Banks can issue guarantee letters to meet payment obligation

NEW DELHI: The Reserve Bank on Monday gave approval to the banks to issue guarantee through standby letters of credit to cover payment obligations arising out of commodity derivative transactions to provide greater flexibility to companies.

"With a view to providing greater flexibility to resident entities which have such payment obligations related to commodity derivative contracts, it has been decided that AD Category-I banks", the RBI said in a notification issued here on Monday.

The board of the bank issuing guarantee will approve the policy on the nature and extent of exposure that the bank can take for such transactions and should be part of the credit exposure on the customers, the RBI said.

The exposure should also be assigned risk weights, for capital adequacy purposes as per the extant provisions, it added.

The standby letter of credit or bank guarantee may be issued for the specific purpose of payment of margin money in respect of approved commodity hedging activities of the company, the RBI said.

Meanwhile the guarantee should not exceed the margin payments made to the specific counter party during the previous financial year and for a maximum period of one year, after marking a lien on the non-funded facility available to the customer, the bank added.

The bank shall ensure that the guidelines for overseas commodity hedging have been duly complied with.