The Reserve Bank of India on 2nd November 2021 has directed banks to follow certain broad guidelines in respect of their guarantee business. In view of the risks involved in the business of issuance of guarantees, the Primary (Urban) Co-operative Banks (UCBs) should extend guarantees within restricted limits so that their financial position is not impaired.
UCB shall confine their guarantees to relatively short-term maturities. Guarantees should not be issued for periods exceeding ten years in any case. The total volume of guarantee obligations outstanding at any time may not exceed 10 per cent of the total owned resources of the bank comprising paid up capital, reserves and deposits.
UCBs should not normally grant letters of credit (LC) facilities in respect of parties who maintain only nominal current accounts. In case of borrowers maintaining only current accounts, who approach for opening of LCs, banks should invariably ascertain from the existing bankers of the borrowers the reasons as to why they are not extending LC facilities to the concerned borrowers.
Banks should open LCs in respect of such parties only after making proper enquiries in regard to the antecedents of the borrowers from the bankers with whom the parties are enjoying main limits, their financial position and their ability to retire the bills. They should also prescribe a suitable margin and obtain other security, as necessary.
Further, there is no restriction for the banks in opening LCs for import of essential items. However, banks are not permitted to open inland LCs, providing a clause therein which would enable other banks to discount usance bills under the LCs.
