What changed
Previously, UCBs could only purchase/discount/negotiate bills under LCs for borrowers with sanctioned regular credit facilities. Now, for LCs restricted to a particular UCB, the bank may negotiate such LCs at its discretion for non-borrower beneficiaries, based on the creditworthiness of the LC issuing bank, provided the proceeds are remitted to the beneficiary's regular banker. The prohibition on negotiating unrestricted LCs for non-borrowers remains unchanged.
What it means for you
UCBs gain flexibility to serve non-borrower clients under restricted LCs, potentially expanding business opportunities. However, they must assess the LC issuing bank's credit risk carefully and ensure proceeds flow to the beneficiary's regular banker, maintaining discipline. The restriction on unrestricted LCs stays, so UCBs cannot bypass borrower-lender norms for open LCs.
What you must do
- Update internal policies to allow negotiation of restricted LCs for non-borrower beneficiaries, subject to credit assessment of the LC issuing bank.
- Ensure that proceeds from such negotiations are remitted directly to the beneficiary's regular banker.
- Continue to prohibit negotiation of unrestricted LCs for entities without regular credit facilities.
- Comply with sharelinking and membership provisions under the Co-operative Societies Act and RCS/CRCS instructions.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Beneficiaries of restricted LCs who are not regular borrowers of the negotiating UCB, LC issuing banks whose creditworthiness is assessed by UCBs
Can we negotiate a restricted LC for a beneficiary who is not our borrower?
Yes, RBI now permits this at your discretion, based on the creditworthiness of the LC issuing bank, provided the proceeds are sent to the beneficiary's regular banker.
Does this circular allow negotiation of unrestricted LCs for non-borrowers?
No, the prohibition on negotiating unrestricted LCs for entities without regular credit facilities remains in force.
What compliance requirements apply when negotiating such restricted LCs?
You must adhere to RBI and RCS/CRCS instructions on sharelinking to borrowing and the Co-operative Societies Act membership provisions.