Centre slashes Kerala’s borrowing limit by ₹3,300 cr citing failure to constitute Guarantee Redemption Fund

Thiruvananthapuram: In a major setback for Kerala, the Union Government has reduced ₹3,300 crore from the state’s borrowing limit for the current financial year. The Centre has now informed the state that it will be allowed to borrow only ₹29,529 crore until December 2025.

The reduction in the borrowing ceiling was communicated shortly after the Union Ministry of Finance issued a formal letter to the state. The Centre has cited Kerala’s failure to constitute a Guarantee Redemption Fund as the reason for the cut. This fund is required to ensure that the state government can back loans taken by public sector firms. The Centre has indicated that it may allow the additional borrowing of ₹3,300 crore only if the state sets up the fund and contributes ₹600 crore to it.

Last year, Kerala was permitted to borrow ₹21,251 crore until December. So, when the borrowing limit was initially raised to ₹29,529 crore this year, the state government was indeed relieved to receive an additional allotment of over ₹8000 crore. But with the Centre now retracting a portion of the increase, the state is back to facing fiscal constraints.

This financial tightening comes at a particularly difficult time. As this is the final year of the current LDF government, expenditure is expected to rise significantly, especially with several flagship projects underway. The sudden reduction in borrowing capacity could jeopardise the funding of these initiatives.

The latest move also comes close on the heels of an earlier decision by the Centre to include off-budget borrowings such as loans taken through institutions like KIIFB and public deposits mobilised by the state etc within the state’s overall borrowing limit. This has further constrained Kerala’s fiscal flexibility.

The Guarantee Redemption Fund
Public Sector Enterprises and co-operative institutions under the state government often raise loans on the strength of government guarantees, which ensure that the state will repay the debt if the institution defaults. In practice, these institutions repay their loans independently, without burdening the state government.

Currently, the Kerala government has extended guarantees for loans worth approximately ₹40,000 crore across 61 state-controlled institutions. The Centre is now insisting that a Guarantee Redemption Fund be created as a safeguard, in case any of these institutions fail to meet their repayment obligations.