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TMI BlogMaster Circular - Guarantees and Co-acceptancesX X X X Extracts X X X X X X X X Extracts X X X X ..... Behalf of Share and Stock Brokers/ Commodity Brokers 2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns 2.2.10 Guarantees of State Government 2.3 Other Stipulations Issuing Bid Bonds and Performance Guarantees for export 2.3.1 Unconditional Guarantees in favour of Overseas Employers/ Importers on behalf of Indian Exporters 2.3.2 Certain Precautions in case of Project Exports 2.3.3 Guarantees for Export Advance 2.3.4 Review of Banks Procedures 2.3.5 Overseas Investments Guarantee on behalf of Wholly Owned Subsidiary (WOS) and Joint Venture (JV) abroad 2.4 Restrictions on guarantees for placement of funds with NBFCs or other non-bank entities 2.5 Payment of invoked guarantees 2.6 Co-acceptance of bills 2.6.1 General 2.6.2 Safeguards 2.7 Precautions to be taken in the case of Letters of Credit 2.8 Compliance to the regulations of Foreign Exchange Management Act, 2000 2.9 Compliance to the Prudential Norms Annex 1 Model Form of Bank Guarantee Bond Annex 2 List of circulars consolidated Master Circular - Guarantees and Co-acceptances A. Purpose This Master Circular consolidates the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not avail any fund based facility from any bank in India. Provision of such facilities shall be in terms of a comprehensive Board approved policy for grant of non-fund based facility to such borrowers. The banks shall ensure that the borrower has not availed any fund based facility from any bank operating in India. However, at the time of granting non-fund based facilities, banks shall obtain declaration from the customer about the non- fund based credit facilities already enjoyed by them from other banks. Banks shall undertake the same level of credit appraisal as has been laid down for fund based facilities. The instructions related to KYC / AML / CFT, submission of credit information to Credit Information Companies and other prudential norms applicable to banks, including exposure norms, issued by RBI from time to time, shall be adhered to in respect of all such facility. However, banks are prohibited from negotiating unrestricted LCs of non-constituents. In cases where negotiation of bills drawn under LC is restricted to a particular bank and the beneficiary of the LC is not a constituent of that bank, the bank shall have the option to negotiate such LCs, subject to the conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be reckoned as tangible security. Banks, may however, treat annuities under build-operate transfer (BOT) model in respect of road/highway projects and toll collection rights where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities, subject to the condition that banks right to receive annuities and toll collection rights is legally enforceable and irrevocable. 2.2.1.3 All exemptions allowed for computation of unsecured advances stand withdrawn. 2.2.2 Precautions for issuing guarantees Banks should adopt the following precautions while issuing guarantees on behalf of their customers. (i) As a rule, banks should avoid giving unsecured guarantees in large amounts and for medium and long-term periods. They should avoid undue concentration of such unsecured guarantee commitments to particular groups of customers and/or trades. (ii) Unsecured guarantees on account of any individual constituent should be limited to a reasonable proportion of the bank s total unsecured guarantees. Guarantees on behalf of an individual should also bear a reasonable proportion to the constituent s equity. (iii) In exceptional cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eviation from the two signatures discipline only in exceptional circumstances. The responsibility for ensuring the adequacy and effectiveness of the systems and procedures for preventing perpetration of frauds and malpractices by their officials would, in such cases, rest on the top managements of the banks. In case, exceptions are made for affixing of only one signature on the instruments, banks should devise a system for subjecting such instruments to special scrutiny by the auditors or inspectors at the time of internal inspection of branches. 2.2.6 Guarantees on behalf of Banks' Directors 2.2.6.1 Section 20 of the Banking Regulation Act, 1949 prohibits banks from granting loans or advances to any of their directors or any firm or company in which any of their directors is a partner or guarantor. However, certain facilities which, inter alia, include issue of guarantees, are not regarded as 'loan and advances' within the meaning of Section 20 of the Act, ibid. In this regard, it is pertinent to note with particular reference to banks giving guarantees on behalf of their directors, that in the event of the principal debtor committing default in discharging his liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the banks in favour of Government Departments in the name of the President of India, any correspondence thereon should be exchanged with the concerned ministries/ departments and not with the President of India. 2.2.8 Guarantees on behalf of Share and Stock Brokers/ Commodity Brokers Banks may issue guarantees on behalf of share and stock brokers in favour of stock exchanges in lieu of security deposit to the extent it is acceptable in the form of bank guarantee as laid down by stock exchanges. Banks may also issue guarantees in lieu of margin requirements as per stock exchange regulations. Banks have been advised that they should obtain a minimum margin of 50 percent while issuing such guarantees. A minimum cash margin of 25 per cent (within the above margin of 50 per cent) should be maintained in respect of such guarantees issued by banks. The above minimum margin of 50 percent and minimum cash margin requirement of 25 percent (within the margin of 50 percent) will also apply to guarantees issued by banks on behalf of commodity brokers in favour of the commodity exchanges, registered with Securities and Exchange Board of India (SEBI), in lieu of margin requirements as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies, whether private or public, which are under professional management, guarantees may not be insisted upon from persons who are connected with the management solely by virtue of their professional/technical qualifications and not consequent upon any significant shareholding in the company concerned. (ii) Where the lending institutions are not so convinced about the aspects of loan proposals mentioned above, they should seek to stipulate conditions to make the proposals acceptable without such guarantees. In some cases, more stringent forms of financial discipline like restrictions on distribution of dividends, further expansion, aggregate borrowings, creation of further charge on assets and stipulation of maintenance of minimum net working capital may be necessary. Also, the parity between owned funds and capital investment and the overall debt-equity ratio may have to be taken into account. B. Where guarantees may be considered helpful (i) Personal guarantees may be helpful in respect of companies, whether private or public, where shares are held closely by a person or connected persons or a group (not being professionals or Government), irrespective of other factors, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet or financial statement of a company discloses interlocking of funds between the company and other concerns owned or managed by a group. C. Worth of the guarantors, payment of guarantee commission, etc Where personal guarantees of directors are warranted, they should bear reasonable proportion to the estimated worth of the person. The system of obtaining guarantees should not be used by the directors and other managerial personnel as a source of income from the company. Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the former or received by the latter, directly or indirectly. This requirement should be incorporated in the bank's terms and conditions for sanctioning of credit limits. During the periodic inspections, the bank's inspectors should verify that this stipulation has been complied with. There may, however, be exceptional cases where payment of remuneration may be permitted e.g. where assisted concerns are not doing well and the existing guarantors are no longer connected with the management but continuance of their g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d bonds. Within the limits so sanctioned, bid bonds against individual contracts may be issued, subject to usual considerations. 2.3.1 Unconditional Guarantees in favour of Overseas Employers/Importers on behalf of Indian Exporters 2.3.1.1 While agreeing to give unconditional guarantee in favour of overseas employers/importers on behalf of Indian Exporters, banks should obtain an undertaking from the exporter to the effect that when the guarantee is invoked, the bank would be entitled to make payment, notwithstanding any dispute between the exporter and the importer. Although, such an undertaking may not prevent the exporter from approaching the Court for an injunction order, it might weigh with the Court in taking a view whether injunction order should be issued. 2.3.1.2 Banks should, while issuing guarantees, keep the above points in view and incorporate suitable clauses in the agreement, in consultation with their legal advisers. This is considered desirable as non-honouring of guarantees on invocation might prompt overseas banks not to accept guarantees of Indian banks, thus hampering the country's export promotion effort. 2.3.2 Certain precautions in case of Project Export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations takes place and banks are not exposed to various risks the export advances received by the exporters are in compliance with the regulations/ directions issued under the Foreign Exchange Management Act, 1999. It will be important for the banks to carry out due diligence and verify the track record of such exporters to assess their ability to execute such export orders. 2.3.3.2 Further, banks should also ensure that the export advances received by the exporters are in compliance with the regulations/ directions issued under the Foreign Exchange Management Act, 1999. 2.3.3.3 It is reiterated that export performance guarantees, where permitted to be issued, shall strictly be in the nature of performance guarantee and shall not contain any clauses which may in effect allow such performance guarantees to be utilized as financial guarantees/Standby Letters of Credits 2.3.4 Review of banks procedures Banks may periodically review the position regarding delegation of powers and their procedures, and take such action as may be necessary with a view to expediting decision on export proposals. They may also consider designating a specified branch, equipped with adequately qualified and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for placement of funds with NBFCs or other non-bank entities 2.4.1 Banks should not execute guarantees for enabling placement of funds with NBFCs or other non-banking entities directly or indirectly, including inter-company deposits/ loans. This stipulation will apply to all sources of funds raised by such entities, e.g. deposits/ loans received from trusts and other institutions. 2.4.2 Transactions of the following types are in the nature of guarantees executed by banks in respect of funds made available by one non-banking entity to another non-banking entity and banks should therefore, desist from such practices: (i) A seller drew bills, normally of 120 to 180 days usance, on the buyer which were accepted by the buyer and co-accepted by his banker. The bills were discounted by the seller with the accommodating company, which retained the bills till the due date. The bank which gave co-acceptance invariably earmarked funds for the liability under the bills against the drawing power in respect of stocks held in the cash credit account of its client, the buyer, or (ii) The accommodating company kept deposits for a specific period with the bank's borrowers under a guarantee execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulated in circular DBR.BP.BC.No.40/21.04.142/2015-16 dated September 24, 2015 on Partial Credit Enhancement to Corporate Bonds and other associated circulars issued subsequently on the subject. The PCE shall be provided only in the form of a non-funded irrevocable contingent line of credit. 2.4.3.2 Lending banks Banks extending credit facilities against the guarantees issued by other banks/FIs should ensure strict compliance with the following conditions: (i) The exposure assumed by the bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/FI and will attract appropriate risk weight as per the extant guidelines. (ii) Exposures assumed by way of credit facilities extended against the guarantees issued by other banks/FI should be reckoned within the inter bank exposure limits prescribed by the Board of Directors. Since the exposure assumed by the bank against the guarantee of another bank/FI will be for a fairly longer term than those assumed on account of inter-bank dealings in the money market, foreign exchange market and securities market, the Board of Directors should fix an appropriate sub-limit for the longer term exposures, since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to time for an individual borrower/group of borrowers. Banks should suitably secure themselves before extending such guarantees. 2.4.5 Infrastructure projects Keeping in view the special features of lending to infrastructure projects viz., the high degree of appraisal skills on the part of lenders and availability of resources of a maturity matching with the project period, banks have been given discretion in the matter of issuance of guarantees favouring other lending agencies, in respect of infrastructure projects alone, subject to the following conditions: (i) The bank issuing the guarantee takes a funded share in the project at least to the extent of 5 percent of the project cost and undertakes normal credit appraisal, monitoring and follow-up of the project. (ii) The guarantor bank has a satisfactory record in compliance with the prudential regulations, such as, capital adequacy, credit exposure, norms relating to income recognition, asset classification and provisioning, etc. 2.5. Payment of invoked guarantees 2.5.1 Where guarantees are invoked, payment should be made to the beneficiaries without delay and demur. An appropriate procedure for ensuring such immediate honouring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceptional cases, that is, to say, in case of fraud or any case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere'. 2.5.7 In order to avoid such situations, it is absolutely essential for banks to appraise the proposals for guarantees 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. 2.5.8 (i) Banks are required to ensure that the guarantees issued by them are honoured without delay and hesitation when they are invoked in accordance with the terms and conditions of the guarantee deed, unless there is a Court order restraining the banks. (ii) Any decision not to honour the obligation under the guarantee invoked may be taken after careful consideration, at a fairly senior level, and only in the circumstances where the bank is satisfied that any such payment to the beneficiary would not be deemed a rightful payment in accordance with the terms and conditions of the guarantee under the Indian Contract Act, 1872. (iii) The Chief Exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of any disputes, such honouring can be done under protest, if necessary, and the matters of dispute pursued separately. (iv) The Government, on their part, have advised the various Government departments, etc. that the invocation of guarantees should be done after careful consideration at a senior-level that a default has occurred in accordance with the terms and conditions of the guarantees and as provided in the guarantee deed. (v) Non-compliance of the instructions in regard to honouring commitments under invoked guarantees will be viewed by Reserve Bank very seriously and Reserve Bank will be constrained to take deterrent action against the banks. 2.6 Co-acceptance of bills 2.6.1 General Reserve Bank has observed that some banks co-accept bills of their customers and also discount bills co-accepted by other banks in a casual manner. These bills subsequently turn out to be accommodation bills drawn by groups of sister concerns on each other where no genuine trade transaction takes place. Banks, while discounting such bills, appear to ignore this important aspect presumably because of the co-acceptance given by other banks. The bills, on maturity, are not honoured by the drawe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for each customer should be maintained, so that the commitments for each customer and the total commitments at a branch can be readily ascertained, and these should be scrutinised by Internal Inspectors and commented upon in their reports. (x) It is also desirable for the discounting bank to advise the Head Office/ Controlling Office of the bank, which has co-accepted the bills, whenever such transactions appear to be disproportionate or large. (xi) Proper periodical returns may be prescribed so that the Branch Managers report such co-acceptance commitments entered into by them to the Controlling Offices. (xii) Such returns should also reveal the position of bills that have become overdue, and which the bank had to meet under the co-acceptance obligation. This will enable the Controlling Offices to monitor such co-acceptances furnished by the branches and take suitable action in time, in difficult cases. (xiii) Co-acceptances in respect of bills for Rs.10,000/- and above should be signed by two officials jointly, deviation being allowed only in exceptional cases, e.g. non-availability of two officials at a branch. (xiv) Before discounting/ purchasing bills co-accepted by other b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsider discounting such bills. 2.6.2.4 It should be ensured that the branch officials strictly adhere to the above referred instructions at the time of co-acceptance of bills. It would be advisable to determine clear accountability in this respect and officials found to be not complying with the instructions must be dealt with sternly. 2.7 Precautions to be taken in the case of Letter of Credit 2.7.1 In the case of LCs for import of goods, banks should be very vigilant while making payment to the overseas suppliers on the basis of shipping documents. They should exercise precaution and care in comparing the clients. The payments should be released to the foreign parties only after ensuing that the documents are strictly in conformity with the terms of the LCs. There have been many irregularities in the conduct of LC business, such as the LC transactions not being recorded in the books of the branch by officials issuing them, the amount of LCs being much in excess of the powers vested in the officials, fraudulent issue of LCs involving a conspiracy/collusion between the beneficiary and the constituent. In such cases, the banks should take action against the concerned officials as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dir.BC.72/13.03.00/2006-07 03.04.2007 Guarantees for Export Advance 13. DBOD.No.Dir.BC.51/13.03.00/2006-07 09.01.2007 Banks Exposure to Commodity Markets Margin Requirements 14. DBOD.No.Dir.BC.35/13.07.10/2006-07 11.10.2006 Guarantees and Co-acceptances 15. DBOD.BP.BC.No.97/21.04.141/2003-04 17.06.2004 Annual Policy Statement for the year 2004-05 - Prudential Guidelines on Unsecured Exposures 16. IECD.No.17/08.12.01/2002-03 05.04.2003 Guarantees and Co-acceptances 17. DBOD.No.BP.BC.47/21.04.141/2002 13.12.2002 Limit of Unsecured Guarantees and Advances 18. DBOD.No.BP.BC.39/21.04.141/2002-03 06.11.02 Exemption of Advances granted to Self Help Groups (SHGs) against Group Guarantee from the Limit of Unsecured Guarantees and Advances 19. DBOD.No.BP.BC.90/21.04.141/2001-02 18.04.02 Exclusion of Credit Card Outstanding from the Norms relating to Unsecured Advances and Guarantees 20. IECD No 16/08.12.01/2001-02 20.02.02 Financing of Infrastructure Projects 21. DBOD.BP.BC.119/21.04137/2000-02 11.05.01 Bank Financing of Equities and Investment in Shares Revised Guidelines 22. DBOD.No.BP.BC.78/21.04.009/99 04.08.99 Bank Guarantees 23. IECD.No.26/08.12.01/98-99 23.04.99 Financing of Infrastru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C.111/C.469(W)-85 02.09.85 Safeguards for Issue of Banks Instruments, etc. 49. DBOD.No.Leg.BC.77/C.235C-85 05.07.85 Section 20 of the Banking Regulation Act, 1949 50. DBOD.No.Dir.BC.25/C.96-84 26.03.84 Guarantee of Inter-company Deposits/Loans by Commercial Banks 51. IECD.No.CAD.82/C.446(HF-P)-84 02.02.84 Guarantee Furnished by Banks in favour of HUDCO in respect of Loans to State Housing Boards and similar Bodies 52. DBOD.No.GC.SIC.BC.97/C.408 (A)-83 26.11.83 Opening of Letters of Credit Issue of Guarantees and Co-acceptance of Bills by Banks 53. DBOD.No.Dir.BC.44/C.96-83 30.05.83 Guarantee of Inter-company Deposits/Loans by Commercial Banks 54. DBOD.No.BP.678/C.473-83 11.01.83 Bank Guarantee 55. DBOD.No.Clg.BC.91/C.109(H)-82 30.09.82 Bank Guarantee Scheme 56. ICD.No.CAD.18/C.446-82 10.02.82 Bank Guarantee - Honouring of 57. DBOD.No.Inf.BC.103/C.109-80 11.09.80 Bank Guarantee Scheme 58. DBOD.No.Clg.BC.21/C.109(H)-80 08.02.80 Bank Guarantee Scheme 59. DBOD.No.Dir.BC.122/C.107(N)-78 20.09.78 Guarantee of Inter-company Deposits/Loans by Commercial Banks 60. DBOD.No.Clg.BC.1/C.109-78 02.01.78 Bank Guarantee Scheme 61. DBOD.No.ECC.BC.77/C.297L(1-A)-78 07.06.78 Unconditional Guarantee I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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