Thiruvananthapuram: A cabinet meeting held on Wednesday decided to establish a guarantee redemption fund in the state, as per directives from the central government. The notification for this was approved.

The state government provides guarantees for public sector undertakings to secure loans, assuring lenders that it will repay the debt if the undertaking defaults. However, if the undertaking fails to repay the loan, the government may not have sufficient funds to cover the liability.

To prevent such situations, the 12th Finance Commission recommended that states set aside a specific percentage of the total guaranteed amount in the Reserve Bank of India (RBI), under what is known as the Guarantee Redemption Fund. In 2025, Kerala should invest Rs 629 crores and a minimum of Rs 2413 crores in five years.

Although the Reserve Bank drafted a blueprint for the Guarantee Redemption Fund in 2017, many states have yet to establish it. To address this, the central government has introduced a new provision this year, stating that states which fail to set up the fund by April 1, 2025, will face a 0.25 per cent reduction in their borrowing limit. As a result, the Centre has reduced Kerala’s borrowing limit by nearly ₹3,000 crore.

However, the state government argues that it has been unable to establish the fund due to the severe financial crisis it has faced in recent years.

As of March 31, 2024, the Kerala government had extended guarantees worth ₹62,868.15 crore to various institutions. This year, it is required to deposit 1% of that amount, which amounts to ₹629 crore, with the Reserve Bank.