RBI permits authorised dealers to issue guarantee

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Mumbai, Nov 10 (UNI) The Reserve Bank today issued a circular, allowing Authorised Dealers, Category-I (AD Category-I) banks to issue guarantees/standby letters of credit to cover these specific payment obligations regarding remittance of foreign exchange related to commodity derivatives contract.

RBI said it had been receiving requests from banks for issuance of bank guarantee/standby letter of credit, in lieu of making a direct remittance towards payment obligations arising out of commodity derivative transactions entered into by customers with overseas counterparties. The move would provide greater flexibility to resident entities, who have such payment obligations related to commodity derivative contracts, the release said.

AD Category-I banks may issue guarantees/standby letters of credit only where the remittance is covered under the delegated authority or under the specific approval granted for overseas commodity hedging by the Reserve Bank.

The issuing bank shall have a Board approved policy on the nature and extent of exposures that the bank can take for such transactions and should be part of the credit exposure on the customers. The exposure should also be assigned risk weights, for capital adequacy purposes as per the extant provisions, the Apex Bank said.

The conditions/Guidelines for issuance of standby letter of credit /bank guarantee - commodity hedging transactions included that such guarantee could be issued for a maximum period of one year, after marking a lien on the non funded facility available to the customer.

The standby letter of credit/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 bank should ensure that the guidelines for overseas commodity hedging have been duly complied with.

UNI VK OBB NP1808

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