ASSESSMENT OF NON FUND

BASED FACILITIES

R.GOVINDARAJAN
HEAD- PROFESSIONAL DEVELOPMENT CENTRE
IIBF SOUTH ZONE
CHENNAI

INDIAN INSTITUTE OF BANKING & FINANCE 1

 SESSION OBJECTIVES
 To learn various Non fund Based Limits in Banking
 To learn risks involved in Non fund Based limits
 To learn about ICC regulations involving Documentary
credits
 To learn about UCPDC 600 and INCOTERMS 2020
 To learn about Global Governance including sanctions
 To learn sanctioning of NFB limits with due diligence
 To learn about various Guarantees and risks involved in
Guarantee Business
 To learn about new developments in Trade Finance
globally
INDIAN INSTITUTE OF BANKING & FINANCE 2
 INTRODUCTION

 FACILITIES TO CLIENTS WITHOUT FLOW OF FUNDS

 EMPHASIS ON NON INTEREST INCOME
 PROFITABLITY OF THE BANK
 BLUE CHIP COMPANIES CAN AVAIL LOW COST OF
FUNDS BOTH FROM DOMESTIC AND FROM ABROAD.
 FAVOURABLE FOR BOTH BANKER AND BORROWER
 CALLED AS QUASI CREDIT

INDIAN INSTITUTE OF BANKING & FINANCE 3

 ADVANTAGES AND RISK FOR BANKS
 NO FUNDS ARE DISBURSED. FUNDS CAN BE USED
FOR OTHER LOANS AND INVESTMENTS.
 MARGIN MONEY IS COLLECTED FROM THE
CUSTOMER
 SOURCE OF NON INTEREST INCOME
 REPUTATION OF THE BANK
 MORE OPERATIONAL CONVENIENCE
 CREDIT RISK EXISTS

INDIAN INSTITUTE OF BANKING & FINANCE 4

 ADVANTAGES TO BORROWERS

 ALTERNATIVE SOURCE OF CREDIT WITH LESSER

OUTLAY OF OWN FUNDS. ( ON DEPOSIT OF
MARGIN MONEY, BANK EXTENDS THE
EQUIVALENT OF FULL CREDIT IN THE FORM OF
NON FUND FACILITIES)
 OPERATIONAL CONVENIENCE
 INDIRECTLY, IT REFLECTS THE FINANCIAL
SOUNDNESS OF THE BORROWER.

INDIAN INSTITUTE OF BANKING & FINANCE 5

 MAJOR NON FUND BASED FACILITIES

 LETTERS OF CREDIT

 BANK GUARANTEES

 CO-ACCEPTANCES

INDIAN INSTITUTE OF BANKING & FINANCE 6

 LETTER OF CREDIT-DEFINITION
 AN UNDERTAKING
 ISSUED BY A BANK
 AT THE REQUEST OF THE BUYER (APPLICANT-
IMPORTER)
 IN FAVOUR OF THE SELLER (BENEFICIARY-EXPORTER)
 WITH AN UNDERTAKING TO HONOR THE
DOCUMENTS BY THE SELLER
 IN ACCORDANCE
 WITH THE TERMS AND CONDITIONS AS SPECIFIED IN
THE CREDIT
INDIAN INSTITUTE OF BANKING & FINANCE 7
LETTER OF CREDIT PROCEDURE IN IMAGES

INDIAN INSTITUTE OF BANKING & FINANCE 8

 FUNDAMENTAL PRINCIPLES OF LETTER OF CREDIT
 AUTONOMY
 disassociated from the actual sales and other contracts
 Thus not affected by any disputes between the exporter and buyer
 Bank is concerned only whether the documents received are complying with
terms and conditions of Letter of credit and if the documents are proper,
the bank is bound to pay the amount.
 THE DOCTRINE OF STRICT COMPLIANCE
 the exporter must respect the written terms “ to the letter” of the letter of
credit
 if there is any discrepancy , the Bank is bound to refuse the document
 the exporter should keep in mind that the Bank may insist on strict
compliance with all requirements stipulated in the letter of credit.

INDIAN INSTITUTE OF BANKING & FINANCE 9

0

INDIAN INSTITUTE OF BANKING & FINANCE 10

INDIAN INSTITUTE OF BANKING & FINANCE 11
EXPORTER VERSUS IMPORTER

INDIAN INSTITUTE OF BANKING & FINANCE 12

 PARTIES INVOLVED IN LETTER OF CREDIT
 ADVISING BANK

 NEGOTIATING BANK

 ACCEPTING BANK

 CONFIRMING BANK

 REIMBURSING BANK

INDIAN INSTITUTE OF BANKING & FINANCE 13

 TYPES OF LETTER OF CREDIT
 INLAND/FOREIGN
 SIGHT/USANCE
 REVOCABLE
 IRREVOCABLE
 CONFIRMED
 BACK TO BACK
 TRANSFERABLE
 RED CLAUSE
 GREEN CLAUSE
 REVOLVING
 STANDBY LC

INDIAN INSTITUTE OF BANKING & FINANCE 14

DIFFERENCE BETWEEN LC AND STANDBY LC

INDIAN INSTITUTE OF BANKING & FINANCE 15

INDIAN INSTITUTE OF BANKING & FINANCE 18
INDIAN INSTITUTE OF BANKING & FINANCE 19
 CREDIT IMPLICATIONS FOR BANKERS

MACRO RISKS TRANSACTION

RISKS

BANK RISKS Transactions risks

COUNTRY
Payment History Financial standing of the
EXPOSURE
Habit of rejecting Customer
Operational staff Documents
will go for more Types of goods
profitable Country with ( soft/Perishable/Hard)
transactions. Forex restrictions
Country in high Price fluctuations
Hence country
Exposure limit is risk Category
Bank Report about
to be set by each Dun and Brad Counter Party
Bank. street reports
Recent Drop in Oil Prices
in futures Markets

INDIAN INSTITUTE OF BANKING & FINANCE 20

 CREDIT IMPLICATIONS FOR BANKERS (CONTD.)
 THE BANK’S LIABILITY IS ABSOLUTE AND UNCONDITIONAL
 ASSESSMENT OF APPLICANT AND HIS ABILITY/WILLINGNESS
TO PAY
 LONG STANDING CUSTOMERS ONLY/REGULAR IN THE
TRADING OF GOODS
 CASH AND COLLATERAL SECURITY
 CASH FLOW AND CREDENTIALS OF THE BENEFICIARY
 COUNTRIES/BANKS AND GOODS /COUNTRY RISK INVOLVED
IN THE TRANSACTION
 FATF/OFAC/SDN/SAL LIST OF ECGC/RBI/DGFT/TRADE
POLICY (2015-2020)
 TRADE BASED MONEY LAUNDERING

INDIAN INSTITUTE OF BANKING & FINANCE 21

OFFICE OF FOREIGN ASSET CONTROL (OFAC)

INDIAN INSTITUTE OF BANKING & FINANCE 22

INDIAN INSTITUTE OF BANKING & FINANCE 23
INDIAN INSTITUTE OF BANKING & FINANCE 24
INDIAN INSTITUTE OF BANKING & FINANCE 25
 ASSESSMENT OF LETER OF CREDIT LIMIT
 TERMS OF LC- DP/DA
 AVERAGE AMOUNT OF LC
 PERODICITY OF SUPPLY BY THE SELLER
 CREDIT PERIOD (USANCE)
 MIN. LEVEL OF STOCKS
 LC OUTSTANING AT A PARTICULAR TIME
 STORAGE/QUOTA/MINIMUM SIZE/CIF VALUE
 ADHERENCE TO RBI/FEMA GUIDELINES/
FTP (2015-2020)
INDIAN INSTITUTE OF BANKING & FINANCE 26
 = C (Rs. In lacs)

PURCHASE CYCLE
Lead time from = L (months)
opening of credit to
The sum of L, T and U can be called shipment
the purchase cycle. We may denote
the purchase cycle by P (months). The
cycle commences at the point of Transit Period for = T (months)
placement of order, whereas the final goods till it arrives at
payment is made at the end of the the factory
cycle.
The quantum of LC limit may now be Credit ( Usance) = U (months)
worked out using the expression period available
( P *C/12)

INDIAN INSTITUTE OF BANKING & FINANCE 27

 LC LIMIT CALCULATION EXAMPLE
Time from placement of order to shipment = 10 days

Transit period = 20 days

Usance Period from arrival of goods = 3 months

Therefore, total purchase cycle = 4 months

Monthly consumption of materials = Rs. 100 lakhs

Letter of credit Limit = Rs. 400 lakhs

INDIAN INSTITUTE OF BANKING & FINANCE 28

 ASSESSMENT OF LETTER OF CREDIT LIMIT WITH DA AND EOQ

RS. IN
LAKHS
TOTAL ANNUAL PURCHASE OF RM (A) 24.00
MINIMUM ORDER LEVEL (EOQ) (B) 6.00
LEAD TIME (MONTHS) 1
USANCE AVAILABLE (MONTHS) 6
TOTAL LEAD TIME + USANCE (C) MONTHS 7
NO.LCS TO BE OPENED (A/B) i.e (D) 4
FREQUENCY OF LCS (12/D) i.e (E) MONTHS 3
LC OUTSTANDING AT ANY POINT OF TIME (C/E) i.e., 7/3 2.33
(MONTHS)
ROUNDED TO NEAREST FIGURE (F) 2
LC LIMIT (2*6.00) ( 6 lakhs represents Minimum Economic 12.00
order quantity)
LC LIMIT WITHOUT EOQ (2.33*6.00) 14.00

INDIAN INSTITUTE OF BANKING & FINANCE 29

INDIAN INSTITUTE OF BANKING & FINANCE 30
 Buyer’s credit and current position

 REFERS TO LOANS FOR PAYMENT OF IMPORTS ARRANGED

ON BEHALF OF THE IMPORTER THROUGH AN OVERSEAS
BANK.
 LARGE NUMBER OF INDIAN BANKS BRANCHES IN ABROAD
PLAYED CRUCIAL ROLES IN FINANCING BUYER’S CREDIT.
 AFTER NIRAV MODI EPISODE IN PNB, RBI VIDE A.P. (DIR
SERIES) CIRCULAR NO. 20 DATED MARCH 13, 2018
DISCONTINUED THE LETTER OF UNDERTAKING (LOU) AND
LETTER OF COMFORT(LOC) FOR TRADE CREDITS.
 40% OF THE INDIAN BANKS OVERSEAS BRANCHES BUSINESS
HAS COME DOWN DUE TO THIS LOU BAN.
INDIAN INSTITUTE OF BANKING & FINANCE 31
 BENEFITS OF BUYER’S CREDIT
 EXPORTER GETS PAID ON DUE DATE. IMPORTER GETS TIME TO
MAKE THE IMPORT PAYMENT AS PER HIS CASH FLOWS.
 THE IMPORTER CAN DEAL WITH EXPORTER ON SIGHT BASIS
AND GET BETTER DISCOUNT.
 THE CURRENCY CAN BE IN ANY FOREIGN CURRENCY
( USD/GBP/EURO/JPY ETC.,) DEPENDING ON IMPORTER’S
CHOICE.
 THE CURRENCY OF IMPORT CAN BE DIFFERENT FROM THE
FUNDING CURRENCY, WHICH ENABLES IMPORTERS TO TAKE A
FAVOURABLE VIEW OF A PARTICULAR CURRENCY.

INDIAN INSTITUTE OF BANKING & FINANCE 32

END OF LOU STORY

INDIAN INSTITUTE OF BANKING & FINANCE 33

INDIAN INSTITUTE OF BANKING & FINANCE 34
 SUPPLIERS CREDIT
 RELATES CREDIT FOR IMPORTS INTO INDIA
 EXTENDED BY THE OVERSEAS SUPPLIERS OR FINANCIAL
INSTITUTIONS OUTSIDE INDIA
 INTEREST ON LIBOR LINKED RATES
 AGAINST USANCE LETTER OF CREDIT
 THE REASON FOR SUPPLIER CREDIT IS DUE TO THE
SUPPLIER WANTS SIGHT PAYMENT WHEREAS THE
IMPORTER WANTS CREDIT PERIOD FOR THE
TRANSACTION.

INDIAN INSTITUTE OF BANKING & FINANCE 35

 BENEFITS AND ADVANTAGES
FOR IMPORTERS
 AVAILABILITY OF CHEAPER FUNDS FOR IMPORT OF RAW
MATERIALS AND CAPITAL GOODS
 EASE OF SHORT TERM FUND PRESSURE AS HE IS ABLE TO GET
CREDIT
 ABILITY TO NEGOTIATE BETTER PRICE WITH SUPPLIERS
 ABLE TO MEET THE SUPPLIERS REQUIREMENT OF PAYMENT AT
SIGHT
FOR SUPPLIERS
 REALISE PAYMENT AT SIGHT
 AVOIDING THE IMPORTER’S CREDIT RISK BY MAKING SETLLEMENT
WITH LC

INDIAN INSTITUTE OF BANKING & FINANCE 36

 PRECAUTIONS FOR THE BANKS IN LETTER OF CREDIT TRANSACTIONS

 ONLY GENUINE AND COMMERCIAL TRADE TRANSACTIONS FOR

CONSTITUENT BORROWERS.
 NO FUND BASED AND NON FUND BASED FACILITIES TO NON
CONSTITUENT BORROWERS
 CREDIT TO REGULAR CONSTITUENT BORROWER IN CASE OF
RESTRICTED LC TRANSACTIONS. NO NEGOTIATION IN CASE OF
UNRESTRICTED TRANSACTIONS.
 COOPEARTIVE BANK TRANSACTIONS STRINGENT KYC/AML/
MONITORING
 LC PURCHASE/DISCOUNT/NEGOTIATION ONLY ON WITHOUT
RECOURSE BASIS.
 NO ACCOMODATION BILLS AND CLOSE MONITORING OF
GROUP/SISTER COMPANY TRANSACTIONS IS ESSENTIAL.

INDIAN INSTITUTE OF BANKING & FINANCE 37

 NON CONSTITUENT BORROWER OF A BANK
 THOSE WHO ARE NOT HAVING CREDIT FACILITIES WITH A BANK
 FACILITIES CAN BE PROVIDED BY
 BOARD APPROVED POLICY
 VERIFICATION OF CUSTOMER CREDENTIALS
 CREDIT APPRAISAL AND DUE DILIGENCE
 KYC/AML/CFT/PMLA ACT 2002
 SUBMISSION OF CREDIT INFORMATION TO CREDIT
INFORMATION COMPANIES
 EXPOSURE NORMS
 REFER RBI LATEST GUIDELINES ON LOANS AND ADVANCES

INDIAN INSTITUTE OF BANKING & FINANCE 38

 BANK GUARANTEES
 UNDER SECTION 126 OF INDIAN CONTRACT ACT, 1872
 TRILATERAL CONTRACT BETWEEN
 PRINCIPAL DEBTOR/CREDITOR/AND SURETY
 THE PARTIES TO THE CONTRACT ARE
 APPLICANT: PERSON AT WHOSE REQUEST THE GUARANTEE IS
ISSUED
 BENEFICIARY: TO WHOM THE GUARANTEE IS TO BE GIVEN AND
WHO ENFORCES IT IN CASE OF DEFAULT
 GUARANTOR: WHO UNDERTAKES TO DISCHARGE THE
OBLIGATIONS OF THE APPLICANT IN CASE OF DEFAULT.

INDIAN INSTITUTE OF BANKING & FINANCE 39

BANK GUARANTEE DIAGRAM

INDIAN INSTITUTE OF BANKING & FINANCE 40

 TYPES OF GUARANTEES
 PERFORMANCE GUARANTEES: FAILS TO PERFORM A NON
FINANCIAL OBLIGATION/LOSS DEPENDS ON THE EVENT.
 FINANCIAL GUARANTEES: DIRECT CREDIT
SUBSTITUTES/CREDIT RISK EXISTS/CREDITWORTHINESS OF THE
BORROWER/IN FAVOUR OF TAX/CUSTOMS/EXCISE/COURT
AUTHORITES/DEPENDS ON FINANCIAL STRENGTH AND
LIQUIDITY OF THE CUSTOMER.
 DEFERRED PAYMENT GUARANTEES: IN FAVOUR OF A SUPPLIER
OF A PLANT AND MACHINERY WHO SOLD ON DEFERRED
PAYMENT BASIS/GUARANTEE IS PAYMENT OF INSTALLMENT/
A MEHOD OF FINANCING FIXED ASSETS.

INDIAN INSTITUTE OF BANKING & FINANCE 41

GUARANTTES IN IMAGES

INDIAN INSTITUTE OF BANKING & FINANCE 42

 TYPES OF GUARANTEES
 BID BOND GUARANTEE
 PERFORMANCE GUARANTEE
 ADVANCE PAYMENT GUARANTEE
 RETENTION MONEY GUARANTEE
 MAINTENANCE GUARANTEE/BONDS
 GUARANTEES ON BEHALF OF TRAVEL
AGENTS AND BUSINESSMEN

INDIAN INSTITUTE OF BANKING & FINANCE 43

 ASSESSMENT OF GUARANTEE LIMIT
 DEPEND ON NATURE/ACTIVITY OF THE
BORROWER/PURPOSE/TYPE OF GUARANTEE REQUIRED.
 CLASSIFY THEM WHETHER IT IS FINANCIAL OR PERFORMANCE ?
 FUNCTION OF VOLUME OF ACTIVITY PROPOSED AND THE
DURATION OF SUCH GUARANTEES.
 BANK SHOULD LIMIT THEMSELVES IN CASE OF FINANCIAL
GUARANTEES AND EXERCISE CAUTION IN CASE OF
PERFORMANCE GUARANTEES
 FINANCIAL GUARANTEES DEPEND ON APPLICANTS FINANCIAL
WORTH/CREDIT WORTHINESS/CAPACITY TO TAKE FINANCIAL
RISKS
 NO BANK GUARANTEE SHOULD NORMALLY HAVE A MATURITY
OF MORE THAN 10 YEARS
INDIAN INSTITUTE OF BANKING & FINANCE 44
 GUARANTEE LIMIT-EXAMPLE
S.NO PARTICULARS AMOUNT
(IN LAKHS)

A OUTSTANDING BGs 500

B CANCELLATION ENVISAGED 300

C REQUIREMENT INCIDENTAL TO REGULAR OPERATIONS 600

D REQUIREMENT PERTAINING TO CONTINGENT EVENTS 100

E REQUIREMENT OF BG ( A-B)+C+D 900

INDIAN INSTITUTE OF BANKING & FINANCE 45

 PERIOD OF EXPIRY OF GUARANTEE
 ALL BANK GUARANTEES SHOULD HAVE AN EXPIRY PERIOD AND EXPIRY DATE
 THE FOLLOWING CLAUSE TO BE INCORPORATED IN ALL GUARANTEES
 NOTWITHSTANDING ANYTHING CONTAINED HEREIN:
 OUR LIABILITY UNDER THIS BANK GUARANTEE SHALL NOT
EXCEED RS…..ONLY
 THIS BANK GUARANTEE IS VALID UPTO (DATE); AND
 WE ARE LIABLE TO PAY THE GUARANTEED AMOUNT OR ANY
PART THEREOF UNDER THIS BANK GUARANTEE ONLY IF YOU
SERVE UPON US A WRITTEN CLAIM OR DEMAND ON OR
BEFORE…… (DATE OF EXPIRY OF GUARANTEE)
 PERIOD CLAIM TO BE MENTIONED

INDIAN INSTITUTE OF BANKING & FINANCE 46

 PERIOD OF EXPIRY OF GUARANTEE (CONTD..)

 RECENT AMENDMENT TO SECTION 28 OF THE CONTRACT ACT

 STRUCK DOWN PROVISIONS INSERTED BY THE 1997
AMENDMENT ACT
 THE SPECIFIED PERIOD IS NOT LESS THAN ONE YEAR FROM
THE DATE OF OCCURRING OR NON OCCURRING OF A SPECIFIED
EVENT FOR EXTINGUISHMENT OR DISCHARGE OF SUCH PARTY
FROM THE SAID LIABILITY.
 THE ISSUING BANK NEED TO INCLUDE A CLAIM PERIOD OF
MINIMUM ONE YEAR IN THE LIMITATION CLAUSE.
 IF THE BENEFICIARY RAISES A CLAIM AFTER THE MANDATORY
ONE YEAR PERIOD, THE BANK IS FREE TO REJECT THE CLAIM.

INDIAN INSTITUTE OF BANKING & FINANCE 47

 ONEROUS CLAUSES
 AUTOMATIC RENEWAL OF BG AT THE REQUEST OF ONLY BY THE
BENEFICIARY
 CLAUSE WHICH PROVIDES FOR PAYMENT WITHOUT INVOKING
 JURISDICTION CLAUSE IN CASE OF DISPUTE
 CLAUSE WHICH SPECIFIES TIME LIMIT FOR PAYMENT LIKE 24/48
HOURS MAY LEAD TO PRACTICAL PROBLEMS
 CLAUSES RELATING TO PAYMENT OF INTEREST ON THE
INVOKED AMOUNT.
 ASSIGNMENT CLAUSE IN GUARANTEE (INHERENT RISK
INVOLVED)

INDIAN INSTITUTE OF BANKING & FINANCE 48

 GUARANTEES AND CAPITAL REQUIREMENT

 BANKS TO MAINTAIN CERTAIN CAPITAL FOR NON FUND BASED LIMITS

 FOLLOW UP OF CLOSED GUARANTEES TO CONSERVE CAPITAL
 EFFORTS SHOULD BE MADE TO GET THE ORIGINAL GUARANTEES
BACK AFTER EXPIRY
 REVERSING THE LIABILITY WILL REDUCE THE CAPITAL
REQUIREMENTS FOR THE BANK
 IF THE ORIGINAL GUARANTEES ARE NOT RETURNED BY THE
BENEFICIARY, BANKS SHOULD FOLLOW UP AND SEND NOTICES FOR
EARLY RECEIPT OF EXPIRED GUARANTEES TO CONSERVE CAPITAL.
 FINALLY, THE PAYMENT OF INVOKED AMOUNT TO BE PAID
EXPEDITIOUSLY.

INDIAN INSTITUTE OF BANKING & FINANCE 49

 CREDIT CONVERSION FACTORS-OFF BALANCE SHEET ITEMS
Letter of credit and guarantees

 Standby LC ( as financial guarantees for loans and securities) – 100%

 Credit enhancements/acceptances -100%
 Performance bonds/Bid Bonds/Indemnity/SBLC for particular Transaction –
50%
 Trade letter of credit with underlying transactions – 20%
 The risk weighted amount of an off balance sheet item that gives to
credit exposure is generally calculated by means of Two steps process:
 converted into a credit equivalent amount by multiplying the
notional amount by relevant CCF
 the relevant credit equivalent amount will be multiplied by
applicable risk weight

INDIAN INSTITUTE OF BANKING & FINANCE 50

 PRECAUTIONS
 SECTION 20 OF THE BANKING REGULATION ACT, 1949
PROHIBITS BANKS FROM ISSUING GUARANTEES TO ITS
DIRECTORS.
 NO WITNESSING OF BANK GUARANTEE DOCUMENTS.
ADVALOREM STAMP DUTY APPLICABLE
 NO BG AGAINST LOANS OR DEPOSITS WITH NBFCS
 NO BG AGAINST LOANS PROVIDED BY BANKS ABROAD EXCEPT
AS ALLOWED BY FEMA REGULATIONS
 NO BG FOR NON CONSTITUENT BORROWERS
 NO BG IN FAVOUR OF OTHER INSTITUTIONS ON BEHALF OF
THEIR BORROWERS AGAINST THE LOAN FACILITIES PROVIDED BY
THEM

INDIAN INSTITUTE OF BANKING & FINANCE 51

GUARANTEES ISSUED AGAINST EXPORT/IMPORT REQUIREMENTS
AS PER FEMA REGULATIONS

 BID BONDS/PERFORMANCE BONDS AND GUARANTEES FOR EXPORTS

 ISSUE OF BANK GUARANTEE IN FAVOUR OF FOREIGN AIRLINES/IATA
 UNCONDITIONAL GUARANTEES IN FAVOUR OF OVERSEAS EMPLOYERS AND
IMPORTERS ON BEHALF OF INDIAN EXPORTERS
 BG ON BEHALF OF SERVICE IMPORTERS
 BG FOR IMPORTS UNDER FOREIGN LOANS AND CREDITS
 BG IN RESPECT OF TRADE CREDITS FOR IMPORTS INTO INDIA
 BG ON BEHALF OF WHOLLY OWNED SUBSIDIARIES/JOINT VENTURES
ABROAD
 OVERSEAS GUARANTEES TO BE ISSUED UNDER URDG (PUBLICATION 758)

INDIAN INSTITUTE OF BANKING & FINANCE 52

 PREVENTION OF FRAUDS IN GUARANTEE ISSUANCE

 SHOULD AVOID GIVING UNSECURED GUARANTEES IN

LARGE AMOUNTS AND FOR MEDIUM AND LONG TERM
PERIODS
 TO BE LIMITED TO A REASONABLE PROPORTION TO
BANK’S TOTAL UNSECURED GUARANTEES
 WITHIN EXPOSURE NORMS OF THE BANKS
 DUE DILIGENCE AND FINANCIAL CAPACITY TO REPAY
 SUFFICIENT EXPERIENCE AND CAPACITY TO
PERFORM IN CASE OF PERFORMANCE GUARANTEE
 ONLY TO CONSTITUENT BORROWERS
INDIAN INSTITUTE OF BANKING & FINANCE 53
 CONSIDERATIONS FOR ISSUANCE OF BANK GUARANTEES

 Overall risk assessment of the Borrower to be considered

along with other fund/non fund based limits
 Past record of invocation
 Issuance of Bid bond guarantee may lead to issuance other
guarantees and hence standalone guarantee limits should not
be considered.
 Indiscriminate bidding and higher margin to be stipulated
 Mobilisation of advances against guarantees and tallying with
Balance sheet will help whether the money has been
diverted to other subsidiaries.
 Order book of this year should be compared with last year’s
figures. Huge request means the borrower is in the process of
overextending may hamper his execution abilities.
INDIAN INSTITUTE OF BANKING & FINANCE 54
 CO-ACCEPTANCE OF BILLS
 BANKS CO ACCEPT THE BILL OF EXCHANGE ALONG WITH THE
DRAWEE
 THEY ADD THE STRENGTH OF THEIR NAME
 ONLY FOR BORROWERS/CONSTITUENTS AND GENUINE TRADE
TRANSACTIONS
 NO CO ACCEPTANCE OF HOUSE BILLS AND ACCOMODATION BILLS
 IN CASE OF SUPPLY OF RAW MATERIALS, GOODS COVERED
SHOULD BE HYPOTHECATED TO THE BANK AND NO ADVANCE TO
BE GRANTED TO AVOID DOUBLE FINANCING.
 IN INTERNATIONAL TRADE TRANSACTIONS CO ACCEPTANCE IS
CALLED AS AVAILSATION. (“POUR AVAL” FRENCH WORD)

INDIAN INSTITUTE OF BANKING & FINANCE 55

 ADDITIONAL POINTS FOR DISCUSSION
 Conditional/unconditional guarantees
 Invocation of Guarantees by Banks/Poser to Finance Ministry/Court Views
 Egregious Fraud/Special Equities in a court of law
 Burden of Proof/Irretrievable injustice and injury/Iran/Yemen example
 In fact, the position re-emphasized by the Bombay High Court in Transrail
Lighting Limited v. Public Electricity Corporation Republic of Yemen, where a
plaintiff was unable to perform a contract due to civil unrest in Yemen and
travel advisories issued by the Government of India against travelling to
Yemen.
 In BG invocation multiple invocation possible?/ Obtaining original
Guarantee/Court views
 Interchangeability of NFB limits/Time Horizon and Risk
 Funded Bank Guarantee- HDFC Bank versus India Nivesh shares and
securities Pvt. Ltd and Edelweiss Custodial services Pvt. Ltd. ( case under
arbitration)
INDIAN INSTITUTE OF BANKING & FINANCE 56
Questions ?

INDIAN INSTITUTE OF BANKING & FINANCE 57

 THANKS

Mail: [email protected]
Phone: 9619160141

INDIAN INSTITUTE OF BANKING & FINANCE 58