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

Government of India
Ministry of Finance
Department of Economic Affairs
New Delhi, the 19th March, 2012
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)2010 dated 31st December, 2010 on the captioned subject.
2.     The lending rates prescribed in the aforesaid Office Memorandum have been reviewed. The revised rates of interest applicable from 1st April,
2011 are given in the Table below:—
Category of borrower                                     
& type of loan                                             Interest rate per cent per annum
1 State Governments:
(i)   Ways and Means Advances
(Recoverable within the year)                                         9.00
(ii)  Other Loans                                                                         9.50
2 Union Territory Governments (with Legislature):
(i)   Loans upto 1 year                                                              9.00 (ii)  Other Loans              9.50
3 Industrial and Commercial Undertakings in the Public Sector and Cooperatives.
(i)   Investment loans                                                             11.50 (ii)  Working Capital loans and loans to
meet Cash losses                                                            13.50 (iii) Loans for implemantation of VRS in
sick PSUs                                                                          11.50
4 Financial institutions in the Public Sector,
Port Trusts, KVIC, NHAI, Municipal Corporation of Delhi,Commodity Boards, Social Service Institutions, Individuals, etc. (i)   Rural Electrification Corporation:
(a) For Minimum Needs Programme (M.N.P.)           10.00 (b) Others         10.00
(ii)  National Bank for Agriculture and Rural
Development (NABARD) and National
Cooperative Development Corporation (NCDC)     10.00 (iii) National Highways Authority
of India (NHAI) and Port Trusts                                  10.00 (iv) Others        11.50
Thratointeresprescribefo“OtheLoans” undesub-para 1 (ii) and 2 (ii) above is also applicable for Additional Central Assistance (ACA) on the un-disbursed amount of the loan/issues for all disaster Reconstructions and Rehabilitation Programme assisted by World Bank & ADB.
The loans to State Electricity Boards, Damodar Valley Corporation undethschemforenovation anmodernisation othermal power stations would carry interest at the same rate as applicable to ‘Other Loans’ to State Governments.  Normally, loans should not be given to Private Sector Companies. In exceptional cases where such loans become necessary interest should be 1/2% higher than those prescribed for Public Sector.
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.
The instructions issued from time to time have been reviewed and are set out in the following paragraphs for facility of reference.
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.
(A) For new installations or expansion of existing institutions:
(a Thtermanconditionoloanshoulbfixewith 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
othewordswhilinteresoloanadvancetan undertakindurinthperiooconstructiowilbe notionallrecovereballowinitcapitalisationthe 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 onliexceptionacases wherthProjecReporhas 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
threpaymenoinstalmentoprincipalhavinregarto the naturothprojectthstagoconstructioetc The period of moratorium should not, however, extend in any case, beyontwyearfrothdatoprojecgoininto 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 requirementcannobraiseithimannebseeking a guarantee from Government. Accordingly, requests from Public SectoUndertakingfofundfomeetinworkincapital requirements should be considered only to the extent the same cannot be had from the State Bank of India/Nationalised Banks.
8.     GENERAL
(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
perioforepaymenisoughtprioconcurrencothe 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 tiindividual casehaving regard tthe project for which the loans are to be utilised. However, no moratorium should ordinarily be allowed in respect of interest payment on loans. Ministries/DepartmentmawitthapprovaotheiFinancial Advisers allomoratoriuorepaymenoprincipawherever considered necessary upto a maximum period of 2 years.
(C) (i)   Repayment before due date: Any instalment paid before itdudatmabtakeentirely towardthprincipal 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 Governmenrepayainstalmenof a loawhicis consolidated as on 1st October,  in advance of the due date bmortha1daythintereswilbpayablwith reference to the actual date of repayment.
(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 ithevenodefaulirepaymenoinstalment(soprincipal 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, 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 instalmentoprincipaand/ointeresfrothdudatof 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 authorit 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 circulaNo.F.2 (190)-B(SD)/91, date15.10.1991.
Howevernrequesfowaiver/postponemenof instalmentoangrounwhatsoevewilbaccepted, except in cases of companies referred to BIFR or in respect othoscompaniewhichavincurrecaslossefor last threyearsiconformitwitthiDivisiocircular 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 estimateorepayment/intereswhichavgonintthe BudgeanGovernment’resourcepositioshoulbe 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 specifieperioofothentirperiodon a loan which originallsanctioneanormaratointerest, will attract the provisions of Rule 223 (1) of G.F.R.2005 and should bdealt 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 ttechnicaeducationainstitutionfoconstructioof 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 defaulirepaymentinteresarateprescribeby Government from time to time will be chargeable on the loans.
(iii) Similarly, in the case of interest free loans to departmental canteenwhersubsidialsprovidetmeerunning 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 whichreceivecashchequobandraffrothe 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
DisbursinOfficeshoulinvariablintimatthdatof 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; (camoundufopaymenseparatelfointeresand 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 cheques/draftanchallanfopaymenoprincipaand interest.
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 othe due date opayment oinstalment othe 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/interespaymentdufrothloanees 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.
(Brajendra Navnit)
Deputy Secretary (Budget)
Tel. No. 23092744

Order: http://finmin.nic.in/the_ministry/dept_eco_affairs/budget/LoanAdvanI0R11.pdf