EXECUTIVE SUMMARY

Banking in India originated in the first decade of 18 century with The General Bank of India coming
into existence in1786. This was followed by Bank of Hindustan. Both these banks are now defunct.
The oldest bank in existence in India is the State Bank of India being established as "The Bank of
Bengal" in Calcutta in June 1806.

The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector
from1935. After India's independence 1947, the Reserve Bank was nationalized and given broader
powers.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private sector and foreign
banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,
strong and transparent balance sheets relative to other banks in comparable economies in its region.
The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The
stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange
rate-and this has mostly been true.

The Modern Banking Functions are Fund based and Non-Fund based functions. These functions of a
bank are those in which banks extend various services to their customers or add their commitments
to certain transactions undertaken by their clients and charge their fees/ commissions for the services
rendered by them / their commitments added to the transactions undertaken by the clients. The
activities popularly known as ‘Non-fund facilities’ provided by Banks.

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.

Thus, we conclude that the Letter of credit and Bank guarantee comes in a plethora of confusing
forms ND GUISES. It is understood in different ways in different parts of the world. But, once the
basics are understood, it is wonderfully adaptable and uniquely user friendly tool
 NON-FUND BASED

1.DESIGN OF STUDY

1.1 OBJECTIVE OF STUDY 7

1.2 SCOPE OF THE STUDY 7
1.3 LIMITATIONS OF THE STUDY 7
1.4 METHODOLOGY 7

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1. DESIGN OF STUDY

1.1 Objective Of Study

1. To understand the importance of banking sector.

2. To perceive the meaning of Non-fund based facility.

3. To visualize the significance of Letter of Credit and Bank Guarantee.

4. To link the role of letter of credit and Bank guarantee with development of the banks.

5. Readers can see the case study of Dena bank playing role of LC and BG.

1.2 Scope Of The Study

1. The readers can come to know the various types of Non-Fund based facilities by Banks.

2. To guide the importers and exporter while removing LC and BG.

3. One can come to know about types of LC and BG.

4. The readers can come to across the sample letter of credit and bank guarantee.

5. They can come to know the procedures of LC and BG.

1.3 Limitations Of The Study

1. The project study is restricted to banking sector used in India only.

2. The conclusion made is based on a sample study and does not apply to all the
individuals.

3. All banks are not included.

1.4 Methodology
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1. Primary data is collected from a sample size of 30 individuals.

2. Secondary data is collected by referring books relating to banking and basics of

banking. Also referred to Dena Bank, magazines and internet.

1. INTRODUCTION

The exchange of goods and services across national boundaries brings greater problems to both
buyer and seller than does domestic business. These problems arise from the diversity of customs,
standards, currencies, local regulations, languages and legal systems that are spread across the
world. To an extent, the globalization of the past half century has reduced the barriers and anomalies,
but the great majority persists.

This project aims to introduce traders, bankers and buyers and sellers of all types to one of the most
widely employed mechanisms for reducing the financial risks of trade, the Documentary Letter of
Credit and Bank Guarantee. The Letter of credit and Bank guarantee comes in a plethora of
confusing forms ND GUISES. It is understood in different ways in different parts of the world. But,
once the basics are understood, it is wonderfully adaptable and uniquely user friendly tool for
businessmen and women world wide.

It is worthwhile, at this stage, remembering the key barriers that present themselves to the average
exporter and importer.

The importer wants to be sure that he will get his goods on time and in good order. He wants to
ensure performance. He does not want to pay for something that he cannot be reasonably sure of
getting.

The exporter wants to be sure that, once he has performed his part of a contract he gets rewarded.
He wants to secure payments. He wants to be paid, preferably as soon as possible, sometimes in
advance.

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2.FUND BASED FACILITY

3.1 INTRODUCTION 10
3.2 MEANING 10
3.3 TYPES OF FUND BASED FACILITY 11

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3.1 FUND BASED AND NON-FUND BASED FUNCTIONS

The difference between fund-based and non-fund based credit assistance lies mainly in the cash
outflow. While the former involves all immediate cash outflow, the latter may or may not involve cash
outflow from a banker. In other words, a fund based credit facility to a borrower would result in
depletion of actual liquidity of a banker immediately whereas grant of non-fund based credit facilities
to a borrower may or may not affect the banker’s liquidity.

This is, of course, not to suggest that there is more risk in fund-based lending than non-fund based
lending, on the contrary, the experience of bankers, in general, has been that the risk exposure in,
non-fund based credit facilities has been much higher than fund-based facilities. This is found to be
due to lack of proper appraisal on the part of the banker of an application for non-fund facilities. It is
therefore, to be appreciated that proposals for both the fund-based and non-fund based limits
deserve and call for the same standard of scrutiny and appraisal.

3.2 FUND BASED FACILITY

F und based functions of a bank are those in which banks make deployment of their funds either by
granting advances or by making investments for meeting gaps in funds requirements of their
customers/ borrowers. Fund-based functions of a bank may be classified into two parts:

• Granting of Loans and Advances

• Making Investments in shares/ debentures/ bonds.

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3.3 FUND BASED FACILITY

I. LOANS AND ADVANCES

1. Commercial Loans Segment

A. Working Capital

i. Cash Credit

ii. Overdraft

iii. Bills Finance

iv. Bills Purchase

v. Bills Discounting.

B. Tem Loans

i. Capital Expenditure

ii. Equipment Finance

iii. Project Finance

2. Personal Loans Segment

i. Consumer Loans Advance against Shares

ii. Housing Loans

iii. Education Loans.

II. INVESTMENTS

1. Capital Market Instruments

2. Debt Market Instruments.

4.NON-FUND BASED FACILITY

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4.1 INTRODUCTION 13

4.2 PURPOSE FOR NON-FUND BASED 13

4.3 WHY CALLED NON-FUND FACILITY 14
4.4 ESTABLISHMENT OF LETTER OF CREDIT
AND BANK GUARANTEE 15
4.5 RBI NORMS 15

4.1 NON-FUND BASED FACILITIES

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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/ Establishment Agency Merchant Banking

Transfer Facilities of LC/BG Function Function

4.2 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 non-fund 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:

4.3 WHY CALLED NON-FUND BASED FACILITIES?

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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/Gsdonot 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.

And, as these facilities also involve financial risks, the amount, and the terms and conditions of the
L/C and B/G, are also determined by the banks, on the basis of all the precautions taken, as is done
at the time of granting Fund Based credit facilities (like stock cash credit), whereby the borrower gets
the right to withdraw the amount immediately after sanction of the limit, of course, within the over-all
credit limit sanctioned and the Drawing Power (DP) available at the material time. Accordingly, the
limits for L/C and B/G were also being stipulated well within the MPBF (Maximum Permissible Bank
Finance). But now, the limits of the L/C and B/G are sanctioned separately and are independent of
the ABF (Assessed Bank Finance

Non-Fund based working capital financing comprises:

1. Letters of Credit (L/Cs), and

2. Bank Guarantees (B/Gs).

4.4 ESTABLISHMENT OF LETTER OF CREDIT AND BANK GUARANTEE:

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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
facili

4.5 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

Example 1.

Particulars Rs. Rs. in Crores

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

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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

@ 50% of limits

150

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.

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5.LETTER OF CREDIT (LC)

5.1 INTRODUCTION 19
5.2 WHY LETTER OF CREDIT? 19
5.3 MEANING 21
5.4 TERMINOLOGY 22
5.5 THE BANK OBLIGATIONS & RESPONSIBILITY 23
5.6 STANDARD FORMS OF DOCUMENTATION 25
5.7 COMMON DEFECTS IN DOCUMENTATION 26
5.8 HOW IT WORKS 27
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5.9 THE PRICE OF LC 29
5.10 LEGAL BASIS FOR LC 29
5.11 PARTIES TO LC 30
5.12 CHARACTERISTIC OF LC 31
5.13 TYPES & PAYMENT STRUCTURE OF LC 33
5.14 ADVANTAGES OF LC
5.14.1 TO EXPORTER 38
5.14.2TO IMPORTER 39
5.15 LIMITATIONS OF LC 40
5.16 CHECKLIST & GUIDE TO EXPORTER 41
5.17 CHECKLIST & GUIDE TO IMPORTER 45
5.1 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.

5.2 WHY LETTER OF CREDITS?

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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
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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.

For many, faced with the risks above, the answer is a Documentary Letter of Credit. The concept of
a documentary credit is remarkably simple. In essence it is:

An undertaking by a bank, on behalf of an importer, to an exporter that, if specified

documents (showing that a shipment has taken place or a service has been supplied) are
presented to that bank within a certain time frame, he will be paid.

5.3 WHAT IS LETTER OF CREDIT (L/C)?

A Letter of Credit (L/C) is a written document issued by the Buyers' Banker (BBK), at a request of the
Buyer (B), in favour of the Seller(S), whereby the Buyer's Banker (BBK) gives an undertaking to the
Seller(S) that, in the event of the Seller tendering the Bill of Exchange to the Seller's Banker (SBK),
along with all the required documents, in strict compliance of all the terms and conditions stipulated in
the L/C, the entire amount of the bill will be paid to the Seller (S) by the Seller's Banker (SBK), on
behalf of the Buyer's Banker (BBK) immediately, as has been, in turn, undertaken by the buyer to his
own Banker(BBK).

The L/C is usually issued by the buyer's banker in quadruplicate. And, the buyer's banker sends the
original and the three copies to the respective parties involved, as under:

i. The original L/C is sent to the paying (seller's) banker (SBK).

ii. One copy is sent to the seller (S) through his (seller's) banker (SBK), for his information and
further necessary action.

iii. One copy is sent to the buyer (B) for his information, and

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iv. One (office) copy is retained by the issuing (buyer's) banker (BBK) for his office records and
reference, whenever the documents, drawn under the L/C, are received for payment or for
issuance of amendments thereto, etc.

While the original L/C is duly stamped, as per the Indian Stamp Act, the other copies are unstamped;
they are just marked as Not Negotiable copies, meant for the buyer, seller, and office copy.

i. The original L/C is sent by the buyer's banker, to the seller's banker, authorizing him to make
the full payment of the Bill of Exchange to the seller, provided all the documents, tendered by
the seller, are in strict conformity with the terms and conditions stipulated therein(L/C). And, in
the event of any of the terms and conditions, how-so-ever minor or apparently insignificant,
being at variance with those stipulated in the L/C, the seller's banker should decline to make
any payment to seller against the documents tendered under the L/C in question.

The paying banker (seller's banker) should, instead, point out the deficiency/ deficiencies found
in the documents to the seller, suggesting to him either;

1. to rectify the irregularities observed, or

2. to contact the buyer, to approach his (buyer's) banker and arrange for the required
amendments to the L/C, so that the paying (seller's) banker could honour and make
payment against the bills drawn under the L/C. and, if so requested by the buyer, the
buyer's banker may issue the required amendment which can well be done by
means of a simple letter on the letter head of the bank (unstamped). Such
amendment letter is also sent by the buyer's banker to all the involved parties, as is
usually done in the case of the issuance of the L/C, i.e.,

a) Original letter is sent to the seller's banker;

b) One copy is sent to the seller's banker for onward transmission to the seller
for his information and necessary action;

c) One copy is sent to the buyer; and

d) One copy is retained by the issuing (buyer's) banker for office records.

Under certain special circumstances, if so requested by the seller (preferably in writing, and that to,
supported by the execution of a duly stamped indemnity bond), the paying (seller's) banker may
make the payment to the seller in full, but "under reserve"; that is, incase the payment is refuse by
the buyer, on the plea that some specific terms and conditions, stipulated in the L/C, were not fulfilled,
the seller's banker will have the right to recover the amount, (paid earlier 'under reserve') immediately
after coming to know of such refusal of the payment by the buyer.

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5.4 Terminology

The English name “letter of credit” derives from the French word “accredit if”, a power to do
something, which in turn is derivative of the Latin word “accreditivus”, and meaning trust. This in effect
reflects the modern understanding of the instrument. When a seller agrees to be paid by means of a
letter of credit s/he is looking at a reliable bank that has an obligation to pay them the amount
stipulated in the credit notwithstanding any defense relating to the underlying contract of sale. This is
as long as the seller performs their duties to an extent that meets the credit terms.

5.4 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 (UCP article 7). 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, which are dealt with at
length in UCP article 9, 13, and 14, although there are some useful disclaimers for the banks to
shelter behind in article 15, 16, 17, and 18.

Some key provisions from these articles can be summarized as follows:

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Banks have to examine documents within seven banking days after receipt of the documents at
their counters. (Article13b).

Banks will examine documents with reasonable care to ensure that they comply on their face with
the requirements of the credit, such documents not to be inconsistent with each other. (Article13a).

Banks examining documents should determine their credit compliance on the basis of the
documents alone. (Article14b). This provision appears to protect the banks but they use these to
look behind sets of documents. Fraud negates all obligations.

There are strict procedures in advising and dealing with discrepancies found in documents.
(Article14d, e and f).

Banks have the protection of the disclaimer provisions, which cover the
following:
Banks are not responsible for the genuineness or contents of any document submitted. (Article15).

Banks are not responsible for losses etc. arising from transmission problems. (Art16).

Force Majeur. (Article17).

Banks are not responsible for the failing of their correspondent banks. (Art18a and b).

The applicant is responsible for all banks charges and other costs at home or abroad even if they
are supposed to be paid by the other party. (Art 18c).

The applicant is responsible for any adverse consequences of foreign laws. (Art 18d).

The various banks have responsibilities between each other.

These mostly relate to payment. (Article 19)

If the buyer and seller feel after all this that the banks have little to do, it is worth adding that most
banks take their responsibilities more seriously than the foregoing implies. It is well worth also adding
that, give the flexibility of interpretation available to the bank that checks the documents, it is
important to each party that they are checked by a bank that has that party’s interests to heart. There
follows a tussle between buyer and seller, each wanting the paying bank to be his own. In some

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countries this is easier than in others. For beneficiaries, this means asking for a confirmed letter of
credit, if this is more expensive.

5.5 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.
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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.

5.4 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 (UCP article 7). 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, which are dealt with at
length in UCP article 9, 13, and 14, although there are some useful disclaimers for the banks to
shelter behind in article 15, 16, 17, and 18.

Some key provisions from these articles can be summarized as follows:

Banks have to examine documents within seven banking days after receipt of the documents at
their counters. (Article13b).

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Banks will examine documents with reasonable care to ensure that they comply on their face with
the requirements of the credit, such documents not to be inconsistent with each other. (Article13a).

Banks examining documents should determine their credit compliance on the basis of the
documents alone. (Article14b). This provision appears to protect the banks but they use these to
look behind sets of documents. Fraud negates all obligations.

There are strict procedures in advising and dealing with discrepancies found in documents.
(Article14d, e and f).

Banks have the protection of the disclaimer provisions, which cover the
following:
Banks are not responsible for the genuineness or contents of any document submitted. (Article15).

Banks are not responsible for losses etc. arising from transmission problems. (Art16).

Force Majeur. (Article17).

Banks are not responsible for the failing of their correspondent banks. (Art18a and b).

The applicant is responsible for all banks charges and other costs at home or abroad even if they
are supposed to be paid by the other party. (Art 18c).

The applicant is responsible for any adverse consequences of foreign laws. (Art 18d).

The various banks have responsibilities between each other.

These mostly relate to payment. (Article 19)

If the buyer and seller feel after all this that the banks have little to do, it is worth adding that most
banks take their responsibilities more seriously than the foregoing implies. It is well worth also adding
that, give the flexibility of interpretation available to the bank that checks the documents, it is
important to each party that they are checked by a bank that has that party’s interests to heart. There
follows a tussle between buyer and seller, each wanting the paying bank to be his own. In some
countries this is easier than in others. For beneficiaries, this means asking for a confirmed letter of
credit, if this is more expensive.

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5.5 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:

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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.

5.6 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.

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5.7 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.

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SELLER’ BUYER’ SELLER BUYER’S

S S ’S
BANKER
BANKE BANKE

SELLE BUYER SELLER BUYER

R

CARRIE CARRIER

1. After a contract is concluded 2. Seller consigns the goods to a

between buyer and seller, carrier in exchange for a bill of
buyer’s bank supplies Letter of lading.
Credit to seller.

SELLER BUYER SELLER BUYER’

’S ’S ’S S
BANKE

SELLER BUYER SELLER BUYER

CARRIER CARRIE
R

3. Seller provide bill of lading to bank 4. Buyer provides bill of lading to

in exchange for payment. Seller’s carrier and takes delivery of goods.
bank exchanges bill of lading from
buyer’s bank for payment. Buyer’s
bank exchanges bill of lading for
payment from buyer.

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5.8 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.

5.9 Legal Basis for Letters of Credit

Although documentary credits are enforceable once communicated to the beneficiary, it is difficult to
show any consideration given by the beneficiary to the banker prior to the tender of documents. In
such transactions the undertaking by the beneficiary to deliver the goods to the applicant is not
sufficient consideration for the bank’s promise because the contract of sale is made before the
issuance of the credit, thus consideration in these circumstances is past. In addition, the performance
of an existing duty under a contract cannot be a valid consideration for a new promise made by the
bank: the delivery of the goods is consideration for enforcing the underlying contract of sale and
cannot be used, as it were, a second time to establish the enforceability of the bank-beneficiary
relation.

Legal writers have analyzed every possible theory from every legal angle and failed to satisfactorily
reconcile the bank’s undertaking with any contractual analysis. The theories include: the implied
promise, assignment theory, the innovation theory, reliance theory, agency theories, estoppels and
trust theories, anticipatory theory, and the guarantee theory. Davis, Treitel, Goode, Finkelstein and
Ellinger have all accepted the view that documentary credits should be analyzed outside the legal
framework of contractual principles, which require the presence of consideration. Accordingly,
whether the documentary credit is referred to as a promise, an undertaking, a chose in action, an
engagement or a contract, it is acceptable in English jurisprudence to treat it as contractual in nature,
despite the fact that it possesses distinctive features, which make it sui generis.

Even though a couple of countries and US states (see e.g. Article 5 of the Uniform Commercial Code)
have tried to create statutes to establish the rights of the parties involved in letter of credit
transactions, most parties subject themselves to the Uniform Customs and Practices (UCP) issued by
the International Chamber of Commerce (ICC) in Paris. The ICC has no legislative authority, rather,
representatives of various industry and trade groups from various countries get together to discuss
how to revise the UCP and adapt them to new technologies. The UCP are quoted according to the
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publication number the ICC gives them. The UCP 600 is ICC publication No. 600 and will take effect
July 1, 2007. The previous revision was called UCP 500 and became effective 1993. Since the UCP
are not laws, parties have to include them into their arrangements as normal contractual provisions. It
is interesting to see that in the area of international trade the parties do not rely on governmental
regulations, but rather prefer the speed and ease of auto-regulation

5.10 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:

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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.

5.11 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.

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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.

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5.12 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).

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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.

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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
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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
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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.

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5.13 Advantages of Letter of Credit:

5.13.1 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:

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.
C) 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.
D) 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.
E) No liability:

In case of confirmed letter of credit and without Recourse clause, the liability of the
exporter comes to an end as soon as he hands over the relevant documents to the
bank.

F) Certainty of payment:
The importer cannot refuse to take possession of the goods and to clear the payment
when the terms of payment is letter of credit. This problem of non-possession and non-
payment may arise in case of D/P & D/A.

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5.13.2 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.

E) Funds are not blocked:

There is no need for the importer to block his funds by making advance payment to the
exporter.

F) Long business associations:

L/C protects the interest of both the exporter and the importer. Nothing is left to the
imagination of both the parties because the L/C mentions all the terms and
conditions of the business. It helps the exporter and importer to have prolonged
business associations

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5.14 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.

D) Packing material consideration:

When the importer places an order, he specifies in the letter of credit the type of
packing material that the exporter should provide. If the exporter uses exporter
can take objection.

E) Lack of safety:
In case of revocable L/C the opening bank can cancel or modify the L/C without
prior permission of the beneficiary. This creates the problems of safety of
payments.

F) Delayed payments:
The exporter collects payments from the negotiating bank no sooner he submits
the documents. When payment is delayed by the opening bank, the exporter has
to pay heavy interest on the advances.

G) Problem of discrepancy:
If the exporter does not submit the documents as demanded by the importer, it is
called discrepancy in documents. Because of discrepancy the importer either can
delay or withhold payment.

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5.15 Letters of Credit - Checklist and Guide for Exporters

Key Checks When the Letter of Credit is Received

Before going any further:

• Check that the letter of credit states that it is subject to the 2007 revision of the Uniform
Customs and Practice for Documentary Credits (UCP) of the International Chamber of
Commerce (usually referred to as UCP 600 or perhaps "current revision")
• Check the authenticity of the credit. Forgeries are comparatively rare, but dangerous. Credits
are normally sent through an Advising/Confirming bank in the UK. Any departure from this
routine should be viewed with suspicion, for example if it comes to you direct from overseas If
you do not recognize the UK Advising/Confirming bank, especially if it comes from a UK
address asking you to send documents abroad, check its authenticity with your own bank
• According to UCP 600 Article 9(b), the Advising bank shows it is satisfied that as to the
apparent authenticity of the credit by advising the credit
• If you receive an unexpected credit from a buyer unknown to you, even under cover of a
seemingly genuine advice from a UK bank, check with the bank that everything is in order
-particularly if it calls for goods to be shipped direct to the buyer with only a PO Box number

Having assured yourself on these points, proceed with the key checks. Bear in mind, as
mentioned, that over half of credit documents are rejected on first presentation to the banks.
The main reason for this is matters that could have been put right, had the credit been checked
early enough, were not put right. Making these key checks on the day the credit arrives,
consulting other departments accordingly and carrying out the more detailed checks
immediately afterwards, will enable difficulties to be spotted in better time to take action.

Check that you will be paid at the time you planned

The credit may specify payment some time after shipment or after documents and/or drafts have
been deemed compliant by the paying bank (Nominated or Issuing bank). Additional delays and other
problems may arise if payment/acceptance is to take place abroad

Check that your company name, address and full title and those of the buyer are correct and
consistent with all other documents

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Check that you can produce the goods, ship them, assemble the documents required and
deliver them to the bank, all by the expiry date and within the time limit for presentation of
transport documents

The bank has no discretion under UCP 600 and is not in a position to treat as compliant either
documents presented after expiry dates or documents not completely in order

If the credit has been sent electronically to a UK bank ("tele transmitted") check that it
provides details of the credit that you can act upon and that is not just a pre-advice

Unless it says otherwise, and provided it refers to UCP 600, the tele transmitted credit: can be taken
as the operative credit; can be safely acted upon; and overrides any later mailed advice. Unless a
pre-advice states otherwise, the Issuing bank is bound to follow up the pre-advice by issuing the
credit

Check that only those bank charges you agreed to pay are stated to be for your account

Be careful over bank reimbursing charges with a credit not expressed in sterling

Detailed Checks Immediately on Receipt of the Credit:

When checking your credit under the headings below, remember that UCP 600 will apply fully unless
you have agreed different terms, which are reflected in the credit. One or more of the following
checkpoints may thus be overridden by conditions stipulated in your particular credit. If you are still
unclear as to what the wording of the credit implies check what UCP 600 has to say on the point and
with the UK bank.

Note: It is recommended that the details of the credit be recorded at this point so that a progress
check can be updated right through to presentation of the final documents to the bank for payment.
The Documentary Letter of Credit Exporters Validation Form available from Chancellor Formecon Ltd
provides a convenient way for doing this.

Company names, addresses and other details

All details should be correctly spelt and consistently reproduced on all the documents

Following UCP 600 Article 14(j), addresses need not be the same as stated in the credit, but must be
within the same country as the respective addresses mentioned -except when the Applicant's contact
details appear as part of the consignee or notify party details on a transport document

Are partial shipments expressly prohibited?

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If not, they are allowed (UCP 600 Article 31(a))

Can you meet the expiry date and also present documents within the transport document time
limit?

You will need to allow for:

• Production and packing

• Inspection, if required, and obtaining any inspection certificate or clean report of findings
• Obtaining other certificates (e.g. certificate of origin)
• Chamber of Commerce and/or consular work
• Shipment against availability of transport
• Assembling and checking documents
• Presenting documents to the bank

 The presentation of documents must be completed within 21 days of the date of

shipment evidenced by the transport document, unless the credit curtails or extends the
period - a credit will more frequently curtail the period

 The expiry date stipulated in the credit must be adhered to - it is not overridden
by the 21-day rule
 It might be in your interest to ask for an extension on the 21 days - provided it
falls within the validity of the contract

Interpretation of common business language

For example, words such as "promptly" and "immediately" are disregarded under UCP (refer to
Article 3 of UCP 600 for further information)

What if the credit is wrong or ambiguous on any of the above points?

Prompt decision and action is necessary on:

• Whether you can change your plans or paperwork to meet the requirement
• Whether to ask the customer to amend the credit and who pays for the amendment
• Whether to let things stand and risk non-payment
• If in doubt, always consult your own bank and/or the paying bank for advice and make a record
of the time, date and outcome of the contact
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• Remember that only the Applicant can authorize amendments, i.e. alterations or extensions,
through his bank

When Compiling Documents for Presentation to the Bank:

Ensure that:

• Documents presented in the credit are presented as separate documents

For example, if a packing list and weight list are required and you have a combined packing
and weight list, two original copies of this document will need to be presented

• You have the correct number of originals and/or copies of each; they carry the information
called for; the title of each is correct and it is issued by the party specified in the credit

• They do not conflict

For example, the shipping marks, quantities/weights, transport details, references, and in
general terms the descriptions, must tally so that they clearly relate on their face to the same
shipment

• The description of goods is correct

They may be described in general terms (not conflicting with the credit) in all documents
except the invoice, where the exact contract description should be reproduced

• Contract details should preferably not be repeated in full in transport documents and some
carriers will refuse to enter more than the minimum necessary information. This may cause a
discrepancy if the information conflicts with that in the credit or other documents

Documents are authenticated where necessary - import regulations in some countries still
make it essential to sign manually and possibly witness documents and any alterations or
additions to them

Any restrictions in the credit are catered for, for example if short form bills of lading are
prohibited

5.16 Letters of Credit - Checklist and Guide for Importers

Arranging for the Letter of Credit

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When negotiating the order or sales contract with your supplier, you should only be thinking of using a
letter of credit if your country's exchange control regulations require it or if your supplier insists on it
as the means of payment. Otherwise, you should try to avoid the procedure because it can quite often
cause problems for both your company and your supplier.

Make sure that you

• Have exchange control approval for the importation, if required

• Will be able to obtain any necessary import license
• Can pay import deposits and Customs duty on time
• Check whether forward exchange cover or a foreign currency account is advisable for credits
not in your currency
• Consult other departments in your company to ensure that the terms of the sales contract and
credit meet their requirements

Points to agree with your supplier

• Who pays the charges for: issuing (and possibly confirming) the credit; amendments and or
extensions; and subsequent payment charges

 Unless you specify otherwise, all those charges will be payable by you as the Applicant
(opener), including those in the Beneficiary's country
 If the credit is in a foreign currency, check with your bank on the matter of reimbursing
commission

• The type of letter of credit and its terms

 If in doubt discuss them with your bank before you proceed

The expiry date of the letter of credit

Must allow time for your supplier as the Beneficiary to: receive the credit; obtain or manufacture
goods; complete arrangements for packaging and transport; and assemble documents prior to
presentation

Issuing bank charges are normally levied on a quarterly basis, so an expiry date of 3 months from
issue or a multiple thereof will be normal in most cases

If the validity proves too short this will likely involve amendments and also lead to delay in dispatch

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Do not work to the supplier's "Ex Works" date, but allow further time for shipment, inspection or
consular work, assembling documents and presenting them to the bank

Check that you have on file the names, full addresses, telephone, email and fax details of the
people responsible for the handling of letter of credit operations for both yourself and your
supplier

When applying to your bank for a letter of credit

Give your bank clear and precise instructions and avoid unnecessary requirements

• If a latest shipment/dispatch date is to be quoted, this should precede the expiry date by the
number of days allowed for presentation of documents
• If a latest shipment/dispatch date is not indicated it will be taken to be the same as the expiry
date

State clearly

What type of letter of credit has been agreed

Who pays what charges, commissions and any other costs

The correct value (see Completing the Application Form, Currency and amount)

• Ensure it covers the value as stated in the sales contract, including any agreed variations in
quantity, price, or other costs such as freight and insurance, inspection fees
• "About" and similar expressions used in conjunction with the credit amount or the quantity of
goods or the unit price allows a tolerance of up to ± 10%

The delivery terms (see Completing the Application Form, Terms) for example £25,000 CFR
Singapore -Incoterms 2000. It is essential to refer to the appropriate Incoterms 2000 in all sales
contracts to establish without doubt the responsibilities of the seller and the buyer during the delivery
of the goods

• Remember to match documents to delivery terms. For example: stipulate "freight paid" on
transport document where appropriate; do not call for a certificate of insurance for CFR or CPT
purchases

Method of Issue

Electronic tele transmission will avoid any possibility of delay

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Where the Beneficiary merely requires advance notification of a credit to come and there is no
immediate urgency to ship goods and present documents, an electronic pre-advice with the effective
credit following by air mail is sufficient

• Note: under UCP 600 Article 11(b) the pre-advice must be followed by the operative credit -
unless the pre-advice says otherwise
• Pre-advice is rarely used due to the near universal use of SWIFT

Part Shipment/Transhipment:

Part shipments should normally be allowed particularly in view of short drawings within the tolerance
allowed (see item 4 under "Completing the Application Form".)

Credits relating to container shipments should not prohibit transhipment and it is not always possible
to dispatch goods by air without transhipment.

Special Conditions/Other Instructions:

Bank charges and who is responsible for payment of these should be entered here

It is normal banking practice for the beneficiary to pay all banking charges in his country and for you
to pay those on your own -unless agreed otherwise

Note: If reference to charges is omitted banks will assume that all bank charges are for your account
as the Applicant

If confirmation by the Advising bank is required, this should also be entered here

An additional charge will be made and it should be agreed as to who pays this charge

Any other specific instructions such as 'credit to be transferable' should be entered, as appropriate

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6. BANK GUARATNTEE (BG)

6.1 NEED FOR THE FACILITY 50

6.2 CONTRACT OF BG 50
6.3 DIFFERENCES BETWEEN LC & BG 51
6.4 TYPES OF BG
6.4.1 SHORT TERM BG 52
6.4.2 LONG TERM BG 54
6.5 PRECAUTIONS FOR ISSUING BG 56
6.6 BANK GUARANTEE PROCEDURE 58
6.7 BANG GUARANTEE FRAUDS 67
6.8 CASES OF BG FRAUD 68

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6.BANK GUARANTEE

6.1 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.

6.2 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.

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6.3 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.

The initial claim is still settled primarily against the bank's client, and not the bank itself. Should the
client default, then the bank agrees in the bank guarantee to pay for its client's debts. This is a type of
contingent guarantee. A bank guarantee is more risky for the merchant and less risky for the bank.
But this is not the case with a letter of credit.

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.

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6.4 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.

6.4.1 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

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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.

In such cases, some persons/companies may prefer to offer a bank guarantee, instead
stipulating the undertaking, given by the bank, on behalf of the person/company, that in the
event of the tender being passes and accepted, and they, in turn, preferring to back out from
the compliance of the terms and conditions of the tender, the bank would pay the amount of
the required earnest money, as stated in the bank guarantee. Such bank guarantees can,
however, be invoked by the beneficiaries, only if it is established that:

a. the tender concerned was accepted, and

b. the relative party had since backed out.

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.

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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.

6.4.2 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
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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.

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6.5 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 non-fund
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).”

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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.

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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.

6.6BANK GUARANTEE PROCEDURE

Guarantees

Identification:

1. Each guarantee is developed in close consultation with the member country, and the country
director ensures that each one is consistent with the Bank's Country Assistance Strategy (CAS).

2. Guarantees for public sector projects and those in support of development policy lending
operations are generally proposed by the government; those for private sector projects may be
proposed by either the government or the sponsors that are promoting a particular project. In all
cases, the member country's request for the guarantee is a prerequisite for further processing of the
guarantee. Bank1 staff advise the member country that it would be required to provide an indemnity to
the Bank in respect of the Bank's guarantee.

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3. When a Bank guarantee is proposed, the Region consults with the Project Finance and
Guarantees Group (PFG) and with the Legal Vice-Presidency (LEG). In addition, when a Bank
guarantee is being considered for a private sector project, PFG coordinates with IFC's Corporate
Planning Department and MIGA's Operations Department to maximize private financing for the
project.

4. The Region forms a task team that includes Regional staff, representatives of PFG and LEG, and
representatives of other Bank departments, as necessary.

5. The task team informs sponsors, lenders, and the member country government that the project or
the program to be supported by the proposed guarantee must comply with all applicable Bank
policies, and that the guarantee is subject to management review and Board approval. They explain
the structure and level of the Bank's fees for the proposed guarantee.

Project Processing:

6. In guarantee operations, appraisal and negotiations are normally an ongoing process, rather than
discrete steps, as in loans.

7. As early as possible during processing, the task team prepares a Project Information Document
(PID). The PID presents the principal elements of the guarantee operation, including its rationale,
composition, potential benefits/risks, proposed environmental assessment category, and the key
features of the proposed guarantee structure. The draft PID is reviewed according to Regional
procedures and cleared by LEG. Once the Bank receives the government's request for the guarantee
(see paragraph 2), and at least 60 days before the expected date of Board presentation, the task
team sends the PID for a Bank guarantee to the Bank's Info Shop. However, when a deviation from
this time framework is justified on operational grounds, the Regional vice president (RVP), in
consultation with LEG and Operations Policy and Country Services (OPCS), may approve the
deviation and determine the appropriate timing of disclosure of the PID.

8. Whenever there is a material change in the guarantee operation, the task team updates the PID
and sends it to the InfoShop again.

9. The borrowing entity (public or private) is responsible for arranging financing (acceptable to the
Bank) to be covered by the guarantee, including the currency and market of the borrowing, the terms
of lending, and the type of private lending instrument acceptable to the Bank.

10. For investment projects supported by guarantees, all reports required to comply with applicable
safeguard and disclosure policies must be prepared in sufficient time for (a) the Regional environment
sector unit to review and comment on the report, and (b) the task team to take the findings into

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account as part of appraisal.

11. The task team, in consultation with the sponsors, the lenders, and the member country
government, develops the structure of the proposed Bank guarantee. The task team assesses the
adequacy of all related aspects—including the project's financial and economic viability, its technical
and environmental aspects, and its implementation arrangements—depending as appropriate on any
appraisals carried out by IFC or other lenders. The appraisal of a policy based guarantee (PBG)
operation is carried out within the framework of the CAS. The appraisal of a PBG assesses the
operation's developmental benefits as well as compliance with policy conditionality, and trade-offs
among additional private exposure (increased access), guarantee coverage (leverage), and yield
(reduced borrowing cost). PFG provides coordination with the market and establishes the fees to be
charged based on the approved policies. LEG assesses the adequacy of the legal aspects of the
proposed guarantee and related project documents.

12. All guarantee proposals are subject to (a) a concept review, and (b) a corporate review. The
concept and corporate review meetings include staff from PFG and LEG, and from SFR/FRM, IFC,
and MIGA as applicable. The corporate review takes place after the concept review has been carried
out. If the terms of the guarantee as finally negotiated deviate significantly from the terms authorized
by the corporate review, or if substantive issues arise that require corporate consideration, the
proposed operation is resubmitted for a corporate review.

Documentation:

13. In the Project Concept Note (PCN) and Project Appraisal Document (PAD), the task team
provides an overview of the investment project and describes the nature and structure of the Bank's
guarantee. If the Bank and IFC and/or MIGA are jointly supporting a project, a single appraisal
document could be used. The PAD indicates the extent to which the Bank is relying on a third party's
appraisal. For PBGs, the Program Document (PD) provides an overview of the development policy
operation and describes the structure of the Bank's guarantee. Proprietary or commercially sensitive
information is excluded from the PAD or PD, as applicable, but the task team indicates the nature of
the excluded information in the Memorandum and Recommendation of the President (MOP).

14. Partial Risk Guarantees. The government negotiates with the private sponsors and lenders their
respective obligations with respect to the project. The Bank's task team assesses the adequacy of the
agreements between the government and the private sponsors and the lenders as a basis for the
provision of a Bank guarantee. As part of the appraisal the task team ensures that timely and
accurate reports on the project’s management and operation as well as annual audited financial
statements are furnished by or on behalf of the borrower. The task team negotiates with the lenders
the terms and conditions of the guarantee, and the incorporation of these provisions in the Guarantee
Agreement, which the government accepts. LEG drafts an Indemnity Agreement and a Project
Agreement12 for negotiation with the government and borrower, respectively.
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15. Partial Credit Guarantees and Policy-Based Guarantees. The task team negotiates with the
lenders the terms and conditions of the guarantee. LEG incorporates these provisions in a Guarantee
Agreement.13 LEG also drafts an Indemnity Agreement and a Project Agreement (if necessary–
normally, when the borrower is not the government) for negotiation with the government and the
borrower, respectively.

16. The legal agreements with the Bank, for the guarantee operations contain all relevant covenants,
including applicable safeguard covenants. The task team confirms the government's acceptance of
agreements to which the government is not a party.

17. Securities Guaranteed by the Bank; Road Shows.14 LEG and PFG clear all documentation
relating to securities to be guaranteed by the Bank to ensure that all the information relating to the
guarantee to be provided by the Bank is accurate. LEG and PFG participate in all road show
presentations to prospective investors.

18. Fee Arrangements. PFG, Loan Client and Financial Services Division (ACTCF), and LEG ensure
that the documentation for the guarantee operation reflects the agreed fee arrangements.

Preparation for Board Presentation

19. The Regional environment sector unit and LEG clear the PAD/PD. The PAD/PD, with a draft MOP
and a cover sheet to the Office of the Corporate Secretary, Board Operations Division (SECBO), is
forwarded to the RVP, who signifies approval by initialing the cover sheet. If negotiations have not
been completed, Board presentation takes place only once the structure of the guarantee is well
defined, unless there are special reasons to seek an early approval. If negotiations have been
completed, the draft Guarantee Agreement, Indemnity Agreement, and Project Agreement are
attached to the package.

20. At least 18 working days before Board presentation (20 working days if a CAS discussion is
involved), Regional staff send the guarantee package to SECBO. Regional staff prepares a printing
request (Form 14) and sends it to the Print Shop with a copy of the guarantee package. A copy of the
printing request is also sent to SECBO. At the same time, the Region sends the PAD/PD and MOP,
and LEG sends the draft legal agreements, to ACTCF, which assigns a number for the guarantee
after its approval by the Board.

21. LEG prepares the Statutory Committee Report or the Recommendation of the Statutory
Committee. LEG and Regional staff obtain the signatures of the expert/nominee selected by the
governor for the country, LEGVP, and the RVP. For PBGs, the Region also obtains the signatures of
the Chief Financial Officer (CFO) and the Senior Vice President and Chief Economist, Development
Economics (DECVP).
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22. For IBRD guarantees, the Treasury Finance Department, in consultation with PFG and LEG,
obtains any currency and market consents required from the relevant member countries under Article
IV, Section 1(b), of IBRD's Articles of Agreement.

23. After all conditions of Board presentation are met, Regional staff submit Form 1767 (Release of
MOP) to SECBO. SECBO issues the guarantee package to the Executive Directors.

Board Presentation

24. Guarantee operations are presented to the Board under regular, not streamlined, procedures. At
least four working days before Board presentation, Regional staff sends to SECBO an attendance
memorandum listing the names and titles of the presenter and other attendees.

25. Following Board approval, SECBO notifies the InfoShop and the ACTCF, and the Region notifies
the government, borrowing entity, and lenders. The Region and the External Affairs Department
prepare a press release, clear it with LEG, and issue it. The PAD/PD is made available at the
InfoShop in accordance with the provisions of The World Bank Policy on Disclosure of Information.

26. As necessary, the task team completes the negotiations on the terms and conditions of the
guarantee. Regional management, in consultation with PFG and LEG, determines when negotiations
are complete and signing can take place. If the negotiations result in any substantial changes in the
terms of the guarantee from those approved by the Board, the Region resubmits the guarantee for
Board approval of the changes; in such a case, signing of the legal documents takes place after final
Board approval. The guarantee becomes effective in accordance with the provisions of the relevant
legal documents.

Supervision

Objective:

27. Supervision of investment projects supported by guarantees is required as long as the guarantees
remain in force. Guarantee operations are supervised to ascertain whether the borrower is carrying
out the project with due diligence to achieve development objectives in conformity with legal
agreements, and to help identify, at an early stage, emerging issues or problems that may arise
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during and after project implementation and recommend possible remedies to Bank Management, the
borrower and/or the project company.

Investment Projects:

28. Supervision of partial risk and partial credit guarantees is carried out in two separate phases. The
first phase corresponds to the period from Guarantee Effectiveness up to achievement of Project
Completion. The second phase corresponds to the period from Project Completion until Guarantee
Expiration.

29. Supervision covers monitoring of the project’s implementation, evaluative review and reporting, as
well as an assessment of the guarantee obligations. During the first phase, supervision is conducted
in accordance with supervision procedures applicable to loans. During the second phase, supervision
covers periodic monitoring of all legal covenants in the agreements with the Bank, and the
governmental contractual obligations that are backed by a guarantee as well as obtaining and
evaluating information with respect to issues that could potentially lead to a commercial or political
default in the project and/or loan documents.

30. For partial risk guarantees, Regional and PFG staff carry out supervision directly or rely on the
lender's supervision. If staff is relying on lender's supervision, staff assesses the scope and frequency
of such supervision. In either of the cases, staff ensures the adequacy of the arrangement for the
Bank to receive all required information. Staff reviews the reports and other information received from
the lender(s) and conducts any other supervision activities, including site visits, as indicated by the
circumstances of the project.

Policy Based Guarantees (PBGs):

31. Supervision is carried out in accordance with supervision procedures applicable to Development
Policy Lending (OP/BP 8.60). In supervising a PBG, the task team monitors the compliance with the
agreed conditionality and the ability of the borrower to meet its obligations under the guarantee. PFG
and the Region complete an evaluation of each PBG transaction after it has reached financial close.
The policy impact of individual PBGs is assessed in manner similar to development policy loans; the
financial impact of individual PBGs is assessed against the specific appraisal criteria set out in the
PD, including incremental market access, leverage and the costs to the borrower. The assessment
takes into account the volume, maturity, and costs of subsequent market borrowings by the recipient
countries.

Implementation Status and Supervision Reports (ISRs):

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32. Regional and PFG staff jointly prepare the Implementation Status and Results Report (ISR) for all
active guarantees. ISRs are prepared annually until Guarantee Expiration.

Implementation Completion Reports (ICRs):

33. ICRs21 for Partial Risk and Partial Credit Guarantees are initiated two years after Project
Completion and completed within six months thereafter. Regions in collaboration with PFG are
responsible for the completion of ICRs for projects supported by a guarantee. Borrowers of loans
guaranteed by the Bank are responsible for preparation of their own final evaluation project report as
an input to the ICR. ICRs for guarantee operations should address the performance of the guarantee
supported project, including the role and value of the guarantee in improving the overall sustainability
of the transaction, helping client countries to access debt and mitigating critical risks that enabled the
realization of the project. ICRs should also evaluate the main categories of risks guaranteed and the
key issues or events that may arise in the future that could lead to a potential call on the guarantee.
Guarantee operations associated with a Bank loan or an IDA credit do not require an additional ICR
from that prepared for the loan(s) or credit(s) supporting the same project.

Responsibilities:

34. Country Directors are primarily responsible for ensuring that adequate staff time and resources
are made available to the task team for supervision of guarantee operations. The project’s task team
leader assigns responsibilities to other task team members to ensure proper supervision of guarantee
operations. The task team develops a supervision plan for the guarantee operation and the key risks
described in the Project Appraisal Document. An assigned PFG staff member participates as a
member of the supervision task team for all guarantee operations and will be primarily responsible for
addressing project issues that affect the guarantee. The Legal vice presidency (LEG) provides
guidance and support on legal issues regarding the supervision of guarantee operations as needed.
LEGCF, within the LEG vice presidency is responsible for coordinating all legal aspects of guarantee
operations. The task team will contact LEGCF and LEGCF will consult and coordinate with any other
unit within LEG, as necessary. The task team also reviews and evaluates the periodic reporting from
the project company and obtains details on the adequacy of the financial management in place.

35. When the Bank supports a project in conjunction with IFC or other multilateral institutions, it
coordinates supervision with those institutions.

36. ACTCF monitors the Bank's receipt of fees and amounts disbursed and outstanding under
guarantees and immediately reports to PFG if fees are not received on the due date.

37. When Regional and PFG staff supervising a transaction learn of any circumstances that might
lead to a call on the guarantee, they inform the RVP, LEG, and ACTCF.
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Coordination

38. Throughout processing and supervision of the guarantee operation, PFG provides advice and
support to the Regions on matters related to Bank guarantees. In collaboration with the Regions and
LEG, PFG has primary operational responsibility for structuring guarantee coverage and pricing. It is
also responsible for issuing the demand notice for the initiation and the processing fee on behalf of
the Bank, and for controlling the use of the proceeds of the initiation fee. PFG participates in the
negotiations of Guarantee Agreements and the related documentation, and is also responsible for
interacting with project sponsors and private lenders.

1. In this statement, "Bank" includes IBRD and IDA; "loan" refers to any debt instrument; "project"
includes any public or private sector investment operation supported by IBRD and IDA as well
as any public sector development policy lending operation supported by IBRD; "private lender"
means a lender that is wholly or predominantly privately owned or a lender that is publicly
owned but is an autonomous entity established and operating under commercial law for the
purpose of pursuing profit (such as a state-owned commercial bank); and a "sponsor" is an
entity responsible for developing and implementing a project.
2. LEGCF is responsible for coordinating, within LEG, all legal aspects of guarantee operations.
3. The PID for a project-based guarantee operation is similar to that for an investment loan (see
BP 10.00, Annex A, for an outline); and the PID for a policy-based guarantee is similar to that
for development policy lending.
4. Staff should refer to The World Bank Policy on Disclosure of Information (2002) as revised in
March 2005.
5. When a project is supported by both a loan and a guarantee, the task team establishes
appropriate linkages, including cross-effectiveness and cross-default conditions for the loan
and the guarantee.
6. In case of partial risk guarantees, a project implementation and management plan is not
required.
7. Staff should refer to World Bank Policy-Based Guarantees (R99-53), approved April 20, 1999,
for further details.
8. The corporate review is carried out by the Operations Committee, unless it has been delegated
to the Regional Operations Committee by the Managing Director, Operations. For more details,
staff should see the OPCS website for criteria and guidelines.
9. The Bank's willingness to consider providing a guarantee, which may be required at an early
stage in the project cycle and before the project is ready for corporate review, is conveyed to
potential project sponsors, whether as an option in bidding documents issued by a member
country government or one of its entities or in a negotiated transaction, after the concept
review meeting considers and endorses the guarantee proposal. Such communication will
include a caveat informing the bidders that Bank's willingness to consider providing a
guarantee is subject to project due diligence, compliance with applicable Bank policies, and
other requirements as well as approvals of the Senior Management and Board of Executive
Directors.

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10. Depending on the project's stage of development when the Bank guarantee is requested, a
PCN may not be necessary and a draft PAD or PD, as applicable can form the basis for
concept or corporate review.
11. The Region maintains in its files the information and analyses that serve as the basis for its
judgments about the project.
12. The agreement between the Bank and the borrower of the guaranteed debt, which sets out the
obligations of the borrower relating to the implementation of the project. The task team also
negotiates any additional agreements to which the Bank is a party.
13. In some cases, instead of being in a separate Guarantee Agreement, the guarantee may be
included in the Loan Agreement or other financing agreement for the borrowing.
14. Road Show refers to presentations made out by an issuer of securities to potential buyers
about the merits of the issue.
15. Guarantee Effectiveness refers to the date on which all conditions precedent to effectiveness
as stipulated in the Guarantee Agreement are met.
16. Project Completion refers to the implementation date of the project or the Commercial
Operations Date (COD) if applicable.
17. Guarantee Expiration refers to the date on which there is no exposure for IBRD or IDA under a
guarantee.
18. The scope of the supervision is limited to project implementation and policies applicable to
projects supported by guarantee operations.
19. This would be carried out annually, unless the task team decides to increase the frequency of
supervision because of project circumstances.
20. The lenders' supervision requirements are defined in the projects' legal agreements. These
generally include : (i) monitoring and reporting on construction progress, operation and
maintenance, project cost analysis, sources and uses of funds, implementation of
environmental and social obligations; (ii) provision of audited financial statements and
compliance certificates etc.; and (iii) assessment of risks that may arise and their potential
impact on the project's construction and operations.
21. Existing guidelines for Loans do not apply to guarantee operations. The scope of ICR for
projects supported by guarantees is as defined.

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6.7 Bank Guarantee Fraud:

Truth vs. Scam

Bank Guarantee is a real Scam Speak term if ever there was one. Even though it has found its way
into common usage in the financial news section of many newspapers, it is nonetheless a favorite
term used by con artists.
The only financial entity legally allowed to issue a document called a Bank Guarantee is THE WORLD
BANK. It is used to describe the instrument The World Bank (The Bank) issues to guarantee loans
made by other banks to The Bank's creditworthy customer, and this is how it works:
ABC company has agreed to work with Outer Slobovia to build a dam and irrigation system in the
country's hinterlands. Neither ABC nor Outer Slobovia has the money for the project, and the amount
required is too much for any one bank to lend.
Therefore, independently or as a joint venture, ABC and O. Slobovia approach The World Bank.

After completing pages and pages of application forms, and after putting in place all the requirements
of The World Bank regarding the project (such as insurances, environmental surveys, yearly
projected costs, projected return, and a whole mess of details to cover every aspect of the project),
The Bank takes several months to review the application.
If and when The Bank feels that the project is loan-worthy and that ABC and O. Slobovia have or will
have the ability to pay back the loan, The Bank arranges with a group of other banks to lend the
money, and guarantees to each of these banks that it will pay back the loan in the event of a default
by ABC, O. Slobovia, or both. That is a Bank Guarantee, with initial capital letters.
Other banks, such as Chase Manhattan, Credit Suisse, or Deutsche Bank also guarantee loans in the
same manner; however I have yet to hear that their loan guarantees have been officially titled Bank
Guarantees.
Other than for the above description, "bank guarantee" is loosely used to signify any one of several
financial instruments used in trade finance. These include LETTERS OF CREDIT in their various roles,
DEMAND GUARANTEES, and PERFORMANCE BONDS.
The term is also loosely used to describe an AVAL, which is a PROMISSORY NOTE that has been date-
stamped and signed by a bank for its creditworthy customer. One might call a CERTIFIED CHECK an
avail.

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The Scam: Financial con artists persuade you that there is a wonderful, secret opportunity available
in trading so-called PRIME BANK GUARANTEES, or PBG's. They use the term as if it were a unique
financial instrument, and attach all sorts of quick wealth accumulation to the myth.
The truth of the matter is that the buying and selling of trade finance instruments is a highly
specialized field, relegated only to experienced FORFAITERS and the forfeiting department of
international banks. Forfeiting requires an intimate working knowledge of international politics, law,
and economy.

6.8 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

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7.DENA BANK

7.1 BANKING IN INDIA 71

7.2 CURRENT SITUATION 71
7.3 HISTORY OF DENA BANK 72
7.4 LOGO 73
7.5 FUND BASED FACILITY OF DENA BANK 73
7.6 NON-FUND BASED FACILITY OF DENA BANK 73
7.7 IMPORTER 74
7.8 EXPORTER 74
7.9 EXPORTER GUIDE 75

BANKING IN INDIA:

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Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are
now defunct. The oldest bank in existence in India is the State Bank of India being established as
"The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like
Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was
the most active trading port, mainly due to the trade of the British Empire, and due to which
banking activity took roots there and prospered. The first fully Indian owned bank was the
Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab National
Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded
under private ownership. The Reserve Bank of India formally took on the responsibility of
regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve
Bank was nationalized and given broader powers

CURRENT SITUATION:

Currently (2007), banking in India is generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private sector and foreign
banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable economies in
its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without
any fixed exchange rate-and this has mostly been true.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with
the Government of India holding a stake), 29 private banks (these do not have government stake;
they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a
combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

HISTORY:

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Dena Bank was founded on 26th May, 1938 by the family of Devkaran Nanjee under the name
Devkaran Nanjee Banking Company Ltd.

It became a Public Ltd. Company in December 1939 and later the name was changed to Dena Bank
Ltd.

In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now a Public
Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act,
1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of
banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations
Act, 1949.

Milestones

• One among six Public Sector Banks selected by the World Bank for sanctioning a loan of
Rs.72.3 crores for augmentation of Tier-II Capital under Financial Sector Developmental
project in the year 1995.
• One among the few Banks to receive the World Bank loan for technological upgradation
and training.
• Launched a Bond Issue of Rs.92.13 crores in November 1996.
• Maiden Public Issue of Rs.180 Crores in November 1996.
• Introduced Tele banking facility of selected metropolitan centers.
• Dena Bank has been the first bank to introduce:
• Minor Savings Scheme.
• Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP).
• Drive-in ATM counter of Juhu, Mumbai.
• Smart card at selected branches in Mumbai.
• Customer rating system for rating the Bank Services.

LOGO:

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The logo of Dena Bank represents Lakshmi, the Goddess of wealth, according to Hindu mythology.

It was the desire of the founding fathers of the Bank that the Bank should be a symbol of prosperity
for all its clients, and the logo represents this promise.

The contemporary 'D' in the logo reflects the dynamism, dedication and the drive towards customer
satisfaction.

Fund based Services:

Dena Bank assist you to import desired goods by providing Rupee loans and Foreign Currency
Loans. We facilitate buyer’s credit for your imports for the period specified under FEMA. We also
assist our customers in raising foreign currency funds through External Commercial Borrowing (ECB)
for expansion/ modernization of existing facilities and/ or import of capital goods etc.

Non-Fund Based Services:

Dena bank assist you to importer and exporter both the Letter of Credit and Bank Guarantee as Non-
fund based facility as per describes under FEMA.

FOR EXPORTER:

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Letter of Credit Advising/ Confirmation:

Dena Bank, 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

Dena Bank 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

Dena Bank 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.

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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:

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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

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• 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 non-existence 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

• Balance Sheet (for medium-sized and large entrepreneurs) B/POD-V form, and Profit and Loss
Account

8. CONCLUSION

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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 Dena bank 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.

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9.ANNEXURE

9.1 SAMPLE LETTER OF CREDIT 81

9.2 SAMPLE BANK GUARANTEE 83
9.3 BIBLIOGRAPHY 86
9.4 WEBLIOGRAPHY 86

8.1SAMPLE LETTER OF CREDIT

(See Instructions on Page 82)

Name and Address of Bank

Date: __________________
irrevocable letter of Credit No. ______________

Beneficiary: Commodity Credit Corporation Account Party: Name of Exporter

Address of Exporter

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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: _______________________

INSTRUCTIONS FOR LETTER OF CREDIT ISSUED FOR DEIP BID

1. Send to: Treasurer, CCC

U.S. Department of Agriculture
14th & Independence Avenue, S.W.
Room 4503 South Building
Stop 1035
Washington, DC 20250-1035

2. If the letter of credit is to apply to any Dairy Export Incentive Program (DEIP) Invitation:

“The Commodity Credit Corporation (CCC) has a right to the amount drawn in accordance with
the terms and conditions of one or more Dairy Export Incentive Program (DEIP) Agreements

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entered into by the exporter pursuant to 7 C.F.R. Part 1494, and the applicable DEIP Invitation(s)
issued by CCC.”

If the letter of credit is to apply to a single DEIP Invitation:

“The Commodity Credit Corporation (CCC) has a right to the amount drawn in accordance with
the terms and conditions of one or more Dairy Export incentive Program (DEIP) Agreements
entered into by the exporter pursuant to 7 C.F.R. Part 1494, and DEIP Invitation No.
________________.

If the letter of credit is to apply to more than one specific DEIP Invitation:

“The Commodity Credit Corporation (CCC) has a right to the amount drawn in accordance with
the terms and conditions of one or more Dairy Export incentive Program (DEIP) Agreements
entered into by the exporter pursuant to 7 C.F.R. Part 1494 and DEIP Invitation Nos.
________________, ___________________, and _________________.”

3. Insert the last date of the month in which the 90th day after the date of the letter of credit falls
(e.g., if the date of the letter of credit is March 15, 2003, the date to be inserted would be Jun 30,
2003).

4. Insert a time period of either “one (1) year” or a specific number of whole month(s) which total
less than one year (e.g., “one (1) month,” “two (2) months,” etc.).

5. Insert the same time period as inserted in the previous space (e.g., “one (1) year,” “one (1)
month,” etc.).

8.2 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
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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,

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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 :-

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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 ………………………………2005 at …………………

8.3 BIBLIOGRAPHY:

Books

Working Capital Management & Control Bhalla V.K.

Indian Banking S. Chand

Basics of Banking & Finance Dr .K. M. Bhattacharya

O. P. Agarwal

Documentary Credits D. C. Gardner

8.4 WEBLIOGRAPHY:

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www.google.com

www.yahoo.com

www.find-internet-banking.info

www.banks.com

www.denabank.com

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