DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE

CONSOLIDATED SINKING FUND- AN ANALYSIS

SUBJECT

LAW OF BANKING

NAME OF THE FACULTY

MR. P. BAYOLA KIRAN

NAME OF THE STUDENT

KUSUMKALI MITRA

2018LLB111

VI SEMESTER

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 ACKNOWLEDGEMENT

I would sincerely like to put forward my heartfelt appreciation to the respected faculty Mr. P.
Bayola Kiran Sir for giving me this golden opportunity to take up this project: Consolidated
sinking fund- An Analysis. I have tried my level best to collect information about the project
in various possible ways to depict clear picture about the given project topic. Last but not
least I am very much indebted to my family and friends for their warm encouragement and
moral support in conducting this project work.

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 INDEX

Abstract………………………………………………………………………………………..4

Introduction……………………………………………………………………………………5

Consolidated Sinking Fund……………………………………………………………………6

Consolidated Sinking Fund Background………………………………………………………7

Objectives of Consolidated Sinking Fund……………………………………………………..8

Salient features and benefits of Consolidated

Sinking Fund…………………………………………………………………………………..9

Significance of development of Consolidated

Sinking Fund…………………………………………………………………………………10

Relaxation given by Reserve Bank of India to states regarding the

Consolidated Sinking Fund during Covid-19………………………………………………..11

States response to the relaxations regarding consolidated sinking

fund given by reserve bank of India………………………………………………………....12

Consolidated Sinking Fund with respect to United Kingdom……………………………….13

Critical Analysis……………………………………………………………………………...14

Conclusion…………………………………………………………………………………....15

Bibliography………………………………………………………………………………….16

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 ABSTRACT

One must have regularly heard that the central government or the state government or any
organization has brought about a debt of numerous crores. Indeed, this debt is caused on the
central government or the state government since they work to expand the governmental
assistance to the relative multitude of individuals. Following a couple of years after the fact,
the concerned governments need to reimburse this advance with interest.

A sinking fund is a sort of asset where a fixed sum is kept for a specific time span. So the
sinking fund resembles a recurring deposit account. After certain years this asset transforms
into a tremendous assortment of finance that are additionally used to reimburse the past dues
or loans taken by the government or an organization.

It is likewise called Debt Remittance Fund in light of the fact that the sum kept in it is utilized
to reimburse the debt later on and the government or the organization does not need to endure
much in reimbursing the credit in the maturity year of the advance. This is likewise similar to
a recurring deposit account in the bank.

In order to give more assets to states and to help the states in need, the Reserve Bank of India
(RBI) on Friday facilitated the rules overseeing withdrawal from the Consolidated Sinking
Fund bringing about arrival of extra Rs 13,300 crore to them.

“In the light of the COVID-19 pandemic and the consequent stress on state government
finances, the RBI has reviewed the scheme and has decided to relax the rules governing
withdrawal from CSF, while at the same time ensuring that depletion of the Fund balance is
done prudently”, RBI Governor Shaktikanta Das said.“Together with the normally
permissible withdrawal, this measure will enable states to meet about 45 per cent of their
redemptions due in 2020-21 through withdrawal from CSF. This change in withdrawal
norms will come into force with immediate effect and will remain valid till March 31, 2021,”
he said.1

State governments keep a Consolidated Sinking Fund (CSF) with RBI as a cradle for
reimbursement of their liabilities.

1
The Hindu BusinessLine, 25 May, 2020, https://www.thehindubusinessline.com/economy/states-pitch-for-
maximum-permissible-use-of-consolidated-sinking-find/article31673167.ece, last accessed 5 March, 2021.

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 INTRODUCTION

The Covid-19 pandemic has tossed a long shadow of weakness. It isn't obvious how much
longer it will take to restore consistency and resuscitate the monetary condition. The principle
things clear at this junction are that the damage to the economy is colossal and recovery
deferred; government spending in saving lives, occupations and re-establishing the economic
needs voluminous systems and financing it would introduce genuine challenges.

Thinking about the reality of the crisis, the Reserve Bank of India (RBI) during its disclosure
on formative and administrative approach measures, has responded strikingly and decisively
to encourage the bond redemption burden on states by loosening certain standards which used
to administer withdrawal from Consolidated Sinking Fund (CSF). On the off chance that, for
instance, the government of Uttar Pradesh gave Rs 200 crore bonds for a time of ten years
(2020 to 2030). This implies that the government should pay 200 crore rupees to these
bondholders in 2030 (interest isn't taken into consideration for simplicity).

Thusly, the concerned state government deposits 10 crore rupees in the sinking reserve each
year to manage this obligation. This implies that in 10 years, the state government would
have effectively saved Rs 100 crore in this asset by 2030. It implies the state government
needs to orchestrate just 100 crore rupees in 2030 in light of the fact that it has effectively
deposited Rs 100 cr in the sinking reserve.

Subsequently obviously with the assistance of this consolidated sinking fund, the state
government has satisfied its obligation with no problem.

This is trusted upon to help states with meeting 45% of the recuperations due in 2020-21.
With such relaxations, state governments can now pull out an extra measure of Rs. 13,300
crores from CSF to make imperative payments.

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 CONSOLIDATED SINKING FUND

A sinking fund means containing cash put in a safe spot or saved to take care of an obligation
or debt. An organization that issues debts should take care of that debt later on, and the
sinking fund assists with mellowing the difficulty of a huge expense of income. A sinking
fund is set up so the organization can add to the asset in the years paving the way to the
bond's maturity.2

CSF is basically a reserve fund predominantly for amortization of obligations or debts. This
is one of the supports accessible to State governments for overhauling their liabilities. It is an
asset through which some monetary discipline is being guaranteed.

2
Sinking Fund: Meaning and Objectives, JagranJosh,10 June, 2020, https://www.jagranjosh.com/general-
knowledge/what-is-the-meaning-and-objectives-of-sinking-fund-1591774997-#:~:text=The%20Consolidated
%20Sinking%20Fund%20in,the%20Reserve%20Bank%20of%20India.last accessed on 5 March, 2021.

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 CONSOLIDATED SINKING FUND BACKGROUND

The Fund was first proposed by Tenth Finance Commission and was framed in the year
1999-2000, for the amortization of open market credits profited of by the State Government.
This is one of the intermediaries available to State governments for patching up their
liabilities. It is a reserve through which some monetary severity is being secured.

In the primary occasion, the asset was set up by 11 states - Andhra Pradesh, Assam,
Arunachal Pradesh, Chhattisgarh, Maharashtra, Goa, Meghalaya, Tripura, Mizoram, West
Bengal and Uttaranchal.

Afterward, the twelfth Finance Commission (2005-10) suggested that all States ought to have
sinking fund. The fund ought to be kept outside the consolidated fund of the States and the
public record. Likewise it ought not be utilized for some other reason, with the exception of
recovery of credits. According to the plan, State governments could contribute 1-3% of the
outstanding market credits every year to the Fund. The CSF has gathered deposits worth Rs
1.3 lakh crore for 23 states as on 31st March, 2020.

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 OBJECTIVES OF THE CONSOLIDATED SINKING FUND

The fundamental target for making CSF was to guarantee the reimbursement of the public
debt, cushion for amortization, all things considered, guarantee great financial administration,
combine their accounts, encourage rebuilding of finance in these states, particularly the states
having persistent income deficiencies, exceptional importance has been given to more
noteworthy transparency in monetary tasks and debt supportability.

The motive behind these measures was to help accomplish the basic targets of the 73rd and
74th amendments of the Constitution by empowering local bodies to work genuinely as
establishments of self-government and to facilitate the weight that State exchequers may look
for in supporting local bodies to assist them with achieving their latent capacity and discharge
their selected responsibilities.

Considering the ideas of the Twelfth Finance Commission, credits from banks and liabilities
due to the National Small Saving fund should likewise be remembered for the amortization of
loans. The asset must be financed outside the consolidated fund of the states and public
account should just be utilized for redemption of credits.

Under these reconsidered rules, the State Government is needed to make yearly appropriation
to the Fund at 0.5 percent of the outstanding debts around the completion of the past financial
year. To the extent rules of the RBI are concerned, outstanding debts are described as
containing Internal Debt and Public Account liabilities of the State Government.3

3
Explained: Consolidated Sinking Fund, Legal Service India, E-Journal,
http://www.legalserviceindia.com/legal/article-2730-explained-consolidated-sinking-fund.html, last accessed on
5th March, 2021.

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 SALIENT FEATURES AND BENEFITS OF CONSOLIDATED SINKING FUND

 Lower default hazard: Since there will be reserves set aside to deal with the securities
at advancement, there's less likelihood of default of target owed at improvement.
Thusly, the aggregate sum owed at advancement is essentially less if CSF is
developed.
 Lower interest rates on the bonds, that is, creditworthiness: Since CSF incorporates a
segment of security and cuts down default peril, the financing costs on the securities
are normally lower.
 Help state governments in meeting their financial shortage: State Governments which
are solid monetarily can step up and get evaluated under government performance
from approved rating offices which may assist them with improving rates in
auctioning of their securities.
 Improve monetary effect: Maintaining CSF gives States and financial backers comfort
that State Development Loans payments shall be made under all conditions.

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 SIGNIFICANCE OF THE DEVELOPMENT OF CONSOLIDATED SINKING FUND

Interest rate in CSF with RBI is deliberate as of now. This reserve was proposed to give a
support to the State Governments in gathering the future reimbursement responsibilities.
States which keep up these resources are holding different levels of interest with respect to
their extraordinary liabilities. There is worth in making interests in CSF needed for State
Governments and show a base limit similar to their remarkable liabilities to give more
unmistakable comfort to monetary subject matter experts.4

To encourage boost, acceptably upkeep of these resources by the State Governments and to
ask them to fabricate the corpus of these reserves, Reserve Bank has cut down the speed of
energy on Special Drawing Facility (SDF) from 100 bps underneath the Repo Rate to 200 bps
under the Repo Rate.

During 2016-17 the State government made a plan for diminishing or avoiding of
commitment and appropriated to Sinking Fund under Public Accounts by book transfer.
Certain sums were used out of this reserve to repay market advances, which was moved and
credited to Revenue Receipts under the Consolidated Fund. This would achieve extending the
remarkable liabilities of the State to the degree. The trade out of the fund cannot be treated as
Revenue Receipts.

4
Sinking Fund, Investopedia, September 20,2020,
https://www.investopedia.com/terms/s/sinkingfund.asp#:~:text=A%20sinking%20fund%20helps
%20companies,of%20a%20sinking%20fund%20feature, last accessed on 5 March, 2021.

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RELAXATION GIVEN BY RESERVE BANK OF INDIA TO STATES REGARDING
THE

CONSOLIDATED SINKING FUND DURING COVID-19

We have to keep in mind that all Indian states don't have a sinking fund. Just 23 states have
deposited a sum of Rs 1, 30, 431 crore as on 31 March 2020 in this fund.

RBI in the notification said, “In the light of the Covid-19 pandemic and the consequent
stress on State Government finances, the RBI has reviewed the Scheme and has decided to
relax the rules governing withdrawal from the CSF, while at the same time ensuring that
depletion of the Fund balance is done prudently.”

Besides the normally permissible withdrawal, RBI says, “this measure will enable the
states to meet about 45 per cent of their redemptions due in 2020-21 through withdrawal
from CSF.”5

Presently because of Coronavirus flare-up states do not have assets to reimburse their old
debts. So these states have asked the RBI to raise 13,300 Crore or 45% of their debt from this
sinking fund. The RBI has conceded this facility to states only upto 31 March 2021.

The states that have amassed the most cash in this sinking fund will be the greatest recipient
of this relaxation. Out of the overall Rs1.30 lakh crore, Maharashtra has deposited Rs 39,948
crore alone. This implies Maharashtra will get the most profit by this relaxation.

5
“RBI relaxes rules for withdrawal from CSF; States may get extra Rs 13,300 cr”,The Economic Times, 22
May, 2020, https://economictimes.indiatimes.com/news/economy/policy/rbi-relaxes-rules-for-withdrawal-from-
csf-states-may-get-extra-rs-13300-cr/articleshow/75888593.cms, last accessed on 5 March, 2021.

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 STATES’ RESPONSE TO THE RELAXATIONS REGARDING CONSOLIDATED
SINKING FUND GIVEN BY RESERVE BANK OF INDIA

A few States grumble that notwithstanding facilitating of rules, the RBI has affirmed for
more meagre quantum of assets.

With their seriously stressed financial circumstance, States need to utilize the Consolidated
Sinking Fund (CSF) to reimburse old debts. As on March 31, the absolute corpus of the fund
was over Rupees 1.30 lakh crore. The RBI chose to loosen up rules overseeing withdrawal
from the CSF. Appropriately, withdrawal was covered at 75% of outstanding balance as on
March 31, to keep up the balance at a reasonable level. 6

The national bank has looked for the States' assent, after which it will liquidate securities in
States' portfolio to make liquidity accessible. Notwithstanding, a few States have whined that
in spite of their assent, the RBI has endorsed a sum under 75% of the outstanding balance.

Bihar, one of five States/UTs having restriction, has an outstanding of over ₹7,683 crore
which implies it might have withdrawn almost ₹5,762 crore. However, it was allowed to
withdraw just ₹2,600 crore (a meagre 33 percent). The State government said that since it
pulled out ₹1,000 crore against the accumulated interest a month ago, it ought to be allowed
to pull out ₹4,762.27 crore from CSF. It contended that it needs to pay almost ₹20,000 crore
for reclamation of credits and payment of interest during the current financial.7

“The Covid-19 pandemic is causing stress on the State’s finance and the State would like to
utilise resources like the sinking fund for meeting demand regarding outstanding liabilities,”
said the communication from the Bihar government. Now, the RBI is expected to take a call
on the demand from States soon.

6
RBI Press Release, June 6, 2020, https://www.rbi.org.in/scripts/FS_PressRelease.aspx?prid=44126&fn=2752,
last accessed on 5 March, 2021.
7
The Hindu BusinessLine, 25 May, 2020, https://www.thehindubusinessline.com/economy/states-pitch-for-
maximum-permissible-use-of-consolidated-sinking-find/article31673167.ece, last accessed 5 March, 2021.

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 CONSOLIDATED SINKING FUND WITH RESPECT TO UNITED KINGDOM

The Consolidated Fund is the Government's overall ledger at the Bank of England. Payments
from this reserve should be approved ahead of time by the House of Commons. The
Government presents its 'demands' to utilize this cash as Consolidated Fund Bills.8

Parliament gives statutory authority for the government to draw assets from the Consolidated
Fund by Acts of Parliament known as Appropriation Acts and Consolidated Fund Acts.
Assets are made accessible under the Acts just for a predefined monetary year, an idea known
as annuality, albeit an individual Act can cover more than one monetary year, posting
separate sums for each. Regularly a two-year time span is covered by a Consolidated Fund
Act, and approximately a few are passed in each parliamentary year.
A Consolidated Fund (Appropriation) Bill is begotten and passed towards the end of the
parliamentary year before the Summer break. At the point when passed, this is known as the
Appropriation Act, and designates the finances from the Consolidated Fund to the reasons set
out in the primary yearly departmental expenditure estimates (the yearly government division
spending plans, known as Estimates).

In the meantime between the beginning of the monetary year and the passing of the
Appropriation Act, an interaction known as Votes on Account is utilized to grant to divisions
upto 45% of the sums they were dispensed in the former monetary year. These Votes on
Account, and any essential changes to departmental financial plans (Supplementary
Estimates) are passed as Consolidated Fund Acts, regularly twice every year in November
and February. Extra assets might be mentioned whenever required and will either require an
extra Consolidated Fund Act, or will be incorporated inside another enactment.

Certain expenses is by law charged straightforwardly from the Consolidated Fund and isn't
liable to Parliament's yearly budget measure, guaranteeing a level of freedom to the
government. Administrations funded in this manner are known as Consolidated Fund
Services and incorporate appointed judges' salaries, payments to the European Union, the
Civil List payments, the salary of the Comptroller and Auditor General, and the costs paid to
returning officials at elections. On account of the judges or judiciary as a whole, this is to
guarantee the judicial freedom presented by the Act of Settlement, 1701.

8
Consolidated Fund, UK Parliament, https://www.parliament.uk/site-information/glossary/consolidated-
fund/#:~:text=The%20Consolidated%20Fund%20is%20the,form%20of%20Consolidated%20Fund%20Bills,
last accessed on 5 March, 2021.

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 CRITICAL ANALYSIS

The States which has figured out how to keep colossal amounts in the CSF reserve will profit
by such relaxations. Those States incorporates Andhra Pradesh, Bihar, Gujarat, Maharashtra,
Odisha, Tamil Nadu, and West Bengal. Regardless, even with these relaxations and helps, a
couple of states may have to face issues in bundling up resources to meet their improved
consumption requirements; all things considered, the axe may fall on capital spending.

SBI EcoWrap was composed as of late that states' capital use in Financial Year 2021 may
wind up being an enormous part of the arranged level of Rs 8.8 lakh crores. FE has actually
revealed that state governments had applied brakes on capital utilize even in the second half
of FY20. What the states will observe is a remarkable significant fall in CapEx that started
somewhere in the last monetary and through FY21.9

9
Explained: Consolidated Sinking Funds (CSF), Lexlife India, June 20,2020,
https://lexlife.in/2020/06/20/explained-consolidated-sinking-funds-csf/, last accessed on 5 March, 2021.

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 CONCLUSION

Progression and changes are a reliable technique. During the new monetary age, State
Governments have figured out how to improve monetary and commitment to the board. All
the State Governments have set up their Fiscal Responsibility Legislations melding the
financial union way. Along these lines, an institutional obligation to monetary sensibility
exists. The customary obligation maintainability markers are on a reasonably strong
equilibrium.

There may not be any basic crucial danger in view of states' open commitment. Be that as it
may, during the continuous past, there shows monetary slippage. Ascending in the shortfalls
and borrowings of states with low liquidity and shallow base has macroeconomic
implications.

From this time forward, it is huge for all the accomplices to accept quantifies as discussed
previously. Monetary and social government help of residents is dependent on amazing
money related and the fulfilment of commitments by the executives of the states. Building
vigorous SDL exhibits and growing commitment the executives' systems in states to manage
existing threats, is both objective and critical.

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 BIBLIOGRAPHY
Statute
 Act of Settlement, 1701.
 Appropriation Act.
 Consolidated Fund Acts.
Online Sources
 Explained: Consolidated Sinking Fund, Legal Service India, E-Journal,
http://www.legalserviceindia.com/legal/article-2730-explained-consolidated-sinking-
fund.html.
 “RBI relaxes rules for withdrawal from CSF; States may get extra Rs 13,300 cr”,The
Economic Times, 22 May, 2020,
https://economictimes.indiatimes.com/news/economy/policy/rbi-relaxes-rules-for-
withdrawal-from-csf-states-may-get-extra-rs-13300-cr/articleshow/75888593.cms.
 Consolidated Fund, UK Parliament, https://www.parliament.uk/site-
information/glossary/consolidated-fund/#:~:text=The%20Consolidated%20Fund
%20is%20the,form%20of%20Consolidated%20Fund%20Bills.
 Explained: Consolidated Sinking Funds (CSF), Lexlife India, June 20,2020,
https://lexlife.in/2020/06/20/explained-consolidated-sinking-funds-csf/.
 The Hindu BusinessLine, 25 May, 2020,
https://www.thehindubusinessline.com/economy/states-pitch-for-maximum-
permissible-use-of-consolidated-sinking-find/article31673167.ece.
 RBI Press Release, June 6, 2020,
https://www.rbi.org.in/scripts/FS_PressRelease.aspx?prid=44126&fn=2752.
 Sinking Fund: Meaning and Objectives, JagranJosh,10 June, 2020,
https://www.jagranjosh.com/general-knowledge/what-is-the-meaning-and-objectives-
of-sinking-fund-1591774997-#:~:text=The%20Consolidated%20Sinking%20Fund
%20in,the%20Reserve%20Bank%20of%20India.
 Sinking Fund, Investopedia, September 20,2020,
https://www.investopedia.com/terms/s/sinkingfund.asp#:~:text=A%20sinking
%20fund%20helps%20companies,of%20a%20sinking%20fund%20feature.

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