Guarantees and co acceptance
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Guarantees and co acceptance

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Guarantees and co acceptance Guarantees and co acceptance Presentation Transcript

  • Submitted By: Megha ThakurNimisha Srivastava Sumit Jain
  • Bank Guarantee  A contract to perform the promise or discharge of liability of a third person in case of his default. “An important criterion for judging the soundness of a banking institution is the size and character, not only of its assets portfolio but also, of its contingent liability commitments such as guarantees, letters of credit, etc.” 2
  • Bank Guarantee “Bank guarantee is the commitment given by the issuingbank (Guarantor) to the beneficiary. If the claim is madeby the beneficiary within the guarantee period and as perthe terms and conditions of the bank guarantee, then thebank should make the payment without fail and alsowithout any delay.” 3
  • Bank Guarantee  Banks issue guarantees on behalf of their customers for various purposes. The guarantees executed by banks comprise both performance guarantees and financial guarantees. The guarantees are structured according to the terms of agreement, viz., security, maturity and purpose. Courts will not interfere in the functions of a banker with regard to bank guarantees issued by them. 4
  • Ghosh Committee Recommendations- Shri A.Ghosh – the then Dy.Governor ,RBI  Bank Guarantees should be issued in serially numbered security forms While forwarding the BGs to the beneficiaries, caution them to verify the genuineness of the guarantee with the issuing bank. 5
  • Constituents of Bank Guarantee  Three parties to the guarantee : Party gives guarantee – Surety Party on whose behalf guarantee is given – Principal Debtor Party in whose favor guarantee is given – Creditor/Beneficiary 6
  • Advantages of Bank Guarantee  The cost of servicing guarantees is significantly less than the cost of bank lending The expansion of company’s foreign trade operations opens new international markets and enlarges the circle of foreign partners Bank guarantees provide favourable conditions on which to work with the suppliers — receive or extend payment deferments from manufacturers, increase the procurement volume of goods and receive additional discounts for purchased products. Reduction of risks inherent in transaction. 7
  • Types of Guarantee  Direct Bank Guarantee - issued by the applicants bank (issuing bank) directly to the guarantees beneficiary without concerning a correspondent bank Indirect Bank Guarantee - with an indirect guarantee, a second bank is involved, which is basically a representative of the issuing bank in the country to which beneficiary belongs. Financial Guarantee – e.g. –Tender Deposit, Sales Tax Payments, Retention Money Performance Guarantee - one of the most common types of bank guarantee which is used to secure the completion of the contractual responsibilities of delivery of goods and act as security of penalty payment by the Supplier in case of non delivery of goods. 8
  • Types of Guarantee  Advance Payment Guarantees - mode of guarantee is used where the applicant calls for the provision of a sum of money at an early stage of the contract and can recover the amount paid in advance, or a part thereof, if the applicant fails to fulfil the agreement. Credit Card Guarantee - issued by the credit card companies to its customer as a guarantee that the merchant will be paid on transactions regardless of whether the consumer pays their credit. 9
  • Bank Guarantee Used In :  Foreign Airlines/IATA -on behalf of Indian agents of foreign airline companies who are members of International Air Transport Association (IATA), in favour of foreign airline companies/IATA, towards their ticketing business. Service Importers Commodity Hedging -hedging of his commodity exposures in overseas markets 10
  • Safeguards to be followed for Bank Guarantee  Issued in security forms from serially numbered to prevent fake guarantees Should not be issued to customer who do not have credit facilities with the bank but only maintain current account Should be issued in Triplicate  Copy to Branch ,Beneficiary , Head Office 11
  • Sample Performance Guarantee  12
  • Guidelines for Guarantee Business  No bank guarantee should normally have a maturity of more than 10 years , though in some fields, it has been allowed to extend beyond 10 years. While issuing such guarantees, banks are advised to take into account the impact of very long duration guarantees on their Asset Liability Management. Further, banks may evolve a policy on issuance of guarantees beyond 10 years as considered appropriate with the approval of their Board of Directors. 13
  • Guidelines for Guarantee Business  Bank Guarantees (BG) comprise both performance guarantees (PG) and financial guarantees (FG) and are structured according to the terms of agreement viz., security, maturity and purpose. As a General Rule, bank guarantees shorter maturities and leave longer maturities to be guaranteed by other financial institutions. 14
  • Precautions for issuing guarantees  Avoid giving unsecured guarantees in large amounts for medium and long-term periods and such commitments to particular groups of customers and/or trades. For individual constituent, unsecured guarantees should be limited to a reasonable proportion of the bank’s total unsecured guarantees and constituent’s equity. Banks can give deferred payment guarantees on an unsecured basis for modest amounts to first class customers in exceptional cases. 15
  • Can a Bank give Bank Guarantee to another Bank? A bank can give BG to another bank on behalf of a client of the beneficiarybank. Also ,a Bank can give BG to a beneficiary on behalf of another Bank.For example:Suppose a client in USA does not accept a BG from an Indian Bank. What will the Indian supplier do then if he doesnt have an account in areputed foreign bank ?The client will approach an Indian Bank for the BG. The Indian Bank will thenapproach a reputed foreign bank for the counter BG. The foreign Bank willissue a BG in favour of the client on behalf of the Indian Bank.Alternatively, the foreign bank, instead of issuing a BG, can stand guarantee tothe BG issued by the Indian Bank to the client in USA 16
  • Bank Guarantee in Export Business  The issuing bank issues a letter of credit reflecting the terms of the sales agreement and forwards it to the confirming bank. The confirming bank checks it for authenticity, adds its own guarantee and forwards it to the exporter. The exporter collects documents proving that he shipped confirming goods -- such as an inspection certificate issued by a shipping company -- and presents them to the confirming bank along with the letter of credit. The confirming bank pays the exporter, the issuing bank pays the confirming bank and the exporter pays the issuing bank. 17
  • Co-Acceptance of Bills  Under this facility banks accept commercial usance bills drawn on their constituents which would enable the latter to enjoy credit which otherwise the seller will not be willing to extend. In this facility the banks add the strength of their name and no finance is envisaged 18
  • Co-Acceptance of Bills  Limits for co-acceptance of bills will be sanctioned by the banks after detailed appraisal of customers requirement is completed and the bank is fully satisfied about the genuineness of the need of the customer. Customers who enjoy other limits with the bank should be extended such limits. Only genuine trade bills shall 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. The valuation of goods as mentioned in the accompanying invoice should be verified to see that there is no overvaluation of stocks. 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 office of the accepting bank. 19
  • Co-Acceptance of Bills  Banks are precluded from co-accepting bills drawn under Buyers Line of Credit schemes of financial institutions like IDBI, SIDBI, PFC etc. Similarly banks should not co-accept bills drawn by NBFCs. Further, banks should not extend co-acceptance on behalf of their buyers/constituents under the SIDBI scheme. Co-acceptance facilities will normally not be sanctioned to customers enjoying credit limit with other banks. 20
  • Safeguards  While sanctioning co-acceptance limits to their customers , the need therefore should be ascertained and such limits should be extended only to those customers who enjoyed other limits with the bank. Only genuine trade bills should be co-accepted and the banks ensure that the goods covered by bills co-accepted are actually received in the stock accounts of the borrowers The valuation of the goods as mentioned in the accompanying invoice should be verified to see that there is no over-valuation of stocks. The bank should not extend their co-acceptance to house bills/ accommodation bills drawn by the group concerns on one another 21
  • References  http://www.rbi.org.in/scripts/BS_ViewMasterCirc ulardetails.aspx http://voiceofca.in/siteadmin/document/25_12_10 _2_ArticleonBankGuarantee.pdf http://www.eximguru.com/exim/guides/export- finance/ch_8_bank_guarantees.aspx http://www.business- standard.com/india/news/how-bank-guarantees- work/406178/ 22
  • Thank You 23