The Union Cabinet today approved the proposal of Ministry of Finance to withdraw the reduced interest rate of 9% in respect of National Small Savings Fund (NSSF) loans in case a State deviates from the targets in the FRBM Act of the State and to restore the original interest rate from the year 2012-13. The State Government can revert to 9% interest rate as and when it again complies with the Fiscal Responsibility and Budget Management (FRBM) targets.
The State will be considered eligible for relief measures recommended by the 13th Finance Commission on NSSF loan from the date of FRBM Act is amended/enacted in accordance with the recommendation of the 13th Finance Commission. In addition, from the year 2012-13, the debt relief recommended by 13th Finance Commission will be allowed to States based on the compliance to the fiscal targets in their respective FRBM Acts as reflected in their Budget Estimates of the year in which the relief is given.
The 13th Finance Commission has recommended providing debt relief measures to the States, inter alia recommending that the interest rate of NSSF loans contracted by the States till 2006-07 and outstanding at the end of 2009-10, be reset at a common interest rate of 9% in place of existing 10.5% or 9.5%. This debt relief is recommended to be available to States only if they amend/legislate FRBM Act in accordance with the recommendations of the Commission. These recommendations had been accepted in principle by the Cabinet in its meeting held in February 2010.
While recommending the relief measure relating to NSSF loans, the 13th Finance Commission has not set any conditionality with regard to compliance with the targets. The Ministry of Finance has observed that continued compliance with FRBM targets is an important aspect and it is essential not only in view of the spirit of the FRBM Act but also because of the huge sacrifice on the part of NSSF whose deficits are eventually an implicit liability of the Central Government.