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RBI/2021-22/119 DoR.STR.REC.65/09.27.000/2021-22 November 02, 2021 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 ourMaster Circular DCBR. BPD (PCB) MC. No.8/09.27.000/2015-16 dated July 1, 2015on the captioned subject (available at RBI websitehttps://rbi.org.in/). The enclosedMaster Circularconsolidates and updates all the instructions /
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FAQ :
The RBI Master Circular consolidates and updates all instructions and guidelines issued up to November 1, 2021, for Urban Co-operative Banks (UCBs) regarding Guarantees, Co-Acceptances, and Letters of Credit.
UCBs should issue guarantees within restricted limits to protect their financial position. Generally, they should provide financial guarantees rather than performance guarantees, confine them to short-term maturities (not exceeding ten years), and ensure the total volume of guarantee obligations does not exceed 10% of the bank's total owned resources.
UCBs should ascertain the need for co-acceptance, extend limits only to existing customers, and only co-accept genuine trade bills. They must ensure goods are received and verify valuations, avoid co-accepting 'house' or 'accommodation' bills, and maintain proper records. Limits beyond a stipulated amount should be exercised by two authorised officials jointly.
UCBs should issue LCs in security forms only, use two authorised signatures for large LCs (one from Head Office/Controlling Office), and ensure LCs are not for amounts disproportionate to the borrower's genuine requirements. They must also verify that borrowers have adequate arrangements for retiring bills and check inventory levels for raw material purchases.
UCBs must honour bank guarantees promptly upon invocation. Reluctance to do so can damage the banking system's reputation. Courts have ruled that bank commitments must be honoured, with interference only in exceptional cases of fraud or irretrievable injustice.
Yes, UCBs can issue guarantees for imports of essential commodities but must take a cash margin of at least half the amount payable under the guarantee as security.
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Source : https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12187&Mode=0