Regulation of Bank Finance^401
set-up factoring divisions which could play a vital role in accelerating efficient and
speedy flow of resources to the corporate entities.
Accordingly, Reserve Bank of India has, of late, allowed Canara Bank to set-up Corporate
subsidiary with Rs. 10 crore Capital in co-operation with Andhra Bank and small
Industries Development Bank to render factoring services in southern region. State
Bank of India and Punjab and Sind Bank have been permitted to form subsidiary to
provide factoring services in Northern region. With a view to catering to the needs of
eastern region United Commercial Bank, United Bank of India and Allahabad Bank
have been permitted to float subsidiary with Rs. 5 crores.
Indiaís first factoring company was set-up jointly by Canbank Financial Services Ltd.,
and Rashtriya Chemical and fertilizers Ltd., to act as a specialised agency to dealers in
fertilizers and farmers using the fertilizers through factoring of trade bills and receivables.
Bank Guarantees
Bank guarantee is one of the facilities that the commercial banks extend on behalf of
their clients in favour o£ third parties who will be the beneficiaries of the guarantees. In
fact when a bank guarantee is given no credit is extended and banks do not part with
any funds. There will be only a guarantee to the beneficiary to make payment in the
event of the customer on whose behalf the guarantee is given, defaulting in his
commitment. So, if the customer fails to pay as per the terms of the guarantee, the
banker giving the guarantee has to pay and claim reimbursement from his client. The
bankerís liability arises only if his customer fails to pay the beneficiary of the guarantee.
That is why bank guarantee limits are known as non-borrowings limits or non-fund
limits.
Important features - The following points are to be considered regarding bank guarantee:
l Guarantees should be for a definite period and as far as possible should not run
for more than one year.
l The guarantees should be in respect of a definite object or enforceable on happening
of a definite event.
l Guarantee should be in respect of transactions which arise out of trade and
commerce, or any other genuine business.
l Guarantees should be specific as to amount.
l Guarantees should be covered by a counter guarantee by a customer giving the
bank absolute right of payment under guarantee on the happening of contingency
guaran≠teed against.