What changed
This master circular updates and consolidates all prior guidelines on guarantees, co-acceptances, and letters of credit for UCBs issued up to June 30, 2011. It replaces the previous master circular dated July 1, 2010, but does not introduce new policy changes—only codifies existing instructions.
What it means for you
UCBs must adhere to strict limits on guarantee volumes: total outstanding 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. Banks are advised to prefer secured guarantees and avoid long tenures beyond 10 years. Performance guarantees are allowed only for scheduled UCBs with due caution.
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 or 25% of total guarantees, whichever is lower.
- Restrict guarantee maturity to a maximum of 10 years; prefer short-term tenures.
- Issue only financial guarantees as a rule; performance guarantees only if scheduled and with caution.
- Maintain adequate security or counter-guarantees for secured guarantees; avoid concentration of unsecured guarantees.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Scheduled Urban Co-operative Banks, Board of Directors of UCBs, Risk management and credit departments of UCBs
What is the maximum tenure for guarantees issued by UCBs?
Guarantees should be confined to short-term maturities and must not exceed 10 years in any case.
Can UCBs issue performance guarantees?
As a general rule, only financial guarantees are allowed. However, scheduled UCBs may issue performance guarantees with due caution.
What is the limit on unsecured guarantees for UCBs?
Unsecured guarantees outstanding at any time must not exceed 25% of owned funds (paid-up capital + reserves) or 25% of total guarantees, whichever is lower.