The central bank is also planning to put a ceiling on state government guarantees. So far, only Gujarat has put a ceiling on its guarantees. Both the issues were discussed at a high-level meeting at the Reserve Bank.

The central bank has mooted the concept of a guarantee fund which will be launched by individual states out of the proceeds of the guarantee fee which is pegged at 2 per cent. "The fund will give us a cushion in case the guarantee is invoked," a state government source said.

"The state governments have agreed that there should be a ceiling on the guarantees... However, there has been no consensus on whether the cap on guarantees should be linked to the state domestic products (SDP), revenue receipts or the consolidated fund," sources said.

At present, state governments are not allowed to giveguarantees in excess of their consolidated fund. The Gujarat government has linked the cap on guarantees to its consolidated fund. The cap, which was earlier fixed at Rs 8,000 crore, has recently been raised to Rs 11,000 crore. "However, this may not be a sound idea as every time you want to raise the cap, you need to go through a constitutional amendment," sources said.

Hence, some of the states are in favour of linking the cap on guarantees to their revenue receipts. In effect, if the revenue receipts go up, automatically the cap on guarantee will go up and vice-versa.

The outstanding guarantees of the Centre and seventeen major states increased from Rs 90,734 crore in 1992 to Rs 118,204 crore in 1996.

State governments usually grant guarantees to promote certain economic enterprises by reducing the credit risk for investors where the investment is characterised by long gestation periods.

Recently, Crisil downgraded the Maharashtra government to A+ from AA- due to the rising revenue and fiscaldeficit of the state on account of the Pay Commission liability and the increasing reliance of the state on market borrowings for financing projects.