Project On

“ FEE BASED MANAGEMENT”

With reference to Bank Of India”

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

Submitted In Partial Fulfillment of the

Requirements for the Award of
The Degree of Bachelor of Commerce-
Banking & Insurance

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

First and foremost, I would like to thank

Almighty god for energy, strength, guidance
and help that has always been with me
throughout my work.

While presenting this project at this project at

this juncture, I feel deeply obliged to our
Mumbai University for providing me with an
opportunity to do this project.

This project could not have seen light of the

day without the inspiring & exhortative
guidance of my prof. Mahek Mam who guided
me like a beacon in the dark.

Last but not the least, I am thankful to all my

friends and colleagues for their moral support
and encouragement.

To sum up I would like to thank all those who

have helped me in some or other way in
 successfully completing this project. It has
been a warming experience for me, which will
surely help me in the future.

Sr CHAPTER Page
No. No.
1 NON-FUND BASED FACILITY 01-06

1.1 Introduction

1.2 Purpose For Non-fund based facility

1.3 Why called Non-fund based facility

1.4 Establishment of Letter of Credit & Bank

Guarantee

1.5 RBI Norms

1.6 RBI Guidelines on Non-fund based facility

1.6.1 Letter of Credit

1.6.2Bank Guarantee

2 LETTER OF CREDIT 07-27

2.1 Introduction

2.2 Why of Letter Of Credit

2.3 Bank Obligations & Responsibility

2.4 Standard form of Documentation

2.5 Common defects in Documentation

2.6 How it works ?

 2.7 Price of Letter Of Credit

2.8 Legal Basis for Letter Of Credit

2.9 Parties to Letter Of Credit

2.10 Characteristic of Letter Of Credit

2.11 Types & Payment structure of Letter Of Credit

2.12 Advantages of Letter of Credit

2.12.1 To Exporter

2.12.2 To Importer

2.13 Limitations of Letter of Credit

2.14 Case study of Letter of Credit

3 BANK GUARANTEE 28-38

3.1 Need for the facility

3.2 Contract of Bank guarantee

3.3 Difference between Letter of Credit & Bank

guarantee

3.4 Types of Bank guarantee

3.4.1 Short term Bank guarantee

3.4.2 Long term Bank guarantee

3.5 Precaution for issuing Bank guarantee

3.6 Cases of Bank guarantee Fraud

4 BANK OF INDIA 39-44

4.1 History of Bank Of India

4.2 Non-fund based facility provide by Bank Of India

 5 CONCLUSION 45
6 ANNEXURE 46-51
7 BIBLOGRAPHY 52

1. NON-FUND BASED FACILITIES

1.1 INTRODUCTION:

It is generally perceived that the non-fund based business is very

remunerative to bank and the borrowers. The banks, besides getting
handsome commission or fee and some other service charges, also get the
low cost deposits in the shape of margin and ancillary business. The funds of
the borrower are not blocked in the advances to be given to the suppliers or
beneficiaries and this keeps his liquidity position comfortable, production
smooth and costs low.

NON-FUND BASED FACILITIES

Funds remittance/ Establishment Agency Merchant Banking

Transfer Facilities of LC/BG Function Function

1.2 PURPOSE FOR NON-FUND BASED FACILITIES:

The borrowers need such facilities not only for purchases of current assets or
financing there of or take benefit of certain services with the help of 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:

1.3 WHY CALLED NON-FUND BASED FACILITIES ?

These are called non-fund based financing (or quasi-credit facilities)

because, at the time of opening of the letter of credit or bank guarantee, no
amount, as such, becomes immediately payable. But, these facilities do
involve some financial commitment on the part of the bank in as much as the
bank is required to pay the amount of the bill (drawn under the L/C, and in
meticulous compliance of all the terms and conditions stipulated therein), in
the event of the applicant (borrower) refusing or being unable to honour the
bill on presentation, at the material time.

The bank, however, is within its rights to proceed legally against the
applicant (borrower) on the basis of the letter of request (counter guarantee
and indemnity) executed by the applicant, at the time of the issuance of the
Letter of Credit, on a duly stamped paper.

Similarly, no amount becomes payable by the bank at the time of execution

of the B/G, but as per the undertaking (commitment) given by the bank,
under the B/G issued, the bank will have to make the payment of the
amount, covered under the B/G by the beneficiary concerned. The bank may
make the required payment by debit to the applicant’s account, even if
sufficient balance may not be available therein. The amount so overdrawn
may have to be deposited by the applicant, in the due course, failing which
the bank may prefer to file a civil suit against the applicant to cover the
amount, on the basis of the counter-guarantee executed by the applicant on
the stamped paper, at the time of the issuance of the Bank Guarantee.

Thus, it is for the aforesaid reasons that the L/C and B/G are referred to as
Non-Fund Based working capital financing. And, accordingly, one should
notharbour any misconception that L/Cs and B/Gs do not involve any
financial commitments and risk. These facilities (L/C and B/G) are also
referred to as Quasi-(or Semi) Credit Facilities for the same reasons

1.4 ESABLISHMENT OF LETTER OF CREDIT AND BANK

GUARANTEE

The major non-fund based facilities that are considered as a part of regular
credit facilities are letter of Credit and Bank Guarantee. As a part of their
non-fund based functions banks allow Letter of credit and bank guarantee
facilities for their customers to meet their requirements. Banks charge
commission for the services rendered by them and commitments on the pact
of the bank these are allowed after making out a very careful and detailed
assessment of borrower’s requirement and capacity. Only need based
facilities are extended after making a detailed appraisal of borrower’s
strengths and capabilities to honour the commitments as and when the same
arise in respect of the facility.

1.5 RBI NORMS:

Prudential exposure norms as per extant guidelines of Reserve Bank of India

provides that the maximum exposure of a bank for all its Fund based and
Non-fund based credit facilities, investments, underwriting, investments in
Bonds and commercial paper and any other commitment should not exceed
25 percent of its (bank's) net worth to an individual borrower and 50 percent
of its, net worth to a 'group'. It may however, be rioted that while calculating
exposure, the Non-fund based facilities are to be taken at 50 percent of the
sanctioned limit. To illustrate the point let us consider the following
example:

Total credit limits to the above borrower are Rs.200 crores which are in
excess of the maximum exposure norm of Rs. 175 crores. but for the
purpose of determining exposure we have taken non-fund based limits at 50
percent of its value and total exposure is taken at 150 crores which is well
within the norm.

Example 1.

Particulars Rs.
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

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

1.6 RBI GUIDEUNES ON NON-FUND BASED FACIUTIES

Reserve Bank of India has also issued detailed guidelines to commercial

banks in respect of non-fund based credit facilities. Some of the important
points to be kept in view in this regard are discussed below:

1.6.1 Letters of Credit

 Bank should normally open letters of credit for their own customers
who enjoy credit facilities with them Customers maintaining current
account only and not enjoying any credit limits should not be granted
L/C facilities except in cases where no other credit facility is needed
by the customer.

 The request of such customer for sanctioning and opening of letter of

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

 Where a customer enjoys credit facilities with some other bank, the
reasons for his approaching the bank for sanctioning L/C limits have
to be clearly stated. The bank opening L/C on behalf of such customer
should invariably make a reference to the, existing banker of the
customer.
 In all cases of opening of letters of credit, the bank has to ensure that
the customer is able to retire the bills drawn under L/C as per the
financial arrangement already finalised.

1.6.2 Bank Guarantee

 The conditions relating to obligant being a customer of the bank

enjoying credit facilities as discussed in case of letters of credit are
equally applicable for guarantees also. In fact, guarantee facilities also
cannot be sanctioned in isolation.

 Financial guarantees will be issued by the banks only if they are

satisfied that the customer will be in a position to reimburse the bank
in case the guarantee is invoked and the bank is required to make the
payment in terms of guarantee.

 Performance guarantee will be issued by the banks only on behalf of

those customers with whom the bank has sufficient experience and is
satisfied that the customer has the necessary experience and means to
perform the obligations under the contract and is not likely to commit
any default.

 As a rule, banks will guarantee shorter maturities and leave longer

maturities to be guaranteed by other institutions. Accordingly, no bank
guarantee will normally have a maturity of more than 10 years.

 Banks should not normally issue guarantees on behalf of those

customer's who enjoy credit facilities with other banks.
 2. LETTER OF CREDIT

2.1 Introduction to Letter of Credit

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

In simple words, a letter of credit is an authorization issued by opening

bank to the negotiation bank that if the exporter presents the relevant set of
documents, makes the payment.
2.2 WHY LETTER OF CREDITS?

The buyer would usually prefer to first receive the goods to be brought and
only after satisfying himself of the quality and quantity of the goods
supplied, he would like to make payment. As against this, the seller will
usually prefer to first receive the full payment for the goods to be supplied,
and only then he would like to deliver the goods. And, if such mutual
distrust would continue, the business transaction can hardly take place.

Here comes the facilitating role of the banking system which serves as a
bridge (a common link) between the buyer and the seller, as both of them
should be having their full faith in the banking system and the bank(s)
concerned.

The mechanism, used by the banker in this regard, is the LETER OF

CREDIT.

Actually, both these methods are common in international transactions. The

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

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

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

• Under a documentary D/P collection the exporter asks his bank to

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

There is a further development of the collection called the:

• DOCUMENTRY D/A COLLECTION. Here the abbreviation stands

for “Documents against Acceptance”. Control over the goods is
released not against payment, but against the importer’s acceptance of
a usance bill of exchange. This may not be as secure as holding back
 the goods, but at least it means that the buyer has acknowledged the
debt and has undertaken to pay on a certain date. In many countries,
notably those with a French legal tradition, dishonor of an accepted
draft is an imprisonable offence.

• The main problem with collections lies in the ability of the buyer to
refuse to pay for (or accept) the documents. He has the option to
decide after shipment that he does not want to buy the goods. This
leaves the supplier with the problem of disposing of his merchandise,
which may have been made to unique specifications, in an often
distant location. The potential problems can be imagined. In addition
to his risk that the market has gone against him, he has to clear, insure
and store the goods. He may have to pay other local costs. All in all,
the market risk on a refused collection can be very high.

2.3 THE BANK’S OBLIGATIONS AND RESPONSIBILITIES:

The prime obligant in a letter of credit is the issuing bank.

It has the initial responsibility of ensuring that the applicant is both

creditworthy. The latter consideration is important to all parties to a trade
transaction, as so much depends on trust. Fraud is the constant companion of
trade finance.

It has a duty of care and information. As mentioned above, banks see more
trade transactions than their customers and can advise on methods and warn
of dangers.

Then, once a credit is opened, the bank is placing itself as a substitute for the
buyer (applicant) and must pay if the conditions of the credit are fulfilled.

The advising bank has the obligation of authenticating the credit once it has
received it and passing it promptly on to the beneficiary . It also has the
responsibility of authenticating and advising all amendments.
The confirming bank takes over the payment responsibilities of the issuing
bank as far as the beneficiary is concerned, although it still has the
obligation of the issuing bank for ultimate reimbursement.

Whichever bank has responsibility for deciding whether documents are in

order and should be either paid (if sight) or taken up (if usance), takes on a
heavy set of obligations.

2.4 Standard Forms of Documentation:

When making payment for product on behalf of its customer, the issuing
bank must verify that all documents and drafts conform precisely to the
terms and conditions of the letter of credit. Although the credit can require
an array of documents, the most common documents that must accompany
the draft include:

• Commercial Invoice:

The billing for the goods and services. It includes a description of

merchandise, price, FOB origin, and name and address of buyer and
seller. The buyer and seller information must correspond exactly to the
description in the letter of credit. Unless the letter of credit specifically
states otherwise, a generic description of the merchandise is usually
acceptable in the other accompanying documents.

• Bill of Lading:
 A document evidencing the receipt of goods for shipment and issued
by a freight carrier engaged in the business of forwarding or
transporting goods. The documents evidence control of goods. They
also serve as a receipt for the merchandise shipped and as evidence of
the carrier's obligation to transport the goods to their proper
destination.

• Warranty of Title:

A warranty given by a seller to a buyer of goods that states that the

title being conveyed is good and that the transfer is rightful. This is a
method of certifying clear title to product transfer. It is generally
issued to the purchaser and issuing bank expressing an agreement to
indemnify and hold both parties harmless.

• Letter of Indemnity:

Specifically indemnifies the purchaser against a certain stated

circumstance. Indemnification is generally used to guaranty that
shipping documents will be provided in good order when available.

2.5 Common Defects in Documentation

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

• Letter of Credit has expired prior to presentation of draft.

• Bill of Lading evidences delivery prior to or after the date range stated
in the credit.
• Stale dated documents.
• Changes included in the invoice not authorized in the credit.
• Inconsistent description of goods.
• Insurance document errors.
 • Invoice amount not equal to draft amount.
• Ports of loading and destination not as specified in the credit.
• Description of merchandise is not as stated in credit.
• A document required by the credit is not presented.
• Documents are inconsistent as to general information such as volume,
quality, etc.
• Names of documents not exact as described in the credit. Beneficiary
information must be exact.
• Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the

document may be allowed if it can be done quickly while remaining in the
control of the bank. If time is not a factor, the exporter should request that
the negotiating bank return the documents for corrections.

If there is not enough time to make corrections, the exporter should request
that the negotiating bank send the documents to the issuing bank on an
approval basis or notify the issuing bank by wire, outline the discrepancies,
and request authority to pay. Payment cannot be made until all parties have
agreed to jointly waive the discrepancy.

2.6 How it works

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

• Acme goes to The Commonwealth Financials and requests a $500,000

letter of credit, with Bangalore Computers as the beneficiary.
• The Commonwealth Financials can issue an LC either on approval of
a standard loan underwriting process or by Acme funding it directly
with a deposit of $500,000 plus fees between 1% and 8%.
 • The Commonwealth Financials sends a copy of the LC to the India
Business Bank, which notifies the Bangalore Computers that payment
is ready and they can ship the merchandise Acme has ordered with the
full assurance of payment to them.
• On presentation of the stipulated documents in the letter of credit and
compliance with the terms and conditions of the letter of credit, the
Commonwealth Financials transfers the $500,000 to the India
Business Bank, which then credits the account to the Bangalore
Computers by that amount.
• Note that banks deal only with documents under the letter of credit
and not the underlying transaction.
• Many exporters have misunderstood that the payment is guaranteed
after
• Receiving the LC. The issuing bank is obligated to pay under the
letter of credit only when the stipulated documents are presented and
the terms and conditions of the letter of credit have been met
accordingly.

SELLER’ BUYER’ SELLER BUYER’S

S S ’S
BANKER
BANKE BANKE

SELLE BUYER SELLE BUYER

R 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 BUYER’
’S ’S SELLER
S
’S
BANKE

BUYER
SELLER BUYER SELLER

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.

2.7 The price of LCs

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

There are many parties involved in letter of credit. The parties involved in
letter of credit are as follows:-

a) Beneficiary:

The beneficiary is an exporter who exports the goods to

the importer in an importers country.
The beneficiary is entitled to payment as long as he can provide the
 documentary evidence required by the letter of credit. The letter of credit
is a distinct and separate transaction from the contract on which it is
based. All parties deal in documents and not in goods. The issuing bank is
not liable for performance of the underlying contract between the
customer and beneficiary. If the beneficiary (seller) conforms to the
letter of credit, the seller must be paid by the bank.

b) Issuing bank:

The issuing bank's liability to pay and to be reimbursed

from its customer becomes absolute upon the completion of the terms and
conditions of the letter of credit. . The issuing banks' role is to provide a
guarantee to the seller that if compliant documents are presented, the bank
will pay the seller the amount due and to examine the documents, and only
pay if j documents comply with the terms and conditions set out in the
letter of credit. Typically the documents requested will include a
commercial invoice, a transport document such as a bill of lading or airway
bill and an insurance document; but there are many others. Letters of credit
deal in documents, not goods.

C) Advising Bank:

An advising bank, usually a foreign correspondent bank of the issuing bank

will advise the beneficiary. Generally, the beneficiary would want to use a
local bank to insure that the letter of credit is valid. In addition, the advising
bank would be responsible for sending the documents to the issuing bank.
The advising bank has no other obligation under the letter of credit. If the
issuing bank does not pay the beneficiary, the advising bank is not obligated
to pay.

D) Conforming Bank:
The correspondent bank may confirm the letter of credit for the
beneficiary. At the request of the issuing bank, the correspondent obligates
itself to insure payment under the letter of credit. The confirming bank
would not confirm the credit until it evaluated the country and bank where
the letter of credit originates. The confirming bank is usually the advising
bank.

2.9 Letter of Credit Characteristics

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

The transaction is considered a straight negotiation if the issuing

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

• Revocability
Letters of credit may be either revocable or irrevocable. A revocable
letter of credit may be revoked or modified for any reason, at any time
by the issuing bank without notification. A revocable letter of credit
cannot be confirmed. If a correspondent bank is engaged in a
transaction that involves a revocable letter of credit, it serves as the
advising bank.

Once the documents have been presented and meet the terms and
conditions in the letter of credit, and the draft is honored, the letter of
credit cannot be revoked. The revocable letter of credit is not a
commonly used instrument. It is generally used to provide guidelines
for shipment. If a letter of credit is revocable it would be referenced
on its face.

The irrevocable letter of credit may not be revoked or amended

without the agreement of the issuing bank, the confirming bank, and
the beneficiary. An irrevocable letter of credit from the issuing bank
insures the beneficiary that if the required documents are presented
and the terms and conditions are complied with, payment will be
made. If a letter of credit is irrevocable it is referenced on its face.

• Transfer and Assignment

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

All letters of credit require the beneficiary to present a draft and

specified documents in order to receive payment. A draft is a written
order by which the party creating it, orders another party to pay
money to a third party. A draft is also called a bill of exchange.

There are two types of drafts: Sight and Time.

A sight draft is payable as soon as it is presented for payment. The

bank is allowed a reasonable time to review the documents before
making payment.

A time draft is not payable until the lapse of a particular time period
stated on the draft. The bank is required to accept the draft as soon as
the documents comply with credit terms. The issuing bank has a
reasonable time to examine those documents. The issuing bank is
obligated to accept drafts and pay them at maturity.

2.10 The Different Types of Documentary Credits and Payment

structures

There are basic types of documentary Credit:

The Revocable Letter of Credit:

It is one that can be amended or cancelled at any time by issuing bank

without the consent of any other party, so as long as the letter of credit has
not been drawn or documents taken up. This sort of credit can even be
withdrawn or changed materially after documents have been presented, so as
long as payment has not been made ( or, in the case of usance credits, the
documents taken up and a value date given).the value of such instruments is,
therefore, very limited and revocable letters of credit are very rare. under
UCP 500 (Article 6c), it is no longer necessary for irrevocable letters of
credit ( see below ) to be specified as such, the assumption is that all letters
of credit are irrevocable unless stated specifically.

The Irrevocable Unconfirmed Letter of Credit:

It is the most common and is now the format that is assumed in the absence
of any instruction to the contrary. The subject of confirmation will be dealt
with below. Unless stated, all comments in this Workbook on the subject of
letters of credit refer to unconfirmed documentary letters of credit. Under
this format, the issuing bank has a commitment to pay against credit
conformed documents which cannot be withdrawn without the consent of
the beneficiary under any circumstances except for provable fraud. Nor can
the credit be amended by the issuing bank without the consent of the
beneficiary (and, possibly, other interested parties named in the credit).

The Irrevocable Confirmed Letter of Credit:

The Irrevocable Confirmed Letter of Credit differs from the previous

instrument in that advising bank becomes a prime obligor, along with the
issuing bank. The advising bank becomes the Confirming Bank, by adding
to its advice of the credit to the beneficiary the words “this letters of credit
caries our confirmation” (or suchlike). Exporters ask for confirmations for
two reasons, to remove the commercial or country risk arising from the
status or domicile of the issuing bank and to have the documents
conclusively checked at a bank in their locality. This is because, with an
open confirmation, the issuing bank hands responsibility for deciding
whether documents are in order to the confirming bank. Once documents are
paid or taken up by the confirming bank there is no recourse to the
beneficiary. Any discrepancy subsequently found by the issuing bank and the
confirming bank. Such disputes are not uncommon and some countries
prohibit confirmation of their banks’ letter of credit for this reason and out of
pride.

It is sometimes possible to have a letter of credit “Silently Confirmed”. This

is done to remove country risk from a credit. The issuing bank does not
normally know that a confirmation is in place and the credit may be payable
at its counters or elsewhere. The extent of the “confirmation” is normally set
out in a separate agreement and would not cover documents found
discrepant by the paying bank- i.e. the “confirmation” bank would normally
retain recourse on the exporter in the event of the documents being rejected
with material discrepancies.

Transferable Letter of Credit:

Transferable letter of credit is an extension of the irrevocable letter of credit.

UCP describes its provisions in Article 48. The Letter of Credit needs to be
payable ( or negotiable) at the counters of the advising bank which becomes
the Transferring Bank. The issuing banks puts into the credit option for the
transferring bank to make the credit available, at the request of the
beneficiary, to another party (the “second beneficiary”) in whole or in part.
There can be more than one second beneficiary and each receives an advice
of the credit through a third bank. The credit cannot normally be further
transferred to a third party. The documents cannot be changed except the
invoice (allowing the first beneficiary to make a profit. The dates can be
changed to allow time to process documents.

The Standby Letter of Credit:

The Standby Letter of credit is not a documentary letter of credit at all, in

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

Back to Back Letter of Credit:

Once a seller has a letter of credit available, he can use it to leverage his own
position. He is no longer merely a supplier, he is now a supplier with (for
this transaction at least) the creditworthiness of the issuing bank. The subject
is tackled in more detail in Finance of Foreign Trade, but some of the
options are outlined below.

In some cases, the seller (beneficiary) might have received assistance

in financing his transaction in the letter of credit he received from the
buyer. It might have been an advance payment letter of credit, which
he could have drawn to pay for goods and services. He may have
received a transferable credit and be able to transfer some of it to a
further supplier.

If not, he may be able to get his bank, on the strength of the incoming
credit, to advance funds to assist him to accumulate the goods needed
to fulfill his contract.

Once the goods are shipped and documents found to be in order, the
seller, depending on the terms of his letter of credit, can normally seek
to receive immediate payment from the advising bank. He may have
accepted discounted amount, charges and recourse.

One sort of pre-export finance he may ask his bank for, but which
many British banks are reluctant to do, is to issue a back to back
letter of credit to a supplier. In these circumstances, the advising
bank (who will often insist on being the paying bank) issues a further,
independent letter of credit to the beneficiary’s supplier(s) for all or
part of the goods. The “ideal” back to back letter of credit, they say,
asks for the same documents, descriptions, etc. as the base letter of
credit, in much the same way as the transferable letter of credit does.
The idea is that, so long as the dates are amended to allow time, the
seller’s bank can receive the second supplier’s documents and submit
them under the first letter of credit unchanged, except for the invoices,
and get paid.
 This mechanism requires skill and trust from the financing bank. But,
then, it is the belief that all documentary credit work requires skill and
trust on the part of the financing banks.

Within the above categories, there are a variety of payment structures:

Sight Credit:

The sight credit a credit where the beneficiary should be able to receive
payment on presentation of credit conformed documents at the paying bank.
This may be the issuing bank or its correspondent in the beneficiary’s
country. Under UCP, banks are allowed seven days to check documents
(which is generous in most cases) and, if payable at the issuing bank, there
will be a transit time. A sight letter of credit payable (as most are) at the
issuing bank in China would routinely take two to three weeks to get paid. If
payable at the counters of the advising bank, that bank may wish to check
that it has received funds from the issuing bank (or its, say, New York
correspondent) before it pays the exporter. This may take two to three days.

Acceptance Credit:

In an Acceptance credit an exporter is asked to give the bank (and thus

normaly the buyer) time to pay. He has to draw a usance (term) bill of
exchange on the issuing ( or advising/ confirming) bank. The documents,
once found to be credit confirmed, are taken up and the exporter is advised
that he will get his money on a stated value date. The date is determined in a
variety of ways, depending on the original agreement between the buyer and
seller. It may be certain number of days (say 90) from bill of lading date. It
may be a number of days from presentation. It may be a specified day.

Deferred Payment:

A Deferred Payment credit is very similar, except that there is no bill of

exchange. The issuing bank simply states that the letter of credit is payable a
specified number of days after one of the trigger dates mentioned above.
There are subtle differences in why a deferred payment credit is preferable
or less attractive than an acceptance credit. Often, bills of exchange carry
stamp duty, which buyers and sellers wish to avoid. On the other hand, they
give any of the holders in due course the option to discount the draft,
assisting liquidity. The handling of accepted drafts can add to the banks’
work, and therefore, commissions.

With both Acceptance and Deferred payment credits an exporter may,

depending on the quality of the issuing (or confirming bank) and on his
reputation, be able to discount the proceeds and be paid a lower amount of
sight.

Also, in both cases, the issuing bank may either be giving the buyer time to
on-sell the goods by allowing payment to be deferred or may bra (for itself
or for its Government) obtaining deferment of the need to pay out foreign
exchange.

Negotiation Credit:

A negotiation credit allows the advising bank to buy the documents from the
exporter, normally with recourse. As with other types of credit the
documents may be payable at the issuing bank or at an advising bank. A
negotiation credit will be negotiable at a specific bank (the “nominated bank
“) or at any bank. If negotiable (or payable) at ony one bank, this is known
as “Restricted credit”. Unless the nominated bank is also the confirming
bank, no bank (whether nominated or not) is obliged to negotiate documents
and can merely pass them on to the issuing bank and pay the exporter on
receipt of cover. This all sounds very complicated –which it is –but if an
exporter wants to setup a regular trade with a reasonably trusted
counterparty, it may well suit him to have documents negotiable in his
country. It may be that the importer cannot get his bank to issue credits
confirmed or payable outside his country, either because the regulations do
not allow it, or because his bank wants tio look at the documents before they
part with their money.

Advance payment or red clause credit:

Under advance payments, or red clause credits the issuing bank allows
the advising bank to make a payment against documents other than those
evidence than the main contract has been fulfilled. These credits were
originally designed to allow exporters to pay for material prior to shipment.
There is suppose to be a credit called “green clause” letter of credit under
which not only the value of the wool, but also the cost of the transport was
advanced. The expression “red clause” derived from the fact that the
stipulation relating to the advance of funds was typed in red on the letter of
credit (traditionally up to the margin). Advance payment credits either allow
the amount paid in advance to be paid clean – with no security except a
receipt –or against some sort of local security, often a bank guarantee or
standby credit the advising bank has a duty of ensuring that the counter
credit(or guarantee ) is in order. Amounts advanced under this credit vary
from 10% to 100%.

There are two reasons for applicants to ask for Revolving credits.
Either there are goods involved and they are to be shipped in a number of
lots or the credit is not used for goods at all and is merely there to assist a
local agent or office to draw cash. Under either circumstance, the cost of a
credit for the full amount drawable over time is avoided. These credits are
worded in a variety of ways. They may stipulate that upto a certain figure
maybe drawn against receipt (or transport documents) every month until a
total or an end date has been received. Or they may say that the second
drawing in a certain month can only be made if a first drawing has been
made.

2.10 Advantages of Letter of Credit:

2.10.1 Advantages of Letter of Credit to the Exporter:

A) Provides packing credit:

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

B) Clearance of exchange control regulations:

 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.

2.10.2 Advantages of letter of credit to the importer:

A) Certainty of shipment of goods:

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

B) Delivery on time:

As the exporter submits the documents in time for

negotiation, it reaches the opening bank in time. This
enables the importer not only to collect the documents on
time but also to collect the goods from the customs.

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

D) Better terms of trade:

The opening bank provides credit facility to the importer. This

helps the importer to obtain better terms of trade from the
foreign supplier.

2.11 Limitations of Letter of Credit:

A) Short life:

Every letter of credit has validity period carries short life.

It does not give sufficient time to the exporters for
shipment of goods and submission of documents.

B) Problem of weight units:

Weights and measures are different in different countries.

Thus disparity often arises through misinterpretation of
weight units.

C) Insurance problem:

The letter of credit may indicate a broad coverage of

marine risk whereas underwriters may view them as less
risky. Hence underwrites may like to go for limited
coverage of risk.

2.12 AIB Tradefinance - Case Study OF LC

This was what an Asian Buyer from an Irish Exporting company stated when
he convinced the Exporter to sell to them on open account terms. The Asian
Buyer obtained 60 days credit, which was to be calculated from the date of
the invoice. The value of the order was USD 100, 000 and the goods were
despatched and invoiced by the Irish Exporter on the 15th April 2006.
The payment from Asia was due on the 14th June 2006. The payment
eventually arrived on the 21st August 2006, over two months late. The delay
in payment cost the Exporter USD 1700 as it resulted in his account being
overdrawn by this amount for 68 days at 9% per annum.

So are Letters of Credit too Expensive ???

The Irish Exporter could have insisted on receiving a confirmed Letter of

Credit (see glossary) through Allied Irish Banks plc.

The following costs would have applied at that time:

Confirmation Fee USD $250

Acceptance Commission (@ 1.5% pa for 60
USD $250
days)
Negotiation / Payment Fee USD $150
Out of Pocket Expenses (estimate) USD $60
Total Letter of Credit Cost USD $710
Interest Cost as a result of late payment USD ($1700)
Benefit of using Letter of Credit USD $990

The Letter of Credit looks expensive because the costs are very visible and
are linked to each transaction. The benefits, on the other hand, are
intangible.

3.BANK GURANATEE

3.1 Need For The Facility:

It is customary for the Bank, in normal course of business, to issue

and execute guarantees in favour of third parties on behalf of the customers.
The Bank guarantees are governed by various provisions as contained in the
Indian Contract Act, 1872. The commercial transactions, bank’s customers
are sometimes required to give a Bank Guarantee. This is mostly as an
alternate to keep cash as a security deposit. The third party who seeks the
guarantee, not being aware of the customer’s financial standing prefers a
bank guarantee. In turn the Bank, which very well understands the financial
standing of the customer, undertakes the guarantee of the customer’s
financial commitments or performance of contracts by him. The bank
charges commission for this service, which depends on the security available
and the financial stability of the customer.

3.2 Contract of Guarantee:

Section 126 of the Indian Contract Act, 1872, defines a “Contract

of Guarantee” is a contract to perform the promise, or discharge the
liability (enforceable at law) of a third person in case of his default. In a
contract of, guarantee given by Bank there are three parties. One is surely
i.e. the Bank issuing the guarantee, second is the principal debtor i.e. the
Bank’s Customer, one whose behalf the guarantee is issued and third is the
creditor i.e. the beneficiary of the guarantee i.e. to whom guarantee is issued.
3.3 Differences between Bank Guarantee and Letter of Credit

A Bank Guarantee and a Letter of Credit are similar in many ways but
they're two different things. The main difference between the two credit
security instruments is the position of the bank relative to the buyer
and seller of a good, service or basket of goods or services in the event of the
buyer's default of payment. These financial instruments are often used
in Trade financing when suppliers, or vendors, are purchasing and selling
goods to and from overseas customers with whom they don't have
established business relationships.

A bank guarantee is a guarantee made by a bank on behalf of a customer

(usually an established corporate customer) should it fail to deliver the
payment, essentially making the bank a co-signer for one of its customer's
purchases. Should the bank accept that its customer has sufficient funds or
credit to authorize the guarantee, it will approve it. A guarantee is a written
contract stating that in the event of the borrower being unable or unwilling
to pay the debt with a merchant, the bank will act as a guarantor and pay its
client's debt to the merchant.

While a letter of credit is a similar, the principal difference is that it is a

potential claim against the bank, rather than a bank's client. For example, a
seller may request that a buyer be provided with a letter of credit, which
must be obtained from a bank and which substitutes the bank's credit for that
of its client. In the event that the borrower defaults, the seller would go the
buyer's bank for the payment. The seller's risk is mitigated because it is
unlikely that the bank will be unable to pay the debt. A letter of credit is less
risky for the merchant, but more risky for a bank.

Banks accept full liability in both cases. With a bank guarantee, a client can
default and the bank assumes the liability. With a line of credit, liability rests
solely with the bank, which then collects the money from its client.
3.4 TYPES OF BANK GUARANTEES

There are two types of Bank Guarantees (B/Gs):

• Short-term Bank Guarantees (which are usually issued for a

period of one year, and say, up to three years); and

• Long-term Bank Guarantees also known as Deferred Payment

Guarantees (DPGs). Long Term Bank Guarantees (DPGs)
contain the undertaking, given by the bank, that the amount of
installments, stipulated by the Term Lending Institutions, for
repayment of the term loans, sanctioned to the applicant
borrower, would be paid by the borrower concerned on the due
dates, on time, failing which the bank itself will make the
payment of the installment on the due date.

3.4.1 SHORT TERM BANK GUARANTEES:

Short term Bank Guarantees usually are of two types:

I. Financial Bank Guarantees; and

II. Performance Bank Guarantees.

I. FINANCIAL BANK GUARANTEES:

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

1) IN LIEU OF EARNEST MONEY:

While submitting a tender, say, for supplying some items, like

furniture, electric fittings, or for undertaking some job, like
construction of a building, installation of a sprinkler system for lawns,
etc., the applicant are invariably required to deposit some amount in
cash or by way of bank term Deposit Receipt (TDRs), on the
condition that if the tender of a particular person/company will be
accepted and the person/company will eventually back out, the
amount so deposited, would be forfeited. This is so, with a view to
ensuring that only such parties, who are serious and sincere enough,
about rendering the required supply and/or services, must file the
relative tenders, quoting some reasonable terms and conditions.

2) IN LIEU OF SECURITY DEPOSIT:

Food Corporation of India (FCI), for example, usually stocks of paddy

to the rice mills, registered with them, so that they may process the
paddy and return the rice to FCI. But, as the stocks of paddy of high
value, are generally issued, FCI may insist that some security money,
(to the extent of say, 10% or 20% of the value of the paddy, to be
supplied at any one time, from time to time), could be deposited with
FCI, such that the party may give back the rice of the required value,
and any shortage could be recovered from such security deposits. But,
making such a huge deposit even by way of Bank's Term Deposit
Receipts (TDRs) may not be as easy or gainful for the companies.
They may, therefore, approach their bankers and apply for the
issuance of a Bank Guarantee for the amount, instead of depositing
the cash or the TDR, as the security deposit.
 3) ADVANCE FOR SUPPLY OF RAW MARETRIALS:

Some companies insist on advance payment in cash or by way of a

bank draft, towards the cost of the goods to be supplied. For example,
in early 1970s, TISCO did insist on advance payment, of the full
amount involved, in cash or by way of a bank draft. These will
naturally, mean loss of interest on the amount so paid in advance.

II. PERFORMANCE GUARANTEE:

The guarantees meant for performance of contracts entered into by the

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

Illustrations of Performance Guarantees are:

a) Performance for installation of plant and machinery within a given

time-frame and with agreed specifications.

b) Performance of plant and machinery up to the agreed level.

c) Performance relating to supply of agreed material within stipulated

period.
Although these guarantees are for performance, the quantum of the
pecuniary obligations is reduced to monetary terms and the guarantee is
issued for the amount.

3.4.2 The long term bank guarantees include:

I. Deferred Payment Guarantees (DPG) and,

II. Statutory Guarantees.

I. Deferred Payment Guarantees:

This is a guarantee for a payment which has been deferred or

postponed. In case of purchase of capital goods like machinery, the
necessity to issue deferred payment guarantee arise. In such
guarantees, the banks are undertaking to pay the installments due
under the deferred payment schedule. Unlike al other Bank
Guarantees here the payment will have to be made by the banks on the
accepted due dates and thereafter the installment is recovered from the
party.

The terms of payment for the purpose of such guarantee, are normally
advance payment of 10-15% of the price of the capital goods and
payment of another 10-15% on receipt of the goods/ documents. The
balance amount, along with interest, is payable in installments spread
over a period of 1-7 years, which is secured by the deferred payment
guarantee.

The appraisal of a proposal involving issue of deferred payment

guarantee has to be undertaken as it is done in case of a term loan to
see the long term viability of the operations, since the payment is to
made out of the future cash generation from the activity.

As regards the payment mechanism, normally the sellers draw usance

bills of exchange which are accepted by the buyer and counter
accepted by the buyer’s bank (bank giving the guarantee). These bills
are discounted by the seller with his bank and on due date the seller’s
 bank presents the bills for payment, which the issue banks pays to the
debit of the buyer’s account. Where the buyer’s account does not
permit such debit, bank has to pay the due amount and initiate steps to
recover the payment from the buyer.

Banks secures such guarantees by having charge on the assets

purchased and also counter guarantee of the buyers.

II. Statutory Guarantees:

These are guarantees issued by banks favoring courts and other

statutory authorities guaranteeing that the customer will honour his
commitments imposed upon him under the law, failing which the bank
will compensate to the extent of the amount guaranteed. These are
usually given in the form of bonds and format of these guarantees are
usually drawn by the courts or the concerned authority or are already
prescribed by the statute as per which the guarantee is required.
3.5 PRECAUTIONS FOR ISSUING BANK GUARANTEE

Appraisal of guarantee limit:

As issuance of guarantees involve financial commitment on the part of

banks, guarantees should be issued only after careful appraisal of
capabilities of the borrowers to perform and meet the commitments being
guaranteed by the banks. Though the guarantee limits are classified as 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).”

Guarantees in respect of disputed duties / taxes issued in favour of

Government departments/ courts should be secured by 10% cash margin.

Onerous Clause:

The guarantee should be free from onerous clauses. Any clause on account
of which the guaranteeing bank may be called upon to pay an amount
beyond the agreed is termed as an onerous clause. Examples of onerous
clauses are:

 Clause for payment of interest if claim amount is not remitted

promptly;

 Clause for payment of other charges / expenses incurred by the

beneficiary to enforce settlement of claim, over and above the amount
guaranteed.

Limitation Period in a Guarantee:

Section 28 of the Indian Contract Act 1872 pertaining to limitation clause of

the guarantee has been amended with effect from 08/01/1997. Due to this
amendment, even when the period of liability is specified in the guarantee,
the beneficiary can enforce his remedies till the limitation period is alive i.e.
30 years where the beneficiary is Government and 3 years in other cases
from the stipulated expiry date / invocation.
Invocation:

The amount claimed under the guarantee should be immediately paid to the
beneficiary if invocation is in accordance with the terms and conditions of
the guarantee. Withholding payment merely at the instance of the customer
should not be done as it results in non-fulfillment of the obligation
undertaken by the bank and also affects bank’s image.

If the amount of demand as a result of payment by the bank to beneficiary in

not paid by the customer within a reasonable period, the recovery process is
to be initiated.

Invocation of Guarantees by the Beneficiary:

Where a guarantee is invoked, no attempt to delay the payment or facilitate

the party to bring injunction restraining the payment should be made
immediately on demand. However, banks should satisfy themselves has been
invoked properly and as per the terms specified therein.

Expiry of Guarantees:

On expiry of validity period of guarantee, a registered acknowledgement due

notice should be sent to the beneficiary advising that the liability of the bank
under the guarantee has been received by the bank. If no reply is received
from the beneficiary within a reasonable period, say, one month from the
date of the aforesaid notice, the entry is reversed by the banks.
3.6 CASES OF BANK GUARANTEE FRAUD

A complaint was filed alleging deficiency in service in not paying

the amount of bank guarantee on demand. The defense plea was that the
demand was not in accordance with terms of guarantee. It was held that
where bank guarantee provided conditions for its invocation then Bank
would not be deficient in service in not making payment under the bank
guarantee if conditions were found not fulfilled. M.P.Minerals Ltd Vs. Bank
of India & ors - 2003 (1) CPR 96 (NC)

The bank was alleged to have failed to issue bank guarantee despite
sufficient security and the complainant suffered financial loss. It was held
that the non-issuance of bank guarantee despite security deposit with the
bank would amount to deficiency in service and the complainant would be
entitled to interest on that security amount. M/s.Anand Lubricating &
Pneumatic Systems Ltd. Vs. State Bank of India - 2003 (2) CPR 53
 4. BANK OF INDIA

4.1 History of Bank of India

Bank of India was founded on 7th September, 1906 by a group of eminent

businessmen from Mumbai. The Bank was under private ownership and
control till July 1969 when it was nationalised along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh
and 50 employees, the Bank has made a rapid growth over the years and
blossomed into a mighty institution with a strong national presence and
sizable international operations. In business volume, the Bank occupies a
premier position among the nationalised banks.

The Bank has 2884 branches in India spread over all states/ union territories
including 155 specialised branches. These branches are controlled through
48 Zonal Offices .There are 27 branches/ offices (including three
representative offices) abroad.
The Bank came out with its maiden public issue in 1997 and follow on
Qualified Institutions Placement in February 2008. . Total number of
shareholders as on 30/06/2008 is 2,29,000.

Our Mission
"to provide superior, proactive banking services to niche markets globally,
while providing cost-effective, responsive services to others in our role as a
development bank, and in so doing, meet the requirements of our
stakeholders".
Our Vision
"to become the bank of choice for corporates, medium businesses and
upmarket retail customers and to provide cost effective developmental
banking for small business, mass market and rural markets"
FOR EXPORTER:

Letter of Credit Advising/ Confirmation:

Bank of India, having wide network of correspondent banks offers Letter of

Credit advising services through SWIFT, fax, telephone to help exporters
arrange for shipment and preparing the documents in advance.

Bank Guarantees

We offer bank guarantees on behalf of exporters to enable them to undertake

big export contacts. The guarantees include bid-bond guarantee, Advance
payment Guarantee etc. The guarantees are issued for eligible purposes as
mentioned in FEMA.

FOR IMPORTER:

Letter of Credit

Bank of India offers L/C facility for the purchase of goods in the
international market. With the Letter of Credit, importers can build up better
trust/ confidence in their suppliers and develop other business relationship at
a much faster pace.

The L/C facility can be granted to the importers after assessing their
requirement / credit worthiness / financial strength and other parameters
being to the satisfaction of the Bank. We help importers drafting the terms of
Letter of Credit so as to protect their interest. The bank's vast network of
branches and correspondent banks enables your enterprise to sustain a
seamless flow of business on a wide platform.
Bank Guarantees

Bank of India on behalf of importers/ other customers issues guarantees in

favour of beneficiaries abroad. The Guarantees can be both Performance and
Financial. The issuance of guarantee is allowed for the purposes defined
under FEMA subject to availability of your credit limits or cash margin.

Bank Export Guarantees:

(Programme for Issuing Demand Guarantees at the Request of Exporters)

1. Goal and Purpose of the Programme:

The goal of the Programme is providing support to Croatian exporters by

issuing demand guarantees (hereinafter: bank guarantees) when concluding
and implementing export transactions.
The purpose of the Programme is issuing bank guarantees with the objective
of facilitating the participation of exporters in international tenders and
entering into contracts for the purpose of exports of goods, works or
services.
Bank guarantees shall not be issued for re-export, export of weapons and
military equipment and exports of ecologically unacceptable products.

2. Beneficiaries of Guarantees

Beneficiaries of bank guarantees can be foreign legal entities inviting

tenders and/or intending to enter into a contract to purchase Croatian goods,
works or services (hereinafter: bank guarantee beneficiaries). If a bank
guarantee is issued in co-operation with an exporter’s commercial bank,
beneficiary of guarantee can be the exporter's commercial bank.
3.Terms and conditions for issue of guarantees:
• exporter has been operating for at least one year
• exporter submitting an application for a guarantee has not been
continuously blocked for more than 30 days in the last 6 months of
operation, has not been or is not threatened to be under bankruptcy
procedure a no process is initiated against it (court, execution,
criminal, liquidation etc.).

The exporter to which bank has issued a tender guarantee is obliged to

submit to bank a report on the results of international tender within 5 days
from the publication of decision on the selected bidder.

The exporter to which bank has issued a performance guarantee or an

advance payment guarantee is obliged to submit to bank quarterly reports on
implementation of the export contract, and immediately inform bank on
possible problems regarding the contract implementation

4. Change in conditions of an issued bank guarantee:

Should a change in terms and conditions of an issued bank guarantee be
necessary, the exporter may submit to bank an Application for change in
terms and conditions in a written form with the consent of the beneficiary.

5. Fees:

Application processing fee:

• one-off fee of 0.25 % on the committed amount of issued bank

guarantee, but at least HRK 500.00 (five hundred)
• charged before the issue of a bank guarantee.
Fee for issuance of bank guarantee:

• fee of 0.20% on the committed amount of the issued bank guarantee

, but at least HRK 500.00. The fee shall be calculated quarterly in
advance.

When a guarantee is issued, the fee amount and the manner of calculation
are agreed upon for each individual transaction. The bank may assume the
exporter’s obligation of payment of agreed fees and the obligation of
submitting the respective fee to bank.

6. Security:

For the purpose of securing due fulfillment of obligations under an issued

bank guarantee, bank accepts bills of exchange and debentures , pledge of
property or transfer of fiduciary title to property supported by property
insurance policy endorsed in favour of bank and other customary security in
the banking operations.

All costs arising out of the establishment and termination of collateral are
borne by the exporter.

When a guarantee is issued in co-operation with the exporter's bank, the

bank may assume the obligation of obtaining and activating the security, as
well as the obligation of collecting receivables.

7. Documentation to Support Application :

Applications for the issue of a bank guarantee have to be accompanied by

the following documents:

• List of authorized signatories for disposing of the funds deposited in

the account
• Data about the collateral (in case of mortgage on the real estate, it is
necessary to submit an assessment of the real estate by an authorized
 court expert accompanied by a photograph of the real estate taken not
more than 2 years beforehand and an excerpt from the Land Register
issued not more than 30 days beforehand)
• Statement of ownership (pursuant to the Anti-Money Laundering Act,
Official Gazette of the Republic of Croatia, No. 69/97, 106/97, 67/01,
114/01, 117/03 and 142/03)
• Form for the purpose of establishing a client’s foreign currency
position adjustment for loans above HRK 700,000
• Certificate of the Tax administration in charge evidencing the 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
5.CONCLUSION

Banking is fastest growing sector in the world. In banking sector provides

most of the facility to customer for their easy convenience and need arises.
The bank provides modern banking functions to their customers. These
banking functions include Fund based and non-fund based facility. Through
the whole project, we can understand that what is the non-fund based
facilities which are provided by banks.

Banks generally provides lots of non-fund based facility but main includes
Letter of Credit and Bank Guarantee. Through the whole project we can
conclude that issuing of letter of credit and bank guarantee is not as easy as
withdrawing cash from a bank. It includes lots of procedure.

The main intention to take this topic is for getting detailed study of Letter of
credit and Bank guarantee. Now even a simple man on the earth can know
the procedure how to get the letter of credit and bank guarantee this was the
main purpose of this project. The procedure is followed practically in banks
also as I have visited the Bank of India and collected the information from
them.

The only difference is in the commission. Banks charges different

commission from bank to bank. Some banks take liquid money and some of
them take assets for granting letter of credit or bank guarantee.
 6.ANNEXURE

SAMPLE LETTER OF CREDIT

Name and Address of Bank

Date: __________________
irrevocable letter of Credit No. ______________

Beneficiary: Commodity Credit Corporation Account Party: Name of

Exporter
Address of Exporter

Gentlemen:

We hereby open our irrevocable credit in your favor for the sum or sums not
to exceed a total of _______________dollars ($__________), to be made
available by your request for payment at sight upon the presentation of your
draft accompanied by the following statement:

(Insert applicable statement)/2

This Letter of Credit is valid until _____________________/3, provided,

however, that this Letter of Credit will be automatically extended without
amendment for _________________/4 from the present or any future
expiration date thereof, unless at least thirty (30) days prior to any such
expiration date the Issuing Bank provides written notice to the Commodity
Credit Corporation at the U.S. Department of Agriculture, 14th and
Independence Avenue, S.W., Room 4503, South Building, Stop 1035,
Washington, D.C. 20250-1035, of its election not to renew this Letter of
Credit for such additional ______________________/5 period. The notice
required hereunder will be deemed to have been given when received by
you.This letter of Credit is issued subject to the Uniform Customs and
Practice for Documentary Credits, 1993 Revision, International Chamber of
Commerce Publication No. 500

(Name of Bank)
By: _______________________

BANK GUARANTEE FORMAT

STAMP

To

The President of India

Acting through Ministry of Coal
Shastri Bhawan
NEW DELHI

Whereas M/s. ______________________(Name of Allocattee Company),

having Registered Office at _________________(Address), hereinafter

called the “Company”, agrees for allocation of _________________(Name

of the captive block) block made by the President of India acting through

Shri K S Kropha, Joint Secretary and Coal Controller, Ministry of Coal

hereinafter called the “Central Government” in the State of

______________(Name of State) for captive mining of coal on the terms and

conditions contained in their letter No. ________________________ dated

_____________ and the Company as per clauses _____ and _____ in the

conditions which inter alia are subject matter of the letter of allocation

herein referred, agrees to furnish this bank guarantee for an amount of Rs.

_______ (in figures) (Rupees ____________ (in words) equivalent to one

year royalty amount based on ________(grade of coal) grade capacity of

coal assessed by CMPDIL at ______ (mine capacity) mtpa at an weighted

average royalty @ Rs. __________(in figures) per tonne.

We, _________ (Name of the bank) Bank,

______________________(Branch, City) Branch hereinafter called “the

Bank” in consideration of the premises, at the request of the Company, do

hereby guarantee and undertake to pay without demur to the Central

Government forthwith on demand at any time upto _____________ (date at

least one year from date of Letter of allocation to be renewed, till exhausted

or rated capacity reached) any money or monies not exceeding a total sum

of Rs. _____________(in figure) (Rupees

__________________________)(in words) as may be claimed by the

Central Government to be due from the Company by way of shortfall in

royalty due to failure by the Company in the observance and performance as

per clause _____ of the terms and conditions of the said letter of allocation.

It is hereby agreed and acknowledged that the decision of the Central

Government as to whether any money is payable by the Company to the

Central Government or whether the Company has made any such default or

defaults as aforesaid and the amount or amounts to which the Central

Government is entitled to by reason thereof will be binding on the Bank and

the Bank shall not be entitled to ask the Central Government to establish its

claim or claims under this Guarantee or to claim any such amount from the

company in the first instance but shall pay the same to the Central

Government forthwith on demand without any demur, reservation, recourse,

contest or protest and/or without any reference to the Company. Any such

demand made by the Central Government on the Bank shall be conclusive

and binding notwithstanding any difference between the Central

Government and the Company or any dispute pending before any Court,

Tribunal, Arbitrator or any other authority.

The Bank further undertake not to revoke this Guarantee during its currency

except with the previous consent of the Central Government in writing and

this Guarantee shall continue to be enforceable till the aforesaid date of its

expiry or the last date of the extended period agreed upon as the case may be

unless during the currency of the Guarantee all the dues of the Central

Government under or by virtue of clause _____ of the said letter of

allocation have been duly paid and its claims satisfied or discharge or the

Central Government certifies that the terms and conditions of the said letter

of allocation have been fully carried out by the company and accordingly

discharged the Guarantee.

Subject to the maximum limit of the Bank’s liability as aforesaid, this

Guarantee shall cover all claim or claims of the Central Government against

the Company from time to time arising out of or under condition

number_______ of the said letter of allocation and in respect of which the

Central Government’s demand or notice in writing be served on the Bank

before the date of expiry of this Guarantee mentioned above or of further

extended period agreed upon, as the case may be.

The Guarantee shall not be affected by any change in the constitution of the

Company or any extension or forbearance to the company by the Central

Government and the Bank will ensure for and be available to and Guarantee

enforceable by the Central Government.

Notwithstanding anything contained herein :-

i. Our liability under this Bank Guarantee shall not exceed

Rs. ________(In figures) (Rupees

___________________________________) (in words).

ii. This Bank Guarantee shall be valid till

_______________(date).

iii. We are liable to pay the guaranteed amount or any part

thereof under this Bank Guarantee only if you serve upon

us a written claim or demand on or before

________________.

The Bank has power to issue this Guarantee under the statute and the

undersigned has full power to sign this Guarantee on behalf of the Bank.

Dated this ………………………… day of ………………

 7.BIBLIOGRAPHY

Books:

Working Capital Management & Control Bhalla V.K.

Indian Banking S. Chand

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

O. P. Agarwal

Documentary Credits D. C. Gardner

WEBLIOGRAPHY:

www.google.com

www.yahoo.com

www.find-internet-banking.info

www.banks.com

www.bank of india.com