Quasi credit (Non Fund based):

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.

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

Letter of credit problems steps

Srinivas Kante:

For Assessing LC Limit we have to take care of following thing .

1.what will be annual purchases.
2.Wht is EOQ-economic order quantity which is calculated by source of supply,means of transport and any discount.
3.Lead time- the time taken in recving the goods after LC opened
4.Transit time if any
5.Usance time- the time to make the payment at any future date accepted by buyer.
Nw he we calculate we hv to convert annual purchases in to months
Then decide whether LC is DA or DP
Da Lc- the LC for which payment is made by the buyer at any future date after its acceptance by him .this is also called usance LC
dP Lc- LC for which the payment is made on production of documents no further time is given.this is also called sight Lc
So It's clear if we talk about dP Lc- we don't count usance time while calcuting total time/LC cycle so it will be Lead time+transit time
If talk Da Lc- it will be Lead time+transit time +usance time
Hw LC limit is calculated on that basis
Monthly purchases*total timing
Total timing will depend on what LC is opened whether do or da
We assume that
-annual consumption of material to b purchased under LC .........C RS.
-Lead time ...L(months)
-transit time...T(months)
-usance period....U(minths/)

Purchase cycle=L+t+u ie.P(months)
LC limit=P*C/12
Why C/12 bcz C is annual purchasing we hv to convert it in months basis while calculating LC limit