Master Circular on Guarantees and Co-acceptances

RBI/2025-26/12 DOR.STR.REC.06/13.07.010/2025-26 April 01, 2025 All Scheduled Commercial Banks (excluding Payment Banks and RRBs) Dear Sir / Madam Master Circular - Guarantees and Co-acceptances Please refer to the Master Circular DOR.STR.REC.2/13.07.010/2024-25 dated April 01, 2024 consolidating the instructions / guidelines issued to banks till March 31, 2024, relating to Guarantees and Co-acceptances. Attached is the revised Master Circular , updated to reflect all instructions issued up to March 31, 2025 on the above matter, as listed in the Annex 2 . It may be noted that this Master Circular only consolidates all instructions on the above matter issued up to March 31, 2025 and does not contain any new instructions/guidelines. Yours faithfully (Vaibhav Chaturvedi) Chief General Manager

CONTENTS

Master Circular - Guarantees and Co-acceptances

A. Purpose This Master Circular consolidates the instructions issued by the Reserve Bank of India relating to the conduct of guarantee business by banks.

B. Classification A statutory directive issued by the Reserve Bank in exercise of the powers conferred by the Banking Regulation Act, 1949.

C. Previous instructions This Master Circular consolidates and updates the previous instructions on the above subject as contained in the circulars listed in Annex 2 .

D. Application To all Scheduled Commercial Banks, excluding Payment Banks and Regional Rural Banks.

1 INTRODUCTION 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 GUIDELINES

2.1 General Guidelines

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.

2.1.7 Banks shall also ensure compliance with A.P. (DIR Series) Circular No. 18 dated October 04, 2024 regarding ‘Due diligence in relation to non-resident guarantees availed by persons resident in India’.

2.2 Guidelines relating to conduct of guarantee business

2.2.1 Norms for unsecured advances & guarantees

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.