RBI Issues Master Circular in Regard to Guarantees, Co-Acceptances & Letters of Credit – UCBs

On 01st April 2023, the Reserve Bank of India (RBI) issued the Master Circular – Guarantees, Co-Acceptances & Letters of Credit – UCBs.

The Master Circular states the following –

• It directs the UCBs to confine their guarantees to relatively short-term maturities; the Guarantees should not be issued for periods exceeding ten years in any case.
• The entire volume of outstanding guarantee commitments at any time may not exceed 10% of the bank’s total owned resources, which include paid-up capital, reserves, and deposits. Under the overall ceiling, the proportion of unsecured guarantees outstanding at any given moment may be limited to 25% of the bank’s owned funds (paid-up capital + reserves) or 25% of the entire amount of guarantees, whichever is less.
• It states that the Banks should issue secured guarantees.
• The Banks should ensure that the systems evolved for recording the details of off-balance sheet transactions are properly followed by all branches. These records should be periodically balanced and internal inspectors should verify the same and offer critical comments.
• The Banks should avoid undue concentration of unsecured guarantee commitments to particular groups of customers and/or trades. The bank’s Board of Directors should fix suitable proportions for the issuance of unsecured guarantees on behalf of any individual constituent so that these guarantees do not exceed the following namely –

(i) A reasonable proportion of the total obligations in respect of unsecured guarantees provided by the bank to all such constituents at any time,

(ii) Reasonable multiple of the shareholdings in the bank