What changed
This master circular updates and consolidates all prior guidelines on guarantees, co-acceptances, and letters of credit for UCBs up to June 30, 2009. It replaces the previous master circular dated July 1, 2008. No new policy changes were introduced; it is a compilation of existing instructions.
What it means for you
UCBs must adhere to strict limits on non-fund based business: total guarantees cannot exceed 10% of owned resources (paid-up capital + reserves + deposits), and unsecured guarantees are capped at 25% of owned funds or 25% of total guarantees, whichever is lower. Guarantees should be short-term, preferably secured, and not exceed 10 years. Performance guarantees are allowed only for scheduled UCBs with caution.
What you must do
- Ensure total outstanding guarantees do not exceed 10% of your bank's owned resources (paid-up capital + reserves + deposits).
- Limit unsecured guarantees to the lower of 25% of owned funds or 25% of total guarantees outstanding.
- Avoid issuing guarantees with maturity beyond 10 years; prefer short-term tenures.
- Prefer secured guarantees backed by tangible assets or counter-guarantees from government or public sector institutions.
- Review board-approved limits for unsecured guarantees per individual customer to avoid concentration.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Board of Directors of UCBs, Credit and risk management teams of UCBs
Can UCBs issue performance guarantees?
Only scheduled UCBs may issue performance guarantees, and that too with due caution. Non-scheduled UCBs should restrict to financial guarantees only, as per the general rule that banks may provide only financial guarantees.