Objective of Session

 To understand NFB facility & its advantage

 Types of NFB facility (BG, LC & DPG)
 Guarantees & its type
 Practical aspects of Bank Guarantee. e.g. Issue of
BG, Delegation and Reversal of BG
 Assessment of BG Limit
 Concept and mechanism of Letter of Credit (LC)
 Different parties to LC
 Types of LC
 Assessment of LC Limit
 NFB facility & its advantage

Facilities which do not involve out flow of funds is

called non-fund based facility.
Advantages of NFB Facility:
 Very remunerative -no blockage of funds
 Earn non interest income (commission)
 Availability of deposits in the form of margin money

However
Bank required to maintain capital adequacy
Poor appraisal may result in frequent invocation -
bank may at times be required to borrow at high
cost
 Types of NFB Facility

The non-fund based facilities are divided in

three broad categories:

Guarantees
Letters of credit
Deferred payment guarantees.
 Guarantees

Guarantee is a contract to perform the promise or

discharge the liability of the third person, in the
event of his default.
(Sec 126 of Contract Act – 1872)

There are three parties to a contract of Guarantee:

a) Principal debtor
b) Creditor
c) Guarantor
 TYPES OF GUARANTEE

Broadly BG are of two types:

FINANCIAL GUARANTEE

PERFORMANCE GUARANTEE
 FINANCIAL GUARANTEE

A contract that helps to ensure that a Creditor is

reimbursed on the failure of a Debtor to pay the o/s
debt.
This involves actual parting of money, or its
equivalent value, by the creditor to the debtor with
the condition that the same will be paid with or
without interest.
Guarantee issued in favour of Banks / FIs
guaranteeing the repayment of advances,
Guarantee in favour of IT / Sales tax /Custom depts.
etc. are Financial guarantees.
The capital adequacy norms stipulate, the risk
weightage 100% for financial guarantee.
 PERFORMANCE GUARANTEE

Guarantee issued for the due performance of a

contract or an obligation arising out of the contract
with in a given time frame constitutes a Performance
Guarantee.
 The guarantee lays stress on performance of
certain acts like
Supply of a product/services.
Completion of any work.
Achievement of a certain level of Exports etc.
 PERFORMANCE GUARANTEE

Bid bonds, guarantee in lieu of earnest money,

Guarantee on behalf of a contractor for due
completion of the work, Guarantee given to railways
for due performance, etc. comes under performance
guarantee category.
This type of guarantee should be issued only on
behalf of customers with proven capacity to
undertake / execute the work for which guarantee is
issued.
The capital adequacy norms stipulate the risk
weightage 50% for performance guarantee.
 DEFERRED PAYMENT GUARANTEE

DPG is issued, in case of purchase of capital goods

involving huge amount and the debtor is given the
facility of paying in installments, e.g. Machinery.
There are four Parties: Buyer, Seller, Buyer’s Bank
& Seller’s Bank.
MECHANISM:
Down payment around 10 to 15% of the cost of
machinery and balance including interest to be paid
in installments spread over 5 to 10 years.
 DEFERRED PAYMENT GUARANTEE

The bills are accepted by buyers and co-accepted

by buyers' bank.
Due to co-acceptance by buyer’s bank seller is able
to discount these bills at their bank at better price.
On due date seller’s bank present the bill to buyer’s
bank.
Buyer’s bank make payment by receiving the
amount from buyers.
If buyer is fails to pay, bank has to pay, to recover
later, hence DPG is a contingent liability for bank.
Appraisal should be as rigorous and meticulous as
for a term loan
 ISSUE OF GUARANTEE

Party on whose behalf guarantee is issued should

be a customer of bank & should have sanctioned
limits.
To the Borrower:
As per usual delegation which is separate for LG at
100% / 25% / 10% margin. (ref IC 222 dt. 15.09.15)
To the Non-Borrower: (can be given to those who don’t
avail any fund based facility from any bank in India)
At 100% margin: usual delegation as applicable for
LG at 100% margin to Borrower
 ISSUE OF GUARANTEE

At ˂ 100% margin

 Branches: No delegation
 RLCC & ZLCC: 50% of usual delegation for NFB
limit per party
 Central Office: Usual Delegation

 Bid Bond Guarantee can be sanctioned only by

Executives in Scale V and above as Branch
Heads & RLCC / SLCC and above
 ISSUE OF GUARANTEE

BG format has to be scrutinised to ensure that

Bank’s liability is restricted to a certain amount and
remains valid for a definite period of time.
(BG – Model format – IC 9092 dt.07.10.2011)
 LIMITATION CLAUSE (REVISED w.e.f. 08.01.97)
Our liability under this bank guarantee shall not
exceed Rs.------- only.
This bank guarantee shall be valid up to----------
We are liable to pay the guarantee amount or any
part thereof under this bank guarantee only and
only if you serve upon us a written claim or
demand on or before --------(date of expiry of
guarantee)
Ensure that the limitation clause is typed as last
para of the guarantee bond preferably starting with
the wordings as “Not withstanding anything
contained herein above”
 Issue of Guarantee - Procedure

Ensure that the Guarantee number (15 digit)

issued by the system should be mentioned on all
pages of the guarantees.
Guarantee can be issued for a max. period of 10
years. (BG for >10 Yrs can be issued only after
prior permission from CAC III & above).
Bank Guarantee issued for Rs.50,000/- and above
should be signed by 2 officers jointly.
In case of branch where there is one signatory
only, that branch may issue BG for Rs.50,000/-
and above only after seeking prior approval from
the Regional Office.
 Issue of Guarantee - Procedure
• E-confirmation of guarantee (IC 9543 dt.30.03.2013)
• BG Rs.10 lacs and above: ECC will seek telephonic /
electronic confirmation from BG issuing branch along with
verification from finacle. However, BG below Rs.10 lacs
will be verified from finacle.
• Branches to incorporate the address of E-confirmation
cell(as under) so that beneficiary can contact this Cell for
confirmation.
 REVERSAL OF EXPIRED GUARANTEE

 Normally expired guarantee can be reversed on

receiving original guarantee deed duly discharged or
after letter of discharge received from the
beneficiary.
 If not received even after the date of validity of the
guarantee:-
 Send a REGD AD notice to the beneficiary stating that the
bank stands discharged from all liabilities as the guarantee
is expired and that the beneficiary should return the
Original Guarantee duly cancelled with in 15 days from the
receipt of the notice.
 REVERSAL OF EXPIRED GUARANTEE

The acknowledgement card evidencing delivery of

the notice should be preserved in the file.

A period of 30 days should be allowed to pass.

Thereafter the guarantee should be reversed.

Top priority for Reversal of Expired guarantees to

be given to avoid excess provision under Capital
adequacy.
 REVERSAL OF EXPIRED GUARANTEE

Before reversal, obtain undertaking from

customer:-

That there is no dispute between him and the

surety.
That he has discharged his liability or performed
his promise to the full satisfaction of the
beneficiary.
That in case of any claim or discovery of a claim
by the beneficiary in future or any circumstances
putting the bank to a loss on account of the said
guarantee, the applicant will indemnify the same.
Letter of Credit
 Letter of Credit
 It is an instrument by which a bank undertakes to pay a
seller for his goods, provided he complies with the
conditions laid down in the credit.
The credit specifies as to when payment is to be made
which may be either when the documents are presented
to the paying bank or at some future date, depending
upon the usance of draft as stipulated in the credit.
• All parties to the credit deal only with the documents and
not the goods.
Parties to LC:`
• Applicant: The buyer of the goods.
• Issuing Bank: Importer’s or buyer’s bank who lends its
name or credit.
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 Parties to LC

• Advising Bank: Issuing Bank’s branch or Correspondent

in exporter’s country to whom the letter of credit is sent
for onward transmission to the seller or beneficiary.
• Beneficiary: The party to whom the credit is addressed
i.e. seller or supplier.
• Negotiating Bank: The bank to whom the beneficiary
presents his documents for negotiation or acceptance
under the credit.
• Confirming Bank: The bank adding confirmation to the
credit.

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 Types of Letter of Credit

 Revocable credit - Is one that can be cancelled or

amended at any time without the prior knowledge of
the seller and other parties.
 Irrevocable credit - Issuing bank gives its
irrevocable undertaking to pay, if all the terms of the
credit are met. Further, a letter of credit may be
restricted or unrestricted. A restricted credit is one
wherein a specified bank is designated to pay,
accept or negotiate.

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 Types of Letter of Credit

 Confirmed Irrevocable credit:

If a LC to which the advising bank at the request of
the issuing bank has added its confirmation that
payment will be made. The advising bank thus
confirms that it will honor drawings, which conform
to the terms of credit.
 Transferable credit -Under this type of credit, the
beneficiary is entitled to request the paying,
accepting or negotiating bank to make available in
whole or part, the credit to one or more other parties
(Article 54 of UCP).

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 Types of Letter of Credit

 Back to Back credit: Is one, where an exporter

received a documentary credit opened by a buyer in
his favour, he tenders the same to the bank in his
country as a cover for opening a credit in favour of
his local suppliers. The later is called back-to-back
credit.
 Revolving credit- Is one, which provides that the
amount of drawings made there under would be
reinstated and made available to the beneficiary
again and again for further drawings during the
currency of credit subject to certain conditions
specified therein.
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 Types of Letter of Credit

 Standby Credit -Is similar to performance bond or

guarantee, but issued in the form of credit. It thus
constitutes a promise to the beneficiary that in the event
of non-performance or non-payment of an obligation, the
beneficiary may request payment from the issuing
banker.
 With or without recourse credit- i.e., where the
beneficiary holds himself liable to the holder of the bill if
dishonored, is considered to be with-recourse. Where he
does not hold himself liable, the credit is said to be
without-recourse. The without-recourse credits by virtue
of their various advantages, are popular.

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 Types of Letter of Credit

 Red clause LC -Also referred to a packing or anticipatory

credit has a clause printed in red ink permitting the
correspondent bank in the exporter’s country to grant
pre-shipment advance to beneficiary at issuing bank’s
responsibility.

 Green clause LC- In addition to pre-shipment finance,

storage facilities are also allowed at the port of shipment
to the exporter at issuing bank’s responsibility.The
clause is typed or printed in green ink.

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 Precautions while establishing the credit:
Before the credit is established, it should be beyond
doubt that
 The applicant would be in a position to retire the bills
under the credit and
 will not approach the bank for any additional credit facility
for the purpose.
All LCs issued are Subject to Various
Provisions of UCP 700 of ICC, Paris & is
Binding on all Parties

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धन्यवाद

09.10.2019