Kerala govt revises loan guidelines for local bodies for revenue-generating projects

The Kerala government has revised the guidelines for local bodies to avail of loans for revenue-generating projects such as construction of shopping complexes and bus stands. Many local self-government bodies at present take loans through the Kerala Urban and Rural Development Finance Corporation Limited (KURDFC) after prior approval of the government.

The order issued earlier this month (August, 2026) states that no funds will be allowed from the administration for loan repayment. If a local body is unable to repay the loan, a departmental inspection will be conducted and the loan amount will be deducted from the general purpose fund of the civic body at the government level and disbursed to the financial institution.

Escrow account

The local bodies are required to open an escrow account for the repayment of the loan; and the income of the project is supposed to be deposited in it. However, some local bodies have been identified to be not depositing the income in the escrow account. The government has decided to revise the existing guidelines due to various similar matters, including excess expenditure over income, lack of reserve funds, delay in implementing the projects and many pending applications before the administration for non-income-generating projects, including construction of office buildings for the local bodies.

As per the revised guidelines, the loan amount should be determined in such a way that it does not exceed the estimated amount of the project. The own funds can be utilised only if the loan amount and interest are not sufficient for repayment. Gram panchayats and municipalities intending to take loan for construction of income-generating projects such shopping complexes, markets and bus stands should prepare the plan, design and detailed estimate of the construction through PRICE software and submit these for inspection by the respective financial institution after obtaining approval of the estimate from the authorised officer.

Consent letter

The local bodies also have to submit a consent letter stating that in case there is a default in repayment, the administration can deduct from the General Purpose Fund of the local body and give it to the bank. The KURDFC, or any other financial institution from which the local body is availing of the loan, should ensure that financial condition of the local body is sufficient to repay the loan.

The applications from the local body have to be submitted to the Joint Director, LSGD. This person should examine the recommendation and reject the applications if the civic body has a negative balance. The tender process for the work can be initiated only once the in-principle approval order for borrowing has been received from the government.