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RBI reminds banks should comply with the guidelines in the conduct of their guarantee business


The reserve Bank of India (RBI) reminded that the banks should comply with the guidelines in the conduct of their guarantee business. 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 the agreement, viz., security, maturity and purpose.


As regards the purpose of the guarantee, as a general rule, the banks should confine themselves to the provision of financial guarantees and exercise caution with regard to performance guarantee business.


As regards maturity, as a rule, banks should guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions.


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.


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 enhancement1, to those customers, who do not avail of 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 a 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 facilities. 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.


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 1 July 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 cooperative banks, they must satisfy themselves that the KYC check has been done properly in these cases.


The guarantee of parent companies may be obtained in the case of subsidiaries whose own financial condition is not considered satisfactory.


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