Loans and Advances by the Central Government – Interest rates and other terms and conditions

Loans and Advances by the Central Government – Interest rates and other terms and conditions


Loans and Advances by the Central Government – Interest rates and other
terms and conditions ***F.No.5(3)-B(PD)/2016***Government of India***Ministry of Finance***Department of Economic Affairs***New Delhi, the 6th January, 2017***OFFICE MEMORANDUM

Untitled 5

 F.No.5(3)-B(PD)/2016
Government of India
Ministry of Finance
Department of Economic Affairs
New Delhi, the 6th January, 2017
OFFICE MEMORANDUM
 

Subject:- Loans and Advances by the Central Government – Interest rates
and other terms and conditions.
Reference this Ministry’s Office Memorandum F.No.5(3)-B(PD)2015 dated 3rd
February, 2016 on the captioned subject.
2. The lending rates, categories and conditions prescribed in the aforesaid
Office Memorandum have been reviewed. The revised rates of interest,
categories and conditions as given in the Table below, would be applicable
from 1st April, 2016 and till the time these are reviewed:
TABLE
Category of borrower & type of loan
Interest rate per cent per annum
1. State Governments (EAP Loan):
8.00
2. Union Territory Governments (with Legislature):
(i) Loans upto 1 year and EAP loan
8.00
(ii) Other Loans
8.50
3. Industrial and Commercial Undertakings in the Public
Sector and Cooperatives:
Loans for implemantation of VRS in
sick PSUs
10.00

The terms and condition and conditions regarding eligibility of loan would
remain the same as that of last year. If any specific request comes in
future from any other financial institution/CPSE/Autonomous
Body/Cooperative, it would be examined by the Budget Division, DEA on
merits of that case. 
3. The terms, including interest rate of loans to Foreign Governments may
be settled in consultation with Budget Division. Terms for on-lending of
funds under externally aided projects should be in accordance with the
prescribed pattern. In case, deviation is considered necessary, Budget
Division should be consulted. 
4. The interest rates prescribed above assume timely repayments and
interest payments and hence no further rebate in rates is to be allowed for
timely payments. 
5. OTHER TERMS AND CONDITIONS 
 (a) The loan sanctioning authority should meticulously follow the
instructions contained in General Financial Rules, 2005 (GFR 2005),
particularly, rules framed under Chapter 9 (II-LOANS) of
GFR, 2005, while sanctioning loans to various entities as stipulated
therein.
(b) The instructions issued from time to time have been reviewed and are
set out in the following paragraphs for facility of reference. 
6. STATE GOVERNMENTS
In the case of loans to State Governments, the arrangements for payment of
annual instalment of principal and interest will be as under:- 
(a) Block loans for State Plan Schemes and other Plan loans for Centrally
Sponsored Schemes:- These loans when drawn in instalments, will be
consolidated and deemed to have been drawn as on 1st October in each year.
The maturity period of the loans sanctioned for State Plans is 20 years,
repayments being made in 20 annual equal instalments together with interest
on the outstanding balance commencing from the following year, subject to
consolidation under the award of Twelfth Finance Commission (TFC). 
However, fifty per cent of these loans will enjoy a five year initial grace
period, after which repayments of these loans will be effected in 15 annual
equal instalments. The amounts annually payable(by way of principal and
interest) would be recovered in 10 equal monthly instalments commencing
15th June, subject to debt waiver under the award of TFC. 
(b) Other Loans:- The terms of repayment of these loans will be as laid
down from time to time. 
7. PUBLIC SECTOR PROJECTS 
(A) For new installations or expansion of existing institutions: 
(a) The terms and conditions of loans should be fixed with reference to the
financial picture presented in the approved Project Report. (Once the
pattern is settled, there should be no change except with the specific
concurrence of this Department for reasons to be stated in writing).
(b) The
capital requirements of a project should include adequate provisions for
interest payment on borrowings during the period of construction (as
specified in the Project Report). The interest on loans due during the
period of construction will be allowed to be capitalised to the extent of
the provisions made for this purpose in the approved Project Report. In
other words, while interest on loans advanced to an undertaking during the
period of construction will be notionally recovered by allowing its
capitalisation, the payment of interest should effectively commence after
the construction period is over. 
(c) The repayment of principal should ordinarily commence one year after
the project commences production, the number of instalments being
determined with reference to the financial projections and repaying
capacity specified in the Project Report. Requests for further moratorium
will be considered only in exceptional cases where the Project Report has
specified any special circumstances that may necessitate a longer period of
moratorium and has indicated clearly what staggering of repayment would be
needed over the necessary break period. The period of loans sanctioned
against capitalised interest during the period of construction may also be
on the same terms and conditions as are applicable to loans provided for
financing the project costs. 
(d) A suitable period of moratorium subject to a maximum of five years from
the date of drawal of the loans may be allowed for the repayment of
instalments of principal, having regard to the nature of the project, the
stage of construction etc. The period of moratorium should not, however,
extend in any case, beyond two years from the date of project going into
production, or in the case of programmes of expansion, beyond two years
from the date of expanded project coming into operation. 
(B) For meeting working capital requirements: The undertakings are expected
to obtain their cash credit requirements from the State Bank of
India/Nationalised Banks by hypothecating their current assets (such as
stock of stores, raw materials, finished goods, work in progress, etc.) and
where the entire working capital requirements cannot be raised in this
manner by seeking a guarantee from Government. Accordingly, requests from
Public Sector Undertakings for funds for meeting working capital
requirements should be considered only to the extent the same cannot be had
from the State Bank of India/Nationalised Banks. 
8. GENERAL REPAYMENT PERIOD 
(A) (i) The period for repayment of loans for all parties other than State
Governments should be fixed with due regard to the purpose for which they
are advanced and it should be restricted to the minimum possible. Normally,
no loan should be granted for a period exceeding 10 years. Where a longer
period for repayment is sought, prior concurrence of the Budget Division in
this Department will be necessary for fixing the period. 
(ii) The repayment of a loan should normally commence from the first
anniversary date of its drawal or on expiry of the period of moratorium, as
the case may be. The recovery should ordinarily be effected in annual equal
instalments of principal. 
(iii) The period of repayment of working capital loans should preferably be
restricted to two or three years. In no case, however, the period of these
loans should exceed 5 years. 
(B) Moratorium: Subject to exceptions made in respect of pubic sector
projects, a suitable period of moratorium towards repayment might be agreed
to in individual cases having regard to the project for which the loans are
to be utilised. However, no moratorium shouldordinarily be allowed in
respect of interest payment on loans. Ministries/Departments may with the
approval of their Financial Advisers allow moratorium on repayment of
principal wherever considered necessary upto a maximum period of 2 years. 
(C) (i) Repayment before due date: Any instalment paid before its due date
may be taken entirely towards the principal provided it is accompanied by
payment towards interest due upto date of actual payment of instalment; if
not, the amount of the instalment will first be adjusted towards the
interest due for the preceding and current periods and the balance, if any,
will alone be applied towards the principal. Where the payment of the
instalment is in advance of the due date by 14 days or less, interest for
the full period (half year or full year as the case may be) will be
payable. If any State Government repays an instalment of a loan which is
consolidated as on 1st October, in advance of the due date by more than 14
days the interest 
(ii) Pre-payment premium: Prepayment premium of 0.25% on the loans with
residual maturity of less than 10 years and 0.50% for the loans with
residual maturity of 10 years and above, shall be charged. The provision
does not apply to the loans to State/UT Governments. 
(D) Penalty Clause: The loan sanctions/agreements should invariably include
a penalty clause providing for levy of a penal rate of interest in the
event of default in repayment of instalment(s) of principal and/or
interest. The penal rate of interest should not be less than 2.50% above
the normal rate of interest at which a loan is sanctioned. 
(E) Defaults in repayment/interest payment: 
(i) In the event of a default in repayment of loan/interest payment, the
recovery of interest at penal rate may not be waived unless there are
special reasons justifying a waiver. However, a decision in this regard
will be taken by the Ministry of Finance (Budget Division) on the advise of
Financial Adviser. Even in such cases, a minimum of 0.25% should be
recovered from the defaulting party as penalty. 
(ii) The penal rate of interest is chargeable on the overdue instalments of
principal and/or interest from the due date of their payment to the date
preceding the date of actual payment. 
(iii) Whenever a fresh loan is to be sanctioned to a borrower who has
earlier defaulted, the loan sanctioning authority must consider the
question of recovery of defaulted dues. All releases to Public Sector
Undertakings against budgeted outlays should be made only after adjusting
the defaults, if any, pertaining to repayment of loans and interest. If for
special and exceptional reasons such adjustments are not possible, specific
orders of Secretary (Expenditure) should be obtained through Budget
Division, before release of fresh loans, in relaxation of extant orders, in
conformity
with this Division circular No.F.2 (190)-B(SD)/91, dated 15.10.1991. 
(iv) Any defaults should ab-initio serve as a warning signal to the
Ministries/ Departments for which curative action has to be taken
immediately. 
(v) Ministries/Departments need to critically review the financial position
of the borrower, including defaulting CPSUs and wherever possible, should
take immediate action to recover the money due to the Government. 
(vi) In the case of defaulting CPSUs, there has to be a clear road map for
restructuring of these CPSUs, as prolonged approval results in burgeoning
of defaults. 
(vii)Ministries/Departments are to ensure that these defaults do not become
fiscally unsustainable. 
(viii) Wherever Ministries/Departments are considering restructuring of a
CPSU, it must be ensured 
that besides equity infusion, funds mobilisation,
rescheduling of loans/interest payments, write off of dues, etc. should be
formulated holistically. However, no request for waiver/postponement of
instalments on any ground whatsoever will be accepted, except in cases of
companies referred to BIFR or in respect of those companies which have
incurred cash losses for last three years, in conformity with this Division
circular No.F.2(165)-B(SD)/94, dated 06.10.1994. 
(F) Requests for modification of terms of loans: 
(i) Borrowers are required to adhere strictly to the terms settled for
loans made to them and modifications of these terms in their favour can be
made subsequently only for very special reasons. Requests for modification
of terms may relate to increase in the period of a loan or of initial
moratorium period towards repayment, or waiver of penal interest or
reduction in or waiver of normal rate of interest. The procedure of dealing
with requests for waiver of penal interest has already been dealt with in
paragraph 8. Cases involving other modifications in repayment terms should
be considered in consultation with the Budget Division in this Ministry. In
referring such cases, the impact of the modifications on the estimates of
repayment/interest which have gone into the Budget and Government’s
resources position should be succinctly brought out by the administrative
Ministry. 
(ii) In examining proposals for modification of the period of the loan, the
interest rate at which the loan was sanctioned should also be reviewed. In
the case of a loan of which repayment has already commenced the revised
rate of interest should be applied ab initio only to the residuary portion
of the loan outstanding on the date of extension of its period. 
(iii) Requests for waiver of recovery of normal interest (either for a
specified period or for the entire period) on a loan which originally
sanctioned at normal rate of interest, will attract the provisions of Rule
223 (1) of G.F.R.2005 and should be dealt with accordingly. 
(G) Loans sanctioned at concessional rates: 
(i) In cases where loans are to be sanctioned at a concessional rate, the
instructions contained in Rule 223 (1) of G.F.R.2005 have to be observed.
In such cases, payment of subsidy (to cover the concession viz. difference
between normal rate and concessional rate) should be made conditional upon
prompt repayment of principal and payment of interest thereon by the
borrower. 
(ii) In cases where loans are sanctioned interest free (e.g. loans to
technical educational institutions for construction of hostels) prompt
repayment should be made a condition for the grant of interest free loans.
That is to say, the sanction letter in such cases should provide that in
the event of any default in repayment, interest at rates prescribed by
Government from time to time will
be chargeable on the loans. 
(iii) Similarly, in the case of interest free loans to departmental
canteens where subsidy is also provided to meet running expenses, the
sanction letter should stipulate that in the event of any default in
repayment, the defaulted dues would be recovered out of the subsidy
payable.
(H) Miscellaneous: A standard form prescribed for issue of loan sanctions
(Appendix-I) should ordinarily be followed.
(i) The date of drawal of a loan by the borrower will be date on which he
received cash, cheque or bank draft from the Drawing and Disbursing
Officer. It should be ensured that the time lag between the date of
obtaining the cash/cheque/bank draft and its disbursement/delivery/despatch
to the payee is reduced to the minimum. Where the cheque or bank draft is
sent through post, the date of posting should be treated as the date of
disbursement of the loan. The Drawing and Disbursing Officer should
invariably intimate the date of payment to his Accounts Office to enable
the latter to make a suitable note in his records. 
(ii) In the case of loans sanctioned to parties other than State and Union
Territory and Foreign Governments and Government Servants, the borrower
should tender the amounts due on or before the due date, at the New Delhi
Office/Main Office of the public sector bank accredited to the Ministry/
Department which sanctions the loan, in cash or by cheque or draft drawn on
any scheduled bank in Delhi/New Delhi in favour of the said PSB Branch. The
payment should be accompanied by a memorandum or challan in duplicate
indicating (a) name of the loan sanctioning Ministry/Department; (b) No.
and date of the loan sanction letter and the loan amount sanctioned; (c)
amount due for payment separately for interest and principal and the
head(s) of account to which the dues are to be credited in the Government Accounts; and (d) due
date of payment. The borrower should be asked to tender separate chequ
Outstation loanees are required to arrange the dues through their bank
ensuring that the memorandum/challan and the cheque/draft reaches the
aforesaid PSB Branch in New Delhi by the due date. 
(iii) Ministries/Departments are required to keep close watch on timely
repayments of loans advanced by them and recovery of interest thereon. Rule
220 (1) (viii) of G.F.R. 2005 provides for a notice to be given to the
borrowers a month in advance of the due date of payment of instalment of
the principal and/or interest thereon. Such notices may be sent in the form
given in Appendix II. The borrower should not however be given any
advantage in the event of non-receipt of such a notice. Repayments/interest
payments due from the loanees should also be reviewed at least quarterly,
and where any default has occurred, a fresh notice should be served on the
borrower to arrange payment with penal/higher rate of interest in the form
set out in Appendix III. 
(iv) Individual cases relating to terms and conditions of loans need not be
referred to the Department of Economic Affairs (Budget Division) unless it
is proposed to deviate from those laid down in
this Office Memorandum. 
This issues with the approval of Finance Minister.
(Vyasan R)
Deputy Secretary (Budget)

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