What changed
This Master Circular updates and consolidates all prior instructions on guarantees, co-acceptances, and letters of credit for UCBs up to June 30, 2007, replacing the July 3, 2006 circular. It reiterates existing limits and safeguards without introducing new policy changes.
What it means for you
UCBs must strictly adhere to the 10% ceiling on total guarantees relative to owned resources and the 25% sub-limit on unsecured guarantees. Banks should prioritize secured guarantees and avoid long-duration commitments beyond 10 years. Boards must set internal limits for unsecured guarantees per constituent to prevent concentration risk.
What you must do
- Ensure total outstanding guarantees do not exceed 10% of owned resources (paid-up capital + reserves + deposits).
- Cap unsecured guarantees at 25% of owned funds (paid-up capital + reserves) or 25% of total guarantees, whichever is lower.
- Issue only financial guarantees as a rule; performance guarantees only if the bank is scheduled and with due caution.
- Restrict guarantee maturity to 10 years maximum; prefer short-term tenors.
- Review Board-approved limits for unsecured guarantees per constituent to avoid concentration.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Board of Directors of UCBs, Credit and risk management teams of UCBs
What is the maximum tenure for a guarantee issued by a UCB?
Guarantees should not exceed 10 years, and banks are advised to prefer relatively short-term maturities.
Can UCBs issue performance guarantees?
Only scheduled UCBs may issue performance guarantees, and that too with due caution. Non-scheduled banks should restrict to financial guarantees.
What is the limit for unsecured guarantees?
Unsecured guarantees outstanding at any time must not exceed 25% of owned funds (paid-up capital + reserves) or 25% of total guarantees, whichever is less.