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FEDAI Rules 6, Guarantees.

On letter of guarantee

RULE 6-Guarantees

  1. Limitations

    In respect of any business directly connected with import and export trade, banks shall not be parties to any of the following guarantees:
    1. Any guarantee for an unlimited amount and/ or for an unlimited period with the following exceptions:
      1. Where such guarantees are given to automobile associations to enable tourists to take motor cars into foreign countries for short period without payment of duty.
      2. Where such guarantees involve the interest of the issuing banks either by way of bills under their letters of credit or purchased by their own overseas branches.
      3. Where such guarantees, in case of collection item, are given against counter guarantees by correspondent banks unlimited as to time and/ or amount.
      4. Where such guarantees are issued against cash deposit for the full invoice value of the goods received by the issuing bank from the customer or where the relative goods are pledged with the issuing bank so long the guarantees remain current.
      1. Guarantees to steamer companies to cover the issue of bills of lading without surrender of the relative mate’s receipt to the steamer company. In the event of genuine loss of the mate’s receipt, banks may be parties to such guarantees to procure the issue of bills of lading but such guarantees should not be for a period exceeding one year.
      2.  Guarantees to the Collector of Customs to cover the delivery of goods without production of the relative import licence. However, if adequate proof is produced indicating the existence of an import licence, the bank may be a party to such a guarantee.
      3. Guarantees to the Collector of Customs (given on behalf of exporters) in respect of indirect shipments to a country through another country either via or in transit shipments.
      4. Standing guarantees to the Collector of Custom for export covering declaration of optional destination ports in shipping bills.
      5. Shipping guarantees for missing bills of lading in respect of purely barter transactions for which no document pass through any bank, except joining in the shipping guarantees given by firms and companies who received documents direct from their branches or affiliated concerns in other countries.

  2. Charges

    The minimum charges for any guarantee shall be Rs.250/-

    The commission for the full specified period of liability shall be collected at the time of signing a guarantee, except in respect of guarantees by item 5 above.

    The “specified period of liability” shall mean the actual validity period of the guarantee plus the additional period, if any, during which claims can be made on the bank under the guarantee.

    Note 1:
     Customer should in their own interest obtain the return of cancelled guarantees at the earliest.

    Note 2:
    Commission for issuing bid-bonds for supplies to projects carried out abroad as well as to supplies to IBRD/IDA/UNICEF aided projects/ programmes in India which are deemed as exports by the Reserve Bank of India, shall be recovered to the extent of 25% thereof for the full period of validity of the bonds at the time of issue. If the bid materialises the balance 75% of the commission shall be recovered. However, if the bid gets frustrated there will not be refund of that part of the commission collected.

    Note 3:
     In respect of Export Performance Guarantees (including Bid-bods forearnest Money and Guarantees for Advance payments) commission may be collected in yearly instalments where the amount of commission is more than Rs.1 lac.

    Note 7:
     The currency of the bank guarantee can be the ‘euro’ at the option of the applicant even though the underlying transaction is in one of the EMU member country currencies.

  3. On letter of guarantee covering import of goods on deferred payment terms and letters of guarantee covering repayment of foreign currency loans extending over one year commission shall be charged at the rate of 0.40% per quarter or part thereof calculated on the amount of liability under such guarantee at the beginning of every quarter. If the guarantee is valid for more than two years, the amount of the commission may, at the bank’s discretion, be collected by instalments subject to the following: (AR 2/95 dated 31.3.95)
    1. the size of the instalments shall be proportionate to the amount of outstanding liability at the beginning of each year;
    2. the first instalment shall be collected at the time of issuing the guarantee, and the subsequent instalments shall be collected thereafter annually, at the beginning of each year. The entire commission must be recovered by the commencement of the last year of validity of the guarantee.
    3. in the event of reduction of the value of the guarantee, there shall be no refund of the commission collected.
    4. in the event of early redemption of deferred payment guarantee, commission for the unexpired period of guarantee may be refunded subject to the condition that the original guarantee has been received to the effect that there are no claims against the guarantee. (AR 2/95 dated 31/03/95)
    5. the minimum commission to be charged annually shall Rs.400/-. Adjustment in instalment, if any, to be done in the last instalment which could be less than this amount.
    6. In the event of default in payment of instalment, interest shall be recovered at the domestic commercial rate of interest, as prescribed by Reserve Bank of India from time to time from the date of default to the date of actual payment.

      Where a guarantee covered under this Rule contains a definite provision for its possible redemption, even though at beneficiary’s option, at a particular time or date or on completion of a certain portion of the repayment prior to the expiry of the full period of the guarantee, the period upto the possible redemption may be considered as the initial validity period for which the commission should initially be recovered. In the event the guarantee is not redeemed at the end of that period, the balance periods may be considered as an extension of the initial period and commission should then be recovered for the balance period. However for the purpose of considering whether the commission mayCollected in instalments as above, the total commission must be taken to be that amount payable for the initial validity period only. If a guarantee qualifies for that concession and if the concession granted for the initial validity period, the same concession may also be granted for the same concession may also be granted for the extended period irrespective of the total quantum of commission payable for the latter period.In the case of guarantees covered by this Rule, if they are backed by a counter guarantee of the Government of India the rate of commission shall be 0.0625% instead of 0.40% per quarter. All other conditions laid down above shall apply but the commission shall be charged at the time of (i) the execution of the guarantee, (ii) the extension of the validity period of the guarantee and (iii) the increase in the amount of the guarantee, as the case may be. (AR 2/95 dated 31.3.95).

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