Chapter 8 Debt Funding-Indian Non Fund Based – Corporate Funding and Listing in Stock Exchange ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Debt Funding-Indian Non Fund Based – Corporate Funding & Listing in Stock Exchange Study Material
Question 1.
Distinguish between the following :
Letter of Guarantee and Bank Guarantee (June 2019, 5 marks)
Answer:
Letter of Credit: A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a bank. It represents an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. The letter of credit ensures the payment will be made as long as the services are performed.
Bank Guarantee: Bank guarantees are part of non-fund based credit facilities provided by the bank to the customers. Bank issue bank guarantee on behalf of his client as a commitment to third party assuring her/ him to honour the claim against the guarantee in the event of the non- performance by the bank’s customer. A Bank Guarantee is a legal contract which can be imposed by law. The banker as guarantor assures the third party (beneficiary) to pay him a certain sum of money on behalf of his customer, in case the customer fails to fulfill his commitment to the beneficiary.
While letters of credit are used mostly in international trade agreements, bank guarantees are often used in real estate contracts and infrastructure projects. Both bank guarantees and letters of credit work to reduce financial risk.
Question 2.
Distinguish between the following:
Letter of Credit Limit and Bank Guarantee Limit. (Aug 2021, 5 marks)
Answer:
Letter of Credit Limit: Letter of credit (LC) is a method of settlement of payment of a trade transaction and is widely used to finance purchase of raw material, machinery etc. It contains a written undertaking by the bank on behalf of the purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfilment of all the terms and conditions incorporated therein. Letters of credit thus offers both parties to a trade transaction a degree of security. The seller can look forward to the issuing bank for payment instead of relying on the ability and willingness of the buyer to pay.
Bank Guarantee Limit: Appraisal of proposals for Bank guarantees is done with same diligence as in the case of fund-based limits. Whenever an application for the issue of bank guarantee is received, Bank examine & satisfy the following aspects:
(a) The need of the bank guarantee & whether it is related to the applicant’s normal trade/business.
(b) Whether the requirement is one time or on the regular basis.
(c) The nature of bank guarantee i.e., financial or performance.
(d) Applicant’s financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation.
(e) Present outstanding on account of bank guarantees already issued.
(f) Margin
(g) Collateral security offered.
Question 3.
Distinguish between the following :
(ii) Red Clause Letter of Credit and Green Clause Letter of Credit
(iii) Financial Bank Guarantee and Performance Bank Guarantee. (June 2022, 5 marks each)
Question 4.
Explain the conditions under which a bank can grant non-funded facilities to customers, (not availing fund based facility from any bank in India). (Dec 2019, 3 marks)
Answer:
Banks can grant non-funded facilities including partial credit enhancement to customers, not availing fund based facility from any bank in India under following conditions:
- Banks are to ensure that the borrower has not availed any fund based facility from any bank operating in India. At the time of granting non-funded facilities, bank to obtain declaration from the customer about the non-funded credit facilities already enjoyed by them from other banks.
- Banks are to undertake similar credit appraisal as for fund based facilities.
- Credit information relating to such facility shall be mandatorily be furnished to the Credit Information Companies.
Question 5.
Explain briefly the documents handled under Letter of Credit. (Dec 2020, 3 marks)
Answer:
Documents handed under letter of credit (LOC):
- Bill of exchange
- Commercial invoice
- Transport document
- Bill of lading
- Insurance Policy/Certificate
- Certificate of origin
Question 6.
Whether ‘Letter of Credit’ (LC) and ‘Letter of Guarantee’ (LG) are one and same. Do you agree? If not, list out the points of differences between them. (Dec 2021, 5 marks)
Answer:
- Bank guarantee and a letter of credit are similar in many ways but they are two different things. Letters of credit ensure a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn’t go as planned.
- Hence, the Letter of Credit and Letter of Guarantee are not one and same. There are some differences between the LC and LG which are as under:
Letter of Credit (LC)
A letter of credit is a document from a bank that guarantees payment. A Letter of Credit is issued by a bank at the request of its customer (importer/buyer) in favour of the beneficiary (exporter /seller).
It is an undertaking/ commitment by the bank, advising/ informing the beneficiary that the documents under a letter of credit would be honoured, if the beneficiary (exporter) submits all the required documents as per the terms and conditions of the letter of credit.
- A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a bank.
- It represents an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds to the beneficiary.
- The letter of credit ensures the payment will be made as long as the services are performed.
- Letters of credit are especially important in international trade due to the distance involved and potentially differing laws in the countries of the businesses involved. In these transactions, it is not always possible for the parties to meet in person.
- The bank issuing the letter of credit holds payment on behalf of the buyer until it receives confirmation that the goods in the transaction have been shipped.
- Letters of credit are used mostly in international trade agreements, whereas bank guarantees are often used in real estate contracts and infrastructure projects.
Letter of Guarantee (Bank Guarantees)
- Bank guarantees are part of non-fund based credit facilities provided by the bank to the customers. Bank issue bank guarantee on behalf of his client as a commitment to third party assuring her/ him to honour the claim against the guarantee in the event of the non- performance by the bank’s customer.
- A Bank Guarantee is a legal contract which can be imposed by law.
- The banker as guarantor assures the third party to pay him a certain sum of money on behalf of his customer, in case the customer fails to fulfil his commitment to the beneficiary.
(i) Bank guarantees represent a more significant contractual obligation for banks than letters of credit do.
(ii) A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary; however, unlike a letter of credit, the sum is only paid if the opposing party does not fulfil the stipulated obligations under the contract.
(iii) Bank guarantees insure both parties in a contractual agreement from credit risk. For instance, a construction company and its cement supplier may enter into a new contract to build a mall.
(iv) Both parties may have to issue bank guarantees to prove their financial stance and capability. In a case where the supplier fails to deliver cement within a stipulated time, the construction company would notify the bank, which then pays the company the amount specified in the bank guarantee.
Question 7.
Y Ltd. an Indian Company opened irrevocable letter of credit for 6 Million Swedish Kroner in favour of Z Ltd. for import of two pulsed rectifiers. Z Ltd. the Swedish Company shipped only one pulsed rectifier but invoiced for two pulsed rectifiers. Bill of Lading also stated that the packing contains two pulsed rectifiers. Based on the documents the Indian Bank remitted the amount to the Banker of Z Ltd. and debited the account of Y Ltd. Y Ltd. wants to hold the Indian Banker responsible for wrong payment against the short shipment.
Will Y Ltd. succeed?
Give your assessment with reasons. (June 2019, 5 marks)
Answer:
Indian Company will not succeed, since the foreign LC is subject to Uniform Customs and Practices for Documentary Credit (UCPDC 600) as per the guidelines of International Chamber of Commerce (ICCJ. According to which LC is not payment against goods but only payment against documents. As far as the Bank is concerned, the documents as called for in the LC have been presented by the seller and there is no internecine discrepancy among the documents. Because of this he will not be held liable for short shipment of the goods, physically.
Question 8.
On the basis of following Information, calculate the limit for Letter of Credit (LC) for the Financial Year 2019-20 of M/s Madhhukar Enterprises:
| (i) Estimated Raw Material purchase for the FY 2019-20 | ₹ 172.64 Crore |
| (ii) Estimated purchase under Letter of Credit for FY 2019-20 (LC) | ₹ 69.41 Crore |
| (iii) Lead time i.e. time from order placement to shipment | 10 days |
| (iv) Transit Time | 20 days |
| (v) Credit (Usance) Period available | 3 months |
(Dec 2019, 5 marks)
Answer:
| Particulars | |
| A. Annual Consumption of Raw Material (RM) to be purchased under Letter of Credit (LC) | ₹ 69.41 Crore |
| B. Average monthly purchase of Raw Material | ₹ 69.41/12 ₹ 5.78 Crore |
| C. Lead time i.e. time from order placement to shipment | 10 days |
| D. Transit Time | 20 days |
| E. Credit (Usance) Period available | 3 months |
| F. Total Period (C+D+E) | 4 months |
| G. Requirement of LC (BX F) i.e. ₹ 5.78 × 4 i.e. LC limit recommended |
₹ 23.14 Crore ₹ 23 Crore |
Question 9.
Alphameter Technologies Limited has outstanding guarantees of 792 crore as on March 31, 2019. During the year, Company had given new guarantees of ₹ 8 crore to the Telecom Department for new telephone lines. The income tax assessment proceedings for the Assessment Year (A.Y.) 2014-15 have concluded and the Department has released bank guarantees of ₹ 21 crore which the company had provided earlier. The Department has demanded an additional guarantee of ₹ 2 crore towards the interest for the A.Y. 2015-16, for which the Company had provided guarantee of ₹ 14 crore in previous years. Compute the bank guarantee limits as on March 31, 2020. (Dec 2021, 5 marks)
Answer:
Calculation of Bank guarantee limits as on March 31, 2020
Bank guarantees including additional guarantee issued during the period (8 cr. + 2 cr.)10B
| Particulars | Amount(in ₹ crores) | |
| Outstanding Bank Guarantee as on 31 st March 2019 | 92 | A |
| Bank guarantees released during the year | 21 | C |
| Bank Guarantee Limits as on 31st March 2020 | 81 | D = A+ B-C |
Notes:
- ₹ 92 crores have been considered as the opening bank guarantees outstanding as on April 1, 2019
- Additions during the year include ₹ 8 crore and ₹ 2 crore bank Guarantee provided towards the interest with the income-tax department
- ₹ 14 crores have not been considered separately, as it was on condition that during the earlier years and is included in the opening guarantees as on April 01, 2019.
Question 10.
Gulab Ltd. is a newly incorporated company and it would like to purchase raw materials from domestic sources as well as from other countries under Letter of Credit (LC).
On the basis of the following information, calculate the limit for Letter of Credit (LC) for the Financial year 2021 – 2022:
| (i) Estimated Raw Material purchase for FY 2021 – 22 | ₹ 240 crore |
| (ii) Estimated purchase under Letter of Credit (LC) for FY 2021 – 22 (90%) | ₹ 216 crore |
| (iii) Of which import of Raw Material under Letter of Credit (30%) | ₹ 64.80 crore |
| (iv) Lead Time – Domestic – Import |
1 Month 2 Months |
| Transit Time -Domestic – Import |
1 Month 2 Months |
| Credit (Usance) Period available – Domestic – Import |
1 Month 4 Months |
Question 11.
Moon Ltd. makes an application for Bank Guarantee Limit for the Financial Year 2021-22 with following data to PQR Bank Ltd.:
(i) Outstanding Bank Guarantee as per the last Audited Balance Sheet: ₹ 95 lakhs
(ii) Bank Guarantee required for the Financial Year 2021 -22: ₹ 115 lakhs
(iii) Estimated maturity or Cancellation during the period : ₹ 65 lakhs Compute the Bank Guarantee limit of Moon Ltd. for the Financial Year 2021 – 22. (June 2022, 3 marks)
Question 12.
Write short note on stand by Letter of Credit.
Answer:
Examples of Standby Letters of Credit: A financial SLOC, the most common type, is typically used in international trade or other high-value purchase contracts where litigation or other non-payment actions may not be feasible. A financial SLOC guarantees payment to the beneficiary if contract requirements are unfulfilled. For example, an exporter sells goods to a foreign buyer who guarantees payment in 30 days. When no payment is received by the deadline, the exporter presents the SLOC to the buyer’s bank to receive payment.
A performance SLOC ensures that time, cost, amount, quality of work, and other criteria are fulfilled in a manner acceptable to the client. The bank pays the beneficiary if any contractual obligations are unmet. For example, a contractor guarantees a construction project will be finished in 90 days. If work remains incomplete after the 90-day period, the client can present the SLOC to the contractor’s bank and receive payment.
Question 13.
Distinguish between letter of guarantee and Bank Guarantee.
Answer:
A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a bank. It represents an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. The letter of credit ensures the payment will be made as long as the services are performed.
Letters of credit are especially important in international trade due to the distance involved and potentially differing laws in the countries of the businesses involved. In these transactions, it is not always possible for the parties to meet in person. The bank issuing the letter of credit holds payment on behalf of the buyer until it receives confirmation that the goods in the transaction have been shipped.
Bank guarantees represent a more significant contractual obligation for banks than letters of credit do. A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary; however, unlike a letter of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
Bank guarantees ensure both parties in a contractual agreement from credit risk. For instance, a construction company and its cement supplier may enter into a new contract to build a mall. Both parties may have to issue bank guarantees to prove their financial stance and capability. In a case where the supplier fails to deliver cement within a specified time, the construction company would notify the bank, which then pays the company the amount specified in the bank guarantee.
Question 14.
What are the various types of letter of credit?
Answer:
Sight Credit – Under this letter of credit, documents are payable at sight/ upon presentation.
Acceptance Credit/ Time Credit – The Bills of Exchange which are drawn, payable after a period, are called usance bills. Under acceptance credit usance bills are accepted upon presentation and eventually honoured on due dates.
Revocable and Irrevocable Credit – A revocable letter of credit is a credit, in which the terms and conditions of the credit can be amended/cancelled by the Issuing bank, without prior notice to the beneficiaries. An irrevocable letter of credit is a credit, the terms and conditions of which can neither be amended nor cancelled without the consent of the beneficiary. Hence, the opening bank is bound by the commitments given in the letter of credit.
Confirmed Credit – Only Irrevocable letter of credit can be confirmed. A confirmed letter of credit is one when a banker other than the Issuing bank, adds its own confirmation to the credit. In case of confirmed letter of credits, the beneficiary’s bank would submit the documents to the confirming banker.
Back-to-Back Credit – In a back to back credit, the exporter (the beneficiary) requests his banker to issue a letter of credit in favour of his supplier to procure raw materials, goods on the basis of the export letter of credit received by him. This type of letter of credit is known as Back-to-Back Credit.
Transferable Credit – While a letter of credit is not a negotiable instrument, the Bills of Exchange drawn under it are negotiable. A Transferable letter of credit is one in which a beneficiary can transfer his rights to third parties. Such letter of credit should clearly indicate that it is a ‘Transferable letter of credit.
“Red Clause” Credit and “Green Clause” Credit – In a letter of credit a special clause allows the beneficiary (exporter) to avail of a pre-shipment advance (a type of export finance granted to an exporter, prior to the export of goods). This special clause used to be printed highlighted in red colour, hence it*is called “Red Clause” Credit.
Standby letter of credit: In certain countries there are restrictions to issue guarantees, as a substitute these countries use standby credit. In case the guaranteed service is not provided, the beneficiary can claim under the terms of the standby credit. In case of Standby letter of credits, the documents required are proof of non-performance or a simple claim form.
Question 15.
What are the documents handles under letter of credit?
Answer:
Documents handled under Letters of Credit: Documents play a crucial role in trade transactions. Documents are integral part of LCs. The banks involved in LC transactions deal only with documents and on the evidence of the correct and proper documents only the paying banks (opening bank/confirming bank) need to make payment. In view of these factors, banks have to be careful while handling documents/ LCs. At various stages, different banks (Negotiating bank {beneficiary’s bank}, confirming bank, opening bank) have to verify whether all the required documents are submitted strictly as per the terms and conditions of credit.
Question 16.
What are the various types of Bank Guarantee?
Answer:
Bank Guarantee: Bank guarantees are part of non-fund based credit facilities provided by the bank to the customers. Bank issue bank guarantee on behalf of his client as a commitment to third party assuring her/ him to honour the claim against the guarantee in the event of the non- performance by the bank’s customer. A Bank Guarantee is a legal contract which can be imposed by law. The banker as guarantor assures the third party (beneficiary) to pay him a certain sum of money on behalf of his customer, in case the customer fails to fulfill his commitment to the beneficiary.
Financial Guarantee: The banker issues guarantee in favour of a government department against caution deposit or earnest money to be deposited by bank’s client. At the request of his customer, in lieu of a caution deposit/ earnest money, the banker issues a guarantee in favour of the government department. This is an example of a Financial Guarantee. This type of guarantee helps the bank’s customer to bid for the contract without depositing actual money.
Performance Guarantee: Performance Guarantees are issued by banks on behalf of their clients. In performance guarantee bank issue on behalf of his client to assure the third party to complete some work on time or as per the terms of contact between the parties. If the work is not completed as per the term of contract then the third party can request the bank to invoke the bank guarantee and make payment for default.
Debt Funding-Indian Non Fund Based Notes
1. Letter of Credit
A letter of credit is a document from a bank that guarantees payment. A Letter of Credit is issued by a bank at the request of its customer (importer) in favour of the beneficiary (exporter). It is an undertaking! commitment by the bank, advising/informing the beneficiary that the documents under a letter of credit would be honoured, if the beneficiary (exporter) submits all the required documents as per the terms and conditions of the loner of credit.
2. Types of Letter of Credit
Sight Credit – Under this letter of credit, documents are payable at sight/upon presentation.
Acceptance Credit/ Time Credit – The Bills of Exchange which are drawn, payable after a period, are called usance bills. Under acceptance credit usance bills are accepted upon presentation and eventually honoured on due dates.
Revocable and Irrevocable Credit — A revocable letter of credit is a credit, in which the terms and conditions of the credit can be amended/cancelled by the Issuing bank, without prior notice to the beneficiaries. An irrevocable letter of credit is a credit, the terms and conditions of which can neither be amended nor cancelled without the
consent of the beneficiary. Hence, the opening bank is bound by the commitments given in the letter of credit.
Confirmed CredIt — Only Irrevocable letter of credit can be confirmed. A confirmed letter of credit is one when a banker other than the Issuing bank, adds its own confirmation to the credit. In case of confirmed letter
of credits, the beneficiar’s bank would submit the documents to the confirming banker.
Back-to-Back Credit – In a back to back credit, the exporter (the beneficiary) requests his banker to issue a letter of credit in favour of his supplier to procure raw materials, goods on the basis of the export letter of credit received by him. This type of letter of credit is known as Back-to-Back Credit.
Transferable Credit – While a letter of credit is not a negotiable instrument, the Bills of Exchange drawn under it are negotiable. A Transferable letter of credit is one in which a beneficiary can transfer his rights to third parties. Such letter of credit should clearly indicate that it is a ‘Transferable’ letter of credit.
“Red Clause” Credit and “Green Clause” Credit – In a letter of credit a special clause allows the beneficiary (exporter) to avail of. a pre-shipment advance (a type of export finance granted to an exporter, prior to the export of goods). This special clause used to be printed highlighted in red colour, hence it is called “Red Clause” Credit
Standby Letter of Credit: In certain countries there are restrictions to issue guarantees, as a substitute these countries use standby credit. In case the guaranteed service is not provided, the beneficiary can claim under the terms of the standby credit. In case of Standby letter of credits, the documents required are proof of non-performance or a simple claim form.
3. Parties involved in letter of credit finance:
1. Applicant: The buyer /importer of goods: This person has to make payment of letter of credit to the issuing bank if the documents are in accordance with the terms and conditions of LC.
2. Issuing Bank: Importer’s or buyer’s bank who lends its name or credit is issuing Bank. It is liable for payment of LC in case the documents are received by it from the nominated or negotiating bank and the documents are in terms of letter of credit. This bank gets 5 days to check the documents.
3. Advising Bank: Issuing bank branch or correspondent in exporter country to whom the letter of credit is sent for onward transmission to the seller or beneficiary, after authentication of genuineness of the credit. Where it is unable to verify the authenticity, it can seek instructions from the opening bank or can advise the LC to the beneficiary, without any liability on its part. This bank has no obligation to negotiate the document.
4. Beneficiary: The party to whom the credit is addressed i.e. seller or the exporter or the supplier of the goods. It gets payment against documents as per LC from the nominated bank within validity period of negotiation maximum 21 days from date of shipment.
5. Negotiating bank: The bank to whom the beneficiary presents the documents for negotiation. It claims payment from the reimbursing bank or opening bank and gets 5 banking days to check the documents.
6. Reimbursing Bank: Third bank which repays, settle or funds the negotiating bank at the request of its principal, the issuing bank.
7. Confirming Bank: The bank adding confirmation to-the credit, which undertakes the responsibility of payment by the issuing bank and on his failure to pay the confirmation, is added on request of the opening bank.
4. Documents handled under Letters of Credit
The important documents handled under LCs are broadly classified as:
(a) Bill of Exchange: Bill of exchange, is drawn by the beneficiary (exporter) on the LC issuing bank. When the bill of exchange is not drawn under a LC, the drawer of the bill of exchange (exporter), draws the bill of exchange on the drawee (importer). In such a case, the exporter takes credit risk on the importer, whereas, when the Bill of Exchange is drawn under LC, the credit risk for the exporter is not on the importer but on the LC issuing bank. Banks should be careful in ensuring that the Bill of Exchange is drawn strictly as per the terms and conditions of the credit.
(b) Commercial Invoice: This is another important document. Commercial invoice is prepared by the beneficiary, which contains:
- relevant details about goods in terms of value, quantity, weights (gross/net), importer’s name and address, LC number
- Commercial invoice should exactly reflect the description of the goods as mentioned in LC.
- Another important requirement is that the commercial invoice should indicate the terms of sale contract (Inco terms) like FOB, C&F, CIF, etc
- Other required details like shipping marks, and any specific detail as per the LC terms should also be covered.
(c) Transport Documents: When goods are shipped from one port to another port the transport document issued is called the bill of lading. Goods can be transported by means of airways, roadways and railways depending upon the situations. In case goods are transported by means of water ways, the document is called bill of lading, by airways it is known as airway bills and by roadways called as lorry receipt and by railways it is known as railway receipt.
(d) Bill of Lading (B/L): The B/ L is the shipment document, evidencing the movement of goods from the port of acceptance (in exporter’s country) to the port of destination (in importer’s country). It is a receipt, signed and issued by the shipping company or authorized agent. It should be issued in sets (as per the terms of credit).
5. Standby Letter of Credit (SLOC)
A standby letter of credit (SLOC or SBLC), also known as a standby or LOC, is a lender’s guarantee of payment to an interested third-party in the event the client defaults on an agreement. Standby letters of credit are formal documents that specify the duties and obligations of each party and serve as an act of good faith. The bank issuing the SLOC performs general underwriting duties to ensure the financial credibility of the party seeking the letter of credit. Then it sends a notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
6. Bank Guarantee
Bank guarantees are part of non-fund based credit facilities provided by the bank to the customers. Bank issue bank guarantee on behalf of his client as a commitment to third party assuring her/ him to honour the claim against the guarantee in the event of the non- performance by the bank’s customer. A Bank Guarantee is a legal contract which can be imposed by law. The banker as guarantor assures the third party (beneficiary) to pay him a certain sum of money on behalf of his customer, in case the customer fails to fulfill his commitment to the beneficiary.
7. Financial Guarantee
The banker issues guarantee in favour of a government department against caution deposit or earnest money to be deposited by bank’s client. At the request of his customer, in lieu of a caution deposit/ earnest money, the banker issues a guarantee in favour of the government department. This is an example of a Financial Guarantee. This type of guarantee helps the bank’s customer to bid for the contract without depositing actual money.
8. Performance Guarantee
Performance Guarantees are issued by banks on behalf of their clients. In performance guarantee bank issue on behalf of his client to assure the third party to complete some work on time or as per the terms of contact between the parties. If the work is not completed as per the term of contract then the third party can request the bank to invoke the bank guarantee and make payment for default.
9. Deferred Payment Guarantee
It is clear from the name of the Bank guarantee that under this guarantee, the banker guarantees payments of installments spread over a period of time.
A bank guarantee and a letter of credit are similar in many ways but they’re two different things. Letters of credit ensure a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn’t go as planned.
Example: A purchases a machinery on a long-term credit basis and agrees to pay in installments on specified dates over a period of time. In terms of the contract of sale, B (the seller) draws Bills of Exchange on the customer for different maturities. These bills are accepted by A. The banker (guarantor) guarantees payment of these bills of exchange on the due date. In the event of default by A, the banker need to honour the claim to the seller (beneficiary).