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This master circular consolidates instructions on guarantees and co-acceptances for scheduled commercial banks excluding payments banks and regional rural banks. Scheduled commercial banks must follow RBI guidelines on guarantee business conduct maturities and internal controls. Banks must honour invoked guarantees promptly without delay.
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RBI/2023-24/04 DOR.STR.REC.5/13.07.010/2023-24 April 1, 2023 All Scheduled Commercial Banks (excluding Payments Banks and RRBs) Dear Sir / Madam Master Circular - Guarantees and Co-acceptances Please refer to the Master Circular DOR.STR.REC.8/13.07.010/2022-23 dated April 1, 2022 consolidating the instructions / guidelines issued to banks till March 31, 2022, relating to Guarantees and Co-acceptances. This Master Circular consolidates the instructions on the above matter issued up to March 31, 2023. Yours faithfully Manoranjan Mishra Chief General Manager CONTENTS Para No Particulars A Purpose B Classification C Previous instructions D Application 1 Introduction 2 Guidelines 2.1 General Guidelines 2.2 Guidelines relating to conduct of guarantee business 2.2.1 Norms for unsecured advances & guarantees 2.2.2 Precautions for issuing guarantees 2.2.3 Precautions for averting frauds 2.2.4 Ghosh Committee Recommendations 2.2.5 Internal Control Systems 2.2.6 Guarantees on behalf of Banks' Directors 2.2.7 Bank Guarantee Scheme of Government of India 2.2.8 Guarantees on Behalf of Share and Stock Brokers/ Commodity Brokers 2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns 2.2.10 Guarantees of State Government 2.3 Other Stipulations –Issuing Bid Bonds and Performance Guarantees for export 2.3.1 Unconditional Guarantees in favour of Overseas Employers/ Importers on behalf of Indian Exporters 2.3.2 Certain Precautions in case of Project Exports 2.3.3 Guarantees for Export Advance 2.3.4 Review of Banks’ Procedures 2.3.5 Overseas Investments – Guarantee on behalf of a Foreign Entity or any of its Step Down Subsidiary 2.4 Restrictions on guarantees for placement of funds with NBFCs or other non-bank entities 2.5 Payment of invoked guarantees 2.6 Co-acceptance of bills 2.6.1 General 2.6.2 Safeguards 2.7 Precautions to be taken in the case of Letters of Credit 2.8 Compliance to the regulations of Foreign Exchange Management Act, 2000 2.9 Compliance to the Prudential Norms Annex 1 Model Form of Bank Guarantee Bond Annex 2 List of circulars consolidated
Master Circular - Guarantees and Co-acceptances
This Master Circular consolidates the instructions issued by the Reserve Bank of India relating to the conduct of guarantee business by banks.
A statutory directive issued by the Reserve Bank in exercise of the powers conferred by the Banking Regulation Act, 1949.
This Master Circular consolidates and updates the previous instructions on the above subject as contained in the circulars listed in Annex 2 .
To all Scheduled Commercial Banks, excluding Payments Banks and Regional Rural Banks.
An important criterion for judging the soundness of a banking institution is the size and character, not only of 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 banks comprise both performance guarantees and financial guarantees. The guarantees are structured according to the terms of agreement, viz., security, maturity and purpose. Banks should comply with the following guidelines in the conduct of their guarantee business.
2.1.1 As regards the purpose of the guarantee, as a general rule, the banks should confine themselves to the provision of financial guarantees and exercise due caution with regard to performance guarantee business. 2.1.2 As regards maturity, as a rule, banks should guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. 2.1.3 No bank guarantee should normally have a maturity of more than 10 years. However, where banks extend long term loans for periods longer than 10 years for various projects, it has been decided to allow banks to also issue guarantees for periods beyond 10 years. While issuing such guarantees, banks are advised to take into account the impact of very long duration guarantees on their Asset Liability Management. Further, banks may evolve a policy on issuance of guarantees beyond 10 years as considered appropriate with the approval of their Board of Directors. 2.1.4 Banks should, in general, refrain from issuing non-fund based facilities to/on behalf of constituents who do not enjoy credit facilities with them. However, banks are permitted to grant non-fund based facilities, including partial credit enhancement 1 , to those customers, who do not avail any fund based facility from any bank in India. Provision of such facilities shall be in terms of a comprehensive Board approved policy for grant of non-fund based facility to such borrowers. The banks shall ensure that the borrower has not availed any fund based facility from any bank operating in India. However, at the time of granting non-fund based facilities, banks shall obtain declaration from the customer about the non- fund based credit facilities already enjoyed by them from other banks. Banks shall undertake the same level of credit appraisal as has been laid down for fund based facilities. The instructions related to KYC / AML / CFT, submission of credit information to Credit Information Companies and other prudential norms applicable to banks, including exposure norms, issued by RBI from time to time, shall be adhered to in respect of all such facility. However, banks are prohibited from negotiating unrestricted LCs of non-constituents. In cases where negotiation of bills drawn under LC is restricted to a particular bank and the beneficiary of the LC is not a constituent of that bank, the bank shall have the option to negotiate such LCs, subject to the condition that the proceeds are remitted to the regular banker of the beneficiary. 2.1.5 Further, BG /LC may be issued by scheduled commercial banks to clients of co-operative banks against counter guarantee of the co-operative bank as permitted hitherto. In such cases, banks shall be guided by the provisions of paragraph 2.3.8.2 of the Master Circular on Loans and Advances-Statutory and Other Restrictions dated July 1, 2015 as amended from time to time. Further, in such cases banks must satisfy themselves 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, they must satisfy themselves that KYC check has been done properly in these cases. 2.1.6 The guarantee of parent companies may be obtained in the case of subsidiaries whose own financial condition is not considered satisfactory.
2.2.1.1 Until June 17, 2004, banks were required to limit their 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 to banks on their loan policies, the above limit on unsecured exposure of banks was withdrawn and banks’ Boards have been given the freedom to fix their own policies on their unsecured exposures. "Unsecured exposure" is defined as an exposure where the realisable 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 the bank and will not include intangible securities like guarantees (including State government guarantees), letter of comfort, etc. 2.2.1.2 For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Banks, may however, treat annuities under build-operate –transfer (BOT) model in respect of road/highway projects and toll collection rights where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities, subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable. 2.2.1.3 All exemptions allowed for computation of unsecured advances stand withdrawn.
