While the general verification of funded and non- funded advances is done simultaneously, there are certain components of non-funded advances, which need to be looked into. The RBI has issued a Master Circular dated 1st July, 2014 under Guarantees and Co-acceptances, which can act as a guiding parameter.

Non-funded advances are called off balance sheet items, as their value is not reflected in the balance sheet. They form the contingent liability items of the bank. However, for the purpose of keeping a control over these items, banks have a system of passing contra entries in its books of accounts at the branch level and hence these items get reflected on the liability as well as asset side of the trial balance. However, while preparing the balance sheet of the bank as a whole, the value of these items are reflected in the notes to accounts.

  • Guarantees
  1. Guarantees are of two types—financial guarantee, wherein the guarantor (the bank) promises to pay the stated amount to the beneficiary, if the person for whom the guarantee is given, fails to pay the same (also referred to as invoking the guarantee); performance guarantee, wherein the guarantor promises to pay the beneficiary a stated sum of amount, if the person for whom the guarantee is given, fails to perform, as expected, in a given period of time. Banks are generally discouraged from issuing performance guarantees.
  2. A guarantee transaction usually comprises two independent but related components— one is the guarantee issued by the banker (of the buyer) to the beneficiary {i.e., seller) and the other is a counter guarantee given by the buyer to his banker, who has issued the guarantee.
  3. Generally, guarantees should not be issued on behalf of customers, who do not enjoy credit facilities with the bank.
  4. Since guarantees invoked could get converted into funded advance to a borrower, banks should not encourage borrowers to over exter n u»e : commitments solely on the basis of a __
  5. Guarantee’ c _ c ~ e : : specific transaction (called spt .-.. g_arantee) or it could be for multiple transactions within a specific time frame (ca c c mmuing guarantees). Guarantees sh _.c generally be for short durations; in an. ca.se :s should not have a maturity period >i me re than 10 years.
  6. Unsecured Guarantees to a particular borrower sh _ c generally not exceed 10% of the total exposure
  7. Banks sho_.u ais not concentrate its

unsecured Guarantees to a particular borrower or a _          _ :

  1. Ghosh Committee has recommended

certain precaut:to be taken by banks while issuing                   ■ e s.

  1. Guarantee’^:, generalh issued by keeping margins, either m the form of cash/term deposit or some ther security.
  2. In case or _ _    — ssued on behalf of

share and s:        brokers, the RBI has advised

that bank? sh _.u btam a minimum margin of 50% (v. ;:r 25            – r _ cash margin).

  1. RBI has laid restrictions on guarantees of inter-comp an . deposits loans and inter- institutional g_a rantees.
  2. In the above mentioned circular, the RBI has also given e uensive guidelines on issue of guarantees n behalf of exporters and importers.
  • Co-Acceptance of Bill”
  1. In this tvpc of facility, the seller despatches the gooc’ ana raises the bill on the buyer. The buve: accepts the bill and then it is co-acceptcu bv buver’s banker. The seller’s banker then discounts this bill.
  2. This type or tacility is often used by customer? to float accommodation bills {i.e., bills which are not supported by genuine sale and purchase of goods) and hence auditors should be careful while examining such bills.
  • Letter of Credit

A Letter of Credit (LC) is a promise by a banker to hon nr the payments to be made by its customer the buyer or importer) to the seller or exporter. This type of payment

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