RBI has issued a Master Circular on April 1, 2025, which has issued new rules related to Guarantees, Co-Acceptance and Letters of Credit (LCs) for Primary (Urban) Co-operative Banks (UCBs).
What does the Master Circular say- This circular has been issued by RBI on 1 April 2025, in which UCBs i.e. (Urban) Co-operative Banks) have been told how to give bank guarantee and do co-acceptance (take guarantee of bills), and issue Letter of Credit (LC).
In simple words, if you want to take a guarantee or LC i.e. Letter of Credit for business from any UCB i.e. (Urban) Co-operative Banks (UCBs), then the bank will thoroughly check your financial condition and requirement. Only those with reliable and old customer profile will get these facilities. If you have got a bank guarantee, and there is any problem in your transaction, then it will be the responsibility of the bank to make the payment on time.
Let us understand it like this- Bank Guarantee:- Give only financial guarantee, not performance guarantee (can be given in some cases but with caution).
There should not be a guarantee for a period of more than 10 years. The total guarantee should not be more than 10% of the bank’s own funds.
Secured guarantee should be given priority, i.e. cash or government backing. Unsecured guarantee should be given in limited amount and very thoughtfully.
Co-acceptance (giving guarantee of bills):- Open only for those customers who already have a credit limit. Avoid fake bills (accommodation bills). There should be real business behind the bill and the customer should actually receive it.
Letters of Credit (LC):- Open only for those customers who are already regular customers of the bank. Issue only in the required amount and with security. Responsibility of immediate payment on LCs will have to be fulfilled, otherwise the bank’s credibility will be affected.
Other important things:- Keep internal checks and monitoring systems strong so that the bank’s risks do not increase due to these facilities. If any LC or guarantee is issued fraudulently and the bank suffers loss, then take action against the concerned officers.
While we are at it, let me tell you about Letters of Credit (LC)…
Letters of Credit (LC) i.e. loan letter, is a banking document used in international trade and sometimes domestic trade, which acts as a kind of bank guarantee. Letter of Credit (LC) is a promise issued by a bank that it will pay a certain amount of money on behalf of its customer (Buyer/Importer), provided the seller (Seller/Exporter) presents certain specified documents.
In simple words – LC is a promise given by the bank that “if my customer fulfills the agreed conditions, I will pay your money on time. Suppose an Indian company is ordering machinery from China. The Chinese company is not able to trust the Indian company whether it will make the payment or not. In such a case:- The Indian company gets a Letter of Credit issued from its bank. The bank promises that if the Chinese company fulfills the conditions of sending the goods and providing the documents, the bank will make the payment. This gives confidence to the Chinese company and it sends the goods. After receiving the documents, the bank makes the payment.
What documents are required under LC?
- Bill of Lading (B/L)
- Invoice
- Packing List
- Insurance Documents
- Origin Certificate
- Custom Clearance etc.
Why is LC necessary?
It guarantees trust. Makes trade possible without advance payment. Reduces risk – especially in international trade In.
What is its relation with loan?If you have opened LC for business, then it can be considered as a type of indirect loan. The bank is taking the risk for you, and for this it can also ask for margin money, charges, and collateral. If you do not make the payment as per the LC, then the bank will recover it from you.
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