Master Circular- Guarantees, Co-Acceptances & Letters of Credit - UCBs - ஆர்பிஐ - Reserve Bank of India
Master Circular- Guarantees, Co-Acceptances & Letters of Credit - UCBs
RBI/2010-11/42 July 1, 2010 The Chief Executive Officers of Dear Sir/Madam, Master Circular- Guarantees, Co-Acceptances & Letters of Credit - UCBs Please refer to our Master Circular UBD. PCB. MC. No. 4 / 09.27.000 / 2009-10 dated July 1, 2009 on the captioned subject (available at RBI website www.rbi.org.in). The enclosed Master Circular consolidates and updates all the instructions / guidelines on the subject up to June 30, 2010. Yours faithfully (Uma Shankar) Encl: As above Master Circular Contents Master Circular Guarantees, Co-Acceptances & Letters of Credit In view of the risks involved in the business of issuance of guarantees, the Primary (Urban) Co-operative Banks (PCBs) should extend guarantees within restricted limits so that their financial position is not impaired. The banks should follow certain broad guidelines in respect of their guarantee business as indicated in the following paragraphs.
It would be desirable for PCBs to confine their guarantees to relatively short-term maturities. Guarantees should not be issued for periods exceeding ten years in any case. The total volume of guarantee obligations outstanding at any time may not exceed 10 per cent of the total owned resources of the bank comprising paid up capital, reserves and deposits. Within the overall ceiling, proportion of unsecured guarantees outstanding at any time may be limited to an amount equivalent to 25% of the owned funds (paid up capital + reserves) of the bank or 25% of the total amount of guarantees, whichever is less. Banks should preferably issue secured guarantees. A secured guarantee means a guarantee made on the security of assets (including cash margin), the market value of which will not at any time be less than the amount of the contingent liability on the guarantee, or a guarantee fully covered by counter guarantee/s of the Central Government, State Governments, public sector financial institutions and/or insurance companies. Banks should generally provide deferred payment guarantees backed by adequate tangible securities or by counter guarantees of the Central or the State Government or public sector financial institutions or of insurance companies and other banks.Banks should avoid undue concentration of unsecured guarantee commitments to particular groups of customers and/or trades. The banks' Board of Directors should fix suitable proportions for issuance of unsecured guarantees on behalf of any individual constituent so that these guarantees do not exceed a -
1.1.7 Deferred Guarantees
1.2 Guarantees in respect of Commodities covered under Selective Credit Controls PCBs should not issue, either to a Court or to Government, or any other person, a guarantee on behalf of or on account of any importers guaranteeing payment of customs duty and/or import duty, or other levies, payable in respect of import of essential commodities without taking, as security for issue of such guarantees, a cash margin equivalent to at least one half of the amount payable under the guarantee. The term "essential commodities" shall mean such commodities as may be specified by the Reserve Bank of India from time to time. 1.3 Safeguards in Issuance of Guarantees While issuing the financial guarantees, the banks should observe the following safe guards :
When it is considered necessary to issue such guarantees, the banks concerned should ensure that the relative guarantee document, beyond a stipulated amount, should not be signed singly but by two authorised officials jointly after obtaining proper sanction and authority and proper record of such guarantee issued being maintained. The credit proposals should be subjected to usual scrutiny by the lending bank ensuring that the proposals conform to the prescribed norms and guidelines and credit facilities are allowed only if the bank is satisfied about the merits of the proposal and the availability of another bank's guarantee should not result in a dilution of the standards of evaluation of the proposal and financial discipline in lending. 1.4 Payment under Bank Guarantees - Immediate Settlement of Cases (i) Government of India and Reserve Bank of India have been receiving a number of complaints on non-payment or delay in payment of bank guarantees upon invocation. (ii) Probably reluctance on the part of banks to honour their commitment in respect of invoked guarantees stems from their fear of difficulty in realising the amount due from their constituents on account of such guarantees. It is possible that in their anxiety to boost up their profitability, banks go out of the way to issue bank guarantees on behalf of constituents without subjecting the proposals to proper scrutiny and assessing the capacity and creditworthiness of their constituents to pay the amounts to the banks in case the guarantees are invoked. Dilution of security (i.e., non-obtention of adequate margin) may be another factor responsible for banks not receiving the dues in respect of invoked guarantees from their clients. (iii) The above aspects may inhibit banks to pay the beneficiaries promptly when guarantees are invoked and they adopt dilatory tactics in respect of invoked guarantees. It is absolutely essential for banks to appraise the proposals for guarantees also with the same diligence as in the case of fund based limits and obtain adequate cover by way of margin so as to prevent the constituents to develop a tendency of defaulting in payments when invoked guarantees are honoured by the banks. (iv) The bank guarantee is a commitment made by the issuing bank to make payment to the beneficiary (albeit at the behest of the bank's constituent). Failure on the part of the bank to honour the claim legitimately made on it projects distorted picture of its functioning. (v) In fact some strictures were passed by Courts in the past against banks for not honouring the guarantee commitments promptly. In this connection, an extract of a judgement pronounced by the Hon'ble Supreme Court, in a case on the issue of injunctions obtained by parties from courts restraining payment of invoked guarantees is appended: "We are therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in case where irretrievable injustice would be done, if bank guarantee is allowed to be encashed, the court should interfere." (vi) The primary (urban) co-operative banks should, therefore, honour bank guarantees issued by them promptly on their invocation as reluctance on their part to honour commitments in respect of invoked guarantees tend to bring the banking system into disrepute. 1.5 Delay in Obtaining Certified Copies of Judgements (i) The Ministry of Finance has advised that some of the Departments such as Department of Revenue, Govt. of India, are finding it difficult to execute judgements delivered by various courts in their favour as banks do not honour their guarantees unless certified copies of the court judgements are made available to them. (ii) Keeping in view these difficulties, banks may follow the following procedure :
1.6 Correspondence with Government Departments (i) The Constitution of India states that all executive action relating to Union of India shall be, and shall be stated to be, in the name of President of India. However, the business of the Government of India is transacted through several ministries / departments and even though documents such as guarantees reflect the President of India as one of the parties, correspondence is not to be exchanged with the President of India but with concerned Government Ministry / Departments. (ii) The banks should, therefore, ensure that any correspondence relating to guarantees furnished by the banks in the name of the President of India favouring the Government Departments should not be addressed to the President of India causing avoidable inconvenience to the President's Secretariat. 2.1 Irregularities in Co-acceptance of Bills
In view of the above, banks should keep in view the following safeguards :
3.1 Guidelines for Grant of LCs Facility Primary (urban) co-operative banks should not normally grant LC facilities in respect of parties who maintain only nominal current accounts. In case of borrowers maintaining only current accounts, who approach for opening of LCs, banks should invariably ascertain from the existing bankers of the borrowers the reasons as to why they are not extending LC facilities to the concerned borrowers. Banks should open LCs in respect of such parties only after making proper enquiries in regard to the antecedents of the borrowers from the bankers with whom the parties are enjoying main limits, their financial position and their ability to retire the bills. They should also prescribe a suitable margin and obtain other security, as necessary. 3.2 LCs for Commodities Covered under Selective Credit Controls There is no restriction for the banks in opening LCs for import of essential items. However, banks are not permitted to open inland LCs, providing a clause therein which would enable other banks to discount usance bills under the LCs. 3.3 Safeguards in Opening of LCs Before opening LCs, banks should ensure that :
3.4 Payment under LCs - Immediate Settlement of Claims
4.1 Credit Exposure Norms and Statutory/Other Restrictions on Non-fund Based Limits (i) Primary (urban) co-operative banks are required to strictly observe exosure noms and statutory / other restrictions prescribed for non-fund based limits (e.g. LCs, Guarantees, Co-acceptances, etc.) as detailed in the Master Circular on ' Exposure Norms and Statutory / Other Restrictions . (ii) The exposure ceilings and other restrictions particularly prescribed for -
must be strictly observed. 4.2 Banks should ensure that the systems evolved for recording the details of off-balance sheet transactions are properly followed by all branches. These records should be periodically balanced and internal inspectors should verify the same and offer critical comments. 4.3 Banks should ensure that unauthorised LCs are not issued. 4.4 Banks must lay down clear instructions for their branch staff in respect of loan accounts where such non-funded facilities become funded on account of devolvement of bills covered under the bank's LCs or due to invocation of guarantees issued by the bank. The banks must evolve proper guidelines to ensure that, accounts where non- funded limits become "funded" are closely monitored and goods covered under devolved bills remain under bank's control / hypothecation, particularly where malafides are suspected. In cases of goods covered under import LCs, banks must also ensure immediate submission of custom's copy of the Bill of Entry and take measures as prescribed in the guidelines issued by Foreign Exchange Department. 4.5 A number of banks adopt the practice of parking the dues of the borrower in respect of devolved LCs and invoked guarantees in a separate account which is not a regular sanctioned facility. As a result, these are not reflected in the principal operating account of the borrower. This renders application of the prudential norms for identification of NPAs difficult. It is, therefore, advised that if the debts arising out of devolvement of LCs or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. 4.6 Banks are encouraged to strengthen their information back up about the borrowers enjoying credit facilities from multiple banks by obtaining declaration from the borrowers about the credit facilities already enjoyed by them from other banks. In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing sanctioned limits of Rs 5.00 crore and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks and introduce a system of exchange of information with other banks. Subsequently banks should exchange information about the conduct of the borrowers’ accounts with other banks at least at quarterly intervals. Banks should also make use of credit reports available from CIBIL. The banks should incorporate suitable clauses in the loan agreements regarding exchange of credit information so as to address confidentiality issues. Banks should also obtain regular certification by a professional, preferably a Company Secretary, Chartered Accountant or Cost Accountant regarding compliance of various statutory prescriptions that are in vogue. The formats for collecting information from the borrowers, exchange of information among banks and certification by a professional are furnished in our circular UBD.PCB.No.36/13.05.000/2008-09 dated January 21, 2009 read with circular UBD.PCB.No. 59 /13.05.000 / 2008-09 dated April 9, 2009. 4.7 Banks are exposed to various risks in every financial transaction including commitments in the form of Guarantees, Co-acceptances, LCs etc. The managements of UCBs have to base their business decisions on sound risk management systems with the ultimate objective of protecting the interest of depositors and stakeholders. It is, therefore, important that UCBs adopt effective Asset-Liability Management (ALM) systems to address the issues related to liquidity, interest rate and currency risks. Banks should invariably follow the ALM guidelines issued by Reserve Bank in this regard. Master Circular
B. List of Other Circulars from which instructions relating to Guarantees, Co-acceptances and LCs have also been consolidated in the Master Circular
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