Consolidated Sinking Fund [CSF]

By : Neha Dhyani

Updated : Apr 15, 2022, 8:46

Consolidated Sinking Fund (CSF) is a reserve fund set aside by the Reserve Bank of India (RBI) for the sole purpose of repayment of debts. This reserve fund gives the state governments the necessary buffer to service their liabilities. The provision for this fund is made in Article 266 (1) of the Indian Constitution.

The activities of the Consolidated Sinking Fund are monitored by the Comptroller and Audit General of India (CAG). It must be noted that for withdrawing the amount from the CSF, state governments need to get sanctions from the Parliament. Besides, the funds can only be used for the redemption of loans and not for any other purpose.

Consolidated Sinking Fund History

The history of the Consolidated Sinking Fund dates back to the 10th Finance Commission of 1999-2000 in which the idea of CSF was first proposed by the RBI. The purpose of this fund was laid out to be the redemption of market loans of states. Initially, only 11 states participated in Consolidated Sinking Fund, namely-Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Maharashtra, Meghalaya, Mizoram, Tripura, Uttranchal, and West Bengal. As of 2020, 23 states of India have set up Consolidated Sinking Fund and have accumulated reserves worth INR 1.3 Lakh Crores.

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Salient Features of Consolidated Sinking Fund

The Consolidated Sinking Fund can be distinguished from other funds based on the following features:

  1. The state’s consolidated fund and public accounts must not be used to finance the Consolidated Sinking Fund.
  2. 1-3% of the outstanding market loans of the state government can be contributed to the Consolidated Sinking Fund
  3. The Consolidated Sinking Fund should necessarily be used to:
    • Repay public debt.
    • Create a buffer for the amortization of liabilities.
    • Ensure good financial governance.
    • Consolidate finance.
    • Restructure the finance of states.
    • Encourage self-governance in local bodies.

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Advantages of Consolidated Sinking Fund

Below listed are some of the important benefits of the Consolidated Sinking Fund reflecting the fund’s significance to the finances of state governments:

  • Default Risk is Low

With Consolidated Sinking Fund, reserves will be set aside to meet the needs of the securities at development; therefore, the risk of a default on the development target will be reduced.

  • Creditworthiness/Low-Interest Rates

The financing cost on the bonds is significantly lowered due to the availability of security and low default risk.

  • Helps State Governments to Overcome Fiscal Deficits

Fiscally strong state governments can have their governance rated by accredited rating agencies, and attract better rates in bond auctions.

Setting up Consolidated Sinking Fund is an intelligent step taken by the state governments to manage public debts and liabilities. This fund helps manage the financial health of state governments and overcome their fiscal deficits. Besides, it encourages self-governance of the local bodies by providing them resources necessary to function properly. In a nutshell, Consolidated Sinking Fund set by the RBI is resourceful for the welfare of state governments.

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FAQs on Consolidated Sinking Fund

Q.1. What is Consolidated Sinking Fund?

Consolidated Sinking Fund is the reserve fund set aside for the repayment of loans.

Q.2. When was the Consolidated Sinking Fund set up?

The Consolidated Sinking Fund was set up in 1999-2000 during the 10th Financial Commission.

Q.3. How many states set up the Consolidated Sinking Fund immediately after its launch?

11 states set up the Consolidated Sinking Fund soon after its launch. These states are -Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Maharashtra, Meghalaya, Mizoram, Tripura, Uttranchal, and West Bengal.

Q.4. Can public accounts and consolidated funds of the state be used to finance the Consolidated Sinking Fund?

No, public accounts and consolidated funds of the state cannot be used to finance the Consolidated Sinking Fund.

Q.5. As of 2020, how many states have set up Consolidated Sinking Fund, and what is the total amount accumulated so far?

As of 2020, 23 states in India have set up Consolidated Sinking Fund, and their total reserve is estimated to be INR 1.3 Lakh Crores.