Fee Based Management

Project On “ FEE BASED MANAGEMENT” With reference to Bank Of India”

Bachelor of Commerce Banking & Insurance (Semester V) Final Year

Submitted In Partial Fulfillment of the Requirements for the Award of The Degree of Bachelor of CommerceBanking & Insurance

S. K. SOMIYA COLLEGE OF ARTS, SCIENCE AND COMMERCE VIDYAVIHAR, MUMBAI 400 077

Acknowledgement First and foremost, I would like to thank Almighty god for energy, strength, guidance and help that has always been with me throughout my work. While presenting this project at this project at this juncture, I feel deeply obliged to our Mumbai University for providing me with an opportunity to do this project.

This project could not have seen light of the day without the inspiring & exhortative guidance of my prof. Mahek Mam who guided me like a beacon in the dark.

Last but not the least, I am thankful to all my friends and colleagues for their moral support and encouragement. To sum up I would like to thank all those who have helped me in some or other way in

successfully completing this project. It has been a warming experience for me, which will surely help me in the future. Sr No. 1

CHAPTER

Page No.

NON-FUND BASED FACILITY

01-06

1.1 Introduction 1.2 Purpose For Non-fund based facility 1.3 Why called Non-fund based facility 1.4 Establishment of Letter of Credit & Bank Guarantee 1.5 RBI Norms 1.6 RBI Guidelines on Non-fund based facility 1.6.1 Letter of Credit 1.6.2Bank Guarantee 2

LETTER OF CREDIT 2.1 Introduction 2.2 Why of Letter Of Credit 2.3 Bank Obligations & Responsibility 2.4 Standard form of Documentation 2.5 Common defects in Documentation 2.6 How it works ?

07-27

2.7 Price of Letter Of Credit 2.8 Legal Basis for Letter Of Credit 2.9 Parties to Letter Of Credit 2.10 Characteristic of Letter Of Credit 2.11 Types & Payment structure of Letter Of Credit 2.12 Advantages of Letter of Credit 2.12.1 To Exporter 2.12.2 To Importer 2.13 Limitations of Letter of Credit 2.14 Case study of Letter of Credit 3

BANK GUARANTEE

28-38

3.1 Need for the facility 3.2 Contract of Bank guarantee 3.3 Difference between Letter of Credit & Bank guarantee 3.4 Types of Bank guarantee 3.4.1 Short term Bank guarantee 3.4.2 Long term Bank guarantee 3.5 Precaution for issuing Bank guarantee 3.6 Cases of Bank guarantee Fraud 4

BANK OF INDIA 4.1 History of Bank Of India 4.2 Non-fund based facility provide by Bank Of India

39-44

5

CONCLUSION

45

6

ANNEXURE

46-51

7

BIBLOGRAPHY

52

1. NON-FUND BASED FACILITIES 1.1 INTRODUCTION: It is generally perceived that the non-fund based business is very remunerative to bank and the borrowers. The banks, besides getting handsome commission or fee and some other service charges, also get the low cost deposits in the shape of margin and ancillary business. The funds of the borrower are not blocked in the advances to be given to the suppliers or beneficiaries and this keeps his liquidity position comfortable, production smooth and costs low.

NON-FUND BASED FACILITIES

Funds remittance/ Transfer Facilities

Establishment of LC/BG

Agency

Merchant Banking

Function

Function

1.2 PURPOSE FOR NON-FUND BASED FACILITIES: The borrowers need such facilities not only for purchases of current assets or financing there of or take benefit of certain services with the help of nonfund based facilities. They also need the facilities for acquisition of fixed assets including their financing.

The relevant aspects of two kinds of non-fund based facilities i.e. LETTER OF CREDITS & BANK GUARANTEE has been discussed in details:

1.3 WHY CALLED NON-FUND BASED FACILITIES ? These are called non-fund based financing (or quasi-credit facilities) because, at the time of opening of the letter of credit or bank guarantee, no amount, as such, becomes immediately payable. But, these facilities do involve some financial commitment on the part of the bank in as much as the bank is required to pay the amount of the bill (drawn under the L/C, and in meticulous compliance of all the terms and conditions stipulated therein), in the event of the applicant (borrower) refusing or being unable to honour the bill on presentation, at the material time. The bank, however, is within its rights to proceed legally against the applicant (borrower) on the basis of the letter of request (counter guarantee and indemnity) executed by the applicant, at the time of the issuance of the Letter of Credit, on a duly stamped paper. Similarly, no amount becomes payable by the bank at the time of execution of the B/G, but as per the undertaking (commitment) given by the bank, under the B/G issued, the bank will have to make the payment of the amount, covered under the B/G by the beneficiary concerned. The bank may make the required payment by debit to the applicant’s account, even if sufficient balance may not be available therein. The amount so overdrawn may have to be deposited by the applicant, in the due course, failing which the bank may prefer to file a civil suit against the applicant to cover the amount, on the basis of the counter-guarantee executed by the applicant on the stamped paper, at the time of the issuance of the Bank Guarantee. Thus, it is for the aforesaid reasons that the L/C and B/G are referred to as Non-Fund Based working capital financing. And, accordingly, one should

notharbour any misconception that L/Cs and B/Gs do not involve any financial commitments and risk. These facilities (L/C and B/G) are also referred to as Quasi-(or Semi) Credit Facilities for the same reasons

1.4 ESABLISHMENT OF LETTER OF CREDIT AND BANK GUARANTEE The major non-fund based facilities that are considered as a part of regular credit facilities are letter of Credit and Bank Guarantee. As a part of their non-fund based functions banks allow Letter of credit and bank guarantee facilities for their customers to meet their requirements. Banks charge commission for the services rendered by them and commitments on the pact of the bank these are allowed after making out a very careful and detailed assessment of borrower’s requirement and capacity. Only need based facilities are extended after making a detailed appraisal of borrower’s strengths and capabilities to honour the commitments as and when the same arise in respect of the facility. 1.5 RBI NORMS: Prudential exposure norms as per extant guidelines of Reserve Bank of India provides that the maximum exposure of a bank for all its Fund based and Non-fund based credit facilities, investments, underwriting, investments in Bonds and commercial paper and any other commitment should not exceed 25 percent of its (bank's) net worth to an individual borrower and 50 percent of its, net worth to a 'group'. It may however, be rioted that while calculating exposure, the Non-fund based facilities are to be taken at 50 percent of the sanctioned limit. To illustrate the point let us consider the following example: Total credit limits to the above borrower are Rs.200 crores which are in excess of the maximum exposure norm of Rs. 175 crores. but for the

purpose of determining exposure we have taken non-fund based limits at 50 percent of its value and total exposure is taken at 150 crores which is well within the norm.

Example 1. Particulars Rs. in Crores

Rs.

Net worth of the bank 700 Maximum exposure permitted for an individual borrower (25% of net worth of the bank)

175

Working Capital Control and Banking Policy 657

Maximum exposure permitted for all borrowers under the same group (50% of net worth of the bank)

350

Example 2. Particulars

Rs.

Limits sanctioned to borrower Fund Based

100

Non-Fund Based

100

Total

200

Total Exposure For Fund Based limits

100

@ 50% of limits For Non-Fund based limits @ 50% of limits

50 150

1.6 RBI GUIDEUNES ON NON-FUND BASED FACIUTIES Reserve Bank of India has also issued detailed guidelines to commercial banks in respect of non-fund based credit facilities. Some of the important points to be kept in view in this regard are discussed below: 1.6.1 Letters of Credit  Bank should normally open letters of credit for their own customers who enjoy credit facilities with them Customers maintaining current account only and not enjoying any credit limits should not be granted L/C facilities except in cases where no other credit facility is needed by the customer. 

The request of such customer for sanctioning and opening of letter of credit should be properly scrutinised to establish the genuine need of the customer. The customer may be, required to submit a complete loan proposal Including financial statements to satisfy the bank about his, needs and also his financial resources, to mire the bills drawn under



Where a customer enjoys credit facilities with some other bank, the reasons for his approaching the bank for sanctioning L/C limits have to be clearly stated. The bank opening L/C on behalf of such customer should invariably make a reference to the, existing banker of the customer.

 In all cases of opening of letters of credit, the bank has to ensure that the customer is able to retire the bills drawn under L/C as per the financial arrangement already finalised.

1.6.2 Bank Guarantee  The conditions relating to obligant being a customer of the bank enjoying credit facilities as discussed in case of letters of credit are equally applicable for guarantees also. In fact, guarantee facilities also cannot be sanctioned in isolation.  Financial guarantees will be issued by the banks only if they are satisfied that the customer will be in a position to reimburse the bank in case the guarantee is invoked and the bank is required to make the payment in terms of guarantee.  Performance guarantee will be issued by the banks only on behalf of those customers with whom the bank has sufficient experience and is satisfied that the customer has the necessary experience and means to perform the obligations under the contract and is not likely to commit any default.  As a rule, banks will guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. Accordingly, no bank guarantee will normally have a maturity of more than 10 years. 

Banks should not normally issue guarantees on behalf of those customer's who enjoy credit facilities with other banks.

2. LETTER OF CREDIT 2.1 Introduction to Letter of Credit In recent times this type of method has become more popular. Letter of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another. On the basis of the instructions given by the importer, his bank gives a written undertaking to the bank of the exporter that if the exporter presents certain shipments documents covering the goods within affixed period, the bank can make payment to the exporter. A letter of credit is an undertaking by a bank to make a payment to a named beneficiary within a specified time, against the presentation of documents which comply strictly with the terms of the letter of credit. In simple words, a letter of credit is an authorization issued by opening bank to the negotiation bank that if the exporter presents the relevant set of documents, makes the payment.

2.2 WHY LETTER OF CREDITS? The buyer would usually prefer to first receive the goods to be brought and only after satisfying himself of the quality and quantity of the goods supplied, he would like to make payment. As against this, the seller will usually prefer to first receive the full payment for the goods to be supplied, and only then he would like to deliver the goods. And, if such mutual distrust would continue, the business transaction can hardly take place. Here comes the facilitating role of the banking system which serves as a bridge (a common link) between the buyer and the seller, as both of them should be having their full faith in the banking system and the bank(s) concerned. The mechanism, used by the banker in this regard, is the LETER OF CREDIT. Actually, both these methods are common in international transactions. The first is called OPEN ACCOUNT and second is called ADVANCED PAYMENT.

•

With open account, the parties may depend on long experience of each other. They may each have checked the other with a credit agency. The exporter may have insurance against bad debts. Certainly he will have confidence in the quality of his contract and the impartial competence of the local courts. Goods and services are regularly traded in this manner in North America, Western Europe and parts of the Far East. National barriers are not seen as legal barriers.

•

Advanced Payments are less common, but are used in the contracting and heavy engineering industries, where substantial work is required and goods are tailor made. If a buyer cancels a contract, it should not be too much of a problem for a supplier of bricks to find an alternative sale. But manufacturers of power stations tend to build to order. In these cases, the seller often has to request his bank to issue an advance payment guarantee in favour of the buyer to secure an advance payment. This is a simple document wherein a bank undertakes to pay the money advanced back to the buyer if he states that the seller has failed to deliver.

Both these techniques assume that each party is not worried that the goods are within the control of the party that has been paid (or part paid). If they wish to ensure that control over the goods is not transferred until they are paid for, they can agree to a documentary collection. •

Under a documentary D/P collection the exporter asks his bank to send the documents that give access to the goods (such as a bill of lading), along with his invoice and any other items required by the importer, to the buyer’s bank with the request that they are handed over to the buyer only if the buyer pays. D/P stands for “DOCUMENTS AGAINST PAYMENT”.

There is a further development of the collection called the: •

DOCUMENTRY D/A COLLECTION. Here the abbreviation stands for “Documents against Acceptance”. Control over the goods is released not against payment, but against the importer’s acceptance of a usance bill of exchange. This may not be as secure as holding back

the goods, but at least it means that the buyer has acknowledged the debt and has undertaken to pay on a certain date. In many countries, notably those with a French legal tradition, dishonor of an accepted draft is an imprisonable offence. • The main problem with collections lies in the ability of the buyer to refuse to pay for (or accept) the documents. He has the option to decide after shipment that he does not want to buy the goods. This leaves the supplier with the problem of disposing of his merchandise, which may have been made to unique specifications, in an often distant location. The potential problems can be imagined. In addition to his risk that the market has gone against him, he has to clear, insure and store the goods. He may have to pay other local costs. All in all, the market risk on a refused collection can be very high.

2.3 THE BANK’S OBLIGATIONS AND RESPONSIBILITIES: The prime obligant in a letter of credit is the issuing bank. It has the initial responsibility of ensuring that the applicant is both creditworthy. The latter consideration is important to all parties to a trade transaction, as so much depends on trust. Fraud is the constant companion of trade finance. It has a duty of care and information. As mentioned above, banks see more trade transactions than their customers and can advise on methods and warn of dangers. Then, once a credit is opened, the bank is placing itself as a substitute for the buyer (applicant) and must pay if the conditions of the credit are fulfilled. The advising bank has the obligation of authenticating the credit once it has received it and passing it promptly on to the beneficiary . It also has the responsibility of authenticating and advising all amendments.

The confirming bank takes over the payment responsibilities of the issuing bank as far as the beneficiary is concerned, although it still has the obligation of the issuing bank for ultimate reimbursement. Whichever bank has responsibility for deciding whether documents are in order and should be either paid (if sight) or taken up (if usance), takes on a heavy set of obligations.

2.4 Standard Forms of Documentation: When making payment for product on behalf of its customer, the issuing bank must verify that all documents and drafts conform precisely to the terms and conditions of the letter of credit. Although the credit can require an array of documents, the most common documents that must accompany the draft include: • Commercial Invoice: The billing for the goods and services. It includes a description of merchandise, price, FOB origin, and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit. Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in the other accompanying documents. • Bill of Lading:

A document evidencing the receipt of goods for shipment and issued by a freight carrier engaged in the business of forwarding or transporting goods. The documents evidence control of goods. They also serve as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination. • Warranty of Title: A warranty given by a seller to a buyer of goods that states that the title being conveyed is good and that the transfer is rightful. This is a method of certifying clear title to product transfer. It is generally issued to the purchaser and issuing bank expressing an agreement to indemnify and hold both parties harmless. •

Letter of Indemnity: Specifically indemnifies the purchaser against a certain stated circumstance. Indemnification is generally used to guaranty that shipping documents will be provided in good order when available.

2.5 Common Defects in Documentation About half of all drawings presented contain discrepancies. A discrepancy is an irregularity in the documents that causes them to be in non-compliance to the letter of credit. Requirements set forth in the letter of credit cannot be waived or altered by the issuing bank without the express consent of the customer. The beneficiary should prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. Commonly found discrepancies between the letter of credit and supporting documents include: • • • • • •

Letter of Credit has expired prior to presentation of draft. Bill of Lading evidences delivery prior to or after the date range stated in the credit. Stale dated documents. Changes included in the invoice not authorized in the credit. Inconsistent description of goods. Insurance document errors.

• • • • • • •

Invoice amount not equal to draft amount. Ports of loading and destination not as specified in the credit. Description of merchandise is not as stated in credit. A document required by the credit is not presented. Documents are inconsistent as to general information such as volume, quality, etc. Names of documents not exact as described in the credit. Beneficiary information must be exact. Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the document may be allowed if it can be done quickly while remaining in the control of the bank. If time is not a factor, the exporter should request that the negotiating bank return the documents for corrections. If there is not enough time to make corrections, the exporter should request that the negotiating bank send the documents to the issuing bank on an approval basis or notify the issuing bank by wire, outline the discrepancies, and request authority to pay. Payment cannot be made until all parties have agreed to jointly waive the discrepancy.

2.6 How it works Imagine that a business called the Acme Electronics from time to time imports computers from a business called Bangalore Computers, which banks with the India Business Bank. Acme holds an account at the Commonwealth Financials. Acme wants to buy $500,000 worth of merchandise from Bangalore Computers, who agree to sell the goods and give Acme 60 days to pay for them, on the condition that they are provided with a 90-day LC for the full amount. The steps to get the letter of credit would be as follows: • •

Acme goes to The Commonwealth Financials and requests a $500,000 letter of credit, with Bangalore Computers as the beneficiary. The Commonwealth Financials can issue an LC either on approval of a standard loan underwriting process or by Acme funding it directly with a deposit of $500,000 plus fees between 1% and 8%.

•

•

• •

•

The Commonwealth Financials sends a copy of the LC to the India Business Bank, which notifies the Bangalore Computers that payment is ready and they can ship the merchandise Acme has ordered with the full assurance of payment to them. On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Financials transfers the $500,000 to the India Business Bank, which then credits the account to the Bangalore Computers by that amount. Note that banks deal only with documents under the letter of credit and not the underlying transaction. Many exporters have misunderstood that the payment is guaranteed after Receiving the LC. The issuing bank is obligated to pay under the letter of credit only when the stipulated documents are presented and the terms and conditions of the letter of credit have been met accordingly.

SELLER’ S

BUYER’ S

BANKE

BANKE

SELLE R

BUYER CARRIE

1. After a contract is concluded between buyer and seller, buyer’s bank supplies Letter of Credit to seller.

SELLER ’S

BUYER’S BANKER

SELLE R

BUYER CARRIER

2. Seller consigns the goods to a carrier in exchange for a bill of lading.

SELLER ’S

BUYER ’S

BANKE

SELLER ’S

BUYER’ S

BUYER SELLER

BUYER CARRIER

3. Seller provide bill of lading to bank in exchange for payment. Seller’s bank exchanges bill of lading from buyer’s bank for payment. Buyer’s bank exchanges bill of lading for payment from buyer.

SELLER CARRIE R 4. Buyer provides bill of lading to carrier and takes delivery of goods.

2.7 The price of LCs The applicant pays the LC fee to the bank, and may in turn charge this on to the beneficiary. From the bank's point of view, the LC they have issued can be called upon at any time (subject to the relevant terms and conditions), and the bank then looks to reclaim this from the applicant. 2.8 Parties to a letter of credit: There are many parties involved in letter of credit. The parties involved in letter of credit are as follows:a) Beneficiary:

The beneficiary is an exporter who exports the goods to the importer in an importers country. The beneficiary is entitled to payment as long as he can provide the

documentary evidence required by the letter of credit. The letter of credit is a distinct and separate transaction from the contract on which it is based. All parties deal in documents and not in goods. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank. b) Issuing bank: The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit. . The issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if j documents comply with the terms and conditions set out in the letter of credit. Typically the documents requested will include a commercial invoice, a transport document such as a bill of lading or airway bill and an insurance document; but there are many others. Letters of credit deal in documents, not goods. C) Advising Bank: An advising bank, usually a foreign correspondent bank of the issuing bank will advise the beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of credit is valid. In addition, the advising bank would be responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay. D) Conforming Bank: The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the correspondent obligates

itself to insure payment under the letter of credit. The confirming bank would not confirm the credit until it evaluated the country and bank where the letter of credit originates. The confirming bank is usually the advising bank.

2.9 Letter of Credit Characteristics •

Negotiability Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the beneficiary, but also any bank nominated by the beneficiary. Negotiable instruments are passed freely from one party to another almost in the same way as money. To be negotiable, the letter of credit must include an unconditional promise to pay, on demand or at a definite time. The nominated bank becomes a holder in due course. As a holder in due course, the holder takes the letter of credit for value, in good faith, without notice of any claims against it. A holder in due course is treated favorably under the UCC. The transaction is considered a straight negotiation if the issuing bank's payment obligation extends only to the beneficiary of the

credit. If a letter of credit is a straight negotiation it is referenced on its face by "we engage with you" or "available with ourselves". Under these conditions the promise does not pass to a purchaser of the draft as a holder in due course. •

Revocability Letters of credit may be either revocable or irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. A revocable letter of credit cannot be confirmed. If a correspondent bank is engaged in a transaction that involves a revocable letter of credit, it serves as the advising bank. Once the documents have been presented and meet the terms and conditions in the letter of credit, and the draft is honored, the letter of credit cannot be revoked. The revocable letter of credit is not a commonly used instrument. It is generally used to provide guidelines for shipment. If a letter of credit is revocable it would be referenced on its face. The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is referenced on its face.

• Transfer and Assignment The beneficiary has the right to transfer or assign the right to draw, under a credit only when the credit states that it is transferable or assignable. Credits governed by the Uniform Commercial Code (Domestic) maybe transferred an unlimited number of times. Under the Uniform Customs Practice for Documentary Credits (International) the credit may be transferred only once. However, even if the credit specifies that it is nontransferable or non assignable, the beneficiary may transfer their rights prior to performance of conditions of the credit.

• Sight and Time Drafts All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. A draft is a written order by which the party creating it, orders another party to pay money to a third party. A draft is also called a bill of exchange. There are two types of drafts: Sight and Time. A sight draft is payable as soon as it is presented for payment. The bank is allowed a reasonable time to review the documents before making payment. A time draft is not payable until the lapse of a particular time period stated on the draft. The bank is required to accept the draft as soon as the documents comply with credit terms. The issuing bank has a reasonable time to examine those documents. The issuing bank is obligated to accept drafts and pay them at maturity.

2.10 The Different Types of Documentary Credits and Payment structures There are basic types of documentary Credit: The Revocable Letter of Credit: It is one that can be amended or cancelled at any time by issuing bank without the consent of any other party, so as long as the letter of credit has not been drawn or documents taken up. This sort of credit can even be withdrawn or changed materially after documents have been presented, so as long as payment has not been made ( or, in the case of usance credits, the documents taken up and a value date given).the value of such instruments is, therefore, very limited and revocable letters of credit are very rare. under

UCP 500 (Article 6c), it is no longer necessary for irrevocable letters of credit ( see below ) to be specified as such, the assumption is that all letters of credit are irrevocable unless stated specifically. The Irrevocable Unconfirmed Letter of Credit: It is the most common and is now the format that is assumed in the absence of any instruction to the contrary. The subject of confirmation will be dealt with below. Unless stated, all comments in this Workbook on the subject of letters of credit refer to unconfirmed documentary letters of credit. Under this format, the issuing bank has a commitment to pay against credit conformed documents which cannot be withdrawn without the consent of the beneficiary under any circumstances except for provable fraud. Nor can the credit be amended by the issuing bank without the consent of the beneficiary (and, possibly, other interested parties named in the credit). The Irrevocable Confirmed Letter of Credit: The Irrevocable Confirmed Letter of Credit differs from the previous instrument in that advising bank becomes a prime obligor, along with the issuing bank. The advising bank becomes the Confirming Bank, by adding to its advice of the credit to the beneficiary the words “this letters of credit caries our confirmation” (or suchlike). Exporters ask for confirmations for two reasons, to remove the commercial or country risk arising from the status or domicile of the issuing bank and to have the documents conclusively checked at a bank in their locality. This is because, with an open confirmation, the issuing bank hands responsibility for deciding whether documents are in order to the confirming bank. Once documents are paid or taken up by the confirming bank there is no recourse to the beneficiary. Any discrepancy subsequently found by the issuing bank and the confirming bank. Such disputes are not uncommon and some countries prohibit confirmation of their banks’ letter of credit for this reason and out of pride. It is sometimes possible to have a letter of credit “Silently Confirmed”. This is done to remove country risk from a credit. The issuing bank does not normally know that a confirmation is in place and the credit may be payable

at its counters or elsewhere. The extent of the “confirmation” is normally set out in a separate agreement and would not cover documents found discrepant by the paying bank- i.e. the “confirmation” bank would normally retain recourse on the exporter in the event of the documents being rejected with material discrepancies. Transferable Letter of Credit: Transferable letter of credit is an extension of the irrevocable letter of credit. UCP describes its provisions in Article 48. The Letter of Credit needs to be payable ( or negotiable) at the counters of the advising bank which becomes the Transferring Bank. The issuing banks puts into the credit option for the transferring bank to make the credit available, at the request of the beneficiary, to another party (the “second beneficiary”) in whole or in part. There can be more than one second beneficiary and each receives an advice of the credit through a third bank. The credit cannot normally be further transferred to a third party. The documents cannot be changed except the invoice (allowing the first beneficiary to make a profit. The dates can be changed to allow time to process documents.

The Standby Letter of Credit: The Standby Letter of credit is not a documentary letter of credit at all, in that it does not normally involve the transport of goods or provision of services. It is basically a guarantee issued by a bank in a letter of credit format. Normally it calls for one or two documents (which can be issued by the beneficiary) to be presented against payment. Typically these might be a copy of an invoice has not been paid. Standby credits were introduced by US banks because they were not allowed to issue on-demand guarantees. They continue to be used as guarantee substitutes and are often found supporting open account trading, or collections. Back to Back Letter of Credit:

Once a seller has a letter of credit available, he can use it to leverage his own position. He is no longer merely a supplier, he is now a supplier with (for this transaction at least) the creditworthiness of the issuing bank. The subject is tackled in more detail in Finance of Foreign Trade, but some of the options are outlined below. In some cases, the seller (beneficiary) might have received assistance in financing his transaction in the letter of credit he received from the buyer. It might have been an advance payment letter of credit, which he could have drawn to pay for goods and services. He may have received a transferable credit and be able to transfer some of it to a further supplier. If not, he may be able to get his bank, on the strength of the incoming credit, to advance funds to assist him to accumulate the goods needed to fulfill his contract. Once the goods are shipped and documents found to be in order, the seller, depending on the terms of his letter of credit, can normally seek to receive immediate payment from the advising bank. He may have accepted discounted amount, charges and recourse. One sort of pre-export finance he may ask his bank for, but which many British banks are reluctant to do, is to issue a back to back letter of credit to a supplier. In these circumstances, the advising bank (who will often insist on being the paying bank) issues a further, independent letter of credit to the beneficiary’s supplier(s) for all or part of the goods. The “ideal” back to back letter of credit, they say, asks for the same documents, descriptions, etc. as the base letter of credit, in much the same way as the transferable letter of credit does. The idea is that, so long as the dates are amended to allow time, the seller’s bank can receive the second supplier’s documents and submit them under the first letter of credit unchanged, except for the invoices, and get paid.

This mechanism requires skill and trust from the financing bank. But, then, it is the belief that all documentary credit work requires skill and trust on the part of the financing banks. Within the above categories, there are a variety of payment structures: Sight Credit: The sight credit a credit where the beneficiary should be able to receive payment on presentation of credit conformed documents at the paying bank. This may be the issuing bank or its correspondent in the beneficiary’s country. Under UCP, banks are allowed seven days to check documents (which is generous in most cases) and, if payable at the issuing bank, there will be a transit time. A sight letter of credit payable (as most are) at the issuing bank in China would routinely take two to three weeks to get paid. If payable at the counters of the advising bank, that bank may wish to check that it has received funds from the issuing bank (or its, say, New York correspondent) before it pays the exporter. This may take two to three days. Acceptance Credit: In an Acceptance credit an exporter is asked to give the bank (and thus normaly the buyer) time to pay. He has to draw a usance (term) bill of exchange on the issuing ( or advising/ confirming) bank. The documents, once found to be credit confirmed, are taken up and the exporter is advised that he will get his money on a stated value date. The date is determined in a variety of ways, depending on the original agreement between the buyer and seller. It may be certain number of days (say 90) from bill of lading date. It may be a number of days from presentation. It may be a specified day. Deferred Payment: A Deferred Payment credit is very similar, except that there is no bill of exchange. The issuing bank simply states that the letter of credit is payable a specified number of days after one of the trigger dates mentioned above. There are subtle differences in why a deferred payment credit is preferable or less attractive than an acceptance credit. Often, bills of exchange carry stamp duty, which buyers and sellers wish to avoid. On the other hand, they

give any of the holders in due course the option to discount the draft, assisting liquidity. The handling of accepted drafts can add to the banks’ work, and therefore, commissions. With both Acceptance and Deferred payment credits an exporter may, depending on the quality of the issuing (or confirming bank) and on his reputation, be able to discount the proceeds and be paid a lower amount of sight. Also, in both cases, the issuing bank may either be giving the buyer time to on-sell the goods by allowing payment to be deferred or may bra (for itself or for its Government) obtaining deferment of the need to pay out foreign exchange. Negotiation Credit: A negotiation credit allows the advising bank to buy the documents from the exporter, normally with recourse. As with other types of credit the documents may be payable at the issuing bank or at an advising bank. A negotiation credit will be negotiable at a specific bank (the “nominated bank “) or at any bank. If negotiable (or payable) at ony one bank, this is known as “Restricted credit”. Unless the nominated bank is also the confirming bank, no bank (whether nominated or not) is obliged to negotiate documents and can merely pass them on to the issuing bank and pay the exporter on receipt of cover. This all sounds very complicated –which it is –but if an exporter wants to setup a regular trade with a reasonably trusted counterparty, it may well suit him to have documents negotiable in his country. It may be that the importer cannot get his bank to issue credits confirmed or payable outside his country, either because the regulations do not allow it, or because his bank wants tio look at the documents before they part with their money. Advance payment or red clause credit: Under advance payments, or red clause credits the issuing bank allows the advising bank to make a payment against documents other than those evidence than the main contract has been fulfilled. These credits were

originally designed to allow exporters to pay for material prior to shipment. There is suppose to be a credit called “green clause” letter of credit under which not only the value of the wool, but also the cost of the transport was advanced. The expression “red clause” derived from the fact that the stipulation relating to the advance of funds was typed in red on the letter of credit (traditionally up to the margin). Advance payment credits either allow the amount paid in advance to be paid clean – with no security except a receipt –or against some sort of local security, often a bank guarantee or standby credit the advising bank has a duty of ensuring that the counter credit(or guarantee ) is in order. Amounts advanced under this credit vary from 10% to 100%. There are two reasons for applicants to ask for Revolving credits. Either there are goods involved and they are to be shipped in a number of lots or the credit is not used for goods at all and is merely there to assist a local agent or office to draw cash. Under either circumstance, the cost of a credit for the full amount drawable over time is avoided. These credits are worded in a variety of ways. They may stipulate that upto a certain figure maybe drawn against receipt (or transport documents) every month until a total or an end date has been received. Or they may say that the second drawing in a certain month can only be made if a first drawing has been made.

2.10 Advantages of Letter of Credit: 2.10.1 Advantages of Letter of Credit to the Exporter: A)

Provides packing credit: Exporters can easily collect pre-shipment finance from the banks against letter of credit. Red clause letter of credit is issued to the exporter to enable him to collect pre-shipment finance from the bank.

B)

Clearance of exchange control regulations:

C)

D)

When the opening bank issues the letter of credit it indicates that the importer has fulfilled all provisions of exchange control regulations in his country. Transfer of funds will not create a problem for the exchange control authorities. No blocking of funds: The exporter gets immediate payment from the bank when he submits full set of negotiable documents to the bank . If the documents are drawn as per the terms of letter of credit the bank pays the exporter in full. Therefore, the exporter does not have to block his funds. No bad debts: As the payment is guaranteed by the opening bank, the exporter is from the problem of bad debt. In case the exporter holds a confirm letter of credit, there is double guarantee by the opening bank & the confirming bank.

2.10.2 Advantages of letter of credit to the importer:

A) Certainty of shipment of goods: The exporter cannot get any benefit under the letter of credit without shipping the goods and submitting documents to the bank. Therefore, the importer is certain to get his supply.

B) Delivery on time: As the exporter submits the documents in time for negotiation, it reaches the opening bank in time. This enables the importer not only to collect the documents on time but also to collect the goods from the customs. C) Overdraft facility:

When the importer falls short of payment, he can take possession of the documents against overdraft facility.

D) Better terms of trade: The opening bank provides credit facility to the importer. This helps the importer to obtain better terms of trade from the foreign supplier. 2.11 Limitations of Letter of Credit: A) Short life: Every letter of credit has validity period carries short life. It does not give sufficient time to the exporters for shipment of goods and submission of documents. B) Problem of weight units: Weights and measures are different in different countries. Thus disparity often arises through misinterpretation of weight units. C) Insurance problem: The letter of credit may indicate a broad coverage of marine risk whereas underwriters may view them as less risky. Hence underwrites may like to go for limited coverage of risk. 2.12 AIB Tradefinance - Case Study OF LC This was what an Asian Buyer from an Irish Exporting company stated when he convinced the Exporter to sell to them on open account terms. The Asian Buyer obtained 60 days credit, which was to be calculated from the date of the invoice. The value of the order was USD 100, 000 and the goods were despatched and invoiced by the Irish Exporter on the 15th April 2006.

The payment from Asia was due on the 14th June 2006. The payment eventually arrived on the 21st August 2006, over two months late. The delay in payment cost the Exporter USD 1700 as it resulted in his account being overdrawn by this amount for 68 days at 9% per annum. So are Letters of Credit too Expensive ???

The Irish Exporter could have insisted on receiving a confirmed Letter of Credit (see glossary) through Allied Irish Banks plc. The following costs would have applied at that time: Confirmation Fee

USD $250

Acceptance Commission (@ 1.5% pa for 60 days)

USD $250

Negotiation / Payment Fee

USD $150

Out of Pocket Expenses (estimate)

USD

Total Letter of Credit Cost

USD $710

$60

Interest Cost as a result of late payment

USD ($1700)

Benefit of using Letter of Credit

USD

$990

The Letter of Credit looks expensive because the costs are very visible and are linked to each transaction. The benefits, on the other hand, are intangible. 3.BANK GURANATEE 3.1 Need For The Facility: It is customary for the Bank, in normal course of business, to issue and execute guarantees in favour of third parties on behalf of the customers. The Bank guarantees are governed by various provisions as contained in the

Indian Contract Act, 1872. The commercial transactions, bank’s customers are sometimes required to give a Bank Guarantee. This is mostly as an alternate to keep cash as a security deposit. The third party who seeks the guarantee, not being aware of the customer’s financial standing prefers a bank guarantee. In turn the Bank, which very well understands the financial standing of the customer, undertakes the guarantee of the customer’s financial commitments or performance of contracts by him. The bank charges commission for this service, which depends on the security available and the financial stability of the customer. 3.2 Contract of Guarantee: Section 126 of the Indian Contract Act, 1872, defines a “Contract of Guarantee” is a contract to perform the promise, or discharge the liability (enforceable at law) of a third person in case of his default. In a contract of, guarantee given by Bank there are three parties. One is surely i.e. the Bank issuing the guarantee, second is the principal debtor i.e. the Bank’s Customer, one whose behalf the guarantee is issued and third is the creditor i.e. the beneficiary of the guarantee i.e. to whom guarantee is issued.

3.3 Differences between Bank Guarantee and Letter of Credit A Bank Guarantee and a Letter of Credit are similar in many ways but they're two different things. The main difference between the two credit security instruments is the position of the bank relative to the buyer and seller of a good, service or basket of goods or services in the event of the buyer's default of payment. These financial instruments are often used in Trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don't have established business relationships. A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases. Should the bank accept that its customer has sufficient funds or credit to authorize the guarantee, it will approve it. A guarantee is a written contract stating that in the event of the borrower being unable or unwilling to pay the debt with a merchant, the bank will act as a guarantor and pay its client's debt to the merchant. While a letter of credit is a similar, the principal difference is that it is a potential claim against the bank, rather than a bank's client. For example, a seller may request that a buyer be provided with a letter of credit, which must be obtained from a bank and which substitutes the bank's credit for that of its client. In the event that the borrower defaults, the seller would go the buyer's bank for the payment. The seller's risk is mitigated because it is unlikely that the bank will be unable to pay the debt. A letter of credit is less risky for the merchant, but more risky for a bank. Banks accept full liability in both cases. With a bank guarantee, a client can default and the bank assumes the liability. With a line of credit, liability rests solely with the bank, which then collects the money from its client.

3.4 TYPES OF BANK GUARANTEES There are two types of Bank Guarantees (B/Gs): • Short-term Bank Guarantees (which are usually issued for a period of one year, and say, up to three years); and • Long-term Bank Guarantees also known as Deferred Payment Guarantees (DPGs). Long Term Bank Guarantees (DPGs) contain the undertaking, given by the bank, that the amount of installments, stipulated by the Term Lending Institutions, for repayment of the term loans, sanctioned to the applicant borrower, would be paid by the borrower concerned on the due dates, on time, failing which the bank itself will make the payment of the installment on the due date. 3.4.1 SHORT TERM BANK GUARANTEES: Short term Bank Guarantees usually are of two types: I.

Financial Bank Guarantees; and

II.

Performance Bank Guarantees.

I.

FINANCIAL BANK GUARANTEES:

As the name itself suggests, the Financial Bank Guarantees are issued in lieu of depositing some required amount in cash, or for facilitating the release of some withhold payments. This type of guarantee is intended to secure purely monetary obligations. These are guarantees issued by Banks on behalf of the customers in lieu of the customer being required to deposit cash security or earnest money. These kinds of guarantees are generally issued on behalf of customers dealing with Government departments. Specifically the following types of guarantee may be classified as financial guarantees:

TYPES (AND PURPOSES) OF FINANCIAL BANK GUARANTEES 1) IN LIEU OF EARNEST MONEY: While submitting a tender, say, for supplying some items, like furniture, electric fittings, or for undertaking some job, like construction of a building, installation of a sprinkler system for lawns, etc., the applicant are invariably required to deposit some amount in cash or by way of bank term Deposit Receipt (TDRs), on the condition that if the tender of a particular person/company will be accepted and the person/company will eventually back out, the amount so deposited, would be forfeited. This is so, with a view to ensuring that only such parties, who are serious and sincere enough, about rendering the required supply and/or services, must file the relative tenders, quoting some reasonable terms and conditions. 2) IN LIEU OF SECURITY DEPOSIT: Food Corporation of India (FCI), for example, usually stocks of paddy to the rice mills, registered with them, so that they may process the paddy and return the rice to FCI. But, as the stocks of paddy of high value, are generally issued, FCI may insist that some security money, (to the extent of say, 10% or 20% of the value of the paddy, to be supplied at any one time, from time to time), could be deposited with FCI, such that the party may give back the rice of the required value, and any shortage could be recovered from such security deposits. But, making such a huge deposit even by way of Bank's Term Deposit Receipts (TDRs) may not be as easy or gainful for the companies. They may, therefore, approach their bankers and apply for the issuance of a Bank Guarantee for the amount, instead of depositing the cash or the TDR, as the security deposit.

3) ADVANCE FOR SUPPLY OF RAW MARETRIALS: Some companies insist on advance payment in cash or by way of a bank draft, towards the cost of the goods to be supplied. For example, in early 1970s, TISCO did insist on advance payment, of the full amount involved, in cash or by way of a bank draft. These will naturally, mean loss of interest on the amount so paid in advance.

II.

PERFORMANCE GUARANTEE:

The guarantees meant for performance of contracts entered into by the customer are called Performance Guarantees. The banker in such cases does not only agree and undertake that his customer on his part shall duly and effectively observe and perform the conditions of the contract entered into by him, but also declares that in the event of default by the customer, he will upon being conclusive, make payment for such default as agreed in the guarantee. In other words, these are guarantees issued by banks on behalf of its customers whereby the banks assures a third party that the customer will perform the contract entered into by the customer as per the condition stipulated in the contract, failing which the bank will compensate the third party up to the amount specified in the guarantee. In this type of guarantee due performance or fulfillment by the principal debtor is guaranteed and the banks undertakes to make good the financial loss caused to the beneficiary on account of non-performance or short performance of the guaranteed obligation. Illustrations of Performance Guarantees are: a) Performance for installation of plant and machinery within a given time-frame and with agreed specifications. b) Performance of plant and machinery up to the agreed level. c) Performance relating to supply of agreed material within stipulated period.

Although these guarantees are for performance, the quantum of the pecuniary obligations is reduced to monetary terms and the guarantee is issued for the amount. 3.4.2 The long term bank guarantees include: I.

Deferred Payment Guarantees (DPG) and,

II.

Statutory Guarantees.

I.

Deferred Payment Guarantees: This is a guarantee for a payment which has been deferred or postponed. In case of purchase of capital goods like machinery, the necessity to issue deferred payment guarantee arise. In such guarantees, the banks are undertaking to pay the installments due under the deferred payment schedule. Unlike al other Bank Guarantees here the payment will have to be made by the banks on the accepted due dates and thereafter the installment is recovered from the party. The terms of payment for the purpose of such guarantee, are normally advance payment of 10-15% of the price of the capital goods and payment of another 10-15% on receipt of the goods/ documents. The balance amount, along with interest, is payable in installments spread over a period of 1-7 years, which is secured by the deferred payment guarantee. The appraisal of a proposal involving issue of deferred payment guarantee has to be undertaken as it is done in case of a term loan to see the long term viability of the operations, since the payment is to made out of the future cash generation from the activity. As regards the payment mechanism, normally the sellers draw usance bills of exchange which are accepted by the buyer and counter accepted by the buyer’s bank (bank giving the guarantee). These bills are discounted by the seller with his bank and on due date the seller’s

bank presents the bills for payment, which the issue banks pays to the debit of the buyer’s account. Where the buyer’s account does not permit such debit, bank has to pay the due amount and initiate steps to recover the payment from the buyer. Banks secures such guarantees by having charge on the assets purchased and also counter guarantee of the buyers.

II.

Statutory Guarantees: These are guarantees issued by banks favoring courts and other statutory authorities guaranteeing that the customer will honour his commitments imposed upon him under the law, failing which the bank will compensate to the extent of the amount guaranteed. These are usually given in the form of bonds and format of these guarantees are usually drawn by the courts or the concerned authority or are already prescribed by the statute as per which the guarantee is required.

3.5 PRECAUTIONS FOR ISSUING BANK GUARANTEE Appraisal of guarantee limit: As issuance of guarantees involve financial commitment on the part of banks, guarantees should be issued only after careful appraisal of capabilities of the borrowers to perform and meet the commitments being guaranteed by the banks. Though the guarantee limits are classified as nonfund based facility, it becomes fund based when guarantee is invoked and the banker is required to make payment on invocation. Under such circumstances it is necessary that proper assessment of the customer and his needs / capacity is made taking into account various factors. Guarantees should be issued only after strict compliance of sanction.

Purpose of Guarantee: Guarantee should be issued for a definite period depending upon the nature of guarantee and condition of sanction of facility. Normally the period should not exceed 10 years.

Amount: Each guarantee must be for a specified amount commensurate with the customer’s means and creditworthiness.

Limitation Clause: The guarantees issued by the bank normally provide for a claim period in addition to the guarantee period. The beneficiary can invoke the guarantee before the expiry of the claim period for any default committed by the principal debtor during the guarantee period. The period up to which claim should be lodged with the bank should be clearly specified in the guarantee. The limitation Clause reads as under:

“Not withstanding anything contained herein, bank’s liability under this Guarantee shall not exceed Rs. (Rupees only); this Guarantee shall be valid up to ; and bank is liable to pay the guaranteed amount or any part thereof under this guarantee only and only if a written claim or demand is served on or before (date of expiry of claim period).” Guarantees in respect of disputed duties / taxes issued in favour of Government departments/ courts should be secured by 10% cash margin. Onerous Clause: The guarantee should be free from onerous clauses. Any clause on account of which the guaranteeing bank may be called upon to pay an amount beyond the agreed is termed as an onerous clause. Examples of onerous clauses are:  Clause for payment of interest if claim amount is not remitted promptly;  Clause for payment of other charges / expenses incurred by the beneficiary to enforce settlement of claim, over and above the amount guaranteed.

Limitation Period in a Guarantee: Section 28 of the Indian Contract Act 1872 pertaining to limitation clause of the guarantee has been amended with effect from 08/01/1997. Due to this amendment, even when the period of liability is specified in the guarantee, the beneficiary can enforce his remedies till the limitation period is alive i.e. 30 years where the beneficiary is Government and 3 years in other cases from the stipulated expiry date / invocation.

Invocation: The amount claimed under the guarantee should be immediately paid to the beneficiary if invocation is in accordance with the terms and conditions of the guarantee. Withholding payment merely at the instance of the customer should not be done as it results in non-fulfillment of the obligation undertaken by the bank and also affects bank’s image. If the amount of demand as a result of payment by the bank to beneficiary in not paid by the customer within a reasonable period, the recovery process is to be initiated. Invocation of Guarantees by the Beneficiary: Where a guarantee is invoked, no attempt to delay the payment or facilitate the party to bring injunction restraining the payment should be made immediately on demand. However, banks should satisfy themselves has been invoked properly and as per the terms specified therein. Expiry of Guarantees: On expiry of validity period of guarantee, a registered acknowledgement due notice should be sent to the beneficiary advising that the liability of the bank under the guarantee has been received by the bank. If no reply is received from the beneficiary within a reasonable period, say, one month from the date of the aforesaid notice, the entry is reversed by the banks.

3.6 CASES OF BANK GUARANTEE FRAUD A complaint was filed alleging deficiency in service in not paying the amount of bank guarantee on demand. The defense plea was that the demand was not in accordance with terms of guarantee. It was held that where bank guarantee provided conditions for its invocation then Bank would not be deficient in service in not making payment under the bank guarantee if conditions were found not fulfilled. M.P.Minerals Ltd Vs. Bank of India & ors - 2003 (1) CPR 96 (NC) The bank was alleged to have failed to issue bank guarantee despite sufficient security and the complainant suffered financial loss. It was held that the non-issuance of bank guarantee despite security deposit with the bank would amount to deficiency in service and the complainant would be entitled to interest on that security amount. M/s.Anand Lubricating & Pneumatic Systems Ltd. Vs. State Bank of India - 2003 (2) CPR 53

4. BANK OF INDIA 4.1 History of Bank of India

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalised along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalised banks. The Bank has 2884 branches in India spread over all states/ union territories including 155 specialised branches. These branches are controlled through 48 Zonal Offices .There are 27 branches/ offices (including three representative offices) abroad. The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February 2008. . Total number of shareholders as on 30/06/2008 is 2,29,000. Our Mission "to provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders". Our Vision "to become the bank of choice for corporates, medium businesses and upmarket retail customers and to provide cost effective developmental banking for small business, mass market and rural markets"

FOR EXPORTER: Letter of Credit Advising/ Confirmation: Bank of India, having wide network of correspondent banks offers Letter of Credit advising services through SWIFT, fax, telephone to help exporters arrange for shipment and preparing the documents in advance. Bank Guarantees We offer bank guarantees on behalf of exporters to enable them to undertake big export contacts. The guarantees include bid-bond guarantee, Advance payment Guarantee etc. The guarantees are issued for eligible purposes as mentioned in FEMA.

FOR IMPORTER: Letter of Credit Bank of India offers L/C facility for the purchase of goods in the international market. With the Letter of Credit, importers can build up better trust/ confidence in their suppliers and develop other business relationship at a much faster pace. The L/C facility can be granted to the importers after assessing their requirement / credit worthiness / financial strength and other parameters being to the satisfaction of the Bank. We help importers drafting the terms of Letter of Credit so as to protect their interest. The bank's vast network of branches and correspondent banks enables your enterprise to sustain a seamless flow of business on a wide platform.

Bank Guarantees Bank of India on behalf of importers/ other customers issues guarantees in favour of beneficiaries abroad. The Guarantees can be both Performance and Financial. The issuance of guarantee is allowed for the purposes defined under FEMA subject to availability of your credit limits or cash margin. Bank Export Guarantees: (Programme for Issuing Demand Guarantees at the Request of Exporters) 1. Goal and Purpose of the Programme: The goal of the Programme is providing support to Croatian exporters by issuing demand guarantees (hereinafter: bank guarantees) when concluding and implementing export transactions. The purpose of the Programme is issuing bank guarantees with the objective of facilitating the participation of exporters in international tenders and entering into contracts for the purpose of exports of goods, works or services. Bank guarantees shall not be issued for re-export, export of weapons and military equipment and exports of ecologically unacceptable products. 2. Beneficiaries of Guarantees Beneficiaries of bank guarantees can be foreign legal entities inviting tenders and/or intending to enter into a contract to purchase Croatian goods, works or services (hereinafter: bank guarantee beneficiaries). If a bank guarantee is issued in co-operation with an exporter’s commercial bank, beneficiary of guarantee can be the exporter's commercial bank.

3.Terms and conditions for issue of guarantees: • exporter has been operating for at least one year • exporter submitting an application for a guarantee has not been continuously blocked for more than 30 days in the last 6 months of operation, has not been or is not threatened to be under bankruptcy procedure a no process is initiated against it (court, execution, criminal, liquidation etc.). The exporter to which bank has issued a tender guarantee is obliged to submit to bank a report on the results of international tender within 5 days from the publication of decision on the selected bidder. The exporter to which bank has issued a performance guarantee or an advance payment guarantee is obliged to submit to bank quarterly reports on implementation of the export contract, and immediately inform bank on possible problems regarding the contract implementation 4. Change in conditions of an issued bank guarantee: Should a change in terms and conditions of an issued bank guarantee be necessary, the exporter may submit to bank an Application for change in terms and conditions in a written form with the consent of the beneficiary. 5. Fees: Application processing fee: • one-off fee of 0.25 % on the committed amount of issued bank guarantee, but at least HRK 500.00 (five hundred) • charged before the issue of a bank guarantee.

Fee for issuance of bank guarantee: • fee of 0.20% on the committed amount of the issued bank guarantee , but at least HRK 500.00. The fee shall be calculated quarterly in advance. When a guarantee is issued, the fee amount and the manner of calculation are agreed upon for each individual transaction. The bank may assume the exporter’s obligation of payment of agreed fees and the obligation of submitting the respective fee to bank. 6. Security: For the purpose of securing due fulfillment of obligations under an issued bank guarantee, bank accepts bills of exchange and debentures , pledge of property or transfer of fiduciary title to property supported by property insurance policy endorsed in favour of bank and other customary security in the banking operations. All costs arising out of the establishment and termination of collateral are borne by the exporter. When a guarantee is issued in co-operation with the exporter's bank, the bank may assume the obligation of obtaining and activating the security, as well as the obligation of collecting receivables. 7. Documentation to Support Application : Applications for the issue of a bank guarantee have to be accompanied by the following documents: • List of authorized signatories for disposing of the funds deposited in the account •

Data about the collateral (in case of mortgage on the real estate, it is necessary to submit an assessment of the real estate by an authorized

court expert accompanied by a photograph of the real estate taken not more than 2 years beforehand and an excerpt from the Land Register issued not more than 30 days beforehand) • Statement of ownership (pursuant to the Anti-Money Laundering Act, Official Gazette of the Republic of Croatia, No. 69/97, 106/97, 67/01, 114/01, 117/03 and 142/03) • Form for the purpose of establishing a client’s foreign currency position adjustment for loans above HRK 700,000 • Certificate of the Tax administration in charge evidencing the nonexistence of debt obligations towards the state (issued not more than 30 days beforehand) • Plan of inflow and outflow of funds in the bank guarantee validity period • Photocopies of international bidding procedures and their translation to the English and/or Croatian language, photocopies of export contracts, reference list of activities carried out so far, technical specification and the description of subject matter of an export contract/ international bidding procedure and other documentation that is necessary for approval • Certificate of Croatian origin of goods, i.e. the calculation of the portion of Croatian goods or services that should generally be at least 60%, • Excerpt from the Court Register (issued not more than 30 days beforehand) • Company incorporation documents (Social Contract in the case of a limited liability company, By-Laws in the case of a shareholding company) • Notification of the classification of the business entity according to NKD (national classification of economic activities)

• BON 1 and BON 2/SOL 2 issued not more than 30 days beforehand 5.CONCLUSION Banking is fastest growing sector in the world. In banking sector provides most of the facility to customer for their easy convenience and need arises. The bank provides modern banking functions to their customers. These banking functions include Fund based and non-fund based facility. Through the whole project, we can understand that what is the non-fund based facilities which are provided by banks. Banks generally provides lots of non-fund based facility but main includes Letter of Credit and Bank Guarantee. Through the whole project we can conclude that issuing of letter of credit and bank guarantee is not as easy as withdrawing cash from a bank. It includes lots of procedure. The main intention to take this topic is for getting detailed study of Letter of credit and Bank guarantee. Now even a simple man on the earth can know the procedure how to get the letter of credit and bank guarantee this was the main purpose of this project. The procedure is followed practically in banks also as I have visited the Bank of India and collected the information from them. The only difference is in the commission. Banks charges different commission from bank to bank. Some banks take liquid money and some of them take assets for granting letter of credit or bank guarantee.

6.ANNEXURE SAMPLE LETTER OF CREDIT Name and Address of Bank Date: __________________ irrevocable letter of Credit No. ______________ Beneficiary: Exporter

Commodity Credit Corporation Account Party: Name of Address of Exporter

Gentlemen: We hereby open our irrevocable credit in your favor for the sum or sums not to exceed a total of _______________dollars ($__________), to be made available by your request for payment at sight upon the presentation of your draft accompanied by the following statement: (Insert applicable statement)/2 This Letter of Credit is valid until _____________________/3, provided, however, that this Letter of Credit will be automatically extended without amendment for _________________/4 from the present or any future expiration date thereof, unless at least thirty (30) days prior to any such expiration date the Issuing Bank provides written notice to the Commodity Credit Corporation at the U.S. Department of Agriculture, 14th and Independence Avenue, S.W., Room 4503, South Building, Stop 1035, Washington, D.C. 20250-1035, of its election not to renew this Letter of Credit for such additional ______________________/5 period. The notice required hereunder will be deemed to have been given when received by you.This letter of Credit is issued subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500 (Name of Bank)

By: _______________________ BANK GUARANTEE FORMAT STAMP To The President of India Acting through Ministry of Coal Shastri Bhawan NEW DELHI

Whereas M/s. ______________________(Name of Allocattee Company), having Registered Office at _________________(Address), hereinafter called the “Company”, agrees for allocation of _________________(Name of the captive block) block made by the President of India acting through Shri K S Kropha, Joint Secretary and Coal Controller, Ministry of Coal hereinafter

called

the

“Central

Government”

in

the

State

of

______________(Name of State) for captive mining of coal on the terms and conditions contained in their letter No. ________________________ dated _____________ and the Company as per clauses _____ and _____ in the conditions which inter alia are subject matter of the letter of allocation herein referred, agrees to furnish this bank guarantee for an amount of Rs. _______ (in figures) (Rupees ____________ (in words) equivalent to one year royalty amount based on ________(grade of coal) grade capacity of

coal assessed by CMPDIL at ______ (mine capacity) mtpa at an weighted average royalty @ Rs. __________(in figures) per tonne.

We,

_________

(Name

of

the

bank)

Bank,

______________________(Branch, City) Branch hereinafter called “the Bank” in consideration of the premises, at the request of the Company, do hereby guarantee and undertake to pay without demur to the Central Government forthwith on demand at any time upto _____________ (date at least one year from date of Letter of allocation to be renewed, till exhausted or rated capacity reached) any money or monies not exceeding a total sum of

Rs.

_____________(in

figure)

(Rupees

__________________________)(in words) as may be claimed by the Central Government to be due from the Company by way of shortfall in royalty due to failure by the Company in the observance and performance as per clause _____ of the terms and conditions of the said letter of allocation. It is hereby agreed and acknowledged that the decision of the Central Government as to whether any money is payable by the Company to the Central Government or whether the Company has made any such default or defaults as aforesaid and the amount or amounts to which the Central Government is entitled to by reason thereof will be binding on the Bank and

the Bank shall not be entitled to ask the Central Government to establish its claim or claims under this Guarantee or to claim any such amount from the company in the first instance but shall pay the same to the Central Government forthwith on demand without any demur, reservation, recourse, contest or protest and/or without any reference to the Company. Any such demand made by the Central Government on the Bank shall be conclusive and binding notwithstanding any difference between the Central Government and the Company or any dispute pending before any Court, Tribunal, Arbitrator or any other authority.

The Bank further undertake not to revoke this Guarantee during its currency except with the previous consent of the Central Government in writing and this Guarantee shall continue to be enforceable till the aforesaid date of its expiry or the last date of the extended period agreed upon as the case may be unless during the currency of the Guarantee all the dues of the Central Government under or by virtue of clause _____ of the said letter of allocation have been duly paid and its claims satisfied or discharge or the Central Government certifies that the terms and conditions of the said letter of allocation have been fully carried out by the company and accordingly discharged the Guarantee.

Subject to the maximum limit of the Bank’s liability as aforesaid, this Guarantee shall cover all claim or claims of the Central Government against the Company from time to time arising out of or under condition number_______ of the said letter of allocation and in respect of which the Central Government’s demand or notice in writing be served on the Bank before the date of expiry of this Guarantee mentioned above or of further extended period agreed upon, as the case may be. The Guarantee shall not be affected by any change in the constitution of the Company or any extension or forbearance to the company by the Central Government and the Bank will ensure for and be available to and Guarantee enforceable by the Central Government.

Notwithstanding anything contained herein :i.

Our liability under this Bank Guarantee shall not exceed Rs.

________(In

figures)

(Rupees

___________________________________) (in words). ii.

This

Bank

Guarantee

shall

be

valid

till

_______________(date). iii.

We are liable to pay the guaranteed amount or any part thereof under this Bank Guarantee only if you serve upon us

a

written

claim

or

demand

on

or

before

________________.

The Bank has power to issue this Guarantee under the statute and the undersigned has full power to sign this Guarantee on behalf of the Bank. Dated this ………………………… day of ………………

7.BIBLIOGRAPHY Books: Working Capital Management & Control Indian Banking Basics of Banking & Finance

Bhalla V.K. S. Chand Dr .K. M. Bhattacharya O. P. Agarwal

Documentary Credits

WEBLIOGRAPHY: www.google.com www.yahoo.com www.find-internet-banking.info www.banks.com www.bank of india.com

D. C. Gardner