What changed
This master circular updates and consolidates all prior instructions on guarantees, co-acceptances, and letters of credit issued up to June 30, 2013, replacing the July 2, 2012 circular. No new policy changes were introduced; it is a compilation of existing guidelines.
What it means for you
UCBs must strictly adhere to the consolidated limits: total guarantees outstanding cannot exceed 10% of total owned resources (paid-up capital + reserves + deposits), and unsecured guarantees are capped at 25% of owned funds (paid-up capital + reserves) or 25% of total guarantees, whichever is lower. Guarantees should be short-term, not exceeding 10 years, and banks should prefer secured guarantees with adequate collateral or counter-guarantees from government or public sector entities.
What you must do
- Review and ensure total guarantee outstanding does not exceed 10% of total owned resources (paid-up capital + reserves + deposits).
- Limit unsecured guarantees to 25% of owned funds (paid-up capital + reserves) or 25% of total guarantees, whichever is lower, and avoid concentration on any single group or trade.
- Restrict guarantee maturity to a maximum of 10 years and prefer short-term maturities.
- Issue only financial guarantees as a general rule; scheduled banks may issue performance guarantees with due caution.
- Ensure secured guarantees are backed by assets with market value at least equal to the contingent liability or by acceptable counter-guarantees.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Scheduled UCBs issuing performance guarantees, Bank boards responsible for setting unsecured guarantee limits
What is the overall cap on guarantees for UCBs?
Total guarantee obligations outstanding at any time must not exceed 10% of the bank's total owned resources, which include paid-up capital, reserves, and deposits.
Can UCBs issue performance guarantees?
As a general rule, UCBs should only issue financial guarantees. However, scheduled UCBs may issue performance guarantees with due caution.
What is the maximum tenure for a guarantee?
Guarantees should be short-term and must not exceed 10 years in any case.