BANK GUARANTEES, CO-ACCEPTANCES AND LETTER OF CREDIT

Contents

BANK GUARANTEE
1. INTRODUCTION 2
2. PARTIES TO BANK GUARANTEE 2
3. CLASSIFICATION OF GUARANTEES 2
4. GENERAL GUIDELINES 6
5. GUIDELINES RELATING TO CONDUCT OF GUARANTEE BUSINESS 6
6. OTHER STIPULATIONS 17
6. RESTRICTIONS 20
7. INVOCATION OF GUARANTEE - PAYMENT OF INVOKED GUARANTEES 27
8. CO-ACCEPTANCE OF BILLS 30
9. PRECAUTIONS TO BE TAKEN IN THE CASE OF LETTER OF CREDIT 33
10. OTHER GUIDELINES ON GUARANTEES 34
11. MODEL FORM OF BANK GUARANTEE BOND 44
B. LETTER OF CREDIT
12. INTRODUCTION 46
13. PARTIES TO A LETTER OF CREDIT 47
14. TYPES OF LETTER OF CREDITS 48
15. ASSESSMENT OF LETTER OF CREDIT FACILITY 49
16. LC MECHANISM 51
17. OTHER GUIDELINES 54

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Disclaimer: Every care has been taken to give up-to-date information based on the RBI and Bank’s guidelines. However, users
are advised to go through banks circulars and guidelines for details.
 A. BANK GUARANTEE
1. INTRODUCTION:
Soundness of a Bank is judged not only by the size, character, and its assets
portfolio but also, of its contingent liability commitments such as guarantees,
letters of credit, etc. As a part of business, banks issue guarantees on behalf of
their customers for various purposes. The guarantees executed by Bank
comprise both performance guarantees and financial guarantees. The
guarantees are structured according to the terms of agreement, viz., security,
maturity and purpose.

With the introduction of risk weights for both on-Balance Sheet and off-Balance
Sheet exposures, Bank have become more risk sensitive, resulting in structuring
of their business exposures in a more prudent manner. Hence, compliance with
the following guidelines in the conduct of the guarantee business should be
ensured by Branches/Offices.
2. PARTIES TO BANK GUARANTEE
APPLICANT: The customer on whose behalf bank issues the Bank Guarantee.
ISSUING BANK: The Bank that issues the Letter of Guarantee on behalf of its
customer and thus undertakes the liability to pay the dues or discharge the
liabilities of the customer in case the guarantee is invoked
BENEFICIARY: The third party in whose favor the bank issues the Bank
Guarantee.
3. CLASSIFICATION OF GUARANTEES:
Section 126 of Indian Contract Act, 1872 defines a Contract of Guarantee as
“…a contract to perform the promise or discharge the liability of a third
person in case of his default.”
Banks also as a part of business issue guarantees on behalf of their
customers for various purposes wherein the bank acts as a guarantor, where
the bank promises to pay the dues or discharge the liabilities of its
customers in favor of a third party in whose favor the guarantee is issued.
Thus Bank's liability is co-extensive with that of the debtor.
A guarantee based on location can be either of the following:

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 An inland guarantee is one, which is executed between the parties in India
and in respect of all transactions in India.
A foreign guarantee is one, which is executed by or in favor of a party
residing outside India and in respect of transactions both in India as well as
outside.
A guarantee based on nature can be a performance or financial guarantee,
detail guidelines on this are discussed elsewhere in this document.
Classification of bank guarantee is on the basis of purpose.
BID BOND GUARANTEES: It is bank guarantee issued by the bank at the time
when the constituent participates in a tender/ bid, he would be required to
furnish a bid bond guarantee. The requests for bid bonds should be
examined in totality as in the case of financing of large projects/contracts.
It should be noted that once the bid is accepted, the party would require
various facilities such as performance guarantee for earnest money deposit,
guarantee in respect of advance payments received, etc. Further, working
capital facilities would also be required for completion of the
contract/project on time. Therefore, branches should submit a
comprehensive proposal, which should also indicate, inter alia, the working
capital and other guarantee facilities that may be required and a regular
sanction or a sanction in principle for other facilities should be obtained
before issuing the Bid Bond Guarantee. It should be ensured that the
facilities, wherever applicable, are covered under the guarantee scheme of
ECGC.
GUARANTEES FOR MOBILISATION OF ADVANCE (ADVANCE PAYMENT
GUARANTEE):When a contractor is given a contract, say to build a road, the
government department, PWD etc. makes an advance payment to the
contractor for mobilizing machinery, materials etc. with a provision to
adjust this amount against bills to be submitted by the contractor for
performance of the contract in due course. If for any reason, the contractor
does not perform the contract, the government department would like to
recover the advance payment made by them as above. However, the
financial position of the contractor may be such that he may not be in a
position to repay. To safeguard against this, the government department

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insist on a guarantee from a bank that they will pay the specified amount in
case of default by the contractor.
DEFERRED PAYMENT GUARANTEES: Deferred payment guarantee, which is
a financial guarantee, is a way of raising long term resources for acquiring
fixed assets/capital goods by securing guarantee of repayment of principal
and interest from his banker to the supplier of capital goods for suppliers’
credit. This also helps the supplier to improve his cash flow by discounting
these bills from his bankers.
In case of capital goods/machinery/heavy vehicles/ tractors /
trailers, the purchasers have to raise large amount of resources to buy these
items. For this the intending purchaser may approach his bank for term loan
repayable over a medium/long term in installments. Some occasions, the
supplier themselves may extend credit by allowing the purchaser to pay in
installments over period of time. The supplier may charge interest on the
credit extended and such interest may also be recovered in installments
along with principal. However, the supplier may not agree to extend such
credit, unless he is satisfied about the capacity of the purchaser to pay
the installments on due date. For this, he may insist on the purchaser's bank
guaranteeing the repayments. For this purpose, Deferred Payment Bank
guarantees are issued in lieu of term loan.

The purchaser (borrower) may then approach the bank to guarantee

repayment on due dates. The bank may consider his request and will
extend the guarantee which covers an extended repayment period
or 'Deferred Payment' by the borrower/purchaser to the
supplier/beneficiary. Hence such a guarantee is called 'Deferred Payment
Guarantee'.
RETENTION MONEY GUARANTEE: In construction contracts, it is common
for the beneficiaries to retain small portion of (usually not exceeding 10%)
of the payments released by them in stages. This retention is in order to
take care of any expense or loss which the beneficiaries might have to incur
in future on account of mistakes (on the part of contractor) or oversight.
Since such retention adversely affects the cash flow of the contractor, the

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 beneficiary agrees to release the retention money, if the contractor submits
Retention Money Guarantee for equivalent amount. The liability under
Retention Money Guarantee extinguishes when the constituents completes
his job to the satisfaction of beneficiary.
MAINTENANCE BOND: When the contractor/vendor successfully completes
his job to the satisfaction of the beneficiary, the bank guarantees issued by
the bank would have served the purpose and the liability would cease to
exist. But the beneficiary would still like to play safe and would ask the
contractor/vendors to submit a fresh bank guarantee that would protect the
former against any mistake/fault/defect in the work which might crop up
later. This is in nature of warranty and also sometime known as warrant
bond.
GUARANTEES FAVOURING GOVERNMENT DEPARTMENTS/ COURTS IN
RESPECT OF DISPUTED AMOUNTS: Requests are received from the
constituents for issuing guarantees favoring government departments/courts
in regard to disputed amounts in respect of excise duty, custom duty, etc. It
should be noted that these are financial guarantees whereby a client seeks
to defer payment of a particular sum of money pending
clarification/judgment. In case of guarantees for disputed amounts of excise
duty, the liability relates to sales already effected and the client would
have generally collected the necessary amount, or his cost of operations
would have absorbed the additional burden.
Similarly, in respect of disputed amounts of custom duty, the client would
initially be paying only a part of the amount and submits a bank guarantee
for the balance amount. Since the purpose of the guarantee is only to help
the client in deferring the payment, unless the decision is in their favor,
prudence would require that they should set apart sufficient amount to
provide for the eventuality and their cost of operations should take into
account the probable liability.
The aforesaid instances are only indicative and not exhaustive.

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4.1 GENERAL GUIDELINES

4.1.1 As regards the purpose of the guarantee, as a general rule, Bank should
confine itself to the provision of financial guarantees and exercise due
caution with regard to performance guarantee business.
4.1.2 As regards maturity, as a rule, Bank should guarantee shorter maturities
and leave longer maturities to be guaranteed by other institutions.
4.1.3 No bank guarantee should normally have a maturity of more than 10
years. However, in view of the changed scenario of the banking industry
where Bank extend long term loans for periods longer than 10 years for
various projects, RBI has allowed issuance of guarantees for periods beyond
10 years. It is decided that the guarantee with a maturity of more than 10
years may be issued only after prior permission of Credit Approval
Committees at Central Office (CAC-III and above). While permitting to issue
such a guarantee with a maturity of more than 10 years, the impact of very
long duration guarantees on the asset liability management should be taken
into account.
5.1 Guidelines relating to conduct of guarantee business
5.1.1 Norms for unsecured advances & guarantees
i. Until June 17, 2004, Banks were required to limit the commitments by way
of unsecured guarantees in such a manner that 20 percent of a bank’s
outstanding unsecured guarantees plus the total of its outstanding
unsecured advances should not exceed 15 percent of its total
outstanding advances. In order to provide further flexibility, the above
limit on unsecured exposure of banks was withdrawn by RBI and Board
have been given the freedom to fix their own policies on unsecured
exposures.
"Unsecured exposure" is defined as an exposure where the realizable
value of the security, as assessed by the bank/ approved valuers / Reserve
Bank’s inspecting officers, is not more than 10 per cent, ab-initio, of the
outstanding exposure. Exposure shall include all funded and non-funded
exposures (including underwriting and similar commitments). ‘Security’
will mean tangible security properly charged to Bank and will not include
intangible securities like guarantees, letter of comfort, etc.
ii. For determining the amount of unsecured advances for reflecting in
Schedule 9 of the published Balance Sheet, the rights, licenses,
authorisations, etc., charged to Bank as collateral in respect of projects
(including infrastructure projects) financed by bank should not be
reckoned as tangible security. Bank, 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

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 securities, subject to the condition that banks’ right to receive annuities
and toll collection rights is legally enforceable and irrevocable.
iii. All exemptions allowed for computation of unsecured advances stand
withdrawn.
5.1.2 Precautions for issuing guarantees
The following precautions should be adopted while issuing guarantees on
behalf of our customers.
i. As a rule, giving unsecured guarantees in large amounts and for medium
and long-term periods should be avoided. Further, undue concentration of
such unsecured guarantee commitments to particular groups of customers
and/or trades should also be avoided.
ii. Unsecured guarantees on account of any individual constituent should be
limited to a reasonable proportion of total unsecured guarantees of the
Bank. Guarantees on behalf of an individual should also bear a reasonable
proportion to the constituent’s equity.
iii. In exceptional cases, deferred payment guarantees on an unsecured basis
may be given for modest amounts to first class customers who have
entered into deferred payment arrangements in consonance with
Government policy.
iv. Guarantees executed on behalf of any individual constituent, or a group of
constituents, should be subject to the prescribed exposure norms.
v. It is essential to realise that guarantees contain inherent risks and that it
would not be in bank’s interest or in the public interest, generally, to
encourage parties to over-extend their commitments and embark upon
enterprises solely relying on the easy availability of guarantee facilities.
5.1.3 Precautions for averting frauds
While issuing guarantees on behalf of customers, the following safeguards
should be observed:
i. At the time of issuing financial guarantees, it should be satisfied that the
customer would be in a position to reimburse the bank in case the bank is
required to make payment under the guarantee.
ii. In the case of performance guarantee, due caution should be exercised
and have sufficient experience with the customer to satisfy that the
customer has the necessary experience, capacity and means to perform
the obligations under the contract, and is not likely to commit any
default.
iii. As per RBI guidelines, Banks should refrain from issuing guarantee on
behalf of customers who do not enjoy credit facilities with them. The said
restriction of not to extend any non-fund based (NFB) facilities to non-
constituents borrowers of the Bank was imposed by RBI to prevent frauds,
diversion of funds etc. in case bank sanctions “one-off” transaction
facilities without assessment of credit needs of the borrowers on well-
established credit norms. However, in view of the recent developments in
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 strengthening the system of collection and maintenance of credit
information, the existing prescriptions have been reviewed by RBI.
Accordingly, Branches/ Offices may grant non-fund based facilities
including Partial Credit Encashment (PCE) to those customers, who do not
avail any fund based facility from any Bank in India, subject to the
following conditions:
a. Branches / Offices 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, Branches shall obtain
declaration from the customer about the non-fund based credit facilities
already enjoyed by them from other Banks.
b. Branches / Offices shall undertake the same level of credit appraisal as
has been laid down for fund based facilities.
c. The existing guidelines on Know Your Customer (KYC)/ Anti-Money
Laundering (AML)/ Combating of Financing of Terrorism (CFT) issued by
RBI / Other Statutory regulators from time to time should be adhered to
in respect of all such credit facilities.
d. Credit information relating to grant of such facility shall mandatorily be
furnished to Credit Information Companies (specifically authorized by
RBI).
e. The delegation for sanction of such facilities shall be 50% of the usual
delegation vested with respective CACs at field level towards non-fund
based limits as per extant Policy on Delegation of Loaning Powers.
However, CACs at Central Office can sanction up to their delegated
powers.
f. In case of guarantees with 100% cash margin i.e. FDR or equivalent, the
same to be sanctioned as per the usual Delegation even if the same is to
be issued on stand-alone basis.
iv. As per RBI guidelines BG /LC may be issued by scheduled commercial
banks to clients of co-operative banks against counter guarantee of the co-
operative bank. In such cases, guidelines under lending against guarantee
of other bank would be applicable. Further, it must be satisfied that the
concerned co-operative banks have sound credit appraisal and monitoring
systems as well as robust Know Your Customer (KYC) regime. Before
issuing BG/LCs to specific constituents of co-operative banks, it must be
satisfied that KYC has been done properly in these cases.
v. Guarantees on behalf of third parties cannot be issued. However, in
cases where company submits bids to secure large value projects in the
names of joint ventures/subsidiaries to leverage the financial strength and
expertise of joint ventures partners, for such projects, B/Gs may be issued
on behalf of joint ventures/subsidiaries by obtaining prior approval from
authority at ZLCC & above subject to there being no change in the share

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 holding pattern of the joint venture / subsidiary company at subsequent
date without fresh approval from the approving authority.
vi. In case of financial guarantees, the details of the ‘designated bank
account’ for routing the transactions shall be mentioned in the guarantee
document.
5.1.4 Ghosh Committee Recommendations
The following recommendations made by the High-Level Committee
constituted in October 1991 (Chaired by Shri A. Ghosh, the then Dy.
Governor of RBI) should be implemented:
i. In order to prevent unaccounted issue of guarantees, as well as fake
guarantees, bank guarantees should be issued in serially numbered
security forms.
ii. Branches should, while forwarding guarantees, caution the beneficiaries
that they should, in their own interest, verify the genuineness of the
guarantee with the issuing bank. The verification of the guarantees is
centralized at CO level by an already established E –Confirmation Cell,
CP&MSME Department, CO, Mumbai having email
ecc@unionbankofindia.com.
5.1.5 Internal control systems
i. Bank guarantees issued for Rs.50,000/- and above should be signed by two
officials jointly. Such a system will reduce the scope for malpractices/
losses arising from the wrong perception/ judgement or lack of honesty/
integrity on the part of a single signatory.
ii. In case of branch where there is one signatory only, that branch may issue
guarantee for Rs.50,000/- and above only after seeking prior approval
from the Regional Office. The aforesaid guarantee will be subjected to
special scrutiny by the auditors/inspectors at the time of internal
inspection of the branch.
iii. To enable modifications of some provisions of Bank Guarantee in Core Banking
System, Branch is permitted for reducing the Bank Guarantee amount subject
to the following conditions:
a. There shall be a request from the beneficiary in writing for
reduction in the Bank Guarantee amount.
b. The request shall be supported by concurrence of the borrower in
writing for
reduction of the Bank Guarantee amount.
c. Branch shall ensure the genuineness of such request received from
the
beneficiary/ borrower before effecting the reduction in the amount.
d. Any such reduction in Bank Guarantee amount in CBS shall be
authorized by the
Branch Head Only.
e. The concerned branch shall send a SFMS message for confirmation
to the beneficiary’s Bank for having modified the amount.

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 f. The borrower shall submit an acknowledgement of the amendment
from the beneficiary.
g. The branches shall be permitted to extend the due date of the BG as being done
hitherto.
5.1.6 Guarantees on behalf of Banks' Directors
5.1.6.1 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 liability and the
bank being called upon to honor its obligation under the guarantee, the
relationship between the bank and the director could become one of
creditor and debtor. Further, directors would also be able to evade the
provisions of Section 20 by borrowing from a third party against the
guarantee given by the bank. These types of transactions are likely to
defeat the very purpose of Section 20 of the Act, if bank do not take
appropriate steps to ensure that the liabilities there under do not devolve
on them.
5.1.6.2 In view of the above, while extending non-fund based facilities such as
guarantees, etc. on behalf of our directors and the companies/firms in
which the director is interested, following should be ensured:
i. Adequate and effective arrangements have been made to the satisfaction
of the bank that the commitments would be met out of their own
resources by the party on whose behalf guarantee was issued and
ii. The bank will not be called upon to grant any loan or advance to meet the
liability, consequent upon the invocation of the guarantee.
In case, such contingencies arise as at (ii) above, the bank will be deemed
to be a party to the violation of the provisions of Section 20 of the Banking
Regulation Act, 1949.
5.1.7 Bank Guarantee Scheme of Government of India
5.1.7.1 The Bank Guarantee Scheme formulated by the Government of India for
the issuance of bank guarantees in favor of Central Government
Departments, in lieu of security deposits, etc. by contractors, has been
modified from time to time. Under the scheme, it is open to Government
Departments to accept freely guarantees, etc. from all scheduled
commercial banks.
5.1.7.2 Bank has adopted the Model Form of Bank Guarantee Bond as given in
Annexure I. The Government of India have advised all the Government
departments/ Public Sector Undertakings, etc. to accept bank guarantees
in the Model Bond and to ensure that alterations/additions to the clauses

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 whenever considered necessary are not one-sided and are made in
agreement with the guaranteeing bank.
In certain cases, beneficiary may require LG in their own format different
from the Model Form of Bank Guarantee Bond. In such cases, the
guarantee should be vetted by Bank’s legal officer or panel advocate
ensuring that there is no onerous clause including obligation of interest
payment on guarantee amount, even if it is backed by 100% margin. The
legal opinion should be held on record till the reversal of the guarantee.
These guarantees must be issued in the format vetted by the Bank’s legal
officer/Panel advocate.
The names of the beneficiary departments and the purposes for which the
guarantees are executed should be mentioned in the guarantee bonds and
the correspondence with the various State Governments. This is necessary
to facilitate prompt identification of the guarantees with the concerned
departments. In regard to the guarantees furnished in favor 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.
4.1.7.3. In respect of guarantees issued in favour of Directorate General of
Supplies and Disposal, the following aspects should be kept in view:
i) In order to speed up the process of verification of the genuineness of the
bank guarantee, the name, designation and code numbers of the
officer/officers signing the guarantees should be incorporated under the
signature(s) of officials signing the bank guarantee.
ii) The beneficiary of the bank guarantee should also be advised to
invariably obtain the confirmation of the Bank about the genuineness of the
guarantee issued by them as a measure of safety.
iii) The initial period of the bank guarantee issued by Bank as a means of
security in Directorate General of Supplies and Disposal contract
administration would be for a period of six months beyond the original
delivery period. Branch / Bank may incorporate a suitable clause in the bank
guarantee, providing automatic extension of the validity period of the
guarantee by 6 months, and also obtain suitable undertaking from the
customer at the time of issuing the guarantee to avoid any possible
complication later.
iv) A clause would be incorporated by Directorate General of Supplies and
Disposal (DGS&D) in the tender forms of Directorate General of Supplies
and Disposal 229 Instruction to the tenderers) to the effect that whenever a
firm fails to supply the stores within the delivery period of the contract
wherein bank guarantee has been furnished, the request for extension for
delivery period will automatically be taken as an agreement for getting the
bank guarantee extended. Branch/ Bank should make similar provisions in
the bank guarantees for automatic extension of the guarantee period.
v) The Public Notice issued by the Customs Department stipulates, inter
alia, that all bank guarantees furnished by an importer should contain a self-
renewal clause inbuilt in the guarantee itself. As the stipulation in the

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 Public Notice issued by the Customs Department is akin to the notice in the
tender form floated by the DGS&D, the provision for automatic extension of
the guarantee period in the bank guarantees issued to DGS&D, as at sub-
paragraph (iv) above, should also be made applicable to bank guarantees
issued favouring the Customs Houses.
vi) The bank guarantee, as a means of security in the Directorate General of
Supplies and Disposal contract administration and extension letters thereof,
would be on non-judicial stamp paper.
5.1.7.2 As per the Cabinet note issued on 12.04.2017, Directorate General of
Supplies and Disposal is closed and Government e Marketplace(GeM) is
created based on the recommendation of Group of Secretaries. “GeM” is a
dedicated e-market for different goods & services procured by
Government Organizations/ Departments/ PSUs. GeM shall work together
with the Banks to make available Integrated e-payment systems for
collection and transfer of payments/ e-Earnest Money deposit (EMD)/ e-
Performance Bank Guarantee.

5.1.8 Other Guarantees:

5.1.8.1 Guarantees on Behalf of Share and Stock Brokers/ Commodity Brokers
Guarantees may be issued on behalf of share and stock brokers in favor 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. Guarantees
may also be issued in lieu of margin requirements as per stock exchange
regulations. A minimum margin of 50 percent has to be obtained 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 bank. 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 on behalf of commodity
brokers in favour of the national level commodity exchanges, viz.,
National Commodity & Derivatives Exchange (NCDEX), Multi Commodity
Exchange of India Limited (MCX) and National Multi-Commodity Exchange
of India Limited (NMCEIL), in lieu of margin requirements as per the
commodity exchange regulations. The requirement of each applicant
borrower should be assessed and usual and necessary safeguards including
the exposure ceilings should be observed.
Such guarantees should be issued strictly as per Policy on Capital Market
Exposure.

5.1.8.2 Irrevocable Payment Commitments – Financial Guarantees

While issuing Irrevocable Payment Commitment (IPCs) to various Stock
Exchange on behalf of Mutual Funds and FIIs, following risk mitigation
measures should be adopted:

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 i. Only those custodian banks would be permitted to issue IPCs who have a
clause in the Agreement with their clients which gives them an inalienable
right over the securities to be received as payout in any settlement.
However, in cases where transactions are pre-funded i.e. there are clear
INR funds in the customer’s account and, in case of FX deals, the bank’s
nostro account has been credited before the issuance of the IPC by
custodian banks, the requirement of the clause of inalienable right over
the security to be received as payout in the agreement with the clients
will not be insisted upon.
As regards calculation of Capital Market Exposure, the instructions are
incorporated in the Policy on Capital Market Exposure.
5.1.9 Guidelines relating to obtaining of personal guarantees of directors and
other managerial personnel of borrowing concerns
5.1.9.1 Personal guarantees of directors / promoters / partners
Credit facilities extended to private limited companies / LLPs shall
normally be supported by personal guarantee of promoters – directors /
designated partners. However, authorities in the rank of RLCC-I and above
can waive / sanction loans in their delegated power even without
guarantee of promoters – directors / designated partners. Guarantee of all
the partners in their personal capacity shall be obtained in the case of
credit facility granted to a partnership firm. Wherever partnership firm is
guaranteeing the advance, the individual partner shall also join as
guarantor.
The Personal guarantees of directors for the credit facilities, etc. granted
to corporates, public or private should be taken, only when absolutely
warranted after a careful examination of the circumstances of the case
and not as a matter of course. In order to identify the circumstances under
which the guarantee may or may not be considered necessary, Branches /
Offices should be guided by the following broad considerations:
5.1.9.1.1 Where guarantees need not be considered necessary
i. Ordinarily, in the case of public limited companies, when the management
is satisfactory, its stake in the concern, economic viability of the proposal
and the financial position and capacity for cash generation, no personal
guarantee need be insisted upon. In fact, in the case of widely owned
public limited companies, which may be rated as first class and satisfying
the above conditions, guarantees may not be necessary even if the
advances are unsecured. Also, in the case of 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.

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 ii. Where the aspects mentioned above of loan proposals are not so
convincing, seek stipulation of 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, and 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.
5.1.9.1.2 Where guarantees may be considered helpful
i. Personal guarantees of directors 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 as financial condition, security
available, etc. The exception being in respect of companies where, by
court or statutory order, the management of the company is vested in a
person or persons, whether called directors or by any other name, who are
not required to be elected by the shareholders. Where personal guarantee
is considered necessary, the guarantee should preferably be that of the
principal members of the group holding shares in the borrowing company
rather than that of the director/managerial personnel functioning as
director or in any managerial capacity.
ii. Even if a company is not closely held, there may be justification for a
personal guarantee of directors to ensure continuity of management.
Thus, loan could be made to a company whose management is considered
good. Subsequently, a different group could acquire control of the
company, which could lead the lending institution to have well-founded
fears that the management has changed for the worse and that the funds
lent to the company are in jeopardy. One way by which lending
institutions could protect themselves in such circumstances is to obtain
guarantees of the directors and thus ensure either the continuity of the
management or that the changes in management take place with their
knowledge. Even where personal guarantees are waived, it may be
necessary to obtain an undertaking from the borrowing company that no
change in the management would be made without the consent of the
bank. Similarly, during the formative stages of a company, it may be in the
interest of the company, as well as the bank, to obtain guarantees to
ensure continuity of management.
iii. Personal guarantees of directors may be helpful with regard to public
limited companies other than those which may be rated as first class,
where the advance is on an unsecured basis.

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iv. There may be public limited companies, whose financial position and/or
capacity for cash generation is not satisfactory even though the relevant
advances are secured. In such cases, personal guarantees are useful.
v. Cases where there is likely to be considerable delay in the creation of a
charge on assets, guarantee may be taken, where deemed necessary, to
cover the interim period between the disbursement of loan and the
creation of the charge on assets.
vi. The guarantee of parent companies may be obtained in the case of
subsidiaries whose own financial condition is not considered satisfactory.
vii. Personal guarantees are relevant where the balance sheet or financial
statement of a company discloses interlocking of funds between the
company and other concerns owned or managed by a group.

5.1.9.1.3Worth 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. An
undertaking should be obtained 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. During the periodic inspections, the
inspecting official 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 guarantees is considered essential
because the new management's guarantee is either not available or is
found inadequate and payment of remuneration to guarantors by way of
guarantee commission is allowed.
5.1.9.1.4Personal guarantees in the case of sick units
As the personal guarantees of promoters/ directors generally instill greater
accountability and responsibility on their part and prompt the
managements to conduct the running of the assisted units on sound and
healthy lines and to ensure financial discipline, guarantees from directors
(excluding the nominee directors) and other managerial personnel in their
individual capacities, may be obtained as per discretion. In case, for any
reasons, a guarantee is not considered expedient at the time of
sanctioning the advance, an undertaking should be obtained from the
individual directors and a covenant should invariably be incorporated in
the loan agreement that in case the borrowing unit show cash losses or
adverse current ratio or diversion of fund, the directors would be under an
obligation to execute guarantees in their individual capacities, if required
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 by the bank. Guarantees may also be obtained as per discretion from the
parent/holding company when credit facilities are extended to borrowing
units in the same Group.
5.1.10 Guarantees of State Government
The guidelines laid down in paragraph above, for taking personal
guarantees of directors and other managerial personnel, should also be
followed in respect of proposal of State Government
undertakings/projects and guarantees may not be insisted upon unless
absolutely warranted. In other words, guarantees of State Governments
could be obtained on merits and only in circumstances absolutely
necessary after thorough examination of the circumstances of each case,
and not as matter of course.
5.1.11 Delegation of Powers
The delegation of powers for issue of guarantees is as per Policy on
delegation of loaning powers in place.
5.1.12 Monitoring:
The exposure assumed on issuance of Bank Guarantee is to be monitored
on a continuous basis with the same standard of monitoring as if the Fund
Based limits are monitored. In respect of Performance Bank Guarantee
issued for implementation of the project, Branch to obtain status of
implementation of each such project on a quarterly basis and ensure that
the progress of execution of the project is as per the time schedule. If it is
delayed, timely corrective measures shall be taken in consultation with
the party.
5.2 Other stipulations
5.2.1 Issuing bid bonds and performance guarantees for export
i.With a view to boost exports, flexible approach should be adopted in the
matter of obtaining cover and earmarking of assets/ credit limits, drawing
power, while issuing bid bonds and performance guarantees for export
purposes. However, bank’s interests may be safeguarded by obtaining an
Export Performance Guarantee of Export Credit Guarantee Corporation of
India Ltd. (ECGC), wherever considered necessary.
ii. ECGC provide 90 percent cover for bid bonds, provided the bank gives an
undertaking not to insist on cash margins. Therefore, cash margin may not
be asked in respect of bid bonds and guarantees which are counter-
guaranteed by ECGC.
iii. In other cases, where such counter-guarantees of ECGC are not available,
for whatever reasons, a reasonable cash margin may be stipulated only if
it is considered absolutely necessary. However, satisfactory capacity and
financial position of the exporter should be ascertained while issuing such
bid bonds/ guarantees.

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iv. Separate limits for issue of bid bonds may be considered for sanction.
Within the limits so sanctioned, bid bonds against individual contracts may
be issued, subject to usual considerations.
5.2.2 Unconditional Guarantees in favor of Overseas Employers / Importers
on behalf of Indian Exporters
i. While agreeing to give unconditional guarantee in favor of overseas
employers/importers on behalf of Indian Exporters, an undertaking should
be obtained 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.
ii. While issuing guarantees, the above points should be kept in view and
suitable clauses in the agreement should be incorporated, in consultation
with empanelled legal adviser/s (advocate/s). This is considered desirable
as non-honoring of guarantees on invocation might prompt overseas banks
not to accept guarantees of Indian banks, thus hampering the country's
export promotion effort.
5.2.3 Certain precautions in case of Project Exports
i. Working Group mechanism has been evolved for the purpose of giving
package approvals in principle at post-bid stages for high value overseas
project exports. The role of the Working Group is mainly regulatory in
nature, but the responsibility of project appraisal and that of monitoring
the project lies solely on the sponsor bank.
ii. As the Working Group approvals are based on the recommendations of the
sponsor banks, the latter has to examine the project proposals thoroughly
with regard to the capacity of the contractor/ sub-contractors, protective
clauses in the contracts, adequacy of security, credit ratings of the
overseas sub-contractors, if any, etc.
iii. Therefore, the need for a careful assessment of financial and technical
demands involved in the proposals vis-à-vis the capability of the
contractors (including sub-contractors) as well as the overseas employers
can hardly be under-rated to the financing of any domestic projects. In
fact, the export projects should be given more attention, in view of their
high values and the possibilities of foreign exchange losses in case of
failure, apart from damage to the image of Indian entrepreneurs.
iv. While bid bonds and performance guarantees cannot be avoided, it is to be
considered whether guarantees should be given in all cases of overseas
borrowings for financing overseas projects. Such guarantees should not be
executed as a matter of course, merely because of the participation of
Exim Bank and availability of counter-guarantee of ECGC. Appropriate

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 arrangements should also be made for post-award follow-up and
monitoring of the contracts.
5.2.4 Guarantees for Export Advance
i. Guarantees are permitted in respect of debt or other liability incurred by
an exporter on account of exports from India. It is therefore intended to
facilitate execution of export contracts by an exporter and not for other
purposes. The guarantees contain inherent risks, and that it would not be
in bank’s interest or in the public interest generally to encourage parties
to over-extend their commitments and embark upon enterprises solely
relying on the easy availability of guarantee facilities. Branches should,
therefore, be careful while extending guarantees against export advances
so as to ensure that no violation of FEMA regulations takes place and bank
is not exposed to various risks. It will be important to carry out due
diligence and verify the track record of such exporters to assess their
ability to execute such export orders.
ii. Further, it should also be ensured that the export advances received by
the exporters are in compliance with the regulations/ directions issued
under the Foreign Exchange Management Act, 1999.
iii. 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
Credit.
5.2.5 Overseas Investment – Guarantee on behalf of Wholly Owned
Subsidiaries (WOSs)/Joint Ventures (JVs) abroad
i. An Indian party may have financial commitment to its overseas JV / WOS
to the limit, as prescribed by the Reserve Bank of India from time to time,
of the net worth of the Indian party as on the date of the last audited
balance sheet. The financial commitment may be in the form of
a) Capital contribution and loan to the JV / WOS;
b) Corporate guarantee (only 50 percent value in case of performance
guarantee) and / or bank guarantee (which is backed by a counter
guarantee / collateral by the Indian party) on behalf of the JV / WOS and
c) Charge on immovable / movable property and other financial assets of the
Indian party (including group company) on behalf of JV / WOS.
The above measures were intended to assist Indian companies in their
overseas business. However, RBI has observed that some banks are
extending non-fund based credit facilities like guarantees / stand-by letter
of credits / letter of comforts etc. on behalf of JV / WOS / Wholly Owned
Step Down Subsidiaries (WoSDS) for purposes which are not connected with
their business, rather, in certain cases, these facilities are used to avail
foreign currency loans for repayment of Rupee loans.

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 It is therefore clarified that Branches including overseas branches /
subsidiaries of our bank, should not issue standby letters of credit /
guarantees / letter of comforts etc. on behalf of overseas JV / WOS /
WoSDS of Indian companies for the purpose of raising loans / advances of
any kind from other entities except in connection with the ordinary course
of overseas business. Further while extending fund / non-fund based credit
facilities to overseas JV / WOS / WoSDS of Indian companies in connection
with their business, either through branches in India or through branches /
subsidiaries abroad, effective monitoring of the end use of such facilities
and its conformity with the business needs of such entities should be
ensured.
5.3 Restrictions:
5.3.1 Restrictions on guarantees of inter-company deposits/loans
Guarantees should not be executed covering inter-company deposits/loans
thereby guaranteeing refund of deposits/loans accepted by NBFC/firms
from other NBFC/firms.
5.3.2 Restriction on guarantees for placement of funds with NBFCs
These instructions would cover all types of deposits/ loans irrespective of
their source, including deposits/loans received by NBFCs from trusts and
other institutions. Guarantees should not be issued for the purpose of
indirectly enabling the placement of deposits with NBFCs.
5.3.2a. Restriction of issuance of guarantee relating to ECB:
As per RBI master directions on ECB, Trade credit and structured
obligations (RBI/FED/2018-19/67 dated 26.03.2019 updated on 08.08.2019)
– issuance of any type of guarantee by Indian Banks, all Indian Financial
Institutions and NBFCs related to ECB is not permitted. Further financial
intermediaries (viz. Indian Banks, All India Financial Institutions or NBFCs)
shall not invest in FCCBs/FCEBs in any manner whatsoever.
5.3.3 Restrictions on Inter-Institutional Guarantees
5.3.3.1 Guarantees should not be executed covering inter-company deposits/
loans. Guarantees should not, also, be issued for the purpose of indirectly
enabling the placement of deposits with non-banking institutions. This
stipulation will apply to all types of deposits/loans irrespective of their
source, e.g. deposits/ loans received by non-banking companies from
trusts and other institutions.
5.3.3.2 Transactions of the following type are in the nature of guarantees
executed in respect of funds made available by one non-banking to
another non-banking company and therefore, such practices should be
desisted:
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
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 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 executed by the bank. In such a case
also, the bank earmarked the amount against drawing power available in
the cash credit account.
5.3.3.2.1 Issuing Guarantees favoring Other Banks/FIs Other Lending
Agencies For The Loans Extended By The Latter.
Guarantees may be issued favoring other banks/ FIs/ other lending
agencies for the loans extended by the latter, subject to strict compliance
with the following conditions.
i. The guarantee shall be extended only in respect of borrower constituents
and to enable them to avail of additional credit facility from other
banks/FIs/lending agencies.
ii. A funded exposure of at least 10% of the exposure guaranteed on the
borrower constituent is to be assumed.
iii. Guarantees or letters of comfort should not be extended in favor of
overseas lenders including those assignable to overseas lenders. However,
branches/offices may also be guided by the provisions contained in FEMA
Notification (Notification no.FEMA.8/2000 dated May 3, 2000 for issuance
of guarantee by whatever name called (say Letter of Comfort), which has
the effect of guaranteeing, a debt, obligation or other liability owed by a
person resident in India to, or incurred by, a person resident outside
India).
iv. The guarantee issued will be an exposure on the borrowing entity on
whose behalf the guarantee has been issued and will attract appropriate
risk weight, as per the extant guidelines.
v. Compliance with the recommendations of the Ghosh Committee and other
internal requirements relating to issue of guarantees, to obviate the
possibility of frauds in this area should be ensured.
vi. Instances of Banks issuing guarantees on behalf of corporate entities in
respect of non-convertible debentures issued by such entities have been
noticed by RBI. It is clarified that the extant instructions apply only to
loans and not to bonds or debt instruments. Guarantees by the banking
system for a corporate bond or any debt instrument not only have
significant systemic implications but also impede the development of a
genuine corporate debt market. Therefore, Branches / Offices are advised
to strictly comply with the extant regulations and in particular, not to
provide guarantees or equivalent commitments for issuance of bonds or
debt instruments of any kind.

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vii. Issuing a Bank Guarantee involves assuming financial liability on behalf of
a customer, even though actual payment would be contingent upon the
conditions laid down in the Guarantee. Consequently a proposal for
issuing a Guarantee on behalf of a customer is to be processed as carefully
as for advance to be granted to the borrower. All precautions prescribed
for processing proposal for advance are to be observed.
Before sanctioning such proposals, normal appraisal should be carried out
as if the entire facility is being allowed by our bank by calling for the
required proposal with due recommendations, required data such as
financial statements, projections etc. On the basis of the appraisal the
sanctioning authority as per applicable delegated loaning powers should
arrive at the limits to be sanctioned.
viii. In respect of Guarantee issued in favour of other Banks / FIs / Other
Lending Agencies for the loans extended by them, stipulations as to
security, margin, control/supervision over the account shall be similar to a
funded exposure.
As other banks would be extending loans on the basis of the guarantees
issued by our bank, the first charge on the securities would be given to our
bank. The security shall be according to the nature of lending – i.e. if it is
working capital finance, then security and margin would be as per the
norms laid down for such financing and if it is term loan then it should be
as per the norms laid down for such financing. In any case it is desirable
that the security is at least 100% of the guarantee extended and the
margin is at least 25% (minimum). Here margin means the contribution by
the promoter to the cost of the project.
ix. Since other Banks/Financial Institutions will be lending against our
Guarantees, the underlying securities should be held at our Bank’s level
and proper documentation including registration of charges for the same
should be obtained.
x. The liability of the Bank under the guarantee must be limited to a definite
amount and the period upto which the Bank will continue to be liable must
be definite in the sense that it will not be liable after the date specified in
the Guarantee, unless a claim is lodged / payment demanded on or before
the specified date.
xi. Guarantees for working capital should normally be issued only for a period
of one year to be renewed thereafter, based on assessment of the
performance of the borrower.
xii. The review of account where exposure on account of Guarantee in favour
of other Banks / FIs and Other Lending Agencies is undertaken is also to be
reviewed within a period not exceeding 12 months as applicable in other
cases where fund based / non-fund based exposure is undertaken.

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xiii. Guarantee issued in favour of other Banks/FIs/Other Lending Agencies for
the loan extended by them is a financial guarantee and appropriate
service charges applicable are to be levied.
xiv. Prudential Limits:
- Guarantees in favour of other Banks / FIs and other Lending Agencies in
aggregate shall not exceed the Tier I capital of the Bank.
- Exposure on borrowers will include exposure taken for guarantees issued in
favour of other Banks / FIs and other lending agencies for complying with
the exposure norms for single / group borrowers.
- Exposure taken for guarantees issued in favour of other Banks / FIs and
other lending Agencies will also form part of exposures with regard to
adherence of various industry / sector exposure limits fixed as per Loan
Policy in force.

xv.Monitoring:
The guarantee limit would be subjected to same standard of monitoring as
if the entire fund based limits are considered by our bank.

5.3.3.2.2 Lending Against Guarantees Of Other Banks / FIs

While extending credit facilities against the guarantees issued by other

banks/FIs strict compliance with the following conditions should be
ensured:

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.(Union Bullion
Scheme is in place for sanctioning gold loan against guarantee issued by
Schedule Commercial Banks acceptable to bank).

ii. Prudential Limits:

- The guidelines for fixing the counterparty exposure limits for transactions
with Banks / FIs has been laid down by the Treasury & International
Banking Department, C.O., which is approved by the Board.

- The risk exposure on the Banks in respect of credit sanctions and the
ceilings for the same have been determined within the overall umbrella
limits fixed for individual Banks, which is monitored at the Corporate
level.

- Hence, exposures assumed by way of credit facilities extended against the

guarantees issued by other Banks shall be reckoned within the prescribed
inter-bank exposure limits. A separate limit is to be fixed for extending

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 credit limits against the BGs issued by Banks & FIs as a part of aforesaid
umbrella limit since such exposures would be fairly long and would attract
greater risk.

- The proposal shall also fulfil exposure limits as applicable for single /
group borrower proprietary / partnership concerns, Industry / sector,
substantial exposure as set out in the loan policy.

iii. Monitoring:

- The exposure assumed on our Bank is to be monitored on a continuous

basis to ensure strict compliance with the prudential limits / sub limits
prescribed for the Bank.

- The exposures would be subjected to the same standards of monitoring as

if the limits are sanctioned without Bank guarantee.

5.3.3.2.3 Common Guidelines:

i. Delegation of Powers:

The delegation of powers for issue of Guarantees in favors of Banks / FIs /

other Lending Agencies and lending against Guarantees of other Banks /
FIs / other Lending Agencies shall be exercised by ZLCC and above, as per
the respective delegated authority vested in them.

ii. Ghosh Committee Recommendation

Branches/Offices should comply with the recommendations of the Ghosh

Committee and other internal requirements relating to acceptance of
guarantees of other banks, to obviate the possibility of frauds in this area.

iii. Review:

Quarterly review will also be undertaken by the Management Committee

for the exposure undertaken against the guarantees of other Banks / FIs
and issue of Guarantees in favors of other Banks / FIs. Information to be
collected by MSME Department at central office for placing before the
Management Committee on Quarterly basis.

iv. Reporting:

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 ZLCC shall immediately report the approvals of credit limits sanctioned
against the guarantees issued by other Banks or the approvals for issue of
Guarantees in favour of other Banks / FIs and Other Lending Agencies to
MSME Department at Central Office along with the process note for
information. Credit limits sanctioned and disbursed against the guarantees
issued by other Banks as well as Guarantees outstanding in favour of other
Banks / FIs and Other Lending Agencies should be reported monthly to
controlling offices.

iv. The draft of Deed of Guarantee shall be approved by the Legal Services
Division at FGMO/RO for ZLCC and Legal Services Division at Central Office
for CACs.

v. MSME Department Central Office shall monitor the portfolio under the
policy and ensure compliances of the regulatory requirement/authorities.

vi. In case of any clarification regarding the applicability of any aspect of this
policy to any situation, clarification / approval shall be sought from Credit
Policy & Research Department, Central Office.

5.3.3.3 Exceptions

i. In regard to rehabilitation of sick/weak industrial units, in exceptional

cases, where bank is unable to participate in rehabilitation packages on
account of temporary liquidity constraints, the guarantees in favors of the
banks which take up their additional share could be provided. Such
guarantees will remain extant until such time that the banks providing
additional finance against guarantees are re-compensated.

ii. In respect of infrastructure projects, bank may issue guarantees favoring

other lending institutions, provided 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.

iii. In cases of Sellers Line of Credit Scheme (since renamed as Direct

Discounting Scheme) operated by IDBI Bank Ltd. and all India financial
institutions like SIDBI, PFC, etc for sale of machinery, the primary credit is
provided by the seller’s bank to the seller through bills drawn on the buyer
and the seller’s bank has no access to the security covered by the
transaction which remains with the buyer. As such, buyer’s banks are

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 permitted to extend guarantee/ co-acceptance facility for the bills drawn
under seller’s line of credit.

iv. Similarly, guarantees can be issued in favors of HUDCO/ State Housing

Boards and similar bodies/ organisations for the loans granted by them to
private borrowers who are unable to offer clear and marketable title to
property, in case otherwise satisfied with the capacity of the borrowers to
adequately service such loans.

v. Issuance of guarantees on behalf of own constituents may be sanctioned,

favoring Development Agencies/ Boards like Indian Renewable Energy
Development Agency, National Horticulture Board, etc., for obtaining soft
loans and/or other forms of development assistance.

5.3.3.4 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,
RBI has given discretion to the Bank in the matter of issuance of
guarantees favoring 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.

5.4 Invocation of Guarantee - Payment of Invoked Guarantees

5.4.1 Where guarantees are invoked, payment should be made to the

beneficiaries without delay and demur. Guarantee generally contain an
undertaking by the Bank to pay the guaranteed amount on demand and
without demur, merely on the basis of a statement by the beneficiary to the
effect that the customer on whose account the Guarantee was given by the
Bank has failed to fulfill the obligations under the relative contract. When
such a demand is made on the Branch within the validity period of the
Guarantee, the Branch Officials must promptly honor the valid claim under
the guarantee to the debit of the customer’s account if there is sufficient

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 balance/drawing power available or in the alternative to the debit of
invoked Guarantee Loan Account (DL2004), irrespective of adequacy of
margin/security or even failure of the customers to reimburse the Bank for
the payment made under the Guarantee, unless there is a prior judicial
order to the contrary. Branches should also ensure that there is no delay in
honoring of invoked guarantees on the pretext that legal advice or approval
of higher authorities is being obtained. Failure on the part of the Bank to
honour its obligation after invocation of the guarantee attracts reputational
risk for the bank.

The customer has to be put on notice that he is under binding legal

obligation to reimburse the bank in respect of the valid claim received
under guarantee issued on his behalf.

Immediately on the payment of the invoked guarantee, full details thereof

should be furnished to the controlling office and the matter should be
followed up with the customer till the amount is fully recovered together
with interest from the date of payment till full recovery of the amount. The
Controlling Offices should ensure compliance.

In case of Invoked BG accounts, the following operational guidelines has to

be followed.
1. TiIl the time borrower repays the invoked amount, debit freeze to the
extent of invoked amount should be made in the operative accounts
(CC/OD/CA) of the borrower. Any debit transaction pending
adjustment of invocation should be allowed only with the approval of
Regional Head.
2. Ensure that the applicable interest is charged in the invoked
accounts.
3. No manual debit/credit to be allowed in the contingent office
accounts related to Bank Guarantee.
4. MSME department to take up with DIT to disable menus for manual
entries in the Finacle in respect of transactions pertaining to
realization of Bank Guarantees. Further, disbursement of funds from
the invoked accounts to be only through the respective registers and
not through TM or LADISB. Credit Verticals to verify the changes
carried out by DIT and confirm the same.

5.4.2 Delays on the part of bank in honoring the guarantees when invoked tend to
erode the value of the bank guarantees, the sanctity of the scheme of
guarantees and image of bank. It also provides an opportunity to the parties
to take recourse to courts and obtain injunction orders. In the case of
guarantees in favors of Government departments, this not only delays the
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 revenue collection efforts but also gives an erroneous impression that bank
is actively in collusion with the parties, which tarnishes the image of the
banking system.

5.4.3 In this regard, the Delhi High Court has made adverse remarks against
certain banks in not promptly honoring the commitment of guarantees when
invoked. It has been observed that a bank guarantee is a contract between
the beneficiary and the bank. When the beneficiary invokes the bank
guarantee and a letter invoking the same is sent in terms of the bank
guarantee, it is obligatory on the bank to make payment to the beneficiary.

5.4.4 The Supreme Court had observed [U.P. Co-operative Federation Private
Ltd. versus Singh Consultants and Engineers Private Ltd. (1988 IC SSC 174)]
that the commitments of the banks must be honored, free from interference
by the courts. The relevant extract from the judgment of the Supreme Court
in a case is as under:

'We are, therefore, of the opinion that the correct position of law is that
commitment of banks must be honored free from interference by the courts
and it is only in 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'.

5.4.4.1 In order to avoid such situations, it is absolutely essential for Branches /

Offices 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 honored by the bank.

5.4.5 (i) In the interest of the smooth working of the Bank Guarantee Scheme, it
is essential to ensure that there is no discontentment on the part of the
Government departments regarding its working. Bank is required to ensure
that the guarantees issued are honored without delay and hesitation when
they are invoked by the Government departments in accordance with the
terms and conditions of the guarantee deed, unless there is a Court order
restraining the bank.

(ii) Any decision not to honour the obligation under the guarantee invoked
may be taken after careful consideration, at a fairly senior level i.e.
Regional Head with information to sanctioning authority, 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

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 the terms and conditions of the guarantee under the Indian Contract Act,
1872.

(iii) The Chief Executive Officer of bank has to assume personal responsibility
for such complaints received from Government departments. Hence
powers are delegated to the Regional Head (with information to
sanctioning authority) so that delay on account of reference to higher
authorities for payment under the guarantee does not occur.

(iv) For any non-payment of guarantee in time, staff accountability should be

initiated and stern disciplinary action including award of major penalty
such as dismissal, should be taken against the delinquent officials at all
levels.

(v) Where bank has executed bank guarantees in favour of Customs and Central
Excise authorities to cover differential duty amounts in connection with
interim orders issued by High Courts, the guarantee amount should be
released immediately when they are invoked on vacation of the stay orders
by Courts. Bank should not hold back the amount on the pretext that it
would affect their liquidity position.

5.4.6 There have also been complaints by Ministry of Finance that some of the
departments such as Department of Revenue, Government of India are
finding it difficult to execute judgements delivered by various Courts in
their favor as banks do not honour their guarantees, unless certified copies
of the Court judgements are made available to them. In this regard,
following procedure as prescribed by Reserve Bank of India is to be
followed:

(i) Where the bank is a party to the proceedings initiated by Government for
enforcement of the bank guarantee and the case is decided in favour of the
Government by the Court, bank should not insist on production of certified
copy of the judgement, as the judgement/ order is pronounced in open
Court in presence of the parties/ their counsels and the judgement is
known to the bank.

(ii) In case the bank is not a party to the proceedings, a signed copy of the
minutes of the order certified by the Registrar/ Deputy or Assistant
Registrar of the High Court or the ordinary copy of the judgement/ order of
the High Court, duly attested to be true copy by Government Counsel,
should be sufficient for honoring the obligation under guarantee, unless the
guarantor bank decides to file any appeal against the order of the High
Court.

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 (iii) Bank should honor the guarantees issued by it as and when they are
invoked in accordance with the terms and conditions of the guarantee
deeds. In case of any disputes, such honoring can be done under protest, if
necessary, and the matters of dispute pursued separately.

(iv) The Government on their part has 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) As per RBI guidelines, non-compliance of the instructions in regard to

honoring commitments under invoked guarantees will be viewed by
Reserve Bank very seriously and Reserve Bank will be constrained to take
deterrent action against the bank.

5.5 Co-acceptance of bills

5.5.1 Preamble
i. Co-acceptance in general terms, is a means of non-fund based import
finance whereby a Bill of Exchange drawn by an exporter on the
importer is co-accepted by a Bank. By co-accepting the Bill of
Exchange, the Bank undertakes to make payment to the exporter
even if the importer fails to make payment on due date.
ii. The co-acceptance by the importer’s banker acts as a guarantee for
the exporter for timely receipt of proceeds from the importer. For
the Bank, it is a non-fund based exposure on the importer.
iii. 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. Bank, 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 honored by the drawees and the banks
which co-accept the bills have to make payment of these bills, and
they find it difficult to recover the amount from the drawers/
drawees of bills. Banks also discount bills for sizeable amounts, which
are co-accepted by certain Urban Co-operative Banks. On maturity,
the bills are not honored and the co-operative banks, which co-
accept the bills, also find it difficult to make the payment. The
financial position and capacity of the co-accepting bank to honor the

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 bills, in the event of need, is not being looked into. Cases have also
been observed where the particulars regarding co-acceptance of bills
are not recorded in the bank's books, with the result that the same
cannot be verified during inspections, and the Head Office becomes
aware of the co-acceptance only when a claim is received from the
discounting bank.

5.5.2 Safeguards

In the light of the above, Branches / Offices should keep in view the
following safeguards:

(i) While sanctioning co-acceptance limits to their customers, the need

therefore, should be ascertained, and such limits should be extended only
to those customers who enjoy other limits with the bank.

(ii) Only genuine trade bills should be co-accepted and the bank should ensure
that the goods covered by bills co-accepted are actually received in the
stock accounts of the borrowers.

(iii) The valuation of the goods as mentioned in the accompanying invoice

should be verified to see that there is no over-valuation of stocks.

(iv) The bank should not extend their co-acceptance to house bills/
accommodation bills drawn by group concerns on one another.

(v) The bank while discounting such bills, co-accepted by other banks, should
also ensure that the bills are not accommodation bills and that the co-
accepting bank has the capacity to redeem the obligation in case of need.

(vi) Bank-wise limits should be fixed, taking into consideration the size of each
bank for discounting bills co-accepted by other banks, and the relative
powers of the officials of the other banks should be got registered with the
discounting banks.

(vii) Care should be taken to see that the co-acceptance liability of any bank is
not disproportionate to its known resources position.

(viii) A system of obtaining periodical confirmation of the liability of co-

accepting banks in regard to the outstanding bills should be introduced.

(ix) Proper records of the bills co-accepted for each customer should be
maintained, so that the commitments for each customer and the total

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 commitments at a branch can be readily ascertained, and these should be
scrutinized 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) Branch Managers to report such co-acceptance commitments entered into

by them to the Controlling Offices periodically in prescribed returns.

(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 banks for Rs. 2
lakh and above from a single party, the Branches / Offices should obtain
written confirmation of the concerned Controlling (Regional/ Divisional/
Zonal) Office of the accepting bank and a record of the same should be
kept.

(xv) When the value of the total bills discounted/ purchased (which have been
co-accepted by other banks) exceeds Rs. 20 lakh for a single borrower/
group of borrowers, prior approval of the Head Office of the co-accepting
bank must be obtained by the discounting bank in writing.

5.5.2.1 Co-accepting bills drawn under Buyers Line of Credit Schemes introduced
by IDBI Bank Ltd. and all India financial institutions like SIDBI, Power
Finance Corporation Ltd. (PFC), etc is not permitted. Similarly, co-
accepting bills drawn by NBFCs is also not permitted. In addition, co-
acceptance should not be extended on behalf of the buyers/constituents
under the SIDBI Scheme.

5.5.2.2 However, co-accepting bills drawn under the Sellers Line of Credit
Schemes (since renamed as Direct Discounting Scheme) operated by IDBI
Bank Ltd. and all India financial institutions for Bill Discounting operated
by IDBI Bank Ltd. and all India financial institutions like SIDBI, PFC, etc. is
permitted, subject to the buyer’s capability to pay, and compliance with

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 the exposure norms prescribed for individual/ group borrowers and within
the delegated loaning powers vested with the delegatee.

5.5.2.3 There have been instances noticed by Reserve Bank of India where
branches of banks open L/Cs on behalf of their constituents and also co-
accept the bills drawn under such L/Cs. Legally, if a bank co-accepts a bill
drawn under its own L/C, the bill so co-accepted becomes an independent
document. The special rules applicable to commercial credits do not apply
to such a bill and the bill is exclusively governed by the law relating to
Bills of Exchange, i.e. the Negotiable Instruments Act. The negotiating
bank of such a bill is not under any obligation to check the particulars of
the bill with reference to the terms of the L/C. This practice is, therefore,
superfluous and defeats the purpose of issuing the L/C. Hence, before
discounting it should be first ascertained from the co-accepting bank/s,
the reason for such co-acceptance of bills drawn under their own L/C and
only after satisfaction on genuineness of such transactions, discounting of
such bills may be considered.
5.5.2.4 The above instructions should be adhered to strictly and any violation in
this matter will be dealt with strictly.

5.6 Precautions to be taken in the case of Letter of Credit

5.6.1 Non-fund based facilities or additional/ad-hoc credit facilities will not be

extended to parties who are not our regular constituents, nor discounting
of bills drawn under LCs, or otherwise, will be done for beneficiaries who
are not our regular clients. The guidelines on NFB limits as enumerated in
Point No.2.2.3.iii is to be complied with. In the case of LCs for import of
goods, branches should be very vigilant while making payment to the
overseas suppliers on the basis of shipping documents. Branches 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 noticed by Reserve Bank of India 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, action is to be taken against the concerned
officials as well as the constituent on whose behalf the LCs were opened
and the beneficiary of LCs, if a criminal conspiracy is involved.

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 In case of devolved LCs, the following operational guidelines has to be
followed.
1. TiIl the time borrower repays the invoked amount, debit freeze to the
extent of invoked amount should be made in the operative accounts
(CC/OD/CA) of the borrower. Any debit transaction pending
adjustment of invocation should be allowed only with the approval of
Regional Head.
2. Ensure that the applicable interest is charged in the invoked
accounts.
3. No manual debit/credit to be allowed in the contingent office
accounts related to Bank Guarantee.
4. MSME department to take up with DIT to disable menus for manual
entries in the Finacle in respect of transactions pertaining to
realization of Bank Guarantees. Further, disbursement of funds from
the invoked accounts to be only through the respective registers and
not through TM or LADISB. Credit Verticals to verify the changes
carried out by DIT and confirm the same.
Monitoring
a. LC beneficiary code is to be made part of CBS. Beneficiary wise code
to be maintained in CBS for better monitoring of exposure and timely
flagging.
b. Contract wise receipt of funds and utilization of funds and work done
to be monitored.
c. MCMR & Stock and Book Debts to be monitored in case of Non-fund
based limits.

5.6.2 Settlement of claims under Letter of Credits

In case the bills drawn under LCs are not honored, it would adversely
affect the character of LCs and the relative bills as an accepted means of
payment. This could also affect the credibility of the entire payment mechanism
through the bank and affect the image of our bank. Hence, branches should,
therefore, honor the commitments under LCs and make payments promptly.

5.7 Compliance to the regulations of Foreign Exchange Management Act,

2000

The directions, regulations issued under Foreign Exchange Management

(Guarantee) Regulations, 2000 as amended from time to time should be
adhered to.

5.8 OTHER GUIDELINES ON GUARANTEES

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5.8.1 Classification of guarantees:

A guarantee can be a performance or financial guarantee. The definitions

of both the guarantees are given here under:

“any guarantee, which lays stress on due performance of contract or an

obligation arising out of the contract within a given time frame will
constitute a PERFORMANCE GUARANTEE, though the non-performance of
the obligations results in payment of specified amounts as liquidated
damages or refund of all advance monies received for performance or such
obligations with or without interest”

In other words, Performance guarantees are essentially transaction-related

contingencies that involve an irrevocable undertaking to pay a third party
in the event the counterparty fails to fulfill or perform a contractual non-
financial obligation. In such transactions, the risk of loss depends on the
event which need not necessarily be related to the creditworthiness of the
counterparty involved.

Instances of such guarantees are as under:

i. Bid Bonds
ii. Guarantee in lieu of security deposits / Earnest Money Deposits
iii. Guarantee on behalf of a manufacturing company in respect of supply/
performance of a product
iv. Guarantee on behalf of a contractor for due completion of work
v. Guarantee in favor of Railways for due performance / licence fees / EPC
contracts.
vi. Export Performance Guarantee
vii. Export Performance Capital Goods Guarantee
viii. Warranties, indemnities and standby letters of credit related to particular
transaction.
ix. Performance bonds Guarantees
x. Retention Money Guarantees
“any guarantee, for discharge of only the pecuniary liability of a third
party on default, will constitute a FINANCIAL GUARANTEE”.

In other words, financial guarantees are direct credit substitutes wherein a

bank irrevocably undertakes to guarantee the repayment of a contractual
financial obligation. Financial guarantees essentially carry the same credit
risk as a direct extension of credit i.e., the risk of loss is directly linked to
the creditworthiness of the counterparty against whom a potential claim is
acquired.

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 Financial Guarantees are those which guarantee repayment of Debt. The
examples of such guarantees are as under:
i. Guarantees for credit facilities;
ii. Guarantees in lieu of repayment of financial securities;
iii. Guarantees in lieu of margin requirements of exchanges;
iv. Guarantees for mobilization advance, advance money before the
commencement of a project and for money to be received in various
stages of project implementation;
v. Guarantees towards revenue dues, taxes, duties, levies etc. in favour of
Tax/ Customs / Port / Excise Authorities and for disputed liabilities for
litigation pending at courts;
vi. Credit Enhancements;
vii. Liquidity facilities for securitization transactions;
viii. Acceptances (including endorsements with the character of acceptance);
ix. Deferred payment guarantees.
x. Guarantees issued in favor of Banks/FIs/Chit Funds undertaking repayment
of advances/payment of prize money.

The aforesaid instances are only indicative and not exhaustive.

5.8.2 Assessment:

5.8.2.1 Need based assessment of Non Fund Based facilities [Letter of Credit &
Letter of Guarantee] shall be done in the same fashion and care should be
taken like Fund Based limits as these limits also have a financial
implication. While assessment of Letter of Credit requirement is based on
the holding level and linked to Flexible Bank Finance [FBF], requirement
of Bank Guarantee (BG) limits by way of performance / EMD / Bid Bond
etc. are supplementary support to business and the same should not be
factored within the FBF.

5.8.2.2 BG requirements are integral part of support required by an enterprise.

Most of the BG’s remain in a dynamic state & hence the cash margin
retained by banks comes back in the main stream of business cash flows
within a period of 12 months. Hence, margin under BG shall be treated as
a part of current asset.

5.8.2.3 BG limits are required for various purposes and may be in the nature of
Performance Guarantees or Financial Guarantees. Such Guarantees may be
for ensuring performance under a contract or procurement of raw
materials or for bidding in tenders, financial guarantees for mobilization of
advance, submitting performance guarantees for execution of projects and
also performance guarantees for return of security deposits.

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5.8.2.4 As per extant guidelines, there are no prescribed norms for assessment of
Bank Guarantee requirements, other than that the same should be need
based and assessed with the same diligence like assessment of Fund Based
limits.

5.8.2.5 In respect of assessment of Fund Based requirement, standardized

approach is being adopted by the Bank like FBF Method, Cash Budget
Method, and Turnover Method etc. Such standardized approach cannot be
adopted in respect of assessment of Non Fund Based requirement,
especially in respect of Letter of Guarantees.

5.8.2.6 While assessing the LG requirement, various factors like the purpose of
Guarantee, estimated quantum of Contracts, estimated quantum of
Tender amount in percentage terms of Contracts, estimated quantum of
Earnest Money Deposit amount in percentage terms of Contracts,
estimated quantum of Mobilization Advance, amount in percentage terms
of Contracts etc shall be taken into account. At the same time the present
outstanding under LG limit and the Guarantees expired/returned or due to
expire in the next year shall also be factored in the assessment of need
based requirement.

5.8.2.7 An illustrative assessment of LG requirement in case of contractors is given

as under:-

Sr. Particulars Rate (%) Amount

No.
1 Estimated Tender Participation 800
2 Strike Rate (depending on past trend) 50
3 Successful Tender 400
2 Earnest Money Deposit % 2 16
3 Mobilization of Advance % - 20
4 Performance Guarantee % 5 20
5 Performance / Financial bank - 17.03
Guarantee required for existing orders
Defect Liability Period/Security Release 25
Guarantee / Retention Money
6 Total 98.03
7 Add : Present utilization of Guarantee 87.48
Limits
Total 185.51
7 Less: Return of EMD 16
8 Less: Return of Guarantee of completed 21.36

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 Sr. Particulars Rate (%) Amount
No.
projects
9 Total LG limit assessed 148.15
10 LG limit requested 148.00
11 LG limit recommended 148.00

5.8.2.8 Guarantee Claim Period:

i. The Hon’ble High Court of Delhi in its judgement dated 28.07.2021, in the
matter of Larsen & Toubro Ltd & Anr vs Punjab National Bank, has
pronounced its verdict on the interpretation of Exception 3 to Section 28 of
the Indian Contract Act (ICA). The judgement has been thoroughly analysed
by our Legal Service Division Central office and has highlighted the relevant
observations of the court on the object and intent of the amendment to the
Section 28 of IC Act.

ii. The Standard BG issued by the Bank usually contains the following terms:
• Expiry / Validity period: Contract between debtor and creditor.
• Claim period: Contractually agreed by creditor and debtor provides
grace period beyond the validity period to make a demand on the
bank for a default which occurred during the validity period of the
BG. A claim period may or may not exist in the BG and
• guarantor has no role to play.
• Enforcement period: Time period within which the creditor can
enforce his accrued rights pursuant to a demand made by him within
the validity period or the claim period before a competent court of
law. This period is statutorily governed by Section 28(b) read with
Exception 3 to Section 28 of the ICA. In the absence of any such
clause in the guarantee, the said period would be determined by the
Limitation Act, 1963.

iii. After analyzing the legislative intent and evolution of statute with regard to
Section 28 of the IC Act the Hon’ble court has categorically held that
Exception 3 to Section 28 of the IC Act deals with curtailment of the period
for the creditor to approach the court/ tribunal to enforce his rights. It
doesn’t in any manner deal with validity period/ claim period within which
the beneficiary is entitled to lodge his claim with the Bank/ Guarantor.

iv. The Model form incorporating the revised claim period clause is given in
Annexure I to the Policy.

v. The operational guidelines on commission on claim period etc are already

issued separately.
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 vi. It is to be noted that unlike Inland BG that is subjected to jurisdiction of
Indian Courts, a BG that is subjected to jurisdiction of foreign court shall be
governed by the local laws and industry practice prevailing in the said
country and hence a BG in Bank’s prescribed format with notwithstanding
clause including minimum claim period of one year cannot be insisted. All
such cases should be examined on case to case basis to ensure in each case
that there is no onerous clause that affects Bank’s rights under the BG and
to be vetted by law officer of respective RO.

5.8.2.9 An illustrative format for obtaining position of work orders from the
customer/s is detailed below:

Work-Order Position and Bank Guarantee Details

Name Orde Date Actual %age Pending Total BG BG Net BG

of r Of amount work Order Require Availe require
Contrac Valu Com contrac Compl Value d d d
t e menc t etion (Cr)
(Cr) emen execut
t of ed (in
work Cr)

Work under Award / Tender Quoted But Not Awarded/Expected Fresh Orders

Sr. Order Details Order Total BG BG Net BG required

No Value (Cr) Required Availed

5.8.2.10 In case of Consortium advances, assessment made by Lead Bank may

be accepted and our share shall be considered accordingly. In case of any
reservations towards assessment the same shall be discussed in the
consortium meeting itself and recorded suitably.

5.8.2.11 BG in favor of courts / various other authorities, as security towards

disputed liability, on behalf of the constituents of the bank shall be issued
generally on 100% cash margin basis.

5.8.3 Reversal Of Expired Guarantees

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i) The liability under the guarantee should be reversed immediately on
return of the original guarantee / letter of discharge from the beneficiary.
The liability under the guarantee should also be reversed immediately, if
the payment of the same is made on invocation, irrespective of whether
the amount of the payment towards the claim amount is recovered from
the customer or not.

ii) Where the final validity period of a Guarantee has expired without the
Branch receiving from the beneficiary any notice of default by the
customer or demand for payment under the Guarantee Letter, the Branch
Officials should promptly request the customer to return the original
Guarantee Letter, together with all the amendments, duly cancelled or to
furnish the Branch a letter from the beneficiary confirming that the Bank
stands discharged from all liability under the Guarantee. (If such a Letter
of Discharge is received through Post or furnished by the customer
personally – instead of returning the original Deed of Guarantee – the
Branch Officials should formally write to the beneficiary acknowledging
receipt of the letter).

iii) If the customer is unable to return the Guarantee Letter / Letter of

Discharge from the beneficiary, despite his efforts, the Branch should
obtain from the customer a letter requesting the Bank to cancel the
Guarantee from his account. Customer has to confirm that he has
completed all his obligations under the relative contract as per terms and
that neither there is any dispute on the subject with the beneficiary nor
any claim on him or against the Bank under the guarantee. Customer has
to undertake that he continues to be liable to the Bank notwithstanding
the cancellation of the guarantee in the Books of the Bank, in the event
the beneficiary makes a claim on the Bank, in future.

iv) On receipt of the letter from the customer as above, the Branch Officials
should write to the beneficiary by Registered Post Acknowledgement Due,
for either returning the original Guarantee or to send a Letter of
Discharge.

v) If there is no response to the letter from the beneficiary 30 days after the
Branch received back posted acknowledgement due card evidencing
delivery of letter, the Branch may reverse the relative liability in its
Books.

vi) Where liability in respect of Guarantees are reversed without the Bank
receiving the original Deed of Guarantees duly cancelled or without letter
of discharge from the beneficiaries, the margin / securities held in respect

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 of such Guarantees should not be released to the customers without prior
approval from the RLCC-I.

vii) Limitation clause should be inserted on Bank Guarantees as detailed

below:

“Notwithstanding anything contained herein:

i. Our liability under the this Bank Guarantee shall not exceed
Rs._______ (Rupees _______ only);
ii. This Bank Guarantee shall be valid upto (Date of Expiry of the
Guarantee)
iii. Further a claim period of ____ months from the expiry date of the
Bank Guarantee is available to make a demand under this Bank
Guarantee. We are liable to pay the guarantee amount or any part
thereof under this Bank Guarantee only and only if you serve upon us
a written claim or demand on or before___________ (Date of Expiry
of the guarantee PLUS the claim period if any)***.
iv. At the end of expiry of the validity period (including claim period),
unless an action to enforce the claim under this guarantee is initiated
before the Court or Tribunal on or before 12 months after the expiry
of the validity period (including claim period), all your rights under
this Bank guarantee shall stand extinguished and we shall be relieved
and discharged from all our liabilities and obligations under this Bank
Guarantee irrespective of return of original Bank Guarantee.

*Amount of BG
**Expiry date of BG
***Claim Period

Note: Clause no. iv is revised to comply with the provisions of Exception 3

to Section 28 of Indian Contracts Act, 1872. However, the branches shall
accept the invocation of BG‟s which are presented to the Bank only and only
if the beneficiary serve upon us a written claim, on or before the due date
(including claim period) which may please be noted.

Waiver of the condition stipulated in point no. iv above can be considered

on case to case basis. For Bank Guarantees falling under the delegation of
Branch (including IFB & MCB)/ SLCC/ RO/ ZLCC, the waiver condition shall
be considered by respective Zonal Level Credit Committee (ZLCC) on case
to case basis. However, for CACs at Central office, respective CAC shall be
the delegated authority.
Viii) Expired BGs issued in favour of Government authorities should be reversed in
the same manner as above.

5.9 Cancellation of BG issued in favour of Customs Department

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 If there is/are clause/s undertaking by bank to renew the BG and for payment
forthwith, i.e. without any demand, on its own on the failure of the party to
obtain and furnish the renewed BG within the stipulated period next before
expiry date of BG, the BG cannot be cancelled even if the BG is expired
merely on the ground that no notice or demand of the beneficiary has been
received. In such cases, Bank would have become liable to pay forthwith,
without any need for a claim or demand, on the failure of the party to obtain
and furnish the renewed BG, within the period next before the stipulated
expiry date. Therefore, before cancelling such BG it is necessary to get the
same examined by Law Officer’s at RO by furnishing the copy of the BG and
the necessary facts / papers including as to the renewals thereof from time
to time and letters of invocation, if any.

5.9.1 Deferred Payment Guarantee (DPG)

Apart from adherence to general guidelines for issuance of guarantee,

Deferred Payment Guarantee limits in lieu of Term Loans should be
considered subject to the viability, Debt Equity Ratio, Debt Service
Coverage Ratio etc. as in the case of assessment of term loans and
evaluation of cash flows over the period of guarantee. Further, adequate
cash margin be insisted for such facilities.

5.9.2 Exposure management measures for off-balance sheet exposures:

The total gross exposure (before margin) in credit contingents i.e. Letter
of Credits and Bank Guarantees shall not exceed 3 times of capital funds
as per the last Audited financials of the Bank as at the end of previous
year or 30% of the total advances as per last audited Balance Sheet of the
Bank, at the end of each quarter, whichever is lower.

5.9.3 E-Confirmation of Bank Guarantees

5.9.3.1 With a view to ensure quick confirmation of Bank Guarantees issued by the
Branches, Bank has set up a separate cell called “E-confirmation Cell”
(ECC) at Central Office based on Ministry of Finance guidelines for
electronic confirmation of genuineness of bank guarantees issued. The
detailed operational guidelines are also circulated to the field
functionaries and following guidelines are being followed:

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 i. In case of the guarantee of Rs.10 lacs and above, ECC will seek telephonic
/ electronic confirmation from BG issuing Branch along with verification
from Finacle. However, guarantee below Rs.10 lacs will be verified from
Finacle.

ii. Confirmation of BG can be done by CM and in his/her absence by

AGM/DGM in MSME Dept., Central Office.

5.9.3.2 As suggested by IBA, a mechanism is devised under which the inland bank
guarantee issuing bank will be transmitting two Cover messages – IFN
760COV and IFN 767COV to the designated Bank as requested by the
applicant of the Bank Guarantee through SFMS.

5.9.4 Non-Issuance of Letter of Undertaking (LOU) / Letter of Comfort (LOC)

for import

5.9.4.1 The practice of issuance of LOUs / LOCs for trade credits for imports into
India by AD category banks has been discontinued with effect from 13th
March 2018. However, Letter of Credit (LC) and Bank Guarantees for trade
credit for imports into India shall continue as per guidelines.

5.9.4.2 LOUs / LOCs for trade credit issued for the purpose of imports into India
and accepted prior to the issuance of RBI guidelines may continue till their
original validity. However, no roll-over is permitted.

5.10 Trade Credits

5.10.1 Trade Credits (TC) refer to the credits extended by the overseas supplier,
bank, financial institution and other permitted recognized lenders for
imports of capital / non-capital goods permissible under the Foreign
Trade Policy of the Government of India. Depending on the source of
finance, such TCs include suppliers‟ credit and buyers‟ credit from
recognised lenders.
5.10.2 As per the RBI revised framework dated 13.03.2019, Bank Guarantee may
be given by the Authorized Dealers (ADs), on behalf of importers, in
favour of overseas lender of TCs not exceeding the amount of TC. The
period of such guarantee cannot be beyond the maximum period of TC.

5.10.3 Therefore in compliance with RBI guidelines, respective sanctioning

authorities are allowed to sanction “Bank Guarantee limit for Trade
Credit” to facilitate Trade Credit for imports. While sanctioning BG for
Trade Credit as Working Capital limit, sanctioning authorities to consider
working capital cycle of the borrower and other assessment methods
applicable to assess WC limit for arriving at the limit.
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 5.10.4 “Bank Guarantee limit for Trade Credit‟ limit may also be sanctioned for
import of capital goods as per extant RBI guidelines. For detailed
guidelines, the revised framework on Trade Credit covering all
operational and reporting aspects issued by Treasury & International
Banking Department may be referred.

5.11 Transmission of Bank Guarantee through e-Stamping:

In view of the Digitization of Trade Processes, endeavors are being made
for implementation of “Automated E-Stamping system (AES)”. The
ultimate goal of AES is to move to digital transmission of bank guarantee
and do away with issuance of paper based bank guarantee. This requires
the beneficiary to either receive the network message or to accept
“advice” from its bank (i.e. Advising Bank / Beneficiary Bank) about the
Bank Guarantee having been created and “advised” in the banking system.
This system is in a very nascent stage and Indian Banks‟ Association (IBA)
along with industry representatives are working for full fledged technology
development and implementation. After the necessary developments,
detailed operational guidelines will be placed before CRMC for approval.

Annexure I

Model Form of Bank Guarantee Bond

GUARANTEE BOND

1. In consideration of the President of India (hereinafter called 'the Government')

having agreed to exempt _______________________________ [hereinafter called
'the said Contractor(s)'] from the demand, under the terms and conditions of an
Agreement dated ___________ made between
_______________________________________________
and___________________________________for_____________ (hereinafter called
'the said Agreement'), of security deposit for the due fulfilment by the said
Contractor(s) of the terms and conditions contained in the said Agreement, on
production of a bank Guarantee for Rs. __________
(Rupees______________________________________ Only) We,
______________________________________________________________,
(hereinafter referred (indicate the name of the bank) to as 'the Bank') at the
request of _________________________________________________ [contractor(s)]
do hereby undertake to pay to the Government an amount not exceeding Rs.
______________ against any loss or damage caused to or suffered or would be
caused to or suffered by the Government by reason of any breach by the said
Contractor(s) of any of the terms or conditions contained in the said Agreement.

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2. We _______________________________________________________ (indicate
the name of the bank) do hereby undertake to pay the amounts due and payable
under this guarantee without any demur, merely on a demand from the
Government stating that the amount claimed is due by way of loss or damage
caused to or would be caused to or suffered by the Government by reason of
breach by the said contractor(s) of any of the terms or conditions contained in the
said Agreement or by reason of the contractor(s)' failure to perform the said
Agreement. Any such demand made on the bank shall be conclusive as regards the
amount due and payable by the Bank under this guarantee. However, our liability
under this guarantee shall be restricted to an amount not exceeding Rs.
_______________.

3. We undertake to pay to the Government any money so demanded

notwithstanding any dispute or disputes raised by the contractor(s)/supplier(s) in
any suit or proceeding pending before any Court or Tribunal relating thereto our
liability under this present being absolute and unequivocal.
The payment so made by us under this bond shall be a valid discharge of our
liability for payment thereunder and the contractor(s)/supplier(s) shall have no
claim against us for making such payment.

4. We,_____________________________________________________________
(indicate the name of bank) further agree that the guarantee herein contained
shall remain in full force and effect during the period that would be taken for the
performance of the said Agreement and that it shall continue to be enforceable till
all the dues of the Government under or by virtue of the said Agreement have
been fully paid and its claims satisfied or discharged or
till__________________________________ Office/Department/Ministry
of________________________________ certifies that the terms and conditions of
the said Agreement have been fully and properly carried out by the said
contractor(s) and accordingly discharges this guarantee. Unless a demand or claim
under this guarantee is made on us in writing on or before the
___________________________________________ we shall be discharged from all
liability under this guarantee thereafter.

5. We, _______________________________________________ (indicate the name of bank)

further agree with the Government that the Government shall have the fullest liberty
without our consent and without affecting in any manner our obligations hereunder to vary

any of the terms and conditions of the said Agreement or to extend time of performance
by the said contractor(s) from time to time or to postpone for any time or from time to
time any of the powers exercisable by the Government against the said Contractor(s) and
to forbear or enforce any of the terms and conditions relating to the said agreement and
we shall not be relieved from our liability by reason of any such variation, or extension
being granted to the said Contractor(s) or for any forbearance, act or omission on the part
of the Government or any indulgence by the Government to the said Contractor(s) or by
any such matter or thing whatsoever which under the law relating to sureties would, but
for this provision, have effect of so relieving us.

6. This guarantee will not be discharged due to the change in the constitution of the Bank
or the Contractor(s)/Supplier(s).

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 7. We, ________________________________________ (indicate the name of bank) lastly
undertake not to revoke this guarantee during its currency except with the previous
consent of the Government in writing.

8. Notwithstanding anything contained herein:-

i) Our Liability under this Bank Guarantee shall not exceed Rs _____________ (Rupees
_______________ only).
ii) This Bank Guarantee shall be valid upto (Date of Expiry of the Guarantee)
iii) We are liable to pay the guarantee amount or any part thereof under this Bank
Guarantee only and only if you serve upon us a written claim or demand on or before
(Date of Expiry of the guarantee PLUS minimum of one year claim period)
iv) At the end of claim period that is on or after (Date of Expiry of the guarantee
Minimum of 1 Year Claim period shall be stipulated) all your rights under this guarantee
shall stand extinguished and we shall be discharged from all our liabilities under this
guarantee irrespective of receipt of original Bank Guarantee duly discharged by Bank.
9. Dated the ____________ day of ___________ _____ for
__________________________(indicate the name of the Bank).

B. LETTER OF CREDIT

1. INTRODUCTION
1.1 Ideally any seller of goods/services would like to receive payment before the
delivery of goods/services to a buyer. Similarly the buyer would also like to
ensure that the goods/services bought are as per his specifications and
deliveries are effected in time, before parting with the money. If the buyer
and seller are at two different, far away stations, both the factors cannot be
satisfied simultaneously. As a compromise, services of third party as an
intermediary are utilized. This intermediary is usually a bank who issues a
letter of assurance to a seller at the request of a buyer for payment of cost of
goods / services sold on certain terms and conditions. Such an assurance letter
is named as a "Letter of Credit".
1.2 A Letter of Credit or a documentary credit is an assurance given in writing as
an instrument issued by a bank at the request of a buyer of goods and services
(applicant) in favor of the seller (beneficiary) wherein the bank undertakes to

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 honor the documents or drafts drawn by the seller in accordance with the
terms and conditions specified in the credit, within a specified time.
1.3 Letter of Credit is a Non Fund Based credit facility given by the bank to its
customers for meeting their working capital requirements or for procurement
of capital goods etc.
1.4 The Letter of Credit based on the mode of payment may be DA or DP:
1.4.1 If the LC stipulates that when the payment is made available to the seller
against delivery of certain specified documents which are presented to the
paying bank, the L/C is called Documents against Payment LC (DP/ LC).
1.4.2 If the credit stipulates the delivery of documents by the seller against
acceptance and that the payment will be made on the due date, the L/C is
called a Usance L/C or D/A L/C.

2. PARTIES TO A LETTER OF CREDIT:

2.1 APPLICANT: The buyer of the goods and services who finalizes terms and
conditions of purchase transaction and submits a request to the bank for
issuing bank guarantee.
2.2 ISSUING BANK: On receipt of a request from its customer, the applicant’s
(purchaser) bank examines the application/proposal and opens a letter of
credit in favor of Seller (beneficiary) with the stipulated terms and
conditions.
2.3 BENEFICIARY: The party to whom the Letter of Credit is issued which is seller
or supplier of the goods/services.
2.4 ADVISING BANK: Opening bank's branch or another bank at beneficiary's place
to which the Letter of Credit is sent for onward transmission to the
beneficiary.
2.5 CONFIRMING BANK: The bank which adds confirmation to the Letter of
Credit.

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2.6 NEGOTIATING BANK: Opening bank's branch or another bank which negotiates
the documents.

3. TYPES OF LETTER OF CREDITS:

3.1 INLAND LC: A Letter of Credit where all the parties including buyer and seller
of goods and services are located within the country.
3.2 FOREIGN LC: A LC where either the opener or the beneficiary is located
outside the country of issue and the LC arises out of export or import of
goods/services out of/into the country of issue.
3.3 REVOCABLE: The Letter of credit that can be cancelled or amended at any
time without the prior knowledge of the beneficiary.
3.4 IRREVOCABLE: Unlike Revocable LC it is a definite undertaking of the issuing
or LC opening bank to honor documents strictly drawn as per terms and
conditions of credit which cannot be amended or cancelled without the
agreement of all the parties to the credit, in particular the beneficiary.
3.5 CONFIRMED LC: When the Letter of Credit is confirmed by the advising bank
or confirming bank as a definite undertaking of such confirmation by the
confirming bank in addition to that of the opening bank.
3.6 TRANSFERABLE LC: A letter of credit that permits the beneficiary of the
letter to make some or all of the credit available to another party, thereby
creating a secondary beneficiary. The party that initially accepts the
transferable letter of credit from the bank is referred to as the first
beneficiary. The bank issuing the letter of credit must approve the transfer.
The bank which is involved in the transferring the credit is the “Transferring
Bank”.
3.7 REVOLVING LC: A LC which provides that the credit allowed to the tune of
the amount of drawings made thereunder would be reinstated and made
available to the beneficiary again and again for further drawings during the
currency of credit, up to a certain sum subject to certain conditions specified
therein.
3.8 BACK TO BACK LC: Two letters of credit (LCs) used together to help a seller
finance the purchase of equipment or services from a subcontractor. With the
original LC from the buyer's bank in place, the seller goes to his own bank and

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 has a second LC issued, with the subcontractor as beneficiary. The
subcontractor is thus ensured of payment upon fulfilling the terms of the
contract.
3.9 STANDBY LETTER OF CREDIT: Standby letter of credit is an arrangement,
where an issuer (usually Bank), at the request of its customer, agrees that the
beneficiary in whose favor it is issued will be paid upon the presentation of
demand for payment and any document evidencing the non performance of
the applicant as stipulated on the standby letter of credit. Thus, the SLC
works as a guarantee for payment to beneficiary in case of any default by the
applicant.
The traditional LC functions as payment instrument whereas SLC work as
default instrument. In case of traditional LC, largely title to goods is vested
with the LC issuing bank until the payment is made or documents are
accepted by the LC applicant to make payment at future date. Where as in
SLC the applicant import goods and the documents are either routed through
the bank on collection basis or received by the applicant directly. Thus,
establishment of SLC becomes a clean exposure to the Bank. The Detailed
guidelines on standby letter of credit is issued by our bank vide IC No.7404
dt.26.06.2006)
4. ASSESSMENT OF LETTER OF CREDIT FACILITY
4.1 For assessment of limits under LC for purchase/import of raw material,
following points may be borne in mind:
4.1.1 LC facility sought is to meet genuine business need of the borrower and that
the same has a reasonable bearing on the operations of the concern.
4.1.2 The raw material imported is essentially meant for own production or for
existing/proposed trading purpose as per the terms of sanction.
4.1.3 Party is not, as far as possible, maintaining unduly high level of inventory
of raw materials in relation to the applicable norms/past trend.
4.1.4 Where LCs are opened on DA basis, the quantum and period of credit
available on the relative purchases are duly taken into account for the
purpose of assessment of working capital as also for working out the
operating limits as per the quarterly statements.

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4.1.5 Double financing against goods obtained on credit under DA LCs and/or
goods covered under advance bills should not be allowed.
4.1.6 Before opening LCs for import of raw materials for
processing/converting to finished goods and exporting the same,
it may generally be ensured that LCs favoring the party should have
sufficient validity period to fulfill his export obligation, after taking into
consideration the lead time involved in importing/ procuring the raw
material and process time needed for its conversion and shipment.
Similarly, while establishing back-to-back LCs, the validity of inland LCs
should be well within the validity period for shipment under the LC opened
by the foreign importer. While assessing the requirement of letters of
credit of a borrower the estimated figure for total purchases during the
assessment year has to be arrived at carefully. This figure could be arrived
at by looking into the estimated consumption of raw materials, power and
fuel, stores and spares, packing materials etc. and the value of stocks at
the beginning and the end of the assessment year. Once annual purchases
are estimated item-wise, the inputs/items which are necessarily to be
procured both indigenously and by imports by opening of LCs have to be
identified and value worked out. Thereafter, the lead time for
procurement/import of such items and the credit period extended by the
suppliers have to be ascertained.
Details of assessment of LC should be adequately captured in the proposal.
While making assessment of LC for raw material, broad aspects to be
covered are (i) raw material that is being purchased, (ii) how much is being
purchased under LC, (iii) from where and from whom purchased, (iv)
whether indigenous or imported. Assessment to be made as under –

Indicative Model for Assessment of LC limit

Foreign Letters of Credit

Particulars Amount in crore (eg)
1. Annual purchases of the constituent 50.00
2. Import purchases (48%) 24.00
3. Average monthly purchases 2.00
4. Import Duty element 0.50

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 5. Net Value of imports per month (3 1.50
Minus 4)
6. Purchase of documents on D/A basis, 0.50
say
7. Purchase of documents on D/P Basis 1.00
8. a) Transit period for imports 2 months
b) Usance period for imports 3 months
c) Total period ( a + b ) 5 months
9. LC Requirement on D/A Basis ( item 06 2.50
x item 08.c) i.e., 0.50 x 5
10. LC Requirement on D/P Basis ( item 07 2.00
x 8.a.) i.e., 1 x 2 months
11. Total FLC Requirement (09 + 10) 4.50

Inland Letters of Credit

Particulars Amount in crore (eg)

1. Inland purchases per month 36.00
2. Average monthly inland purchases 3.00
3. Cash purchases per month say 1.00
4. Credit Purchases per month (2 Minus Credit Purchases per
3) 2.00 month (2 Minus 3)
2.00
Purchase of documents on D/A basis say 1.00
Purchase of documents on D/P Basis Purchase of
1.00 documents on D/P
Basis 1.00
a) Transit period for inland purchases 0.5 months
b) Usance period for inland purchases 1.5 months
c) Total period ( a + b ) 2.0 months
Inland LC limit on D/A Basis (5 x 7.c.) 2.0
i.e. 1 x 2.0
Inland LC limit on D/P Basis (6 x 7.a.) 0.50
i.e. 1 x 0.50
Total ILC requirement (8 + 9) 2.50

NOTES:
(1) Limits for one time LC transactions have to be assessed on the basis of
the cost of the capital goods proposed to be purchased / imported and the
ability of the constituent to meet the margin requirements and the bills
received under the transaction.
(2) The above assessment gives the indicative maximum permissible LC
limit for a constituent. However, while fixing the required LC limit,

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 Branches / Offices should take into account the ability of the constituent to
meet the commitment on presentation of bills.

4.1.7 The borrower should have adequate arrangement for retiring the bills under
LC out of their own sources or from the existing borrowing arrangements.
4.1.8 LC limit for working capital purpose should not be utilized for retiring bills
pertaining the acquisition of capital goods (i.e. the diversion should not be
permitted).As regards LCs for acquisition of capital goods,
approval/sanction of separate limit is necessary and the Bank should satisfy
itself about tying up of funds for meeting the consequent liabilities from
long term funds.
4.1.9 Suppliers of the products being procured under LC and trade cycle of
business may also be discussed, while appraising LC facility.
4.1.10 Interchangeability between L/C & BG may normally be allowed when both
are sanctioned with common purpose. Approval of sanctioning authority
should be obtained before permitting the same.

5 LC MECHANISM:
After the sanction of the Letter of Credit facility, bank may proceed for
opening of the LC on request of the applicant and further negotiation as
given below.
5.1 The LC is to be opened as per the sanction stipulation incorporated in the
sanction advice.
5.1.1 Application for opening an LC has to be obtained for opening of LC in
prescribed format which is to be stamped as applicable in the State of the
opening branch. It should be signed by the authorized signatory of the
applicant. Nature of documents required under the LC, their content and
details of issuing authority should be clearly specified as per bank’s
guidelines. On having satisfied that the application is in order, the
commodity to be purchased is required / traded as per his line of
business/activity, the terms and conditions are complied with, and limit is
available, branch should open the LC as per Bank’s guidelines.

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5.1.2 Prescribed margin amount is to be recovered and kept in Sundry/
SDR/FDR/DRIC as per the sanction terms.
5.1.3 The LC should be signed by two authorized officials as per bank’s guidelines
and to be forwarded.
5.2 Forwarding/Advising of LC:
5.2.1 The LC should not be directly forwarded to the beneficiary.
5.2.2 As far as possible, it should be forwarded to the nearest branch of our bank
with a request to advise the LC to the beneficiary.
5.2.3 If the beneficiary wants the LC to be advised through his bankers, the same
may be agreed to.
5.2.4 On receipt of the LC from the opening branch, the advising branch should
forward the same to the beneficiary after confirming from the opening
bank.

5.3 Amendments in the LC:

5.3.1 The opening or issuing bank can make amendments in LC or terms of LC and
has advised the beneficiary by the same advising bank after recovery of
applicable amendment charges.
5.3.2 The amendment becomes valid only if it is acceptable to the beneficiary. In
case of objections it loses its validity and original terms are applicable.

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5.4 Negotiation of documents under LC: After dispatching the goods the
beneficiary would present the documents to the advising branch/bank for
negotiation with a written request. When the documents under L/C are
received at the L/C opening branch, it should be first acknowledged after
ensuring that all enclosures and original documents said to be enclosed. The
branch should scrutinize the documents within a "Reasonable Time",
carefully to see if there are any discrepancies. If there are no discrepancies
it can be accepted. If yes, the negotiating branch should be informed by
expeditious means quoting the discrepancies and that the documents are not
acceptable and the same are held at their risk and responsibility. If the
documents are in order, the branch may make the payments to the debit of
party's account. If no such arrangements are made, the drawee should be
intimated and advised to make arrangements to retire the documents
immediately. It is possible that the drawee may refuse to accept the
documents due to some discrepancies. For all such cases reference should be
made to provisions of UCP 600 and matter resolved, within "Reasonable
Time" as defined under UCP 600.
5.5 Refusal to accept documents by drawee/ borrower:
5.5.1 When the borrower refuses to accept documents due to discrepancies, the
branch should immediately take up the matter with the negotiating branch
within a "Reasonable Time", as defined in Article 14 (b) of UCP Brochure No.
600.
5.5.2 Sometimes, the borrower/drawee may be willing to accept the documents
despite the discrepancies. In such cases, the branch should obtain a letter in
writing from the opener of the LC duly signed by the authorized signatories
and then the documents may be allowed to be retired. However, the matter
must be sorted out and all formalities should be completed within
"Reasonable Time" as prescribed under UCP 600.
5.5.3 Revolving L/C:
5.5.4 Revolving LC is a mechanism by which the importer/buyer can import/buy
goods under the same LC many times by reinstating the amount of credit
available after each retirement of the bill. The above facility enables the

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 buyer to arrange regular supply of material without resorting to opening of
fresh LC each time.
5.5.5 While opening Revolving LC the "Total Drawing Clause for the total
amounts to be negotiated under the LC" and also a "Final Validity Clause"
must be incorporated in the LC. i.e. if an annual requirement of a
particular goods is Rs. 12/- lacs and a delivery period is two months, an
opener may resort to opening of Revolving LC for Rs. 2/- lacs, with "Total
Drawing Clause" of Rs. 12/- lacs and "Final Validity Clause" of one year. This
may facilitate the regular supply of goods by blocking his limits only up to
Rs. 2/- lacs and without frequently approaching to the bank for opening of
fresh LCs.
5.5.6 Similarly a suitable limit for a single transaction should be specified in
conformity with the volume of business projected. Such a limit will be fixed
keeping in mind the quantum and value of such purchases required in a
year, level of holding of such stocks and lead time etc.
5.5.7 Reinstatement of the limits under LC should be allowed only if the earlier
documents have been retired and full amount recovered. Necessary
commission should be charged at the time of each reinstatement.
5.5.8 The revolving LCs with "Reinstatement Clause" can be opened only as per
the terms of sanction.

6 OTHER GUIDELINES:
6.1 Goods consigned under LC should be properly insured.
6.2 Branches may stipulate reasonable margin while sanctioning L/C limits,
depending upon past track record, financial strength, and age of
relationship etc. of the party. The delegation will vary depending on the
margin stipulated and can be referred as per the delegated authority
guidelines.
6.3 While opening the LC, branches should ensure that the applicant will be
able to get the release of the goods either from his own sources or to the
debit of his cash-credit account. Thus the fund based limits be assessed
based on the holding period of the stocks or term loan in case of purchase of

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 capital goods etc. In case of limits assessed under DP basis corresponding
working capital limits must be assessed.
6.4 It should be ensured that no finance is allowed against the stocks received
under a usance LC. Such goods should however, be charged / hypothecated
to the bank. However, in case the value of stocks under LC should be
separately shown by way of footnote in the stock statements, then these
stocks should be excluded for the purpose of calculating advance
value/drawing power
6.5 Limits sanctioned under DA LC will be treated as clean advance.
6.6 Limits sanctioned under DP basis cannot be converted to DA basis or vice
versa without the permission of sanctioning authority or subject to
guidelines issued from time to time.
6.7 Precautions to be taken and in case of amendments in the LCs the same is to
be advised through the same bank and the same gets valid only if it is
acceptable to the beneficiary. Proper Analysis of available information like
frequent devolvement of LCs, Non-submission of evidence of imports or
stock statements, Non-co-operation in getting stocks audited, routing
through Banks to be done at the time of assessment. Allowing remittances
against DA LC Bills much before due date is to be verified and then
payments is to be made.
6.8 Internal Guidelines:
6.8.1 As per IC7411 dt.26.06.2006, following guidelines are advised for
compliance:
6.8.1.1 Cash flow statement should be obtained from the borrowers and
critically analyzed before opening letter of credit so as to ensure that
adequate cash flows are available on the respective due dates to retire
the documents under LC and that there are no devolvement.
6.8.1.2 Creation of funds out of sale proceeds of the underlying goods for
meeting the liability under DA LC on due date. This is particularly when
the period of credit sales is much shorter than the usance period of LC.
6.8.1.3 In case of frequent devolvement in excess of 5% of sanctioned limits,
margin higher than normal applicable 25% in respect of DA LC to be

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 obtained. Apart from higher margin, additional collateral to be insisted
upon during review of limits.
6.8.1.4 In case of continuous devolvement, no fresh LCs are to be opened
without the concurrence of Zonal Head/FGM.
6.8.2 In the Loan Policy 2020-21 of the Bank, following guidelines are advised:
6.8.2.1 Letter of Credit and Purchase / Discount /Negotiation of bills under LCs
shall be considered only in respect of genuine commercial trade
transactions of the borrower constituents, who have been sanctioned
regular credit facilities by the Bank. Bank should not, therefore, extend
fund-based (including bills financing) or non-fund based facilities like
opening of LCs, providing guarantees and acceptances to non-
constituent borrower or / and non-constituent member of a consortium
/ multiple banking arrangement / Joint Lending Arrangement. However,
in cases where negotiation of bills drawn under LC is restricted to our
bank and the beneficiary of the LC is not a constituent of our bank, we
may negotiate such an LC, subject to the condition that the proceeds
will be remitted to the regular banker of the beneficiary. The
prohibition regarding negotiation of unrestricted LCs of non-constituents
will continue to be in force
6.8.2.2 Bank may discount bills under its own LC with utmost prudence in
respect of valued customer with good track record. The delegation for
discounting bills under Bank's own LC, shall be vested with the
respective delegatee under whose delegation the discounting of bills
under L/C falls.
6.8.2.3 Industry such as construction and other industry where NFB form a
major source of finance such as NFB facilities such as LC, LG. Such huge
commitments are not reflected in DER. In such cases, NFB liabilities
should also be factored while arriving at DER. Details of guarantees /
LCs I contract-wise performance should be furnished in Executive
Summary to evaluate the performance vis-a-vis guarantees / LCs issued.
6.8.2.4 The Bank, in the ordinary course of business, is required to extend non-
fund based credit facilities to the customers and such facilities get
converted into funded exposure in the event of constituent failing to

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 meet the commitment or reimburse the Bank on invocation /
crystallization of the facility. Off-balance sheet exposures also attract
Capital Adequacy norms. It is, therefore, necessary to manage credit
risk under non-funded facility with the same diligence as in the case of
funded facility.
6.8.2.4.1 At the time of credit appraisal, all off balance sheet exposures of the
borrower like L/G, L/C, disputed tax liabilities, claims etc., should be
ascertained and quantified in the proposal. Whenever such liabilities
are very high, their impact on credit risk should be studied and brought
out in the proposal. The total gross exposure (before margins) in credit
contingents i.e. Letters of Credits and Bank Guarantees should not
exceed 3 times of capital funds as per the Audited financials of the
Bank during the previous year or 30%of the total advances of the Bank
at the end of each quarter whichever is lower.
6.8.2.4.2 Non-fund based facility shall be extended to constituents after taking
adequate care in the form of "Credit Investigation" and following "Know
Your Customer" principles. The underlying nature of transaction must
be fully understood and evaluated as part of approval process.
6.8.2.4.3 Credit risk in non-fund based facilities shall be assessed in a manner
similar to the assessment of fund-based facilities.
6.8.2.4.4 As for Deferred Payment Guarantees in lieu of Term Loans, the limits
are to be considered subject to the viability, Debt Equity Ratios, Debt
Service Coverage Ratio etc. as in the case of assessment of term loans
and evaluation of cash flows over the period of guarantee. Further,
adequate cash margin be insisted for such facilities.
6.8.2.4.5 No LC limits should be considered for import of capital goods without
ascertaining the source of finance I proper tie-up for Term Loan.

6.9 External guidelines: As per RBI master circular, following precautions are
enumerated in the case of Letter of Credit facility:
6.9.1 Banks should not extend any non-fund based facilities or additional/ad-hoc
credit facilities to parties who are not their regular constituents, nor should
they discount bills drawn under LCs, or otherwise, for beneficiaries who are

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 not their regular clients. 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 well
as the constituent on whose behalf the LCs were opened and the beneficiary
of LCs, if a criminal conspiracy is involved.
6.9.2 Settlement of claims under Letter of Credits: In case the bills drawn under
LCs are not honored, it would adversely affect the character of LCs and the
relative bills as an accepted means of payment. This could also affect the
credibility of the entire payment mechanism through banks and affect the
image of the banks. Banks should, therefore, honor their commitments
under LCs and make payments promptly.
6.9.3 In cases where the bills discounting/purchasing/negotiating bank and LC
issuing bank are different entities, bills purchased/discounted/negotiated
under LC (where the payment to the beneficiary is not made ‘under
reserve’), will be treated as an exposure on the LC issuing bank and not on
the third party / borrower. However, in cases where the bills
discounting/purchasing/negotiating bank and LC issuing bank are part of the
same bank, i.e. where LC is issued by the Head Office or branch of the same
bank, then the exposure should be taken on the third party/borrower and
not on the LC issuing bank. In the case of negotiations ‘under reserve’, the
exposure should be treated as on the borrower.
6.9.4 Precautions to be taken in the case of Letter of Credit: Non-fund based
facilities or additional/ad-hoc credit facilities will not be extended to
parties who are not our regular constituents, nor discounting of bills drawn
under LCs, or otherwise, will be done for beneficiaries who are not our

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 regular clients. In the case of LCs for import of goods, branches should be
very vigilant while making payment to the overseas suppliers on the basis of
shipping documents. Branches 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 noticed by
Reserve Bank of India 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, action is to be
taken against the concerned officials as well as the constituent on whose
behalf the LCs were opened and the beneficiary of LCs, if a criminal
conspiracy is involved.
6.9.5 Settlement of claims under Letter of Credits: In case the bills drawn under
LCs are not honoured, it would adversely affect the character of LCs and the
relative bills as an accepted means of payment. This could also affect the
credibility of the entire payment mechanism through the bank and the
linage of our bank. Hence, branches should, therefore, honour the
commitments under LCs and make payments promptly.
6.9.6 Compliance to the regulations of Foreign Exchange Management Act,
2000: The directions, regulations issued under Foreign Exchange
Management (Guarantee) Regulations, 2000 as amended from time to time
should be adhered to.

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