Bridge Finance, LC & BG

BRIDGE FINANCE:
 Commercial banks often grant bridge loans to business enterprises
to temporarily bridge the financial gap between granting of loans by
other banks and financial institutions and actual disbursement by
them
 Bridge loans are sanctioned generally by the commercial banks to
meet the time gap between the closure of a public issue of equity
or other shares by a company and actual availability of funds after
completing all the formalities as required by regulatory authorities
 Specially in project implementation, availment of bridge loans
becomes essential in order to avoid cost and project overrun due to
delay in getting the finance
 After the funds are available to the business enterprises from the
expected source, the bridge loan is repaid
 Banks have to exercise caution in granting bridge loans unless a
proper tie up with the incoming funds is made, the repayment may
cause problems
 Bridge Finance, LC & BG
BANK GUARANTEES:
 The non-fund based business is very profitable proposition for the
banks as it gives substantial revenue without deployment of funds
 The non-fund based facilities are 100% substitute for fund-based
facilities
 The contingent liability becomes a current liability if it
crystalized/paid on due dates
 These are 100% risk weighted assets for which bank has to
maintain required CAR
 Hence, it is important for a proper appraisal of credit proposal
 It overcomes shortage of funds, increases liquidity, easy for
monitoring, facilitates international trade and achieve optimum
utilization of funds.
 Bridge Finance, LC & BG
BANK GUARANTEES (Contd.):
 Section 126 of Indian Contract Act defines guarantee as contract to
perform the promise or discharge liability of a third person in case
of default
 There are 3 parties to the guarantee contract
i. Applicant/Principal debtor who needs the facility of issue of BG
ii. Beneficiary/Creditor
iii. Bank or Guarantor
 Guarantee is a secondary contract, the primary contract being
between the applicant and the beneficiary
 Business concerns who wish to participate in tenders/auctions are
required to submit BGs for a minimum stipulated amount. In turn
key projects/Civil projects which takes considerable time for
completion, the principal provides mobilization advance and as a
security against the fund provided, the contractor is often required
to submit bank guarantee
 Bridge Finance, LC & BG
TYPES OF GUARANTEES:
 BGs which are issued are broadly classified as
i. Performance guarantee
ii. Financial guarantee
iii. Deferred payment guarantee
 The Performance Guarantees in respect of performance of a
contract or obligation. In the event of non-performance, short-
performance of the obligation, the bank (issuer) will be called upon
to make good the monetary loss arising out of non-fulfillment of
guarantee obligation Eg. Guarantee issued in lieu of custom duty
payment.
 In certain contracts entered in to by the customers with
government departments/large companies, there is a provision for
payment of certain amounts of money against the BG to enable the
customer to carry out the performance of the contract. In case of
customer’s failure to perform, the guaranteed amount will be paid
by the bank for non-fulfillment. In this case, payment of guaranteed
amount for non-fulfillment is called Financial Guarantee
 Bridge Finance, LC & BG
TYPES OF GUARANTEES (Contd.):
 Deferred Payment Guarantees arise in the case of purchase
of machinery or capital equipment. The manufacturer
supplies machinery against cash payment of 10% and gets the
bill accepted for the balance amount by the purchasers bank
or alternatively gets the guarantee issued for the balance
amount.
 The purchaser requests his banker for issue of guarantee in
favor of the seller’s bank incorporating the condition of
deferred payment sale and undertaking to accept usence
drafts by the seller on his banker and for payment thereof on
respective due dates together with future interest if any
 The total amount of guarantee will be the principal amount
agreed to be paid in deferred installments including interests
 BANK GUARANTAEE
THREE SPECIFICS

• A. SPECIFIC PURPOSE: The guarantee should be issued for a specific purpose

and objective only relating to the normal business of the customer. It should be
enforceable on happening of definite event.

• B.SPECIFIC PERIOD: Guarantee must be for a specific period preferably for a

shorter periods. BG should contain a standard protective clause that determines and
restricts the amount of guarantee and period enforceability of the claim against the
bank.

• SPECIFIC AMOUNT: The banks liability should be restricted to a certain sum of

money and there should be no ambiguity in the amount for which the guarantee is
issued.
 BANK GUARANTAEE
• ASPECTS TO BE CONSIDEERED WHILE ISSUING BGs
• The purpose for which BG is issued
• Amount of BG limit is required which should be assessed properly.
• Whether BG limit is required continuously or on adhoc basis.
• Which type of BG limit is required viz, Performance or financial?
• Period of the guarantee
• The applicants financial strength and capacity
• Past record of the BG issued-Whether the applicant is prompt in
meeting financial/business commitments
• Margin stipulation
• Collateral security
• Verify the draft of the guarantee document to make sure that it doesn’t
contain any onerous clause deter mental to banks interest
 ELIMINATION OF EXPIRED BANK
GUARANTEE
Guarantees which have expired should not be allowed to remain
outstanding in view of Capital Adequacy Norms. If the BGs are allowed
continue in the records after expiry, it attracts CAR which is drain on
banks profit. Hence BGs are to be eliminated immediately on expiry in
the books of the bank. The Bank guarantees (BG) can be eliminated:

a) On receipt of original BG duly cancelled by the

beneficiary.
b) On receipt of letter from beneficiary.
c) On giving notice to the beneficiary in prescribed format.
 Bridge Finance, LC & BG
RBI GUIDELINES ON BANK GUARANTAEE.
An important criterion for judging the soundness of a banking institution is the size and
character, not only of its assets portfolio but also contingent liability commitments.
The guarantees are structured according to the terms of agreement viz, security,
maturity and purpose. Banks are to comply with the following norms while issuing
guarantees.
1.Confining to financial guarantee and cautious with regard to issue of performance
guarantee
2.Issue of guarantee for shorter maturities,
3. Avoid issue of unsecured guarantees.
4.Guarantees executed on behalf of constituents subject to prescribed exposure norms
as per RBI guidelines.
5.At the time of issue of FBG, banks should satisfy that the customer would be in a
position to reimburse the bank in case of bank is required to make payment under the
guarantee.
6. Guarantee should be issued in serially numbered, signed by two officials jointly and
beneficiaries be advised that they should in their own interest verify the genuineness of
the guarantee with the issuing bank.
 Bridge Finance, LC & BG
IMPORTANT POINTS TO BE FOLLOWED:-
1. A separate liability register shall be maintained and guarantee
issued shall be recorded.
2. Required margin has to be collected for each BG issued.
3. Due date and claim period are properly defined and noted in
the records and commission at the applicable rate has to be
collected.
4. BG issued on a non-judicial stamp paper of requisite value
and is signed by two officials.
5. Entries have been made in the bank guarantee register and
necessary slips are passed under the general ledger heads on
both sides of the balance sheet.
6. All the bank Guarantees should incorporate Standard
Limitation clause prescribed by the IBA in the Guarantee
bond issued by them un-failingly
 Bridge Finance, LC & BG
IMPORTANT POINTS TO BE FOLLOWED:-
EXTENSION /RENEWAL OF BG:-
1.Extension of the validity of BG shall be at the request of the customer
and not at the request of beneficiary.
2. Extension letter shall be issued on a stamped paper duly signed by the
two officers.
3. A copy of the extension letter should be held with the original BG
folder.
4.Commission at the appropriate rate shall be collected for the extension
period.
5. When BGs are expired, immediate steps to be taken to obtain the
original guarantee bond from the beneficiary and entry to be reversed as
otherwise continuing such entry in the books results in providing 100%
CAR BY THE BANK for the expired guarantee also.
 Bridge Finance, LC & BG
INVOCATION OF GUARANTEE:-
1. When guarantees are invoked, scrutinize the claim to ensure
whether it is in order. If the claim is in order it has to be
honored without delay.
2. On paying the amount to the beneficiary, the margin money
should be appropriated towards the paid guarantee. Reverse
entries shall be passed to the contingent liability.
3. The party shall be informed accordingly and demand
payment accordingly together with interest.
4. Any delay on the party of the bank in honoring the
guarantee when invoked tend to erode the value of the bank
guarantees, the sanctity of the scheme of guarantee and image
of bank.
 Bridge Finance, LC & BG
Assessment of BG limit.(amount in lakhs)
A. Earnest money Guarantee/Bid bond Guarantee:-

1. Projected sales for the ensuing year Rs.1,200 lakhs

2. Projected bids to be participated Rs.1,200 lakhs

3. Average monthly bids Rs.100 lakhs

4. Anticipated period of BG for bids. 3 months.

5. Quantum of BG limit.(3x4) Rs. 300 lakhs

 Bridge Finance, LC & BG
RESTRICTIONS FOR ISSUE OF BG’S;

1. Banks should not execute guarantees covering

inter-company deposits/loans there by guaranteeing
refund of deposits/loans accepted by NBFCs.

2. Guarantees should not be issued for the purpose of

indirectly enabling the placement of deposits with
NBFCs.
 Bridge Finance, LC & BG
• QUESTION: Your Bank has issued a Bank guarantee of Rs.5 lac on
behalf of the customer M/S. Gupta & co. in favor of state electricity
board. Due to non-fulfillment of the obligation, the beneficiary
invoked the guarantee and demanded the payment without specifying
the facts showing that the conditions of the bank guarantee invocation
have been fulfilled, which had been a requirement of the guarantee
bond. Bank refused to make the payment on the basis stating that it is
not proper invocation of the guarantee. Examine the bank’s decision in
the matter.

• ANSWER: In the absence of details of circumstances leading to

invocation of guarantee, bank is in order in rejecting the invocation by
the beneficiary. Beneficiary should provide the cause of action while
invoking the guarantee.
 Bridge Finance, LC & BG
• QUESTIOIN: Your customer has requested for issue of a Bank guarantee of
Rs.30 lacs in favor of State Electricity Board covering security depositor a
temporary connection to be taken for 6 months for construction of his factory
building.
• What is the type of guarantee issued?
• What precautions you take before issuing BG?
• What documents you would obtain?

The guarantee is issued by the Bank in lieu of money to the beneficiary. Hence , this is a
Financial guarantee. Before issuing a guarantee, a draft of guarantee specimen
required by the beneficiary to be perused to ensure 1) The guarantee does not contain
any onerous clauses detrimental to the interest of the bank, 2) The period and the
amount of the guarantee should be specific, 3) The purpose should be genuine
commercial transaction and the applicant should be engaged in the relevant activity. The
documents to be taken are 1) Financial statements of the applicant, 2) Request letter
supported by the format of the guarantee to be issued, 3) Margin and security 4)
Counter guarantee by the applicant.
 Bridge Finance, LC & BG
LETTER OF CREDIT:
 Letter of Credit is a letter/document issued by a bank at the instance of
its customer favoring supplier of goods where by the issuing bank
undertake to make payment on submission of certain documents as
specified in the letter.
 LCs issued by banks facilitate trade between two parties, both at
domestic and international level
 The issuing bank undertakes to pay the amount of shipment to seller
provided the latter has submitted the shipping and other documents of
title as stipulated in the LC through the bank of the seller
 When an LC is issued on account of international trade, the buyer is
known as importer of goods, the seller is called exporter of goods
 Bridge Finance, LC & BG
UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY
CREDIT (UCPDC):
 Commercial banks around the globe issues LCs and the modalities
for issuing LCs are subject to provisions of UCPDC framed by
International Chamber of Commerce.
 Provisions of UCPDC are common in all countries and all
commercial banks handle LC business as per the guidelines of
UCPDC
 It is important to bear in mind that under LC, commercial banks
deal with documents and not the underlying goods. If the
documents are strictly in compliance with the terms of LC, the
issuing bank has to make payment to the seller’s bank irrespective
of the condition of the goods.
 Lcs are widely used in international trade. Hence standardization of
terms used in LCs, the ICC, Paris has codified the practices and
published them as a set of rules called UCP 600. India has ratified
these rules.
 Bridge Finance, LC & BG
UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDIT
(UCPDC):
SOME IMPORTANT RULES OF UCP 600
 If an LC is stated to be revocable, it is deemed to be irrevocable.
 Unless an LC is stated as transferable, it is not transferable.
 A bank advising an LC is supposed to have verified the authenticity
of the Lc. If the advising bank is not able to verify the authenticity,
they must state it clearly. Or else they will be responsible if the LC
turns out to be a fraudulent one.
 If the advising bank is not able to recover its charges from the
beneficiary, the opening bank is responsible to pay it.
 Unless the LC specifies that only ‘original documents’ are
acceptable, carbon copies or computer printouts are acceptable.
 Unless prohibited in the LC, documents which are dated before the
date of the LC, can be accepted.
 Bridge Finance, LC & BG
UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDIT (UCPDC):
SOME IMPORTANT RULES OF UCP 600

 Unless prohibited in the LC shipping documents containing the name of

someone other than the beneficiary as the shipper (sender) can be
accepted. The exporter may have bought the goods from someone else
and told him to ship the goods directly to the buyer and give the shipping
documents to him. Such transaction may be under a back to back LC too.
 If the LC is silent on when the documents have to be presented to a bank,
the beneficiary has to present the document within 21 days from the
date of shipment. This is to prevent the demurrage at the port of
discharge.
 The reimbursing banks charges are to be borne by the issuing bank.
 Issuing bank has to scrutinize the documents and either accept or reject
the documents within 5 days following the day of receipt of documents.
While rejecting documents they have to specify all discrepancies in very
first message intimating the rejection and cannot be in instalments.
 Bridge Finance, LC & BG
PARTIES TO THE LC:
1. Applicant- buyer.
2. Beneficiary- Seller in whose favor the LC is established.
3. Opening/Issuing bank
4. Advising bank which confirms the genuineness of the issue of
LC. This bank will be in the sellers country.
5. Confirming bank- the bank in the sellers country which adds
its guarantee to the LC.
6. Negotiating bank- which funds the money to the
seller.(correspondent bank at the exporter's country)
7. Reimbursing bank-issuing bank’s correspondent which settles
the claims of the negotiating bank.
 Bridge Finance, LC & BG
TYPES OF LCs:
1. Revolving LC: It is an LC limit like CC limit which gets
revolved. Many LCs are covered under the limit for a certain
period, say one year. Bank has to maintain liability register.
When once the earlier LC’s get cancelled, the liability gets
extinguished. This way several LC’s may be issued subject to
the limit fixed.
2. IRREVCOCABLE LC: In this type of LC, any change or
cancellation of the LC done by the applicant through the
issuing bank must be authenticated by the beneficiary of
the LC.
3. Confirmed LC: An LC is said to be confirmed when another
bank adds its additional confirmation to honor the LC
subject to complying terms of the LC, ON presentation at the
request or authorization of the issuing bank.
 Bridge Finance, LC & BG
TYPES OF LCs:
 UN-CONFIRMED LC: This type of letter of credit does not
acquire the other banks confirmation.
 TRABSFERABLE LC: A Transferable LC is the one under which
the exporter has the right to make the credit available to one
or more subsequent beneficiaries.
 UNTRANSFERABLE LC: It is said to the credit that seller cannot
give a part or complete right of assigned credit to somebody
or to the person he wants.
 USANCE LC: It is a kind of credit that wont be paid
immediately The seller will give an opportunity to the buyer
to pay the required money after taking the related goods and
selling them.
 Bridge Finance, LC & BG
TYPES OF LCs:
 AT SIGHT LC: It is a kind of credit that the bank after observing the
documents from the seller and checking all the documents
immediately pays the required money
 RED CLAUSSE LC. In this kind of credit, the seller before sending the
products, can take the part of the money from the bank as packing
credit loan. To gain the attention of sellers bank, the terms and
conditions are usually written in red ink.
 GREEN CLAUSES LC: The applicant also provides for storage facilities
at the post of shipment in addition to pre shipment credit to the
beneficiary.
 BACK TO BACK LC: It is a type of LC issued in the case of
intermediary trade. Intermediate companies such as trading houses
are sometimes required to open LCs favoring their suppliers and
receive export LC from the buyers.
 Bridge Finance, LC & BG
TYPES OF LCs:
POINTS TO BE KEPT IN MIND WHILE EXTENDING THE LCs
1. Availability of LC limit.
2. Import license issued by the DGFT for goods under restricted
list.
3. Verify terms and conditions incorporated by importer are in
compliance with the UCP & FEMA.
DOCUMENTS TO BE OBTAINED:
1. Applications for issue of LC
2. Copy of the contract with the seller.
3. Original exchange control copy of the import license.
 Bridge Finance, LC & BG
DOCUMENTS UNDER THE LC:
1. Transport document viz. B/L, Airway bill, Railway/Lorry
receipts (Documents of title)
2. Bill of exchange drawn by seller to buyer
3. Commercial invoice
4. Certificate of origin
5. Packing list
6. Inspection/ Quality certificate
 Bridge Finance, LC & BG
DOCUMENTS UNDER THE LC:
PROCESS ISSUES:
1. LC will be sent at SWIFT(society for world wide inter bank
telecommunication) to the correspondent in the country of
seller for advising.
2. After shipment, seller will get the document negotiated by a
bank of his choice. The negotiating bank will courier the
documents to the issuing bank seeking reimbursement.
3. On receiving the instruments, the issuing bank will check the
them for compliance with the LC terms. If in order, advised to
the importer and corresponding amount is debited to the
importer and also advise the corrpospondant abroad to
debit their account and make payment to the negotiating
bank.
 Bridge Finance, LC & BG
DOCUMENTS UNDER THE LC:
PROCESS ISSUES:
4. The importer customer shall submit following documents at
the time of payment/retirement of import bill.
1.Letter of request to release the document,
2. Bill of exchange signed by the importer,
3. Form A1 of FEMA declaration.
4. Original import license.
 Bridge Finance, LC & BG
ASSESSMENT OF EXPOSURE UNDER LC:
Supposing a company has projected total raw material
requirements of say Rs.600 lakhs during the projected year. If the
company has projected a total cash purchase is Rs.150 lakhs and
Rs.150 lakhs under trade creditors. For the rest of the amount of
Rs.300 lakhs the company proposes to acquire Raw materials
under DP LC. Suppose normal transit period is 30 days, the LC
requirement will be arrived as under.
1. Under DP basis, normal transit period is 30 days from the
date of LC opening and till payment.
2. Thus the Lc limit under DP basis is
3. LC limit = Amount of RM purchased under LC X Lead period
12
5. In this case limit under LC –DP will be 300/12 X1=25 lakhs.
 Bridge Finance, LC & BG
LETTER OF COMFORT:
 This is only a letter. This doesn’t have any legal implication for
the provider. This letter is provided by the corporates in
connection with channel finance.
 Channel financer is providing finance to the supply
channel(suppliers of components) consisting of a number of
SME who manufacture and supply the components to a bigger
company which has assembly lines.
 Best example could be an automobile manufacturer who gets
the four wheeler components from many suppliers.
 In this case the automobile company facilitates bank finance
to be provided to the suppliers through a letter of comfort.
 Bridge Finance, LC & BG
LETTER OF COMFORT:
M/s.Victoria enterprises is a MSME unit engaged in manufacture
of plastic containers. They have approached for working capital
and term loan facilities. Give a list of documents to be obtained
for appraisal of credit needs as per the check list given by your
COMMON
c CHECKLIST FOR MANUFACTURING UNITS-Particulars
NEW FRESH ACCOUNTS  /
X
1. Application form in prescribed format requesting the type of facilities and amount with signatures.
2. CIBIL verification/ ECGC Caution list, MCA Portal
3. Audited financial papers for the last -03- years along with form 3CA & 3CD
4. Latest 2 years I.T. Returns / Wealth Tax Returns of the Firm / Company / Proprietor / Partners /
Directors.
5. Estimates for current year and projected financials for the next two years in case of working capital
and for term loan till the period term loan exists / CMA Data / Project Report.
6. Latest Means and Standing of Partners / Guarantors in F-135 with signatures and photographs and
proof of their properties.
7. Background of the unit
1. Date of establishment, location, constitution of the unit, collaboration
2. Products being manufactured – installed capacity and utilised capacity
3. Details regarding group concerns and the items being manufactured by them, brief financial
performance
4. Expansions carried out till date in the unit & group concerns
5. Present infrastructure facilities available with the unit i.e. Power, water, L&B. etc.,
6. Promoters / Management of the unit, their age, Technical Qualification, experience,
association with other group concerns, affiliation with any Industry / Association /
 Bridge Finance, LC & BG
LETTER OF COMFORT:
8. License / Registration for sales tax / excise / municipal / SSI registration / copy of Firm/Company
registration.

9. Export-Import / Power Sanction Letter / Pollution Control Board Certificate / FDA Clearance etc.,
10. Memorandum & Articles of association for company’s, partnership deed for partnership firm
11. Certification of Incorporation for company’s and Registration of firm for partnership firm.
12. Shareholding Pattern in case of company and profit/loss sharing ratio in case of partnership firm
13. Latest Search Report in case of company.
14. Lease Agreement/ Sale Agreement copy of shop / factory premises.
15. Sales Tax return of the firm / company
16. Month wise Sales/Purchases Debtors/Creditors during the current financial year.
17. List of Associates/Group concerns and their banking arrangements with name of the proprietor/ partners /
directors.
18. Proposed Security particulars, list of machineries, details of collateral securities.
19. Title Clearance Report on the proposed properties to be mortgaged from Bank’s Approved Advocate (to be
obtained after concurrence from us).