Master Circular- Guarantees, Co-Acceptances & Letters of Credit – UCBs

Reserve Bank ogf India

RBI/2023-24/05
DoR.STR.REC.4/09.27.000/2023-24

April 1, 2023

The Managing Director / Chief Executive Officers
All Primary (Urban) Co-operative Banks

Dear Sir / Madam,

Master Circular – Guarantees, Co-Acceptances & Letters of Credit – UCBs

Please refer to our Master Circular DoR.STR.REC.9/09.27.000/2022-23 dated April 1, 2022 on the captioned subject (available at RBI website https://rbi.org.in/). The enclosed Master Circular consolidates and updates all the instructions / guidelines on the subject issued up to March 31, 2023 as listed in the Annex.

Yours faithfully

(Manoranjan Mishra)
Chief General Manager

Master Circular- Guarantees, Co-Acceptances & Letters of Credit

Master Circular

Guarantees, Co-Acceptances & Letters of Credit – UCBs

1. Guarantees

rticular UCB, and the beneficiary of the LC is not a borrower who has been granted regular credit facility by that UCB, the UCB concerned may, as per their discretion and based on their perception about the credit worthiness of the LC issuing bank, negotiate such LCs, subject to the condition that the proceeds will be remitted to the regular banker of the beneficiary of the LC. However, the prohibition regarding negotiation of unrestricted LCs for borrowers who have not been sanctioned regular credit facilities will continue to be in force.

(xi) UCBs negotiating bills as above, under restricted LCs, would have to adhere to the instructions of the Reserve Bank / RCS or CRCS regarding share linking to borrowing and provisions of Co-operative Societies Act on membership

3.4 Payment under LCs – Immediate Settlement of Claims

(i) There have been a few instances where LCs were opened by officials of banks in an unauthorised manner. In certain cases, the LCs transactions were not recorded in the books of the branch by officials issuing them, while in some other cases the amounts of LCs were much in excess of the powers vested in them for the purpose. Subsequently when the banks come to know about the fraudulent issue of LCs, they disclaim liability on the ground that these are transactions involving a conspiracy / collusion between the beneficiary and the constituent.

(ii) It may be appreciated that if the bills drawn under LCs are not honoured, it will 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. It is, therefore, necessary that all the banks should honour their commitments under LCs and make payments promptly leaving no opportunity for any complaints in this regard. Needless to say that banks should take suitable action against the concerned officials as well as the constituents on whose behalf the LCs are opened and the beneficiaries of LCs, if a criminal conspiracy is involved.

4. Other Common Guidelines

4.1 Credit Exposure Norms and Statutory / Other Restrictions on Non-fund Based Limits

(i) UCBs are required to strictly observe exposure norms and statutory / other restrictions prescribed for non-fund based limits (e.g. LCs, Guarantees, Co-acceptances, etc.) as detailed in the Master Circular on ‘Exposure Norms and Statutory / Other Restrictions and other norms issued by RBI from time to time.

(ii) The exposure ceilings and other restrictions particularly prescribed for

a. total credit exposure including non-fund based limits,

b. unsecured guarantees,

c. advances to bank’s Directors,

d. loans and advances to relatives of Directors,

e. advances to nominal members, must be strictly observed.

4.2 Banks should ensure that the systems evolved for recording the details of off-balance sheet transactions are properly followed by all branches. These records should be periodically balanced and internal inspectors should verify the same and offer critical comments.

4.3 Banks should ensure that unauthorised LCs are not issued.

4.4 Banks must lay down clear instructions for their branch staff in respect of loan accounts where such non-funded facilities become funded on account of devolvement of bills covered under the bank’s LCs or due to invocation of guarantees issued by the bank. The banks must evolve proper guidelines to ensure that, accounts where non-funded limits become “funded” are closely monitored and goods covered under devolved bills remain under bank’s control / hypothecation, particularly where malafides are suspected. In cases of goods covered under import LCs, banks must also ensure immediate submission of custom’s copy of the Bill of Entry and take measures as prescribed in the guidelines issued by Foreign Exchange Department.

4.5 A number of banks adopt the practice of parking the dues of the borrower in respect of devolved LCs and invoked guarantees in a separate account which is not a regular sanctioned facility. As a result, these are not reflected in the principal operating account of the borrower. This renders application of the prudential norms for identification of NPAs difficult. It is, therefore, advised that if the debts arising out of devolvement of LCs or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning.

4.6 Banks are encouraged to strengthen their information back up about the borrowers enjoying credit facilities from multiple banks by obtaining declaration from the borrowers about the credit facilities already enjoyed by them from other banks. In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing sanctioned limits of Rs.5.00 crore and above or wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks and introduce a system of exchange of information with other banks. Subsequently banks should exchange information about the conduct of the borrowers’ accounts with other banks at least at quarterly intervals. Banks should also make use of CRILC or credit reports available from Credit Information Companies. The banks should incorporate suitable clauses in the loan agreements regarding exchange of credit information so as to address confidentiality issues. Banks should also obtain regular certification by a professional, preferably a Company Secretary, Chartered Accountant or Cost Accountant regarding compliance of various statutory prescriptions that are in vogue. The formats for collecting information from the borrowers, exchange of information among banks and certification by a professional are furnished in our circular UBD.PCB.No.36/13.05.000/2008-09 dated January 21, 2009 read with circular UBD.PCB.No.59/13.05.000/2008-09 dated April 9, 2009.

4.7 Banks are exposed to various risks in every financial transaction including commitments in the form of Guarantees, Co-acceptances, LCs etc. The managements of UCBs have to base their business decisions on sound risk management systems with the ultimate objective of protecting the interest of depositors and stakeholders. It is, therefore, important that UCBs adopt effective Asset-Liability Management (ALM) systems to address the issues related to liquidity, interest rate and currency risks. Banks should invariably follow the ALM guidelines issued by Reserve Bank in this regard.

Annex

A. List of Circulars consolidated in the Master Circular

B. List of Other Circulars from which instructions relating to Guarantees, Co-acceptances and LCs have also been consolidated in the Master Circular