Important Guidelines On Guarantees and Co-Acceptances
Important Guidelines On Guarantees and Co-Acceptances
Important Guidelines On Guarantees and Co-Acceptances
1. GUIDELINES (GENERAL)
Bank guarantees should not normally extend beyond 10 years. Banks may
issue guarantees (BG) for periods beyond 10 years taking into account the
impact of very long duration guarantees on their Asset Liability Management
and in tune with their policy on issuance of guarantees beyond 10 years as
approved by the Board.
2. OTHER GUIDELINES
Banks’ Boards have been given the freedom to fix their own policies on
their unsecured exposures including unsecured guarantees.
Avoid giving unsecured guarantees in large amounts for medium and long-term
periods and such commitments to particular groups of customers and/or trades.
In case of PG, banks should exercise due caution and satisfy themselves 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.
Banks should refrain from issuing BGs on behalf of customers who do not enjoy
credit facilities with them other than customers of co-operative banks against
counter guarantee of the co-op. bank which have sound credit appraisal and
monitoring systems as well as robust Know Your Customer (KYC) regime.
BGs for Rs. 0.50 Lakh and above are to be signed by two officials jointly. A lower
cut-off point, depending upon the size and category of branches, may be
prescribed by banks, where considered necessary.
Allow deviation from the two signatures discipline should be only in exceptional
circumstances. In such cases there should be a system for subjecting such
instruments to special scrutiny by the auditors or inspectors at the time of
internal inspection of branches.
a) Adequate and effective arrangements are in place to honor the commitments out of
their own resources by the party on whose behalf guarantee was issued, and
b) The bank will not be called upon to grant any loan or advance to meet the liability,
consequent upon the invocation of guarantee.
Bank Guarantee Scheme of Government of India
BGs are to be issued in the Model Form of Bank Guarantee Bond and in
favour of Govt. departments in the name of President of India and any
correspondence thereafter should be exchanged with the concerned
departments only.
d) Like the tender form floated by DGSD, the Public Notice issued by the Customs
Department stipulates, inter alia, that all BGs furnished by an importer should
contain a self renewal clause inbuilt in the guarantee itself. Hence, BGs issued
in favour of DGSD and Customs Houses should invariably contain suitable
clause for automatic extension of the guarantee period etc.
Banks can issue BGs on behalf of share and stock brokers in favour of Stock
Exchanges towards security deposit, margin requirements as per Stock Exchange
Regulations.
BGs can also be issued on behalf of commodity brokers in favour of 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.
Banks are required to obtain a minimum margin of 50% (out of which cash
margin to be 25%) while issuing such guarantees in both the above cases and to
observe usual and necessary safeguards including the exposure ceilings.
Obtaining Personal guarantees of directors
Obtaining the personal guarantees of directors by banks for credit facilities, etc.
granted to corporate, public or private, should be only when the same is absolutely
warranted and should not taken as a matter of course. In order to identify the
circumstances under which the guarantee may or may not be considered
necessary, banks are required to follow the guidelines as under:-
In case of public limited companies, the lending institutions are satisfied about the
management, economic viability, stake in the concern, financial position, cash
generation, etc., obtaining of personal guarantee of directors may be dispensed
with. For widely owned public limited companies with first class rating and
satisfying the said conditions, guarantees may not be insisted upon even if the
advances are unsecured.
In respect of closely held private or public companies where shares are held
by a person or persons, or a group (not being professionals), obtaining the
personal guarantee of principal members is considered as helpful for facilities
granted by banks with the exception in respect of companies where, by court
or statutory order, the management of the company is vested in a person or
persons as director/s or by any other name, who are not required to be
elected by the shareholders.
Banks may insist for personal guarantee of directors of public limited companies
other than those rated first class and the advance is on unsecured basis and
those financial position and/or cash generation capacity is not so satisfactory.
Banks are required to honour the bonds/guarantees in case of invocation and make
payments accordingly to non-resident beneficiaries.
a) Foreign Airlines/IATA
b) Service Importers
c) BG-Commodity Hedging
Subject to terms and conditions as may be stipulated by RBI, Banks can issue
guarantee or standby Letter of Credit on behalf of a domestic party towards the
margin payable by him/her covering hedging of his commodity exposures in
overseas markets.
Invocation of Guarantee
Banks are required to honour any invocation of the guarantee and send a
detailed report to RBI, Foreign Exchange Department, External Payment
Division (EPD), Mumbai, explaining the circumstances leading to the invocation
of the guarantee.
d) Other stipulations
ECGC would provide 90% cover for bid bonds, provided the banks give an
undertaking not to insist on cash margins. Cash margin should invariably be
stipulated where ECGC cover is not available for whatever reasons.
Banks may consider sanctioning separate limits for issue of bid bonds.
Within the limits so sanctioned, bid bonds against individual contracts may
be issued, subject to usual considerations.
The sponsor banks should 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. irrespective of whether ‘In Principle’ package approvals at post bid
stages for high value overseas projects exports by the Working Group evolved is
in place.
a) Minor Guarantees
Banks are authorized to issue BGs freely on behalf of their customers and
overseas branches and correspondents in the ordinary course of business in
respect of missing or defective documents, authenticity of signatures and for
other similar purposes.
While Banks/FIs are not permitted to issue guarantees/ standby letters of credit
or letters of comfort in favour of overseas lenders relating to External
Commercial Borrowing (ECB)generally, such requests from SMEs and those
from textile companies for modernization or expansion of the textile units are
considered on merits by RBI under Approval Route.
Overseas Investment should be within the present ceiling of 400% of the net worth
of the Indian Party as on the date of the last audited balance sheet. Indian Party can
offer any form of guarantee provided that:
All financial commitments including all forms of guarantees are within the
overall ceiling of 400% of net worth prescribed for overseas investment.
No guarantee should be 'open ended' i.e. the amount and period of the guarantee
should be specified upfront. In the case of performance guarantee, time
specified for the completion of the contract shall be the validity period of the
related performance guarantee;
In case the ceiling of 400% of net worth exceeds due to invocation of guarantee,
the
Indian Party shall seek the prior approval of the Reserve Bank before remitting
funds from India, on account for such invocation.
Issuance of corporate guarantees (including performance guarantee) is
required to be reported to RBI, etc.
4. Restrictions on issuance on guarantees
Guarantees should not be issued for the purpose of indirectly enabling the
placement of deposits with NBFCs. These stipulations 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.
Banks can issue guarantees favouring other banks/ FIs/ other lending agencies
for the loans extended by the latter as per a board approved policy,
The guaranteeing bank should assume a funded exposure of at least 10% of the
exposure guaranteed.
Exceptions
Banks should appraise the proposal with due diligence, as in the case of fund
based limits, prior to issuance of the guarantees so as to ensure that the
persons on whose behalf the guarantees are issued will be in a position to
perform their obligations in the case of performance guarantees and honour
their commitments out of their own resources, as and when needed, in the
case of financial guarantees.
Any decision not to honour the obligation under the guarantee invoked may be
taken after careful consideration, at a fairly senior level, and only in the
circumstances where the bank is satisfied that any such payment to the
beneficiary would not be deemed a rightful payment in accordance with
the terms and conditions of the guarantee under the Indian Contract Act.
6. Co-acceptance of bills
Under this facility banks accept commercial usance bills drawn on their
constituents which would enable the latter to enjoy credit which otherwise the seller
will not be willing to extend. In this facility the banks add the strength of their name
and no finance is envisaged. RBI has directed banks to take suitable safeguards
while extending such facilities, a few of which are as under:-
Banks are precluded from 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. Similarly, banks should not
co-accept bills drawn by NBFCs and not to extend co-acceptance on behalf of
their buyers/constituents under the SIDBI Scheme.
Banks are permitted to co-accept bills drawn under the Sellers Line of Credit
Schemes (since renamed as Direct Discounting Scheme) operated by IDBI
and all India financial institutions for Bill Discounting operated by IDBI and all
India financial institutions like SIDBI, PFC, etc. without any limit, subject to the
buyer’s capability to pay, and compliance with the exposure norms prescribed by
the bank for individual/ group borrowers.
Co-acceptance of bill drawn under their own LC by bank defeats the purpose of
issuing LC as the bill so co-accepted becomes an independent document and the
special rules applicable to commercial credits do not apply to such a bill and the
same 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.
The discounting banks should, therefore, ascertain from the co-accepting bank
the reason for such co-acceptance and upon satisfying themselves of the
genuineness of such transactions, they may consider discounting such bills.
7. Letters of Credit
Precautions
Banks should honour their commitments under LCs and make payments
promptly. Any dishonor/delay would adversely affect the character of LCs and
relative bills as an accepted means of payment, besides, causing adverse
impact on the credibility of the entire payment mechanism through banks and
affect the image of the banks.
Letter of Guarantee
The word ‘Guarantee’ means a promise; usually in writing that the Surety (Guarantor) shall fulfill the promise
if the concerned Principal Debtor (Customer) fails to discharge his responsibility/obligation to the Creditor
(Beneficiary). In brief, a Bank Guarantee is an undertaking given by a Bank to perform the promise or
discharge the liability of its customer in case of his default.
Features
The guarantee must be for a certain fixed amount and the period of its validity must be limited and
fixed.
Bank should look to the past performance both for Bank Guarantee & Investment (if any) of the
Customer.
Bank may request potential Customer to open an Al-Wadiah Current Account andlet him maintain the
account satisfactorily for a reasonable period.
The customer must execute a ‘Counter Guarantee’ to the Bank providing inter-alia that he will
indemnify the Bank against all consequences and gives authority to the Bank to charge all payments
to his account. Tangible security (cash & collateral security) in support of “Counter Guarantee” shall
also be obtained securing the entire amount of the Guarantee.
The guarantee will be issued only after completion of full documentation as per sanction stipulation.
• The Bank Guarantee for procurement of any assets / property / services may be settled under Bai
Al-Murabaha / MPI / Bai Al-Muajjal / Hire Purchase under Shirkatul Mielk (HPSM) mode of
investments with the Principal Debtor (Customer).
• As soon as the guarantee period is over, the original guarantee should be called back duly
cancelled by the beneficiary.
Various types of Guarantee are issued by Bank for several purposes as when and where needed by the
surety. Bank secures the providedfacility by either cash or collateral security and or by both as per sanction
by the competent authority. The most common types of Bank Guarantees are
Government Organization and Institutions, Corporations, Companies etc. generally invite tenders for
completion of their projects, such as road building, construction of bridges, building construction, and use of
facilities, performance of any service and / or sale of unwanted goods. Parties bidding for the tender must
submit with their bids a guarantee to the beneficiary or issuer of the tender (Government Organization and
Institutions, Corporations, Companies etc.). This type of guarantee is known as a “Tender of Bid Guarantee”.
It is, generally, sought for 2 per cent to 5 per cent of the contract amount.
After the declaration of the successful bidder/bidders, the original guarantees, of parties whose bids have not
been successful, are returned to the Bank for cancellation. Only the guarantee of the successful bidder is
retained till the signing of the final agreement and submission of another guarantee under the name of
“Good performance of Undertaking Guarantee”. In case of default of the successful bidder, at whose request
the Guarantee is issued, in entering into the agreement and / or in submitting a Good Performance of
Undertaking Guarantee, the beneficiary may en-cash the “Tender for Bid Guarantee” from the issuing Bank.
As such, this type of Guarantee should usually be issued at higher cash margin with collateral security
covering the Guarantee amount.
This type of guarantee is issued to ensure the proper and timely performance of undertakings by the
successful bidder. The object of this type of guarantee is the assurance of good performance of undertakings
arising from signing of a contract, which is issued at the request of the applicant (the contractor), in favour
of the beneficiary (Government Organization and Institutions, Corporations, Companies etc.), to ensure the
performance of the undertakings accepted by the contractor, according to the stipulations of agreements
signed. The submission of this type of guarantee by the contractor is an essential per-requisite for the
signing of the agreement with the beneficiary (Government Organization and Institutions, Corporations,
Companies etc.).
This type of guarantee is issued by the Bank at the request of the Customer (Contractor) to assure the
beneficiary (Government Organization and Institutions, Corporations, Companies etc.) of the proper working
of the customer (contractor) and the attainment of the forecast output, within the stipulated time, after part
of the job has been covered. It is valid for a stipulated period after the completion of the project and the
start-up of the work for which the project was taken in hand.
Banks give guarantee to shipping companies for release of goods in the absence of shipping documents, in
case goods arrive before receipt of such documents by the consignee and are incurring demur-rage or
original documents have been lost after retirement from the Bank. These guarantees are limited to bill
amount or letter of credit value and for period till receipt of original bill of lading. The guarantee is actually
signed by the importer in favour of shipping company and countersigned by the Banker. Normally, full value
of invoice or letter of credit must be retained as margin for issue of guarantee. Alternatively, the goods may
be cleared by Bank and kept in its custody as soon as the original shipping documents are received, these
shall be sent to clearing agents to facilitate return of original guarantee. In the alternative way, custom
authority’s confirmation regarding cancellation shall be obtained.
The objective of this type of guarantee is to secure the funds, paid by the beneficiary (Government
Organization and Institutions, Corporations, Companies etc.) to the contractor, before start of the job, or in
the process of the job, to strengthen the financial position of the contractor for speeding up the progress of
work. The beneficiary will take steps to re-collect the funds paid by en-cashing the Guarantee, in case of the
contractor’s failure to meet his commitments. These guarantees are issued by the Bank, in favour of the
beneficiary, at the request of the contractor.
These are required for a fixed percentage of the total amount of the contactor that the beneficiary is
expected to pay to the contractor in the form of advance payments. The funds, paid by the beneficiary to the
contractor, are deducted from the job position reports at various stages in such a manner that before the last
temporary/partially job position report is filed in, the said amount should have been amortized.
According to the general terms of the contract, the amount of the guarantee is also reduced each time up to
the amount of the deductions, on the basis of the beneficiaries’ declaration, and the guarantee is released,
with the consent of the beneficiary, at the latest, by the date of the temporary/partially hand-over of the job.
In spite of the supervision and various tests carried out by the beneficiary during the period of the contract,
at various stages of the process of work, for greater confidence regarding proper performance of the job,
after the final handing over, and for a stipulated period, the beneficiary deducts the equivalent of 10% (more
or less) of the gross amount of the job position over the reports of the contractor, and holds it in an account
with himself, and may return the good performance of job assurance amount to the contractor against the
Bank guarantee.
This Type of guarantee, issued by the Bank at the request of the customer (contractor) in favour of the
beneficiary is called “Return of Bond Deductions Guarantee”.
According to the general terms of the contract, the equivalent of 50% of the amount of such guarantees, is
released by the beneficiary, immediately after the approval of the final position of job report, and the
remaining 50% of the guarantee remains valid until the approval of the memorandum of final hand-over.
At the end of each month, in accordance with the terms of the contract, and, with the approval of the
overseer (to be appointed and introduced by the beneficiary), the contractor prepares a report of all the jobs
completed till that date, as well as, the material on the job site, and submits it to the beneficiary. This
document is known as the “Position/Program Report”.
The Guarantee period is a fixed duration of time, after the temporary hand-over, to guarantee the
rectification of mistakes and short-comings caused by non-adherence to the specifications of the contract and
/ or the use of bad or poor material on the job, which the contractor is committed to redress.
This guarantee is issued in favour of customs authority on account of custom duties for imported goods and
machinery or export commodities on behalf of Clients.
Sometimes, importers are not in a position to pay in cash, the customs duties to release their imported
goods. As such, they need to submit Bank Guarantee to the Customs for an amount equivalent to the
amount of the customs duty.
By issuing the above guarantee, the Bank makes commitment for payment, and must pay the amount of the
guarantee to the Customs Authority, without any delay, at the fixed maturity or on the dates when the
installments fall due.
In same circumstances like disputes over taxation, customers’ desire guarantees to release the goods under
guarantee up to final settlement of dispute by the competent authority.
This type of Guarantees is issued by the Bank to make payment of dues at fixed maturities, such as the
“Guarantee to Pay Taxes.” Normally, this type of guarantee is issued against 100% cash security.
Besides the various guarantees stated above, applications may be received for the issuance of multifarious
other types of Bank guarantee for all kinds of jobs. The draft of such guarantees is usually dictated by the
beneficiary.