Non Fund Business

Bank Guarantee: As a part of Banking Business, Bank Guarantee (BG) Limits are sanctioned and guarantees are issued on behalf of our customers for various purposes. Broadly, the BGs are classified into two categories:

Financial Guarantees are direct credit substitutes wherein a bank irrevocably undertakes to guarantee the payment of a contractual financial obligation. These guarantees essentially carry the same credit risk as a direct extension of credit i.e. the risk of loss is directly linked to the creditworthiness of the counter-party against whom a potential claim is acquired. Example – Guarantees in lieu of repayment of financial securities/margin requirements of exchanges, Mobilization advance, Guarantees towards revenue dues, taxes, duties in favour of tax/customs/port/excise authorities, liquidity facilities for securitization transactions and Deferred payment guarantees.

Performance Guarantees are essentially transaction-related contingencies that involve an irrevocable undertaking to pay a third party in the event the counterparty fails to fulfill or perform a contractual obligation. In such transactions, the risk of loss depends on the event which need not necessarily be related to the creditworthiness of the counterparty involved. Example – Bid bonds, performance bonds, export performance guarantees, Guarantees in lieu of security deposits/EMD for participating in tenders, Warranties, indemnities and standby letters of credit related to particular transaction.

Though, BG facility is a Non-fund Facility, it is a firm commitment on the part of the Bank to meet the obligation in case of invocation of BG. Hence, monitoring of Bank Guarantee portfolio has attained utmost importance. The purpose of the guarantee is to be examined and it is to be spelt out clearly if it is Performance Guarantee or Financial Guarantee. Due diligence of client shall be done, regarding their experience in that line of activity, their rating/grading by the departments, where they are registered. In case of Performance Guarantees, banks shall exercise due caution to satisfy that the customer has the necessary experience, capacity and means to perform the obligations under the contract and is not likely to commit default. The Financial Indicators/Ratios as per Banks Loan Policy guidelines are to be satisfactory. The position of receivables and delays if any, are to be examined critically, to understand the payments position of that particular activity. The financial position of counter party, type of Project, value of Project, likely date of completion of Project as per agreement are also to be examined. The Maturity period, Security Position, Margin etc. are also to be as per Policy prescriptions and are important to take a view on charging BG Commissions.

Branches shall use Model Form of Bank Guarantee Bond, while issuing Bank Guarantees in favour of Central Govt. Departments/Public Sector Undertakings. Any deviation is to be approved by Zonal Office. It is essential to have the information relating to each contract/project, for which BG has been issued, to know the present stage of work/project and to assess the risk of invocation and to exercise proper control on the performance of the Borrower. It is to be ensured that the operating accounts of borrowers enjoying BG facilities route all operations through our Bank accounts. To safeguard the interest of the bank, Branches need to follow up with the Borrowers and obtain information and analyze the same to notice the present stage of work/project, position of Receivables, Litigations/Problems if any leading to temporary cessation of work etc.

Letter of Credit: A Letter of Credit is an arrangement by means of which a Bank (Issuing Bank) acting at the request of a customer (Applicant), undertakes to pay to a third party (Beneficiary) a predetermined amount by a given date according to agreed stipulations and against presentation of stipulated documents. The documentary Credit are akin to Bank Guarantees except that normally Bank Guarantees are issued on behalf of Bank’s clients to cover situations of their non performance whereas, documentary credits are issued on behalf of clients to cover situation of performance. However, there are certain documentary credits like standby Letter of Credit which are issued to cover the situations of non performance. All documentary credits have to be issued by Banks subject to rules of Uniform Customs and Practice for Documentary Credits (UCPDC). It is a set of standard rules governing LCs and their implications and practical effects on handling credits in various capacities must be possessed by all bankers. A documentary credit has the seven parties viz., Applicant (Opener), Issuing Bank (Opening of LC Bank), Beneficiary, Advising Bank (advises the credit to beneficiary), Confirming Bank – Bank which adds guarantee to the credit opened by another Bank thereby undertaking the responsibility of payment/negotiation/acceptance under the credit in addition to Issuing Bank), Nominated Bank – Bank which is nominated by Issuing Bank to pay/to accept draft or to negotiate, Reimbursing Bank – Bank which is authorized by the Issuing Bank to pay to honour the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the paying / negotiating or accepting Bank. The various types of LCs are as under:

i) Revocable Letter of Credit is a credit which can be revoked or cancelled or amended by the Bank issuing the credit, without notice to the beneficiary. If a credit does not indicate specifically it is a revocable credit the credit will be deemed as irrevocable in terms of provisions of UCPDC terms.

ii) Irrevocable Letter of credit is a firm undertaking on the part of the Issuing Bank and cannot be cancelled or amended without the consent of the parties to letter of credit, particularly the beneficiary.

iii)Payment Credit is a sight credit which will be paid at sight basis against presentation of requisite documents as per LC terms to the designated paying Bank.

iv) Deferred Payment Credit is a usance credit where payment will be made by designated Bank on respective due dates determined in accordance with stipulations of the credit without the drawing of drafts.

v) Acceptance Credit is similar to deferred credit except for the fact that in this credit drawing of a usance draft is a must.

vi) Negotiation Credit can be a sight or a usance credit. A draft is usually drawn in negotiation credit. Under this, the negotiation can be restricted to a specific Bank or it may allow free negotiation whereby any Bank who is willing to negotiate can do so. However, the responsibility of the issuing Bank is to pay and it cannot say that it is of the negotiating Bank.

vii) Confirmed Letter of Credit is a letter of credit to which another Bank (Bank other than Issuing Bank) has added its confirmation or guarantee. Under this, the beneficiary will have the firm undertaking of not only the Bank issuing the LC, but also of another Bank. Confirmation can be added only to irrevocable and not revocable Credits.

viii) Revolving Credit is one where, under the terms and conditions of the credit, the amount is revived or reinstated without requiring specific amendment to the credit. The basic principle of a revolving credit is that after a drawing is made, the credit reverts to its original amount for re-use by beneficiary. There are two types of revolving credit viz., credit gets reinstated immediately after a drawing is made and credit reverts to original amount only after it is confirmed by the Issuing Bank.

ix) Installment Credit calls for full value of goods to be shipped but stipulates that the shipment be made in specific quantities at stated periods or intervals.

x) Transit Credit – When the issuing Bank has no correspondent relations in beneficiary country the services of a Bank in third country would be utilized. This type of LC may also be opened by small countries where credits may not be readily acceptable in another country.

xi) Reimbursement Credit – Generally credits opened are denominated in the currency of the applicant or beneficiary. But when a credit is opened in the currency of a third country, it is referred to as reimbursement credit.

xii) Transferable Credit – Credit which can be transferred by the original beneficiary in favour of second or several second beneficiaries. The purpose of these credits is that the first beneficiary who is a middleman can earn his commission and can hide the name of supplier.

xiii) Back to Back Credit/Countervailing credit – Under this the credit is opened with security of another credit. Thus, it is basically a credit opened by middlemen in favour of the actual manufacturer/supplier.

xiv) Red Clause Credit – It contains a clause providing for payment in advance for purchasing raw materials, etc.

xv) Anticipatory Credit – Under this payment is made to beneficiary at preshipment stage in anticipation of his actual shipment and submission of bills at a future date. But if no presentation is made the recovery will be made from the opening Bank.

xvi) Green Clause Credit is an extended version of Red Clause Credit in the sense that it not only provides for advance towards purchase, processing and packaging but also for warehousing & insurance charges. Generally money under this credit is advanced after the goods are put in bonded warehouses etc., up to the period of shipment.

Other concepts

i)Bill of Lading: It should be in complete set and be clean and should generally be to order and blank endorsed. It must also specify that the goods have been shipped on board and whether the freight is prepaid or is payable at destination. The name of the opening bank and applicant should be indicated in the B/L.

ii) Airway Bill: Airway bills/Air Consignment notes should always be made out to the order of Issuing Bank duly mentioning the name of the applicant.

iii)Insurance Policy or Certificate: Where the terms of sale are CIF the insurance is to be arranged by the supplier and they are required to submit insurance policy along with the documents.

iv) Invoice: Detailed invoices duly signed by the supplier made out in the name of the applicant should be called for and the invoice should contain full description of goods, quantity, price, terms of shipment, licence number and LC number and date.

v) Certificate of Origin: Certificate of origin of the goods is to be called for. Method of payment is determined basing on the country of origin.

vi) Inspection Certificate: Inspection certificate is to be called for from an independent inspecting agency (name should be stipulated) to ensure quality and quantity of goods. Inspection certificate from the supplier is not acceptable.

vii) Lloyds Certificate: Shipments should be made only by Conference Vessels, which are in the approved list of Lloyds Register of Shipping and classified as Lloyds 100 A1 or its equivalent classification. Age of the vessel should not be more than 25 years and it should be seaworthy. Any other documents required by the applicant, such as weight certificate, packing list, quality certificates should be mentioned in the application.

LoC/LoU is issued for making payment of Import Bills received either under FLC or on collection basis for imports made into India in favour of Overseas Bank or Financial Institution outside India to the extent of US $ 20 million or its equivalent per transaction. The period of such LoC / LoU / Guarantee has to be co-terminus with the period of credit, reckoned from the date of shipment. No roll-over/extension will be permitted beyond the permissible period. The precautions & Conditions for issuance of LOC/LOU are:

• The facility may be considered in cases where there is mismatch between cash flows to meet the FLC commitment on the due date.
• At any point of time the liability under FLC, FIBC and LoC/LoU/Guarantee put together shall not exceed the sanctioned FLC limit.
• The stocks procured under FLC/Letter of Comfort are to be deducted to ensure Working Capital limits are fully secured by adequate Drawing Power.
• Multi currency option is not available to the importer.
• In case the import is made on collection basis, branch should ensure strict compliance of KYC/AML regulations.
• Commission to be collected upfront @ 0.50% per quarter or part thereof for the specified period of liability i.e. actual validity period of LOC / LOU / Guarantee.
• Importer is required to pay all-in-cost (with a ceiling over 6 months LIBOR minus 200 basis points) to the Overseas Bank / FI outside India. All-in-cost includes arranger fee, upfront fee and management fee.

General Guidelines: LC is to be opened for our own customers known to be participating in the trade. The importer should have Import Export (IE) code number allotted by Director General of Foreign Trade. The importer should have adequate sanctioned limits and/or funds provision for clearance of goods. Exchange control copy of license to be obtained in case of the item of import falls under negative list. If the import is freely permissible obtain a declaration from the importer to that effect. Import LCs is to be advised through our Foreign Correspondents. Date of dispatch of goods should be after the date of opening of the LC. When the LC is opened against third party licence, the applicant should hold a proper letter of authority issued by the import licence holder along with the exchange control copy of the licence. The description of goods, validity for shipment, country of shipment and origin are as per the provisions of Policy/Licence etc. Branch is required to obtain confidential report on the overseas seller at the time of opening of LC in case where the value of LC is $25000 and above, however, in case of borrowers with credit rating of A+ the limit is above USD 1 lac. Confidential report is a must in case where the importer dealings with the branch are less than 1 year irrespective of the value.

LC should be opened only in favour of overseas supplier/manufacturer or shipper of goods and not in favour of the applicant himself or his nominee. Terms of shipment such as FOB/C&F/CIF etc are to be clearly mentioned. For C&F and FOB, applicant should hold insurance cover note/policy in the joint names of the Bank and the Opener. The policy should cover at least 110% of the CIF value, and is valid for entire shipment period. Usance period should not exceed 180 days. LC should not be opened for import of goods from banned countries. LC should be signed by two officers, where the value of LC is Rs.10000 and above, where it is not issued through SWIFT. LC should invariably contain a clause that the credit is subject to the provisions of UCPDC 600 and URR 725.

LC should stipulate a condition that the shipments should be made only by conference vessels, which are on the approved list of Lloyds or any certificate to show that the vessel is seaworthy & not more than 25 years old. LC should insist for an inspection certificate issued by a well known international Inspection Agencies. Last date of shipment should be within the validity of Licence. Goods are to be consigned only in the name of LC opening bank and never directly to the buyer. Similarly Documents of title to goods should be required to be sent only to the LC opening Bank but not to the importer directly. The origin of the goods is to be specifically mentioned in the application. No onerous clause is incorporated in the LC, which is detrimental to the interest of the Bank. Payment to be claimed only against presentation of full set of documents. Currency in which payment for import is to be made is in accordance with the permitted methods of payment.

LC – Operational Guidelines: LC covering letter should be addressed to the bank to whom LC is being forwarded and signed by authorized officer of the branch duly mentioning Full name of the signatory of the letter, His/her Designation, Signature number/Power of Attorney number allotted by the bank, Authorized Email ID of the branch and Clearly mentioning that the any information relating to the said Letter of credit can be obtained by email id as provided in the letter by quoting the LC no and date. On receipt of LC, advising bank to send e-mail through its authorized mail ID seeking confirmation from LC opening bank in having issued the said LC. LC opening bank is required to give confirmation by email on the same email id of the LC advising bank, through its authorized e-mail ID only. The confirmation should normally be under the signature of signatories other than those to LCs. Effort may be made to verify the same through search engines such as google whether the firm exists, if so its addresses and other information positive or negative against the firm. Certain information is available on the internet in public domain such as sales tax defaulter or whether registration with sales tax still valid or not. Information is available state wise and within the state circle wise. The same may be confirmed by LC opening and advising banks.

LC discounting/negotiating bank to send confirmation by an email on the authorized email ID of the LC opening bank informing that the name of the courier, its docket no and list of documents dispatched. It has been ascertained that all the necessary details such as name of the beneficiary, date of last shipment, details of goods to be purchased under LC, name of LC advising bank etc is captured in CBS system while opening LC. Even all amendments such as amendment in last date of shipment, date of expiry and even change in usance and the amount of LC are also captured in CBS. Therefore LC confirmation work can also be centralized within the bank. Confirmation needs to be sent though the authorized email of the LC opening bank to the authorized email ID of LC negotiating bank.

The recent development in issuance of Inland Letter of Credit is implementation of Structured Financial Messaging System (SFMS) with effect from 1st January 2013. It is aimed at establishing a safe and secure environment in banking industry for conducting trade finance business and for sending and receiving messages for LC instruments. This serves as the basic platform for transmitting messages of Inland Letter of Credits by all banks in India.