 2017 Prelims]
(a) The money which is tendered in courts of law to defray the fee of legal cases.
(b) The money which a creditor is under compulsion to accept in settlement of his claims.
(c) The bank money in the form of cheques, drafts, bills of exchange, etc.
(d) The metallic money in circulation in a country.
Answer: (b)
