Quasi credit (Non Fund based):
Quasi Credit signifies financing for trade, and it concerns both domestic and
international trade transactions. A trade transaction requires a seller of goods and
services as well as a buyer. Various intermediaries such as banks and financial
institutions can facilitate these transactions by financing the trade
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:
i) 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.
ii) 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
position of receivables and delays if any, are to be examined critically, to understand
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.
The Financial Indicators/Ratios as per Banks Loan Policy guidelines are to be
satisfactory. Banks are required to be arrived Gearing Ratio (Total outside
liabilities+proposed non-fund based limits / Tangible Networth - Non Current Assets)
of the client and ideally it should be below 10.
In case where the guarantees issued are not returned by the beneficiary even after
expiry of guarantee period, banks are required to reverse the entries by issuing
notice (if the beneficiary is Govt. Department 3 months and one month for others) to
avert additional provisioning. Banks should stop charging commission on expired
Bank Guarantees with effect from the date of expiry of the validity period even if the
original Bank Guarantee bond duly discharged is not received back.
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.
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.
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.
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
Co-acceptance Facilities : RBI Guidelines, Co-acceptance of
Bills covering supply of Goods & Machinery
Bills co-acceptance Co-acceptance is a means of non-fund based import finance
whereby a Bill of Exchange drawn by an exporter on the importer is co-accepted by a
Bank. By co-accepting the Bill of Exchange, the Bank undertakes to make payment to
the exporter even if the importer fails to make payment on due date
RBI guidelines on co-acceptances:
In the light of the above, banks should keep in view the following safeguards:
(i) While sanctioning co-acceptance limits to their customers, the need therefor should
be ascertained, and such limits should be extended only to those customers who enjoy
other limits with the bank.
(ii) Only genuine trade bills should be co-accepted and the banks should ensure that the
goods covered by bills co-accepted are actually received in the stock accounts of the
borrowers.
(iii) The valuation of the goods as mentioned in the accompanying invoice should be
verified to see that there is no over-valuation of stocks.
(iv) The banks should not extend their co-acceptance to house bills/ accommodation
bills drawn by group concerns on one another.
(v) The banks discounting such bills, co-accepted by other banks, should also ensure
that the bills are not accommodation bills and that the co-accepting bank has the
capacity to redeem the obligation in case of need.
(vi) Bank-wise limits should be fixed, taking into consideration the size of each bank for
discounting bills co-accepted by other banks, and the relative powers of the officials of
the other banks should be got registered with the discounting banks.
(vii) Care should be taken to see that the co-acceptance liability of any bank is not
disproportionate to its known resources position.
(viii) A system of obtaining periodical confirmation of the liability of co-accepting banks
in regard to the outstanding bills should be introduced.
(ix) Proper records of the bills co-accepted for each customer should be maintained, so
that the commitments for each customer and the total commitments at a branch can be
readily ascertained, and these should be scrutinised by Internal Inspectors and
commented upon in their reports.
(x) It is also desirable for the discounting bank to advise the Head Office/ Controlling
Office of the bank, which has co-accepted the bills, whenever such transactions appear
to be disproportionate or large.
(xi) Proper periodical returns may be prescribed so that the Branch Managers report
such co-acceptance commitments entered into by them to the Controlling Offices.
(xii) Such returns should also reveal the position of bills that have become overdue, and
which the bank had to meet under the co-acceptance obligation. This will enable the
Controlling Offices to monitor such co-acceptances furnished by the branches and take
suitable action in time, in difficult cases.
(xiii) Co-acceptances in respect of bills for Rs.10,000/- and above should be signed by
two officials jointly, deviation being allowed only in exceptional cases, e.g. nonavailability
of two officials at a branch.
(xiv) Before discounting/ purchasing bills co-accepted by other banks for Rs. 2 lakh and
above from a single party, the bank should obtain written confirmation of the concerned
Controlling (Regional/ Divisional/ Zonal) Office of the accepting bank and a record of the
same should be kept.
(xv) When the value of the total bills discounted/ purchased (which have been coaccepted
by other banks) exceeds Rs. 20 lakh for a single borrower/ group of
borrowers, prior approval of the Head
