The RBI has issued a master circular consolidating guidelines for banks regarding the conduct of guarantee business. It categorizes guarantees into financial and performance guarantees, advising banks to primarily focus on financial guarantees and exercise caution with performance guarantees. The guarantees are recommended to be shorter, with a limit of10 years, although exceptions are allowed for guarantees beyond 10 years for projects financed with long-term loans. Banks are urged to refrain from issuing non-fund based facilities to entities without credit facilities, except under certain conditions. Additionally, banks are permitted to issue guarantees to clients of cooperative banks against the cooperative bank's counter guarantee, subject to compliance with regulatory guidelines and satisfactory credit appraisal. Finally, parent company guarantees may besought for subsidiaries with unsatisfactory financial conditions.
The guidelines detail the considerations and procedures for obtaining personal guarantees, particularly from promoters, directors, and other stakeholders, in corporate lending scenarios. It delineates circumstances where personal guarantees may or may not be necessary, emphasizing the importance of thorough assessment and discretion by banks. Factors such as company ownership structure, financial stability, and management continuity are highlighted as determinants for the necessity of personal guarantees. Additionally, the circular addresses the role of personal guarantees in stressed units, guidelines for state government guarantees, and precautions in project exports and export advances, ensuring compliance with regulatory frameworks and risk management practices.
The master circular provides guidelines regarding banks' procedures for review and expediting decisions on export proposals, suggesting the designation of specific branches for dealing with export credit. It also outlines provisions for banks to issue guarantees on behalf of Indian entities for overseas investments, subject to certain conditions, while restricting guarantees for placement of funds with non-bank entities. The circular emphasizes compliance with regulatory frameworks, risk management practices, and prudential limits in issuing guarantees for loans and investments, including exceptions for specific schemes and development projects. Additionally, it clarifies that banks should not provide guarantees for corporate bonds or debt instruments but permits partial credit enhancement for corporate bonds subject to specified conditions.
The master circular outlines guidelines for the payment of invoked guarantees, emphasizing the importance of prompt and unconditional payment to beneficiaries. Delays in honoring guarantees not only erode their value but also tarnish the image of banks and the banking system, potentially leading to legal repercussions. Banks are urged to ensure that entities for whom guarantees are issued have the capacity to fulfill their obligations. The Circular mandates the personal attention of top management to guarantee payment mechanisms, with strict disciplinary actions against any delays or non-compliance. It also addresses issues related to co-acceptance of bills and precautions to be taken in letter of credit (LC) transactions, stressing vigilance, and compliance with regulations. Furthermore, banks should adhere to the regulations of the Foreign Exchange Management Act, 1999 and prudential norms issued by the RBI.
Originally published 08 May 2024
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