The Hindu Business Line : Exposure Draft on accounting standards for Govts — `Treat letter of comfort as implicit guarantee'

THE Centre and State Governments may soon be required to treat letters of comfort issued by them to banks and financial institutions as `implicit guarantees', which they would have to disclose in their annual or other periodic financial statements.

The outstanding guarantees or contingent liabilities given by the Centre as on March 31, 2002 was estimated at Rs 96,859 crore, while the corresponding figure for the State Governments (based on information received from 17 major States) stood even higher at Rs 1,66,116 crore. The aggregate sums guaranteed by the Centre and States have risen from Rs 1,00,603 crore in end-March 1993 to Rs 2,62,975 crore, which is well over 12 per cent of the country's gross domestic product (GDP).

However, these figures pertain to only `explicit' contingent liabilities of the Governments that are recognised by law or contracts. Besides these, State Governments, for instance, also issue letters of comfort to banks and financial institutions to enable public entities (including special purpose vehicles) to raise funds from the market. But the provisions of the Indian Contract Act and the Article 299 (1) of the Constitution, which deals with contractual obligations, currently, do not consider a letter of comfort to constitute a guarantee.

Very often, these are issued by the concerned secretary or department head and not signed by the Governor. As a result, they are not `charged' or fixed to the security of the consolidated fund of the particular Government.

But things may change with the Government Accounting Standards Advisory Board (GASAB) now issuing its first `Exposure Draft' on proposed accounting standards on "guarantees given by Governments". The draft has proposed that in respect of financial statements prepared on or after April 1, 2003 (i.e. current fiscal), both the Centre and State Governments also furnish information with regard to letters of comfort provided by them and the underlying `implicit' contingency liabilities arising therein.

"The international practice appears to be to treat the letter of comfort as good as an implicit guarantee", the Exposure Draft has stated.

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