The Reserve Bank of India (RBI) issued a Master Circular on April 1, 2025, introducing new guidelines for Primary (Urban) Co-operative Banks (UCBs) regarding the issuance of bank guarantees, co-acceptance of bills, and Letters of Credit (LCs). These new rules aim to enhance financial stability and risk management for both banks and customers.
UCBs can only provide financial guarantees, while performance guarantees will be issued in specific cases with caution.
The maximum tenure for any guarantee is 10 years.
The total guarantee exposure of a bank cannot exceed 10% of its total owned funds.
Secured guarantees (backed by cash or government securities) are preferred.
Unsecured guarantees should be issued only in limited amounts and under strict scrutiny.
Co-acceptance is restricted to customers who already have a credit limit approved by the bank.
The bank must ensure that the bills represent genuine trade transactions and not fraudulent (accommodation) bills.
Stringent verification is required to ensure that the goods/services mentioned in the bill have been received by the customer.
LCs can only be issued for existing customers with a track record of reliable transactions.
Banks should limit the LC amount to necessary levels and ensure adequate security measures.
Banks are required to fulfill LC payment obligations promptly, as delays could harm the institution’s credibility.
Banks must strengthen internal checks and monitoring systems to mitigate risks.
Any fraudulent issuance of LCs or bank guarantees leading to financial losses must be dealt with strict disciplinary action against responsible officers.
LCs play a crucial role in both domestic and international trade. It is a formal promise by a bank to make payments on behalf of a buyer to a seller, provided the seller meets the stipulated conditions.
Example: Suppose an Indian company imports machinery from China. The Chinese company may hesitate to trust the Indian buyer’s payment ability. In this case:
The Indian company requests its bank to issue an LC.
The bank guarantees the payment to the Chinese company if it submits the required documents.
Upon receiving the correct documentation, the bank makes the payment, ensuring a secure transaction for both parties.
Bill of Lading (B/L) – Proof of shipment.
Invoice – Details of goods and payment amount.
Packing List – Specifies itemized goods.
Insurance Documents – Ensures goods are covered.
Certificate of Origin – Confirms the source country.
Customs Clearance Documents – Required for import/export compliance.
Provide assurance to international and domestic traders.
Enable businesses to trade without requiring upfront payments.
Reduce financial risks, especially in global trade.
An LC functions as an indirect loan, as the bank takes on the payment obligation.
Banks may require collateral, margin money, and charges for issuing an LC.
If the buyer defaults, the bank has the right to recover the amount from them.
RBI’s latest circular aims to enhance the transparency, security, and accountability of banking transactions involving guarantees and LCs. Customers and businesses must comply with these new rules to ensure smooth and secure financial operations. With these measures in place, RBI seeks to strengthen the banking sector while minimizing fraudulent activities and financial risks.
