The Reserve Bank of India on 9th November 2021 has consolidated the instructions / guidelines issued to banks till June 30, 2015, relating to Guarantees and Co-acceptances. The circular shall be applicable to all Scheduled Commercial Banks, excluding Payments Banks and Regional Rural Banks.
Banks should adopt the following precautions while issuing guarantees on behalf of their customers.
- 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.
- Unsecured guarantees on account of any individual constituent should be limited to a reasonable proportion of the bank’s total unsecured guarantees. Guarantees on behalf of an individual should also bear a reasonable proportion to the constituent’s equity.
- 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.
- Guarantees executed on behalf of any individual constituent, or a group of constituents, should be subject to the prescribed exposure norms.
Section 20 of the Banking Regulation Act, 1949 prohibits banks from granting loans or advances to any of their directors or any firm or company in which any of their directors is a partner or guarantor. However, certain facilities which, inter alia, include issue of guarantees, are not regarded as ‘loan and advances’ within the meaning of Section 20 of the Act.
Further Banks may issue guarantees on behalf of share and stock brokers in favour of stock exchanges in lieu of security deposit to the extent it is acceptable in the form of bank guarantee as laid down by stock exchanges. Banks may also issue guarantees in lieu of margin requirements as per stock exchange regulations.
Banks should not execute guarantees for enabling placement of funds with NBFCs or other non-banking entities directly or indirectly, including inter-company deposits/ loans. This stipulation will apply to all sources of funds raised by such entities, e.g. deposits/ loans received from trusts and other institutions.
