GUARANTEES AND CO-ACCEPTANCE

General Guidelines

2.1.1    As a general rule, the banks should confine themselves to financial guarantees over performance guarantee business.

2.1.2    banks should prefer shorter maturities and leave longer maturities for other institutions.

2.1.3      No bank guarantee should normally exceed 10 years. However, it has since been decided to allow banks to also issue guarantees for periods beyond 10 years keeping in view their Asset Liability management. Banks may evolve a policy on issuance of guarantees beyond 10 years with the approval of their Board of Directors.

2.2       Guidelines relating to conduct of guarantee business

2.2.1    Norms for unsecured advances & guarantees

(i)            Until June 17, 2004, 20% of unsecured guarantees plus the total unsecured advances should not exceed 15% of its total advances. Banks’ Boards have now been given the freedom to fix their own policies on their unsecured exposures. Exposure shall include all funded and non-funded exposures. ‘Security’ will mean tangible security charged to the bank.

(ii)        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.

2.2.2    Precautions for issuing guarantees

Banks should adopt the following precautions while issuing guarantees on behalf of their customers.

(i)    As a rule, banks should avoid giving unsecured guarantees in large amounts and for medium and long-term periods. They should avoid undue concentration of such unsecured guarantee commitments to particular groups of customers and/or trades.

(ii)   Unsecured guarantees should be limited to a reasonable proportion of the bank’s total unsecured guarantees. Guarantees on behalf of an individual should also be of a reasonable proportion to the constituent’s equity.

(iii)    In exceptional cases, banks may give deferred payment guarantees on an unsecured basis 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 the bank’s interest or in the public interest, to encourage parties to over-extend their commitments.

2.2.3    Precautions for averting frauds

While issuing guarantees on behalf of customers, the following safeguards should be observed by banks:

(i) At the time of issuing financial guarantees, banks 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, banks should satisfy themselves that the customer has the necessary experience, capacity and means to perform the obligations under the contract.

(ii)          Banks should refrain from issuing guarantees on behalf of customers who do not enjoy credit facilities with them. However, BG /LC may be issued by scheduled commercial banks to clients of co-operative banks against counter guarantee of the co-operative bank. Further, 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.

2.2.4    Ghosh Committee Recommendations

     (i) Bank guarantees should be issued in serially numbered security forms.

      

     (ii) Banks should, caution the beneficiaries that they should, verify the genuineness of the guarantee with the issuing bank.

2.2.5    Internal control systems

Bank guarantees issued for Rs.50,000/- and above should 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. In case, exceptions are made for affixing of only one signature on the instruments, banks should devise a system for subjecting such instruments to special scrutiny by the auditors or inspectors at the time of internal inspection of branches.

2.2.6    Guarantees on behalf of Banks' Directors

2.2.6.1 Certain facilities which include issue of guarantees, are not regarded as 'loan and advances' within the meaning of Section 20 of the Act. However in case of devolvement, the very purpose of Sec 20 would be defeated.

2.2.6.2 In view of the above, banks should, while extending non-fund based facilities on behalf of their directors and the companies/firms in which the director is interested, ensure that:

i. adequate and effective arrangements have been made to ensure that the commitments would be met out of their own resources by the party.

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.

           

2.2.7    Bank Guarantee Scheme of Government of India

2.2.7.1 Under the scheme, it is open to Government Departments to accept freely guarantees, etc. from all scheduled commercial banks in lieu of security deposits, etc. by contractors.

2.2.7.2 Banks should adopt the Model Form of Bank Guarantee Bond. Banks should mention in the guarantee bonds and their correspondence with the various State Governments, the names of the beneficiary departments and the purposes for which the guarantees are executed. In regard to the guarantees furnished by the banks in favour of Government Departments in the name of the President of India, any correspondence thereon should be exchanged with the concerned ministries/ departments and not with the President of India. In respect of guarantees issued in favour of Directorate General of Supplies and Disposal, the following aspects should be kept in view:

i.          The name, designation and code numbers of the officer signing the guarantees should be incorporated under the signature of officials.

ii.          The beneficiary of the bank guarantee should obtain the confirmation of the concerned banks about the genuineness of the guarantee issued by them.

iii.         The initial period of the bank guarantee would be for a period of six months beyond the original delivery period. Banks may incorporate a suitable clause, 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 DGS&D in the tender forms to the effect that whenever a firm fails to supply the stores within the delivery period of the contract, the request for extension for delivery period will automatically be taken as an agreement for getting the bank guarantee extended. Banks 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 Notice 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, should also be made applicable to bank guarantees issued favouring the Customs Houses.

vi.        The bank guarantee and extension letters thereof, would be on non-judicial stamp paper.

2.2.8    Guarantees on behalf of Share and Stock Brokers/ Commodity Brokers

Banks may issue guarantees on behalf of share and stock brokers in favour of stock exchanges in lieu of security deposit. Banks may also issue guarantees in lieu of margin requirements as per stock exchange regulations. Banks have been advised that they should obtain a minimum margin of 50 percent while issuing such guarantees. A minimum cash margin of 25 per cent (within the above margin of 50 per cent) should be maintained in respect of such guarantees issued by banks. The above minimum margin will also apply to guarantees issued by banks on behalf of commodity brokers in favour of the national level commodity exchanges, in lieu of margin requirements as per the commodity exchange regulations. Banks should assess the requirement of each applicant and observe usual and necessary safeguards including the exposure ceilings.

2.2.8.1  Irrevocable Payment Commitments – Financial Guarantees

 Banks issuing Irrevocable Payment Commitment (IPCs) to various Stock Exchange on behalf of Mutual Funds and FIIs are advised to adopt the following risk mitigation measures:

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, the requirement of the clause will not be insisted upon.

2.2.9    Guidelines relating to obtaining of personal guarantees of directors

and other managerial personnel of borrowing concerns

2.2.9.1 Personal guarantees of directors

Banks should take personal guarantees of directors for the credit facilities, etc. granted to corporates, public or private, only when absolutely warranted and not as a matter of course.

A.        Where guarantees need not be considered necessary

i. Ordinarily, in the case of public limited companies, when the lending institutions are satisfied about the management, no personal guarantee need be insisted upon.

ii. Where the lending institutions are not so convinced about the aspects of loan proposals mentioned above, they should seek to stipulate conditions to make the proposals acceptable without such guarantees. (Eg. restrictions on distribution of dividends, further expansion, aggregate borrowings, creation of further charge on assets, stipulation of maintenance of minimum net working capital, parity between owned funds and capital investment and the overall debt-equity ratio.)

B.        Where guarantees may be considered helpful

i. Personal guarantees of directors may be helpful in respect of companies, where shares are held closely by a person or connected persons or a group. 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 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, a lending institution could make a loan 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 lending institution. Similarly, during the formative stages of a company, it may be in the interest of the company, as well as the lending institution, to obtain guarantees to ensure continuity of management.

iii. Where companies are not rated as first class and the advance is on an unsecured basis.

iv. Companies, whose financial position and/or capacity for cash generation is not satisfactory even though the relevant advances are secured.

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.

C.        Worth of the guarantors, payment of guarantee commission, etc

Where personal guarantees of directors are warranted, they should bear reasonable proportion to the estimated worth of the person. Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration would be paid or received. 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.

D.        Personal guarantees in the case of sick units

As the personal guarantees of promoters/ directors generally instill greater accountability, banks, may obtain guarantees from directors (excluding the nominee directors) and other managerial personnel in their individual capacities. In case, for any reasons, a guarantee is not considered expedient by the bank at the time of sanctioning the advance, an undertaking should be obtained from the individual directors 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 by the bank. Banks may also obtain guarantees at their discretion from the parent/holding company when credit facilities are extended to borrowing units in the same Group.

2.2.10  Guarantees of State Government

Banks should obtain guarantees of State Governments on merits and only in circumstances absolutely necessary, and not as matter of course.

2.3       Other stipulations – Issuing bid bonds and performance guarantees for export  

(i.)        With a view to boost exports, banks should adopt a flexible approach in the matter of obtaining cover, while issuing bid bonds and performance guarantees for export purposes. Banks may, however, safeguard their interests by obtaining an Export Performance Guarantee of ECGC, wherever considered necessary.

(ii.)       ECGC would provide 90 percent cover for bid bonds, provided the banks give an undertaking not to insist on cash margins.

(iii.)      Where counter-guarantees of ECGC are not available, the banks may stipulate a reasonable cash margin only if it is considered absolutely necessary.

(iv.)      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.

2.3.1    Unconditional Guarantees in favour of Overseas Employers/

            Importers on behalf of Indian Exporters

(i.)        While agreeing to give unconditional guarantee in favour of overseas employers/importers on behalf of Indian Exporters, banks should obtain an undertaking from the exporter that when the guarantee is invoked, the bank would make payment, notwithstanding any dispute between the exporter and the importer.

This is considered desirable as non-honouring of guarantees on invocation might prompt overseas banks not to accept guarantees of Indian banks, thus hampering the country's export promotion effort.

2.3.2    Certain precautions in case of Project Exports

(i.)        Banks are aware that the 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 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.

(iii.)      Therefore, 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 should be made, 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 by the banks in all cases of overseas borrowings for financing overseas projects. Appropriate arrangements should also be made for post-award follow-up and monitoring of the contracts.

2.3.3    Guarantees for Export Advance

 (i)        Guarantees are intended to facilitate execution of export contracts by an exporter and not for other purposes. Banks should ensure that there is no violation of FEMA regulations.

(ii)        Further, banks should also ensure that the export advances received by the exporters are in compliance with the regulations/ directions issued under FEMA.

(iii) It is reiterated that export performance guarantees, shall not contain any clauses which may in effect allow it to be utilized as financial guarantees/Standby Letters of Credits

2.3.4    Review of banks’ procedures

Banks may periodically review their position regarding delegation of powers and procedures, and take action for expediting decision on export proposals. They may also consider designating a specified branch, equipped with adequately qualified and trained staff, in each important centre to deal expeditiously with all export credit proposals at the centre.

2.3.5 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. The financial commitment may be in the form of

(a)  capital contribution and loan;

(b)  corporate guarantee and / or bank guarantee and

(c)  charge on immovable / movable property and other financial assets.

                     Banks, shall not issue standby letters of credit / guarantees / letter of comforts etc. on behalf of overseas JV / WOS / Wholly Owned Step Down Subsidiaries (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 such facility, banks should ensure effective monitoring of the end use of such facilities and its conformity with the business needs of such entities.

2.4       Restrictions on guarantees of inter-company deposits/loans

Banks should not execute guarantees covering inter-company deposits/loans thereby guaranteeing refund of deposits/loans accepted by NBFC/firms from other NBFC/firms.

2.4.1    Restriction on guarantees for placement of funds with NBFCs

Guarantees should not be issued for the purpose of indirectly enabling the placement of deposits/ loans with NBFCs.

2.4.2    Restrictions on Inter-Institutional Guarantees

2.4.2.1 Guarantees should not, be issued for the purpose of indirectly enabling the placement of all types of deposits/loans with non-banking institutions.

2.4.2.3 (a) Banks may issue guarantees favouring other banks/ FIs/ other lending agencies for the loans extended by the latter, subject to strict compliance with the following conditions.

(i)    The Board of Directors should reckon the integrity/ robustness of the bank’s risk management systems and put in place a well-laid out policy in this regard which would address the following issues:

·         Prudential limits, linked to bank’s Tier I capital, up to which guarantees favouring other banks/FIs/other lending agencies may be issued

·         Nature and extent of security and margins

·         Delegation of powers

·         Reporting system

·         Periodical reviews

(ii)   The guarantee shall be extended only to enable the borrower to avail of additional credit facility from other banks/FIs/lending agencies.

(iii) The guaranteeing bank should assume a funded exposure of at least 10% of the exposure guaranteed.

(iv) Banks should not extend guarantees or letters of comfort in favour of overseas lenders. However, AD banks may also be guided by the provisions contained in Notification No. FEMA 8/2000-RB dated May 3, 2000.

(v)   The guarantee issued by the bank will be an exposure on the borrowing entity and will attract appropriate risk weight.

(vi) Banks should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees.

(vii) Banks are strictly advised not to provide guarantees or equivalent commitments for issuance of bonds or debt instruments of any kind.

2.4.2.3 (b) Lending banks

Banks extending credit facilities against the guarantees issued by other banks/FIs should ensure strict compliance with the following conditions:

(i)    The exposure assumed by the bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/FI and will attract appropriate risk weight.

(ii)   Such exposures should be reckoned within the exposure limits prescribed by the Board of Directors. Since the exposure assumed by the bank will be for a fairly longer term, the Board of Directors should fix an appropriate sub-limit for the longer term exposures, since these exposures attract greater risk.

(iii) Banks should monitor such exposures on a continuous basis and ensure strict compliance with the prudential norms.

(iv) Banks should comply with the recommendations of the Ghosh Committee and other internal requirements relating to acceptance of guarantees of other banks.

2.4.2.4 Exceptions

(i)  In regard to rehabilitation of sick/weak industrial units, in exceptional cases,  where banks are unable to participate in rehabilitation packages on account of temporary liquidity constraints, the concerned banks could provide guarantees in favour of the banks which take up their additional share. 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, banks may issue guarantees favouring 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 Direct  Discounting Scheme 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 permitted to extend guarantee/ co-acceptance facility for the bills drawn under seller’s line of credit.

(iv) Similarly, guarantees can be issued in favour of HUDCO/ State Housing Boards and similar bodies for the loans granted by them to private borrowers who are unable to offer clear and marketable title to property, provided banks are otherwise satisfied with the capacity of the borrowers to adequately service such loans.

(v) Banks may issue guarantees on behalf of their constituents, favouring Development Agencies/ Boards like Indian Renewable Energy Development Agency, National Horticulture Board, etc., for obtaining soft loans and/or other forms of development assistance.

2.4.2.5 Infrastructure projects

Keeping in view the special features of lending to infrastructure projects, banks have been given discretion in the matter of issuance of guarantees favouring other lending agencies, subject to the following conditions:

(i)    The bank issuing the guarantee takes a funded share in the project at least to the extent of 5 percent of the project cost and undertakes normal credit appraisal, monitoring and follow-up of the project.

(ii)   The guarantor bank has a satisfactory record in compliance with the prudential regulations, such as, capital adequacy, credit exposure, norms relating to income recognition, asset classification and provisioning, etc.

2.5.      Payment of invoked guarantees

2.5.1    Where guarantees are invoked, payment should be made to the beneficiaries without delay and demur on the pretext that legal advice or approval of higher authorities is being obtained.

2.5.2    Such delays erode the value of the bank guarantees, the sanctity of the scheme of guarantees, image of banks and may also lead to unnecessary litigation. In the case of guarantees in favour of Government departments, this not only delays the revenue collection efforts but also gives an impression that banks are in collusion with the parties.

2.5.3    There should be an effective system 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 in the case of financial guarantees.

2.5.4    the banks should have a proper mechanism for making payments in respect of invoked guarantees promptly, so that no room is given for complaints. When such complaints are made, particularly by the Government departments, the Chief Executive Officer, should personally look into it.

2.5.5    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.

2.5.6    As per the judgement of Supreme court, the commitment of the banks must be honoured, free from interference by the courts. Except in case of fraud or any case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere'.

2.5.7    It is absolutely essential for banks to appraise the proposals for guarantees with the same diligence, as in the case of fund based limits, and obtain adequate cover by way of margin so as to prevent the constituents to develop a tendency of defaulting in payments.

2.5.8    (i)         Banks are required to ensure that the guarantees issued the Government are honoured without delay and hesitation upon invocation, unless there is a Court order restraining the banks.

            (ii)        Any decision not to honour the obligation may be taken, at a fairly senior level and only in the circumstances where any such payment to the beneficiary would not be deemed a rightful payment in accordance with the terms and conditions of the guarantee under the Indian Contract Act, 1872.

     (iii)        Sufficient powers should be delegated so that delay on account of reference to higher authorities for payment does not occur.

            (iv)       For any non-payment of guarantee in time, staff accountability should be fixed and stern disciplinary action including award of major penalty such as dismissal, should be taken against the delinquent officials at all levels.

            (v).       Where banks have 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.

2.5.9    (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, banks 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 honouring the obligation under guarantee, unless the guarantor bank decides to file any appeal against the order of the High Court.

(iii)       In case of any disputes, honouring can be done under protest, if necessary, and the matters of dispute pursued separately.

(iv)       The Government, on their part, have advised the various Government departments, etc. that the invocation of guarantees should be done after careful consideration at a senior-level.

(v)        Non-compliance of the instructions in regard to honouring commitments under invoked guarantees will be viewed by Reserve Bank very seriously and Reserve Bank will be constrained to take deterrent action against the banks.

2.6       Co-acceptance of bills

2.6.1    General

·         Banks co-accept bills of their customers and also discount bills co-accepted by other banks in a casual manner which ultimately turn out to be accommodation bills.

·         Banks also discount bills for sizeable amounts, which are co-accepted by certain Urban Co-operative Banks. On maturity, the bills are not honoured and the co-operative banks, which co-accept the bills, also find it difficult to make the payment.

·         Particulars regarding co-acceptance of bills are not recorded in the bank's books, with the result that the Head Office becomes aware only when a claim is received from the discounting bank.

2.6.2    Safeguards

          (i) Co-acceptance limits should be need based and extended only to those customers who enjoy other limits with the bank.

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

            (iii) The valuation of the goods should be verified to see that there is no over-valuation of stocks.

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

            (v) The banks 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 and these should be scrutinised by Internal Inspectors and commented upon in their reports.

            (x) It is also desirable for the discounting bank to advise the Head Office of the bank, which has co-accepted the bills, whenever such transactions appear to be disproportionate or large.

(xi) Proper periodical returns may be prescribed so that the Branch Managers report such    co-acceptance commitments entered into by them to the Controlling Offices.

(xii) Such returns should also reveal the position of bills that have become overdue, and which the bank had to meet under the co-acceptance obligation.

(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.

(xiv) Before discounting/ purchasing bills co-accepted by other banks for Rs. 2 lakh and above from a single party, the bank should obtain written confirmation of the concerned Controlling Office of the accepting bank.

(xv) When the value of total co-accepted bills discounted/ purchased 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.

2.6.2.1 The 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), NBFCs etc.

2.6.2.2 However, banks may co-accept bills drawn under the Sellers Line of Credit Schemes (since renamed as Direct Discounting Scheme) operated by IDBI Bank Ltd.[1] and all India financial institutions for Bill Discounting operated by IDBI Bank Ltd.[2] 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.

2.6.2.3 There have been instances where branches of banks open L/Cs on behalf of their constituents and also co-accept the bills drawn under such L/Cs. The discounting banks should first ascertain from the co-accepting banks, the reason for co-acceptance of bills drawn under their own L/C and only after satisfying themselves of genuineness of such transactions, they may consider discounting such bills.

2.6.2.4 It would be advisable to determine clear accountability in case these safeguards are not adhered to and officials found to be not complying with the instructions must be dealt with sternly.

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

2.7.1    Banks should not extend any non-fund based facilities or additional/ad-hoc credit facilities to parties or discount bills drawn under LCs, or otherwise, for beneficiaries who are 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. 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.

2.7.2    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 banks and affect the image of the banks. Banks should, therefore, honour their commitments under LCs and make payments promptly.

2.8     Compliance to the regulations of Foreign Exchange Management Act, 2000

Banks should note to comply with the directions, regulations issued under Foreign Exchange Management (Guarantee) Regulations, 2000 as amended from time to time.

Based on RBI master circular dated 1/7/2015. Please visit www.rbi.in  further clarification if required ................... Poppy